“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
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” Prospects”and “Item“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, 2020, 20192023, 2022 and 20182021 and the consolidated statements of financial position as of December 31, 20202023 and 2019.2022. We present our consolidated financial statements in U.S. Dollars.
expected macroeconomic trends in Israel and the US, including the expected growth in energy demand;
potential new projects and existing projects;
potential expansions (including new projects or existing projects);
its gas supply agreements;
dividend policy;
expected trends in energy consumption;
regulatory developments;
its 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;
the gas supply arrangements; and
the price and volumeimpact of gas available to OPC and other IPPs in Israel and the US;
War.
statements relating to Qoros:
the agreement to sell Kenon’s remaining interest in Qoros to the Majority Qoros Shareholder; and
Qoros’ expectation to renew or refinance its working capital facilities to support its continued operations and development;
statements with respect to trends in the Chinese passenger vehicle market;
Qoros’ expectation of pricing trends in the Chinese passenger vehicle market;
Qoros’ ability to increase its production capacity;
statementslitigation and arbitration relating to the investment by the Majority Shareholder in Qoros into Qoros, including the put option and the Majority Shareholder in Qoros’ obligation to assume its proportionate share of Kenon and Chery’s guarantee and pledge obligations;
Qoros.
| • | statements relating to the agreement to sell Kenon's remaining interest in Qoros to the Majority, including with respect to the timing for payments and the conditions to me in connection with the sale including the release of the pledge over Kenon’s shares in Qoros; andZIM:
|
with respect to ZIM:
expectations regarding general market conditions;
expectations regarding trends related to the assumptions used in Kenon’s and ZIM’s impairment analysis with respect to Kenon’s investment in ZIM, and ZIM’s assets, respectively,global container shipping industry, including with respect to expectedfluctuations in vessel and container supply, industry consolidation, demand for containerized shipping services, bunker and alternative fuel price, freightprices, charter and freights rates, demand trends;
container values and other factors affecting supply and demand;
plans regarding ZIM’s business strategy, areas of possible expansion and expected capital spending or operating expenses;
anticipated ability to obtain additional financing in the future to fund expenditures;
expectation of modifications with respect to itsZIM’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;
statements with respect to International Maritime Organization, or IMO, regulations which came into effect in 2020 (“IMO 2020”) and other regulations, including the expected effectsbenefits of 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;
statementsplans regarding the 2M Alliance and expected benefits of the alliance;
hedging activities;
statementsability to pay dividends in accordance with respect to ZIM’s dividend policy; and
trends relatedexpectations regarding ZIM’s competition and ability to market conditions and the global container shipping industry, including with respect to fluctuations in container supply, industry consolidation, demand, bunker prices and charter/freights rates, including as a result of the COVID-19 pandemic.
compete effectively.
The preceding list is not intended to be an exhaustive list of each of our forward-looking statements. The forward-looking statements are based on our beliefs, assumptions and expectations of future performance, taking into account the information currently available to us and are only predictions based upon our current expectations and projections about future events.
There are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from the results, level of activity, performance or achievements expressed or implied by these forward-looking statements which are set forth in “Item 3.D Risk Factors.” Given these risks and uncertainties, you should not place undue reliance on forward-looking statements as a prediction of actual results.
Except as required by law, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The foregoing factors that could cause our actual results to differ materially from those contemplated in any forward-looking statement included in this annual report should not be construed as exhaustive. You should read this annual report, and each of the documents filed 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 we expect.
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. | Methods 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, prospects and liquidity can suffer materially as a result of any of the risks described below. While we have described all of theThe risks we consider material, these risksdiscussed below 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
Some of our businesses have significant capital requirements.We may raise financing or provide guarantees or collateral to make investments in or otherwise support existing or new businesses.
TheOur business plans of our businesses contemplatemay require additional financing and may seek to raise debt or equity financing which is expected to be raised from third parties. However, our businessesfinancing. Kenon may be unablealso seek to raise financing at the necessary capital from third party financing sources.
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, either in accordance with their business plans or in response to new developments or to meet operating expenses, and such businesses are unable to raise such financing, Kenon may provide such financing by (i) utilizing cash on hand, (ii) issuing equity in the form of shares or convertible instruments (through a pre-emptive offering or otherwise), (ii)(iii) raising debt financing at the Kenon level, (iv) using funds received from the operations or sales of Kenon’s otherdistributions from its interests in its businesses, (iii)(v) selling part, or all, of its interest in any of its businesses (iv) raising debt financing atand using the Kenon levelproceeds from such sales, or (v)(vi) providing guarantees or pledging collateral in support of the debt of Kenon or its 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.
1
Kenon may also seek to raise financing at the Kenon level to meet its obligations. Kenon is currently restricted in raising indebtedness at the Kenon level pursuant to the limitations set forth in the side letter described under “—Side letter Entered into in connection with the Repayment of the Deferred Payment Agreement. In the event that funds
Funds from its businesses or external financing aremay not be available to us to make investments we seek to make or to meet suchour obligations on reasonable terms or at all,all. Kenon may need to sell assets to fund any investments it seeks to make or to meet suchKenon’s obligations, and its ability to sell assets may be limited, particularly in light the various pledges over the shares and assets of some of Kenon’s businesses.limited. Any sales of assets may not be at attractive prices, particularly if such sales must be made quickly to meet Kenon’s obligations.quickly.
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. Kenon has provided loans and guarantees and made equity investments to support its businesses, such as investments in and guarantees of debt relating to Qoros andOPC (including equity investments in OPC,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 otheradditional investments in or grants additional guarantees to support its businesses. Third partyTo the extent Kenon uses cash on hand or other available liquidity to make an investment in existing or new businesses, it will reduce amounts available for distribution to shareholders.For example, CPV requires capital for the development, construction or acquisition of existing and future projects. CPV will require additional debt and equity financing for its projects. The main source of equity has been the investors in the CPV Group (OPC is CPV’s main investor). Difficulty in obtaining the required capital amounts (and such amounts may be significant, considering the advanced projects by the CPV Group) may prevent the CPV Group from being able to execute its plans and strategy, all or with considerable delay. Additional equity financing by OPC may involve Kenon participating in equity raises of OPC. Additional financing for CPV Group may involve equity financing at the CPV Group level which would dilute OPC (to the extent OPC is not the investor), which would indirectly dilute Kenon’s interest in CPV.
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 certain 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 a guarantee or any indemnification rights, or a guarantee, and/or provides additional collateral, including via cross-collateralization, this could reduce our liquidity. For further information on theour capital resources and requirements of each of our businesses, see “Item 5.B Liquidity and Capital Resources.”
We face risks in connection with our strategy, which includes potential acquisitions or investments in new or existing business and we may fail to identify opportunities or consummate investments and acquisitions on favorable terms, or at all, in existing or new businesses.
Our strategy contemplates making investments or acquisitions in its existing or new businesses. Our success in executing this strategy depends on our ability to successfully identify and evaluate investment opportunities or consummate acquisitions on favorable terms.
However, the identification of suitable investment or acquisition candidates can be difficult, time-consuming and costly, and it is challenging to identify and successfully consummate investment or acquisitions that meet our objectives. As a result, we may not identify or successfully complete investment or acquisitions that we target, which may impede execution of our strategy.
We expect that any such acquisitions or other investments 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. While the foregoing set forth our current expectations as to potential investments, we are not limited to the foregoing criteria and we have broad discretion as to how we deploy our capital resources and may make investments or acquisitions that do not meet the foregoing criteria.
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 any approvals in the countries in which we may purchase assets in the future or in the United States. 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.”
Furthermore, we may face competition with other local and international companies, including financial investors, for acquisition or investment opportunities, which may result in us losing investment opportunities or increasing our cost of making investments. Some of our competitors for investments and acquisitions may have more experience in the relevant sector, 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.
To the extent we acquire or otherwise make investments in businesses where we do not have significant (or any) experience, we would face risks of operating in a sector with which we lack experience, which could impact the success of any such acquisition or investments.
In addition, there is no assurance that any investments we make will generate a positive return and we face the risk of losing some or all of the funds we invest.
Any funds we use to make acquisitions of a new business will reduce amounts available for investments in our existing businesses and investments in existing or new businesses will reduce amounts available for distribution to shareholders or repurchases of shares and could require us to raise debt or equity financing.
Disruptions in the financial markets could adversely affect Kenon or its businesses, which may not be able to obtain additional financing on acceptable terms or at all.
Kenon’s businesses may seek to access capital markets for various purposes, which may include raising funding for the repayment of indebtedness, acquisitions, capital expenditures andor 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’sKenon 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 abilityaccess to access financing. The high levels of inflation and interest rates as well as geopolitical developments including the war in Ukraine and the War in Israel have adversely impacted financial markets and the cost of debt financing and have increased volatility in financial markets.
Kenon may seek to access the capital or lending markets to obtain financing in the future, including to support its businesses. The availability of such financing and the terms thereof will beis 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 andgenerally, (iv) the state of the economy.global economy, including inflation and interest rates and (v) geopolitical events such as the Russian invasion of Ukraine and the War in Israel. 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 deemsdeem it necessary to access financing and isare unable to do so on acceptable terms or at all, this could have a material adverse effect on our financial condition or liquidity.
We are 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,NYSE. The ability of one or NYSE. Our abilitymore of our businesses to complete a public offering, distribution or listing of one or more of our businesses is heavily dependent upon the public equity markets. Financial market conditions were volatile in 2023 and remain volatile and these conditions could become worse.
As our holdings in OPC and ZIM securities of our business 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 realizeeffect or defer such a sale, potentially for a long period of time.
We have pledged a portion of our shares in OPC to secure obligations to the buyer of the Inkia Business under the indemnification obligations in the share purchase agreement for the sale,past, and in 2020 we increased the number of pledged shares and the duration of the pledge until the end of 2021. To the extent that we are required to make payments under the indemnity obligationmay in the share purchase agreement, we may be required to sell shares in OPC and we would be subject to market conditions at the time of such sale (and the TASE regulations in relation to such sale) which could mean that we are forced to sell our shares for a lower price than we would otherwise be able to do so, particularly if we need to sell a significant amount of shares. If we do not make required payments in the event we are required to make payments under the share purchase agreement, then, in certain circumstances, the pledge can be enforced to satisfy the indemnity obligations, which would result in a loss of some or all of the pledged OPC shares.
In connection with ZIM’s IPO, we have enteredfuture enter into a lockup agreementagreements with respect to our shares in ZIM which expires on July 26, 2021, solisted companies in connection with offerings by those companies, and in some cases, we will unlikelymay be ablerequired to sell or otherwise dispose of our shares in ZIM prior to that date,enter into a lockup agreement. In addition, we are subject to limited exceptions.
securities laws restrictions on resales, including in the United States, to the extent we are an affiliate of the issuer, or hold restricted shares, 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,we do not conduct independent operations or possess significant assets other than investments in and advances to our businesses.businesses and our cash on hand and treasury investments. As a result, we depend on funds from our businesses or external financing to meetmake distributions, to make investments or acquisitions, to pursue our operating expensesstrategy and obligations, includingfor our operating expenses, our guarantee of the indemnification obligations under the share purchase agreement for the sale of the Inkia Business and our guarantee obligations in respect of Qoros debt.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.
The Majority Shareholder in Qoros holds 63% of Qoros and Kenon and Chery have 12% and 25% stakes in Qoros, respectively. Kenon can appoint two of nine Qoros directors. Although we still actively participate in the management of Qoros through our 12% interest and board representatives, our right to control Qoros decreased with the Majority Shareholder in Qoros’ investments in Qoros. For further information, see “Item 4.B Business Overview—Our Businesses—Qoros —Qoros’ Investment Agreement” and “Item 4.B Business Overview—Our Businesses—Qoros—Kenon’s Sale of Half of its Remaining Interest in Qoros to the Majority Shareholder in Qoros.”
In addition, we rely on the internal controls and financial reporting controls of our businesses and theany failure ofby 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 company,companies, some of whom rely on the prompt receipt of financial statements from each of their subsidiaries and associated company.companies. Additionally, in certain circumstances, we may be required to file with our annual report on Form 20-F, or a registration statement filed with the SEC, financial information of associated companies which has been audited in conformity with SEC rules and regulations and relevant audit standards. We may not, however, be able to procure such financial statements, or such audited financial statements, as applicable, from our subsidiaries and associated companies and this could render us unable to comply with applicable SEC reporting standards.
Our businesses are leveraged.
Some of our businesses are significantly leveraged and may incur additional debt financing in the future. As of December 31, 2020, 2023:
OPC had $921$1,530 million of outstanding indebtedness and OPC’s proportionate share of debt (including accrued interest) of CPV associated companies was $839 million, and
ZIM had outstanding indebtedness (mostly lease liabilities) of approximately $1.9 billion and Qoros had external loans and borrowings of RMB3.3 billion (approximately $512 million) and loans and other advances from parties related to the Majority Shareholder of RMB5.3 million (approximately $809 million).$5.9 billion.
Highly leveraged assets are inherently more sensitive to declines in earnings, increases in expenses and interest rates, and adverse market conditions. A leveraged company’s income and net assets also tend to increase or decrease at a greater rate than would otherwise be the case if money had not been borrowed. Consequently, the risk of loss associated with a leveraged company is generally greater than for companies with comparatively less debt. Additionally, some of our businesses’ assets have been pledged to secure indebtedness, and as a result, the amount of collateral that is available for future secured debt or credit support and a business’ flexibility in dealing with its secured assets may be limited. Our businesses that are leveraged use a substantial portion of their consolidated cash flows from operations to make debt service payments, thereby reducing itstheir ability to use their cash flows to fund operations, capital expenditures, or future business opportunities. Additionally, ZIM remains highly leveraged and continues to face risks associated with those of a highly leveraged company.
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;
minimum liquidity and fixed charge cover ratios;
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, wethey may decide to sell assets or to take other actions, including (i) reducing financing in the future for investments, acquisitions or general corporate purposes or (ii) dedicating an unsustainable level of our cash flow from operations to the payment of principal and interest on their indebtedness. As a result, the ability of our businesses to withstand competitive pressures and to react to changes in the various industries in which we operate could be impaired. A breach of any of our businesses’ debt instruments and/or covenants could result in a default under the relevant debt instrument(s),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 couldWe understand that Qoros continues to have a material adverse effect on our business, financial condition, resultssignificant external loans and borrowings, all of operations or liquidity.which we understand is in default and has been accelerated, and significant loans and other advances from parties related to the Majority Qoros Shareholder remain outstanding.
In addition, we have back-to-back guarantee obligations to Chery of approximately $17 million and have pledged substantially all of our interest in Qoros to support certain Qoros debt, as well as Chery’s guarantees of Qoros debt.
We face risks in relation to the Majority Shareholder in Qoros’ investment in Qoros and the agreement to sell all of Kenon'sour remaining interest in Qoros
In 2018, the Majority Shareholder in Qoros acquired 51% of Qoros from Kenon and Chery. The investment was made pursuant to an investment agreement among the Majority Shareholder in Qoros, Quantum, Wuhu Chery Automobile Investment Co., Ltd. (a subsidiary of Chery), or Wuhu Chery, and Qoros. In April 2020, Kenon sold half of its remaining12% interest in Qoros, (i.e. 12%)including risks relating to collection of the Majority Shareholderarbitration award in Qoros. As a result, connection with this agreement.
Kenon holds a 12% interest in Qoros, the Majority Shareholder in Qoros holds 63% and Chery holds 25%.Qoros.
In April 2021, Kenon agreedKenon’s subsidiary Quantum (which holds Kenon’s share in Qoros) entered into an agreement (the “Sale Agreement”) with the Majority Qoros Shareholder to sell all of its remaining interest in Qoros (i.e. 12%) to the Majority Shareholder in Qoros for a purchase price of RMB1,560 million (approximately $238 million). The sale is subject to certain conditions, including a release of the share pledge over the shares to be sold (substantially all of which have been pledged to Qoros’ lending banks), approval of the transaction by the National Development and Reform Commission and registration with the State Administration of Market Regulation.
An entity within the Baoneng Group has guaranteed the obligations of the Majority Shareholder in Qoros under this agreement.
The purchase price for Kenon's 12% stake in Qoros is payable in instalments with a deposit of 5% of the purchase price payable no later than July 31, 2021 and the final payment due by March 31, 2023. The agreement provides that the first and second payments, including the deposit (collectively representing, together with the deposit, 50% of the purchase price), will be paid into a designated account set up in the name of the Majority Shareholder in Qoros over which Quantum has joint control. According to the agreement, the transfer of these payments to Quantum will occur by the end of Q2 2022, provided that the relevant conditions are met in connection with the registration of the shares to the purchaser, subject to receipt by Quantum of collateral acceptable to it. The agreement provides that the third and fourth payments will be paid directly to Quantum.
Completion of the sale requires obtaining necessary regulatory approvals and a release of the pledge over Kenon's shares in Qoros and the registration of the transfer of such shares as well as the execution of amended documents relating to Qoros (e.g. the Joint Venture Agreement), which will require execution of relevant documentation by the relevant parties, including Qoros' shareholders.
Kenon faces risks in connection with the sale agreement, including the risk that regulatory approvals are not obtained, that the pledge over Kenon's shares is not released or that the sale is not completed for any other reason whether because conditions to the sale are not met or because the Majority Shareholder in Qoros is not able to, or otherwise does not, comply with its obligations under the agreement.
The agreement requires Kenon to transfer all of its shares representing 12% of Qoros following payment of only 50% of the total purchase price, with the remaining 50% of the purchase price to be paid in installments following the transfer of shares. Kenon's ability to enforce such payment obligations, if not paid as required, may be more limited after it has transfer title to the shares.
Kenon has put rights with respect to its remaining interest in Qoros. In the event that the Majority Shareholder in Qoros fails to pay the full amount of any payment due for the sale of Kenon's remaining interest in Qoros within sixty days after the relevant payment date, or Quantum fails to receive the full amount of the first and second payments (including the deposit) by June 30, 2022, Quantum may, at its sole election, immediately exercise the put option without any required notice period.
Substantially all of Kenon's shares in Qoros are pledged to Qoros' lenders and it is a condition to the transfer of shares that such pledge be released. To the extent that Kenon’s pledge is not released as required, this would impact Kenon’s ability to complete the sale of its remaining 12% interest in Qoros.
If the saleQoros for RMB 1.56 billion (approximately $220 million), and Baoneng Group has provided a guarantee of Kenon's remaining interest is not completed on the agreed terms or at all and if the Majority Qoros Shareholder’s obligations under the Sale Agreement. The Majority Qoros Shareholder in Qoros doesdid not purchase Kenon’s equity interest in Qoros upon exercisemake any of the put option,required payments under the Sale Agreement, and in the fourth quarter of 2021, Quantum initiated arbitral proceedings against the Majority Qoros Shareholder and Baoneng Group with China International Economic and Trade Arbitration Commission (“CIETAC”). In February 2024, CIETAC issued a final award, not subject to any conditions, in favor of Quantum. The tribunal ruled that the Majority Qoros Shareholder and Baoneng Group are obligated to pay Quantum approximately RMB 1.9 billion (approximately $268 million), comprising the purchase price set forth in the Sale Agreement (as adjusted for any reason,inflation) of approximately RMB 1.7 billion (approximately $239 million), together with pre-award and post-award interest (which will accrue until payment of the award), legal fees and expenses. Kenon intends to seek to enforce this couldaward against the Majority Qoros Shareholder and Baoneng Group since they have failed to perform their payment obligations under the award. In connection with this arbitration, Kenon has obtained a material adverse effect on Kenon.court order freezing assets of Baoneng Group at different rankings (primarily comprising equity interests in entities owning directly and indirectly listed and unlisted equity interests in various businesses).
Any value that could be realized in respect of this award is subject to significant risks and uncertainties, including the risk that Quantum may be unable to enforce the award or otherwise collect the amounts awarded or otherwise owing to it, risks relating to any action that may be taken seeking to challenge the award or enforcement of the award, risks relating to the process for enforcement of judgments in this proceeding/jurisdiction, risks relating to the financial condition of the parties subject to the award, risks related to the value in respect of any frozen assets pursuant to court orders as well as the risk of competing claims and Kenon’s ability to realize any value in respect of such assets or otherwise in connection with the award, including the risk that Kenon does not realize any value from such assets or any value that is realized is less than amounts owed to Kenon and other risks and uncertainties, which could impact Quantum’s ability to realize any value from this award.
In addition to the Sale Agreement, the Majority Qoros Shareholder was required to assume Quantum’s obligations relating to Quantum’s pledge of its remaining shares in Qoros. Baoneng Group provided a guarantee to Kenon. This guarantee provides for a number of obligations, including an 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 Baoneng Group, which was then transferred to the Supreme People’s Court for trial. 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.
Qoros has been in default under certain loan facilities for a number of years, including its RMB 1.2 billion loan facility. The lenders under Qoros’ RMB 1.2 billion loan facility have obtained a court order in respect of a payment default by Qoros, subject to Baoneng Group’s appeal against such order. The court order (when effective) would, among other things, enable the lenders to take steps to enforce pledges over Qoros’ assets and other security for the loan including the shares in Qoros pledged by its shareholders to secure the loan, including Quantum’s pledge of its 12% interest in Qoros. Accordingly, we face risks in connection with any enforcement by the lenders and the impact thereof.
Our success will beis dependent upon the efforts of our directors and executive officers.
Our success will beis 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 ourOur businesses we have facilities and generate costs and revenues in a number of geographic regions across the globe. As a result, a significant portion of our revenue and certain of our businesses’ operating expenses, assets and liabilities, are denominated in currencies other than the U.S. Dollar.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. Dollar.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:NIS to USD exchange rate. OPC's acquisitionOPC is also 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 will increasewhich operates in the U.S., (ii) the expected investments in CPV’s new and existing projects 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. From time to time, and in accordance with its business considerations, OPC uses currency hedging. However, there is no certainty as to the reduction of the exposure to the US dollar.
We have outstanding back-to-back guarantees to Chery of up to RMB109 million (approximately $17 million)exchange rates under such currency forwards, and OPC incurs costs in respect of certain of Qoros’ indebtedness. In addition, from time to time, we have held, and may hold, a portion of our available cash in RMB, which may expose us to RMB exchange rate fluctuations.those hedging.
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 any dividends or other distributions to our shareholders ifthat we decide tomay make any distributions in the future. For example, OPC pays dividends in NIS. 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,values, and/or amount of equity may be materially affected by short-term or long-term exchange rate movements or controls. Such movements may give rise to one or more of the following risks, any of which could have a material adverse effect on our business, financial condition, results of operations or liquidity:
| • | Transaction Risk—exists where sales or purchases are denominated in overseas currencies and the exchange rate changes after our entry into a purchase or sale commitment but prior to the completion of the underlying transaction itself; |
| • | 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; |
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;
| • | 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. |
Translation Risk—exists where the currency in which the results of a business are reported differs from the underlying currency in which the business’ operations are transacted;
Economic Risk—exists where the manufacturing cost base of a business is denominated in a currency different from the currency of the market into which the business’ products are sold; and
Reinvestment Risk—exists where our ability to reinvest earnings from operations in one country to fund the capital needs of operations in other countries becomes limited.
If our businesses 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 (or CPI)(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 Whichwhich Our Businesses Operate
Conditions in the global economy, and in the industries in which our businesses operate in particular, could have a material adverse effect on us.
The business and operating results of each of our businesses are affected by worldwide economic conditions, particularly conditions in the energy generation passenger vehicle, and shipping industries in which our businesses operate. The operating results and profitability of our businesses may be adversely affected by slower global economic growth,conditions, credit market crises, lower levels of consumer and business confidence, downward pressure on prices, highinflation, unemployment levels, reduced levels of capital expenditures, fluctuating commodity prices (particularly prices for electricity, natural gas, bunker, gasoline, and crude oil), bankruptcies, government deficit reduction and austerity measures, heightened volatility, uncertainties with respect to the stability of the emerging markets, increased import and export tariffs and other forms of trade protectionism, geopolitical events such as the War or the Russian invasion of Ukraine and other challengesdevelopments 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. As a result of deteriorating global economic conditions some of the customers ofwhich could impact our businesses have experienced,business and may experience,could lead to deterioration of their businesses,business, cash flow shortages, and/or difficulty in obtaining financing. As a result, existing or potential customers may delay or cancel plans to purchase the products and/or services of our businesses, or may not be able to fulfill their obligations to us in a timely fashion. Furthermore, the vendors, suppliers and/or partners of each of our businesses may experience similar conditions, which may impact their ability to fulfill their obligations.
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, includingsuch as 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. The coronavirus outbreak has led to quarantines, cancellationFurther outbreaks and spread and new variants of events and travel, business and school shutdowns and restrictions, supply chain interruptions, increased unemployment and overall economic and financial market instability. Further spread of the coronavirusCOVID-19 could cause additional quarantines, reduction in business activity, labor shortages and other operational disruptions.
Furthermore, the War and the Russian invasion of Ukraine have led to and are 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 fullU.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 this outbreak willthese 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 our businesses depend on debt financing to finance operations and projects. Additionally, due to increases in inflation, certain governmental authorities responsible for administering monetary policy have increased, 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, with rates raised further in 2023 to over 5% as of December 31, 2023. The increase in the benchmark rate has resulted in an increase in market interest rates. Current high interest rates and any further increase in interest rates could make it difficult for us and our businesses to obtain future developments, including continuedfinancing or service existing financings on favorable terms, or at all, and thus reduce revenue and adversely affect our operating results. High interest rates could lower our or our businesses’ return on investments. Our interest expense increases to the extent interest rates rise in connection with our variable interest rate borrowings and higher interest rates also impact new and refinancings of existing fixed rate borrowings. If in the future we have a need for significant further severityborrowings, our cost of capital would reflect the outbreak of the coronavirus and the actions to contain the coronavirus or treat its impact.current interest rates. 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 recent volatility in global markets, the coronavirus outbreak, trade protectionism and commodity prices, or otherwise) could have a material adverse effect on our business, financial condition, results of operations or liquidity.
We could be adversely affected by the War in Israel.
On October 7, 2023, the War broke out in Israel, which as at the date of this report is still underway. The War led to consequences and restrictions that affected the Israeli economy, which included, among other things, a decline in business activity, extensive recruitment of reservists, restrictions on gatherings in workplaces and public spaces, restrictions on the activity of the education system, and more. The impacts of the War on OPC and ZIM include considerable uncertainty with respect to macro‑economic factors in Israel as well as potential adverse effects on the credit rating of Israel and Israeli financial institutions (particularly the Israeli banking system), potential fluctuations in the currency exchange rates, particularly a strengthening of the dollar exchange rate against shekel, and instability in the Israeli capital markets. For example, in February 2024, Moody’s rating agency downgraded the State of Israel’s credit rating to A2 from A1 with a negative rating outlook and of the Israeli financial institutions, particularly the Israeli banking system (against the background of the reduction of Israel’s rating, in February 2024 the international rating company Moody’s gave notice of a reduction of the credit rating of the five large banks in Israel to a level of A3 with a negative rating outlook), which could adversely affect investments in the Israeli economy and trigger a removal of money and investments from Israel, increase the costs of the financing sources in Israel, cause a weakening of the exchange rate of the shekel against the other currencies (particularly the dollar), harm the activities of the business sector and create instability in the Israeli capital market (including increased volatility, falling prices of traded securities, and limited liquidity and accessibility).
There is a significant uncertainty as to the development of the War and its impact on us. To the extent the above risks, events or potential outcomes materialize, wholly or partly, or in a case of a worsening of the security situation, this could negatively impact both OPC’s and ZIM’s activities and the activities of OPC and ZIM customers and suppliers in Israel (including physical harm or curtailment of activities) and could also negatively impact the results of OPC and ZIM and the availability and cost of the capital and financing sources that are required by OPC and ZIM.
A deterioration of the political and security situation in Israel may have an adverse effect on the economic conditions, and could cause difficulties with respect to OPC’s operations and damage to its assets in Israel. Security and political events, such as war or an act of terror, could cause damage to the facilities used by OPC, including damage to the facilities of the power plants, construction of the power plants under construction, and additional projects, IT systems, shortage of foreign manpower and foreign experts, damage to the system for transmission of natural gas to the power plants and the grid, damage to OPC’s material suppliers (such as natural gas suppliers) or material customers, thereby adversely affecting the continuous supply of electricity to customers.
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:
heightened economic volatility;
difficultyunfavorable changes 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 or other trade protection measures and/or licensing requirements and local fire and security codes and standards;requirements;
increased costs and risks of developing, staffing and simultaneouslyassociated with managing a number of operations across a number of countries as a result of language and cultural differences;countries;
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.
WeOur businesses require qualified personnel to manage and operate ourtheir various businesses.
AsOur businesses require a resultnumber of our decentralized structure, we require qualified and competent management to independently direct the day-to-day business activities of each of our businesses, execute their respective business plans, and service their respective customers, suppliers and other stakeholders, in each case across numerous geographic locations. WeOur 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. This includes developing talent and leadership capabilities in the emerging markets in which certain of our businesses operate, where the depth of skilled employees may be limited. Changes in demographics, training requirements and/or the unavailability of qualified personnel could negatively impact the ability of each of our businesses to meet these demands. In addition, the War has resulted in a significant call up of military reserves, which impacts personnel in Israel. If any of our businesses fail to trainhire 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 ofthis could impact their operations, 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 Israel, and CPV Group, solar panels and wind turbines for CPV Group and bunker and containers for ZIM), parts, components and sub-systems used in their products or services exposes us to volatility in the prices and availability of these materials, parts, components, systems and services. Some of these suppliers or their sub-suppliers are limited-limited or sole-sourcesole 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— Supplier concentration may expose OPC’s Israel Operations—OPC to significant financial credit or performance risk.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 coronavirus outbreakWar in Israel, catastrophic events or catastrophic events,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. For example, there are only a limited number of suppliers of natural gas in Israel and the War increases risks relating to access to gas supply. Furthermore, quality and sourcing issues experienced by third-party providers can also adversely affect the quality and effectiveness of our businesses’ products and/or services and result in liability and reputational harm that could have a material adverse effect on our business, financial condition, results of operations or liquidity.
Some of our businesses must keep pace with technological changes and develop new products and services to remain competitive.
The markets in which some of our businesses operate experience rapid and significant changes as a result of the introduction of both innovative technologies and services. To meet customer needs in these areas, these businesses must continuously design new, and update existing, products and services, as well as invest in, and develop new technologies. Introducing new products and technologies requires a significant commitment to research and development that, in return, requires the expenditure of considerable financial resources that may not always result in success.
Our sales and profitability may suffer if our businesses invest in technologies that do not operate, or may not be integrated, as expected or that are not accepted into the marketplace as anticipated, or if their services, products or systems are not introduced to the market in a timely manner, in particular, compared to its competitors, or become obsolete. Furthermore, in some of these markets, the need to develop and introduce new products rapidly in order to capture available opportunities may lead to quality problems. Our operating results depend on our ability, and the ability of these businesses, to anticipate and adapt to changes in markets and to reduce the costs of producing high-quality, new and existing products and services. If we, or any of these businesses, are unsuccessful in our efforts, such a failure could have a material adverse effect on our business, financial condition, results of operations or liquidity.
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, 2020,2023, OPC employed 116169 employees in Israel and 150 employees in the United States, and ZIM employed approximately 5,145 employees and Qoros employed approximately 2,6466,460 employees. Our businesses have experienced and could experience strikes, industrial unrest, work stoppages or labor disruptions as a result of the coronavirus outbreak.disruptions. Any disruptions in the operations of any of our businesses as a result of labor stoppages, strikes or other disruptions 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. In addition, as a result of the War, OPC and ZIM may face personnel availability issues as some of their employees might be drafted as reservists, and their absence may disrupt OPC and ZIM businesses.
A disruption in our and each of our business’ information technology systems, including incidents related to cyber security, could adversely affect our business operationsoperations.
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. For example one of ZIM’s peers experienced a major cyber-attack on its IT systems in 2017, which impacted the company’s operations in its transport and logistics businesses and resulted in significant financial loss. 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. For example, the COVID-19 pandemic and the resulting reduced staff in in offices andThe increased reliance on remote access for employees havein recent years has increased and may continue to increase 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. ProtectionistChanges 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 several nationalsuch markets, impact our profitability and make the repatriation ofor our ability to repatriate profits, difficult, and may expose us or any of our businesses to penalties, sanctions and reputational damage. In addition, the uncertainty of the legal environment in some regions could limit our ability to enforce our rights.
The global and diverse nature of our operations means that legal and compliance risks will continue to exist and additional legal proceedings and other contingencies, the outcome of which cannot be predicted with certainty, will arise from time to time. No assurances can be made that we will be found to be operating in compliance with, or be able to detect violations of, any existing or future laws or regulations. In addition, as we hold minority interests in ZIM and Qoros, we do not control them and therefore cannot ensure that they will comply with all applicable laws and regulations. A failure to comply with or properly anticipate applicable laws or regulations could have a material adverse effect on our business, financial condition, results of operations or liquidity.
We may be subject to further governmentgovernmental regulation as a result of our regulatory status, which may adversely affectcould subject us to restrictions that could make it impractical for us to continue our strategy.business as contemplated and could have a material adverse effect on our business.
The U.S. Investment Company Act of 1940, or the “Investment Company Act,” regulates “investment companies,” which includes, entitiesin 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 (orbasis. 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 assets, excluding interesttrading in primarily controlled companies).securities. We do not believe that we are subject to regulation under the U.S. Investment Company Act of 1940.Act. We are organized as a holding company that conducts its businesses primarily through majority owned and primarily controlled subsidiaries. MaintainingWe 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 either (a) to substantially change the manner in which we conduct our operations to avoid being required to register as an investment company, or (b) to register as an investment company under the U.S. Investment Company Act of 1940, either of which could have an adverse effect on us and the market price of our securities. 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 New York Stock Exchange, or the NYSE, and subject to criminal and civil actions that could be brought against us, any of which would have a material adverse effect on the liquidity and value of the Kenon shares and on our business, financial condition, results of operations or liquidity.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, or the FCPA,“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, obtain ormay 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 operationsOperations
OPC’s profitability depends on the EA’s electricity rates and tariff structure.
The price of electricity for OPC’s customers is directly affected by the electricity generation component tariff, and such tariff is the basis of linking the price of natural gas pursuant to gas purchase agreements, and therefore OPC is exposed to changes in the electricity generation component. A 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. A decrease in the generation component tariff will result in a deterioration in OPC’s 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 the IEC’s fuels, changes in the attribution of costs to the generation component or system costs), 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. A revised tariff structure came into force with the revision of the tariff for consumers for 2023, which included 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; and (iv) defining a maximum of two clusters for each day of the year. These changes had a significant impact on tariffs and OPC’s results.
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. 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, but rather will reduce the profit margins and will have an adverse effect on OPC’s profits.
As part of its activity in the United States, OPC is exposed to changes in electricity prices in the United States.
OPC is subject to changes in the electricity market and technological changes.
OPC has electricity generation and supply activity using a range of technologies, including conventional technology (mainly natural gas), and renewable energy (in the United States), including as part of projects under development (including carbon capture projects in the United States) and construction. OPC is working to expand its renewable energy activities in Israel and the United States, while incorporating technologies involving carbon capture. A delay or failure to adopt new production technologies, as well a failure to manage and lead internal organizational innovation or other 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 OPC as a leader in the industry, or to a decrease in its market share. The increase in market share of renewable energies, and the setting of emission reduction targets and standards (for example, changes in the gas standards set by the EPA in the United States) may lead to decreased generation using conventional energy, including OPC’s production facilities, as well as reduce the production operations at the OPC-Rotem Power Plant (including in view of its location). In addition, a preference by OPC’s customers for renewable energies may have an 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, 2023, OPC had $1,530 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.
A breach of covenants could result, among other things, in acceleration of the debt and cross-defaults across the debt instruments.
For example, the trust deeds 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 lenders. Interest rates may also increase in certain circumstances, such as a downgrading of rating or failure to comply with financial covenants.
In addition, distributions (including the repayment of shareholders’ loans) may be subject to compliance with certain financial covenants. Financing agreements impose certain restrictions in connection with a change of control in OPC, expiry of licenses, termination or change of material agreements and other circumstances. Failure to comply with such covenants or the occurrence of any of the specified events set out in the agreements may restrict distributions by OPC, increase finance costs, require more prompt payment to lenders, require an increase in collateral or equity contributions, or trigger demand by the lenders for immediate repayment or result in enforcement of collateral or guarantees provided by OPC, any of which may have an adverse effect on OPC, and could trigger cross-default provisions in OPC’s financing agreements.
OPC may 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 regarding the amount of loans that Israeli banks are permitted to grant to single borrowers or groups of borrowers due to the group of companies to which OPC and its controlling shareholder belong (or entities related thereto). Similar restrictions may also apply to non-banking entities with regard to investments or the provision of credit by them. Furthermore, various investors have investment policies that include ESG targets that may limit the financing amounts available to OPC.
OPC may not achieve its environmental, social, and governance (“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, involvement of regulators in the area of ESG is increasing, and various regulations are imposed in the field of ESG in various frameworks.
Under the trend, existing and potential investors and other stakeholders (including customers) 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 financing. This trend may manifest itself in various ways, including investors refraining from making investments in the field of natural gas, difficulty in obtaining credit, an increase in finance costs, difficulty in recruiting employees and other impacts. Furthermore, the imposition of various regulatory provisions in the area of ESG, particularly environmental regulations, may result in significant costs to OPC. These trends may have an adverse effect on OPC’s business and financial position, including loss of customers, restricting OPC’s ability to implement its growth plan, impairment of assets, an increase in the price of debt, erosion of OPC’s value, or an adverse effect on OPC’s market position.
OPC’s operations are significantly influenced by regulations.
OPC is subject to significant government regulation. See “Item 4.B Business Overview—Our Businesses—OPC—OPC’s Description of Operations—Regulatory, Environmental and Compliance Matters.” OPC is exposed to changes in these regulations as well as changes to regulations applicable to sectors that are associated with the company’s activities. Various regulations and changes in regulation may have an adverse effect on OPC’s activity and results or on its terms of engagement with third parties, such as its customers and suppliers, including natural gas suppliers. Furthermore, regulatory processes might lead to delays in obtaining permits and licenses (for example, the pending proceedings relating to CPV Valley’s Title V permit), 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 recent years, the industry in which OPC operates has been subject to frequent regulatory changes, and OPC believes that further regulatory changes may be implemented in the coming years, including the application of new arrangements, including due to the development of the private power production market in Israel based on the Israeli Government’s goals and development of incentives and renewable energies in Israel and worldwide. Regulatory changes can also impact OPC’s results of operations. For example, there were significant revisions to the tariff structure in Israel in 2023, which impacted OPC’s results. Regulatory changes, changes in regulators’ policy or in their interpretation of the regulations may have various impacts on the power plants owned by OPC or the power plants it intends to develop (as well as on the economic viability of the construction of new power plants) or the economic viability of taking part in tenders in this area. The regulations that impact OPC may apply pursuant to competition laws or in the context of promotion of 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, carbon capture and restrictions under the EPA. Failure by OPC to comply with 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 applicable law and regulations or 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 objectives or requirements 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 objectives or requirements, to restrictions on making investments and obtaining credit, and impair its 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 the IEC to the System Operator). In February 2023, the EA proposed a resolution to, among other things, grant a supply license to OPC-Rotem. In February 2020, the EA issued standards regarding deviations from consumption plans submitted by private electricity suppliers, which became effective on September 1, 2020. 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 March 2024, the EA issued a resolution that addresses the application of certain standards to OPC-Rotem, including those regarding deviations from consumptions plans submitted by private electricity suppliers, and the award of a supply license to OPC-Rotem (if it applies for one and complies with the conditions for receipt thereof). This is in light of the Israeli Electricity Authority’s stated intention to consolidate the regulation that applies to OPC-Rotem with the regulation applicable to other manufacturers entering into a bilateral transaction, thereby allowing OPC-Rotem to operate in the energy market in a manner that is similar to that of other electricity generation facilities that are allowed to conduct bilateral transactions. The resolution will come into force on May 1, 2024.
The final complementary arrangements have been approved. However, the award process of the license (including the terms of the license) has not yet been completed. If such supply license is not obtained, or if the supply license that is obtained has terms not according to the complementary arrangements that have been approved, 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 faces risks relating to gas supply agreements, the System Operator and the IEC and PPAs.
OPC has agreed to purchase minimum quantities in its gas supply agreements
In accordance with gas supply agreements, OPC group companies are in some cases required to consume minimum quantities of gas set forth in gas supply agreements (a “take or pay” undertaking), or to undertake to purchase gas from the gas supplier. Failure to consume the minimum quantities of gas may be caused by, among other things, an operative malfunction as a result of which it would be impossible to generate electricity, or a material decrease in 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 of OPC-Rotem at the instruction of the System Operator. The acquisition of gas in quantities lower than what is required under the contractual obligation may expose OPC group companies that are party to gas supply agreements to additional payment obligations to gas suppliers.
In addition, from the commercial operation date of the Karish Reservoir (which began commercial operations in 2023), the total take or pay obligation to Energean and Tamar by OPC-Rotem and OPC-Hadera is expected to be higher than the obligation prior to the operation of the Karish Reservoir, although a utilization or sale of the gas surpluses may, to a certain extent, offset such obligations.
Disputes between OPC-Rotem and the System Operator
During 2023, Noga raised claims against OPC-Rotem as described in “Item 4. Information on the Company—Regulatory, Environmental and Compliance Matters—Israel—OPC-Rotem’s Regulatory Framework” and “Item 4. Information on the Company—Industry —Overview of Israeli Electricity Generation Industry—The generation component and changes in the IEC’s costs”. The loading of OPC’s power plants is carried out in accordance with the directives of the system operator. Furthermore, OPC-Rotem sells surplus electricity to the system operator. Load declines or a decline in sales to the system operator have an adverse effect on OPC-Rotem’s results. If such disputes are not settled between the parties, this may have an adverse effect on OPC. OPC expects those disputes to be resolved as part of complementary arrangements regarding Rotem, including the receipt of a supply license (if any are set and subject to their final content). In March 2024, the EA issued a resolution that addresses the application of certain standards to OPC-Rotem, including those regarding deviations from consumptions plans submitted by private electricity suppliers, and the award of a supply license to OPC-Rotem (if it applies for one and complies with the conditions for receipt thereof). The final complementary arrangements have been approved. However, the award process of the license (including the terms of the license) has not yet been completed.
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 group companies to excess payment obligations or breaches 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
A substantial part 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 for adequate periods 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. 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.
OPC is in the process of the construction and development of power generation facilities and is contemplating further such development. Existing regulation, such as antitrust laws, regulation by virtue ofregulations under the Israeli Law for Promotion of Competition and Reduction of Concentration, Law,enacted in 2013 (the “Market Concentration Law”) or regulation by virtue ofregulations under the Israeli Electricity Sector Law, 5756-1996 or Electricity(the “Electricity Sector Law,Law”) with respect to holdings inholding generation licenses impose restrictions, including restrictions on maximum capacity, which may restrictlimit the expansion of OPC’s activity in Israel.
OPC believes that the capacity set in the generation licenses (in accordance with conditional and permanent generation licenses) of entities, which are considered related parties of OPC, was deemed to be held by a single “person.” According to OPC’s estimates, 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 capacity attributed to OPC (plus the capacity attributed to entities that may be considered related parties for that purpose) may 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, 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.
According to the IsraeliMarket Concentration Law, when allocatingissuing 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 AntitrustCompetition Commissioner regarding sector concentration. Kenon, OPC, and OPC’s subsidiaries are considered concentration entities under the Israel Corporation Groupgroup 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, in which Kenon holds an approximately 28% interest.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 AntitrustCompetition Authority and the Chairman of the Committee for the Reduction of Concentration, or the Concentration Committee, recommended to the Electricity Authority, or 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 IsraeliMarket Concentration Law.
Following the Israeli Government’s electricity sector reform, as part of which the IEC is expected to sell five of its sites (currently remaining sites are three), the Israel Competition Authority issued guiding principlesregulations for sector concentration consultation in such sale process. The regulations were published under a temporary order and are in effect for three years. According to such principles, which are subject to change and review considering the relevant circumstances, entitiesregulations, a person will not be permitted togranted a generation license or approval in accordance with Sections 12 or 13 of the Electricity Sector Law if, following the issuance, the person will hold more thangeneration licenses or connection commitment for gas-fired power plants the total capacity of which exceeds 20% of the total planned installed capacity for this type of power plant. The planned capacity for 2025 for gas-fired power generation units is 16,700 MW. In addition, the regulations set restrictions on the dateallocation of salerights in relation to holdings in power plants using pumped storage and wind energy. Also, according to the regulations, notwithstanding the above, the EA may grant such a generation license or approval on special grounds (after consultation with the Israel Competition Authority) for the benefit of all the sites being sold. Theelectricity sector. Furthermore, the EA may refrain from granting a generation capacitylicense 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 an entity’s related parties withholdings of a person in other generation licenses will be counted towards such entity’s capacity for purposesthat do not constitute a holding of this 20% limitation.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 principlesregulations may therefore increase competition and impose limitations on OPC’s ability to expand its business. In addition, the EA published proposed regulationsbusiness in respect of maximum holdings in generation licenses which are not identical to the Competition Authority principles.Israel. 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 14,000 MW (including capacity of IEC). We may be subject to more restrictive interpretation. Theaggregate MW currently attributable to OPC including Oil Refineries Ltd., or ORL, andas well as Israel Chemicals Ltd., as partiesa party with generation licenses that are related to OPC, is approximately 1,480 MW.
In addition, OPC faces risks in connection with1,500 MW (including the expansion of its business into the United States with the CPV acquisition and OPC may examine possibilities for further expanding its electricity generation activities by means of construction of power plants and/or acquisition of power plants (including in renewable energy) in and outside of its existing geographies. The regulatory environment or other limitations or restrictions in such jurisdictions may restrictSorek 2), based on OPC’s ability to expand its business in such other jurisdictions.assessment.
OPC faces risks in connection with integrationentry (or attempts to enter) into new markets, to complete acquisitions, or to 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. Furthermore, operating in other markets depends on various factors, including knowledge of the CPV business.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.
In January 2021, an entity in which OPC holds a 70% interest acquired CPV, 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. For risks relating to CPV’s business, see “—Risks Relating to OPC’s U.S. Business.”
The acquisition of CPV by OPC involves, among other things,Furthermore, the integration of two companies that have previously operated independently. OPC is insignificant new operations into the process of integration and establishing operating procedures and corporate governance in order to revise OPC’s structure and management after completion ofexisting operations requires the transaction. These processes and procedures are expected to continue in the near term. The success of the CPV acquisition will depend on, among other things, the successful integration of CPV into the OPC group, implementation ofvarious processes, including control and information flow procedures, assimilation and absorptionprocesses, integration of management processes, integration of financial reporting, the integration of the new operations and personnel,human resources, as well as implementationOPC’s understanding of a successfulthe market in which the acquired activity operates and the integration of its business strategy and development plans forplans.
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.
The potential difficultiesOPC does not own and will not own all the rights to all of combining the operationsOPC’s existing projects (including OPC Israel, Gnrgy, OPC Power and projects of the companies include, among others:
difficultiesCPV Group) and future projects. A less than 100% stake in the integrationprojects might restrict OPC’s flexibility when conducting its activities, including entering into agreements with other holders of operations and systems;
conforming standards, controls, procedures and accounting and other policies, business cultures and compensation structures between the OPC and CPV;
difficultiesrights in the assimilation of employees, including possible culture conflicts and different opinions;
difficulties in managing the expanded operationssuch projects. This can also restrict OPC’s ability to take actions that would be available as a 100%-owner of a larger and more complex company; and
project.
coordinating across a new jurisdiction for OPC.
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Many of these factors will be outside of OPC’s control and any one of them could result in increased costs. The diversion of management’s attention, and any difficulties encountered in the transition and integration process, could harm OPC’s business, financial condition and results of operations.
In addition, the CPV acquisition may result in material unanticipated problems, expenses, and liabilities.
Changes in the EA’s electricityCPI in Israel, interest rates, haveor exchange rates could adversely affect OPC.
OPC is exposed to changes in the CPI, directly and may further reduce OPC’s profitability.
The priceindirectly, due to the linkage of electricity for OPC’s customersa substantial portion of its revenues to the generation tariff (which is directlypartly affected by changes in the electricityCPI) and to the CPI. Natural gas purchase prices are also linked to the generation tariff and thisinclude a US Dollar floor price. Furthermore, some of OPC’s capital costs and investments are linked to the CPI, directly or indirectly. OPC is the basis of linking the price of natural gas pursuantfurther exposed to gas purchase agreements. Therefore, changes in the electricity rates published by the EA, including the rateCPI through OPC’s debentures (Series B) and some of the electricity generation component,OPC-Hadera project financing agreement (which are not subject to hedging arrangements). Generally, an increase in the CPI increases OPC’s liabilities and costs although the structure of OPC’s revenues (which is impacted by CPI) mitigates this impact to some extent.
OPC is also exposed to changes in interest rates as OPC has interest bearing loans and obligations bearing variable interest mainly based on Prime or LIBOR interest plus a margin. An increase in variable interest rates may havelead to an increase in OPC’s finance costs, in connection with both existing debt and debt that may be incurred in the future. Furthermore, an increase in interest rates affects 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 OPC’s growth and potentially resulting in impairment of assets and/or recording of impairment losses.
Further, OPC is exposed to changes in exchange rates, mainly the U.S. Dollar to NIS exchange rate, both indirectly and directly, due to the linkage of a substantial adverse effect on OPC’s profits.
To the extent that the generation component tariffs published by the EA change as a resultportion of among other things, fluctuations in currency exchange rates or IEC fuel costs, OPC’sits revenues from sales to private customers and cost of sales will be affected. The EA publishes tariffs each year. The EA has published the electricity tariffs for 2021, which included a decrease of the EA’s generation component tariff by approximately 5.7%. The decline in the generation component is expected to have a negative impact on OPC’s profits in 2021 compared with 2020.
Furthermore, the gas price formula determined in the agreements with the Tamar Group is subject to a minimum U.S. dollar price mechanism. When the price of gas is equal to or lower than the minimum price, as was the case for example in January and February 2021 for both OPC-Rotem and OPC-Hadera (and for OPC-Rotem may be, and for OPC-Hadera will be, the case for the rest of 2021) reductions in the generation tariff will not lead(which is partly affected by changes in such exchange rate). Also, some of OPC’s natural gas purchases are either linked to a reductionthe exchange rate and/or are denominated in U.S. Dollars, and are linked to the generation tariff and include floor prices denominated in U.S. Dollars.
Therefore, an appreciation of the U.S. Dollar increases the cost of natural gas consumedpurchased by OPC-Rotem and/or OPC-Hadera, but ratherOPC, although the structure of OPC’s revenues (which is impacted by CPI) mitigates this impact to some extent.
However, since the generation component is generally updated once a reduction in profit margins. For OPC-Hadera,year, there may be timing gaps between the effect of the U.S. Dollar’s appreciation on profit margins dependsOPC’s gas cost and its effect on the US$/NIS exchange rate fluctuations. Therefore, declinesOPC’s gross margin. Such timing difference may adversely affect OPC’s profitability and cash flows in the EA generation component tariff belowshort term. In the minimum price may not result in a corresponding decline in natural gas expenses, due tolong term, an appreciation of the floor price mechanism and mayU.S. Dollar will lead to a declinehigher generation tariff, and accordingly to higher revenues for OPC, but also to a corresponding increase in profit margins becausegas 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 gas priceU.S. Dollar and the Euro. 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 not decrease as much as revenues.incur costs associated with such forwards.
OPCWith respect to OPC’s investment in CPV Group, which operates in the United States, and whose functional currency is leveragedthe U.S. Dollar, generally, a decrease in the exchange rate may adversely effect on the value of OPC’s U.S. Dollar-denominated investment and OPC’s net income and equity which are translated to the OPC’s functional currency (NIS). On the other hand, if there is a need to raise NIS-denominated sources in Israel to fund the investments in CPV Group’s backlog of projects under development, an increase in the exchange rate of U.S. Dollar may be unabletrigger outflows to comply with its financial covenants or meet its debt service or other obligations.
As of December 31, 2020, OPC had $921 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:finance the investments.
Minimum OPC faces risks relating to liquidity loan life coverage ratios and debt service coverage ratios covenants; and
Other non-financial covenants and limitations such as restrictions on dividend distributions, repayments of shareholder loans, asset sales, pledges investments and incurrence of debt, as well as reporting obligations.
Breachpotential difficulty in securing the funding resources required to achieve the future strategic plans of the various 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.OPC group, including risks relating to high leverage levels.
Furthermore, OPC may have a limited ability to receive financing from Israeli banks due to Israeli regulatory restrictions 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.
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, including in light of CPV’s development projects, OPC willmay need to raise moneylarge amounts of financing in the upcomingnext few years in connection with execution of its businessstrategic plans. OPC’s and its subsidiaries and associated companiesThe financing agreements of the OPC group, including OPC’s debentures, restrict the amount of debt they areOPC group is permitted to incur and provision of collateral.collateral to secure such debt. In addition, raising capital involves risks relating to the level ofhigh leverage levels and financing costs. High leverage exposes OPC and its subsidiaries and associatedgroup companies to inherent risks involved with leverage and could have an adverse impact on their credit rating, operating results and businesses and on their ability to distribute dividends and/or torepay their obligations, comply with the terms of the financing agreements and couldor distribute dividends. High leverage levels may also involverequire provision of collateral or guarantees by OPC. Therefore,OPC of obligations of its subsidiaries or associated companies. In order to execute its plans, OPC may also be required to raise capital from investors (in addition to or instead of raising debt financing), 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 OPC will be able to raise the amounts required or as to how any financing will be raised under favorable terms or at all. An inundertaken, and the ability to raise capital will depend on market conditions, the provisions of OPC group’s financing agreements and their debt structure, investors’ willingness to take part in capital raising (including OPC’s shareholders) and OPC’s operating results. Difficulties in securing the required financing and/or a failure to maintain an optimal debt/equitydebt structure could harm themay have an adverse effect on OPC’s ability to execute its businessfuture strategic plans, its financial strength, its compliance with the terms of its financing agreements and its operating results. The realization of any of the risks described above may lead to high financing and liquidity needs and increase financing costs and liquidity challenges of the OPC group.
OPC faces risks in connection with project financing agreements.
Project financing agreements of OPC (such as those of CPV, OPC-Hadera, Tzomet, and the Kiryat Gat Power Plant) include various undertakings, including as to compliance with the terms of licenses and permits, performance and other conditions (including conditions for drawing under the facilities), and failure to comply with such undertakings may limit the ability to draw loans, 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 take certain actions relating to commercial plans, the project’s activity and its ownership and undertakings to publish various reports. Failure to comply with such conditions and restrictions, or to obtain the lenders’ consent may, among other things, have an adverse effect on the financings (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 shareholder 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.
As a holding company of project companies, OPC itself does not hold any independent power generation operation other than its business, financial conditioninvestments in companies it owns. Therefore, OPC is dependent on cash flows from the subsidiaries and associated companies it 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 of operations.its subsidiaries and associated companies and restrictions placed on distributions under agreements with the financing entities of the project companies owned by OPC, including payment provisions under such agreements. A decrease in cash flows from OPC-Rotem, OPC-Hadera, Tzomet, Kiryat Gat, 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 obligations.
OPC is subject to instability in global markets and the global geopolitical environment.
Instability in global markets, including political or other instability due to various factors, as well as instability in the banking system in the financial markets, economic instability, including concerns about a recession or a slowdown in growth and uncertainty in the geopolitical environment, may affect, among other things, OPC’s supply chain the availability of financing, credit and liquidity, prices of OPC’s raw materials, the availability of gas and electricity tariffs, the cost and availability of personnel in the power plants, the availability and financial stability of OPC’s suppliers, timetables for project construction (as a result, among other things, of delays in the supply chain and the availability of foreign experts and contractors), and the financial strength of OPC’s customers and credit providers. Such instability may also cause disruption in the development, 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 as well as instability in supply chains may have an adverse effect on OPC’s projects under development or construction in Israel and the U.S., as well as OPC’s ability to secure the financing required for the projects, and the ongoing work involving projects under construction or development.
The global geopolitical environment, against the backdrop of the War in Israel, the Russian invasion of Ukraine, tensions between the United States and China, and increasing risks in trade routes in the Red Sea, has been unstable. This continued instability and its impact on global economic relations, trade routes, and other impacts has extensive macroeconomic effects, which has a range of impacts, including volatility in energy prices, economic uncertainty, delays and challenges in the supply chain, an increase in commodity prices, and their availability. 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 higher expenses, which may 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 and carries out preventative and scheduled maintenance works, there is no certainty as to OPC’s ability to prevent damages and shutdowns as a result of any such disruptions including planned maintenance, technical failures and natural disasters.malfunctions.
OPC’s ongoing activities and operations may be affected by technical disruptionsnatural disasters, climate damages, and faults to critical equipment. For instance, various naturalfire.
Natural disasters, such as flood, extreme climate conditions, earthquakes, or fires,fire, may harmdamage OPC’s facilities in Israel and thereby affectingthe United States and impair its operations andincluding the reliable supply of electricity. Furthermore, such delayselectricity to customers, which could adversely impact OPC’s results and activities (severe cold or other disruptions could cause a delayheat waves in Israel or the construction and CODUnited States). In addition, in light of projects such as the Tzomet project. Due to the nature of OPC’s activities, which, for example, include theincluding its use of flammables, operations involving high temperatures and pressures and storage of flammable materials and working with high temperatures and pressures,fuels, OPC’s facilities are exposed to the risk of fire hazards. Shouldfires and explosion risks, and as a result, to environmental risks as well. If OPC’s facilities are damaged due to natural disasters damage OPC’sor fire, renovation of affected facilities restoration may involve the investmentrequire significant investments of significant resources and may take significant amounts of time to complete, which would likely lead tomay cause full or partial shutdown of the damaged electricity generation facilities that are damaged. Losses that are not fully covered by OPC’scausing loss of income. OPC purchases insurance policies may have an adverse effect on OPC.
In addition, maintenance work may result in operational shutdowns and impact results. For example,required to cover risks associated with its activity, as planned, major overhaul maintenance work was completed between September and November 2018, which halted the OPC-Rotem plant’s operations along with the related energy generation activities, which impacted results for that period. OPC’s long-term service agreement for the maintenance of OPC-Rotem includes timetables for performance of the maintenance work, and in particular the first “major overhaul” maintenance, which is to be performed every six years. Regular maintenance work is conducted approximately every 18 months; the most recent regularly scheduled maintenance in 2020 was delayed due to COVID-19 related restrictions resulting in completion of this maintenance and relating shutdowns later in 2020. While these shutdowns and delayrequired in the timing oflicenses it was granted and under the planned maintenance work did not havefinancing agreements to which it is a significant impact onparty, however there is no certainty that in such cases OPC will be compensated for some or all the generation activities of the OPC-Rotem power plant and its results, and such delays or shutdowns in the future could have a material impact on OPC. The next regular maintenance work is expected to take place in October 2021.damages it may suffer.
Furthermore, OPC-Hadera reached COD on July 1, 2020. Certain components of the gas and steam turbines were subject to replacement, repair or improvement work during December 2020 and early 2021, and additional work is expected in the rest of 2021. During performance of such work, the power plant is expected to be operated partially. Partial operation or shutdowns for continued periods could impact OPC-Hadera’s compliance with availability provisions.
The political and security situation in Israel may affect OPC.
A deterioration ofin the political and security situation in Israel may adversely affect OPC’s activities and harm its assets. Securityassets in a number of ways, which may have an adverse effect on OPC’s results and operations. For example, security and political events, such as a war or acts of terrorism, may harmcause damage to the facilities servingused by OPC, (includingincluding damage to the power station facilitiesstations owned by the Company), theOPC, OPC’s projects under construction, of the OPC’s current development projects and future projects, computerIT systems, facilities for transmission of natural gas to the power stations and the electricity transmission grid. In addition, such acts may cause damage to OPC’s material suppliers, including natural gas suppliers, thereby affecting continuous high-quality supply electricity.
Furthermore, a deterioration in the political and security situation or political instability in Israel may have an adverse effect on OPC’s material suppliers, thereby limitingIsrael’s economic situation, specifically Israel’s credit rating and financial system (banks and institutional entities) and accordingly on OPC’s ability to supply electricityexecute new projects, raise funding for its operations and plans, and develop new projects. In addition, such deterioration may have an adverse effect on the consumption patterns and the nature and scope of OPC’s customers in Israel and/or their financial position, which may adversely affect OPC’s results. A deterioration in OPC’s results may affect its ability to meet its customers reliably. Likewise, a deteriorationundertakings under the financing agreements and bond debentures, specifically with respect to financial covenants, liquidity, the ability to repay and obligations and to refinance such agreements (including renewal of the short-term credit facilities). Furthermore, negative developments in the political and security situation in Israel may have a negative effect on OPC’s ability to construct new projects, to raise capital for new projects and to initiate new projects in areas exposed to a security risk. Negative developments intrigger the political and security situation in Israel and various security events may cause additional restrictions on OPC, includingimposition of boycotts by various parties. In addition, in such cases,parties and may lead to claims by parties with whom OPC has contracted, may claim to terminate their obligations pursuant to the agreements with the OPCfor example, that contracts have terminated due to the occurrence of force majeure events.events as well as limited availability of various experts. In addition, personnel availability issues may arise as some of OPC’s employees may be called for reserve military dutydrafted as reservists and their absence may affect OPC’s operations. Furthermore, issues may arise in view of security developments in connection with the performance of maintenance works, construction work, as well as an adverse effect on the supply chain and the availability of components in light of the tensions and the increasing risks in trade routes in the Red Sea, and scaling down of airline activity. These effects may have an adverse effect on the arrival of equipment and foreign personnel to Israel (including personnel and equipment required to carry out maintenance and construction work in the OPC group’s sites in Israel) and the time frames for their arrivals.
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, however there is no certainty that in such cases, OPC will be compensated for some or all of the damages it may have suffered.
In view of the increasing risks and the security risk that has materialized, the insurance terms and conditions may change to become not as favorable as existing ones and make it difficult or limit the ability to renew insurance policies. Furthermore, changes in the political conditions in the United States or security or global geopolitical events may also affect OPC’s operations.activities, including due to changes in natural gas and energy prices or government policies in the field of energy.
In addition, changes in the political conditions in the United States or security or global geopolitical events may affect OPC’s operations in the United States, including natural gas and energy prices, and government policy in the field of energy.
The War may affect OPC operations in Israel.
There is a significant uncertainty as to the development of the War (which started in October 2023 and as at the date of this report is still underway) and its impact on OPC and its operations, and there is also significant uncertainty as to the impact of the War on macroeconomic and financial factors in Israel, including the situation in the Israeli capital markets and the credit rating of the State of Israel.
OPC’s business activities may be affected by the War in the following ways:
Uninterrupted activity of the power plants—OPC power plants in Israel continue to generate electricity pursuant to the provisions of their electricity generation licenses. OPC makes the necessary adjustments on an ongoing basis to ensure uninterrupted activities. OPC’s sites (similar to most private business activities in Israel) could be exposed to physical damage as a result of the War. OPC companies (including OPC-Rotem, OPC-Hadera, Kiryat Gat and Tzomet) have obtained insurance policies that provide certain coverage in connection with direct physical harm and consequential damages (lost profits directly or in respect of War damages to other significant parties, such as suppliers, subject to certain conditions) deriving from terrorist and war activities. The insurance policies expire on various dates in 2024. OPC is subject to risks that insurance cover may not compensate all or even some of any damages suffered.
Furthermore, OPC’s operations in Israel are subject to the directives of the Defense and Cyber Unit in the Ministry of Energy regarding cyber defense matters in power plants. OPC employs a multi-faceted approach with respect to protection of its generation facilities against cyber-attacks, particularly protections against outside intrusions, protections against internal attackers that have access to the control networks of the power plants (e.g., suppliers and technicians) and the creation of real time capabilities for monitoring and identifying cyber events. Since the outbreak of the War, OPC is making the required adjustments on an ongoing basis in order to minimize the exposure to cyber risks.
Uninterrupted supply of natural gas to the power plants—OPC’s power plants’ main suppliers of natural gas are Tamar and with Energean. From the beginning of the War and up to November 12, 2023, the supply of the natural gas from the Tamar reservoir was suspended, as the Tamar gas field was shut down during parts of the fourth quarter 2023. There has been no change in the activities of the Karish reservoir, which belongs to Energean, as a result of the War. In addition, the Leviathan reservoir (an offshore gas field in the Mediterranean, approximately 130 km off the shores of Haifa, Israel, with estimated reserves of recoverable gas of 22.9 tcf (the “Leviathan reservoir”)) is continuing its supply of gas to the Israeli economy. The continuation of the activities of the Karish reservoir and the Leviathan reservoir have been significantly impacted by the scope of the War and a worsening of the defense (security) situation in Israel, particularly in the north. During the suspension period of the Tamar reservoir, OPC acquired natural gas mainly from Energean as well as under short term agreements and casual transactions in the secondary market. During this period, there was no significant change in OPC’s natural gas costs compared with the situation existing prior to the start of the War. A shortage or interruption in the supply of natural gas from the Karish reservoir (without utilization of compensatory agreements under Standard 125, as detailed below) could have a significant negative impact on OPC’s natural gas costs.
OPC-Rotem, OPC-Hadera and Tzomet power plants are “two fuels” generators of electricity (i.e., they have the capability of operating using both natural gas and diesel oil, subject to adjustments). During this period, the plants had a sufficient amount of diesel oil in conformance with the terms of the license of each plant. OPC-Hadera and Tzomet power plants are subject to Standard 125, which covers a case of a shortage of natural gas in the economy. Pursuant to OPC’s position and based on past experience, Standard 125 also applies to OPC-Rotem power plant, and OPC has expressed its position to the Electricity Authority regarding this matter.
Electricity Demand — there has been no material impact of the War on the level of demand for electricity by OPC’s customers in Israel. However, OPC’s customers (including significant customers) have facilities in Israel that could be exposed to physical damage or to economic and other consequences of the War, and their continued regular operation (and, in turn, OPC’s revenues therefrom) could also be negatively impacted by the War.
Proposed decision of the Electricity Authority regarding coverage of expenses of the War of Israel Electric Company Ltd.—on October 26, 2023, the EA published hearing results whereby the revenues from sale of the Eshkol power plant (“Eshkol”) (in excess of the carrying value in the books plus the costs of the land and the selling costs) will used for purposes of covering expenses incurred and realized during the War, including costs of diesel oil in accordance with the principles provided in the hearing regarding the manner of spreading out the expenses and recognizing them as a derivative of the surplus revenues. A final decision regarding the matter has not yet been made.
Financial strength and liquidity—A significant adverse impact on the ability to generate cash from OPC’s current operating activities in Israel due to, among other things, occurrence of one of the risks above, could have an adverse effect on OPC’s financial strength and on its ability to comply with the provisions of the financing agreements of OPC’s companies, including the debentures, as well as on the ability to utilize credit facilities. A negative impact on the credit rating in Israel and, accordingly, a possible negative impact on the credit rating of the banks in Israel, could impact compliance with the minimum rating commitments. Subject to certain conditions, OPC may consider raising debt and/or equity in order to reduce the possible impact. For example, in January 2024, OPC completed issuance of debentures (Series D), in the amount of about NIS 200 million.
At this stage, it is not possible to assess the effect that the War may have on OPC’s operations in Israel.
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 coronavirus.
globe. The outbreak of 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 measures take to address itrestrictions implemented as a result thereof, could have had ana material impact on business globally including IsraelOPC’s main suppliers (such as suppliers of natural gas, construction and our operations. The coronavirus outbreak has led to quarantines, cancellation of events and travel, businesses and school shutdowns and restrictions, supply chain interruptions and overall economic and financial market instability. For example, in light of the restrictions on entry into Israel due to the coronavirus pandemic, the OPC-Rotem maintenance work was postponed and was ultimately performed in October 2020. Both contractors informed OPC that these circumstances constitute a force majeure under their agreements with OPC. Further proliferation and outbreaks of the coronavirus, including outbreaks of new variations could cause additional quarantines, reduction in business activity and consumption in the Israeli market, labor shortages and other operational disruptions, andcontractors) or OPC’s main customers, may adversely impactaffect OPC’s activities and resultsperformance, as well as its ability to complete projects under construction inon time or at all and/or on its ability to executedexecute future projects. The full impact of this outbreak on OPC will depend on future developments, including continued or further severity of the outbreak of the coronavirus, impact on main suppliersA pandemic (such as suppliersCOVID-19) might lead to disruptions in the global supply chain of natural gasvarious 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 maintenance contractors) or main customers, the extent the virus spreads to other regions, including Israel, and the actions to contain the coronavirus or treat its impact which are outside of OPC’s control.
Further to notices issued to OPC in 2020 by Energean claiming “force majeure events” under its agreement, in September 2020, Energean issued an additional notice to OPC claiming force majeure events under its agreement and indicating that it expects flowing of the first gas from the Karish reservoir to take place in the second half of 2021. OPC rejected the force majeure contentions under the agreements. As stated in Energean's January 2021 publications, flowing of gas from the Karish reservoir is expected to take place during the fourth quarter of 2021. This projection requires an increase in workforce in order to be attained, and if such increase is not effected the flowing of gas may be further delayed. In February 2021, as part of issuance of bonds by Energean, Moody’s published a report stating that the full operation of the Karish reservoir may be delayed to the second quarter of 2022. There is, therefore, no guarantee that such alternative gas supply will be available by the stated timeframes or at all, which could have a material adverse effect on OPC’s business, financial condition and results of operations.
Changes in the Consumer Price Index in Israel or the U.S. Dollar to NIS exchange rate could adversely affect OPC.
Inflation in Israel may affect OPC. A significant portion of the liabilities of OPC and its subsidiaries is linked to the CPI, including the interest rates applicable to a substantial part of the OPC-Rotem, OPC-Hadera and Tzomet loans and OPC’s Series B bonds. Therefore, changes to the CPI could impact OPC’s financing expenses and results of operations. In addition, to the extent that the price OPC pays for gas is above the floor price in its gas supply agreements, the price it pays for gas is linked in part to the U.S. Dollar to NIS exchange rate, and accordingly variations in such rate can impact OPC’s results. The IEC’s electricity tariff is also set, in part, in accordance with the IEC’s fuel costs that are denominated in U.S. Dollars and is therefore also affected by variations in the U.S. Dollar to NIS exchange rate.
There are 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 high exit costs or objections from various parties (whose approval OPC requires), in connection with dispositions of its operating companies, development projects or their assets. For example, pursuant to Electricity Sector Law the transfer of control over an entity that holds a generation license in Israel must be approved by the EA. Additionally, there are restrictions on a transfer of control of OPC, OPC-Rotem, OPC-Hadera and Tzomet, pursuant to, among others, OPC-Rotem’s and Tzomet’s PPAs with the Israel Electric Corporation, or IEC (which PPAs will be assigned to the System Administrator), the trust deed relating to OPC’s bonds, and OPC-Rotem’s, OPC-Hadera’s and Tzomet’s credit agreements. Such restrictions may prohibit or make it difficult for OPC to dispose of its interests in its businesses.
OPC is also defined as a “significant real corporation.” As a result, OPC is subject to various restrictions, which mainly include restrictions on significant financial entities holding an interest (above a certain percentage) in such companies and restrictions on OPC’s holdings (above a certain percentage) of financial entities.
Such restrictions may also limit Kenon’s ability to transfer its interests in OPC.
OPC holds 80% of OPC-Rotem and has entered into a shareholders’ agreement with the minority shareholder.
OPC owns a majority of the voting equity in OPC-Rotem (80%), and has entered into shareholders’ agreements with Veridis, the 20% minority shareholder of OPC-Rotem. The shareholders’ agreement grants Veridis certain minority rights, including veto rights over certain decisions, including (i) changes to OPC-Rotem’s constitutional documents, (ii) the liquidation of OPC-Rotem, (iii) changes to the rights attached to OPC-Rotem’s shares that may prejudice shareholders, (iv) entry into related party transactions, (v) changes in OPC-Rotem’s activities and entry into new projects, (vi) significant acquisitions and dispositions, (vii) changes in OPC-Rotem’s share capital or incurrence of significant debt and (viii) appointment or dismissal of directors on behalf of Veridis or the auditors. The agreements also provide for a right of first refusal and tag-along rights in the event of a sale of OPC-Rotem shares by any of the parties. Therefore, OPC’s ability to develop and operate OPC-Rotem may be limited if OPC is unable to obtain the approval of Veridis for certain corporate actions OPC deems to be in the best interest of OPC-Rotem. In addition, OPC’s ability to dispose of its interest in OPC-Rotem may be limited as a result of the foregoing. OPC’s operation of OPC-Rotem may also subject OPC to litigation proceedings initiated by Veridis.development.
OPC requires qualified personnel to manage and operate its various businesses and projects.a skilled workforce.
OPC requires professional and skilled personnel in order to manage its currentoperating activities and the performance of its projects, and to serviceprovide services customers, suppliers and respondother parties. OPC needs a professionally-trained and skilled workforce in order to manage OPC’s operating activities, execute the projects it owns and provide services to customers, suppliers and suppliers.other parties. The services provided by OPC require special training. Therefore, OPC must be able to retain employees with appropriate qualifications. During the power plants’ construction stage, most of the employees, experts and professionalsadvisors 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. As a result, OPC faces 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 retention 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 infrastructure that is in line with OPC’s growth rate. Furthermore, travel restrictions implemented as a result of a pandemic or natural disaster or any other event of deterioration or escalation in the necessary skills. Furthermore, OPC employs foreign employees. Any unavailabilitypolitical and/or security situation, including the War, may lead to shortage of qualified personnel could negatively impactexpert 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.
In addition, mostSimilarly, 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, to a certain extent, 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 and the OPC Hadera’s operations employeesOPC-Hadera’s workers are employed through aunder collective agreement. Collectiveagreements. The collective agreements may reduce managerial flexibilityrestrict OPC’s management’s ability to conduct operations in a flexible manner, and imposemay lead to additional costs to OPC. Furthermore, difficulty with renewal of the collective agreements or any related labor disputes might have an adverse effect on OPC.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.”
TheAn 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 and relies on the accuracy, availability and security of information technology systems for data processing, storage and reporting. In recent years, cyber security attacks of security systems have increased globally and OPC could be exposed to such attacks, which may harm its business and operations or result in reputational damage. These attacks are becoming more sophisticated, and may be perpetrated by computer hackers, cyber terrorists or other perpetrators of corporate espionage. Given the security risks in Israel and the industry in which OPC operates, it may be particularly susceptible to cyber security attacks.businesses.
If a cyber-attack occurs,Although OPC may notis 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 on its information systems and any such attack could have a significant effect on OPC’s operations. Cyber security attacks could include malicious software (malware), attempts to gain unauthorized access to data, social media hacks and leaks, ransomware attacks, remote control and shutdown of critical systems, and other electronic security breaches of OPC’s information technology systems and its power plant facilities as well as the information technology systems of its customers and other service providers that could lead to disruptions in criticalOPC’s electricity production and supply, in OPC’s IT systems, unauthorized release, misappropriation, corruption or loss of data or confidential information. Furthermore, damage to such systemsin OPC’s reputation and may also result in service delaysdata theft or interruptions to OPC’s ability to provide electricity to its customers.leaks (including private information). In addition, any system failure, accident or security breach could result ina lack of compatibility between IT systems, management and business disruption, unauthorized access to, or disclosuredepartments and the existence of customer or personnel information, corruptiontechnological gaps, increase cyber risks. The fact that OPC is an Israeli company puts it at a higher risk of OPC’s data or of itscyber-attacks. In the event that a major cyber-attack against OPC occurs and is not prevented by the defense systems, reputational damage or litigation. OPCthis 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. OPC, therefore, remains potentially vulnerable to additional known or yet unknown threats, as in some instances, OPC and its customers may be unaware of an incident or its magnitude and effects. Should OPC experience a cyber-attack, this could have a material adverse effect on OPC’s operations and reputation. In addition, OPC may incur costs to protect itself against damage to its reputation, business, financial conditionIT systems and to recover from such damage, including, for example, a system recovery, protection against any legal actions or results of operations.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 19note 18 to our financial statements included in this annual report.
LitigationLegal 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”), the IEC, Israel Tax Authority, or ILA), and excessive verdictsoutcomes may occur.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 intended to reduce various risks, including policies related to development projects, as isthat cover damages customary in the industry. However, the existingnot all risks and/or potential exposures are covered and/or may be covered by OPC’s various insurance policies. Furthermore, insurance policies maintainedplace coverage limits on certain risks, and include deductibles and/or exclusions, as a result of which any insurance benefits that may be received by OPC and its subsidiaries and associated companies maywill not cover certain types of damages or may notnecessarily cover the entirefull extent of the potential damages and/or losses and/or liabilities. The decision as to the type and scope of damage caused. In addition,the insurance is made taking into account, among other things, the cost of the insurance, its nature and scope, regulatory and contractual requirements (including by virtue of project financing agreements), and the ability to obtain adequate coverage in the insurance market. OPC may not be able to renew or obtain insurance on comparableto cover certain risks, and there is uncertainty as to OPC’s ability to renew policies that cover war and terror risks in Israel due to the War (and OPC may take out new policies whose terms in the future. OPC andare inferior than those of its subsidiaries may be adversely affected if they incur lossesexisting policies). Any damages that are not partially or fully covered by theirOPC’s insurance policies.
OPC’s operations are significantly influenced by regulations.
OPC is subject to significant government regulation. OPC-Rotem, OPC-Hadera and Tzomet are governed by different regulatory regimes set by the EA and any future projects will also be governed by different regulations, 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 changespolicies may have an adverse effect on OPC’s activityOPC, and resultsthere is no certainty that OPC or on its terms of engagement with third parties, such assubsidiaries and investees will receive full compensation under its customers and suppliers, such as the Tamar Group. In the coming years, OPC expects frequent regulatory changespolicies in the industry, including in relationevent of damage. In addition, OPC’s failure to the private electricity market in Israel, which isrenew insurance policies may constitute a new and developing market. Regulatory changes may impact the power stations owned by OPC breach of OPC’s licenses and/or the power stations that it intends to develop, including the economic feasibility of establishing new power stations.financing agreements.
Furthermore, OPC is subject to health and safety risks.
OPC’s operations involve various safety risks including safety risks relating to the operation and the equipment required to operate OPC’s power plants, and the power plants use chemical substances by power plants, some of which are toxic and/or flammable. Safety incidents may cause damage, injuries and even loss of life among employees and subcontractors’ employees. Such incidents may cause reputational damage, and expose OPC to civil or criminal lawsuits in respect of bodily injury or other damages. OPC’s expansion of its activities in constructing and operating power plants and generation facilities on consumer’s premises increases such risks. The expansion of OPC’s activity to include the building and operating additional power plants and generation facilities on consumers’ premises increases the probability that such risks will materialize. OPC has adopted procedures covering safety incidents, which include reporting of safety incidents and the steps to be taken should such incidents occur, including bodily injury. However, such procedures may not be sufficient to prevent damage from occurring as a result of such incidents and such procedures cannot prevent safety incidents. OPC maintains third-party insurance and employers’ liability insurance maintained, however, such insurance coverage does not guarantee full coverage in respect of the damage caused by any incidents.
Furthermore, OPC’s activities are subject to environmental, safety and business licensing laws and regulations including those that seek to regulate noise pollutionchange regularly. Legislative changes and emission of contaminants to treat hazardous materials. If stricter regulatory requirements are imposed on private electricity producers environmental standards may affect OPC’s operations and facilities and its costs. Deficiencies and/or if OPC does not complynon-compliance with such requirements,environmental and safety laws and regulations, this couldthe 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 expenses relating to cleaning and remediation of environmental damages, which might have an adverse effect on OPC’sthe operations and operating results and activity. Furthermore, stricter regulatory requirements could require material expenditures or investments byof OPC.
Additionally, OPC requires certain licenses to produce and sell electricity in Israel, and may need further licenses in the future. For example, in November 2017, 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 Administrator). 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 issued standards regarding deviations from consumption plans submitted by private electricity suppliers, which will become 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 has stated that this regulation will apply to OPC-Rotem after supplementary arrangements have been determined for OPC-Rotem, which have yet to be determined. OPC-Rotem is currently in discussions with the EA and OPC has submitted its position to the EA that preserving OPC’s rights under the OPC-Rotem tender required granting a supply license at the same time as applying the described decision to OPC-Rotem. This regulation could limit OPC-Rotem’s operations if it does not obtain a supply license or if it obtains a license that contains more restrictive terms than expected. OPC is still examining the effects of the decision on OPC-Rotem and OPC-Hadera.
Furthermore, the grant of a permanent generation license to Tzomet, upon expiration of the conditional license, is subject to Tzomet’s compliance with the conditions set by law. 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 also “—OPC faces risks in connection with the expansion of its business.”
With the acquisition of CPV, OPC is subject to risks relating to the regulations applicable to CPV's business in the United States.
Construction and development projects may not be completed or, if completed, may not be completed on time or perform as expected.
OPC faces risks in connection with itsthe construction and development projects,of its projects.
Projects under construction or development involve specific risks in addition to general or industry-specific risks, including future projects, in particular because it owns projects at a development stage. Constructing and developingTzomet which has only recently begun operations. The construction of a power station project entails certainplant involves a range of construction risks, such as:
delays in project completion,
as risks associated with the development stages and advancement of the planning procedures, the construction contractor
supply and operationits financial strength, the supply of key equipment
performance and the condition of workssuch equipment, including increases in equipment and material prices, transport costs and supply schedules, the condition of the facilities and their systems, execution of the work at the required specifications,
quality and on time, receipt of the services required from the IEC to establish the station and connect it to the grid (which may be affected by sanctions and IEC strikes),
impact on PPAs from any delays in completing new projects,
applicable regulations, and
obtaining the required approvals and permits for the development and operation of the station, including obtaining permits required in connection with the environment, including emission permits, and compliance with their terms.
OPC faces these risks in the development of its Tzomet project.
Tzomet is subject to conditions set forth in its 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 September 2018, Tzomet entered into an EPC agreement with PW Power Systems LLC, or PW, for construction of the Tzomet project. In March 2020, Tzomet issued a notice to commence to the contractor under the agreement and extended the period for completion of construction by three months. OPC’s management currently does not expect that the extension will result in a delay in the project. For more information on Tzomet’s EPC agreement, see “Item 4.B Business Overview—OPC—OPC’s Description of Operations—Tzomet.” If OPC is unable to meet its commitments or achieve the milestones under the agreement, including in the case that OPC is unable to obtain relevant approvals, this could result in increased costs for or delays in the project, which could have a material adverse effect on our business, financial condition and results of operations.
In December 2019, Tzomet entered into a financing agreement to finance the construction of Tzomet’s power plant, and funding under this agreement is subject to conditions, see “Item 5.B Liquidity and Capital Resources—OPC’s Liquidity and Capital Resources—OPC’s Material Indebtedness—Tzomet Financing.” If Tzomet is unable to comply with any of the conditions this could impact the financing for the construction of the power plant and resultits connection to the grid, the applicable regulation and obtaining the permits required for the planning stage, for the execution of construction and operation of the power plant, including obtaining the necessary permits for planning procedures, the construction of the facility, environmental permits, including emission permits and compliance with their terms and conditions.
Such development and 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 delaysother geographic regions, including the regions in which CPV operates. The materialization of any such construction risks may, among other things, 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 an inability to complete the project.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 to third parties in terms of schedule or cancellation of the projects and loss of investments in OPC. In addition, the provisions regarding the compensation of OPC by construction contractors for under-performance of the power plants and for the delay is normally capped. 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 and meet deadlines may have adverse effect on OPC’s businesses and operations, including its liabilities to financing entities, authorities and customers and on credit support OPC has provided 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 these 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 from other IPPs.in its operations.
In recent years,The policies of governments where the Israeli government’s policy has beenOPC group operates is to open the electricity market to competitioncompetition. In Israel, such a policy reduces the IEC’s market share in the generation and supply segment, it has and may further lead to encourage the entry of private electricity producers. This policy has increasedan increase in the number of private electricity producers increasing the level ofand intensify competition in the privateIsraeli electricity generation and supply market, which may have an adverse effect on OPC’s business.
Pursuant tocompetitive position. Regulations set by the Electricity Sector Law (Amendment No. 16EA with the aim of opening the Israeli electricity supply market further intensify competition in the supply segment, and Temporary Order) (2018) that was published in July 2018, the IEC is required to sell five of its power plants (currently remaining plants are three) through a tender process by 2023, whichthis trend is expected to reduce the IEC’s market share to below 40%. OPC participatedincrease in the tenders ofnext few years. In recent years, competition in the Alon Tabor plant and Ramat Hovav plants — the first two plants that have been sold out of the five plantssupply to be sold by the IEC — but was not the winning bidder. There is no certainty that OPC will participatecustomers in future IEC tenders or that it will be successful.
Furthermore, the IEC will be required to build and operate two new gas-powered stations, but will not be authorized to construct any new stations or recombine existing stations. This new law is expected to further increase competition from private producers,Israel has intensified, which may have an adverse effect on OPC’s business. For more information regarding this law, see “Item 4.B Business Overview—Our Businesses—OPC—OPC’s Description of Operations—Regulatory, Environmental and Compliance Matters.”
Increased competition could make it more difficult for OPC to enter into new long-term PPAs, renew the existing PPAs at the time they expire. OPC-Rotem has a PPA with the IEC, the government-owned electricity generation, transmission and distribution company in Israel, or the IEC PPA (which will be assigned by IEC to the System Administrator). The term of the IEC PPA is for 20 years after the power station’s COD. According to the agreement, OPC-Rotem is entitled to operate in one of the following two ways (or a combination of both with certain restrictions set in the agreement): (1) provide the entire net available capacity of its power station to IEC or (2) carve out energy and capacity for direct sales to private consumers. OPC-Rotem has allocated the entire capacity of the plant to private consumers since COD. Under the IEC PPA, OPC-Rotem can also elect to revert back to supplying to IEC instead of private customers, subject to twelve months’ advance notice. If OPC is required to rely on the IEC PPA because it is unable to enter into sufficient PPAs as a result of increased competition, it will be faced with lower margins, which may have an adverse effect on its business, financial condition and results of operations. In January 2020, Tzomet entered into a PPA with the IEC, or the Tzomet PPA. Once the Tzomet plant reaches its COD, its entire capacity will be allocated to the System Administrator pursuant to the terms of engagement between OPC and its customers. Furthermore, the Tzomet PPA, and Tzomet will not be permittedactivity of the CPV Group is also exposed to sign agreements with privatecompetition in the market in which it operates. In recent years, competition in the supply to customers unless the electricity trade rules are updated.
Furthermore, entry into PPAs that are not long-term, are at less competitive prices and/or with high “take or pay” commitments could have a material adverse effect on OPC’s business, financial condition and results of operation.segment in Israel has intensified, which may adversely affect OPC.
OPC is dependent on certain significantmaterial customers.
OPC has a small number of material customers, that purchase a significant portion of OPC’s output under PPAs that account for a substantial percentagecharacterized by high consumption rates of the anticipated revenue of itstotal generation companies. OPC’s top two customers represented approximately 42% of its revenuescapacity in 2020; therefore,Israel. OPC’s revenues from theelectricity generation of electricityin Israel are highly sensitive to the consumption by significantof material customers. Therefore, shouldexpiration of an agreement with a material customer or where there be a decrease inis no or lower demand for electricity from OPC’s significant customersby a material customer or should such customerswhere a material customer does not fulfill theirfulfil its obligations including payment default by failingsuch customer or disputes, or where OPC fails to make paymentsfulfill its obligations to OPC, OPC’s revenues could be significantly affected.
Intel and a group of companies related to the Company’s controlling shareholder, the Bazan Group, a related party of OPC, are major OPC customers, and represented approximately 22.5% and 19.3%, respectively, of OPC’s revenues in 2020. Loss of these customers couldmay have a material adverse effect on OPC’s businessrevenues and resultsits operating results.
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 operations. In January 2018, a shareholder of the ORL Group filed a claim against,such agreements if they are renewed (due to, among others, increased the competition in the market in which OPC regarding certain gas purchase transactions. If this suit operates). In addition, OPC is exposed to collection risks and/or related considerations impacts OPC’s ability to do businessconsumption risks in connection with the ORL Group or other related parties, or if OPC were to otherwise lose these significant customers, this could impact OPC’s business and results of operations.material customers.
Furthermore, OPC-Hadera is dependent on Hadera Paper’sInfinya’s consumption of steam. If such consumption ceases, it could have a material effect on the ability to benefit from the arrangements set for electricity producers using cogeneration technology.
A failure to anticipate the electricity consumption profile of OPC’s operationscustomers, including its material customers, and OPC-Hadera’s classificationan increase of such consumption over the production capacity of OPC’s production facilities and power plants and tariffs may adversely affect OPC’s power plants and tariffs and may impair OPC’s profitability. In addition, OPC is exposed to the financial strength of the System Operator.
OPC may suffer from temporary or continued interruption to regular supply of fuels (natural gas or diesel fuel) and changes in 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, including an increase in prices as a cogenerationresult of the foregoing, may disrupt the electricity producer (which entails certain benefits)generation activity and consequently adversely affect OPC’s operating results. A continued interruption to the supply of natural gas would require OPC to generate electricity by using an alternative fuel as far as possible (in Israel, the main alternative fuel is diesel fuel). For further information onDue to the EA’s interpretive approach to regulations relatingof compensation of operators in the event of shortages of natural gas in Israel, as applicable to cogeneration electricity producers, see “Item 4.B Business Overview—OPC—OPC’s Description of Operations—Regulatory, Environmental and Compliance Matters—Regulatory Framework for Cogeneration IPPs.”OPC-Rotem as opposed to other operators, OPC-Rotem may not be entitled to compensation in the event it is required to use alternative fuels.
Supplier concentration may exposeFurthermore, in the event of purchases of natural gas in addition to purchases pursuant to existing gas supply agreements of the OPC group companies (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, including shutdown or damage due to significant financial credita state of emergency), there is no certainty regarding the price which OPC will be required to pay for the purchase of additional gas or performance risk.alternative gas. The cost of natural gas has a material effect on OPC’s margins.
With regard to CPV, natural gas purchases are based on market prices, and therefore the results of CPV Group are affected by the market price of natural gas.
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 including construction contractors, suppliers of equipment and maintenance services, suppliers of infrastructure services.
The Tamar Grouppower 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. Any disruptions and technical malfunctions in the continued operation, construction and maintenance 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 sole supplierprofits. The foregoing risks also apply to projects under construction. Furthermore, projects under construction and development depend on construction contractors in all matters pertaining to the completion of gas. If the Tamar Group is unableproject, the project’s performance and OPC’s ability to supply OPCfulfill 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 gas requirements, this couldundertakings or any other difficulties it faces in the construction of the project, may have a material adverse effect on OPC’s profitability.OPC. Furthermore, OPC has also entered into an agreement with Energean foris dependent upon infrastructure suppliers such as Israel National Gas Lines Ltd. (“INGL”) and the supplyIEC in Israel and on suppliers of electricity and gas infrastructure in the future. Energean’s natural gas reservoirs have been established. In early 2021, Energean notified United States.
OPC that it expects thatdepends on infrastructure, securing space on the flowing ofgrid and infrastructure providers.
The power plants owned by OPC use, and future projects and acquisitions in Israel will use, electricity grid to sell electricity to their customers, and therefore are dependent on the first gas fromIEC (which manages the Karish reservoir is expected to take placetransmission and distribution network) and the System Operator in Israel and on the electrical grid and regulator in the first quarter of 2022. Further to notices issued to OPC in 2020 by Energean claiming “force majeure events” under its agreement, in September 2020, Energean issued an additional notice to OPC claiming force majeure events under its agreement and indicating that it expects flowing of the first gas from the Karish reservoir to take placerelevant operating markets in the second half of 2021. OPC rejected the force majeure contentions under the agreements. As stated in Energean's January 2021 publications, flowing of gas from the Karish reservoir is expected to take place during the fourth quarter of 2021. This projection requires an increase in workforce by Energean in order to be attained, and if such increase is not effected the flowing of gas may be further delayed. In February 2021, as part of issuance of bonds of Energean, Moody’s published a report stating that the full operation of the Karish reservoir may be delayedUnited States. Unavailability or damage to the second quarter of 2022. There is no guarantee thatgrid infrastructures or disruptions in their operations or inadequate supply may damage OPC’s facilities and impair its ability to transmit the gas supply will be available by the stated timeframes or at all.
OPC-Rotem has a single maintenance agreement with Mitsubishi Heavy Industries Ltd., or Mitsubishi, for the maintenance of its power station. If Mitsubishi is unable to perform its obligations under its contract with OPC-Rotem, including warranties, this could resultelectricity generated in the technical malfunctioning of the power station. This could lead to delays in the supply of electricity, loss of revenues for OPC and a reduction in its profits. It could also have similar adverse effects on other projects once they are completed.
OPC-Hadera has a single maintenance agreement with General Electric International, Inc. and its affiliates and Tzomet has a single maintenance agreement with PW and are both subjectplant to the same risks identified above.
OPC relies on transmission facilities for the transmission of power and gas.
OPC’s businesses depend upon transmission facilities owned and operated by the IEC to deliver the wholesale power it sells from its power generation plants. If transmission is disrupted, or if the transmission capacity infrastructure is inadequate, OPC’s ability to sell and deliver wholesale powerelectricity grid, which may be adversely impacted. OPC’s businesses may also be affected by IEC strikes and sanctions.
Furthermore, there is currently a single company supplying natural gas to OPC and one company providing it with gas transmission services. OPC has an agreement with the same company to provide OPC with gas transmission services upon commencement of the Energean supply contract. Failure to comply with the requirements of these companies or limitations in the supply or transmission of gas by such companies could affect OPC’s ability to generate electricity using natural gas, which could have a material adverse effect on OPC’s businessbusinesses. Similarly, pressures on the transmission and resultsdistribution networks (including due to the introduction of operations. Finally, OPC’s plants require water for their operation. A continued disruptionrenewable energies), and delays in the water supply could disruptdevelopment of infrastructure that will support 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. In Israel, the power plants and projects under development are exposed to the system management and regulation of generation sources by the System Operator and prioritization of other generation plants over those of OPC. 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 electrical grid.
Furthermore, the power plants owned by OPC use water in 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 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 facilities over those of the Group.
OPC is subject to regulations in connection with ties with hostile entities and anti-corruption legislation.
As a business that has activities in Israel and the United States, OPC companies are 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, the United States and in other countries. OPC implements measures to ensure it is compliant with such regulations. However, considering the extensive scope of OPC’s activities (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’s businesses, development projects or other assets.
Exit barriers, including lack of adequate market conditions, high exit costs or objections from various parties, may make it difficult for OPC to dispose of various assets or companies it owns. An 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 (including by virtue of guarantees provided by OPC) may also restrict OPC’s ability to transfer control. Such restrictions and other similar restrictions applicable to companies controlled by OPC and to agreements with partners and the holdings structure in the power plants in the United States may prevent OPC 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 are not necessarily certain. 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 fulfill such undertakings secured by OPC’s guarantees may expose OPC to a requirement to pay or 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.regulations, including changes in regulation and rules applicable to electricity producers operating in the United States, compliance with license terms and conditions and with permit requirements, incentive policies and tax benefits for renewable energy.
As a business operating in the area of electricity generation (gas-fired energy and renewable energy) in the United States, CPV is subject to significantrisks associated with U.S. federal and local regulations and legislation, mainly relating to the U.S. electricity market and natural gas market, including environmental regulations.as well as to regulations affecting U.S. businesses in general. CPV’s activity is exposed to regulatory policies and to changes applicable to markets in which it operates. Such regulations, including the applicable regulatory enforcement policy, may change and could also be affectedimpacted, from time to time, by changes in political and governmental policies at the federal, state and statelocal levels. In addition,As a result, CPV’s resultsprojects may be adversely affected by the enhanced licensing requirements, including public hearings or administrative proceedings in connection with the management of its businesses. For implications regarding CPV’s Valley Title V outstanding process, see “Item 4B Business Overview—Regulatory, Environmental and development projectsCompliance Matters—United States—Permits/licenses required in connection with operational projects.” Regulatory restrictions applicable to CPV’s activity or holdings, or to the holdings in the renewable energy sector are affected by governmental policies (federal and state) relating toCPV Group, or any change in any of the promotion and granting of incentives to renewable energy. Furthermore,above could adversely affect OPC’s activity or results.
In addition, CPV is subject to environmental lawspolicies 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 renewaldecisions made by Regional Transmission Organizations (“RTO”) or Independent System Operator (“ISO”) of the licenses. A failuremarkets in which it operates or deviation fromexpects to operate. Changes in such policies or decisions may affect active projects (for example, the standards or regulationscapacity prices tenders) and/or non-compliance with the terms of the issued licenses, could have a material adverse effect on CPV’s business, results of operationprojects under development (for example, steps pertaining to interconnection 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, thistransmission agreements) could have an adverse effect on CPV’s results and activity.
Furthermore, stricteras a business operating in the area of renewable energy and operating to develop projects with carbon capture or utilization of use of hydrogen, CPV’s results and advancement of projects under development in this area are impacted by governmental policies (federal and state) relating to encouragement and incentivizing of renewable energy and carbon capture, as well as from the various permits required for such projects, including regulatory requirements could require material expenditurespermits. In case such incentives are minimized or investments by CPV.revoked, such change will adversely affect the profitability of such projects.
CPV is subject to market risks.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, primarily themainly related to prices of electricity, natural gas, emission allowances and certificates for renewable energy (REC—Renewable Energy Credits, as well asCertificates (the “RECs”). In addition, the CPV Group is exposed to fluctuations in the index pricesprice indices associated with the projects’ hedging agreements that have been entered into by certain CPV projects. CPV’sagreements. The projects generallymay enter into commodity prices hedgeprice hedging agreements to reducemitigate some of the exposure to price fluctuations and/or to assureensure minimum cash flows as an inherent part of the activities. However, such hedge agreementshedging arrangements may not ultimately assurealways be available (or may be on non-profitable terms, involving high costs or strict requirements for collateral) and may not provide full protection, against price fluctuations, including fluctuations 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 CPV’sthe CPV Group’s project operations, and may create obligations whether or not the underlying facility is either operating or available. In addition, hedging agreements may not be renewed or may be renewed on different terms and conditions and/or the hedge agreementscounterparty may not being renewed on favorable termsfulfill its financial obligations due to financial distress or at all. Also, once theseother factors. Hedging may also offset the energy margins of the CPV Group as a result of market conditions and hedging arrangements expire,conditions.
In addition, the CPV Group is exposed to changes in the capacity payments which are determined by auctions in the operating markets and to changes in the methodology of the capacity auctions, and 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 or the capacity payments which may vary according to market terms.
CPV’s facilities are subject to price fluctuations exceptdisruptions, including as a result of natural disasters, terrorist attacks, and infrastructure failure.
Local, national or global 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 operation. Disasters and terrorist attacks (including global disasters and attacks) may affect third parties with which CPV 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 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 transact with financial entities.
CPV requires funds for realization of growth plans
Realization of CPV’s growth plans depends on the ability to raise the required capital for the development, construction or acquisition of projects. Difficulty in raising required capital, which 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.
The main source for equity financing for CPV has been the investors in the CPV Group (OPC is CPV’s main investor). Additional equity financing by OPC may involve Kenon participating in equity raises of OPC. Any equity financing for the CPV Group may involve equity financing at the CPV Group level which would dilute OPC (to the extent such new hedging arrangements are entered into. ThisOPC is not the investor), which would indirectly dilute Kenon’s interest in CPV.
An inability to extend or renew certain agreements could have a materialan adverse effectimpact 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.
CPV’s operations and financial condition may be adversely affected by the outbreak of pandemics such as the COVID-19.
COVID-19 or another pandemic, or the persistence or development of new strains of COVID-19, may have an adverse effect on the results of the CPV Group’s operations results, its financial condition and cash flows, resulting from, 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), adverse impacts on the health on CPV’s workforce and the workforce of its service providers, and the inability of CPV’s contractors, suppliers, and other business partners to complete their contractual obligations.
Malfunction, accidents and technical failures may adversely affect CPV.
CPV’s facilities are subject to malfunctions such as mechanical breakdowns, technical disruption, malfunctions in the electricity and natural gas transmission systems and interconnection infrastructure, malfunctions in electricity connections, gas transmission connections, 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, availability of operating or construction projects, meeting schedules or compliance with obligations to third parties and market operators , could increase operating and equipment acquisition costs, impose penalties costs due to lack of capacity, and adversely affect CPV’s results of operation.
CPV faces risks relating to its technology systems, information security and cyber security.
The CPV Group uses IT, communication and data processing systems extensively for its operating activities. Physical, reputational or logical damage to such administrative and/or operational systems for any reason whatsoever may expose the CPV Group to delays and disruptions in its business activities, including the supply of natural gas and delivery of electricity, 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 physical or reputational 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 protect information security. However, there is no certainty as to its ability to prevent cyber-attacks or vulnerabilities on the Group’s IT systems.
CPV faces risks relating to its reliance on external suppliers (including transmission networks)
CPV’s business relies on third parties, such as construction contractors for construction projects, equipment suppliers, maintenance contractors, suppliers of natural gas and capacity of natural-gas transmission network, including natural gas projects that are exposed to risks involving securing uninterrupted transmission of natural gas. Global events and macro events, such as an increase in demand for raw materials, equipment and related services, which contribute to increases in costs of raw materials, equipment and freight and supply delays which may adversely affect the operations and results of the CPV Group. In addition, the projects are dependent on significant suppliers, and a termination of a suppliers’ 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 (including due to malfunctions) could adversely affect the activities of the CPV Group, including operational and development activities, and its results. For information regarding changes in solar panels supply, see “Item 4B Business Overview—OPC’s Description of Operations—OPC’s Raw Materials and Suppliers—United States—Services Agreements, Equipment Agreements and EPC Contracts.”
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, 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 that regulate the foregoing. 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. Compliance with environmental protection laws and regulations may cause significant costs arising from investments required for adjusting facilities and for operating activities which will meet the applicable standards, 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.
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 need to be renewed periodically depending upon the permit requirements. A failure to obtain the required permits and to comply with 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 place strict liability, jointly and severally, for the costs of cleaning up and restoring sites where hazardous substances have been dumped or discharged. CPV (and OPC) 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 and potentially both its existing natural gas-fired generation due to its high efficiency and new natural gas-fired generation with carbon capture or co-firing hydrogen. 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, have also passed 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. 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 such actions will prevent exposure to said penalties.
CPV faces risks in connection with the construction and development of its projects’ power plants.
As a business 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 foregoing factors may result in, among other things, delays in project completion, an increase in costs and adversely affect the CPV Group’s operating results and achievement of its strategy.
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)tornadoes or severe rain/snow events) could adversely affect CPV's activitiesthe CPV Group’s profits, operations and its financial condition and results of operation.results. Such severe weather conditions could also affect suppliers and the pipelines that supplysupplying natural gas to natural gas-poweredgas-fired facilities. Furthermore,In addition, severe weather conditions could cause damage to CPV’s facilities, increasedincrease repair costs and result in loss of revenue if CPV fails to supply electricity to the markets in which it operates.operates or exposes the CPV Group to capacity penalties in PJM or ISO-NE and liquidated damages to counterparties. To the extent that these losses are not covered by CPV’sthe CPV Group’s insurance or are not recovered by CPV through the price of electricity theyprices, this could have a materialmaterially adverse effect on CPV’s business,the financial condition, results, of operationoperating results and cash flows.flows of the CPV Group.
CPV’s facilities are subject to disruptions, including breakdownsCPV faces risks of difficulties in obtaining financing and other disruptions as a resultmeeting the terms of natural disasters, terrorist attacks, and infrastructure failure.
CPV’s facilities are subject to breakdowns, such as mechanical breakdowns, breakdowns in the electricity and natural gas transmission systems, breakdown of electricity and gas transmission connections, difficulties with fuel supply, and accidents or disruptions of the activities of the facilities or the infrastructure on which they operate. Any such disruption could have material adverse effect on CPV’s business, financial condition and results of operation.financing agreements.
CPV’s facilities and operations could be adversely affected by natural disasters, terrorist attacks, infrastructure failure (such as failure of gas pipeline systems, Regional Transmission Organizations, or RTO/Independent System Operator, or ISO systems) and other extreme events. Such events could also adversely impact CPV’s suppliers and customers, thereby adversely impacting CPV. In addition, such events may affect the ability of CPV's personnel to operate or maintain CPV’s facilities or perform additional tasks necessary for their proper operation. Natural disasters and terrorist attacks may also disrupt capital market activity and, consequently, CPV's ability to raise capital.
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, maintenance providers, suppliers of natural gas and capacity of natural‑gas transmission grids. Any disruption in the operations of such third parties could have a material adverse effect on CPV’s business, financial condition and results of operation.
An inability to obtain required financing could have a material adverse effect on CPV’s business, financial condition and results of operation.
CPV’sThe CPV Group’s results and its development projects could be adverselybusiness plans are materially impacted if we are unableby the CPV Group’s ability to obtain financing on attractive terms, or at all, to comply with the terms and conditions of CPV’s existingthe financing agreements entered into by the projects or the CPV Group and theits ability to refinance existing debt and credit on favorable terms or at all. Thecredit. In the absence of a debt refinance, repayment of the original financing will be required, which may adversely affect OPC's results. In addition, the CPV Group’s financing agreements that have been entered into at a project level include restrictions, covenants and obligations that could limit distributiondistributions or require or accelerate making of repayments upon occurrence of certain events (such as cash sweeps provisions) which are currently in certain events. If we are unable to obtaineffect. Difficulty in obtaining financing or refinancing on favorable terms or at allthat are worse than the prior financing may adversely affect CPV’sthe ability of the CPV Group to execute itsrefinance existing financing agreements and/or carry out projects under development and ultimately effecting whether projects or adversely affect the results of CPV’s active project.are economical. 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 in someunder certain circumstances - even the provision ofa demand for immediate repayment of the credit facilities, which could have a material adverse effect on CPV’s business, financial conditionloans and resultsenforcement of operation.
An inabilitycollateral given to extend or renew certain agreements could have an adverse impact on CPV’s business, financial conditionlenders (projects assets, projects rights and results of operation.
Most of CPV’s material agreements (including hedging agreements, financing agreements, gas supply agreements, gas transmission agreements and project management agreements) have short to medium terms,guarantees, as is customary in the market in which CPV operates. An inability to renew or extend agreements that are close to expiration on favorable terms or at all could have a material adverse effect on CPV’s business, financial condition and results of operation.
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. Therefore, its activities are subject to construction risks that are part of the construction of a power plant, including obtaining the required financing, receipt of permits, connection of the facility to transmission and distribution networks, compliance with timetables and dependency on technical teams and equipment. Any failure or delay with respect to such items could result in delays in project completion, increase in costs andapplicable), thus adversely affect the results CPV’s results of operation.
CPV’s operations and financial condition may be adversely affected by the outbreak of the coronavirus.
The spread of the coronavirus has had a significant impact on the economy and financial markets – both in the United States and worldwide. In addition, during the coronavirus outbreak, considerable instability is visible in the U.S. commodity markets, including a decline in the prices of electricity and natural gas. With the reduced worldwide demand for fuel, fuel prices plummeted to a low point and have remained at levels that turn new drillings in the United States into economic challenges. As a result, there has been a decline in the fuel production, mainly in the Permian Reservoir in Texas, as well as a decrease in the accompanying production of natural gas. Furthermore, the electricity market in the northeastern part of the U.S. was harmed by COVID-19, mainly due to a significant part of the population staying in their homes. In April through June 2020, the demand for electricity in the northeastern part of the U.S. was approximately 5%–10% lower than usual, with the most significant decline being experienced in New York City. Although CPV’s power plants continued to operate during COVID-19, there were changes in employee shift time schedules, a reduction of self‑initiated shutdowns for purposes of periodic maintenance, extension of the length of the unplanned periodic maintenance period, adaptations with respect to employees working from home and other adaptations required in the workplace. Furthermore, CPV was and continues to be required to make adjustments relating to information security at its power plants. In addition, COVID-19 has affected and may continue to affect the availability of suppliers and factors involved in the development and construction processes of CPV's projects. The full impact of this outbreak on CPV will depend on future developments, including continued or further severity of the outbreak of the coronavirus, impact on main suppliers or main customers, the extent the virus spreads to other regions, including the United States, and the actions to contain the coronavirus or treat its impact which are outside of CPV’s control. The outbreak of the virus and the (possible) spread thereof ataffecting the CPV power plants or restrictions on conducting business in the areas in which CPV operates, as well as the measures taken and that will be taken worldwide as a result thereof – which have impacted the economy and commodity markets in the U.S., in general, and the prices of electricity and natural gas, in particular – could have a material adverse effect on CPV’s activities, thwart completion of CPV’s project under construction and delay advancement of CPV’s projects under development, and could also impact the ability to commence execution of its future projects.
Risks Related to the Sale of the Inkia Business
We have indemnification obligations under the share purchase agreement for the sale of the Inkia Business
In December 2017, our wholly-owned subsidiary Inkia sold its Latin America and Caribbean businesses, or the Inkia Business, to an entity controlled by I Squared Capital, an infrastructure private equity firm. For further information on the sale and share purchase agreement see “Item 4.B Business Overview—Discontinued Operations—Inkia Business — Sale of the Inkia Business— Share Purchase Agreement.”
Under the share purchase agreement, our subsidiary Inkia has agreed to indemnify the buyerGroup’s results and its successors, permitted assigns, and affiliates against certain losses arising from a breach of Inkia’s representations and warranties and certain tax matters, subject to certain time and monetary limits depending on the particular indemnity obligation. Following repayment of the deferred payment agreement in October 2020, these indemnification obligations are supported by (a) a pledge of shares of OPC which represent 29% of OPC’s outstanding shares as of March 31, 2021, which pledge expires on December 31, 2021 subject to extension in the event of unresolved indemnity claims, and (b) a corporate guarantee from Kenon for all of the Inkia’s indemnification obligations, which expires on December 31, 2021, subject to extension in the event of unresolved indemnity claims. To the extent that Inkia is required to make indemnification payments under the share purchase agreement (and such payment obligations are agreed between buyer and seller or determined by a court in a non-appealable judgment), the buyer is entitled to seek recourse to the foregoing support arrangements in the following order: first, by exhausting rights under the OPC share pledge and second, against the Kenon guarantee.
If Inkia is required to make indemnification payments under the share purchase agreement this could require us to sell OPC shares or result in enforcement of the OPC share pledge and enforcement the Kenon guarantee, which could impact our liquidity and financial position. Furthermore, any enforcement of the OPC share pledge could result in the buyer acquiring a significant interest in OPC or could result in a sale of a significant amount of OPC shares which could adversely affect the market price of OPC’s shares.
If Kenon is required to make payments under the guarantee it may need to use funds from its businesses, or sell assets, including OPC shares. Furthermore, any sales of assets may not be at attractive prices, particularly if such sales must be made quickly to meet the sellers’ obligations.
We are subject to certain restrictions in connection with the agreements entered into in connection with the repayment of the Deferred Payment Agreement
In October 2020, Kenon received the full amount of the deferred consideration (approximately $218 million (approximately $188 million net of taxes)) under the Deferred Payment Agreement prior to the due date for such payment (December 2021). In connection with the agreement with the buyer of the Inkia Business to repay the Deferred Payment Agreement prior to initial scheduled maturity, the parties agreed to increase the number of OPC shares pledged to 55,000,000 shares (representing approximately 29% of OPC’s shares as of March 31, 2021) and to extend the OPC Pledge and the corporate guarantee by one year until December 31, 2021. In addition, Kenon has agreed that, until December 31, 2021, it shall maintain at least $50 million in cash and cash equivalents, and has agreed to restrictions on indebtedness, subject to certain exceptions.
Risks Related to Our Interest in Qoros
Qoros is significantly leveraged.
As of December 31, 2020, Qoros had external loans and borrowings of RMB3.3 billion (approximately $512 million) and loans and other advances from parties related to the Majority Shareholder of RMB5.3 billion (approximately $809 million). Qoros will require additional financing for its continued development and operating expenses, including accounts payable, and debt service requirements until it increases its sales levels, and is also seeking to extend repayment deadlines under its credit facilities. To the extent that the Majority Shareholder in Qoros provides additional financing to Qoros in the form of equity (or loans that convert to equity), Kenon’s interest in Qoros would be diluted.
strength.
Highly leveraged businesses are inherently more sensitive to declines in revenues, increases in expenses and interest rates, and adverse market conditions. This is particularly true for Qoros, as Qoros has yet to generate positive cash flows from its operations. Qoros has limited cash flows and uses a portion of its liquidity to make debt service payments, including interest and amortization payments on its RMB3 billion, RMB1.2 billion and RMB700 million facilities. This debt reduces its ability to use cash flows from operations to fund its operations, capital expenditures, or future business opportunities.
Qoros’ RMB3 billion syndicated credit facility, RMB1.2 billion syndicated credit facility, and RMB700 million syndicated credit facility contain affirmative and negative covenants. Those facilities, as well as its other short-term credit facilities, also contain events of default and mandatory prepayments for breaches, including certain changes of control, and for material mergers and divestments, among other provisions. A significant portion of Qoros’ assets secures its RMB3 billion syndicated credit facility and, as a result, the amount of collateral that Qoros has available for future secured debt or credit support and its flexibility in dealing with its secured assets is therefore relatively limited.
Qoros’ lenders under its RMB1.2 billion facility agreed to postpone RMB180 million (approximately $28 million) of repayments due during 2020 until the end of 2020 and all repayments are currently up to date. Qoros is in ongoing discussions with its lenders under its RMB3 billion, RMB1.2 billion and RMB700 million facilities to reschedule all future repayments.
If Qoros is unable meet its debt service obligations or otherwise comply with other covenants in its credit facilities, this would lead to an event of default. Each of Qoros’ significant debt facilities above contains a “cross-default” provision which provides for an event of default if any other debt of Qoros in excess of RMB50 million becomes payable prior to maturity, so a default under such other debt facilities would result in a default under the facilities referenced above and a default that leads to acceleration under either facility above will result in an event of default under the other facility. Currently, Qoros’ debt-to-asset ratio is higher, and its current ratio is lower, than the allowable ratios set forth in the terms of Qoros’ RMB3 billion syndicated credit facility, which was also the case in 2019 and 2020. The lenders under this credit facility waived compliance with the financial covenants under this facility through the first half of 2020. The waiver has not been extended and Qoros’ debt-to-asset ratio continues to exceed, or its current ratio continues to be less than, the permitted ratios. Qoros’ syndicated lenders have not revised such covenants and could accelerate the repayment of borrowings due under this credit facility. Such a default results in a cross default, enabling the lenders to require immediate payment under, Qoros’ RMB 1.2 billion and RMB 700 million facilities. If Qoros does not maintain a good relationship with its lenders or negotiate successfully with them this could impact requests for lender consents, including the pledge release over Kenon’s interest in Qoros in connection with Kenon’s April 2021 agreement to sell all of its remaining interest in Qoros (i.e. 12%) to the Majority Shareholder in Qoros.
In the event that any of Qoros’ lenders accelerate the payment of Qoros’ borrowings, Qoros would not have sufficient liquidity to repay such debt. Additionally, as a substantial portion of Qoros’ assets, including its manufacturing facility and significant portion of its intellectual property, secure its syndicated credit facility and other indebtedness, if Qoros were unable to comply with the terms of its debt agreements, this could result in the foreclosure upon and loss of certain of Qoros’ assets.
Kenon has outstanding “back-to-back” guarantee obligations to Chery in respect of guarantees that Chery has given in respect of Qoros’ bank debt and has pledged substantially all of its interests in Qoros to secure Qoros’ bank debt, as well as Chery’s guarantees of Qoros’ debt. Accordingly, if Qoros’ debt facilities become payable due to a default under these facilities or otherwise, Kenon may be required to make payments under its guarantees and could lose the shares in Qoros it has pledged. In addition, Kenon may be required to increase the amount of Qoros shares pledged (or Kenon may provide other credit support).
Qoros sales volumes decreased in 2020 and it needs to significantly increase sales to reach breakeven.
Qoros’ sales decreased to approximately 12,587 vehicles in 2020, as compared to approximately 26,000 in 2019. A substantial number of the 2019 sales reflected purchase orders by the leasing companies introduced by the Majority Shareholder in Qoros. In 2020, the number of vehicles sold to such leasing companies decreased to 1,544 compared to 22,900 in 2019. Qoros’ success will depend upon Qoros increasing its sales volumes, which will depend on, among other things:
the volume of vehicles purchased by customers introduced by the Majority Shareholder in Qoros;
the development of the Qoros brand;
successful development and launch of new vehicle models;
performance of its dealer network, including dealerships that are owned and operated by a party related to the Majority Shareholder in Qoros;
build-up of its aftersales and services infrastructure;
managing its procurement, manufacturing and supply processes;
establishing effective, and continuing to improve, customer service processes; and
securing additional financing to support its operating and capital expenses and further its growth and development.
Qoros will need to increase sales to a broad base of customers to establish its brand and create a sustainable customer base. Qoros’ success is also dependent upon the margins it achieves on the cars it sells.
In prior years, Qoros has sold a majority of its vehicles to leasing companies introduced by the Majority Shareholder in Qoros.
A significant portion of car sales in 2018 and 2019 were made to leasing companies, which were introduced by the Majority Shareholder in Qoros. In 2020, the number of vehicles sold to leasing companies significantly reduced. If these entities continue to reduce or cease their purchases from Qoros, it could have a material impact on sales which could have a material adverse effect on Qoros’ business, financial condition and results of operations. This concentration of sales also results in potential credit risk and impacts the development of the Qoros brand, which Qoros is seeking to establish across a broad customer base.
We have a minority interest in Qoros.
Kenon owns 12% of Qoros, as a result of the sale of half of its remaining interest in Qoros (i.e. 12%) to the Majority Shareholder in Qoros in April 2020. The Majority Shareholder in Qoros holds 63% of Qoros and Chery holds 25%.
Prior to the Majority Shareholder in Qoros’ investments, Kenon had a 50% interest in Qoros, and the right to appoint three of the six directors on the Qoros board, among various other management rights. Following the 2018 and 2020 sales of Qoros shares to the Majority Shareholder in Qoros, Kenon’s interest in Qoros has been diluted, and it is now entitled to only appoint two of the nine Qoros directors.
Accordingly, while Kenon maintains an active role as one of the three joint venture partners in Qoros, it holds a minority interest in Qoros. Qoros’ other joint venture partners may have goals, strategies, priorities, or resources that conflict with our goals, strategies, priorities or resources, which may adversely impact our ability to effectively own Qoros, undermine the commitment to Qoros’ long-term growth, or adversely impact Qoros’ business. In addition, the Joint Venture Agreement contains provisions relating to the transfer and pledge of Qoros’ shares, the appointment of executive officers and directors, and the approval of certain matters which may prevent us from causing Qoros to take actions that we deem desirable. For further information on the terms of our Joint Venture Agreement, see “Item 4.B Business Overview—Our Businesses—Qoros—Qoros’ Joint Venture Agreement.”
Qoros has entered into certain arrangements and agreements with its shareholders.
Qoros has entered into transactions with its shareholders and their related parties.
Qoros currently sells a significant portion of its cars through dealerships that are owned and operated by a party related to the Majority Shareholder in Qoros.
In recent years, Qoros has sold a significant portion of its cars to leasing companies that were introduced by the Majority Shareholder in Qoros.
Qoros has taken loans and other advances from parties related to the Majority Shareholder with outstanding balances as at December 31, 2020 of RMB5.3 billion (approximately $809 million).
Qoros sources a portion of its engines and spare parts from Chery and has entered into various commercial agreements with respect to the provision of such supplies from Chery. Qoros has also entered into a platform sharing agreements with Chery, pursuant to which Qoros provides Chery with the right to use Qoros’ platform in exchange for a fee.
Qoros has total amounts payable to Chery in the amount of RMB245 million (approximately $38 million) as of December 31, 2020.
Qoros may enter into additional commercial arrangements and agreements with shareholders or their affiliates in the future. Kenon’s ability to control the terms of such transactions may be limited. Such transactions could create potential conflicts of interest, which could impact the terms of such transactions.
Qoros faces certain risks relating to its business.
Qoros faces the following risks relating to its business, which could have a material adverse effect on Qoros’ business, financial condition and results of operations:
Risks relating to sales levels, brand and the achievement of broad customer acceptance — Qoros commenced commercial operations in the end of 2013 and has not achieved significant sales levels. Qoros’ future business and profitability depend, in large part, on its ability to sell vehicle models to its targeted customers in its targeted price range;
Risks relating to Qoros’ network of dealers to sell its automobiles to retail customers — Qoros sells vehicles through a network of dealers, including dealerships that are owned and operated by a party related to the Majority Shareholder in Qoros. An increasing number of these dealers are owned and operated by a party related to the Majority Shareholder in Qoros, so Qoros’ success is increasingly dependent on the success of such dealerships. Qoros does not directly employ, and therefore cannot control, the salespersons of its dealer network and as a result Qoros’ dealer network may not achieve the required standards of quality of service. Qoros’ dealer network will likely be affected by conditions in the Chinese passenger vehicle market and the Chinese economy (which may impact Qoros, as a relatively new company, more than other established companies), the financial resources available to existing and potential dealers, the decisions dealers make as a result of the current and future sales prospects of Qoros’ vehicle models, and the availability and cost of the capital necessary to acquire and hold inventories of Qoros’ vehicles for resale. Qoros has had and may continue to have difficulty in successfully expanding its dealer network if existing dealers are not performing well in terms of sales.
Risks relating to the competitive industry in which Qoros operates — Qoros operates in the highly competitive Chinese passenger vehicle market with established automobile manufacturers that may be able to devote greater resources to the design, development, manufacturing, distribution, promotion, pricing sale and support of their products, which could impair Qoros’ ability to operate within this market or adversely impact Qoros’ sales volumes or margins. Furthermore, additional competitors, both international and domestic, may seek to enter the Chinese market. Increased competition may impact Qoros’ margins and may also make it difficult for Qoros to increase sales.
Risks relating to recent trends in the Chinese market. Sales in the Chinese vehicle market declined in 2018, 2019, and 2020, after many years of growth. The COVID-19 outbreak has exacerbated this downward trend. This trend has resulted in increased competition in China’s automotive market through price reductions, which has resulted in reduced margins.
Risks relating to suppliers. Qoros sources the component parts necessary for its vehicle models from over 100 suppliers. A number of Qoros’ component parts are currently obtained from a single source. Additionally, Qoros sources its engines and certain spare parts from Chery. Qoros is dependent upon the continued ability of its suppliers to deliver the materials, systems, components and parts needed to conduct its manufacturing operations in sufficient quantities and at such times that will allow Qoros to meet its production schedules. If Qoros is unable to pay its suppliers on a timely basis, it may be unable to procure on favorable terms the parts, components and services it requires to continue operating and Qoros has been, and may continue to be, subject to suits or other claims in respect of outstanding payables.
New Energy Vehicle (NEV) market strategy. Qoros has indicated that it plans to launch NEV models in the future, which is expected to require significant capital expenditure, research and development expenses, raw material procurement costs and selling and distribution expenses. If Qoros is unable to cost efficiently design, manufacture, market, sell and distribute and service its NEVs, its financial condition and results of operation will be materially and adversely affected. Furthermore, the NEV industry is currently experiencing lower profit margins as compared with internal combustion vehicles due to the decrease in government subsidies, which could affect NEV manufacturers in China, including Qoros.
Risks relating to the impact of the coronavirus on Qoros’ operations and the operations of its suppliers. Qoros’ manufacturing plant was closed for approximately two months in 2020 as a result of measures taken in response to the COVID-19 outbreak. This closure resulted in a halt of production for part of 2020 and Qoros’ administrative functions were also impacted by precautionary measures which resulted in workers staying home for periods of time. This outbreak has also impacted suppliers, upon whom Qoros is dependent for production, some of which were subject to temporary facility closures. In addition, this outbreak has impacted car sales generally in China, as consumer activity has been significantly impacted. Starting in the second quarter of 2020, the production of Qoros’ manufacturing plant and the operation of Qoros returned to normal. In 2021, Qoros’ manufacturing plant was shut down as a result of engine and semiconductor shortages and has yet to resume production. The full impact of this outbreak on Qoros will depend on future developments, including the severity of the pandemic in 2021 and beyond, the extent of the spread of the pandemic in other regions and the actions to contain the coronavirus or treat its impact. Qoros may be required to modify its operations in the future in response to disruptions and temporary closures it experiences, including any such disruptions experienced by its suppliers, and incur expenses or delays relating to the coronavirus outbreak outside of its control.
Credit Risk. Qoros is subject to credit risks in connection with its accounts receivable for sales of vehicles on a wholesale basis.
Risks Related to Our Interest in ZIM
ZIM is leveraged. 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.
ZIM is leveraged and may incur additional debt financing in the future. As of December 31, 2020, the face value of ZIM’s outstanding indebtedness (including lease liabilities) was $1,862 million to be repaid between 2021 through 2036, of which $501 million of principal (including short-term bank loans) are scheduled to be repaid during the following 12 months (not including early repayments of $84.6 million and $0.8 million to the holders of Series 1A Notes and to the holders of Series 1B Notes, respectively, in accordance with the mandatory excess cash redemption of ZIM’s notes on March 22, 2021). ZIM’s Series 1 and 2 unsecured Notes (tranches C and D) in an aggregate amount of $433 million (further to its partial repurchase of Series 1 (Tranche C) Notes in October 2020) will mature in June 2023. Highly leveraged assets are inherently more sensitive to declines in earnings, increases in expenses and interest rates, and adverse market conditions. This may have important negative consequences for ZIM’s business, including requiring that a substantial portion of the cash flows from ZIM’s operations be dedicated to debt service obligations, increasing ZIM’s vulnerability to economic downturns in the shipping industry, limiting its flexibility in planning for or reacting to changes in its business and its industry, restricting ZIM from pursuing certain acquisitions or business opportunities and limiting, among other things, ZIM’s ability to borrow additional funds or raise equity capital in the future and increasing the costs of such additional financing.
ZIM’s ability to generate cash flow from operations to make interest and principal payments in respect of its debt, depends on its performance, which is affected by a range of economic, competitive and business factors. ZIM cannot control many of these factors, including general economic conditions and the health of the shipping industry. If ZIM’s operations do not generate sufficient cash flow from operations to satisfy its debt service and other obligations, ZIM may need to sell assets, borrow additional funds or undertake alternative financing plans, such as refinancing or restructuring its debt, or reducing or delaying capital investments and other expenses. It may also be difficult for ZIM to borrow additional funds on commercially reasonable terms or at all. Substantially all of ZIM’s vessels and most of its container fleet are leased by it and accordingly, ZIM has limited assets that its owns and is able to pledge to secure financing, which could make it more difficult for ZIM to incur additional debt financing.
The agreements governing ZIM’s outstanding indebtedness, as well as certain other financial agreements (including certain vessel charters) to which ZIM is party, contain covenants and other limitations which restrict ZIM’s ability to operate. The marine shipping industry remains capital-intensive and cyclical, and ZIM has in the past, and it may in the future continue to experience losses, working capital deficiencies, negative operating cash flow or shareholders’ deficiency. Such losses may not be offset by other cost-cutting measures ZIM may take in the future. Should any of the aforementioned occur, ZIM’s ability to pursue operational activities that it considers to be beneficial may be affected, which may, in turn, impair ZIM’s financial condition and operations.
In recent years, due to deteriorating market conditions, ZIM has obtained amendments to certain of its financial covenants, the most recent of which concluded in the third quarter of 2018. However, in June 2020, further to an early repayment to a certain group of creditors (“Tranche A”), such amended covenants were removed and no longer apply. Other indebtedness currently require ZIM, among other things, to maintain a monthly minimum liquidity of at least $125 million and impose other non-financial covenants and limitations such as restrictions on dividend distribution and incurrence of debt and various reporting obligations.
If ZIM is unable to meet its obligations or refinance its indebtedness as it becomes due, or if it is unable to comply with the related requirements, ZIM may have to take disadvantageous actions, such as (i) reducing financing in the future for investments, acquisitions or general corporate purposes or (ii) dedicating an unsustainable level of its cash flow from operations to the payment of principal and interest on indebtedness. As a result, the ability of ZIM’s business to withstand competitive pressures and to react to changes in the container shipping industry could be impaired. If ZIM chooses not to pursue any of these alternatives and is unable to obtain waivers from the relevant creditors, a breach of any of its debt instruments and/or covenants could result in a default under the relevant debt instruments. Upon the occurrence of such an event of default, the lenders could elect to declare all amounts outstanding thereunder to be immediately due and payable and, in the case of credit facility lenders, terminate all commitments to extend further credit.
Furthermore, the acceleration of any obligation under a particular debt instrument may cause a default under other material debt or permit the holders of such debt to accelerate repayment of their obligations pursuant to “cross default” or “cross acceleration” provisions, which could have a material adverse effect on ZIM’s business, financial condition and liquidity.
If ZIM is unable to generate sufficient cash flows from its operations, its liquidity will suffer and it may be unable to satisfy its debt service and other obligations.
ZIM’s ability to generate cash flow from operations to make interest and principal payments on its debt obligations 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 ZIM’s operations do not generate sufficient cash flow from operations to satisfy its debt service and other obligations, it may need to borrow additional funds or undertake alternative financing plans, such as refinancing or restructuring its debt, or reducing or delaying capital investments and other expenses. It may be difficult for ZIM to incur additional debt on commercially reasonable terms, even if ZIM is permitted to do so under its restructured debt agreements, due to, among other things, its financial condition 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.
ZIM onlypredominantly 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.assets (except for minority ownership rights in a company operating a terminal in Tarragona, Spain, which is currently in the process of winding down). 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 armed conflicts (such as in the Middle East and between Russia and Ukraine), terrorist activities, embargoes, strikes, inflation rates, climbing interest rates, trade wars and trade wars;the short- and long-term impacts of the COVID-19 or other pandemics on the global economy;
• the global supply of and demand for commodities and industrial products globally and in certain key markets, such as China;
• developments or disturbances 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;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 canals, ports and terminals;
• weather conditions;
• 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, although freight rates have recovered during the fourth quarter of 2019, mainly driven by a recovery of the higher bunker cost associated with the implementation of IMO 2020 Regulations, the comprehensive Shanghai (Export) Containerized Freight Index which(SCFI) increased from 716 points at October 17, 2019 to 1,023 points at January 3, 2020, thereafter decreased to 818 points aton April 23, 2020, with the global outbreak of COVID-19, to 5,047 as of December 31, 2021, but as of December 31, 2023, was 1,760. In 2022 and increased2023, freight rates have significantly declined due to reduced demand as well as the easing of both COVID-19 restrictions and congestion in ports, and this trend may change again to 2,311 points at December 11, 2020.depending on future supply and demand curves, bottlenecks around the world and other factors. Furthermore, rates within the charter market, through which ZIM sources almost allmost of itsZIM’s capacity, may also fluctuate significantly based upon changes in supply and demand for shipping services. In addition,The severe shortage of vessels available for hire during 2021 and the first half of 2022 has resulted in 2014,a significant increase of charter rates and longer charter periods dictated by owners, however, since September 2022, charter hire rates have been normalizing, with vessel availability for hire still low. Charter hire rates in order2023 have fallen to cope withpre-COVID-19 levels on average, as additional capacity entered the cyclicalitymarket and increased pressure on charter rates. See below “Item 3.D. Risk Factors—Risks relating to our Interest in ZIM—ZIM charters-in most of its fleet, which makes it more sensitive to fluctuations in the industrycharter market, and its leveraged financial position, ZIM entered intoas a restructuringresult of its debt. 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 itsZIM’s business, financial condition, results of operations and liquidity.
ZIM charters-in substantially all of its fleet, withGlobal economic downturns and geopolitical challenges throughout the majority of charters being less than a year, which makes ZIM 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 substantially all of the vessels in its fleet. As of December 31, 2020, of the 87 vessels through which ZIM provides transport services globally, 86 are chartered (including 57 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 56% (according to Alphaliner). Any rise in charter hire ratesworld could adversely affect ZIM’s results of operations.
While there have been fluctuations in the demand in the container shipping market, charter demand is currently higher than expected, 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. In addition, 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 to serve ZIM’s Asia-U.S. East Coast Trade, with the vessels intended to be delivered to ZIM between February 2023 and January 2024. ZIM is also 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, 2020, 44% of ZIM’s chartered-in vessels (or 49% in terms of TEU capacity) were chartered under leases for terms exceeding one year, and ZIM may be unable to take full advantage of short-term reductions in charter hire rates with respect to such longer-term charters. In addition, a substantial portion of ZIM’s fleet is chartered-in for short-term periods of one year and less, which could cause ZIM’s 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, the principal amount of ZIM’s long-term contractual obligations would increase. There can be no assurance that ZIM will replace short-term leases with long-term leases or that the terms of any such long- term leases will be favorable to ZIM. 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 itsZIM’s business, financial condition and results of operations and liquidity.
operations.
The global COVID-19 pandemic has created significant business disruptions and adversely affected ZIM’s business and is likely to continue to create significant business disruptionsoperating results have been, and adversely affect its business in the future.
In March 2020, the World Health Organization declared the outbreak of novel coronavirus COVID-19 a global pandemic. The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains, created significant volatility and disruption in financial markets and increased unemployment levels, all of which may become heightened concerns upon a second wave 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. In March 2020, the Government of Israel imposed a mandatory quarantine of all foreign visitors and, in addition, announced that non-Israeli residents or citizens traveling from certain countries may be denied entry into Israel. Israel has further issued regulations imposing partial home confinement and other movement restrictions, reducing staffing of nonessential businesses, restricting public transportation and other public activities. In mid-September 2020, in light of an increase in percentage per capita of reported cases, the government of Israel imposed an additional lockdown for a period of approximately three weeks, subject to certain exceptions. In December 2020, following a further increase in the percentage per capita of reported cases, the government of Israel imposed an additional lockdown for a period of two weeks, with the option of an additional extension thereafter, and subject to certain exceptions. 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. In addition, since December 2020 the US Food and Drug Administration FDA issued three Emergency Use Authorizations (EUAs) for COVID-19 vaccines applications, launching COVID-19 vaccination campaigns in many countries worldwide. There is no certainty that these countries will succeed in administering enough doses of the vaccines to reduce global or national morbidity rates, that the vaccination will prove as effective as in the results of their clinical trials, or that the vaccines will continue to be, effective for all existingaffected by worldwide and future variantsregional economic and geopolitical challenges, including global economic downturns. In particular, the outbreak of the virus. ZIM continueswar between Israel and Hamas in October 2023, which has led to monitor itsmilitary, political and economic instability in the Middle East, may affect ZIM’s business 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 factoriesas an Israeli-based company. Additional armed conflicts between Israel and other facilitiesterror groups such as port terminals, which led to aHezbollah have flared in other countries in the Middle East. Specifically, since October 2023, the Iranian-linked Houthis in Yemen have been launching continuous attacks against vessels sailing in the Red Sea crossing the Bab-El-Mandeb straits, causing cargo flow disruptions, and disrupting global shipping. In response, ZIM has taken temporary decrease in supplyproactive measures by re-routing some 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 decreased consumption of goods, negatively affecting trade volumes and the shipping industry globally. Moreover, because ZIM’s vessels travel to ports in countries in which cases of COVID-19 have been reported, ZIM faces risks to its personnel and operations. Such risks include delays in the loading and discharging of cargo on or fromrestructuring ZIM’s vessels, difficulties in carrying out crew changes, offhire 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 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 pressureservices on the supply-demand balance, which could also put financial pressure on ZIM’s customers and increase the credit risk that ZIM faces in respectIndian subcontinent to East Mediterranean trade. An escalation of some of them. Such events have affected our operations andthis situation may have a material adverse effect on ZIM’s business, financial condition, and results of operations. See also “—ZIM is incorporated and based in Israel and, therefore, ZIM’s results may be adversely affected by political, economic and military instability in Israel. Specifically, the current war between Israel and Hamas and the additional armed conflicts in the Middle East may adversely affect ZIM’s business.”
Moreover, the war between Israel and Hamas, military conflicts in the Middle East and the war between Russia and Ukraine may adversely affect the global supply chain and the maritime shipping industry. In addition,response to the Houthis’ attacks in the Red Sea, several of ZIM’s competitors have also re-routed their services, leading to longer voyage schedules and higher costs of operations. Further, these military conflicts have led and may continue to lead to a decline in the financial markets and to a rise in energy prices. The continued conflicts impede the global flow of goods, and could result in product and food shortages, could harm economic growth and could place more pressure on already rising inflation. Furthermore, freight movement and supply chains in the Red Sea, Ukraine and neighboring countries have been, and may continue to be, significantly disrupted. Economic sanctions levied on Russia, Iran, Hamas and 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 conflicts or other impactsgeopolitical 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, the geopolitical situation, increase of interest rates, possible long term effects of the COVID-19 pandemic, could havesevere hits to the effectGDP growth of heightening many of the other risk factors disclosed herein.both advanced and developing countries, fiscal fragility in advanced economies, high sovereign debt levels, highly accommodative macroeconomic policies and persistent difficulties accessing credit.
26According to a report by the International Monetary Fund (IMF) as of January 2024, global growth is expected to decrease to 3.1% in 2024 compared to 3.2% in 2023. Global inflation is expected to be at 5.8% in 2024 and 4.4% in 2025. Geopolitical trends and economic downturns may decrease global growth and increase inflation more than currently expected. The recent 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 2024, 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 in the Middle East, 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.
A decrease in the level of China’s export of goods could have a material adverse effect on ZIM’s business.
AAccording 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 other countries in Asia, 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 US and China have intensified in recent years, and trade restrictions have reduced bilateral trade between the US 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 the 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 recently 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 itsZIM’s vessels profitably.
Global container ship capacity has increased over the years and continuesAccording to exceed demand. AsAlphaliner, as of December 31, 2020,2023, global container ship capacity was approximately 2428 million 20-foot equivalent units, or TEUs, spread across approximately 5,3716,000 vessels. According to Alphaliner,Furthermore, global container ship capacity is projectedexpected to increase by 3.7%9.9% in 2021,2024, with a vessel order book of 7.1 million TEU, while demand for shipping services is projected to increase only by 3.5%2.2%, therefore the increase in shipvessel capacity is expected to be more aligned withmuch higher than the increase in demand for container shipping. During the first half of 2020, the COVID-19 pandemic outbreak has caused a decrease in demand for goods, causing carriers to adopt mitigating measures such as blank sailings and redelivery of chartered vessels. However, during the second half of 2020 carriers resumed temporarily halted service lines, performed additional sailings, and reduced the number of idle vessels to a minimum as a result of a significant increase in demand and a market shift to consumption of goods over services. Thus, the reduction of demand for shipping services in 2020 was significantly lower than anticipated in early 2020, although 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.
There is no guarantee that measures of blank sailings and redelivery of chartered vessels will prove successful, partially or at all in mitigatingZIM endeavors to adapt ZIM’s vessel fleet capacity to the gap between excess supply and demand. Additionally, responsesdemand trends. For example, 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.” As of December 31, 2023, ZIM operated 144 vessels. 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.needs and due to shortage of vessels in the charter market, or, on the opposite, to terminate charter agreements earlier than expected. 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 continue to 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, decreased scrapping levels of older vessels, any declinechange 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, awaiting repairs or retrofitted scrubbers that meet the IMO’s 2020 low-sulfur fuel mandate 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. Until such capacity is fully absorbed byOvercapacity can cause the container shipping market and, in particular, the shipping lines on which ZIM’s operations are focused, the industry will continue to experience downward pressure on freight rates and such prolonged pressure could have a material adverse effect on ZIM’s financial condition, results of operations and liquidity.
The increasing vessel size of containership newbuilding has exceeded the parallel developmentAccess to ports and adjustment of new and existing container terminals, which has led to higher utilization of vessels, near-full capacity at container terminals and congestion in certain ports. In addition, access to portscanals could be limited or unavailable, for other reasons.including due to geopolitical events, weather and climate conditions, congestion in terminals and inland supply chains, and ZIM may incur additional costs as a result thereof.
In recent years, the size of container ships has increased dramatically and at a faster rate than that to which container terminals are able to cater efficiently. 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 congestions,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, priorities and concerns and the interests of the container shipping industry may not be taken into account. In addition, asconsidered.
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 itsZIM’s operations in accordance with itsZIM’s growth strategy, due to the limited availability of terminal facilities. This is especially the case for express or expedited services that ZIM operates, as such services depend on ZIM’s ability to secure favorable berthing windows that facilitate smooth flow of the carried cargo along the supply chain. In addition to ports, ZIM’s access to canal transit may be restricted, whether because of the worsening drought conditions in the Panama Canal or the Yemeni Houthis’ continued attacks on vessels in the Red Sea headed to the Suez Canal. If canal transit remains restricted or inaccessible altogether, ZIM will be required to limit the number of vessels in the canals or re-route ZIM’s vessels altogether, which is expected to increase ZIM’s operating expenses and may have a material adverse effect on ZIM’s business, financial condition and results of operations.
ZIM’s status as an Israeli company has limited, and may continue to limit, its ability to call on certain ports. For example, in December 2023, the Malaysian government announced its decision to prohibit ZIM from docking at any Malaysian port in response to the Israel-Hamas war. 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 (includingcontrol. For example, the COVID-19 pandemic).pandemic has caused disruptions to global trade and severe congestion at ports and inland supply chains. Ports and terminals may implement certain measures such as dwell fees or similar charges applied against containers that remain in the terminal longer than the specified amount of days, as well as work procedures intended to relieve congestion which may also limit ZIM’s access to terminals and apply additional costs to ZIM or to ZIM’s customers. Although ZIM has taken measures to relieve congestion and to avoid additional costs as a result of dwell fees and similar charges, these 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 since the second half of 2022 and throughout 2023, other recent macroeconomic and geopolitical events may place pressure on terminals to increase their services rates, thereby increasing ZIM’s operational costs. ZIM cannot ensure that itsZIM’s 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 ourits 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.
Technological developments which affect global trade flows and supply chains are challenging some of ZIM’s largest customers and may therefore affect ZIM’s 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. Rising tariff barriers and environmental concerns also accelerate these trends.
ZIM’s ability to participate in operational partnerships in the shipping industry is limited, which may adversely affect itsZIM’s business, and ZIM faces risks related to its strategic cooperation agreement withor the 2M Alliance.Alliance, which has announced its termination in January 2025, can unilaterally terminate the agreement earlier than January 2025 by providing a six-month prior written notice.
The container shipping industry has experienced a reduction in the number of major carriers, as well asand 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 2018, OOCL2016 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. In 2017, the merger of United Arab Shipping CompanyONE and Hapag-Lloyd,OOCL was acquired by COSCO, and the acquisition of Hamburg Sud by Maersk took place. Furthermore, in April 2020, Hyundai Merchant Marine (HMM) terminatedconsummated the termination of its strategic cooperation with 2M and joined THE Alliance. The recentPast 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 in January 2024 Maersk and Hapag Lloyd announced they would establish the new Gemini Alliance beginning in February 2025, resulting in Hapag Lloyd leaving the THE Alliance.
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 isare unable to do so, itZIM 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 other trade zones in which itZIM operates, including a strategic operational agreement with the 2M Alliance (expected to terminate in January 2025) on the Asia-US East Coast and Asia-US Gulf Coast trades. See “Item 4.B—Business Overview—Our Businesses—ZIM—ZIM’s operational partnerships.” ZIM may seek to enter into additional operational partnerships or similar arrangements with other shipping companies or local operators, partners or agents. For example, in September 2018, ZIM entered into a strategicThe unilateral termination of ZIM’s existing operational cooperation agreementagreements, including with the 2M Alliance, in the Asia-USEC trade zone, which includes a joint network of five lines operated by ZIM and by the 2M Alliance. In March 2019, ZIM expanded its partnership with the 2M Alliance by entering into a second strategic cooperation agreement to cover the Asia-East Mediterranean and Asia-American Pacific Northwest trade zones, which includes two service lines on each trade, and in August 2019, ZIM further expanded its partnership and launched two new US-Gulf Coast direct services with the 2M Alliance. At the end of 2020, ZIM further upsized two joint services by utilizing larger vessels on the Asia U.S. Gulf Coast service and the Asia-U.S. East Coast service and in March 2021 ZIM announced its intention to launch in early May 2021 a new joint service line connecting from Yantian and Vietnam to U.S. South Atlantic ports via Panama Canal. Pursuant to its agreement with the 2M Alliance, commencing June 1, 2021, ZIM and the 2M Alliance will discuss possible amendments to the agreement that would govern the next phase of the parties’ cooperation. If the parties fail to mutually agree on the terms for a continuation of the strategic operational cooperation, any party may terminate the agreement prior to December 1, 2021, and such termination would become effective on April 1, 2022. A termination of this or any future cooperation agreement ZIMit may enter into, could adversely affect its business, financial condition and results of operations.
These strategic cooperation agreements and other arrangements, if ZIM chooses to enter into them with other carriers, 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 the rest of the trade zones in which the 2M Alliance operates, as well as in other trade zones in which other alliances operate, ZIM is still unable to benefit from the economies of scale that many of its competitors are able to achieve through participation in strategic arrangements (i.e., strategic alliances or operational agreements). If ZIM is not successful in expanding or entering into additional operational partnerships which are beneficial to it, this could adversely affect its business. In addition, ZIM’s status as an Israeli company has limited, and may continue to limit, its ability to call on certain ports and has therefore limited, and may continue to limit, its ability to enter into alliances or operational partnerships with certain shipping companies.
The container shipping industry is highly competitive and competition may intensify even further, which could negatively affect In addition, 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,existing collaboration with the top three carriers in terms of global capacity — A.P. Moller-Maersk Group, Mediterranean Shipping Company and COSCO — accounting for approximately 45% of global capacity, and the remaining carriers together contributing less than 55% of global capacity as of February 2021, according to Alphaliner. Certain of ZIM’s large competitors2M Alliance 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, there has been an increase in merger and acquisition activities within the container shipping industry in recent years, which has further concentrated global capacity with certain of ZIM’s competitors. See “— ZIM’slimit its ability to enter into strategic alliances and participateor other certain operational agreements. If ZIM is not successful in expanding or entering into additional operational partnerships in the shipping industry is limited, which mayare beneficial to ZIM, this could adversely affect its business, and ZIM faces risks related to its strategic cooperation agreement with the 2M Alliance.” If one or more of its competitors expands its market share through an acquisition or secures a better position in an attractive niche market in which it 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. In addition, as some of ZIM’s 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. Upon the expiration of its existing contracts, ZIM cannot assure 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 2020, ZIM’s 10 largest customers represented approximately 16% of its freight revenues and its 50 largest customers represented approximately 34% of its freight revenues. Although ZIM believes it currently has a diversified customer base, it 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.
Rising bunker prices and the low-sulfur fuel mandate under the IMO 2020 Regulations may have an adverse effect on ZIM’s results of operations.
Fuel expenses, in particular bunker expenses, represent a significant portion of ZIM’s operating expenses, accounting for 9%, 12% and 17% of the income from voyages and related services for the years ended December 31, 2020, 2019 and 2018, 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, concerns related to the global recession and financial turmoil, 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 in 2020, due in part to decreased demand as a result of the COVID-19 pandemic and the changing dynamics among OPEC+ members.
Effective January 1, 2020, the IMO imposed the IMO 2020 Regulations which 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%. Commencing January 1, 2020, ships are required to remove sulfur from emissions through the use of scrubbers or other emission control equipment, or purchase marine fuel with 0.5% sulfur content, which has led to increased demand for this type of fuel and higher prices for such bunker compared to the price ZIM would have paid had the IMO 2020 Regulations not been adopted. Substantially all 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, or 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 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 we charge to customers in part to minimize our 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 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 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.
ZIM may face difficulties in chartering or owning enough large vessels to support its growth strategy due to the possible shortage of vessel supply in the market.
Container shipping companies have been incorporating, and are expected to continue to incorporate, larger, more economical vessels into their operating fleets. Particularly, 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 to serve ZIM’s Asia-US East Coast Trade, with the vessels expected to be delivered to ZIM between February 2023 and January 2024. 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, cargo shippers are encouraged to deploy large vessels, particularly within the more competitive trades. According to Alphaliner, vessels in excess of 12,500 TEUs represented approximately 74% of the current global orderbook based on TEU capacity as of February 2021, and approximately 29% of the global fleet based on TEU capacity will consist of vessels in excess of 12,500 TEUs by the end of 2021. 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 LNG dual-fuel container vessels, 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 its 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 inability to participate in certain alliances and thereby access lager vessels for deployment. Even if ZIM is able to acquire or charter-in larger vessels, it cannot assure it will be able to achieve utilization of its vessels necessary to operate such vessels profitably.
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 and maritime arrest. For example, ZIM had expenses of $9.6 million in respect of claims and demands for lost and damaged cargo for the year ended December 31, 2020. 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. However, the occurrence of any of the aforementioned risks could have a material adverse effect on ZIM’s business, financial condition, results of operations or liquidity and ZIM may not be adequately insured against any of these risks. For more information about ZIM’s insurance coverage, see “— ZIM’s insurance may be insufficient to cover losses that may occur to its 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 ZIM’s vessels are found with contraband, whether with or without the knowledge of any of ZIM’s 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 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 ZIM’s 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 carrier partners whom ZIM 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 ZIM’s suppliers, including its land transportation suppliers, could materially and adversely affect ZIM’s 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 its 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.
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, collisions and contact with fixed and floating objects, (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, smuggling fines, third-party claims in excess of a vessel’s insured value arising from collisions with other vessels, damage to other third-party property 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 credit facilities, insurance proceeds are pledged in favor of the lender 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.
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. Currently, global demand for container shipping is highly volatile across regions and remains subject to downside risks stemming mainly from factors such as government-mandated shutdowns due to the COVID-19 pandemic, 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. During 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 significant containers shortage which also resulted in surge in the freight rates, climbing up to record-breaking 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 additional significant deterioration in the global economy, such conditions could have a material adverse effect on ZIM’s business, financial condition, results of operations and liquidity. Further, 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. 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. Geopolitical challenges such as trade wars, weather and natural disasters, political crises, embargoes and canal closures could also have a material adverse effect on ZIM’s business, financial condition and results of operations.
ZIM’s business may be adversely affected by trade protectionism in the markets that itZIM 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 ZIM’sits 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 15 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. WhileIn January 2020 China and the U.S. reached an agreement was reachedaimed at easing the trade war. However, tensions between China and the U.S. in January 2020 aimed at easing the trade war,continue, and there can beis no assurance that therefurther escalation will not be any further escalation.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. The U.S. has imposed significant amounts of tariffs on Chinese imports since 2018. 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 ZIM’s business, financial condition and results of operations.
The global COVID-19 pandemic has created significant business disruptions and affected ZIM’s business, and future outbreaks of new COVID-19 strains or other pandemics may continue to create significant business disruptions and affect ZIM’s business in the future.
In March 2020, the World Health Organization declared the outbreak of novel coronavirus COVID-19 a global pandemic. During the three years following the outbreak, 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. 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, as well as lockdowns and restrictions on travel.
Although ZIM is considered an essential business and therefore enjoyed certain exemptions from the restrictions under Israeli regulations, ZIM has voluntary reduced ZIM’s maximum permitted percentage of staffing in ZIM’s offices in order to mitigate the COVID-19 risks and have 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. COVID-19 vaccination campaigns were launched in many countries worldwide, including Israel. During 2022, the outbreak of the COVID-19 pandemic gradually subsided worldwide. However, an outbreak of a new COVID-19 strain or a new pandemic may have a material adverse effect on ZIM’s business, financial condition and results of operations.
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. If new strains of COVID-19 or new pandemics erupt, ZIM may face risks to ZIM’s 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 factories’ 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 may increase 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 ZIM’s 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 in this Annual Report.
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, Mediterranean Shipping Company (“MSC”), A.P. Moller-Maersk Group (“Maersk”), 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 ZIM’s 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 — MSC, Maersk and CMA CGM — accounting for approximately 46.7% of global capacity, and the remaining carriers together contributing less than 53.3% of global capacity as of December 2023, 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 lower 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 has announced its termination in January 2025, can unilaterally terminate the agreement earlier than January 2025 by providing a six month prior written notice.” 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 provide assurance that ZIM’s 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 2023, ZIM’s 10 largest customers represented approximately 13% of its freight revenues and its 50 largest customers represented approximately 28% of its freight revenues. Although ZIM believes it currently has a diversified customer base, ZIM 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 ZIM’s 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 ZIM’s business and results of operations.
By reducing the cost of labor through automation and digitization, including by means of new technologies of an artificial intelligence and machine learning, among others, 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 geopolitical and economic events, pandemics, 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 ZIM’s business. An important example is ZIM’s 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 ZIM relies on for their vessels and service to deliver cargo to ZIM’s customers, as well as third party agencies who serve as ZIM’s 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 ZIM’s suppliers, including ZIM’s land transportation suppliers, could materially and adversely affect ZIM’s 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 experienced difficulties in carrying out crew changes and may experience this again in the event of future pandemic outbreaks, 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, 2023, of the 144 vessels through which ZIM provides transport services globally, 135 are chartered (accounted as right-of-use assets under the accounting guidance of IFRS 16), which represents a percentage of chartered vessels that is significantly higher than the industry average of 44% (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 took 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 low (compared to pre-COVID-19 levels).
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, 2023, 74.8% of ZIM’s chartered-in vessels (or 81.9% 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 ZIM’s 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 (assuming full vessel utilization). 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 67.5% of the current global orderbook based on TEU capacity as of December 31, 2023, and approximately 38% of the global fleet based on TEU capacity will consist of vessels in excess of 12,500 TEUs by December 31, 2024. 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 ZIM’s strategic agreement with Seaspan Corporation for the long-term charter of ten 15,000 TEU 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 ZIM’s 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 larger vessels for deployment. Even if ZIM is able to acquire or charter-in larger vessels, ZIM cannot provide assurance 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 28.3%, 30.1% and 18.9% of ZIM’s operating expenses and cost of services for the years ended December 31, 2023, 2022 and 2021, 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 Russia-Ukraine conflict, the military conflicts in the Middle East 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 to an annual average of $83 per barrel in 2023, compared to $100 per barrel in 2022. Any further deterioration of geopolitical and economic factors may lead to an increase in bunker prices.
In accordance with ZIM’s ESG strategy and strategic long-term charter agreements (See “Item 4.B—Business Overview—Our Businesses--ZIM—Strategic Chartering Agreements”), ZIM long-term chartered 28 LNG dual fuel container vessels, of which 15 were already delivered to ZIM and the remaining 13 are expected to be delivered to ZIM during the remainder of 2024. In August 2022 ZIM 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. In March 2023 ZIM announced the successful LNG bunkering of the first LNG dual fuel vessel delivered to ZIM, ZIM Sammy Ofer, in Kingston Freeport Terminal, Jamaica. 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, or 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, in January 2024, U.S. President’s Biden’s administration announced a temporary pause on the approval process for new U.S. LNG export facilities in order to consider potential climate change consequences, and this could impact the availability of global LNG supply. ZIM’s operations may be significantly affected by the supply and demand conditions of the LNG global trade market, and ZIM may need to rely on other LNG suppliers to supply LNG for ZIM’s other LNG container vessels.
The IMO 2020 Regulations which 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 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, or 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.
The European Union’s Emissions Trading System, or ETS, which entered into effect on January 1, 2024, sets a limit on the total amount of greenhouse gases that ZIM as a shipping company is permitted to emit on route to or from European Union members’ ports. Such cap is expressed in emission allowances, where one allowance gives the right to emit one ton of carbon dioxide equivalent. Each year, ZIM will be required to surrender enough allowances to fully account for ZIM’s emissions, otherwise ZIM will be subject to heavy fines. The ETS Regulations require ZIM to purchase and surrender allowances equal to a percentage of ZIM’s emissions that gradually increases over time, from 40% of reported emissions in 2024 to 100% of reported emissions in 2026. ZIM anticipates it will be required to purchase allowances from the EU carbon market on an ongoing basis, which will increase ZIM’s operating costs. ZIM has implemented a New Emission Factor, or NEF, surcharge, intended to shift the additional costs associated with compliance with the ETS Regulations to ZIM’s customers, however there is no assurance that this surcharge will enable ZIM to mitigate the possible increase costs in full or at all. The IMO 2020 Regulations, the ETS and any future air emissions regulations with which ZIM must comply may cause ZIM to 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 and NEF 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 manage part of ZIM’s 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 ZIM’s vessel fleet.
Although ZIM charters most of its fleet, ZIM currently owns and operates fourteen vessels, eight of which were purchased during 2021 in several separate transactions in addition to one vessel already previously owned, and five of which were purchased in February 2024 after previously being chartered to ZIM. ZIM may purchase additional vessels, depending on market terms and conditions and on ZIM’s operational needs. As a vessel owner ZIM may incur additional costs due to maintenance and regulatory requirements, most of them described in this Item 3.D and elsewhere in this Annual Report. In addition, as vessel owners ZIM may be exposed to higher risks due to ZIM’s 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 ZIM’s insurance policy may not cover all or part of ZIM’s costs. See also below “—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 fuel, terrorist attacks and piracy. For example, ZIM incurred expenses of $21.5 million in respect of claims and demands for lost and damaged cargo, vessels and war risks for the year ended December 31, 2023. 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 ZIM’s 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—ZIM’s insurance may be insufficient to cover losses that may occur to its 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, and more recently also acts of terrorism, 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, especially with respect to war risks, the insurance cost for which has risen sharply recently as a result of the military tension and escalation in the Middle East. Even if ZIM’s 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 ZIM’s 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.
Volatile market conditionsCrew 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 negatively affecttry 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 ZIM’s business financial condition, or results of operations andrequire ZIM to pay or deposit large sums to have the arrest lifted, which could thereby result in impairment charges.
As of the end of each of its reporting periods, ZIM examines whether there have been any events or changes in circumstances, such as a decline in freight rates or other 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 ZIM’s financial statements.
For each of the years ended December 31, 2020, 2019 and 2018, ZIM concluded there were no indications for potential impairment, or that the recoverable amount of our CGU was higher than the carrying amount of our CGU and, as a result, did not recognize an impairment loss in its financial statements. 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 ZIM’s business, financial condition and results of operations and financial condition, which may result in ZIM recording an impairment charge.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 itsZIM’s vessels; however, the amount and timing of payment, if any, would be uncertain and beyond ZIM’sits 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 may result in a prepayment event under certain of ZIM’s credit facilities, and 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 itZIM operates, including those of the State of Israel, the United States, the International Safety Management Code, or the ISM Code, and the European Union. Such extensive regulation could also become more and more restrictive or less permissive from time to time, such as, for example, the OSRA enactment and the non-renewal of maritime block exemptions for operational agreements between carriers. See below, “—ZIM is subject to competition and antitrust regulations in the countries where ZIM operates, has been subject to antitrust investigations by competition authorities in the past and may be subject to antitrust investigations in the future. Moreover, ZIM relies on applicable competition exemptions for operational agreement with other carriers, and the revocation of these exemptions could negatively affect ZIM’s business and ability to conduct ZIM’s business.”
Any violation or alleged 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 usZIM 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 itZIM operates, and has been subject to antitrust investigations by competition authorities.authorities in the past and may be subject to antitrust investigations in the future. Moreover, ZIM relies on applicable competition exemptions for operational agreement with other carriers, and the revocation of these exemptions could negatively affect ZIM’s business and ability to conduct ZIM’s business.
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 other, mandatory periodic employee trainings, ZIM faces investigations from time to time, and, if ZIM 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 subject to competition and antitrust regulations in each of the countries where itZIM operates. In mostsome 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. In August 2020, ZIM’s board of directors adopted a comprehensive new antitrust compliance plan, which included the adoption of a global policy as well as mandatory periodic employee trainings. 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 ZIM relies on could negatively affect itsZIM’s business and results of operations. In recent years, a number ofSpecifically, Commission Regulation (EC) No 906/2009, or the Consortia Block Exemption Regulation, or CBER), exempts certain cooperation agreements in the liner shipping companies,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, or TFEU. In October 2023, the EU competition authority, or the DG Competition, announced its intention not to renew the CBER following its expected expiry in April 2024. A similar decision was made by the United Kingdom’s Competition and Markets Authority (CMA) not to enact a UK block exemption that would replace the CBER following Brexit. Although ZIM currently does not believe this will have a material impact on its operations as currently conducted, the non-renewal of the block exemption regulation in the EU and UK is expected to increase legal costs and legal uncertainty and delay the implementation of operational cooperation agreements between carriers, thus potentially limiting ZIM’s ability to enter into cooperation arrangements with other carriers. In addition, the non-renewal of the existing CBER raises concerns of a “domino effect” for the non-renewal or the shortening of the effective period of similar block exemption regulations in other jurisdictions (similarly to the UK). Any of the above could adversely affect ZIM’s business, financial condition and results of operations.
The spike in freight rates and related charges during 2021 and the first half of 2022 has resulted in increased scrutiny and enforcement actions by governments and regulators around the world, including ZIM, have been the subjectU.S. President Biden’s administration and the FMC, as well as the ministry of antitrust investigationstransportation in China. In the U.S., the EUOcean Shipping Reform Act of 2022 (OSRA) signed into law in June 2022 mandates a series of rulemaking projects by the Federal Maritime Commission, or the “FMC,” and other jurisdictions into possible anti-competitive behavior. in February 2023 the FMC published a final rule that prohibits the collection of detention and demurrage from U.S. truckers and consignees on import, 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 ZIM’s financial results. If ZIM is found to be in violation of the applicable regulation, ZIM could be subject to various sanctions, including monetary sanctions.
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 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 trial proceedings on the FMC panel. 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 incorporated by reference into this annual report.
Finally, Commission Regulation (EC) No 906/2009,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 Block Exemption Regulation, exempts certain cooperation agreements (such as operational cooperation agreements, VSA (vessel sharing agreements), SCA (slot chartering agreements)FCPA, and slot swap agreements)similar anti-bribery laws in other jurisdictions generally prohibit companies and their intermediaries from making improper payments to government officials or other persons around the liner shipping sector fromworld for the prohibitionpurpose 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 compliance plan mandates compliance with these anti-bribery laws, establishes anti-bribery and anti-corruption policies and procedures, imposes mandatory training on anti-competitive agreements contained at Article 101its employees and enhances reporting and investigation procedures. ZIM operates in many parts of the Treaty onworld that are recognized as having governmental and commercial corruption. ZIM cannot provide assurance you that ZIM’s internal control policies and procedures will protect it from reckless or criminal acts committed by its employees or third party intermediaries. In the Functioningevent 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 European Union,appearance of impropriety), injunctions against future conduct, profit disgorgements, disqualifications from directly or TFEU. Ifindirectly engaging in certain types of businesses, the Block Exemption Regulation is not extendedloss of business permits or other restrictions which could disrupt its terms are amended, this couldbusiness and have ana material adverse effect on ZIM’s 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 shipping industryloading, offloading, transshipment, or delivery of containers, and limitthe levying of customs duties, fines or other penalties against ZIM as well as damage to ZIM’s abilityreputation. Changes to enter into cooperation arrangements with other shipping companies, whichexisting inspection and security procedures, including as a result of political or public pressure, could adversely affectingimpose 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 ZIM’s operations.
ZIM is subject to environmental and other regulations and failure to comply with these regulations could have a material adverse effect on ZIM’s business. In addition, Environmental, Social and Governance (ESG) regulation and reporting is expected to intensify in the future, which could increase its business.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 (including(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 Comprehensive Environmental Response, Compensation and Liability Act (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.
ZIM may also incur additional compliance costs relating to existing or future requirements which could have a material adverse effect on its business, results of operations and financial conditions. Such costs include, among other things: reduction of greenhouse gas emissions; 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, the IMO 2020 Regulations have required ZIM’s vessels to comply with its low sulfur fuel requirement since January 1, 2020. ZIM complies with this requirement by using fuel with low sulfur content, which is more expensive than standard marine fuel, or ZIM may upgrade its vessels to provide cleaner exhaust emissions. Environmental or other incidents may result in additional regulatory initiatives, statutes or changes to existing laws that could affect ZIM’s operations, require it 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.
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 and termination or suspension of, and substantial harm to, itsZIM’s 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 these claims and are in discussions with this state regulator. 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 wasZIM were 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 itsZIM’s 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.
Furthermore, ZIM is subject to limits imposed by IMO regulations on the maximum sulfur content of ZIM’s fuel. See, “—Rising energy and bunker prices (including LNG) may have an adverse effect on ZIM’s 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; development and implementation of emergency procedures and disclosure of information relating to ESG matters, including climate change. 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. Also, on March 6, 2024, the Securities and Exchange Commission (the “SEC”) issued a rule requiring registrants to disclose certain information regarding climate-related risk scheduled to phase in starting in 2025. 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). All vessels constructed on or after September 8, 2017, are required to comply with the D-2 standards. To date, all of ZIM’s owned vessels are installed with on-board ballast systems, however any additional requirements may subject ZIM to additional costs of compliance and adversely affect ZIM’s 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 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. A supplemental notice of proposed rulemaking was issued on October 18, 2023. The comment period for this proposal closed on December 18, 2023. 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. New federal and state regulations could require the installation, 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 ZIM’s 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 IMO has been developing a comprehensive strategy on reduction of greenhouse gas emissions from ships. 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.
Further, on January 1, 2024, a new emissions trading system entered into effect by the European Union, setting a cap on the total amount of greenhouse gases ZIM is permitted to emit when sailing to or from EU ports. See “Item 4.B—Business Overview—Our Businesses—ZIM—ZIM’s Regulatory Matters—Environmental and other regulations in the shipping industry.”
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 ZIM’s 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. 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. 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. Pillar Two legislation has been enacted or substantively enacted in certain jurisdictions in which ZIM operates, and the legislation will be effective for ZIM and ZIM’s subsidiaries, or the ZIM Group, for the financial year beginning January 1, 2024. Following ZIM’s assessment, the Pillar Two effective tax rates in most of the jurisdictions in which the ZIM group operates are above 15%. While ZIM does not expect any potential exposure to Pillar Two taxes, it may be subject to additional and/or higher tax payments as a result of this regulation, whether due to any amendment or due to the absence of applicable safe harbor exemptions to the ZIM group.
Tax authorities may challenge tax positions that ZIM takes or historically has taken, may assess taxes where ZIM 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 ZIM’s 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 ZIM’s 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 ZIM 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. Specifically, ZIM has incurred and will continue to incur substantial debt as part of ZIM’s strategy to renew and improve ZIM’s fleet by long-term chartering 46 newbuild vessels, including 28 TEU LNG fueled vessels. Although as of December 31, 2023 ZIM’s cash position was strong with liquidity of $2.7 billion, ZIM’s potential 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 ZIM’s 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 their respective recoverable amount and, if necessary, an impairment loss is recognized in ZIM’s financial statements.
ZIM recognized an impairment loss of approximately $2.1 billion in the third quarter of 2023. For each of the years ended December 31, 2022 and 2021, ZIM did not recognize any impairment loss in ZIM’s financial statements (as of December 31, 2022 and 2021, ZIM concluded there were no indications for impairment). With respect to the impairment analysis carried out during the year ended December 31, 2023, see Note 7 to ZIM’s audited consolidated financial statements included elsewhere in this Annual Report. ZIM cannot assure that it will not recognize additional 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 ZIM’s 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 ZIM’s balance sheet.
Since ZIM generates revenues in a number of geographic regions across the globe, ZIM 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 ZIM’s 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 5—Operating and Financial Review and Prospects—Material Factors Affecting Results of Operations—ZIM.”
Risks related to ZIM’s operations in Israel
ZIM is incorporated and based in Israel and, therefore, ZIM’s results may be adversely affected by political, economic and military instability in Israel. Specifically, the current war between Israel and Hamas and the additional armed conflicts in the Middle East may adversely affect ZIM’s business.
ZIM is incorporated and ZIM’s headquarters are located in Israel and the majority of ZIM’s key employees, officers and directors are residents of Israel. Additionally, the terms of the Special State Share require ZIM to maintain ZIM’s headquarters and to be incorporated in Israel, and to have ZIM’s chairman, chief executive officer and a majority of ZIM’s board members be Israeli. As an Israeli company, ZIM has relatively high exposure, compared to many of ZIM’s competitors, to war, 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, ZIM’s service routes and port of calls and existing relationships with certain foreign corporations, as well as affect the willingness of potential partners to enter into business arrangements with ZIM.
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, and ZIM may not be able to obtain adequate insurance if events escalate further. 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 ZIM’s business. Further, due to the Israel-Hamas war, a special war risk insurance premium was levied on ZIM’s chartered vessels calling Israel’s territorial water and ports. ZIM has applied a war surcharge on its customers in an attempt to offset the cost associated with the payment of this war risk insurance premium, however, there is no assurance that this surcharge will enable ZIM to mitigate the possible increased costs in full or at all.
Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel, its neighboring countries and terror organizations which are today considered to be backed by Iran. On October 7, 2023, Hamas terrorists launched a surprise attack and invaded southern Israel from Gaza under the cover of a barrage of missiles launched into southern Israel, targeting the Israeli civilian population and local military forces. In response to this assault, Israel declared war on Hamas and the Israeli Defense Force invaded the Gaza strip.
In response to the Israel-Hamas war, other terror organizations such as Hezbollah in Lebanon and the Houthis in Yemen, both backed by Iran, have launched missile attacks against Israel as part of what they have referred to as “axis of resistance”. Further, in Yemen, the Houthis have attacked vessels in the Red Sea suspected by them to be either linked to Israel or to call Israeli ports. The escalation of hostilities between Israel and neighboring and regional terror organizations such as Hezbollah in Lebanon and Hamas in the Gaza Strip follow years of terrorist activity and acts of violence perpetrated against Israel from the Northern border, Gaza, 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 and the Middle East as a whole. This instability, especially the recent conflicts, has raised concerns regarding security in the region and the potential for further escalated armed conflicts. In addition, in February 2024, the rating agency Moody’s cut Israel’s credit rating following the war with Hamas and has lowered Israel’s outlook from stable to negative, which increases the risk of increased interest rates, currency fluctuations, inflation, securities market volatility and uncertainty as to the scope of future investments in Israel.
In addition, Israel faces an explicit threat from Iran and more distant neighbors. 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, Hezbollah in Lebanon, pro-Iranian groups in Iraq, and the Houthis in Yemen, and is cultivating a strategy dedicated to annihilating the State of Israel through proxy militia groups across the Middle East. The escalation of the war and armed conflicts or hostilities in Israel or neighboring countries or a direct military war between Israel and Iran could increase the disruptions in ZIM’s operations, including significant employee absences, failure of ZIM’s information technology systems and cyber-attacks, which may lead to the shutdown of ZIM’s headquarters in Israel for an unknown period of time. Although ZIM maintains an emergency plan, such events can have material effects on ZIM’s 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 ZIM’s business, financial condition, results of operations or liquidity. If ZIM’s facilities, including ZIM’s headquarters, become temporarily or permanently disabled by an act of terrorism or war, it may be necessary for ZIM 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 ZIM’s results of operations.
Moreover, following the terror attack by Hamas on October 7, 2023, protests in support of Palestinians and against Israel have erupted in the Middle East and western counties, including the U.S. The increased negative public opinion against Israel across the world may cause countries, corporations and organizations to limit their business activities with Israeli-linked businesses or deter them from expanding existing engagements. ZIM’s status as an Israeli company may limit ZIM’s ability to cross the Suez Canal given the threat of Houthi attacks, call certain ports and enter into alliances or operational partnerships with certain shipping companies, which has historically adversely affected ZIM’s operations and ZIM’s ability to compete effectively within certain trades.
The Israel-Hamas war follows a period of internal civil controversy and protest in Israel over a judicial reform proposal introduced by the Israeli government in January 2023. The judicial reform has sparked a significant backlash both inside and outside of Israel, led to civil protest and raised economic concerns, and was challenged by an appeal made to the Israeli supreme court. In January 2024, the Israeli Supreme Court ruled that the portion of the judicial reform previously legislated by the Israeli parliament, the Knesset, in an attempt to limit judicial review of government actions, is stricken down as unconstitutional. Any attempt to relaunch the judicial reform may reignite the internal civil protest and economic concerns.
Further, ZIM’s operations could be disrupted by the obligations of personnel to perform military service. As of December 31, 2023, ZIM had approximately 860 employees based in Israel, certain of whom are currently called upon for military service duty due to the war for an unlimited period, and more may be called in the future if the war continues or in other emergency circumstances. Further, some of ZIM’s employees are 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, although recently the Israeli government published a possible plan to extend military reserve service duty to the age of 46). ZIM’s operations could be disrupted by the absence of a significant number of employees related to military service, which could materially adversely affect ZIM’s business and operations.
ZIM’s risks associated with ZIM’s Israeli affiliation may enhance and further increase other risk factors detailed in this Annual Report.
General risk factors
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 ZIM’s information technology systems. Despite security and controls design, implementation and updates, ZIM’s 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. As an Israeli company, ZIM is a potential target for a cyber-attack, as cyber-attacks against Israeli entities have increased following the war between Israel and Hamas that erupted in October 2023. 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 ZIM’s 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 two main data centers are located in Europe. Each data center can back up the other one.
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 its 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, in particularincluding 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), itZIM still processesprocess and obtainsobtain certain personal information relating to individuals, and any failure by itZIM to comply with the GDPR or other data privacy laws where applicable could result in proceedings or actions against ZIM, which could subject itZIM to significant fines, penalties, judgments and negative publicity.
ZIM is incorporatedLabor shortages or disruptions could have an adverse effect on ZIM’s business and based in Israel and, therefore, its results may be adversely affected by political, economic and military instability in Israel.reputation.
ZIM is incorporatedemploys, directly and its headquarters are located in Israelindirectly, approximately 6,460 employees around the globe (including contract workers) as of December 31, 2023. ZIM, ZIM’s subsidiaries, 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,independent agencies with which ZIM has relatively high exposure, compared to manyagreements could experience strikes, industrial unrest or work stoppages. Several of its competitors, to actsZIM’s employees are members 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. 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, ZIM’s 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.unions. In recent years, these have included hostilities between Israel and Hezbollah in Lebanon and Hamas in the Gaza Strip, both of which resulted in rockets being fired into Israel, causing casualties and disrupting economic activities. Recent political uprisings, social unrest and violence in the Middle East and North Africa, including Israel’s neighbors Egypt and Syria, are affecting the political stability of those countries. This instabilityZIM 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 ZIM to develop alternative infrastructure and it 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 occurexperienced labor interruptions as a result of an event associated with the security situationdisagreements between management and unionized employees and have entered into collective bargaining agreements addressing certain of these concerns. If such disagreements arise and are not resolved 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 attacka timely and immediately after the attack or on any cost of repairing the damage, whichever is lower. Any losses or damages incurred by ZIMcost-effective manner, such labor conflicts could have a material adverse effect on its business.ZIM’s 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 ZIM’s managerial flexibility with re-organization procedures and termination procedures. In addition, ZIM’s 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 ZIM’s 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 ZIM did not incur as a private company, including costs associated with ZIM’s reporting requirements under the Exchange Act. ZIM 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, including enhanced ESG reporting requirements, 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 U.S. 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 ZIM’s ordinary shares.
Changes in the laws and regulations affecting public companies could result in increased costs to ZIM as ZIM 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 ZIM 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 ZIM’s Board of Directors, ZIM’s 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 armed conflict involving Israelof these effects could adversely affect ZIM’s business, financial condition and results andof operations.
Further,
Risks related to ZIM’s operations could be disrupted by the obligations of personnel to perform military service.ordinary shares
The State of Israel holds a Special State Share in ZIM, which imposes certain restrictions on itsZIM’s operations and gives Israel veto power over transfers of certain assets and shares above certain thresholds, and may have an anti- takeoveranti-takeover effect.
The State of Israel holds a Special State Share in ZIM, which imposes certain limitations on itsZIM’s operating and managing activities and could negatively affect itsZIM’s business and results of ourZIM’s operations. These limitations include, among other things, transferability restrictions on ZIM’s share capital, restrictions on itsZIM’s ability to enter into certain merger transactions or undergo certain reorganizations and restrictions on the composition of its boardZIM’s Board of directorsDirectors and the nationality of itsZIM’s 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 itsZIM’s ordinary shares or otherwise negatively affect itsZIM’s business and results of operations. In addition, the terms of the Special State Share dictate that ZIM maintains a minimum fleet of 11 whollywholly-owned seaworthy vessels. As of March 1, 2024, ZIM owned seaworthy14 vessels.
Currently, as a result of waivers received from the State of Israel, ZIM owns fewer vessels than the minimum fleet requirement. However, if ZIM acquires and owns additional vessels in the future, these vessels would beZIM’s dividend policy is subject to change at the minimum fleet requirementsdiscretion of ZIM’s Board of Directors and conditionsthere is no assurance that ZIM’s 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 ZIM’s shareholders on a quarterly basis at a rate of 30% of the Special State Share,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 ZIM’s board of directors absolute discretion at the time of any such distribution, and ifthe satisfaction of the applicable relevant tests under the Israeli Companies law at the time of these distributions. ZIM would want to disposepaid a cash dividend of such vessels, it would need to obtain consent from the Stateapproximately $769 million, or $6.40 per ordinary share on April 4, 2023. ZIM has not distributed additional dividends since April 2023. During 2022, ZIM paid cash dividends of Israel.approximately $3.30 billion. During 2021, ZIM paid a special cash dividend of approximately $237 million, and a cash dividend of approximately $299 million.
Furthermore, although there are no contractual restrictions on any salesAny 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 ZIM’s shares by its controlling shareholders, if Idan Ofer’s ownership interest in Kenon is less than 36%, or Idan Ofer ceasesannual net income, the actual payout ratio could be anywhere from 0% to be the controlling shareholder, or sole controlling shareholder50% of Kenon, then Kenon’s rights with respect to its shares in ZIM (e.g., Kenon’s right to voteZIM’s net income, and receive dividends in respect of its ZIM shares) will be limited to the rights applicable to an ownership of 24% of ZIM, until or unless the State of Israel provides its consent, or does not object to, this decrease in Idan Ofer’s ownership or “control” (as defined in the State of Israel consent received by IC in connection with the spin-off). The State of Israel may also revoke Kenon’s permit if there is a material change in the facts upon which the State of Israel’s consent was based, upon a breach of the provisions of the Special State Share by Kenon, Mr. Ofer, or ZIM, or if the cancellation of the provisions of the Special State Share with respect to a person holding shares in ZIM contrary to the Special State Share’s provisions apply (without limitation). For further informationfluctuate depending on the Special State Share, see “Item 4.B Business Overview—Our Businesses—ZIM—ZIM’s Special State Share.”
Risks Related to Our Spin-Off
The potential indemnification of liabilities to IC pursuant to the Separationcash flow needs and Distribution Agreement may require us to divert cash to IC to satisfy our indemnification obligations.
We entered into a Separation and Distribution Agreement with IC, or the Separation and Distribution Agreement, which provides for, amongsuch other things, indemnification obligations designed to make us financially responsible for liabilities incurred in connection with our businesses, and as otherwise allocated to us in the Separation and Distribution Agreement. If we are required to indemnify IC under the circumstances set forth in the Separation and Distribution Agreement, we may be subject to substantial liabilities, which could have a material adverse effect on our business, financial condition, results of operations or liquidity.
factors. There can be no assurance that IC’s indemnification of certain of our liabilitiesdividends will be sufficientdeclared 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 insure us againstpay dividends, to reduce the full amount of those liabilities,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 IC’sthe amount of any cash dividends ZIM distributes will vary significantly 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 satisfy its indemnification obligationpay 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 not be impaired in the future.prevent ZIM from meeting ZIM’s existing and future obligations when they become due.
Pursuant to the Separation and Distribution Agreement, IC has agreed to indemnify us for certain liabilities retained by it (which includes one pending legal matter). However, third parties could seek to hold us responsible for any of the liabilities that IC has agreed to retain, and there can be no assurance that the indemnity from IC will be sufficient to protect us against the full amount, or any, of such liabilities, or that IC will be able to satisfy its indemnification obligations. Moreover, even if we ultimately succeed in recovering from IC any amounts for which we are held liable, we may be temporarily required to bear these losses ourselves. Additionally, IC’s insurers may deny coverage to us for liabilities associated with occurrences prior to the spin-off. Even if we ultimately succeed in recovering from such insurance providers, we may be required to temporarily bear such loss of coverage. If IC is unable to satisfy its indemnification obligations or if insurers deny coverage, the underlying liabilities could have a material adverse effect on our business, financial condition, results of operations or liquidity.
Risks Related to Our Ordinary Shares
Our ordinary shares are traded on more than one stock exchange and this may result in price variations between the markets.
Our ordinary shares are listed on each of the NYSE and the TASE. Trading 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 58%62% 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. TheSales of our shares by Ansonia or 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 58%62% 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,Constitution, a merger or other sale of our company or our assets, and all matters requiring shareholder approval. In certain circumstances, Ansonia’s interests as a principal shareholder may conflict with the interests of our other shareholders and Ansonia’s ability to exercise control, or exert significant influence, over us may have the effect of causing, delaying, or preventing changes or transactions that our other shareholders may or may not deem to be in their best interests.
We may not have sufficient distributable profits to pay dividends or make other distributions.distributions or repurchase shares.
We have paid significant dividends in 2023 and prior years but there is no assurance as to the level of future dividends or whether we will declare dividends with respect to our ordinary shares at all. Our dividends have generally been funded from the dividends received from our subsidiaries and associated companies as well as the divestment of our equity interests in our businesses. Distributions from our subsidiaries and associated companies may be lower in the future and there is no assurance that we will receive any dividends at all, which would then impact our ability to pay dividends. Even if we do have sufficient funds, we may choose to use our cash for purposes other than the payment of dividends, including investment in existing or new businesses. Therefore there is no assurance that Kenon shareholders will receive any dividends in the future and as to the amount of such dividends, if any.
We received significant dividends from our holding in ZIM in prior years, and these dividends have been a significant source of liquidity for us, enabling us to pay the dividends that we have paid in the past few years. However, ZIM’s financial performance declined in 2023 compared to 2022 and ZIM has not declared a dividend since March, 2023. Accordingly, the significant dividends we received from ZIM in recent years may not continue and this could impact amounts available to pay dividends. In addition, in March 2024, OPC’s Board of Directors made a decision to suspend OPC’s dividend distribution policy (adopted in 2017) for a period of two years.
Any dividends are also subject to legal limitations. Under Singapore law and our constitution,Constitution, dividends, whether in cash or in specie, must be paid out of our profits available for distribution. The availability of distributable profits is assessed on the basis of Kenon’s standalone unconsolidatedstand-alone accounts (which are based upon the Singapore Financial Reporting Standards or the SFRS)(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. As a result, 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.
Under Singapore law, it is possible to effect either a court-free or court-approved capital reduction exercise to return cash and/or assets to our shareholders. Further, the completion of a court-free capital reduction exercise will depend on whether our directors are comfortable executing a solvency statement attesting to our solvency, as well as whether there are any other creditor objections raised (in the event that we have creditors other than IC).raised. We have completed capital reduction exercises in connection with the distribution of our Tower shares and the cash distribution in March 2018,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.
In March 2023, we announced a repurchase plan of up to $50 million to repurchase shares. Through the end of 2023, we have repurchased approximately 1.1 million shares for approximately $28 million. Our 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 dividend payments onor 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 2020,every year between 2018 and 2023, we distributed approximately $120 million inhave made cash distributions to our shareholders. Although a significant percentage of our shareholders hold their shares through the TASE, the dividendeach 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. However, we do not fully comply such rules; for example, we do not have a fully independent nominating and corporate governance committee. We may, in the future, decide to rely on other foreign private issuer exemptions provided by the NYSE and follow home country corporate governance practices in lieu of complying with some or all of the NYSE’s requirements.
Following our home country governance practices, as opposed to complying with the requirements that are applicable to a U.S. domestic registrant, may provide less protection to you than is accorded to investors under the NYSE’s corporate governance rules. Therefore, any foreign private exemptions we avail ourselves of in the future may reduce the scope of information and protection to which you are otherwise entitled as an investor.
It may be difficult to enforce a judgment of U.S. courts for civil liabilities under U.S. federal securities laws against us, our directors or officers in Singapore.
We are incorporated under the laws of Singapore and certain of our officers and directors are or will be residents outside of the United States. Moreover, most of our assets are located outside of the United States. Although we are incorporated outside of the 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, such thatmatters. 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 constitutionConstitution and by the laws governing corporationscompanies 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.Constitution.”
Singapore corporate law may delay, deter or prevent a takeover of our company by a third-party,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 Chapter 289 of Singapore2001 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,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 (ii) granting to our directors of the authority to issue new shares with different or similar rights, additional shares may be issued carrying such preferred rights to share in our profits, losses and dividends or other distributions, any rights to receive assets upon our dissolution or liquidation and any redemption, conversion and exchange rights. At the annual general meeting (the “AGM”) of shareholders held in 2020, or the 2020 AGM,2023 (the “2023 AGM”), our shareholders granted the board of directors authority (effective until the conclusion of the annual general meeting of shareholders to be held in 2021,2024, or the 20212024 AGM, or the expiration of the period by which the 20212024 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 20202023 AGM and shareholders will be asked to renew this authority at the 20212024 AGM. Ansonia, our significant shareholder, may use its ability to control to approve a grant of such authority to our board of directors, or exert influence over, our board of directors to cause us to issue additional ordinary shares, which would dilute existing holders of our ordinary shares, or to issue securities with rights and privileges that are more favorable than those of our ordinary shareholders. There are no statutory pre-emptive rights for new share issuances conferred upon our shareholders under the Companies Act, Chapter 50 of Singapore, or the Singapore Companies Act. Furthermore, any additional issuances of new shares by our directors could adversely impact the market price of our ordinary shares.
Risks Related to Taxation
We may be classifiedtreated as a passive foreign investment company (“PFIC”) for U.S. federal income tax purposes, 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 treated 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 (generally 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 purposes of these tests, “passive income” generally includes, among other items, dividends, interest and certain rents and royalties, and net gains from the sale or exchange of property that gives rise to such income. In addition, 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 stock.
Based upon, among other things, the valuation of our assets and the composition of our income and assets, taking into account our proportionate share of the income and assets of other corporations in which we do notown, directly or indirectly, 25% or more (by value) of the stock, we believe that we were not a passive foreign investment company, or PFIC for U.S. federal income tax purposes for our previousthe taxable year ended December 31, 2020.2023. 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 thatsuch year. Accordingly, we cannot assure you that we will not be a PFIC for our current, or any future, taxable year. A non-U.S. corporation will be a PFIC for any taxable year if either (i) 75% or more of its gross income for such year is passive income or (ii) 50% or more of the value of its assets (based on an average of the quarterly values of the assets) during such year is attributable to assets that produce passive income or are held for the production of passive income. For this purpose, we will be treated as owning our proportionate share of the businesses and earning our proportionate share of the income of any other business in which we own, directly or indirectly, 25% or more (by value) of the stock. In particular, in February 2021, ZIM completed its initial public offering, which reduced our equity interest from 32% to approximately 28%. Further reduction in our equity interest in ZIM to or below 25% will limit our ability to treat our proportionate share of ZIM’s businesses and earning 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 and result in us becoming a PFIC for our current, and any future, taxable year. Additionally,addition, 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.affect our PFIC status. Moreover, changes in the composition of our income or assets, taking into account our proportionate share of the income and assets of other corporations in which we own, directly or indirectly, 25% or more (by value) of the stock, may cause us to become a PFIC. As a result, dispositions of operating companies could increase the riskalso affect our PFIC status.
Although we believe 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 expected sale of all of our remaining interest in Qoros to the Majority Shareholder 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 becomingwere not a PFIC for our current,the taxable year ended December 31, 2023, we were likely treated as a PFIC for the taxable year ended December 31, 2022 and anywe may again be treated as a PFIC for U.S. federal income tax purposes for foreseeable future taxable year.years. If we are treated as a PFIC for any taxable year during which a U.S. Holder (as defined below) holds an ordinary share, certain adversethe U.S. federal income tax consequences could applyto 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. Additionally, if we are treated as a PFIC for any taxable year during which a U.S. Holder holds an ordinary share, we would generally continue to be treated as a PFIC with respect to such U.S. Holder.Holder even if we cease to be treated as a PFIC for any subsequent taxable years. 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 with the information necessary to make and maintain a QEF Election for any subsequent taxable year for which we are treated as a PFIC. For further information on such U.S. tax implications, see “Item 10.E Taxation—U.S. Federal Income Tax Considerations—Passive Foreign Investment Company.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.
The enactment of legislation implementing changes in taxation of international business activities, the adoption of other tax reform policies or changes in tax legislation or policies could materially impact our financial position and results of operations.
Corporate tax reform, base-erosion efforts and tax transparency continue to be high priorities in many tax jurisdictions where we have business operations. Our tax treatment may also be impacted by tax policy initiatives and reforms such as the Base Erosion and Profit Shifting ("BEPS") Project (including "BEPS 2.0") of the OECD which was set up to combat tax avoidance by multinational enterprises using BEPS tools. In January 2019, the OECD announced further work in continuation of its BEPS project, focusing on two “pillars.” Pillar One provides a framework for the reallocation of certain residual profits of multinational enterprises to market jurisdictions where goods or services are used or consumed. Pillar Two consists of two interrelated rules referred to as the Global Anti-Base Erosion Rules, which operate to impose a minimum tax rate of 15% calculated on a jurisdictional basis. Such initiatives may include the taxation of operating income, investment income, dividends received or, in the specific context of withholding tax dividends paid. Many of these proposed measures require amendments to the domestic tax legislation of various jurisdictions. Many OECD countries and members of the inclusive framework on BEPS have acknowledged their intent to support the actions, including the need for a global minimum tax rate. Depending on the implementation of these measures, Kenon and its operating companies’ tax incentives may be affected, which outcome may have a negative effect on our financial position, liquidity and results of operations. Although the timing and methods of implementation may vary, many countries, including Singapore and Israel, have implemented, or are in the process of implementing, legislation or practices inspired by BEPS. As the Two Pillar solution is subject to implementation by each member country, the timing and ultimate impact of any such changes on our tax obligations is uncertain. These changes, when enacted, may increase our tax obligations. The foregoing tax changes and other possible future tax changes may have a material adverse impact on us, our business, financial condition, results of operations and cash flow.
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, thereThere 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.
ITEM 4. | Information on the Company |
A. | History and Development of the Company |
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:
an approximately 58%55% interest in OPC, an owner, developer and operator of power generation facilities in the Israeli and US power market;
an approximately 28%20.7% interest in ZIM, a large provider of global container shipping services; and
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 December 2017, our wholly-owned subsidiary Inkia sold its power generation and distribution businesses in Latin America and the Caribbean, or the Inkia Business, to an entity controlled by I Squared Capital, an infrastructure private equity firm. As a result of this sale, our power generation business consists of our 58% interest in OPC. In January 2021, an entity which is 70%-owned by OPC acquired CPV.
In April 2021, we entered into an agreement to sell our remaining 12% interest in Qoros.
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.Wewww.kenon-holdings.com. We have appointed Gornitzky & Co., Advocates and Notaries, as our agent for service of process in connection with certain claims which may be made in Israel.
Our ordinary shares are listed on each of the NYSE and the TASE under the symbol “KEN.”
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 that operates dynamic, primarily growth-oriented, businesses. The companies we own, in whole or in part, are at various stages of development, ranging frominitially established cash generating businesses to early stage companies.
We were established in connection with a spin-off of our businesses from IC to promote the growth and development of our primary businesses. Through the implementation of the strategy we established in connection with our spin-off, we have realized significant value for our shareholders while our businesses and our holdings have substantially evolved.
We have made significant distributions to shareholders, totaling more than $2.4 billion in cash and listed securities, since our spin-off and initial listing in 2015 (including the dividend declared in March 2024). In 2015, we distributed substantially all of our interest in Tower. In addition, since 2018, we have distributed to shareholders total cash of approximately $2 billion, from the proceeds of the sale of the Inkia Business, proceeds from the sale of a portion 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. In March 2023, we announced a repurchase plan of up to $50 million to repurchase shares, and to date we have repurchased 1.1 million shares for approximately $28 million. In March 2024, we announced a further dividend of approximately $200 million.
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 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 previous 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 billion as of March 21, 2024. The value of ZIM has also grown substantially, with Kenon realizing approximately $1 billion in dividends and over $500 million in share sale proceeds since 2021, and currently holding approximately 21% of ZIM.
Since our spin-off over nine 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 considering various ways to further maximize value for our shareholders.
We believe that in the current market environment, there could be 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 primarily engagedwell-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 of OPC.
Our strategy is to realize the value of our businesses for our shareholders. In connection with this strategy, we will support the development of our business and we may provide our shareholders with direct access to our businesses, which may include spin-offs, listings, offerings, distributions or monetization of our businesses. To the extent we monetize our businesses (i.e., through offerings or sales), we may distribute the proceeds derived from such transactions to our shareholders.
Consistent with our strategy, we distributed approximately $120 million to our shareholders in 2020 and on March 30, 2021, Kenon’s board of directors approved an interim dividend of approximately $100 million for the year ending December 31, 2021.
Set forth below are some highlights of important developments for Kenon and its businesses in 2020 and 2021:
| • | DPA Repayment. In October 2020, Kenon received the full amount of the deferred consideration payable (approximately $218 million (approximately $188 million net of taxes)) under the Deferred Payment Agreement prior to the due date for such payment (December 2021). In connection with the agreement with the buyer of the Inkia Business to repay the Deferred Payment Agreement prior to initial scheduled maturity, the parties agreed to increase the number of OPC shares pledged from 32,971,680 shares to 55,000,000 shares (representing approximately 29% of OPC’s shares as of March 31, 2021) and to extend the OPC Pledge and the corporate guarantee by one year until December 31, 2021. In addition, Kenon has agreed that, until December 31, 2021, it shall maintain at least $50 million in cash and cash equivalents, and has agreed to restrictions on indebtedness, subject to certain exceptions.
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| • | Acquisition of CPV. In October 2020, OPC announced an agreement by CPV Group LP, an entity in which OPC indirectly holds a 70% stake, for the acquisition of CPV from Global Infrastructure Management, LLC. CPV is engaged in the development, construction and management of renewable energy and conventional energy (natural gas-fired) power plants in the United States. The acquisition was completed in January 2021. The consideration for the acquisition is $648 million (payable in cash), subject to post-closing adjustments based on closing date cash, working capital and debt. Additional consideration of $95 million was paid in the form of a vendor loan in respect of CPV’s 17.5% equity in the Three Rivers project, which is currently being developed. CPV subsequently reduced its interest in the Three River’s project to 10% and the consideration for the transaction and the amount of the seller’s loan was reduced accordingly.
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| • | OPC-Hadera reaches COD. On July 1, 2020, OPC-Hadera’s cogeneration power plant reached its COD.
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| • | Equity Issuances. In 2020 and 2021 to date, OPC has issued new ordinary shares in private and public offerings for total consideration of approximately NIS 1.4 billion ($0.4 billion). As a result of these share issuances, including Kenon's participation in the October 2020 public offering, Kenon’s interest in OPC decreased from 69.8% to 58.2%.
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| • | 2020 Sale of 12% in Qoros. In April 2020, we sold half of our remaining interest in Qoros (i.e. 12%) to the Majority Shareholder in Qoros for RMB1.56 billion (approximately $220 million). As a result, Kenon holds a 12% interest in Qoros and retains a put option to sell this interest to the Majority Shareholder in Qoros for a price of RMB 1.56 billion (approximately $220 million). Pursuant to relevant agreements, the Majority Shareholder in Qoros is required to assume guarantee and pledge obligations of the shareholders in accordance with its pro rata ownership interest in Qoros. The Majority Shareholder in Qoros assumed its guarantee obligations in connection with its initial 51% investment, and in connection with the sale of 12% of Kenon's interest in Qoros in 2020, but has not assumed its pledge obligations under the RMB 1.2 billion loan facility but the Majority Shareholder in Qoros has provided Kenon a guarantee in respect of its pro rata share of the pledge obligations which it was required to assume from Kenon with respect to the RMB1.2 billion loan facility.
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| • | 2021 Agreement to Sell Remaining 12% Interest in Qoros. In April 2021, we entered into an agreement to sell our remaining 12% interest in Qoros to the Majority Shareholder in Qoros for a purchase price of RMB1,560 million (approximately $238 million). The sale is subject to certain conditions, including approvals by relevant government authorities and a release of the pledge over Kenon's shares in Qoros, which are currently pledged to secure debt of Qoros under its RMB1.2 billion loan facility. The purchase price is payable in installments due between July 31, 2021 and March 31, 2023. For more information, see “—Kenon’s Agreement to Sell its Remaining Interest in Qoros to the Majority Shareholder in Qoros”
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| • | Receipt of Payments from Chery. Kenon had provided cash collateral to Chery of the RMB244 million (approximately $36 million) in connection with reductions in Kenon's back-to-back guarantee obligations to Chery; the relevant agreements provided that such cash collateral was to be released as Chery's guarantee obligations were reduced. Kenon received aggregate cash payments of $17 million from Chery in December 2019 and April 2020 as a result of repayments on Qoros’ bank loans and corresponding reductions of Chery’s obligations under its guarantees, bringing the total cash received from Chery to RMB244 million (approximately $36 million) in connection with these repayments resulting in full reimbursement of the cash collateral.
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ZIM
| • | IPO and NYSE Listing. In February 2021, ZIM completed an initial public offering of its shares on the New York Stock Exchange selling 15 million new ordinary shares (including shares issued pursuant to the exercise of the underwriters’ overallotment option), for gross consideration of $225 million (before deducting underwriting discounts and commissions or other offering expenses). As a result of the offering, our interest in ZIM decreased from 32% to approximately 28%. We continue to assess our options with respect to our ownership interest in ZIM.
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As we execute our strategy, we intend to operate under disciplined capital allocation principles designed to ensure the prudent use of our capital.
Our strategy set forth above is designed to promotepromoting the growth and development of our primarysuch 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, maximize value for our shareholderswe have made significant investments and ensure the prudent use of our capital. However, we will be required tomay make determinations over time that will be based on the factsfurther investments in OPC, in which Kenon holds a 55% stake. OPC remains a growth business with projects under development and circumstances prevailing at such time, as well as continually evolving market conditions and outlook. As a result, we will be required to exercise significant judgment while seeking to adhere to these capital allocation principles in order to maximize value for our shareholders and further theOPC’s strategy contemplates continued development of our businesses.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 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.
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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. In March 2024, Kenon declared a dividend of approximately $200 million. Including the dividend announced in March 2024 Kenon will have returned more than $2.4 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
Information in this report on OPC is based on OPC’s annual report and financial statements and board of directors report for the year ended December 31, 2023.
OPC, which accounted for approximately 100% of our revenues in the year ended December 31, 2020,2023, is an owner, developer and operator of power generation facilities located in Israel and, since its acquisition of CPV, in the United States. OPC’s facilities and primary development projects are set forth below.OPC has the following three operating segments:
| • | Israel. OPC manages its activities through OPC Israel, in which OPC holds 80%, with the remaining 20% held by Veridis. OPC is engaged in generation and supply of electricity and energy to private customers and to Noga (the System Operator) and the development, construction and operation of power plants and energy generation facilities using natural gas and renewable energy in Israel. |
Operations in Israel
| • | Renewable Energy in the U.S. in which OPC (through its 70% interest in CPV Group) is engaged in the initiation, development, construction and operation of power plants using renewable energy in the United States (solar and wind) and supply of electricity from renewable sources to customers; and |
OPC-Rotem, in which OPC has an 80% equity interest, operates a conventional combined cycle power plant in Mishor Rotem, Israel, with an installed capacity of 466 MW (based on OPC-Rotem’s generation license). The power plant utilizes natural gas, with diesel oil and crude oil as backups.60
| • | Energy Transition in the U.S. in which OPC (through its 70% interest in CPV Group) is engaged mainly in the initiation, development, construction and operation of conventional energy power plants in the United States, which supply efficient and reliable electricity. All active power plants in this area of operation are held through associates (which are not consolidated in OPC’s or our financial statements). |
OPC-Hadera, a wholly-owned subsidiary ofFurthermore, OPC operates a power plant using cogeneration technology with an installed capacity of 144 MW(through CPV) is engaged in Hadera which reached its COD on July 1, 2020 and owns the Energy Center, which consists of boilers and a steam turbine. The 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.
Tzomet, a wholly-owned subsidiary of OPC, is developing a natural gas-fired open-cycle power station in Israel with capacity of approximately 396 MW. Tzomet has a conditional license for the development project, which 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. In September 2018, Tzomet entered into an EPC contract in an amount equivalent to approximately $300 million for the design, engineering, procurement and construction of the Tzomet power plant and provision of certain maintenance services in connection with the power station’s main equipment for a period of 20 years from the plant’s COD. During 2020, the construction of the Tzomet power plant commenced. OPC expects that the Tzomet plant will reach its COD in January 2023 and that the total cost of completing the Tzomet plant will be approximately NIS1.5 billion (approximately $0.5 billion) (excluding NIS 100 million, which is half of the tax assessment on the land). As of December 31, 2020, OPC had invested approximately NIS 694 million (approximately $216 million) in the project.
Construction of energy generation facilities on the premises of consumers. To date, 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 (natural gas) on the premises of consumers for aggregate capacity of approximately 76MW, 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 depends on the number of arrangements entered into and is expected to be an average of NIS 4 million for each 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 41 MW. As of December 31, 2020, OPC’s investment in such generation facilities amounted to approximately NIS 12 million ($4 million).
Sorek 2 Desalination Plant. In May 2020, OPC, through a wholly-owned subsidiary, won a build-operate-transfer (BOT) tender with the State of Israel for the construction, operation and maintenance of a seawater desalination plant, pursuant to an agreement which states that OPC will construct, operate and maintain a natural gas-fired cogeneration power plant with a capacity of up to 99MW 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 has yet to be received). 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 construction of the plant will be completed in the second half of 2023. Excess capacity beyond that used by the desalination plant is expected to be sold to the System Administrator.
Operations in the United States
OPC operatesadditional business activities (U.S. Other) in the United States since January 2021, when an entity in which OPC indirectly holds a 70% stake, acquired CPV from Global Infrastructure Management, LLC. The consideration for the acquisition was $648 million in cash, subjectthat are complementary to post-closing adjustments based on closing date cash, working capital and debt. Additional consideration of $95 million was paid in the form of a vendor loan in respect of CPV’s 17.5% equity in the Three Rivers project, which is currently being developed. CPV subsequently reduced its interest in the Three River’s project to 10% and the consideration for the transaction and the amountelectricity generation activity of the seller’s loan was reduced accordingly. In addition to the $648 million consideration,CPV Group. These additional activities include initiation and development of projects for generation of electricity (highly-efficient power planning running on the completion date of the transaction, the buyer paid an additional $5 million for a deposit in the same amount held by CPV and subsequent to the completion date of the transaction, $5 million was provided by the buyer for replacement of a letter of credit issued by the seller for the CPV Keasbey project. The final consideration is subject to final closing adjustments to be completed within 120 days of closing of the acquisition.
CPV is engaged in the development, construction and management of power plants running conventional energy (powered by natural gas) integrating carbon capturing capabilities, under various development stages; the provision of assets and renewable energy 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 14,800 MW, of which approximately 4,850 MW consists of wind energy and another approximately 9,950 MW consist of conventional power plants. CPV holds ownership interests in active power plants it constructed over the past years (both conventional and renewable energy): in power plants powered by natural gas (of the open‑cycle type from an advanced generation), CPV’s proportionate ownership interest is approximately 1,290 MW out of 4,045 MW (5 power plants), and in wind energy CPV’s proportionate ownership interest is approximately 106 MW out of 152 MW (1 power plant) (the remaining 30% interest for this project was acquired by CPV on April 7, 2021).
In addition, CPV holds a 10% ownership interest in the Three Rivers project, which consists of the construction of a natural gas, combined cycle power plant with expected capacity of 1,258 MW (CPV’s proportionate interest is approximately 125MW), expected to participate in tenders for capacity in the PJM market. Its expected COD is May 2023 and the expected cost of construction is approximately $1.3 billion for 100% of the project (not just CPV’s ownership interest). CPV also has 9 renewable energy projects in advanced stages of development, and additional projects using various technologies in different stages of development, having an aggregate scope of about 6,175 MW. CPV manages its active plants and the development of its projects. In addition, CPV provides management services to power plants in the U.S., which it holds, and which are owned by third parties.
OPC's Listing in 2017 and Financing Activities in 2019 to 2021
In August 2017, OPC completed an initial public offering in Israel,parties, and a listing onretail operation to sell electricity from renewable sources to commercial and industrial customers which started in 2023 and which is designed to supplement the TASE, resulting in net proceeds to OPCgeneration activities of approximately $100 million and Kenon retaining 76% stake.
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 decreasedelectricity from 75.8% to 69.8% (68.9% on a fully diluted basis).
In 2020 and 2021 up to the date of this report, OPC issued new shares in multiple offerings:
In October 2020, OPC issued a total of 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 (the Clal Group and the Phoenix Group) in a private placement in connection with the acquisitionrenewable sources of CPV.
Also in October 2020, OPC issued a total of 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.
Operations Overview
In January 2021,The following tables set forth summary operational information regarding OPC’s main operations in Israel (held and operated through OPC issued 10,300,000 ordinary shares (representing approximately 5.5% of OPC’s issuedIsrael) and outstanding share capital at the time on a fully diluted basis) to Altshuler ShahamUnited States (held and entities managedoperated by Alsthuler Shaham in a private placement for a total (gross) consideration of NIS 350 million (approximately $107 million)CPV).
As a result of these share issuances, including Kenon's participation in the October 2020 public offering, Kenon’s interest in OPC decreased from 69.8% to 58.2%.
Overview of OPC's Operations
Israel
The following table sets forth summary operational information regarding OPC’s main operations in Israel as of March 25, 2021:(held and operated through OPC Israel):
| | | | | | | | | | | | | | | | Amount of | | Total |
| | | | | | | | | | | | | | | | OPC | | estimated |
Power | | | | | | | | | | | | | | | | investment | | cost of the |
plants/ | | | | | | | | | | | | | | | | in the | | investment |
facilities | | | | Installed | | Current | | | | | | | | | | project at | | in the |
for | | | | electricity | | OPC | | | | | | COD/ | | Main | | 12/31/2020 | | project |
generation | | | | capacity | | Ownership | | | | | | Expected | | customer/ | | (NIS | | (NIS |
of energy | | Status | | (MW) | | Interest | | Location | | Technology | | COD | | consumer | | millions) | | millions) |
| | | | | | | | | | | | | | | | | | |
Rotem Power Plant | | Active | | » 466 | | 80% | | Rotem plain | | Conventional | | July 2013 | | Private customers and IEC | | » 2,000 | | – |
| | | | | | | | | | | | | | | | | | |
Hadera Power Plant | | Active | | » 144 | | 100% | | Hadera Industrial Zone | | Cogeneration | | July 2020 | | Private customers and the System Administrator | | » 9001 | | – |
Energy Center which as at the submission date of the report is operated for supply of steam as a back up | | On the premises of Hadera Paper Mills | |
| | | | | | | | | | | | | | | | | | |
Zomet | | Under construction | | » 396 | | 100%
| | Plugot Intersection | | Conventional with open cycle | | January 2023 | | The System Administrator | | » 694 | | » 1,5002 |
| | | | | | | | | | | | | | | | | | |
Sorek 2 | | In initiation | | Up to 99 | | 100% | | On the premises of the Sorek B seawater
desalination facility | | Conventional | | Second half of 2023 | | Yard consumer and pursuant to EA regulations | | » 1 | | Up to 200 |
| | | | | | | | | | | | | | | | | | |
Facilities for generation of energy on the consumer’s premises | | In various stages of development starting from initiation and up to construction | | Every facility up to 16 megawatts (as at the submission date of the report, construction and operation agreements were signed for a total of 76 megawatts. The Company intends to take action to sign construction and operation agreements in a cumulative scope of at least 120 megawatts | | 100% | | On the premises of consumers throughout Israel | | Conventional | | The planned commercial operation dates are pursuant to the conditions provided in the agreements and in any case no later than 48 months from the signing date of the agreement3 | | Yard consumers also including Group customers | | » 12 | | » an average of NIS 4 per megawatt |
Active Power Plants
Power plant/ energy generation facilities | | | | Method of presentation in the OPC financial statements | | | | Type of project / technology | | Year of commercial operation |
OPC-Rotem
| | 466 | | Consolidated | | Mishor Rotem | | Natural gas, combined cycle | | 2013 |
Tzomet(2)
| | 396 | | Consolidated | | Plugot Intersection | | Natural gas, open-cycle | | 2023 |
OPC-Hadera(3)
| | 144 | | Consolidated | | Hadera | | Natural–gas—cogeneration | | 2020 |
Kiryat Gat(4)
| | 75 | | Consolidated | | Kiryat Gat industrial park | | Natural gas, combined cycle | | 2019 |
______________________________________________________________
(1) | As stipulated in the relevant generation license. |
(2) | Reached COD on June 22, 2023. |
(3) | 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. |
(1) The total investment is presented netVirtual Supply–- OPC has virtual supply agreements of compensation from the construction contractor to which Hadera is entitled under Hadera’s construction agreement. Hadera offset part of such compensation against payments to the construction contractor.
(2) The estimate of the costs does not take into account half of the assessment received from Israel Lands Authority in January 2021, in the amount of about NIS 200 million (not including VAT) in respect of capitalization fees.
(3) The binding agreements and execution thereof are subject to receipt of approvals and/or consents of third parties, where necessary, including connection of the consumer to the natural gas distribution infrastructures (to the extent the consumer is not already connected), receipt of approval of Israel Electric Company (IEC) for connection of the facility to the electricity network, issuance of a building permit for the facility, and where necessary even preparation of a detailed statutory plan (Urban Planning Scheme) for this purpose.
approximately 50 MW with customers.
The following table sets forth summary operational information for OPC’s operating plants in Israel as of and for the years ended December 31, 2022 and 2023:
| | | | | | |
| | | | | Net energy generated (GWh)(1) | | | | | | | | | Net energy generated (GWh)(1) | | | | |
OPC-Rotem | | | 466 | | | | 3,514 | | | | 93.4 | % | | | 466 | | | | 3,285 | | | | 90.5 | % |
Tzomet(3) | | | 396 | | | | 283 | | | | 16.3 | % | | | — | | | | — | | | | — | |
OPC-Hadera | | | 144 | | | | 939 | | | | 90.7 | % | | | 144 | | | | 800 | | | | 73.6 | % |
Kiryat Gat(4) | | | | | | | | | | | | | | | | | | | | | | | — | |
OPC Total | | | | | | | | | | | | | | | | | | | | | | | | |
(1) | The net 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. |
(3) | The commercial operation date of Tzomet is June 2023. Tzomet is a peaker plant. |
(4) | Since completion of the acquisition in March 2023. |
PPAs
Except for Tzomet, OPC sells energy in Israel through PPAs. The weighted average remaining life of OPC’s PPAs based on firm capacity as of March 25, 2021, is approximately 6.58 years for OPC-Rotem and 11.49 years for OPC-Hadera (subject to the option for early termination or extension as set out in the agreement with each customer), including a 25-year PPA with Hadera Paper mill.Infinya. The Gat Partnership has PPAs with private customers with the weighted average remaining life of approximately 6 years, subject to early termination or extension arrangements. 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, OPC-Hadera and Kiryat Gat Power Plant have approximately 85 private customers, with whom they entered into PPAs. Total revenue from electricity sales to private customers out of OPC's total revenue from electricity sales in the operating segment in Israel in 2023 was 88%, ascompared with 94% in 2022. This decline arises from the sale of capacity to the dateSystem Operator, and an increase in sales to the System Operator (mainly due to the commercial operation of this report.Tzomet). For further information on the IEC PPA, see “Item 4.B Business Overview—Our Businesses—OPC’s Description of Operations—Regulatory, Environmental and Compliance MattersMatters—Israel—OPC-Rotem’s Regulatory Framework.”
Israel—Projects under Development and Construction
Power plants / energy generation facilities | | | | |
Sorek 2
| | Under construction | | On the premises of the Sorek B seawater desalination facility |
Energy generation facilities on the consumers’ premises | | Various stages of development/construction(3) | | On consumers’ premises across Israel |
Hadera 2
| | Preliminary development | | Hadera, adjacent to the Hadera power plant |
The Ramat Beka Solar Project | | Preliminary development | | Neot Hovav Local Industrial Council |
United States
The following table sets forth summary operational information regarding OPC’s United States operations (active projects), through its 70% ownership of CPV, as of March 25, 2021:CPV:
| | | | CPV | | | | | | | Year of | |
| | | | Ownership | | Fuel/ | | Installed Capacity | | | commercial | |
Plant | | Location | | Interest | | technology | | (MW) | | | operation | |
| | | |
|
| | | | | | | |
CPV Fairview | | Pennsylvania | | 25%
| | Natural gas, combined cycle | | | 1,050 | | | 2019 | |
| | | |
|
| | | | | | | | |
CPV Towantic | | Connecticut | | 26%
| | Natural gas / two fuels, combined cycle | | | 805 | | | 2018 | |
| | | |
|
| | | | | | | | |
CPV Maryland | | Maryland | | 25%
| | Natural gas, combined cycle | | | 745 | | | 2017 | |
| | | |
|
| | | | | | | | |
CPV Shore | | New Jersey | | 37.53%
| | Natural gas, combined cycle | | | 725 | | | 2016 | |
| | | |
|
| | | | | | | | |
CPV Valley | | New York | | 50%
| | Natural gas, combined cycle | | | 720 | | | 2018 | |
| | | |
|
| | | | | | | | |
CPV Keenan II | | Oklahoma | | 70%1
| | Wind | | | 152 | | | 2010 | |
Active Plants in Commercial Operation
| | | | | | | | | | 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 |
| | | | | | | | | | |
Three Rivers | | Illinois | | 10%(1) | | Natural gas, combined cycle | | 1,258 | | 2023 |
Renewable Energy Projects |
Keenan II | | Oklahoma | | 100%(2) | | Wind | | 152 | | 2010 |
Mountain Wind(3) | | Maine | | 100% | | Wind | | 82 | | Various between 2008 and 2017 |
CPV Maple Hill Solar LLC (“Maple Hill”) | | Pennsylvania | | 100% (subject to the tax equity partner’s share) (4) | | Solar | | 126 MWdc | | Second half of 2023 |
(1) | Three Rivers power plant commenced its operations in July 2023 (CPV holds a 10% interest in the power plant). The total construction costs of the project amounted to approximately NIS 4.8 billion (approximately $1.3 billion). |
(2) | In April 2021, CPV acquired the remaining 30% interest in this project and, therefore, has 100% ownership interest. |
(3) | Acquired in April 2023. |
(4) | On May 12, 2023, the CPV Group entered into an agreement with a “tax equity partner” for an investment in the project. According to the agreement, the tax equity partner’s investment in the project is predicated on the achievement of defined milestones, with part (20%) due at the time of completion of the construction works, and the remainder (80%) due at the commercial operation date, which was achieved on December 1, 2023. As all milestones were met the tax equity partner completed its $82 million investment on December 15, 2023. The agreement allows the tax equity partner the option to sell its equity to CPV Group for a specified amount. |
____________The table below sets forth an overview of the generation capacity of CPV’s plants in commercial operation for 2023 and 2022.
| | | | | | |
| | Net Electricity generation (GWh)(1) | | | | | | Actual Availability Percentage (%) | | | Net Electricity generation (GWh)(1) | | | | | | Actual Availability Percentage (%)(4) | |
Conventional Energy Projects | |
Fairview | | | 7,213 | | | | 81.1 | % | | | 84.2 | % | | | 7,607 | | | | 85.6 | % | | | 87.3 | % |
Towantic | | | 5,551 | | | | 77.5 | % | | | 91.2 | % | | | 4,960 | | | | 69.3 | % | | | 83.5 | % |
Maryland | | | 4,162 | | | | 64.5 | % | | | 93.0 | % | | | 3,779 | | | | 69.8 | % | | | 90.9 | % |
Shore | | | 4,000 | | | | 63.3 | % | | | 83.4 | % | | | 4,422 | | | | 69.8 | % | | | 96.0 | % |
Valley | | | 4,392 | | | | 72.3 | % | | | 77.6 | % | | | 4,831 | | | | 80.0 | % | | | 88.6 | % |
Three Rivers | | | 2,814 | | | | 64.0 | % | | | 74.8 | % | | | n/a | | | | n/a | | | | n/a | |
| |
Renewable Energy Projects | |
Keenan II | | | 271 | | | | 20.4 | % | | | 93.6 | % | | | 286 | | | | 21.5 | % | | | 92.3 | % |
Mountain Wind | | | 140 | | | | 22.0 | % | | | 79.6 | % | | | — | | | | — | | | | — | |
Maple Hill | | | 4.9 | | | | 99.8 | % | | | 6.6 | %
| | | — | | | | — | | | | — | |
(1) | The net electricity generation is the gross generation during the period 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 to 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 period 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 30–50 days and reduce the power plants’ generation and availability until such maintenance has been completed. The variances regarding the availability of the production and capacity for the Fairview, Shore and Valley in 2023 compared with 2022 was mainly due to major maintenance outages taken in 2023. CPV Group's projects may be under planned and unplanned maintenance from time to time, including as occurred in 2023. In 2024, no major planned maintenances are expected in projects (aside from immaterial planned tests). In 2023, Fairview, Shore, and Valley underwent material planned maintenance. |
Maryland is expected to complete testing during 2024 and commencing commercial sales and revenue collection from PJM.
(4) | The availability of Fairview’s & Valley’s production and capacity compared with 2022 was mainly affected by planned hot gas path inspections. In addition, in the fourth quarter of 2023, planned maintenance work was performed in the Fairview power plant, which led to variances regarding the availability of its production and capacity. Shore performed its planned major inspection. Keenan experienced curtailments in generation. |
Projects under Construction
(1) In April 2021, CPV acquired the remaining 30% interest in this project and, therefore, currently has 100% ownership interest.
The table below sets forth an overview of CPV’s projects under construction.
| | | | Type of project/ technology | | | | | | Projected date of commercial operation | | Expected construction cost for 100% of the project |
CPV Stagecoach Solar, LLC (“Stagecoach”)(1) | | Georgia | | Solar | | 102 MWdc | | Q2 2022 | | First half 2024 | | Approximately $112 million |
CPV Backbone Solar, LLC (“Backbone”)(2) | | Maryland | | Solar | | 179 MWdc | | June 2023 | | Second half of 2025 | | Approximately $304 million |
(1) | The Stagecoach project entered into a 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 Solar Renewable Energy Credits (RECs), 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. |
(2) | The Backbone project has signed a connection agreement and electricity supply agreement with the global e–commerce company for a period of 10 years from the start of the commercial operation, for supply of 90% of the electricity expected to be generated by the project in the said period, and sale of solar renewable energy certificates (“SREC”), which is valid up to 2035. The balance of the project’s capacity (10%) will be used for supply to customers, retail supply of electricity of the CPV Group or for sale in the market. |
The power plants in which CPV has an interest generally sell their output on the spot market. CPV has in place hedging arrangements as discussed below.
OPC’s Strategy
OPC’s vision is to continue establishing its position as a leading high-quality independent power producer (IPP) including in matters pertaining to ESG. Within this framework, OPC:
• Operates within a hybrid model that efficiently utilizes natural gas and renewable energies in order to secure optimal and reliable supply of electricity, while promoting a green and clean energy future. OPC promotes the energy transition (power generation that will transition to low carbon emission energy production) through a set of energy generation solutions, both through efficient, continuous, reliable conventional means (natural gas) and through renewable sources (solar, wind and storage), based on professional standards, transparency, reliability, operational and organizational excellence, technological innovation and environmental commitment, in partnership with, and with a commitment to the changing needs of, all stakeholders, specifically customers, employees, communities, investors and creditors.
• Is active throughout the value chain in the field of energy, from the initiation, development and construction stages of projects, to the operational stage to the supply stage, while working to achieve optimal utilization; and
• Works to expand its activity and enhance its position by further promotion of projects in the field of energy in Israel and the United States. OPC is working to continue initiating, developing and operating projects to generate electricity using a range of leading technologies that support energy transition, specifically renewable energies and natural gas projects with carbon capture, and enhancing the inherent synergy of the energy generation and supply activities.
OPC’s vision is based on an assumption that private electricity market in general, and in Israel and in the United States in particular, will continue to expand in the future, to support the increasing demand for electricity (including as a result of GDP growth rates, demand for EVs and government policies of transitioning to low-carbon economy that encourages electrification), alongside a gradual change in the type of energy production (mainly decommissioning of coal-fired power plants).
In order to implement this vision, OPC is focused in achieving competitive advantages in (i) the initiation, development and construction of facilities for generation of electricity and energy (including at the customers’ sites) using a range of technologies—including conventional technologies and renewable sources; (ii) operation and maintenance of its power plants and those of third parties as the asset manager in relation to OPC’s US operations; (iii) optimization and synergy in the management of energy sales to customers, through a range of means of generation and ancillary arrangements, and in the acquisition of natural gas, while engaging in a range of contracts in order to ensure continuity of supply at a competitive price; and (iv) ESG measures.
OPC objectives include (i) increasing its electricity generation capacity in Israel and the United States and expanding OPC’s customer base and types of customers; (ii) initiating, developing and constructing projects with energy generation facilities using renewable technologies and energy storage facilities that are adapted, among other things, to the needs of customers and the market and (iii) developing further it ESG strategy.
In addition to expansion of its renewable energy activity, OPC continues to pursue innovative and efficient conventional means (natural gas) of energy production, and in the United States while incorporating carbon capture. Such projects, using these technologies, are essential to the promotion of the transition to clean, low-emission energy, and are necessary for a reliable and efficient electricity supply.
From time to time, OPC may explore possibilities for expanding its activities in the electricity and energy generation and supply segment, including by constructing and/or acquiring active power plants (using renewable energy and storage); whether they are under construction, or under development, including in additional territories around the world, and project development for such projects that are found suitable and are consistent with OPC’s business plans, as applicable from time to time.
OPC’s Description of Operations
Israel
OPC’s operations in Israel include power generation plants that operate on natural gas and diesel. As of December 31, 2023, OPC’s installed capacity of its active plants was approximately 1,081 MW. OPC’s operations in Israel consist of four power plants in operation: OPC-Rotem, Tzomet, OPC-Hadera, and Kiryat Gat.
OPC’s activity in Israel is conducted through OPC’s subsidiary, OPC Israel, in which OPC has an 80% and Veridis owns the remaining 20%. OPC Israel owns and operates all of OPC’s business activities in the energy and electricity generation and supply sectors in Israel, including a 100% interest in four active power plants, OPC-Rotem, OPC-Hadera, Tzomet and Kiryat Gat, and Sorek 2 (which is currently under construction), a 51% interest in Gnrgy (an eMobility original equipment manufacturer and EV charge point operator), as well other operations in Israel including energy generation facilities on consumers’ premises and virtual electricity supply activities.
Set forth below is an overview of OPC’s holdings structure in Israel as of March 21, 2024:
Active Power Plants
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. The OPC-Rotem plant was constructed for an aggregate cost of approximately $508 million.
Below are the key elements of OPC-Rotem business operations:
Sales of Electricity
OPC-Rotem has a PPA with the IEC, the government-owned electricity generation, transmission and distribution company in Israel, or the IEC PPA (which was assigned by the 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 the 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, 2023, 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). OPC-Rotem has the option to sell the electricity to Noga in accordance with a PPA with the IEC. Under the IEC PPA, OPC-Rotem can also elect to revert back to supplying to the IEC instead of private customers, subject to twelve months’ advance notice.
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 Tamar Group and Energean as described below.
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. The agreement includes a requirement to purchase minimum quantities (‘take or pay’) from Tamar Group. Commencing in March 2020, OPC-Rotem was required to purchase minimum amounts of gas pursuant to the agreement (referred to as the "take or pay obligation"). The agreement has been amended several times in the past several years and in 2022, OPC-Rotem exercised an option to reduce some of the quantities purchased under the Tamar agreement in connection with the gas supply agreement with Energean, as a result of which the quantity and purchase cost of natural gas from the Tamar Group has declined 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 to ten years (and shorter if the total contractual quantity is supplied earlier). 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 March 2023, Energean notified OPC-Rotem of the completion of the commissioning and commencement of commercial operation of gas supply.
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. Commercial operation of the Karish Reservoir began on March 26, 2023 and since that time OPC-Rotem has reduced purchases of quantities under the Tamar Agreements, and started acquiring a substantial portion of the gas also from Energean, and thereby reducing its gas acquisition costs. OPC is currently in touch with Energean in connection with its notices to OPC-Rotem.
Since the beginning of the War in Israel and up to November 12, 2023, supply of the natural gas from the Tamar reservoir was suspended. There was no change in the activities of the Karish reservoir of Energean as a result of the War. During the suspension period of the Tamar reservoir, OPC acquired natural gas mainly from Energean as well as under short‑term agreements and through transactions in the secondary market, such that there has been no significant change in OPC’s natural gas costs compared with the situation existing prior to the start of the War. A shortage or interruption in the supply of natural gas from the Karish reservoir (without compensatory agreements) could have a significant negative impact on OPC’s natural gas costs.
Maintenance
In December 2023, OPC-Rotem entered into a new maintenance agreement with Mitsubishi Power Europe Ltd. and a company operating on its behalf that will serve as a local contractor (together “Mitsubishi”) for a total estimated cost of approximately EUR 67 million to be paid over the term of the agreement, in accordance with a payment schedule set forth in the agreement (the “New Rotem Maintenance Agreement”). The New Rotem Maintenance Agreement is expected to replace OPC-Rotem’s existing maintenance agreement with Mitsubishi Heavy Industries Ltd. which is expected to expire in October 2025. The term of the New Rotem Maintenance Agreement is 12 years from the end of the term of the existing OPC-Rotem maintenance agreement, or the completion of the required maintenance work, and no later than 20 years from the end of the term of the existing OPC-Rotem maintenance agreement. As part of the New Rotem Maintenance Agreement, Mitsubishi provides to OPC-Rotem an undertaking to maintain a certain level of availability of the components relevant to the power plant and other parameters related to the performance of the relevant components in the power plant (including an undertaking regarding emissions). In addition, Mitsubishi provided OPC-Rotem a warranty in connection with some of the maintained components. As part of the New Rotem Maintenance Agreement, the timetable for maintenance work for the power plant was extended such that maintenance work will be executed in the power plant every 25,000 working hours (approximately three years). Alongside the signing of the New Rotem Maintenance Agreement, OPC-Rotem has undertaken to purchase new equipment for the power plant at the total cost of approximately EUR 8 million. OPC’s existing 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 two years. In accordance with the New Rotem Maintenance Agreement, the timetable for the execution of scheduled maintenance works in the power plant is approximately every three years. No planned material maintenance work took place in OPC-Rotem in 2023, although the power plant was shut down due to non-scheduled maintenance work for immaterial periods. 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. This schedule could change as a result of various factors including, among others, the scope of operation of the power plant, security developments in Israel, infrastructure constraints or rescheduled works with the maintenance contractor which could adversely affect the operations of OPC-Rotem and the OPC group.
Tzomet
Tzomet owns a natural gas-fired open-cycle power station in Israel with capacity of approximately 396 MW. The Tzomet plant is a “peaking” facility and all capacity will be sold to the IEC. OPC Israel owns 100% of the shares of Tzomet. The Tzomet plant’s total construction cost amounted to approximately NIS 1.4 billion (approximately $386 million) (excluding NIS 200 million in connection with the tax assessment relating to the land).
The Tzomet plant reached COD on June 22, 2023 and the EA has granted a permanent electricity generation license to Tzomet for a period of 20 years. The completion of the construction of the Tzomet power plant was initially scheduled for January 2023, but was delayed by the construction contractor as a result of COVID 19 and delays in the global supply chains of components and equipment required for the project.
Below are key elements of Tzomet business operations:
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 is 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 sells all of its energy and capacity from its facilities to Noga (acting as a peaker plant) in accordance with the power purchase agreement based on an approved Tzomet tariff.
In January 2020, Tzomet entered into a PPA with the 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 capacity to the IEC and the 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 require compliance with criteria set out in relevant regulation, (iii) the plant will be operated pursuant to the System Operator’s directives and (iv) Tzomet will be required to comply with certain availability requirements set out in its license and relevant regulation, and pay penalties for any non-compliance. Tzomet plant’s entire capacity is 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 period is 15 years from piping of first gas (which started in December 2022), including a 5-year extension option, subject to advance notice, under terms and conditions that are customary in gas transmission agreements signed by INGL at that time. The agreement is subject to cancellation under certain conditions.
Under the agreement, partial connection fees were defined in respect of the connection planning and procurement. In addition, OPC has provided a corporate guarantee in connection with Tzomet’s obligations under the agreement.
Maintenance Agreement
In December 2019, Tzomet entered into a long-term maintenance agreement with PW Power Systems LLC (“PW”). The cost of the Tzomet maintenance agreement is part of the total estimated consideration of the agreement with the power plant’s construction contractor, of approximately $300 million. The consideration in respect of the maintenance work may increase in line with the maintenance work that will actually be required. Pursuant to the agreement, PW will provide maintenance work on 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. Since Tzomet’s COD and through the end of 2023, a number of maintenance works took place in the power plant, each of which was immaterial in scope.
Tariff Arrangements
Pursuant to the generation license, Tzomet is entitled to receive an availability tariff from the System Operator of between 5.7 and 6.5 agorot per kilowatt hour, subject to the number of ignitions. In addition, Tzomet is entitled to an electricity and gas tariff based on the generation and purchase cost and pursuant to the terms of the generation license and relevant EA regulation.
OPC-Hadera
OPC-Hadera operates a cogeneration power station in Israel, with capacity of approximately 144 MW. The cogeneration power plant reached its COD on July 1, 2020. OPC-Hadera holds a permanent license for generation of electricity using cogeneration technology and a supply license. The generation license has been granted by the EA for a period of 20 years which may be extended by an additional 10 years. OPC-Hadera also holds the supply license which is in effect for as long as OPC-Hadera holds a valid generation license. OPC-Hadera 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. OPC Israel owns 100% of OPC-Hadera. The total consideration under the EPC contract for the project was approximately $185 million. OPC-Hadera power plant is “two‑fuels” generator of electricity (capable of using both natural gas and diesel oil, in its operations, subject to the required adjustments).
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.
Below are the key elements of OPC-Hadera business operations:
EPC Contract
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. Payments under the insurance policies and/or compensation from the construction contractor were not 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). OPC-Hadera had filed an arbitration proceeding against the contractor. In December 2023, OPC-Hadera signed a settlement agreement the construction contractor, which provides for a settlement of the parties' claims and termination of related arbitration proceedings, and compensation payable by the construction contractor to OPC-Hadera of approximately $21 million. The net compensation payable to OPC-Hadera is approximately $7 million after offset of amounts payable by OPC-Hadera to the construction contractor.
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 less favorable tariff arrangements will apply. OPC-Hadera is entitled, if it complies with the terms and conditions of the regulations arrangements, to sell to the System Operator up to 50% of the electrical energy generated during on-peak and mid-peak hours, based on an 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. The annual tariff is set according to the actual amount of electricity provided during on-peak and off-peak hours. 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 starting in July 2020. The agreement provides a minimum quantity of steam to be purchased by Infinya (take or pay), which will be subject to adjustment. The tariff paid by Infinya for the electricity purchased by it for the agreement term is based on the DSM Tariff, with a discount on the generation component, plus a fixed payment in respect of the size of the connection.
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 June 2022, OPC-Hadera exercised an option to reduce the quantities by approximately 50%, with effect from March 2023.
In September 2016, OPC-Hadera entered into another gas supply agreement with the Tamar Group. OPC-Hadera exercised an early termination right in June 2022 and this supply agreement terminated in June 30, 2023.
In December 2017, OPC-Hadera signed an agreement for the purchase of natural gas from 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 to ten years (unless the total contractual quantity is supplied earlier). In August 2022, OPC-Hadera informed Energean of an 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.
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. Commercial operation of the Karish Reservoir began in March 2023, and since that time OPC-Hadera has reduced purchases of quantities under the Tamar Agreement, and started acquiring a substantial portion of the gas from Energean, and thereby reducing its gas acquisition costs.
Since the beginning of the War in Israel and up to November 12, 2023, supply of the natural gas from the Tamar reservoir was suspended. There was no change in the activities of the Karish reservoir that belongs to Energean as a result of the War. During the suspension period of the Tamar reservoir, OPC has acquired natural gas mainly from Energean as well as under short‑term agreements and by means of transactions in the secondary market, where in this period there has been no significant change in OPC’s natural gas costs compared with the situation existing prior to the start of the War. A shortage or interruption in the supply of natural gas from the Karish reservoir (without compensatory agreements) could have a significant negative impact on OPC’s natural gas costs.
Maintenance Agreement
In June 2016, OPC-Hadera entered into a maintenance agreement with General Electric International Ltd., or GEI, and GE Global Parts & Products GmbH 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. In 2023, planned and unplanned maintenance work was conducted in the power plant’s gas turbine over an aggregate period of approximately 40 days. During that maintenance work, the power plant continued to operate on a partial basis. In 2023, the performance and capacity of the power plant improved compared to 2022. Certain planned maintenance work is expected to take place in 2024 in one of the gas turbines and in the steam turbine, which will take approximately 35 days in total.
Kiryat Gat Power Plant
Kiryat Gat operates a combined cycle power station powered by conventional energy, with installed capacity of approximately 75 MW. The power plant began operations in November 2019, upon receiving generation and supply licenses awarded by the EA. The plant is located in Kiryat Gat area.
The Kiryat Gat Power Plant was acquired by OPC in March 2023, through a subsidiary for consideration of approximately NIS 870 million (approximately $242 million) (after working capital adjustments). The consideration was used to repay an approximately NIS 303 million (approximately $84 million) shareholder loan that was provided to the Gat Partnership by Dor Alon (for the purpose of early repayment of the former senior debt of the Kiryat Gat Power Plant, and the remaining balance of approximately NIS 567 million (approximately $158 million) was used to acquire all the rights in the Gat Partnership (out of the remaining balance, approximately NIS 300 million (approximately $83 million) was paid in December 2023 as a deferred consideration, subject to immaterial adjustments to consideration).
Below are the key elements of Kiryat Gat business operations:
Sales of Electricity
The Kiryat Gat has PPAs with private customers, including kibbutzim and academic institutions, and the remaining weighted average duration of those agreements is approximately 6 years, subject to early termination or extension arrangements set out in the agreements. Following completion of the transfer of the rights in the power plant to OPC, electricity supply agreements with most of the Gat Partnership’s customers were amended to extend electricity supply period.
In October 2016, the Kiryat Gat Power Plant and the IEC entered into an agreement for the purchase of capacity and energy and the provision of utility services (the “Gat PPA”). As part of the IEC Reform, the IEC’s obligations under an agreement with the IEC were assigned to Noga, as from December 2021, except with regard to certain provisions and obligations that concern the connection of the power plant to the grid and arrangements pertaining to measurement and metering, which will continue to apply between the IEC and the Kiryat Gat Power Plant. Pursuant to the Gat PPA, the Kiryat Gat Power Plant undertook to sell to the IEC energy and ancillary services, and the IEC undertook to sell to Kiryat Gat the utility services and power system operating services, including backup services, in accordance with the agreement, the law and regulations. The agreement remains in effect until the end of the period in which Kiryat Gat is permitted to sell electricity to private consumers as set forth in the supply license regarding the utility and system management services, and up to the end of the period in which the Kiryat Gat Power Plant may sell energy to the System Operator, as set forth in the generation license regarding the purchase of energy and the ancillary services, and in accordance with the Cogeneration Regulations’ provisions regarding the purchase of capacity and energy in the period during which the production unit does not meet the cogeneration terms and conditions. The agreement also includes provisions governing the connection of the power plant to the electrical grid, as well as provisions covering the design, construction, operation and maintenance of the Kiryat Gat Power Plant. In addition, Kiryat Gat undertook to meet the capacity and reliability requirements provided in its license and law and regulations, and to pay for any failure to comply with them.
Gas Supply Agreement
Kiryat Gat is party to a natural gas supply agreement with the Tamar, which sets forth conditions for the purchase of a minimum quantity of gas and other arrangements. The agreement includes additional provisions and arrangements customary in agreements for the purchase of natural gas, including with regard to maintenance, gas quality, force majeure, limitation of liability, early termination provisions under certain cases subject to conditions, assignments and a dispute resolution mechanism. In accordance with the relevant regulation, the Tamar may demand, based upon certain financial data or rating, guarantees according to the number of gas consumption days, in accordance with the contractual quantity set forth in the agreement. The agreement includes provisions regarding restrictions on secondary gas sale by the partnership to third parties.
Operating and maintenance agreement
On January 29, 2017, the Gat Partnership and Siemens Israel Ltd. (“Siemens”) entered into an operating and maintenance agreement in connection with the Kiryat Gat Power Plant (the “Gat Operating and Maintenance Agreement”). As part of the agreement, Siemens undertook to provide all operation and maintenance services to the Kiryat Gat Power Plant, at an estimated total cost of approximately NIS 207 million (approximately $57 million), which is paid over the term of the agreement, in accordance with a formula set in the agreement. The term of Kiryat Gat’s operating and maintenance agreement is 20 years or 170 thousand operating hours from the commercial operation date, whichever is earlier, subject to early termination provisions in the 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 on the quarterly payment to Siemens, in accordance with the provisions of the Gat Operating and Maintenance Agreement. Kiryat Gat’s position is that a discount should apply to the payment, and Siemens disputes this position. The power plant qualifies for a discount application if it works on a partial operation regime solely for the production and sale of electricity. Siemens claims that the power plant switched to a full cogeneration regime and therefore does not qualify for a discount. The parties commenced an arbitration proceeding which is ongoing and there is no certainty that the decision would be favorable for Kiryat Gat. If it is ruled that Kiryat Gat is not entitled to a discount, it will be required to pay the difference in the payment amounts for previous periods in respect of maintenance and operation services provided to the power plant, and increase the payment amounts under the agreement going forward, i.e., without applying the discount.
Following acquisition in March 2023, the power plant’s activity was shut down due to non-scheduled maintenance work for a period which was immaterial to OPC group. The Kiryat Gat Power Plant is powered solely by natural gas.
Tariff arrangement
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.
Kiryat Gat operates under a tariff arrangement of a defined capacity and energy transaction for a facility that does not meet cogeneration conditions by virtue of EA resolutions. In accordance with the provisions of the Cogeneration Regulations, the EA set an arrangement for electricity producers which no longer meet the conditions required for a cogeneration facility. Such an arrangement (“a hedged availability transaction”) applies to the Kiryat Gat Power Plant. 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.
Intra-Group Agreements
In March 2023, Intra-Group Agreements were signed between the Gat Partnership and certain OPC companies, in connection with the Kiryat Gat Power Plant’s current commercial activity (which include certain arrangements in relation to the Kiryat Gat financing agreement), including an agreement for the sale of the electricity the Kiryat Gat power plant will generate to the end consumers (through the sale of energy and capacity to a supplier), and including appropriate arrangements, according to the Financing Agreement), and regarding the purchase of natural gas by the Kiryat Gat power plant required for its operations from OPC companies, through OPC Natural Gas (which purchases natural gas from the OPC group companies’ existing gas agreements). Furthermore, OPC power plants entered into agreement with the Gat Partnership pursuant to which it committed to pay the Gat Partnership for production, energy, and capacity, under certain circumstances, as set forth in this agreement.
Gnrgy
Gnrgy (which is 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. OPC Israel owns 51% of Gnrgy. Gnrgy’s founder retains the remaining equity interest in Gnrgy and is party to a shareholders’ agreement with OPC, which among other things gives OPC an option to acquire a 100% interest in Gnrgy. In January 2024, OPC Israel entered into a separation agreement with the minority shareholder in Gnrgy, for further details about the agreement see, “Item 5 Operational Review and Prospects—Recent Developments—OPC.”
In July 2021, the EA granted virtual supply license to Gnrgy. The installation and operation of electric vehicle charging stations is not subject to obtaining a supply license pursuant to the Electricity Sector Law, Gnrgy therefore requested to cancel its license and the bank guarantee that was provided to the EA.
Projects Under Development and Construction in Israel
Overview
The following table sets forth summary operational information regarding OPC’s projects under development and construction in Israel.
Israel—Projects under Development and Construction (advanced)
Power plants / energy generation facilities | | | | | | | | | | Expected commercial operation date | | | | Total expected construction cost (in NIS million) |
Sorek 2 | | Under construction | | Approx, 87 | | On the premises of the Sorek B seawater desalination facility | | Natural gas—Cogeneration | | Second half of 2024(2) | | Onsite consumers and the System Operator | | 200 |
Energy generation facilities on the consumers’ premises | | Various stages of development/construction(3) | | The cumulative amount of the agreements is about approximately 127 MW. Construction works in respect of approximately 20 MW have been completed but commercial operations has not yet began, except for immaterial part of the projects in the operation stage; Approximately 25MW are under construction. The remaining capacity of (83MW) is under various development stages. (4) | | On the premises of consumers throughout Israel | | Natural gas, renewable energy (solar) and storage | | Gradually from the second half of 2023 and through the end of 2025, | | Yard consumers and the System Operator. | | An average of about 4 per MW (a total of about 480) |
(1) | As stipulated in the relevant generation license. |
(2) | Currently, certain actions and conditions associated with the construction and operation of the project have not been completed. Sorek 2 is taking measures to obtain adequate extensions. In addition, in the fourth quarter of 2023, the construction contractor of the Sorek 2 project delivered a force majeure notification due to outbreak of the War and Sorek 2 project delivered on its behalf a force majeure notification to the initiator of the desalination facility. The EA extended project completion dates due to the defense (security) such that an extension of two months was allowed for date of the financial closing. OPC is currently assessing the impact of such notification on the timeframe for the construction of the project. Completion of the construction and operation of the Sorek 2 generation facility are subject to fulfillment of conditions and factors that do not yet exist, including receipt of permits and reaching a financial closing. Ultimately, the date expected for completion of the construction and commencement of the operation could be delayed as a result of, among other things, a delay in completion of the construction work (including construction of the desalination facility), delays in receipt of the required permits, disruptions in arrival of equipment, force majeure events, the occurrence of risk factors to which OPC is exposed, including delays relating to the war or its consequences. Such delays could impact the project’s costs and could also trigger and increase in costs (beyond the expected cost indicated above) and/or could constitute non compliance with liabilities to third parties. |
(3) | The construction of several projects was completed and they are in different stages of testing and connection to the grid. The remaining projects are in various development stages with certain preconditions for execution of the projects for construction of facilities for generation of electricity on the customer’s premises (or any of them) had not yet been fulfilled, and the fulfillment thereof is subject to various factors, such as, licensing, permits, connection to infrastructures and construction. Due to the War, OPC delivered a force majeure notification to customers. The War and its impacts could have an adverse impact on the compliance with the expected dates for the commercial operation and the expected costs of the projects. |
(4) | Each facility with a capacity of up to 16 megawatts. |
Projects under development in Israel
Power plant/ energy generation facilities | | | | | | | | |
The Ramat Beka Solar Project | | Advanced Development | | Neot Hovav Local Industrial Council | | Photovoltaic in combination with storage | | In May 2023, OPC won the tender issued by ILA for planning and an option to purchase leasehold rights in land for the construction of renewable energy electricity generation facilities with a capacity about 245 MW with integration of storage of about 1,375 MWh in relation to three compounds in the Neot Hovav Industrial Regional Council. On February 5, 2024, the government authorized OPC to prepare on its behalf national infrastructure plans for photovoltaic electricity generation projects and to submit them to the National Committee for Planning and Building of National Infrastructures. The estimated construction cost of the project is in the range of NIS 1.93 to NIS 2.0 billion (approximately $532 million to $551 million). |
Hadera 2 | | Initial development | | Hadera, adjacent to the Hadera power plant | | Conventional with storage capability | | On December 27, 2021, the National Infrastructure Committee submitted National Infrastructure Plan (“NIP”) 20B for government approval under Section 76C (9) of the Planning and Building Law, 1965. In December 2022, a renewable option agreement was signed with Infinya Ltd., which awards Hadera 2 an annual option, which may be renewed for a period of up to 5 years, during which it will be allowed to lease the land adjacent to the Hadera Power plant for the project. On May 28, 2023, the Israeli government did not approve NIP 20B and returned it to the National Committee for Planning and Building of National Infrastructures for further discussion. Following this, OPC submitted a petition on behalf of Hadera 2 in respect of the government decision, which was summarily dismissed on July 19, 2023 on the grounds of failure to exhaust proceedings. OPC continues to promote NIP 20B and awaits recommencement of the above discussions. |
Intel Israel facilities | | Initial development | | Kiryat Gat | | Conventional | | On March 3, 2024, OPC Power Plants signed a non-binding memorandum of understanding with Intel Electronics (“Intel”), an OPC existing customer, pursuant to which OPC Israel will construct and operate a power plant, which will supply electricity to Intel’s facilities, including expansion of the facilities currently being constructed, for a period of 20 years from the operation date. |
Description of Projects Under Development and Construction
Construction of energy generation facilities on the premises of consumer
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 capacity of approximately 127 MW, as well as arrangements for the sale and supply of energy to consumers. Upon completion, OPC will operate the facilities and use them to generate electricity that will be supplied to the grid and/or to the consumers, in accordance with the different commercial arrangements agreed, for a period of approximately 15-20 years from the COD of the generation facilities. In general, the agreements with consumers are based on a discount to the generation component and a savings on the grid tariff, and other arrangements (which depend, in certain cases, on the nature of the project), which are related to the rights to the land and various arrangements related to the construction and operation of the 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 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.
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 with construction constructors, equipment supply agreements, including for the supply of motors for the generation facilities, and maintenance agreements for some of the projects. Some PPAs with OPC-Rotem and OPC-Hadera have been extended in connection with such arrangements. OPC intends to sign construction and operation agreements with additional consumers regarding rights to land for construction and operation of an energy generation facility, and arrangements for the supply and sale of energy with private individuals, public entities, including government entities.
As of December 31, 2023, OPC’s investment in such generation facilities amounted to approximately NIS 119 million (approximately $33 million).
Sorek 2
In May 2020, Sorek 2 (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 2 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 Generation Facility”), and supply the energy required for the Desalination Facility for a period that will end on the shorter of (i) 24 years and 11 months from the Desalination Facility’s commercial operation date or (ii) 27 years and 9 months from the date on which the franchise agreement is signed, being March 15, 2048. At the end of this period, ownership of the Sorek 2 Generation Facility will be transferred to the State of Israel. OPC estimates that construction of the plant would be completed and commercial operation date would be in the second half of 2024. Sorek 2’s engagement with IDE includes, among other things, Sorek 2’s undertakings to construct the facility by the later of: (i) 24 months of the date of approval of National Infrastructures Plan 36A (which was approved in December 2021) or (ii) within four months from the date on which the construction of the gas pipeline was completed, including obtaining the required permits, and the supply of gas to the power plant has started (a condition that has not yet been fulfilled) and an undertaking to supply energy at a specific scope and capacity to the Desalination Facility. The construction of the Sorek Generation Facility will be undertaken by Sorek 2 as an IPP contractor (subcontractor of the concessionaire) under the BOT (build, operate, transfer) agreement of the Desalination Facility, and in connection with this Sorek 2 has undertaken, among other things, to provide a performance guarantee and other guarantees in favor of IDE. The capacity that will be generated by the Sorek 2 generation facility, subject to the completion of its construction, shall be sold to the Desalination Facility and to another customer with a generation facility at its premises in accordance with a PPA with that customer, and the remaining capacity will be sold in accordance with applicable regulations. The Sorek Generation Facility is expected to be established under the framework of the Arrangement for High Voltage Producers Connected to the Grid that are Established without a Tender, and the capacity remaining beyond the consumption of the Desalination Facility is designated to be sold to the onsite consumer and the System Operator. This regulation applies to generation facilities in the transmission grid, that will be awarded a tariff approval until the earlier of (i) the grant of the entire quota of tariff approvals with an aggregate capacity of 500 MW or (ii) May 2024, in accordance with the deferral of the date that was set due to the war. To secure Sorek 2’s commitments under the Sorek B IPP agreement, OPC provided IDE with a guarantee that will remain valid throughout the term of the agreement. In connection with the project, Sorek 2 also entered into the equipment supply agreement (which was subsequently assigned to the construction contractor) for the supply of the gas turbine and related equipment (the “Equipment Supply Agreement”), and a maintenance agreement with General Electric (GE) group. OPC estimates that the construction cost of the Sorek 2 project, including its share in the Construction Agreement and the Equipment Supply Agreement, which constitute most of the cost (excluding the long term Maintenance Agreement), in the amount of approximately NIS 200 million (approximately $55 million).
Currently, certain actions and conditions associated with the construction and operation of the project have not been completed. Sorek 2 is taking measures to obtain adequate extensions. In addition, during the fourth quarter of 2023, the construction contractor of the Sorek 2 project delivered a force majeure notification due to outbreak of the War in Israel. The construction work, its completion the commercial operation date and the costs involved with the construction could be adversely impacted by the War, according to which delays are expected in the time frames due to, among other things, difficulties in the arrival of foreign work teams to the site, professionals’ departures, and the arrival of equipment to the site. Upon receipt of the notice, OPC delivered BHI’s notice to IDE and to the government, and clarified that due to the War it expects delays in time frames and in the completion of the construction work. Given that the War continues, other effects and/or damages may arise in the future due to War. OPC is collecting additional data about the event and its effects and maintains contact with the government and the contractor to assess the influences and their effects on the time frames for the construction of the project and the costs arising therefrom (which may increase). Sorek 2 is taking action to obtain adequate extensions, which have not yet been received. The EA extended project completion dates due to the defense (security) situation such that an extension of two months was allowed for date of the financial closing. OPC is currently assessing the impact of such notification on the timeframe for the construction of the project.
Hadera 2
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 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.
Ramat Beka Solar Project
In May 2023, an OPC subsidiary won a tender of the ILA to develop renewable energy electricity generation facilities using photovoltaic technology with an option to acquire lease rights for land in Israel for construction in three areas in Neot Hovav Industrial Local Council, with a total area of approximately 2,270 hectares. The total amount of the bid was approximately NIS 484 million (approximately $133 million). OPC announced that it intends to develop a project to generate electricity using photovoltaic technology in these three areas, with an estimated cumulative capacity of 245 megawatts and an estimated storage capacity of 1,375 megawatt hours. The total development cost for solar projects in the three areas is estimated by OPC to be between NIS 1,930 million (approximately $532 million) and NIS 2,000 million (approximately $551 million). Subject to completion of all development processes and obtaining required approvals, OPC estimates that the project will be ready for the construction stage in 2026. Pursuant to the terms of the tender, in the third quarter of 2023, 20% of the total consideration was paid in respect of an authorization and planning agreement. This amount will not be refunded in the event the project’s development and planning procedures fail to develop into an authorized plan and lease agreements are not signed. In February 2024, the government approved and provided the consent to advance development of the project.
Potential Expansions and Projects in Various Stages of Development
Rotem 2. 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. In December 2021, the National Committee for Planning and Building of National Infrastructures rejected National Infrastructures Plan 94 that was advanced by OPC-Rotem, however it called on the initiator to examine the possibility of using other technologies on the site. OPC is examining the options, including advance of a power plant using “green technology” with reduced emissions and/or an electricity storage facility. In August 2022, OPC received from the Israeli Land Authority an extension of the period for 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.
Sorek tender. In February 2023, OPC received a notification that it successfully passed 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. In May 2023, the Reduction of Concentration Committee published its recommendation regarding OPC’s participation in the Sorek tender, if it does not win the Eshkol Power Plant, and in accordance with the committee’s agreement regarding the expansion of the activity of the group of corporations controlled by Mr. Idan Ofer in the field of electricity according to the terms and conditions of the Market Concentration Plan. On November 30, 2023, the tender documents were published, including the tender filing date, that was set for June 2024. In February 2024, the Israeli Electricity Authority published a hearing regarding the eligibility of the bidders in the Sorek tender for receipt of a production license from sectoral concentration and aggregate concentration aspects (having consulted the Concentration Committee and taking into account the possibility that a third party will win the Eshkol tender). In the hearing, it was decided in relation to OPC, among other things, that OPC Power Plants complies with the requirements of the Market Concentration Regulations regarding the capacity limit attributed to OPC, including after taking into account the additional future capacity of Sorek (which is planned to stand at 670 MW, in view of the discharge restriction until 2035). The hearing takes into account the future planned capacity using natural gas by the end of the decade which is 18,926 MW (including the coal-fired units that are expected to be converted into natural gas).
On February 21, 2024 the EA published a resolution regarding the “Regulation of the Activity of the Generation Unit in the Sorek Site”. In accordance with the resolution as part of the tender, one CCGT unit will be constructed with a capacity of 630-900 MW under ISO conditions, which will operate according to the Trade Rules in the covenants, and under a capacity tariff according to the winning bid in the tender. The license period and the period of entitlement to the tariff will be 24 years and 11 months. The reservation of availability on the grid will be for a capacity of 900 MW, subject to compliance with the terms of the covenant, in relation to the completion of financial closing on the required date, and subject to relevant discharge restriction. Through July 1, 2035, the discharge of electricity to the grid will be capped at 670 MW, and no capacity payments will be paid above the cap. The receipt of the generation license requires compliance with the concentration rules. Furthermore, as part of the resolution, remedies and compensation were set, pursuant to which the winning bidder will be entitled in respect of damage or delay, subject to the qualifications and conditions set out in the resolution.
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.
Power plant for Intel Israel facilities. In March 2024, a subsidiary of OPC entered into a non-binding memorandum of understanding (the “MoU”) with Intel, an existing customer of OPC, pursuant to which OPC’s subsidiary will construct and operate a power plant with a capacity of at least 450 MW (and OPC does not expect capacity to exceed 650 MW) (the “Project”). The Project will supply electricity to Intel’s facilities in Kiryat Gat, including an expansion of the facilities which is currently taking place, for a period of 20 years from the commercial operation date.
In accordance with the MoU, OPC’s subsidiary will hold exclusive project rights, and will bear its construction cost. The MoU includes provisions regarding promotion of the development and planning of the Project, acquisition of the rights to land, and collaboration of the parties to obtain the required permits in connection with the Project. The existing electricity supply agreement between the parties shall continue to apply in relation to Intel’s electricity requirements beyond the Project’s capacity, subject to adjustments and conditions. In addition, the MoU includes arrangements regarding the tariff that will be paid to OPC’s subsidiary, which is based on rates that reflect a discount to the generation component tariff (graduated and based on the Project’s characteristics) and other provisions that will be included in a detailed agreement that the parties are expected to enter into.
OPC estimates that the construction cost of the Project will be approximately $1.3 million to $1.4 million per MW, and that subject to the completion of the development and planning procedures, the Project is expected to reach the construction stage during 2026.
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) 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 GW, of which approximately 5 GW consists of renewable energy and another approximately 10 GW consists of conventional, natural gas-fired power plants.
CPV holds rights in commercially operational power plants it developed and constructed over the past years (both conventional, natural gas-fired and renewable energy), as well as in renewable energy projects, carbon capture projects and gas-fired power plants under construction and in early development stages, with total capacity of approximately 9,000 MW.
Set out below is CPV’s holdings structure:
Below is a description of CPV’s main areas of operation:
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 two operational power plants operated using wind energy is approximately 234 MW and one active solar power plant is 126 MWdc (which reached COD in November 2023) and its share in two solar energy projects under construction is 279 MWdc, both of which are in the construction stages, and approximately 114 MW in one wind project under construction. 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 82 MW. The acquisition was completed in April 2023. The purchase price for the acquisition was $175 million, after adjustments, of which $100 million was financed with equity from CPV’s shareholders, including OPC, which contributed its portion (i.e., 70%) of such equity investment. CPV financed the remaining purchase price of $75 million with a loan facility with a five-year term.
Energy Transition—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 all six operating power plants of 5,303 MW (the CPV Group’s share is 1,416 MW), which are part of the Energy Transition. 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 — the CPV Group is engaged in the development of carbon capturing electricity generation projects and also provides asset and energy management services to power plants in the United States using different technologies for projects developed by CPV and third parties. Additionally, in early 2023, CPV Group established retail power supply activity through CPV Retail Energy. CPV provides asset management services for power plants with an overall capacity of approximately 6,170 MW (including 100 MW attributed to Maple Hill project) and energy management services for power plants with a total capacity of approximately 6,164 MW. During 2023, CPV Retail Energy executed contracts with approximately 200 commercial and industrial customers; CPV Retail Energy fixes the price of purchased power with hedging transactions.
CPV Group Strategy
The CPV Group’s strategy focuses on promoting energy transition in the United States through the following:
• Developing and operating renewable energy projects by optimizing the performance and returns of CPV’s operating renewable platform and developing and constructing new renewable projects focused in premium markets where renewable demand outstrips supply; and engaging in discussions with large renewable potential purchasers.
• Reducing carbon emissions for dispatchable electricity generation by developing conventional generation with carbon capture 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, balancing production in renewable energy while developing plans to further reduce 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. CPV Group's retail activity serves smaller commercial and industrial customers interested in renewables and willing to pay premium prices.
Electricity generation and supply using conventional technologies and renewables
The table below sets forth an overview of CPV’s power plants that were in commercial operation as of December 31, 2023.
| | | | | | | | Year of commercial operation | | Type of project/ technology / client | | |
CPV Fairview, LLC (“Fairview”) | | Pennsylvania | | 1,050 | | 25% | | 2019 | | Gas-fired, combined cycle | | PJM MAAC |
CPV Towantic, LLC (“Towantic”) | | Connecticut | | 805 | | 26% | | 2018 | | Gas-fired (with dual fuel), Combined cycle | | ISO-NE CT |
CPV Maryland, LLC (“Maryland”) | | Maryland | | 745 | | 25% | | 2017 | | Gas-fired, Combined cycle | | PJM SW MAAC |
CPV Shore Holdings, LLC (“Shore”) | | New Jersey | | 725 | | 37.53% | | 2016 | | Gas-fired, Combined cycle | | PJM EMAAC |
CPV Valley Holdings, LLC (“Valley”) | | New York | | 720 | | 50% | | 2018 | | Gas-fired, Combined cycle | | NYISO Zone G |
CPV Three Rivers LLC (“Three Rivers”) | | Illinois | | 1,258 | | 10% | | 2023(1) | | Natural gas, combined cycle | | PJM |
Renewable Energy Projects |
CPV Keenan II Renewable Energy Company, LLC (“Keenan II”) | | Oklahoma | | 152 | | 100%(2) | | 2010 | | Wind | | SPP (Long-term PPA) |
CPV Mountain Wind(3) | | Maine | | 82 | | 100% | | Between 2008 and 2017 | | Wind (4 wind power plants) | | ISO-NE market |
CPV Maple Hill Solar LLC (“Maple Hill”) | | Pennsylvania | | 126 MWdc | | 100%(4) (subject to tax equity partner’s share) | | Second half of 2023 | | Solar | | PJM MAAC + PA SRECs |
(1) | Three Rivers power plant, which commenced commercial operation in July 2023, is entitled to receive capacity payments from June 2023. |
(2) | On April 7, 2021, CPV acquired 30% of the rights in Keenan II from its tax equity partner. |
(3) | In April 2023, CPV acquired all rights (100%) in four active wind power plants (the “Mountain Wind Project”). CPV received (indirectly, through a 100%-held corporation) all of the seller’s rights in the Mountain Wind Project in consideration for approximately NIS 625 million (approximately $ 175 million) (after adjustments). The purchase consideration was funded by way of capital injection by CPV’s investors at the total amount of approximately $ 100 million (of which OPC’s share is 70%), and the remaining balance was funded by a loan from a bank under a financing agreement. |
(4) | On May 12, 2023, CPV entered into an agreement with a “tax equity partner” for an investment in the project. According to the agreement, the tax equity partner’s investment in the project is predicated on the achievement of defined milestones, with part (20%) due at the time of completion of the construction works, and the remainder (80%) due at the commercial operation date, which was achieved on December 1, 2023. As all milestones were met, the tax equity partner completed its $82 million investment on December 15, 2023. The agreement gives the tax equity partner the option to sell its equity to CPV for a specified amount. |
Projects under Construction
The table below sets forth an overview of CPV’s projects under construction.
| | | | | | | | | | Projected date of commercial operation | | Type of project/ technology | | | | Expected construction cost for 100% of the project |
CPV Stagecoach Solar, LLC (“Stagecoach”) | | Georgia | | 102 MWdc | | 100% | | Q2 2022 | | | | Solar | | Approximately $52 million(1) | | Approximately $112 million(2) |
CPV Backbone Solar, LLC (“Backbone”) | | Maryland | | 179 MWdc | | 100% | | June 2023 | | Second half of 2025 | | Solar | | Approximately $130 million(3) | | Approximately $304 million(4) |
(1) | The CPV Group has signed a non-binding memorandum of understanding with a tax equity partner, whereby approximately $43 million of such amount is expected to be received on the project’s commercial operation date and the balance is expected to be received over a period of 10 years. The investment of the tax equity partner is subject to negotiations and signing of binding agreements. Regarding projects that are entitled to tax benefits of the type of Production Tax Credits (the “PTC”), CPV’s estimate with respect to the scope of the tax equity partner’s investment is based on the IRA and estimates with respect to tax equity partners, a tax benefit for every KW/hr of generation, and does not depend on the anticipated cost of the investment (i.e., does not depend of initiation fees and reimbursement of pre-construction development expenses). |
(2) | Includes financing costs under the financing agreement (see, “Item 5 Operating and Financial Review and Prospects—OPC’s Liquidity and Capital Resources—OPC’s Material Indebtedness—United States”). The project’s expected cost of investment is subject to changes. |
(3) | The project is located on a former coal mine and, therefore, it is expected to be entitled to higher tax benefits of 40% in accordance with the IRA. The CPV Group intends to sign an agreement with a tax equity partner in respect of approximately 40% of the cost of the project and use of the tax credits that are available to the project (subject to appropriate regulatory arrangements). |
(4) | Excludes development fees but includes financing costs under the financing agreement. CPV Group intends to provide the project with solar panels through its existing master agreement for the purchase of solar panels. The total cost of such project is expected to be approximately $330 million, approximately 40% of which is expected to be financed by a tax equity partner such that the net investment cost for CPV Group is estimated to be approximately $150 million. In addition, CPV Group is working to obtain a short term revolving financing facility for part of the remainder of the project cost. Customary collateral with a value of about $17 million is expected to be provided for purposes of the agreement covering connection to the network (grid) and the PPA as well as additional development expenses in the project. Construction of the project commenced in June 2023 and commercial operation in PJM is expected to be reached in the third quarter of 2025. |
Projects under Development
In addition to the projects summarized above, CPV has a number of carbon capture power generation projects with an aggregate capacity of approximately 5,300 MWdc, and renewable energy projects (solar and wind energy technologies) in various development stages, with an aggregate capacity of approximately 3,650 MWdc. Below is a summary of the scope of the development projects (in megawatts) in the United States:
| | | | | | | | | |
| | | | | | | | | |
Solar (1) | | | 1,550 | | | | 1,050 | | | | 2,600 | |
Wind (2) | | | 250 | | | | 1,000 | | | | 1,250 | |
Total renewable energy | | | 1,800 | | | | 2,050 | | | | 3,650 | |
| | | | | | | | | | | | |
Carbon capture projects (natural gas | | | | | | | | | | | | |
with reduced emissions) | | | 1,300 | | | | 4,000 | | | | 5,300 | |
*Out of the total of the development projects approximately 1,100 megawatts (of renewable energy) and about 4,650 megawatts (of which about 1,250 megawatts are renewable energy) are in the PJM market in an advanced stage and in an initial stage, respectively.
| (1) | The capacities in the solar technology projects in the advanced development stages and in the early development stages are about 1,200 MWac and about 850 MWac. |
| (2) | Includes the Rogue’s Wind project, with a capacity of 114 MW in Pennsylvania, which signed a long-term PPA agreement, the terms of which have been improved, and which project is in an advanced stage of development, the start date of which is expected to be in the first half of 2024. The expected cost of the investment in the project is estimated at about NIS 1.2 billion (about $0.3 billion), the investment of the tax equity partner is estimated at about NIS 0.5 billion (about $0.1 billion). |
The main development activities for a development project include, among other things, the following processes: securing of the rights in the project’s lands; licensing and permitting processes; obtaining permits and regulatory approvals, regulatory planning processes and public hearing; environmental surveys; engineering study and tests; equipment testing, insurance procurement and ensuring of interconnection to the relevant transmission grids (including filing a request for the interconnection agreement and execution of an interconnection agreement); signing of agreements with relevant investors or lenders with relevant investors or lenders and relevant suppliers (construction contractor, equipment and turbine contractors) and entering into a hedge agreement and PPAs, and RECs (based on the type of project) (certain activities of development may include provision of collateral and undertaking obligations towards third parties in connection with the advancement of the projects).
Carbon Capture Projects
CPV is developing four Energy Transition power plants with reduced emissions that are powered by natural gas based on use of advanced carbon capturing technologies in Michigan, Ohio, West Virginia and Texas. According to public research, carbon capture and storage are expected to be a market of approximately $35 billion by 2032. CPV Group’s share in such Energy Transition Projects is 70% for the projects in Texas, West Virginia, Michigan. In January 2024, the CPV Group acquired 100% of the equity interests in Project Oregon for approximately $2 million (with potentially up to $14 million of additional consideration payable upon the occurrence of financial closing). The projects are expected to capture 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 construction 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. CPV has commenced the licensing processes, performed surveys and acquired land rights for carbon capture projects in Texas and West Virginia.
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.
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 Investment Tax Credits (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 $60/metric ton. In addition, the tax credit is eligible for direct pay for up to the first five years for carbon capture equipment placed in service after December 31, 2022.
In relation to projects that are under development by the CPV Group, the IRA is expected to have a positive effect on benefits available under the law in respect of using carbon capturing technologies. The full effects of the IRA have not yet been clarified, and are expected to be clarified when detailed regulations are formulated.
The table below sets forth additional details regarding the CPV project (with a PPA) for which construction has not commenced.
| | | | | | | | Projected Year of construction start | | Projected date of commercial operation | | Type of project/ technology | | Activity area and electricity region | | | | Expected construction cost ($ millions) |
CPV Rogue’s Wind, LLC (“Rogue’s Wind”) | | Pennsylvania | | Approx. 114 MW | | 100%(1) | | Second half of 2024 | | First half of 2026(2) | | Wind | | PJM MAAC | | Approximately $135 million | | Approximately $377 million(3) |
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(1) | Upon consummation of an agreement with a “tax equity 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 (the project has been 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. |
(3) | Does not include development fees, but includes financing costs under the financing agreement. |
Management of Projects
CPV provides general asset management services to power plants in the United States using renewable energy and natural gas-fired energy, for a total volume, as of December 31, 2023, of 6,170 MW (4,885 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, 2023, of 6,164 MW (4,879 MW for projects in which it has rights, and 1,285 MW for projects for third parties), by entering into energy management agreements. Both categories of management agreements are usually for short to medium terms.
As of March 2024, the remaining average period of all asset management agreements (in projects in which the CPV Group has rights and in projects of third parties) is approximately 6.5 years, and the remaining average period of management agreements in projects in which the CPV Group has rights is approximately 6.5 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 3 years, and the remaining average period of all energy management agreements in projects in which the CPV Group has rights is approximately 2 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. 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 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 established a retail power supply activity through CPV Retail Energy. CPV Retail Energy relies on CPV’s decarbonization efforts and ESG trends by helping commercial and industrial businesses meet their sustainability goals through renewable and low carbon dispatchable energy solutions. During 2023, CPV Retail Energy executed contracts with approximately 200 commercial and industrial customers; CPV Retail Energy fixes the price of purchased power with hedging transactions. In connection with the retail power supply activity, a corporate guarantee was granted to guarantee CPV Retail Energy's obligations.
CPV Retail Energy offers customers the ability to procure renewable energy to help meet the customer’s energy transition goals and offers contract terms that range from one to five years (with the typical term being approximately two years). CPV Retail Energy utilizes a standard electricity supply agreement that allows customers to select whether standard cost components, such as energy or ancillary services, are fixed at a price or passed through at cost to the customer.
Description of CPV operations
CPV projects predominantly sell capacity and electricity in the PJM, NYISO and ISO-NE wholesale markets. Keenan (a consolidated subsidiary) 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 declaring insolvency, liquidation, sale of assets or merger, entering into or amending material agreements, incurring 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: (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.
CPV Projects Key Contracts
Set forth below is a discussion of the key contracts for each of CPV’s project companies that are commercially operational or under construction.
Active projects
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 set forth 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 for up to 25% of the agreed supply quantity. The agreement is valid up to May 31, 2025. |
| • | Maintenance: a maintenance agreement (MA) with its original equipment manufacturer, for the provision of maintenance services for the combustion turbines. In consideration for the maintenance services, Fairview pays a fixed and a variable amount as of the date stipulated in the agreement. The MA period is 25 years beginning in 2016 or ends earlier when specific milestones are reached on the basis of usage and wear and tear. Fairview has paid an average of approximately $9 million (all-in costs) each year for the past two years. |
| • | Operation: an agreement for operation and maintenance of the facility. The initial period of the agreement is three years from the completion date of construction of the facility and 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. The agreement is currently under the automatic annual one-year renewal option. 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 CPV entity, 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:
| • | Gas Supply & Transmission: |
| • | an agreement for the guaranteed gas transmission of 2,500 MMBtu per day, at the AFT 1 Tariff. The agreement’s initial term ends on March 31, 2025. The agreement renews automatically for periods of one year each time, unless one of the parties terminates the agreement. |
| • | an agreement for the supply of gas, pursuant to which up to 125,000 MMBtus per day will be supplied at a price linked to market prices. The agreement has an initial term, which commenced on April 1, 2023, and ends on March 31, 2025. |
| • | 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, beginning in 2016 or ends earlier when specific milestones are reached on the basis of usage and wear and tear. Towantic has paid an average of approximately $8 million (all-in costs) each year for the past two years. |
| • | Operation: an agreement for operation and maintenance of the facility, which commenced in May 2018. 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 is 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 (all-in costs) each year for the past two years. |
Maryland
Maryland is party to the following agreements:
| • | 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 is effective until October 31, 2024. |
| • | 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. |
| • | Maintenance: a services agreement with its original equipment manufacturer for the provision of maintenance services for the combustion turbines. In consideration for the maintenance services, Maryland pays a fixed and a variable amount as of the date stipulated in the agreement. The agreement period is 20 years beginning in 2014 or ends earlier when specific milestones are reached on the basis of usage and wear and tear. Maryland has paid an average of approximately $6 million (all-in costs) each year for the past two years. |
| • | 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 agreement. Maryland has paid an average of approximately $4 million (all-in costs) each year for the past two years. |
| • | 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 which is expected to commence operation during 2024. 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:
| • | 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 is effective through October 31, 2024. |
| • | Gas Transmission: two agreements with interstate pipeline companies for the use of 2 different pipeline systems, one of which was operational since 2015 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 these 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. |
| • | Maintenance: an amended services agreement with its original equipment manufacturer for the provision of maintenance services for the turbines. In consideration for the maintenance services, Shore pays a fixed and a variable amount as of the date stipulated in the agreement. The agreement period is 20 years beginning in 2014 or ends earlier when specific milestones are reached on the basis of usage and wear and tear. Shore has paid an average of approximately $6 (all-in costs) million each year for the past two years. |
| • | 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 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. The agreement is currently under the automatic annual one year renewal option. Shore has paid an average of approximately $4 million (all-in costs) each year over the past two years. |
Valley
Valley is party to the following agreements:
| • | 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 and the agreement is effective through October 31, 2025. |
| • | 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 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. |
| • | Maintenance: an agreement with its original equipment manufacturer for maintenance services for the fire turbines. The consideration includes fixed and variable amounts. The agreement period is the earlier of: (i) 132,800 equivalent base load hours; or (ii) 29 years from 2015. Valley has paid an average of approximately $6 million (all-in costs) each year for the past two years. |
| • | 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 additional three-year periods unless one of the parties gives a termination notice in accordance with the agreement. The agreement is currently under the automatic three year renewal option. Valley has paid an average of approximately $5 million (all-in costs) each year for the past two years. |
| • | 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 ended on May 31, 2023. |
Three Rivers
Three Rivers is party to the following agreements:
| • | 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. |
| • | GSPA. Three Rivers entered into a 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. |
| • | Gas Interconnection: two connection agreements for transmission of gas, whereby each of them is sufficient for the full demand of the facility. |
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.
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.
| • | 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. |
| • | 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 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. |
| • | 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. Three Rivers achieved substantial completion in July 2023 and will achieve final completion upon the satisfaction of a final performance test but no later than the maximum period set in the agreement. |
| • | Maintenance: a services agreement with its original equipment manufacturer for the provision of maintenance services for the combustion turbines. In consideration for the maintenance services. Three Rivers pays a fixed and a variable payment. The agreement period is 25 years beginning in 2020; or ends earlier when specific milestones are reached on the basis of usage and wear and tear. On average, Three Rivers is expected to pay approximately $6 million (all-in costs) each year. |
| • | 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. The agreement period will commence during the construction period, and will continue for approximately 3 years from the construction completion date of the facility, which occurred in June 2023. On average, Three Rivers is expected to pay approximately $6 million (all-in costs) each year. |
Keenan
Keenan II is party to the following agreements:
| • | 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. |
| • | PPA: a wind power energy agreement for sale of renewable energy. Pursuant to the terms and conditions of the agreement, the purchaser 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 purchaser is permitted, with proper notice, 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 or renewal period at its fair market value, as defined in the agreement and pursuant to the terms and conditions stipulated therein. |
| • | O&M Agreement: an agreement for the operation and maintenance of the wind farm which commenced in February 2016. The consideration includes fixed annual management fees and the agreement lasts for 15 years from the commencement date. On average, Keenan paid approximately $5 million each year for the past two years. |
| • | Operation: a master services agreement and an operations agreement with its original equipment manufacturer for the operation, maintenance and repair of the wind turbines. The consideration includes fixed annual fees, performance-based bonus (or liquidated damages) and reimbursement of expenses for additional work. The agreement expires in February 2031. Keenan has paid an average of approximately $6 million (all-in costs) each year for the past 2 years. |
CPV Mountain Wind
CPV Mountain Wind holds 100% in each of the four wind projects: (i) CPV Saddleback Ridge Wind, LLC; (ii) CPV Canton Mountain Wind, LLC; (iii) CPV Beaver Ridge Wind, LLC; and (iv) CPV Spruce Mountain Wind, LLC. CPV Mountain Wind is party to the following agreements:
| • | Maintenance: a master services agreement for the management and maintenance of the four wind facilities (Beaver Ridge, Canton Mountain, Saddleback Ridge, Spruce Mountain) entered into by Mountain Wind. Staff is shared between the four projects. At all projects except for Beaver Ridge, the services agreement applies only to work outside the scope of the turbine services which is performed by the original equipment manufacturers. At Beaver Ridge, where there is no agreement with the original equipment manufacturer, the agreement also covers the direct maintenance of the wind turbines. The agreement commenced on April 5, 2023 and has an initial two year term. Mountain Wind will pay approximately $3 million (all-in costs) per year. |
| • | Services Agreements and Operation Agreements: a master service agreement and an operation agreement with its original equipment manufacturer for the operation, maintenance, and repair of the wind turbines is entered by each of Mountain Wind Project with the exception of Beaver Ridge; maintenance at Beaver Ridge is performed under an agreement by a third-party provider. The agreements for Saddleback Ridge and Canton Mountain were entered in 2016 and both have 20 years terms with a sunset date of September 16, 2035. The agreement for Spruce Mountain was entered in December 2023 and has an 8-year term. The Beaver Ridge agreement was entered in April 2023 and has a 2-year term. On average, the four projects are expected to pay approximately $4 million (all-in costs) each year. |
| • | Other contracts: The projects are engaged in contracts to sell 100% of the electricity and RECs, under separate contracts (PPAs) with local utility companies and councils, generally for a period of the next 15 to 20 years from the acquisition of the projects by CPV, while most of the capacity is sold under separate contracts for the next 12 years from the acquisition of the projects by CPV (the periods of the contracts may change according to termination clauses determined in each agreement). |
Maple Hill
Maple Hill is party to the following agreements:
Tax Equity Partner. In May 2023, CPV entered into an investment agreement with a tax equity partner for approximately NIS 280 million (approximately $78 million) in the Maple Hill project. In consideration for its investment in the project corporation, the tax equity partner is expected to receive most of the project’s tax benefits, including Investment Tax Credit (ITC) at a higher rate of 40% (in accordance with the IRA), and participation in the distributable free cash flow from the project (at single digit rates and on a gradual basis as set out in the investment agreement). In addition, the tax equity partner is entitled to participate in the project’s loss for tax purposes; in the first few years, the tax equity partner’s share in such taxable income or loss for tax purposes is high. At the end of 6 years from the COD, the tax equity partner’s share in such taxable income decreases significantly, and CPV has the option to acquire the tax equity partner’s share in the project corporation within a certain period and in accordance with terms of the agreement. The agreement includes a standard guarantee provided by CPV, and an undertaking to indemnify the tax equity partner in connection with certain matters. Furthermore, the tax equity partner has certain veto rights, among other things, in respect of the creation of liens on the Maple Hill project corporation’s assets or the entry of the Maple Hill project corporation into additional material agreements. Some of the tax equity partner’s investment was made available upon the completion of the construction work, and the remaining amount was made available on the commercial operation date. In December 2023, the terms and conditions for the commercial operation of the project were fully met in accordance with the investment agreement with the tax equity partner in the project, and the tax equity partner completed its entire investment in the project in a total aggregate amount of approximately $82 million.
| • | 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 the date that the service provider actually begins providing services, which occurred in November 2023 and can be renewed for 2 one-year terms unless one of the parties provides notice on non-renewal in accordance with the agreement. On average, Maple Hill is expected to pay approximately $0.4 million (all-in costs) each year. |
| • | SREC. An agreement with an international energy company for the sale of 100% of the SRECs generated in the project through 2027 to an international energy company. CPV provided collateral for its obligations under the agreement, which include delivery of SRECs generated by the project. |
| • | 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. CPV provided collateral for its obligations under the agreement which include making certain payments to the other party as part of the settlement of the virtual PPAs. 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. |
Projects under Development or Construction
Stagecoach (under construction)
Stagecoach is party to the following agreements:
| • | 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 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. The agreement provides for sale to a global utility 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 |
| • | 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, at a fixed price for 20 years from the commercial operation date. |
| • | 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. |
| • | 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 the date when the service provider actually started rendering operational period services, which is expected to commence in the first half of 2024. 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. |
Backbone
CPV is party to the following agreements:
| • | EPC. In June 2023, CPV Group entered into an EPC agreement with a construction contractor in respect of the construction of Backbone Project. In accordance with the agreement, the contractor is required to plan, purchase, install, build, test, and operate the solar project in full, on a turnkey basis. The total consideration in the EPC agreement was set at a fixed amount of approximately $175 million, which will be paid in accordance with the milestones set in the EPC agreement. |
| • | Renewable Solar Energy Credits. In 2023, Backbone entered into an agreement with a global company to sell 90% of the renewable solar energy credits (which are valid until 2035) produced by the solar project, along with a hedge of the electricity price of the energy that will be generated and sold to PJM, at a fixed price for 10 years from the commercial operation date. The balance of the project’s capacity (10%) will be used for supply to active customers, retail supply of electricity of the CPV Group or for sale in the market. |
Rogue’s Wind
CPV is party to the following agreements:
| • | Rogue’s Wind Energy Project. In April 2021, an agreement was signed for the sale of all the electricity, and the project’s environmental consideration (including RECs), benefits relating to availability and accompanying services). The agreement may be adjusted to updated factors of the project. 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
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; and (v) 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 renewable energy projects and natural gas-fired power plants in advanced stages of development.
OPC’s Material Customers
Israel
In Israel, OPC has several material customers characterized by high consumption rates in terms of their total production capacity. OPC’s revenues from electricity generation are highly sensitive to the consumption of material customers; therefore, if there is no demand for electricity by a material customer (such as, due to malfunctions, suspension or other factors) or payment default by such a customer, this could have a materially adverse impact on OPC’s revenues in Israel. As of 2023, the share of OPC’s two private customers in Israel that exceeds 10% of OPC’s consolidated revenues amounts to approximately 25.6% of OPC’s revenues. Each of OPC’s remaining customers does not exceed 10% of OPC’s revenues from electricity generation.
In May 2023, OPC-Rotem signed new PPAs with Oil Refineries Ltd. (“Bazan”) for the supply of the electricity to the Bazan group’s consumption facilities at a maximum quantity of 125 MW was renewed in May 2023. The electricity is supplied in consideration for a payment based on the ultra-high voltage load and time tariff, which is determined from time to time by the Israeli Electricity Authority, and net of a discount on the generation component according to the rates and arrangements set out in the agreement. The term of the agreement is ten years starting July 2023 (upon the expiry of the previous agreement), subject to early termination grounds and also tiered exit points starting 5 years after the supply commencement date, in accordance with the provisions agreed upon. The PPA includes other provisions, which are generally included in PPAs of this type, including, among other things, provisions regarding consumption in excess of the maximum quantity, an undertaking for capacity by the power plant, and supply of electricity from different sources. In addition, the agreement includes provisions regarding the supply of approximately 50 MW in electricity from generation facilities using renewable energy, in a gradual manner, as from January 2025, and in accordance with the dates that were set and “green certificates”, subject to ceilings and the terms and conditions that were agreed. The arrangements for the supply of electricity generated using renewable energy constitute part of OPC’s strategy to expand its activities in the field of renewable energy, and supply energy from renewable energy sources in Israel.
In January 2023, OPC-Rotem and another material customer extended their engagement for an additional period that will start at the end of the term of the existing agreement (including an option to extend the term in accordance with provisions that were set). As part of revising the engagement, certain provisions of the original PPA between the parties were revised, and the customer is expected to significantly increase the capacity it will acquire under PPA prices, as revised, over the next few years.
The entire capacity of the Tzomet power plant is allocated to the System Operator under a fixed capacity arrangement.
The capacity that will be generated by the Sorek 2 generation facility, subject to the completion of its construction shall be sold to the desalination facility and to another customer with a generation facility at its premises in accordance with the PPA with it, and the remaining capacity will be sold in accordance with applicable regulations.
In February 2024, OPC-Rotem entered into an agreement with Partner Communications Company Ltd. (“Partner Communications”) for the purpose of selling electricity to Partner Communications’ consumers, who are household consumers or small businesses (SMB) as decided between the parties. The agreement will allow the diversification of OPC’s customer mix. According to the agreement, OPC will supply electricity at maximum quantities and under the conditions as defined therein, to Partner Communications’ customers, who will enter into an agreement with OPC and Partner Communications for the supply of electricity by OPC. OPC is required to supply the electricity, and is entitled to payment from Partner Communications in accordance with the quantity of electricity that the consumers consume in accordance with the tariff set in the agreement. The agreement is not subject to an undertaking by Partner Communications to purchase a minimum quantity of electricity or to sign-on a minimum number of consumers. However, the agreement provides for an undertaking by Partner Communications not to sign-on or supply electricity to its customers from any source other than through OPC, so long as a certain number of its customers has not signed-on to OPC in accordance with the agreement. The agreement sets a maximum number of household electricity consumers that can be signed-on to OPC, and a maximum hourly consumption in relation to small- and medium-size businesses, or SMBs, unless it is agreed otherwise by Partner Communications and OPC. The agreement is effective from April 1, 2024 to March 31, 2030, subject to early termination provisions.
United States
The CPV Group’s projects mainly sell electricity and capacity to the PJM, NY-ISO and ISO-NE wholesale markets.
Keenan (a consolidated company in the renewable energy field) entered into a long-term PPA in 2010 for 20 years with a utility company in relation to the project’s sources of income. Similarly, the power plants of Mountain Wind (a consolidated subsidiary in the renewable energy field which completed the acquisition of four power plants in wind energy in 2023) entered into PPAs as discussed above.
The CPV Group’s projects under development are expected to sell their energy, capacity and RECs in the wholesale market or directly to consumers through long-term PPAs. Similarly, Mountain Wind (a consolidated subsidiary in the renewable energy field) entered into a series of PPAs, and Maple Hill has also entered into a PPA. In addition, one of the solar projects, Backbone, that is in the advanced development stages, with a total capacity of about 179 MWdc, received a connection agreement to the grid from PJM and signed a 10-year PPA agreement for 90% of the energy and SRECs. The remaining 10% of the project’s capacity is expected to be used to supply CPV Group’s retail energy customers or sold in the spot market.
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 (except for Kiryat Gat which uses only natural gas). OPC’s active power plants acquire natural gas mainly the Karish Reservoir (which is held by Energean and which commenced commercial operations in March 2023) as described below and from the Tamar Group. In 2023, OPC started purchasing large quantities of natural gas from the Karish Reservoir. The Tamar Reservoir was shut down for a period of time as a result of the War. There were no changes to the activity of the Karish Reservoir due to the War. However, the Karish Reservoir was shut down for approximately 28 days due to planned maintenance and during this period was operating on a partial basis. In addition, the Leviathan Reservoir continues supplying gas to the Israeli economy. The continued operation of the Karish Reservoir and the Leviathan Reservoir is significantly affected by the scope of the War and the deterioration in security situation in Israel, especially in the north. While the Tamar Reservoir was shut down, OPC purchased natural gas mainly from Energean, and also through short-term agreements and occasional transactions in the secondary market. During this period there was no material change in OPC’s natural gas costs compared with prior to the War. Any natural gas shortage or disruption to the supply of natural gas from the Karish Reservoir (without activating compensating arrangements under covenant 125, as described below) may have a material adverse effect on OPC’s natural gas costs.
In connection with OPC’s on-site facilities, the required gas is expected to be purchased as part of the agreements in which OPC had engaged and/or will engage. The Sorek 2 facility is expected to purchase some of the natural gas required for its operation from the Leviathan Reservoir as part of its arrangements with the Desalination Facility. The remaining gas quantities that will be required for the operation of the generation facility are expected to be purchased through gas purchase agreements into which OPC has entered and/or will enter. From time to time, OPC may enter into additional gas sale and purchase agreements for its operations in the respective 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, OPC-Hadera and the Tzomet power plants are dual-fuel electricity producers that can operate using both natural gas and diesel fuel subject to adjustments. In 2023, OPC-Rotem, OPC-Hadera and Tzomet had negligible operations in diesel fuel (only for periodic testing purposes). OPC-Hadera and Tzomet power plants are subject to “covenant 125” which deals with natural gas shortages in Israel, and which prescribes, among other things, that the System Operator has power to issue guidance on the use of diesel fuel in the electricity sector at times of gas shortages, and that according to such guidance of the System Operator, an electricity producer using diesel fuel shall be compensated in respect of the difference between the cost of production using diesel fuel and the cost of production using gas, which is known to the producer. OPC believes, based on past experience, that covenant 125 also applies to the OPC-Rotem power plant and disagrees with the EA’s position that this is not the case.
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.
OPC-Rotem and OPC-Hadera have also entered into agreements with Energean, which has the leases to the Karish and Tanin natural gas fields, for purchase of natural gas by them. According to the terms and conditions in the agreements, the total original basic quantity of natural gas, Rotem and Hadera were expected to purchase is approximately 5.3 BCM for Rotem and approximately 3.7 BCM for Hadera (the “Total Basic Contractual Quantity”). The agreements include, among other things, a take or pay mechanism, whereby OPC-Rotem and OPC-Hadera have undertook to pay for a minimum quantity of natural gas even if they have not used it. The price of the natural gas in the agreements with Energean is denominated in U.S. Dollars and is based on an agreed formula, which is linked to the electricity generation component and includes a minimum price.
OPC-Rotem and OPC-Hadera paid the minimum price during 2021 (excluding two months for OPC-Rotem and one month for OPC-Hadera). 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. In 2023, the gas price in the OPC-Rotem Tamar agreement was equal to the minimum price over 8 months in total. For OPC-Rotem, the effect of changes in tariff on profit margins depends on the US/NIS exchange rate fluctuations. In 2023, OPC-Hadera’s gas price was higher than the minimum price. In addition, in 2024, if there will be no changes to the generation component, OPC-Hadera’s gas price is expected to be higher than the minimum price. 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 and tariff structure.”
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 natural gas in Israel. For example, in March 2013, an agreement was signed between the Gat Partnership and INGL for transmission of natural gas to the Gat Partnership’s facilities. The agreement was amended in November 2016 in order to allow the piping of gas to the power plant, as planned at the time. To this end, changes were made to the gas infrastructure and the commercial terms and conditions. The agreement includes provisions that are customary in agreements with INGL and is essentially similar to the agreements of OPC-Rotem, OPC-Hadera and Tzomet with INGL. The agreement term is 15 years from the gas piping date, including a 5-year extension option, subject to advance notice, under terms and conditions that are customary in gas transmission agreements signed by INGL at that time. Under the agreement, partial connection fees were defined in respect of the connection planning and procurement. Upon the completion of the purchase of the power plant by OPC, the Transmission Agreement was assigned to OPC. Pursuant to the agreement, Gat Partnership is required to provide a guarantee for the benefit of INGL or choose an alternative arrangement, and Gat Partnership has provided INGL a guarantee. As of December 2022, the piping to natural gas to Tzomet started.
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, including identifying and assembling special equipment in certain facilities.
In respect of the Renewable Energy operations, on March 10, 2022, CPV entered into a framework purchase agreement of solar panels for a total capacity of approximately 530 MWdc. According to the agreement, the solar panels are 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 $185 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.
In 2023, the CPV Group started receiving deliveries of the solar panels. All panels that were allocated to Maple Hill and Stagecoach under the agreement have been delivered by the supplier. In addition, the solar panels allocated to Backbone under the agreement have been ordered with the corresponding deliveries set to be begin in the first half of 2024.
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 the 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 2022, the energy effectively generated by the power plants owned by OPC-Rotem and OPC-Hadera was 4.08 TWh, constituting about 5.3% of the total energy generated in Israel, and about 10.8% of the energy generated by independent power producers in Israel during that year (including renewable energies).
In February 2021, the EA made a decision regarding the 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. 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, this will further intensify the competition in the supply segment. As of March 2023, the main actors in the renewable energy supply segment are EDF Energies Israel Nouvelles Ltd., Meshek Energy Ltd., Shikun & Binui Energy Ltd., and Enlight Ltd.
From 2023, the electricity supply segment has included a retail channel, comprising the marketing of electricity to many end customers, the provision of services and ongoing management of customer accounts in an appropriate manner. At least regarding small customers (households and small businesses), players in this channel include mainly communications companies, utility companies, and other entities with experience and relative advantages in distribution to end customers (for example, Cellcom and Amisragas).
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. CPV believes that the CPV Group project’s share of the total capacity in their respective markets are not significant which allows for significant growth.
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 power 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 external and government 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” (or “TAOZ”) tariffs published by the EA. As updated by the EA’s decision , the seasons are divided into three in accordance with the resolution of the Israeli Electricity Authority to update the demand hours clusters in 2023, as follows: (i) summer—June to 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 2024 based on seasons and demand hours, published by the EA.
| | | | Weighted production rate (AGOROT per kWh) | |
| | | | | | | | | | | | | | |
Winter | | Off—peak | | | 19.66 | | | | 19.42 | | | | 19.16 | | | | 18.98 | |
| | Mid-peak | | | - | | | | - | | | | - | | | | - | |
| | On-peak | | | 73.75 | | | | 72.85 | | | | 71.87 | | | | 71.17 | |
Spring or Fall | | Off—peak | | | 18.87 | | | | 18.64 | | | | 18.38 | | | | 18.21 | |
| | Mid-peak | | | - | | | | - | | | | - | | | | - | |
| | On-peak | | | 29.54 | | | | 22.27 | | | | 21.97 | | | | 21.76 | |
Summer | | Off—peak | | | 23.07 | | | | 22.79 | | | | 22.49 | | | | 22.27 | |
| | Mid-peak | | | - | | | | - | | | | - | | | | - | |
| | On-peak | | | 118.5 | | | | 117.05 | | | | 115.48 | | | | 114.35 | |
Weighted Average Rate | | |
| 31.19 | | |
| 30.81 | | |
| 30.39 | | |
| 30.07 |
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.
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 2022 and 2023. These figures have not been audited or reviewed.
| | | | | | | |
Summer (2 months) | | | 338 | | Summer (4 months) | | | 982 | |
Winter (3 months) | | | 458 | | Winter (3 months) | | | 495 | |
Transitional Seasons (7 months) | | | 838 | | Spring and fall (5 months) | | | 688 | |
Total for the year | | | 1,634 | | Total for the year | | | 2,165 | |
United States
The revenues from generation of electricity are seasonal and are impacted by weather. In general, in natural gas-fueled 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, 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.
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, 2023, see “—Our Businesses—OPC—Operations Overview—OPC’s Description of Operations—Israel.”
OPC leases its principal executive offices in Israel. OPC owns all of its power generation facilities.
As of December 31, 2023, the consolidated net book value of OPC’s property, plant and equipment was $1,713 million.
The table below sets forth a 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 Agreement of Rotem 2 |
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 2 |
Land on which Sorek 2 is being constructed | | Sorek 2 Desalination Facility | | Right of use | | About 2 dunams |
Land held through Kiryat Gat |
Land on which Kiryat Gat is being constructed | | Kiryat Gat | | Ownership | | About 12 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 interconnection and transmission. In addition to the project lands, CPV leases office space for use by the headquarters in Silver Spring, Maryland, Sugar Land, Texas, and in Braintree, Massachusetts pursuant to multi-year lease agreements.
CPV plants in commercial operation
| | | | The right in the property | | | | |
Conventional Energy Projects |
Shore |
Land on which the Shore power plant was constructed | | Middlesex County, New Jersey | | Ownership | | About 111,290 square meters (28 acres) | | N/A |
Maryland |
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 |
Valley |
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 |
Fairview |
| | | | | | | | |
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 |
Three Rivers |
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 |
Keenan II |
Land on which the Keenan II wind farm was constructed | | Woodward County, Oklahoma | | Contractual easements | | Rights to land and the equipment | | December 31, 2040 |
Mountain Wind |
Land on which the CPV Mountain Wind wind farms were constructed (information is aggregated for the four wind farms of Mountain Wind) | | Franklin, Oxford and Waldo Counties, Maine | | Contractual easements and leases | | Approx. 15,000,000 square meters (3,700 acres) | | Forty years (Thirty years for 20% of Spruce Mountain) Various 2046—2055 |
Maple Hill |
Land on which the Maple Hill power plant was 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, 2058 |
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 |
Land on which the Backbone power plant will be built | | Garrett County, Maryland | | Lease agreement | | Approximately 2,559 acres | | The earlier of March 31, 2025 or commencement of the operating period, plus an option to extend by five consecutive periods of seven years during operations. |
________________________________
| (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. OPC’s sites (similar to most private business activities in Israel) could be exposed to physical damage as a result of the War in Israel. 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. Insurance policies for OPC-Rotem, OPC-Hadera will expire at the end of July 2024. Insurance policies for Tzomet will expire at the end of May 2024 and for Kiryat Gat—at the end of April 2024. 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, 2023, in Israel, OPC had a total of 169 employees, of which 114 employees are in the OPC Israel division (including plant operation, corporate management, finance, commercial and other), and 55 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 | | | 55 | | | | 50 | | | | 34 | |
Plant operation, corporate management, finance, commercial and other | | | 114 | | | | 100 | | | | 86 | |
OPC Total (in Israel) | | | 169 | | | | 150 | | | | 120 | |
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. The term of the OPC-Rotem collective agreement ended on March 31, 2023, and a revised collective agreement was signed in respect of OPC-Rotem’s employees for a period of four years until March 31, 2027. Approximately 70 of the employees in OPC-Hadera are employed under a collective agreement which was signed in December 2022 and will be in effect through March 2026.
United States
As of December 31, 2023, CPV had a total of 150 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
A shareholders’ agreement is in place between OPC and Veridis regarding OPC Israel. The shareholders’ agreement regarding OPC Israel includes customary terms and conditions, including, inter alia provisions 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.
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) 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.
The agreement provides for additional rights in the event of the sale of OPC Israel’s 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.
An amendment to the shareholders’ loan agreement was signed as part of the Veridis transaction, such that OPC Israel provided to OPC-Rotem (whether directly or indirectly) NIS 400 million (approximately $118 million) for repayment purposes as stated above, and provisions were set regarding the repayment of the Shareholder Loans in the future, taking into account OPC-Rotem’s free cash flow in accordance with provisions of the agreement.
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 Hapoalim Capital Markets Group (4.5% interest) (together, 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 $1,215 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 confirmed their participation in an additional undertaking to invest in developing and expanding CPV’s operations, each according to their proportional share, an additional $400 million. In 2023, CPV and the Financial Investors invested in the equity of the Partnership OPC Power (both directly and indirectly) a total of approximately $150 million, and extended it approximately $45 million in loans, respectively, based on their stake in the Partnership. As of March 22, 2024, total investments in the Partnership’s equity and the outstanding balance of the loans (including accrued interest) amount to approximately $927 million, and approximately $339 million, respectively. In March 2023, CPV and the Financial Investors approved their participation in a facility for 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 proportionate share, as outlined above, for a total of approximately $75 million. In September 2023, after utilizing the entire investment commitment and the shareholder loans advanced, the facility was increased by $100 million, in accordance with each partner’s proportionate share (the CPV’s share in the facility is $70 million). As of March 22, 2024, the total balance of investment undertakings and shareholders’ loans advanced by all partners under the facility is estimated at approximately $100 million (excluding the guarantee facility).
The general partner of the Partnership, an entity wholly-owned by OPC, manages the ownership of CPV, with certain material actions (or actions 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 18 to our financial statements included in this annual report.
Industry Overview
Overview of Israeli Electricity Generation Industry
Israel’s powerElectricity generation units primarily utilize fossil fuels. Mostand 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). None of the actions provided in the Electricity Sector Law shall be carried out except pursuant to a license, subject to legal restrictions, and in accordance with activity in each of power generationthe segments requiring a relevant license. As of December 31, 2022, the installed electricity production capacity in Israel (of the IEC and independent producers) was 17,434 MW excluding renewable energies, and approximately 4,800 MW of renewable energies, with actual generation constituting approximately 10.1% of total actual consumption in the economy in 2022. According to publications of the EA, the annual rate of increase in demand for electricity in 2023 is carriedexpected to be at less than 1%. According to the Electricity Sector Status Report, in 2022 the sectoral generation amounted to 76.9 TWh; in 2025, the annual generation forecast is expected to be 81.7 TWh. In 2023, the EA reviewed key points of progress in the renewable energy market, and stated that at the end of 2023 the rate of actual consumption of renewable energy in the Israeli economy was 12.5%; the rate of renewable energy installed capacity out of total capacity in Israel as of the end of 2023 was 24.4%.
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 power producers and suppliers and electricity consumers.
The Ministry of Energy oversees 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. 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 (including private 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 Noga as well as independent power 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 state-owned IEC. However,EA.
The IEC supplies electricity to most of the customers in recent yearsIsrael 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, the 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. Noga is a government company, whose operations commenced in November 2021, and is in charge of the management of the electricity system in the generation and transmission segments, including constant balancing out between the supply of electricity and the demand for planning of the transmission system, including, among other things, drawing up a development plan for the transmission and generation segments. Pursuant to the Electricity Sector Law, the IEC and Noga are each defined as an “essential service provider” and as such, they are subject to the criteria and tariffs set by the EA. As of 2022, the IEC’s share amounted to 51.5% in the generation segment and 69% in the supply segment.
According to the Electricity Market Report, as of 2022, independent power producers (including OPC power plants), including those using renewable energy, active in Israel have an aggregate generation capacity of approximately 11,706 MW, constituting 53% of the total installed generation capacity in Israel. According to Electricity Market Report, at the end of 2025 (the end of the IEC Reform), the market share of privatethe independent power producers, has been increasing in lightincluding renewable energies, is expected to amount to approximately 66% of the Israeli government policy to allow competitiontotal installed capacity in the sector. In generation terms, in 2025 the market share of the independent power producers (including OPC power plants), and including renewable energies, is expected to amount to approximately 60% of the total generation in the market.
The generation component and changes in the IEC’s costs
In accordance with the Electricity Sector Law, the EA determines the tariffs, including the rate of the IEC electricity market.generation component, in accordance with the costs principle and the other considerations provided for in the Electricity Sector Law, as applied by the EA. The generation component is based on, inter alia, 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 such costs of the IEC. The generation component may also change based on the 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 load and time tariff (the “DSM Tariff”), net of the generation component discount. Since the electricity price in the agreements between OPC-Rotem, OPC-Hadera and Kiryat Gat (and of the generation facilities) 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 the IEC, including the price of coal and the 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. In general, an increase in the generation component has a positive effect on OPC’s results.
In Israel, the TAOZ tariffs are supervised (controlled) and published by the EA. Generally, the electricity tariffs in Israel in the summer and the winter are higher than those in the transition seasons. Acquisition of the gas, which constitutes the main cost in this business operations, is not impacted by seasonality of the TAOZ (or the demand hours’ brackets). The hourly demand brackets change the breakdown of OPC revenues over the quarters in such a manner that it increases the summer months (and mainly the third quarter) at the expense of the other quarters, and particularly the first and fourth quarters. The summer on-peak (August) high voltage tariff for 2023 indicates that the generation component in 2023 accounted for about 91% of TAOZ. In addition, the TAOZ includes system costs at the rate of 7% and public utilities at the rate of about 2%.
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 resolution, the high cost of coal was the main reason for the increase in electricity tariffs. 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 was changed to NIS 0.3081 per kWh, approximately 1.2% decrease compared to the tariff set on January 1, 2023. 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 decline in coal prices, and increase in other costs. The tariff of NIS 0.3081 which came into effect on April 1, 2023 was reduced by approximately 1.4% from the tariff set in February 2023 to NIS 0.3039.
An update to the hourly demand brackets, which became effective from January 2023, had a negative impact on our results from Israel activities and caused a change in the seasonality of our revenues, which resulted in a significant increase in our results during the summer period at the expense of the other months of the year (particularly the first quarter).
On February 1, 2024, an annual update of the tariff for 2024 came into effect for the IEC’s electricity consumers. According to the decision, the generation component was updated to NIS 0.3007 per KWh, a decline of 1.1%, mainly due to the excess proceeds expected from the sale of the Eshkol power plant, which led to a reduction in the generation segment. Furthermore, as part of the resolution regarding the updating of the tariff, and according to a decision about the designation of proceeds from the sale of Eshkol, the surplus proceeds from the sale will be first used to cover costs incurred during the War, including diesel fuel costs, and only then will the surplus proceeds be used to cover past one-off costs.
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 DSM tariff, such that it integrates a significant portion of solar energy and storage. According to the published resolution, the following key revisions were set: (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; and (iv) defining a maximum of two clusters for each day of the year (without the mid-peak cluster that was in force until the resolution went into effect). 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 DSM 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 stipulated 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.
The revision of the demand hour clusters had a negative effect on OPC’s results, mainly in view of the consumption profile of OPC’s customers (who are mostly industrial and commercial customers), which generally have low level of consumption fluctuations during the day compared to the sectoral consumption profile as reflected in the tariffs and regulations set as part of the revision for off-peak and on-peak hours. In addition, a change of the demand hour clusters changes the breakdown of OPC’s revenues and profits from its operations in Israel between the different quarters, such that revenues and profits in the summer (June-September), and mainly the third quarter, increase at the expense of the other quarters.
The IEC Reform and development of the private electricity market in Israel
The entrance of the independent power producers and suppliers has led to a significant decrease in the IEC’s market share in the sale of electricity to large electricity consumers (high and medium voltage consumers). The market share of independent producers in the generation and supply segments is expected continue to grow in coming years as a result of, inter alia, 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 power plants and their transfer from the IEC to independent producers, and imposed limitations on the IEC with respect to construction of new power plants, as well as a result of opening the supply segment to competition, including providing licenses to suppliers without generation means and the resolution regarding smart meters installation rules.
The following tables featuretable presents data on the share of private electricityindependent power producers and the IEC in the electricity market, as well as renewable energy production in 20182021 and 2019,2022, as published by the EA in the Report on the Condition of the Electricity Market for 2018 and 2019.EA.
| | | | | | |
| | | | | % of Total Installed Capacity in the Market | | | | | | % of Total Installed Capacity in the Market | |
IEC | | | 11,615 | | | | 54 | % | | | 10,527 | | | | 47 | % |
Independent power producers (without renewable energy) | | | 6,231 | | | | 29 | % | | | 6,907 | | | | 31 | % |
Renewable energy (independent power producers) | | | | | | | | | | | | | | | | |
Total in the market | | | 21,502 | | | | 100 | % | | | 22,233 | | | | 100 | % |
| | | | | | |
| | | | | % of Total Installed Capacity in the Market | | | | | | % of Total Installed Capacity in the Market | |
IEC | | | 12,752 | | | | 66 | % | | | 13,355 | | | | 73 | % |
Private electricity producers (without renewable energy) | | | 4,288 | | | | 22 | % | | | 3,439 | | | | 19 | % |
Renewable energy (private electricity producers) | | | | | | | | | | | | | | | | |
Total in the market | | | 19,366 | | | | 100 | % | | | 18,198 | | | | 100 | % |
| | Energy generated (thousands of MWh) | | | % of total energy produced in Israel | | | Energy generated (thousands of MWh) | | | % of total energy produced in Israel | |
IEC | | | 38,223 | | | | 52 | % | | | 39,224 | | | | 51 | % |
Independent power producers (without renewable energy) | | | 30,077 | | | | 41 | % | | | 30,155 | | | | 39 | % |
Renewable energy (independent power producers) | | | | | | | | | | | | | | | | |
Total in the market | | | 73,975 | | | | 100 | % | | | 76,886 | | | | 100 | % |
| | Energy generated (thousands of MWh) | | | % of total generated in the market | | | Energy generated (thousands of MWh) | | | % of total generated in the market | |
IEC | | | 47,784 | | | | 66 | % | | | 47,900 | | | | 69 | % |
Private electricity producers (without renewable energy) | | | 21,359 | | | | 29 | % | | | 19,232 | | | | 28 | % |
Renewable energy (private electricity producers) | | | | | | | | | | | | | | | | |
Total in the market | | | 72,476 | | | | 100 | % | | | 69,170 | | | | 100 | % |
SalesSet forth below are data about the distribution of IPPs are generally made onconsumers between private suppliers and the basis of PPAs fordefault supplier (in accordance with the sale of energy to customers, with prices predominantly linked to the tariff published by the EA and denominated in NIS. The EA operates a “Time of Use” tariff, which provides different energy rates for different seasons (e.g., summer and winter) and different periods of time during the day. Within Israel, the price of energy varies by season and demand period, with tariffs varying based upon the season—summer (July, August), winter (January, February, December) and transition (March-June, September-November)—and demand (peak, shoulder and off-peak).IEC’s data):
In January 2021, the EA published the electricity tariffs for 2021, which included a decrease of the EA’s generation component tariff by approximately 5.7%. OPC-Hadera’s and OPC-Rotem’s gas prices were at the minimum price in January and February 2021 and for OPC-Rotem may be (and for OPC-Hadera will be) at the minimum price for the remainder of 2021. This decrease in the EA generation component is expected to have a negative impact on OPC's profits in 2021 compared with 2020. As of December 31, 2019, the total installed capacity of the Israeli market (IEC and IPPs) was approximately 17,040 MW excluding renewable energy, and approximately 2,326 MW, including renewable energy. According to EA publications, the demand for electricity in Israel is expected to grow at an annual rate of 2.8%, reaching an annual generation forecast of 97.26 kilowatts per hour in 2030. These projections for the growth in the electricity market are based on the following assumptions:
| Estimates
megawatts
|
New installed capacity with gas up to 2030 | 1,400-4,000 |
Sale of IEC sites that have not yet been sold in accordance with sector reform (Hagit, Eshkol and Redding) | 2,771 |
Total additional potential private capacity up to 2030 | 4,171 – 6,771 |
The IEC has been classified by the Electricity Sector Law as an “essential service provider” and, as such, is subject to basic obligations concerning management of the Israeli power utility market. These obligations include the filing of development plans, management of Israel’s power system, management of Israel’s power transmission and distribution systems, provision of backup and infrastructure services to IPPs and consumers, and the purchase of power from IPPs. The IEC also transmits all of the electricity in Israel.
Pursuant to the Israeli Government’s electricity sector reform,IEC Reform, an 8-year plan was formed, under which the IEC was required, among other things, (i)to sell certain generation sites (including the Eshkol, which is under a process of completing a sale to an independent producer)), 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. The Reading power plant, was also supposed to be sold as part of the IEC Reform; a government taskforce was set up, which considered alternatives to such power plant in order to secure the supply of electricity to Gush Dan. A final decision as to the selected alternative is expected to be made in July 2024.
In May 2023, OPC submitted, through a joint special-purpose corporation, held in equal parts by OPC Power Plants and a corporation held by the Noy Fund ("OPC Eshkol"), a bid to purchase the Eshkol Power Plant as part of an IEC tender. In June 2023, OPC was notified that the Tenders Committee declared that an offer submitted by Eshkol Power Energies Ltd. is the winning offer in the Tender, and that OPC Eshkol was declared a "second qualifier" according to the tender documents. Since the winning bidder did not complete the signing of the acquisition agreement, in July 2023, the IEC announced the cancellation of the tender, and its decision to hold a new tender between the bidders that took part in the first bid (and which includes a minimum price of NIS 9 billion (approximately $2 billion) (the "Tender"). In August 2023, OPC Eshkol filed an administrative petition to the Tel Aviv Administrative Court. On September 14, 2023, the Administrative Court rejected the petition. OPC Eshkol did not submit a bid as part of the tender that took place on October 30, 2023.
Forecast of potential growth in natural gas in the Israeli electricity market
According to the hearings and resolutions of the EA, four gas-powered conventional generation units are expected to be constructed, including the unit that is expected to be constructed as part of the Sorek tender, with a capacity of up to 900 MW, the replaced generation unit in the Eshkol site with a capacity of up to 850 MW, and two conventional units with a capacity of up to 900 MW each.
The assessment as to the growth potential in natural gas generation units in the upcoming decade is conditional upon compliance with the renewable energy targets. According to external data available to OPC, OPC believes new natural gas generation capacity of 5,400 to 9,000 MW will be required between 2030 and 2040.
In September 2022, Noga published a long-term demand forecast for 2022-2050, according to sell five power plants (currently three plants remain to be sold) through a tender process over a period of 7 years, which is expected to reduce the IEC's market share to below 40% (ii) the IEC will cease acting as the System Administrator and (iii) certain limitations will be imposed on entities participating in the tender process as well as in overall capacity held by a single entity in the market. Furthermore, the IEC is permitted to build and operate two new gas-powered stations (through a subsidiary), but is not authorized to construct any new stations or recombine existing stations. This reformdemand is expected to increase IPPs’ presenceby 3.1% per year by 2030 and 3.7% in 2030-2040, based mainly on growth forecasts in connection with the market and lead to further industry competition. The IEC’s Alon Tabor power plant was sold in 2019 and the Ramat Hovav power plant was sold in 2020. OPC submitted purchase bids as partintroduction of both tenders but was not the winning bidder.electric vehicles into Israel.
For further information on Israel’s regulatory environment, see “—OPC’s DescriptionVirtual supply—Opening of Operations—Regulatory, Environmentalthe supply segment to suppliers without means of generation and Compliance Matters.” For information on the risks related to changes in Israel’s regulatory environment, see “Item 3.D Risk Factors—Risks Related to OPC—Changes in the EA’s electricity rates may reduce OPC’s profitability” and “Item 3.D Risk Factors—Risks Related to OPC—OPC’s operations are significantly influenced by regulations.”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. OPC began entering into virtual supply agreements with customers for a total capacity of 50 MW. OPC also entered into a virtual supply agreement with Noga. 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
The electricity market in the United States, in which CPV operates, is the largest private electricity market in the world with about 1,100 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 transition in the United States to renewable and lower carbon emitting generation has been accelerating in recent years. While hydroelectric generation has been a mainstay of the industry from its early days, and certain parts of the country have a significant resource base, there is an acceleration of wind and solar power plants. A key factor driving the increase in renewable technologies are state policies supporting the decarbonization of the economy which includes energy, transportation, and heating. Thirty states have enacted mandatory targets for the percentage of renewable energy to support state demand, and others have policy goals that target reductions in CO2 emissions over time. State run programs for renewable energy development require local utilities to procure a percentage of power from renewable resources through certification programs typically referred to as RECs (Renewable Energy Certificates), which are tradable on a number of exchanges throughout the country. In addition, federal and state tax policies have incentivized investment in certain renewable technologies through Production Tax Credits (PTC), which provide a tax benefit for every KW/h generated during a ten-year period and through Investment Tax Credits (ITC), which provide tax benefits based upon the amount of investment made in a project.
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. See below a description of OPC’s operations by geography. For an overview of certain key historical financial and operational information for OPC see “Operating and Financial Review and Prospects—Business Overview—OPC.”
Israel
OPC’s operations in Israel include power generation plants that operate on natural gas and diesel. As of December 31, 2020, 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-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 has an 80% equity interest in OPC-Rotem.
OPC-Hadera
OPC’s second power plant, OPC-Hadera operates a cogeneration power station in Israel, with capacity of approximately 144 MW, whichMW. The cogeneration power plant reached its COD on July 1, 20202020. OPC-Hadera holds a permanent license for generation of electricity using cogeneration technology and a supply license. The generation license has been granted by the EA for a period of 20 years which may be extended by an additional 10 years. OPC-Hadera also holds the supply license which is in effect for as long as OPC-Hadera holds a valid generation license. OPC-Hadera owns the Hadera Energy Center, which consists of boilers and a steam turbine. The Hadera Energy Center currently serves as backupback-up for the OPC-Hadera power plant’s supply of steam. Itssteam and its turbine is not currently operating and is not expected to operate with generation of more than 16MW. OPC Israel owns 100% of OPC-Hadera. The total investmentconsideration under the EPC contract for the project was approximately $185 million. OPC-Hadera power plant is “two‑fuels” generator of electricity (capable of using both natural gas and diesel oil, in its operations, subject to the required adjustments).
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.
Below are the key elements of OPC-Hadera business operations:
EPC Contract
In January 2016, OPC-Hadera entered into an EPC contract with an EPC contractor, IDOM, for the design, engineering, procurement and construction of the OPC-Haderacogeneration power plant and infrastructure(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 (includingin the Energy Center) amountedevent that IDOM fails to about NIS 0.9 billion (approximately $0.3 billion).
Tzomet
OPC owns 100% of 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 396MW conventional open-cycle power plant. Tzomet’s conditional license remains subject to conditions set forthmeet its contractual obligations 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 February 2020, the EA notified OPC that financial closing for the Tzomet project had been met. During 2020, the construction of the Tzomet power plant commenced. OPC expects that the Tzomet plant will reach its COD in January 2023 and that the total cost of completing the Tzomet plant will be approximately NIS 1.5 billion (approximately $0.5 billion) (excluding NIS 100 million, i.e. half of the tax assessment received with respect to the land). As of December 31, 2020, OPC had invested approximately NIS 694 million (approximately $216 million) in the project.
agreement.
OPC has participatedOn July 1, 2020, the commercial operation date of the Hadera power plant commenced after a delay in the pastcompletion of construction as a result of, among other things, components replaced or repaired. Payments under the insurance policies and/or compensation from the construction contractor were not received (except for amounts unilaterally offset by OPC against payments to the construction contractor in respect of the delay in operation, and will consider participating in future tenders, includingnon-compliance with the IEC tenders. However, therepower plant’s performance). OPC-Hadera had filed an arbitration proceeding against the contractor. In December 2023, OPC-Hadera signed a settlement agreement the construction contractor, which provides for a settlement of the parties' claims and termination of related arbitration proceedings, and compensation payable by the construction contractor to OPC-Hadera of approximately $21 million. The net compensation payable to OPC-Hadera is no certainty that OPC will participate in such tenders or that it will be successful.approximately $7 million after offset of amounts payable by OPC-Hadera to the construction contractor.
See “Item 3.D Risk Factors—Risks RelatedSales of Electricity and Steam
OPC-Hadera’s power plant supplies the electricity and steam needs of Infinya’s facility and provides electricity to OPC—OPC faces risksprivate customers in connectionIsrael. 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 less favorable tariff arrangements will apply. OPC-Hadera is entitled, if it complies with the expansionterms and conditions of its business” and “Item 3.D Risk Factors—Risks Relatedthe regulations arrangements, to OPC—OPC faces competition from other IPPs.”
Construction of energy generation facilities on the premises of consumers
OPC has engaged several consumers (including consumers that were successful in the EA’s tender) in agreements through the installation and operation of generation facilities (natural gas) on the premises of consumers for capacity of approximately 76MW, 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 consumersSystem Operator up to 50% of the electrical energy generated during on-peak and mid-peak hours, based on an annual calculation, and up to 35 MW during off-peak hours based on an annual calculation, for a period of approximately 15-20up to 18 years from the CODpermanent 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 generation facilities.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. The planned COD dates are in accordance withannual tariff is set according to the conditions provided in the agreements, but not later than 48 months from the execution date of the relevant agreement. The totalactual amount of OPC’s investment depends onelectricity provided during on-peak and off-peak hours. Notwithstanding the number of arrangementsforegoing, the EA decided not to make changes regarding producers that use gas to generate electricity.
OPC-Hadera has entered into and is expected to be an average of NIS 4 million for every installed MW. OPC has also entered into construction agreements and agreementsa PPA with Infinya for supply of motors for the generation facilities with a total capacityall of approximately 41 MW. As of December 31, 2020, OPC’s investment in such generation facilities amounted to approximately NIS 12 million (approximately $4 million).
Sorek 2
In May 2020, OPC, through its wholly owned subsidiary, won a build-operate-transfer (BOT) tender with the State of Israel for the construction, operationInfinya’s electricity 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 99MW at the premises of the desalination plant, and sell electricity to the desalination plantsteam needs for a period of 25 years following which ownershipstarting in July 2020. The agreement provides a minimum quantity 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 has yetsteam to be received). OPC is currently in the process of entering into an equipment supply agreement, a construction agreement and a maintenance agreement,purchased by Infinya (take or pay), which will be subject to approvaladjustment. The tariff paid by the Seawater Desalination Authority. OPC estimates that the construction periodInfinya for the plant will endelectricity purchased by it for the agreement term is based on the DSM Tariff, with a discount on the generation component, plus a fixed payment in respect of the second halfsize of 2023. The plant is expected to operate in accordance with the EA’s regulations. Excess capacity beyond that used by the desalination plant is expected to be sold to the System Administrator.connection.
The following table sets forth summary operational information for OPC’s operating plants in Israel as ofIn 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 forinclude early termination and/or extension provisions (as the year ended December 31, 2020:
| | | | | | | | | |
OPC-Rotem | | | 466 | | | | 3,321 | | | | 92 | % |
OPC-Hadera | | | | | | | | | | | 79 | % |
OPC Total | | | | | | | | | | | |
|
The following table sets forth summary operational information for OPC’s operating plants in Israel as of and for the year ended December 31, 2019:
| | | | | | | | | |
OPC-Rotem | | | 466 | | | | 3,727 | | | | 99 | % |
OPC-Hadera (Energy Center) | | | | | | | | | | | 94 | % |
OPC Total | | | | | | | | | | | | |
The following table sets forth summary operational information for OPC’s operating plants in Israel as of and for the year ended December 31, 2018:
| | | | | | | | | |
OPC-Rotem | | | 466 | | | | 3,299 | | | | 87 | % |
OPC-Hadera (Energy Center) | | | | | | | | | | | 94 | % |
OPC Total | | | | | | | | | | | | |
The following summaries provide a description of OPC’s businesses in Israel.
OPC-Rotem
OPC has an 80% stake in OPC-Rotem. The remaining 20% is held by Veridis, which is indirectly controlled by Delek Automotive Systems Ltd. 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)case may be).
Gas Supply Agreements
OPC-Rotem purchases natural gas fromIn 2012, Infinya entered into an agreement with the Tamar Group pursuant to afor the supply of natural gas, which has been assigned to OPC-Hadera. This gas supply agreement that expires upon the earlier of June 2029April 2028 or the date on which OPC-RotemOPC-Hadera consumes the entire contractual capacity. Both contracting parties have the option to extend the agreement, under certain conditions. The EA’sprice of gas is linked to the weighted average of the generation component tariff published by the EA, and it is the base for the natural gasalso subject to a price linkage formula in the agreement between OPC-Rotem and the Tamar Group.floor. According to the agreement, with the Tamar Group, OPC-Rotem has thegas shall be supplied on a firm basis, and includes a take or pay obligation, by OPC-Hadera. In June 2022, OPC-Hadera exercised an option to decreasereduce the daily contractual gas amount to a specific amount set forth in the agreement between 2020 and 2022, such that the minimum consumptionquantities by approximately 50%, with effect 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 — see below- 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 is 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 (“take-or-pay” obligation).2023.
In September 2016, OPC-Hadera entered into another gas supply agreement with the Tamar Group. OPC-Hadera exercised an early termination right in June 2022 and this supply agreement terminated in June 30, 2023.
In December 2017, OPC-RotemOPC-Hadera signed an agreement for the purchase of natural gas from Energean (the “OPC-Hadera Energean Agreement” and, together with the OPC-Rotem Energean Israel Ltd., or Energean.Agreement, the “Energean Agreements”). Pursuant to this agreement, OPC-RotemOPC-Hadera has agreed to purchase from Energean 5.33.7 billion m3 of natural gas overfor 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, thethis 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 (unless the total contractual quantity is supplied earlier). Further to notices issued to OPC in 2020 byIn August 2022, OPC-Hadera informed Energean claiming “force majeure events” under its agreement, in September 2020, Energean issuedof an additional notice to OPC claiming force majeure events under its agreement and indicating that it expects flowingincrease of the firstcontractual gas quantity under the original terms and conditions of the OPC-Hadera Energean Agreement, which increases the take or pay commitment under the agreements.
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. Commercial operation of the Karish Reservoir began in March 2023, and since that time OPC-Hadera has reduced purchases of quantities under the Tamar Agreement, and started acquiring a substantial portion of the gas from Energean, and thereby reducing its gas acquisition costs.
Since the beginning of the War in Israel and up to November 12, 2023, supply of the natural gas from the Tamar reservoir was suspended. There was no change in the activities of the Karish reservoir that belongs to Energean as a result of the War. During the suspension period of the Tamar reservoir, OPC has acquired natural gas mainly from Energean as well as under short‑term agreements and by means of transactions in the secondary market, where in this period there has been no significant change in OPC’s natural gas costs compared with the situation existing prior to the start of the War. A shortage or interruption in the supply of natural gas from the Karish reservoir (without compensatory agreements) could have a significant negative impact on OPC’s natural gas costs.
Maintenance Agreement
In June 2016, OPC-Hadera entered into a maintenance agreement with General Electric International Ltd., or GEI, and GE Global Parts & Products GmbH pursuant to take placewhich 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 second halfservice agreement) have reached the end-date of 2021. OPC rejected the force majeure contentions under the agreements. According to Energean's January 2021 publications, flowing of gastheir performance and (ii) 25 years from the Karish reservoirdate 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. In 2023, planned and unplanned maintenance work was conducted in the power plant’s gas turbine over an aggregate period of approximately 40 days. During that maintenance work, the power plant continued to operate on a partial basis. In 2023, the performance and capacity of the power plant improved compared to 2022. Certain planned maintenance work is expected to take place during the fourth quarter of 2021. This projection requires an increase in workforce in order to be attained, and if such increase is not effected the flowing of gas may be further delayed. In February 2021, as part of issuance of bonds by Energean, Moody’s published a report stating that the full operation of the Karish reservoir may be delayed to the second quarter of 2022. There is no guarantee that the gas supply will be available by the stated timeframes or at all.
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 Administrator). 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 operate2024 in one of the following two ways (orgas turbines and in the steam turbine, which will take approximately 35 days in total.
Kiryat Gat Power Plant
Kiryat Gat operates a combinationcombined cycle power station powered by conventional energy, with installed capacity of both,approximately 75 MW. The power plant began operations in November 2019, upon receiving generation and supply licenses awarded by the EA. The plant is located in Kiryat Gat area.
The Kiryat Gat Power Plant was acquired by OPC in March 2023, through a subsidiary for consideration of approximately NIS 870 million (approximately $242 million) (after working capital adjustments). The consideration was used to repay an approximately NIS 303 million (approximately $84 million) shareholder loan that was provided to the Gat Partnership by Dor Alon (for the purpose of early repayment of the former senior debt of the Kiryat Gat Power Plant, and the remaining balance of approximately NIS 567 million (approximately $158 million) was used to acquire all the rights in the Gat Partnership (out of the remaining balance, approximately NIS 300 million (approximately $83 million) was paid in December 2023 as a deferred consideration, subject to immaterial adjustments to consideration).
Below are the key elements of Kiryat Gat business operations:
Sales of Electricity
The Kiryat Gat has PPAs with private customers, including kibbutzim and academic institutions, and the remaining weighted average duration of those agreements is approximately 6 years, subject to early termination or extension arrangements set out in the agreements. Following completion of the transfer of the rights in the power plant to OPC, electricity supply agreements with most of the Gat Partnership’s customers were amended to extend electricity supply period.
In October 2016, the Kiryat Gat Power Plant and the IEC entered into an agreement for the purchase of capacity and energy and the provision of utility services (the “Gat PPA”). As part of the IEC Reform, the IEC’s obligations under an agreement with the IEC were assigned to Noga, as from December 2021, except with regard to certain provisions and obligations that concern the connection of the power plant to the grid and arrangements pertaining to measurement and metering, which will continue to apply between the IEC and the Kiryat Gat Power Plant. Pursuant to the Gat PPA, the Kiryat Gat Power Plant undertook to sell to the IEC energy and ancillary services, and the IEC undertook to sell to Kiryat Gat the utility services and power system operating services, including backup services, in accordance with the agreement, the law and regulations. The agreement remains in effect until the end of the period in which Kiryat Gat is permitted to sell electricity to private consumers as set forth in the supply license regarding the utility and system management services, and up to the end of the period in which the Kiryat Gat Power Plant may sell energy to the System Operator, as set forth in the generation license regarding the purchase of energy and the ancillary services, and in accordance with the Cogeneration Regulations’ provisions regarding the purchase of capacity and energy in the period during which the production unit does not meet the cogeneration terms and conditions. The agreement also includes provisions governing the connection of the power plant to the electrical grid, as well as provisions covering the design, construction, operation and maintenance of the Kiryat Gat Power Plant. In addition, Kiryat Gat undertook to meet the capacity and reliability requirements provided in its license and law and regulations, and to pay for any failure to comply with them.
Gas Supply Agreement
Kiryat Gat is party to a natural gas supply agreement with the Tamar, which sets forth conditions for the purchase of a minimum quantity of gas and other arrangements. The agreement includes additional provisions and arrangements customary in agreements for the purchase of natural gas, including with regard to maintenance, gas quality, force majeure, limitation of liability, early termination provisions under certain cases subject to conditions, assignments and a dispute resolution mechanism. In accordance with the relevant regulation, the Tamar may demand, based upon certain financial data or rating, guarantees according to the number of gas consumption days, in accordance with the contractual quantity set forth in the agreement. The agreement includes provisions regarding restrictions on secondary gas sale by the partnership to third parties.
Operating and maintenance agreement
On January 29, 2017, the Gat Partnership and Siemens Israel Ltd. (“Siemens”) entered into an operating and maintenance agreement in connection with the Kiryat Gat Power Plant (the “Gat Operating and Maintenance Agreement”). As part of the agreement, Siemens undertook to provide all operation and maintenance services to the Kiryat Gat Power Plant, at an estimated total cost of approximately NIS 207 million (approximately $57 million), which is paid over the term of the agreement, in accordance with a formula set in the agreement): (1) provideagreement. The term of Kiryat Gat’s operating and maintenance agreement is 20 years or 170 thousand operating hours from the entire net available capacity of its power stationcommercial operation date, whichever is earlier, subject to IEC or (2) carve out energy and capacity for direct sales to private consumers. OPC-Rotem has allocatedearly termination provisions in the entire capacityagreement.
After the commercial operation of the power plant, a dispute has arisen between the parties regarding the Gat Partnership’s right to private consumers since COD. Asreceive a discount on the quarterly payment to Siemens, in accordance with the provisions of December 31, 2020, OPC-Rotem suppliesthe Gat Operating and Maintenance Agreement. Kiryat Gat’s position is that a discount should apply to the payment, and Siemens disputes this position. The power plant qualifies for a discount application if it works on a partial operation regime solely for the production and sale of electricity. Siemens claims that the power plant switched to a full cogeneration regime and therefore does not qualify for a discount. The parties commenced an arbitration proceeding which is ongoing and there is no certainty that the decision would be favorable for Kiryat Gat. If it is ruled that Kiryat Gat is not entitled to a discount, it will be required to pay the difference in the payment amounts for previous periods in respect of maintenance and operation services provided to the power plant, and increase the payment amounts under the agreement going forward, i.e., without applying the discount.
Following acquisition in March 2023, the power plant’s activity was shut down due to non-scheduled maintenance work for a period which was immaterial to OPC group. The Kiryat Gat Power Plant is powered solely by natural gas.
Tariff arrangement
Kiryat Gat Power Plant’s revenues from sale of energy are linked to 36 private customers accordingthe generation component; therefore, its profitability is affected by changes in the generation component (revenues from provision of capacity are linked to PPAs. OPC manages salesthe 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.
Kiryat Gat operates under a tariff arrangement of a defined capacity and energy transaction for a facility that does not meet cogeneration conditions by virtue of EA resolutions. In accordance with the provisions of the Cogeneration Regulations, the EA set an arrangement for electricity producers which no longer meet the conditions required for a cogeneration facility. Such an arrangement (“a hedged availability transaction”) applies to the Kiryat Gat Power Plant. 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 OPC-Rotem power plantSystem Operator. The capacity payment is capped.
Intra-Group Agreements
In March 2023, Intra-Group Agreements were signed between the Gat Partnership and certain OPC companies, in a manner that is intendedconnection with the Kiryat Gat Power Plant’s current commercial activity (which include certain arrangements in relation to permit flexibility in the sale of electricity to its customers (for example by means of suspending from time to timeKiryat Gat financing agreement), including an agreement for the sale of the electricity)electricity the Kiryat Gat power plant will generate to the end consumers (through the sale of energy and capacity to a supplier), and including appropriate arrangements, according to the Financing Agreement), and regarding the purchase of natural gas by the Kiryat Gat power plant required for its operations from OPC companies, through OPC Natural Gas (which purchases natural gas from the OPC group companies’ existing gas agreements). Under the IEC PPA, OPC-Rotem can also elect to revert back to supplying to IEC instead of private customers, subject to twelve months’ advance notice. In addition, some of OPC-Rotem’s customers haveFurthermore, OPC power plants entered into agreementsagreement with the Gat Partnership pursuant to which it committed to pay the Gat Partnership for production, energy, and capacity, under certain circumstances, as set forth in this agreement.
Gnrgy
Gnrgy (which is 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. OPC Israel owns 51% of Gnrgy. Gnrgy’s founder retains the remaining equity interest in Gnrgy and is party to a shareholders’ agreement with OPC, which among other things gives OPC an option to acquire a 100% interest in Gnrgy. In January 2024, OPC Israel entered into a separation agreement with the minority shareholder in Gnrgy, for constructionfurther details about the agreement see, “Item 5 Operational Review and Prospects—Recent Developments—OPC.”
In July 2021, the EA granted virtual supply license to Gnrgy. The installation and operation of energy generation facilities, wherebyelectric vehicle charging stations is not subject to obtaining a supply license pursuant to the Electricity Sector Law, Gnrgy therefore requested to cancel its license and the bank guarantee that was provided to the EA.
Projects Under Development and Construction in Israel
Overview
The following table sets forth summary operational information regarding OPC’s projects under development and construction in Israel.
Israel—Projects under Development and Construction (advanced)
Power plants / energy generation facilities | | | | | | | | | | Expected commercial operation date | | | | Total expected construction cost (in NIS million) |
Sorek 2 | | Under construction | | Approx, 87 | | On the premises of the Sorek B seawater desalination facility | | Natural gas—Cogeneration | | Second half of 2024(2) | | Onsite consumers and the System Operator | | 200 |
Energy generation facilities on the consumers’ premises | | Various stages of development/construction(3) | | The cumulative amount of the agreements is about approximately 127 MW. Construction works in respect of approximately 20 MW have been completed but commercial operations has not yet began, except for immaterial part of the projects in the operation stage; Approximately 25MW are under construction. The remaining capacity of (83MW) is under various development stages. (4) | | On the premises of consumers throughout Israel | | Natural gas, renewable energy (solar) and storage | | Gradually from the second half of 2023 and through the end of 2025, | | Yard consumers and the System Operator. | | An average of about 4 per MW (a total of about 480) |
(1) | As stipulated in the relevant generation license. |
(2) | Currently, certain actions and conditions associated with the construction and operation of the project have not been completed. Sorek 2 is taking measures to obtain adequate extensions. In addition, in the fourth quarter of 2023, the construction contractor of the Sorek 2 project delivered a force majeure notification due to outbreak of the War and Sorek 2 project delivered on its behalf a force majeure notification to the initiator of the desalination facility. The EA extended project completion dates due to the defense (security) such that an extension of two months was allowed for date of the financial closing. OPC is currently assessing the impact of such notification on the timeframe for the construction of the project. Completion of the construction and operation of the Sorek 2 generation facility are subject to fulfillment of conditions and factors that do not yet exist, including receipt of permits and reaching a financial closing. Ultimately, the date expected for completion of the construction and commencement of the operation could be delayed as a result of, among other things, a delay in completion of the construction work (including construction of the desalination facility), delays in receipt of the required permits, disruptions in arrival of equipment, force majeure events, the occurrence of risk factors to which OPC is exposed, including delays relating to the war or its consequences. Such delays could impact the project’s costs and could also trigger and increase in costs (beyond the expected cost indicated above) and/or could constitute non compliance with liabilities to third parties. |
(3) | The construction of several projects was completed and they are in different stages of testing and connection to the grid. The remaining projects are in various development stages with certain preconditions for execution of the projects for construction of facilities for generation of electricity on the customer’s premises (or any of them) had not yet been fulfilled, and the fulfillment thereof is subject to various factors, such as, licensing, permits, connection to infrastructures and construction. Due to the War, OPC delivered a force majeure notification to customers. The War and its impacts could have an adverse impact on the compliance with the expected dates for the commercial operation and the expected costs of the projects. |
(4) | Each facility with a capacity of up to 16 megawatts. |
Projects under development in Israel
Power plant/ energy generation facilities | | | | | | | | |
The Ramat Beka Solar Project | | Advanced Development | | Neot Hovav Local Industrial Council | | Photovoltaic in combination with storage | | In May 2023, OPC won the tender issued by ILA for planning and an option to purchase leasehold rights in land for the construction of renewable energy electricity generation facilities with a capacity about 245 MW with integration of storage of about 1,375 MWh in relation to three compounds in the Neot Hovav Industrial Regional Council. On February 5, 2024, the government authorized OPC to prepare on its behalf national infrastructure plans for photovoltaic electricity generation projects and to submit them to the National Committee for Planning and Building of National Infrastructures. The estimated construction cost of the project is in the range of NIS 1.93 to NIS 2.0 billion (approximately $532 million to $551 million). |
Hadera 2 | | Initial development | | Hadera, adjacent to the Hadera power plant | | Conventional with storage capability | | On December 27, 2021, the National Infrastructure Committee submitted National Infrastructure Plan (“NIP”) 20B for government approval under Section 76C (9) of the Planning and Building Law, 1965. In December 2022, a renewable option agreement was signed with Infinya Ltd., which awards Hadera 2 an annual option, which may be renewed for a period of up to 5 years, during which it will be allowed to lease the land adjacent to the Hadera Power plant for the project. On May 28, 2023, the Israeli government did not approve NIP 20B and returned it to the National Committee for Planning and Building of National Infrastructures for further discussion. Following this, OPC submitted a petition on behalf of Hadera 2 in respect of the government decision, which was summarily dismissed on July 19, 2023 on the grounds of failure to exhaust proceedings. OPC continues to promote NIP 20B and awaits recommencement of the above discussions. |
Intel Israel facilities | | Initial development | | Kiryat Gat | | Conventional | | On March 3, 2024, OPC Power Plants signed a non-binding memorandum of understanding with Intel Electronics (“Intel”), an OPC existing customer, pursuant to which OPC Israel will construct and operate a power plant, which will supply electricity to Intel’s facilities, including expansion of the facilities currently being constructed, for a period of 20 years from the operation date. |
Description of the electricity will be made by the energy generation facilityProjects Under Development and OPC-Rotem, see “-Construction
Construction of energy generation facilities on the premises of consumers.”
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 most recent regularly scheduled maintenance was scheduled for the second quarter of 2020, but this was delayed due to COVID-19 related restrictions. In April 2020, OPC-Rotem shut down the power plant for a number of days in order to perform internally‑initiated technical tests and treatments. These shutdowns and delay in the timing of the planned maintenance work did not have a significant impact on the generation activities of the OPC-Rotem power plant and its results. In October 2020, Mitsubishi carried out maintenance work, as planned. The execution of maintenance work required thirteen days during which the activities of the Rotem Power Plant were halted. The next regular maintenance work is expected to take place in October 2021, during which the plant’s operations are expected to be suspended for 18 days.
Shareholder Agreementconsumer
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 capacity of approximately 127 MW, as well as arrangements for the sale and supply of energy to consumers. Upon completion, OPC will operate the facilities and use them to generate electricity that will be supplied to the grid and/or to the consumers, in accordance with the different commercial arrangements agreed, for a shareholders’ agreementperiod of approximately 15-20 years from the COD of the generation facilities. In general, the agreements with consumers are based on a discount to the generation component and a savings on the grid tariff, and other arrangements (which depend, in certain cases, on the nature of the project), which grants minorityare related to the rights to the land and various arrangements related to the construction and operation of the 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 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.
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 Rotem’s minority shareholder.has also signed construction agreements with construction constructors, equipment supply agreements, including for the supply of motors for the generation facilities, and maintenance agreements for some of the projects. Some PPAs with OPC-Rotem and OPC-Hadera have been extended in connection with such arrangements. OPC intends to sign construction and operation agreements with additional consumers regarding rights to land for construction and operation of an energy generation facility, and arrangements for the supply and sale of energy with private individuals, public entities, including government entities.
As of December 31, 2023, OPC’s investment in such generation facilities amounted to approximately NIS 119 million (approximately $33 million).
Sorek 2
In May 2020, Sorek 2 (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 2 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 Generation Facility”), and supply the energy required for the Desalination Facility for a period that will end on the shorter of (i) 24 years and 11 months from the Desalination Facility’s commercial operation date or (ii) 27 years and 9 months from the date on which the franchise agreement is signed, being March 15, 2048. At the end of this period, ownership of the Sorek 2 Generation Facility will be transferred to the State of Israel. OPC estimates that construction of the plant would be completed and commercial operation date would be in the second half of 2024. Sorek 2’s engagement with IDE includes, among other things, Sorek 2’s undertakings to construct the facility by the later of: (i) 24 months of the date of approval of National Infrastructures Plan 36A (which was approved in December 2021) or (ii) within four months from the date on which the construction of the gas pipeline was completed, including obtaining the required permits, and the supply of gas to the power plant has started (a condition that has not yet been fulfilled) and an undertaking to supply energy at a specific scope and capacity to the Desalination Facility. The construction of the Sorek Generation Facility will be undertaken by Sorek 2 as an IPP contractor (subcontractor of the concessionaire) under the BOT (build, operate, transfer) agreement of the Desalination Facility, and in connection with this Sorek 2 has undertaken, among other things, to provide a performance guarantee and other guarantees in favor of IDE. The capacity that will be generated by the Sorek 2 generation facility, subject to the completion of its construction, shall be sold to the Desalination Facility and to another customer with a generation facility at its premises in accordance with a PPA with that customer, and the remaining capacity will be sold in accordance with applicable regulations. The Sorek Generation Facility is expected to be established under the framework of the Arrangement for High Voltage Producers Connected to the Grid that are Established without a Tender, and the capacity remaining beyond the consumption of the Desalination Facility is designated to be sold to the onsite consumer and the System Operator. This regulation applies to generation facilities in the transmission grid, that will be awarded a tariff approval until the earlier of (i) the grant of the entire quota of tariff approvals with an aggregate capacity of 500 MW or (ii) May 2024, in accordance with the deferral of the date that was set due to the war. To secure Sorek 2’s commitments under the Sorek B IPP agreement, OPC provided IDE with a guarantee that will remain valid throughout the term of the agreement. In connection with the project, Sorek 2 also entered into the equipment supply agreement (which was subsequently assigned to the construction contractor) for the supply of the gas turbine and related equipment (the “Equipment Supply Agreement”), and a maintenance agreement with General Electric (GE) group. OPC estimates that the construction cost of the Sorek 2 project, including its share in the Construction Agreement and the Equipment Supply Agreement, which constitute most of the cost (excluding the long term Maintenance Agreement), in the amount of approximately NIS 200 million (approximately $55 million).
Currently, certain actions and conditions associated with the construction and operation of the project have not been completed. Sorek 2 is taking measures to obtain adequate extensions. In addition, during the fourth quarter of 2023, the construction contractor of the Sorek 2 project delivered a force majeure notification due to outbreak of the War in Israel. The construction work, its completion the commercial operation date and the costs involved with the construction could be adversely impacted by the War, according to which delays are expected in the time frames due to, among other things, difficulties in the arrival of foreign work teams to the site, professionals’ departures, and the arrival of equipment to the site. Upon receipt of the notice, OPC delivered BHI’s notice to IDE and to the government, and clarified that due to the War it expects delays in time frames and in the completion of the construction work. Given that the War continues, other effects and/or damages may arise in the future due to War. OPC is collecting additional data about the event and its effects and maintains contact with the government and the contractor to assess the influences and their effects on the time frames for the construction of the project and the costs arising therefrom (which may increase). Sorek 2 is taking action to obtain adequate extensions, which have not yet been received. The EA extended project completion dates due to the defense (security) situation such that an extension of two months was allowed for date of the financial closing. OPC is currently assessing the impact of such notification on the timeframe for the construction of the project.
Hadera 2
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 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.
Ramat Beka Solar Project
In May 2023, an OPC subsidiary won a tender of the ILA to develop renewable energy electricity generation facilities using photovoltaic technology with an option to acquire lease rights for land in Israel for construction in three areas in Neot Hovav Industrial Local Council, with a total area of approximately 2,270 hectares. The total amount of the bid was approximately NIS 484 million (approximately $133 million). OPC announced that it intends to develop a project to generate electricity using photovoltaic technology in these three areas, with an estimated cumulative capacity of 245 megawatts and an estimated storage capacity of 1,375 megawatt hours. The total development cost for solar projects in the three areas is estimated by OPC to be between NIS 1,930 million (approximately $532 million) and NIS 2,000 million (approximately $551 million). Subject to completion of all development processes and obtaining required approvals, OPC estimates that the project will be ready for the construction stage in 2026. Pursuant to the terms of the tender, in the third quarter of 2023, 20% of the total consideration was paid in respect of an authorization and planning agreement. This amount will not be refunded in the event the project’s development and planning procedures fail to develop into an authorized plan and lease agreements are not signed. In February 2024, the government approved and provided the consent to advance development of the project.
Potential Expansions and Projects in Various Stages of Development
Rotem 2. 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. In December 2021, the National Committee for Planning and Building of National Infrastructures rejected National Infrastructures Plan 94 that was advanced by OPC-Rotem, however it called on the initiator to examine the possibility of using other technologies on the site. OPC is examining the options, including advance of a power plant using “green technology” with reduced emissions and/or an electricity storage facility. In August 2022, OPC received from the Israeli Land Authority an extension of the period for 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.
Sorek tender. In February 2023, OPC received a notification that it successfully passed 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. In May 2023, the Reduction of Concentration Committee published its recommendation regarding OPC’s participation in the Sorek tender, if it does not win the Eshkol Power Plant, and in accordance with the committee’s agreement regarding the expansion of the activity of the group of corporations controlled by Mr. Idan Ofer in the field of electricity according to the terms and conditions of the Market Concentration Plan. On November 30, 2023, the tender documents were published, including the tender filing date, that was set for June 2024. In February 2024, the Israeli Electricity Authority published a hearing regarding the eligibility of the bidders in the Sorek tender for receipt of a production license from sectoral concentration and aggregate concentration aspects (having consulted the Concentration Committee and taking into account the possibility that a third party will win the Eshkol tender). In the hearing, it was decided in relation to OPC, among other things, that OPC Power Plants complies with the requirements of the Market Concentration Regulations regarding the capacity limit attributed to OPC, including after taking into account the additional future capacity of Sorek (which is planned to stand at 670 MW, in view of the discharge restriction until 2035). The hearing takes into account the future planned capacity using natural gas by the end of the decade which is 18,926 MW (including the coal-fired units that are expected to be converted into natural gas).
On February 21, 2024 the EA published a resolution regarding the “Regulation of the Activity of the Generation Unit in the Sorek Site”. In accordance with the resolution as part of the tender, one CCGT unit will be constructed with a capacity of 630-900 MW under ISO conditions, which will operate according to the Trade Rules in the covenants, and under a capacity tariff according to the winning bid in the tender. The license period and the period of entitlement to the tariff will be 24 years and 11 months. The reservation of availability on the grid will be for a capacity of 900 MW, subject to compliance with the terms of the covenant, in relation to the completion of financial closing on the required date, and subject to relevant discharge restriction. Through July 1, 2035, the discharge of electricity to the grid will be capped at 670 MW, and no capacity payments will be paid above the cap. The receipt of the generation license requires compliance with the concentration rules. Furthermore, as part of the resolution, remedies and compensation were set, pursuant to which the winning bidder will be entitled in respect of damage or delay, subject to the qualifications and conditions set out in the resolution.
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.
Power plant for Intel Israel facilities. In March 2024, a subsidiary of OPC entered into a non-binding memorandum of understanding (the “MoU”) with Intel, an existing customer of OPC, pursuant to which OPC’s subsidiary will construct and operate a power plant with a capacity of at least 450 MW (and OPC does not expect capacity to exceed 650 MW) (the “Project”). The Project will supply electricity to Intel’s facilities in Kiryat Gat, including an expansion of the facilities which is currently taking place, for a period of 20 years from the commercial operation date.
In accordance with the MoU, OPC’s subsidiary will hold exclusive project rights, and will bear its construction cost. The MoU includes provisions regarding promotion of the development and planning of the Project, acquisition of the rights to land, and collaboration of the parties to obtain the required permits in connection with the Project. The existing electricity supply agreement between the parties shall continue to apply in relation to Intel’s electricity requirements beyond the Project’s capacity, subject to adjustments and conditions. In addition, the MoU includes arrangements regarding the tariff that will be paid to OPC’s subsidiary, which is based on rates that reflect a discount to the generation component tariff (graduated and based on the Project’s characteristics) and other provisions that will be included in a detailed agreement that the parties are expected to enter into.
OPC estimates that the construction cost of the Project will be approximately $1.3 million to $1.4 million per MW, and that subject to the completion of the development and planning procedures, the Project is expected to reach the construction stage during 2026.
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) 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 GW, of which approximately 5 GW consists of renewable energy and another approximately 10 GW consists of conventional, natural gas-fired power plants.
CPV holds rights in commercially operational power plants it developed and constructed over the past years (both conventional, natural gas-fired and renewable energy), as well as in renewable energy projects, carbon capture projects and gas-fired power plants under construction and in early development stages, with total capacity of approximately 9,000 MW.
Set out below is CPV’s holdings structure:
Below is a description of CPV’s main areas of operation:
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 two operational power plants operated using wind energy is approximately 234 MW and one active solar power plant is 126 MWdc (which reached COD in November 2023) and its share in two solar energy projects under construction is 279 MWdc, both of which are in the construction stages, and approximately 114 MW in one wind project under construction. 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 82 MW. The acquisition was completed in April 2023. The purchase price for the acquisition was $175 million, after adjustments, of which $100 million was financed with equity from CPV’s shareholders, including OPC, which contributed its portion (i.e., 70%) of such equity investment. CPV financed the remaining purchase price of $75 million with a loan facility with a five-year term.
Energy Transition—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 all six operating power plants of 5,303 MW (the CPV Group’s share is 1,416 MW), which are part of the Energy Transition. 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 — the CPV Group is engaged in the development of carbon capturing electricity generation projects and also provides asset and energy management services to power plants in the United States using different technologies for projects developed by CPV and third parties. Additionally, in early 2023, CPV Group established retail power supply activity through CPV Retail Energy. CPV provides asset management services for power plants with an overall capacity of approximately 6,170 MW (including 100 MW attributed to Maple Hill project) and energy management services for power plants with a total capacity of approximately 6,164 MW. During 2023, CPV Retail Energy executed contracts with approximately 200 commercial and industrial customers; CPV Retail Energy fixes the price of purchased power with hedging transactions.
CPV Group Strategy
The CPV Group’s strategy focuses on promoting energy transition in the United States through the following:
• Developing and operating renewable energy projects by optimizing the performance and returns of CPV’s operating renewable platform and developing and constructing new renewable projects focused in premium markets where renewable demand outstrips supply; and engaging in discussions with large renewable potential purchasers.
• Reducing carbon emissions for dispatchable electricity generation by developing conventional generation with carbon capture 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, balancing production in renewable energy while developing plans to further reduce 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. CPV Group's retail activity serves smaller commercial and industrial customers interested in renewables and willing to pay premium prices.
Electricity generation and supply using conventional technologies and renewables
The table below sets forth an overview of CPV’s power plants that were in commercial operation as of December 31, 2023.
| | | | | | | | Year of commercial operation | | Type of project/ technology / client | | |
CPV Fairview, LLC (“Fairview”) | | Pennsylvania | | 1,050 | | 25% | | 2019 | | Gas-fired, combined cycle | | PJM MAAC |
CPV Towantic, LLC (“Towantic”) | | Connecticut | | 805 | | 26% | | 2018 | | Gas-fired (with dual fuel), Combined cycle | | ISO-NE CT |
CPV Maryland, LLC (“Maryland”) | | Maryland | | 745 | | 25% | | 2017 | | Gas-fired, Combined cycle | | PJM SW MAAC |
CPV Shore Holdings, LLC (“Shore”) | | New Jersey | | 725 | | 37.53% | | 2016 | | Gas-fired, Combined cycle | | PJM EMAAC |
CPV Valley Holdings, LLC (“Valley”) | | New York | | 720 | | 50% | | 2018 | | Gas-fired, Combined cycle | | NYISO Zone G |
CPV Three Rivers LLC (“Three Rivers”) | | Illinois | | 1,258 | | 10% | | 2023(1) | | Natural gas, combined cycle | | PJM |
Renewable Energy Projects |
CPV Keenan II Renewable Energy Company, LLC (“Keenan II”) | | Oklahoma | | 152 | | 100%(2) | | 2010 | | Wind | | SPP (Long-term PPA) |
CPV Mountain Wind(3) | | Maine | | 82 | | 100% | | Between 2008 and 2017 | | Wind (4 wind power plants) | | ISO-NE market |
CPV Maple Hill Solar LLC (“Maple Hill”) | | Pennsylvania | | 126 MWdc | | 100%(4) (subject to tax equity partner’s share) | | Second half of 2023 | | Solar | | PJM MAAC + PA SRECs |
(1) | Three Rivers power plant, which commenced commercial operation in July 2023, is entitled to receive capacity payments from June 2023. |
(2) | On April 7, 2021, CPV acquired 30% of the rights in Keenan II from its tax equity partner. |
(3) | In April 2023, CPV acquired all rights (100%) in four active wind power plants (the “Mountain Wind Project”). CPV received (indirectly, through a 100%-held corporation) all of the seller’s rights in the Mountain Wind Project in consideration for approximately NIS 625 million (approximately $ 175 million) (after adjustments). The purchase consideration was funded by way of capital injection by CPV’s investors at the total amount of approximately $ 100 million (of which OPC’s share is 70%), and the remaining balance was funded by a loan from a bank under a financing agreement. |
(4) | On May 12, 2023, CPV entered into an agreement with a “tax equity partner” for an investment in the project. According to the agreement, the tax equity partner’s investment in the project is predicated on the achievement of defined milestones, with part (20%) due at the time of completion of the construction works, and the remainder (80%) due at the commercial operation date, which was achieved on December 1, 2023. As all milestones were met, the tax equity partner completed its $82 million investment on December 15, 2023. The agreement gives the tax equity partner the option to sell its equity to CPV for a specified amount. |
Projects under Construction
The table below sets forth an overview of CPV’s projects under construction.
| | | | | | | | | | Projected date of commercial operation | | Type of project/ technology | | | | Expected construction cost for 100% of the project |
CPV Stagecoach Solar, LLC (“Stagecoach”) | | Georgia | | 102 MWdc | | 100% | | Q2 2022 | | | | Solar | | Approximately $52 million(1) | | Approximately $112 million(2) |
CPV Backbone Solar, LLC (“Backbone”) | | Maryland | | 179 MWdc | | 100% | | June 2023 | | Second half of 2025 | | Solar | | Approximately $130 million(3) | | Approximately $304 million(4) |
(1) | The CPV Group has signed a non-binding memorandum of understanding with a tax equity partner, whereby approximately $43 million of such amount is expected to be received on the project’s commercial operation date and the balance is expected to be received over a period of 10 years. The investment of the tax equity partner is subject to negotiations and signing of binding agreements. Regarding projects that are entitled to tax benefits of the type of Production Tax Credits (the “PTC”), CPV’s estimate with respect to the scope of the tax equity partner’s investment is based on the IRA and estimates with respect to tax equity partners, a tax benefit for every KW/hr of generation, and does not depend on the anticipated cost of the investment (i.e., does not depend of initiation fees and reimbursement of pre-construction development expenses). |
(2) | Includes financing costs under the financing agreement (see, “Item 5 Operating and Financial Review and Prospects—OPC’s Liquidity and Capital Resources—OPC’s Material Indebtedness—United States”). The project’s expected cost of investment is subject to changes. |
(3) | The project is located on a former coal mine and, therefore, it is expected to be entitled to higher tax benefits of 40% in accordance with the IRA. The CPV Group intends to sign an agreement with a tax equity partner in respect of approximately 40% of the cost of the project and use of the tax credits that are available to the project (subject to appropriate regulatory arrangements). |
(4) | Excludes development fees but includes financing costs under the financing agreement. CPV Group intends to provide the project with solar panels through its existing master agreement for the purchase of solar panels. The total cost of such project is expected to be approximately $330 million, approximately 40% of which is expected to be financed by a tax equity partner such that the net investment cost for CPV Group is estimated to be approximately $150 million. In addition, CPV Group is working to obtain a short term revolving financing facility for part of the remainder of the project cost. Customary collateral with a value of about $17 million is expected to be provided for purposes of the agreement covering connection to the network (grid) and the PPA as well as additional development expenses in the project. Construction of the project commenced in June 2023 and commercial operation in PJM is expected to be reached in the third quarter of 2025. |
Projects under Development
In addition to the projects summarized above, CPV has a number of carbon capture power generation projects with an aggregate capacity of approximately 5,300 MWdc, and renewable energy projects (solar and wind energy technologies) in various development stages, with an aggregate capacity of approximately 3,650 MWdc. Below is a summary of the scope of the development projects (in megawatts) in the United States:
| | | | | | | | | |
| | | | | | | | | |
Solar (1) | | | 1,550 | | | | 1,050 | | | | 2,600 | |
Wind (2) | | | 250 | | | | 1,000 | | | | 1,250 | |
Total renewable energy | | | 1,800 | | | | 2,050 | | | | 3,650 | |
| | | | | | | | | | | | |
Carbon capture projects (natural gas | | | | | | | | | | | | |
with reduced emissions) | | | 1,300 | | | | 4,000 | | | | 5,300 | |
*Out of the total of the development projects approximately 1,100 megawatts (of renewable energy) and about 4,650 megawatts (of which about 1,250 megawatts are renewable energy) are in the PJM market in an advanced stage and in an initial stage, respectively.
| (1) | The capacities in the solar technology projects in the advanced development stages and in the early development stages are about 1,200 MWac and about 850 MWac. |
| (2) | Includes the Rogue’s Wind project, with a capacity of 114 MW in Pennsylvania, which signed a long-term PPA agreement, the terms of which have been improved, and which project is in an advanced stage of development, the start date of which is expected to be in the first half of 2024. The expected cost of the investment in the project is estimated at about NIS 1.2 billion (about $0.3 billion), the investment of the tax equity partner is estimated at about NIS 0.5 billion (about $0.1 billion). |
The main development activities for a development project include, among other things, the following processes: securing of the rights in the project’s lands; licensing and permitting processes; obtaining permits and regulatory approvals, regulatory planning processes and public hearing; environmental surveys; engineering study and tests; equipment testing, insurance procurement and ensuring of interconnection to the relevant transmission grids (including filing a request for the interconnection agreement and execution of an interconnection agreement); signing of agreements with relevant investors or lenders with relevant investors or lenders and relevant suppliers (construction contractor, equipment and turbine contractors) and entering into a hedge agreement and PPAs, and RECs (based on the type of project) (certain activities of development may include provision of collateral and undertaking obligations towards third parties in connection with the advancement of the projects).
Carbon Capture Projects
CPV is developing four Energy Transition power plants with reduced emissions that are powered by natural gas based on use of advanced carbon capturing technologies in Michigan, Ohio, West Virginia and Texas. According to public research, carbon capture and storage are expected to be a market of approximately $35 billion by 2032. CPV Group’s share in such Energy Transition Projects is 70% for the projects in Texas, West Virginia, Michigan. In January 2024, the CPV Group acquired 100% of the equity interests in Project Oregon for approximately $2 million (with potentially up to $14 million of additional consideration payable upon the occurrence of financial closing). The projects are expected to capture 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 construction 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. CPV has commenced the licensing processes, performed surveys and acquired land rights for carbon capture projects in Texas and West Virginia.
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.
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 Investment Tax Credits (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 $60/metric ton. In addition, the tax credit is eligible for direct pay for up to the first five years for carbon capture equipment placed in service after December 31, 2022.
In relation to projects that are under development by the CPV Group, the IRA is expected to have a positive effect on benefits available under the law in respect of using carbon capturing technologies. The full effects of the IRA have not yet been clarified, and are expected to be clarified when detailed regulations are formulated.
The table below sets forth additional details regarding the CPV project (with a PPA) for which construction has not commenced.
| | | | | | | | Projected Year of construction start | | Projected date of commercial operation | | Type of project/ technology | | Activity area and electricity region | | | | Expected construction cost ($ millions) |
CPV Rogue’s Wind, LLC (“Rogue’s Wind”) | | Pennsylvania | | Approx. 114 MW | | 100%(1) | | Second half of 2024 | | First half of 2026(2) | | Wind | | PJM MAAC | | Approximately $135 million | | Approximately $377 million(3) |
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(1) | Upon consummation of an agreement with a “tax equity 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 (the project has been 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. |
(3) | Does not include development fees, but includes financing costs under the financing agreement. |
Management of Projects
CPV provides general asset management services to power plants in the United States using renewable energy and natural gas-fired energy, for a total volume, as of December 31, 2023, of 6,170 MW (4,885 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, 2023, of 6,164 MW (4,879 MW for projects in which it has rights, and 1,285 MW for projects for third parties), by entering into energy management agreements. Both categories of management agreements are usually for short to medium terms.
As of March 2024, the remaining average period of all asset management agreements (in projects in which the CPV Group has rights and in projects of third parties) is approximately 6.5 years, and the remaining average period of management agreements in projects in which the CPV Group has rights is approximately 6.5 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 3 years, and the remaining average period of all energy management agreements in projects in which the CPV Group has rights is approximately 2 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. 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 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 established a retail power supply activity through CPV Retail Energy. CPV Retail Energy relies on CPV’s decarbonization efforts and ESG trends by helping commercial and industrial businesses meet their sustainability goals through renewable and low carbon dispatchable energy solutions. During 2023, CPV Retail Energy executed contracts with approximately 200 commercial and industrial customers; CPV Retail Energy fixes the price of purchased power with hedging transactions. In connection with the retail power supply activity, a corporate guarantee was granted to guarantee CPV Retail Energy's obligations.
CPV Retail Energy offers customers the ability to procure renewable energy to help meet the customer’s energy transition goals and offers contract terms that range from one to five years (with the typical term being approximately two years). CPV Retail Energy utilizes a standard electricity supply agreement that allows customers to select whether standard cost components, such as energy or ancillary services, are fixed at a price or passed through at cost to the customer.
Description of CPV operations
CPV projects predominantly sell capacity and electricity in the PJM, NYISO and ISO-NE wholesale markets. Keenan (a consolidated subsidiary) 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 declaring insolvency, liquidation, sale of assets or merger, entering into or amending material agreements, incurring 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: (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.
CPV Projects Key Contracts
Set forth below is a discussion of the key contracts for each of CPV’s project companies that are commercially operational or under construction.
Active projects
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 set forth 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 for up to 25% of the agreed supply quantity. The agreement is valid up to May 31, 2025. |
| • | Maintenance: a maintenance agreement (MA) with its original equipment manufacturer, for the provision of maintenance services for the combustion turbines. In consideration for the maintenance services, Fairview pays a fixed and a variable amount as of the date stipulated in the agreement. The MA period is 25 years beginning in 2016 or ends earlier when specific milestones are reached on the basis of usage and wear and tear. Fairview has paid an average of approximately $9 million (all-in costs) each year for the past two years. |
| • | Operation: an agreement for operation and maintenance of the facility. The initial period of the agreement is three years from the completion date of construction of the facility and 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. The agreement is currently under the automatic annual one-year renewal option. 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 CPV entity, 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:
| • | Gas Supply & Transmission: |
| • | an agreement for the guaranteed gas transmission of 2,500 MMBtu per day, at the AFT 1 Tariff. The agreement’s initial term ends on March 31, 2025. The agreement renews automatically for periods of one year each time, unless one of the parties terminates the agreement. |
| • | an agreement for the supply of gas, pursuant to which up to 125,000 MMBtus per day will be supplied at a price linked to market prices. The agreement has an initial term, which commenced on April 1, 2023, and ends on March 31, 2025. |
| • | 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, beginning in 2016 or ends earlier when specific milestones are reached on the basis of usage and wear and tear. Towantic has paid an average of approximately $8 million (all-in costs) each year for the past two years. |
| • | Operation: an agreement for operation and maintenance of the facility, which commenced in May 2018. 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 is 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 (all-in costs) each year for the past two years. |
Maryland
Maryland is party to the following agreements:
| • | 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 is effective until October 31, 2024. |
| • | 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. |
| • | Maintenance: a services agreement with its original equipment manufacturer for the provision of maintenance services for the combustion turbines. In consideration for the maintenance services, Maryland pays a fixed and a variable amount as of the date stipulated in the agreement. The agreement period is 20 years beginning in 2014 or ends earlier when specific milestones are reached on the basis of usage and wear and tear. Maryland has paid an average of approximately $6 million (all-in costs) each year for the past two years. |
| • | 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 agreement. Maryland has paid an average of approximately $4 million (all-in costs) each year for the past two years. |
| • | 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 which is expected to commence operation during 2024. 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:
| • | 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 is effective through October 31, 2024. |
| • | Gas Transmission: two agreements with interstate pipeline companies for the use of 2 different pipeline systems, one of which was operational since 2015 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 these 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. |
| • | Maintenance: an amended services agreement with its original equipment manufacturer for the provision of maintenance services for the turbines. In consideration for the maintenance services, Shore pays a fixed and a variable amount as of the date stipulated in the agreement. The agreement period is 20 years beginning in 2014 or ends earlier when specific milestones are reached on the basis of usage and wear and tear. Shore has paid an average of approximately $6 (all-in costs) million each year for the past two years. |
| • | 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 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. The agreement is currently under the automatic annual one year renewal option. Shore has paid an average of approximately $4 million (all-in costs) each year over the past two years. |
Valley
Valley is party to the following agreements:
| • | 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 and the agreement is effective through October 31, 2025. |
| • | 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 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. |
| • | Maintenance: an agreement with its original equipment manufacturer for maintenance services for the fire turbines. The consideration includes fixed and variable amounts. The agreement period is the earlier of: (i) 132,800 equivalent base load hours; or (ii) 29 years from 2015. Valley has paid an average of approximately $6 million (all-in costs) each year for the past two years. |
| • | 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 additional three-year periods unless one of the parties gives a termination notice in accordance with the agreement. The agreement is currently under the automatic three year renewal option. Valley has paid an average of approximately $5 million (all-in costs) each year for the past two years. |
| • | 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 ended on May 31, 2023. |
Three Rivers
Three Rivers is party to the following agreements:
| • | 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. |
| • | GSPA. Three Rivers entered into a 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. |
| • | Gas Interconnection: two connection agreements for transmission of gas, whereby each of them is sufficient for the full demand of the facility. |
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.
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.
| • | 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. |
| • | 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 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. |
| • | 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. Three Rivers achieved substantial completion in July 2023 and will achieve final completion upon the satisfaction of a final performance test but no later than the maximum period set in the agreement. |
| • | Maintenance: a services agreement with its original equipment manufacturer for the provision of maintenance services for the combustion turbines. In consideration for the maintenance services. Three Rivers pays a fixed and a variable payment. The agreement period is 25 years beginning in 2020; or ends earlier when specific milestones are reached on the basis of usage and wear and tear. On average, Three Rivers is expected to pay approximately $6 million (all-in costs) each year. |
| • | 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. The agreement period will commence during the construction period, and will continue for approximately 3 years from the construction completion date of the facility, which occurred in June 2023. On average, Three Rivers is expected to pay approximately $6 million (all-in costs) each year. |
Keenan
Keenan II is party to the following agreements:
| • | 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. |
| • | PPA: a wind power energy agreement for sale of renewable energy. Pursuant to the terms and conditions of the agreement, the purchaser 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 purchaser is permitted, with proper notice, 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 or renewal period at its fair market value, as defined in the agreement and pursuant to the terms and conditions stipulated therein. |
| • | O&M Agreement: an agreement for the operation and maintenance of the wind farm which commenced in February 2016. The consideration includes fixed annual management fees and the agreement lasts for 15 years from the commencement date. On average, Keenan paid approximately $5 million each year for the past two years. |
| • | Operation: a master services agreement and an operations agreement with its original equipment manufacturer for the operation, maintenance and repair of the wind turbines. The consideration includes fixed annual fees, performance-based bonus (or liquidated damages) and reimbursement of expenses for additional work. The agreement expires in February 2031. Keenan has paid an average of approximately $6 million (all-in costs) each year for the past 2 years. |
CPV Mountain Wind
CPV Mountain Wind holds 100% in each of the four wind projects: (i) CPV Saddleback Ridge Wind, LLC; (ii) CPV Canton Mountain Wind, LLC; (iii) CPV Beaver Ridge Wind, LLC; and (iv) CPV Spruce Mountain Wind, LLC. CPV Mountain Wind is party to the following agreements:
| • | Maintenance: a master services agreement for the management and maintenance of the four wind facilities (Beaver Ridge, Canton Mountain, Saddleback Ridge, Spruce Mountain) entered into by Mountain Wind. Staff is shared between the four projects. At all projects except for Beaver Ridge, the services agreement applies only to work outside the scope of the turbine services which is performed by the original equipment manufacturers. At Beaver Ridge, where there is no agreement with the original equipment manufacturer, the agreement also covers the direct maintenance of the wind turbines. The agreement commenced on April 5, 2023 and has an initial two year term. Mountain Wind will pay approximately $3 million (all-in costs) per year. |
| • | Services Agreements and Operation Agreements: a master service agreement and an operation agreement with its original equipment manufacturer for the operation, maintenance, and repair of the wind turbines is entered by each of Mountain Wind Project with the exception of Beaver Ridge; maintenance at Beaver Ridge is performed under an agreement by a third-party provider. The agreements for Saddleback Ridge and Canton Mountain were entered in 2016 and both have 20 years terms with a sunset date of September 16, 2035. The agreement for Spruce Mountain was entered in December 2023 and has an 8-year term. The Beaver Ridge agreement was entered in April 2023 and has a 2-year term. On average, the four projects are expected to pay approximately $4 million (all-in costs) each year. |
| • | Other contracts: The projects are engaged in contracts to sell 100% of the electricity and RECs, under separate contracts (PPAs) with local utility companies and councils, generally for a period of the next 15 to 20 years from the acquisition of the projects by CPV, while most of the capacity is sold under separate contracts for the next 12 years from the acquisition of the projects by CPV (the periods of the contracts may change according to termination clauses determined in each agreement). |
Maple Hill
Maple Hill is party to the following agreements:
Tax Equity Partner. In May 2023, CPV entered into an investment agreement with a tax equity partner for approximately NIS 280 million (approximately $78 million) in the Maple Hill project. In consideration for its investment in the project corporation, the tax equity partner is expected to receive most of the project’s tax benefits, including Investment Tax Credit (ITC) at a higher rate of 40% (in accordance with the IRA), and participation in the distributable free cash flow from the project (at single digit rates and on a gradual basis as set out in the investment agreement). In addition, the tax equity partner is entitled to participate in the project’s loss for tax purposes; in the first few years, the tax equity partner’s share in such taxable income or loss for tax purposes is high. At the end of 6 years from the COD, the tax equity partner’s share in such taxable income decreases significantly, and CPV has the option to acquire the tax equity partner’s share in the project corporation within a certain period and in accordance with terms of the agreement. The agreement includes a standard guarantee provided by CPV, and an undertaking to indemnify the tax equity partner in connection with certain matters. Furthermore, the tax equity partner has certain veto rights, among other things, in respect of the creation of liens on the Maple Hill project corporation’s assets or the entry of the Maple Hill project corporation into additional material agreements. Some of the tax equity partner’s investment was made available upon the completion of the construction work, and the remaining amount was made available on the commercial operation date. In December 2023, the terms and conditions for the commercial operation of the project were fully met in accordance with the investment agreement with the tax equity partner in the project, and the tax equity partner completed its entire investment in the project in a total aggregate amount of approximately $82 million.
| • | 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 the date that the service provider actually begins providing services, which occurred in November 2023 and can be renewed for 2 one-year terms unless one of the parties provides notice on non-renewal in accordance with the agreement. On average, Maple Hill is expected to pay approximately $0.4 million (all-in costs) each year. |
| • | SREC. An agreement with an international energy company for the sale of 100% of the SRECs generated in the project through 2027 to an international energy company. CPV provided collateral for its obligations under the agreement, which include delivery of SRECs generated by the project. |
| • | 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. CPV provided collateral for its obligations under the agreement which include making certain payments to the other party as part of the settlement of the virtual PPAs. 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. |
Projects under Development or Construction
Stagecoach (under construction)
Stagecoach is party to the following agreements:
| • | 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 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. The agreement provides for sale to a global utility 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 |
| • | 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, at a fixed price for 20 years from the commercial operation date. |
| • | 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. |
| • | 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 the date when the service provider actually started rendering operational period services, which is expected to commence in the first half of 2024. 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. |
Backbone
CPV is party to the following agreements:
| • | EPC. In June 2023, CPV Group entered into an EPC agreement with a construction contractor in respect of the construction of Backbone Project. In accordance with the agreement, the contractor is required to plan, purchase, install, build, test, and operate the solar project in full, on a turnkey basis. The total consideration in the EPC agreement was set at a fixed amount of approximately $175 million, which will be paid in accordance with the milestones set in the EPC agreement. |
| • | Renewable Solar Energy Credits. In 2023, Backbone entered into an agreement with a global company to sell 90% of the renewable solar energy credits (which are valid until 2035) produced by the solar project, along with a hedge of the electricity price of the energy that will be generated and sold to PJM, at a fixed price for 10 years from the commercial operation date. The balance of the project’s capacity (10%) will be used for supply to active customers, retail supply of electricity of the CPV Group or for sale in the market. |
Rogue’s Wind
CPV is party to the following agreements:
| • | Rogue’s Wind Energy Project. In April 2021, an agreement was signed for the sale of all the electricity, and the project’s environmental consideration (including RECs), benefits relating to availability and accompanying services). The agreement may be adjusted to updated factors of the project. 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
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; and (v) 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 renewable energy projects and natural gas-fired power plants in advanced stages of development.
OPC’s Material Customers
Israel
In Israel, OPC has several material customers characterized by high consumption rates in terms of their total production capacity. OPC’s revenues from electricity generation are highly sensitive to the consumption of material customers; therefore, if there is no demand for electricity by a material customer (such as, due to malfunctions, suspension or other factors) or payment default by such a customer, this could have a materially adverse impact on OPC’s revenues in Israel. As of 2023, the share of OPC’s two private customers in Israel that exceeds 10% of OPC’s consolidated revenues amounts to approximately 25.6% of OPC’s revenues. Each of OPC’s remaining customers does not exceed 10% of OPC’s revenues from electricity generation.
In May 2023, OPC-Rotem signed new PPAs with Oil Refineries Ltd. (“Bazan”) for the supply of the electricity to the Bazan group’s consumption facilities at a maximum quantity of 125 MW was renewed in May 2023. The electricity is supplied in consideration for a payment based on the ultra-high voltage load and time tariff, which is determined from time to time by the Israeli Electricity Authority, and net of a discount on the generation component according to the rates and arrangements set out in the agreement. The term of the agreement is ten years starting July 2023 (upon the expiry of the previous agreement), subject to early termination grounds and also tiered exit points starting 5 years after the supply commencement date, in accordance with the provisions agreed upon. The PPA includes other provisions, which are generally included in PPAs of this type, including, among other things, provisions regarding consumption in excess of the maximum quantity, an undertaking for capacity by the power plant, and supply of electricity from different sources. In addition, the agreement includes provisions regarding the supply of approximately 50 MW in electricity from generation facilities using renewable energy, in a gradual manner, as from January 2025, and in accordance with the dates that were set and “green certificates”, subject to ceilings and the terms and conditions that were agreed. The arrangements for the supply of electricity generated using renewable energy constitute part of OPC’s strategy to expand its activities in the field of renewable energy, and supply energy from renewable energy sources in Israel.
In January 2023, OPC-Rotem and another material customer extended their engagement for an additional period that will start at the end of the term of the existing agreement (including an option to extend the term in accordance with provisions that were set). As part of revising the engagement, certain provisions of the original PPA between the parties were revised, and the customer is expected to significantly increase the capacity it will acquire under PPA prices, as revised, over the next few years.
The entire capacity of the Tzomet power plant is allocated to the System Operator under a fixed capacity arrangement.
The capacity that will be generated by the Sorek 2 generation facility, subject to the completion of its construction shall be sold to the desalination facility and to another customer with a generation facility at its premises in accordance with the PPA with it, and the remaining capacity will be sold in accordance with applicable regulations.
In February 2024, OPC-Rotem entered into an agreement with Partner Communications Company Ltd. (“Partner Communications”) for the purpose of selling electricity to Partner Communications’ consumers, who are household consumers or small businesses (SMB) as decided between the parties. The agreement will allow the diversification of OPC’s customer mix. According to the agreement, OPC will supply electricity at maximum quantities and under the conditions as defined therein, to Partner Communications’ customers, who will enter into an agreement with OPC and Partner Communications for the supply of electricity by OPC. OPC is required to supply the electricity, and is entitled to payment from Partner Communications in accordance with the quantity of electricity that the consumers consume in accordance with the tariff set in the agreement. The agreement is not subject to an undertaking by Partner Communications to purchase a minimum quantity of electricity or to sign-on a minimum number of consumers. However, the agreement provides for an undertaking by Partner Communications not to sign-on or supply electricity to its customers from any source other than through OPC, so long as a certain number of its customers has not signed-on to OPC in accordance with the agreement. The agreement sets a maximum number of household electricity consumers that can be signed-on to OPC, and a maximum hourly consumption in relation to small- and medium-size businesses, or SMBs, unless it is agreed otherwise by Partner Communications and OPC. The agreement is effective from April 1, 2024 to March 31, 2030, subject to early termination provisions.
United States
The CPV Group’s projects mainly sell electricity and capacity to the PJM, NY-ISO and ISO-NE wholesale markets.
Keenan (a consolidated company in the renewable energy field) entered into a long-term PPA in 2010 for 20 years with a utility company in relation to the project’s sources of income. Similarly, the power plants of Mountain Wind (a consolidated subsidiary in the renewable energy field which completed the acquisition of four power plants in wind energy in 2023) entered into PPAs as discussed above.
The CPV Group’s projects under development are expected to sell their energy, capacity and RECs in the wholesale market or directly to consumers through long-term PPAs. Similarly, Mountain Wind (a consolidated subsidiary in the renewable energy field) entered into a series of PPAs, and Maple Hill has also entered into a PPA. In addition, one of the solar projects, Backbone, that is in the advanced development stages, with a total capacity of about 179 MWdc, received a connection agreement to the grid from PJM and signed a 10-year PPA agreement for 90% of the energy and SRECs. The remaining 10% of the project’s capacity is expected to be used to supply CPV Group’s retail energy customers or sold in the spot market.
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 (except for Kiryat Gat which uses only natural gas). OPC’s active power plants acquire natural gas mainly the Karish Reservoir (which is held by Energean and which commenced commercial operations in March 2023) as described below and from the Tamar Group. In 2023, OPC started purchasing large quantities of natural gas from the Karish Reservoir. The Tamar Reservoir was shut down for a period of time as a result of the War. There were no changes to the activity of the Karish Reservoir due to the War. However, the Karish Reservoir was shut down for approximately 28 days due to planned maintenance and during this period was operating on a partial basis. In addition, the Leviathan Reservoir continues supplying gas to the Israeli economy. The continued operation of the Karish Reservoir and the Leviathan Reservoir is significantly affected by the scope of the War and the deterioration in security situation in Israel, especially in the north. While the Tamar Reservoir was shut down, OPC purchased natural gas mainly from Energean, and also through short-term agreements and occasional transactions in the secondary market. During this period there was no material change in OPC’s natural gas costs compared with prior to the War. Any natural gas shortage or disruption to the supply of natural gas from the Karish Reservoir (without activating compensating arrangements under covenant 125, as described below) may have a material adverse effect on OPC’s natural gas costs.
In connection with OPC’s on-site facilities, the required gas is expected to be purchased as part of the agreements in which OPC had engaged and/or will engage. The Sorek 2 facility is expected to purchase some of the natural gas required for its operation from the Leviathan Reservoir as part of its arrangements with the Desalination Facility. The remaining gas quantities that will be required for the operation of the generation facility are expected to be purchased through gas purchase agreements into which OPC has entered and/or will enter. From time to time, OPC may enter into additional gas sale and purchase agreements for its operations in the respective 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, OPC-Hadera and the Tzomet power plants are dual-fuel electricity producers that can operate using both natural gas and diesel fuel subject to adjustments. In 2023, OPC-Rotem, OPC-Hadera and Tzomet had negligible operations in diesel fuel (only for periodic testing purposes). OPC-Hadera and Tzomet power plants are subject to “covenant 125” which deals with natural gas shortages in Israel, and which prescribes, among other things, that the System Operator has power to issue guidance on the use of diesel fuel in the electricity sector at times of gas shortages, and that according to such guidance of the System Operator, an electricity producer using diesel fuel shall be compensated in respect of the difference between the cost of production using diesel fuel and the cost of production using gas, which is known to the producer. OPC believes, based on past experience, that covenant 125 also applies to the OPC-Rotem power plant and disagrees with the EA’s position that this is not the case.
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 OPC’s shareholders’these agreements see “—Shareholders’ Agreements.“—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.
OPC-Rotem and OPC-Hadera have also entered into agreements with Energean, which has the leases to the Karish and Tanin natural gas fields, for purchase of natural gas by them. According to the terms and conditions in the agreements, the total original basic quantity of natural gas, Rotem and Hadera were expected to purchase is approximately 5.3 BCM for Rotem and approximately 3.7 BCM for Hadera (the “Total Basic Contractual Quantity”). The agreements include, among other things, a take or pay mechanism, whereby OPC-Rotem and OPC-Hadera have undertook to pay for a minimum quantity of natural gas even if they have not used it. The price of the natural gas in the agreements with Energean is denominated in U.S. Dollars and is based on an agreed formula, which is linked to the electricity generation component and includes a minimum price.
OPC-Rotem and OPC-Hadera paid the minimum price during 2021 (excluding two months for OPC-Rotem and one month for OPC-Hadera). 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. In 2023, the gas price in the OPC-Rotem Tamar agreement was equal to the minimum price over 8 months in total. For OPC-Rotem, the effect of changes in tariff on profit margins depends on the US/NIS exchange rate fluctuations. In 2023, OPC-Hadera’s gas price was higher than the minimum price. In addition, in 2024, if there will be no changes to the generation component, OPC-Hadera’s gas price is expected to be higher than the minimum price. 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 and tariff structure.”
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 natural gas in Israel. For example, in March 2013, an agreement was signed between the Gat Partnership and INGL for transmission of natural gas to the Gat Partnership’s facilities. The agreement was amended in November 2016 in order to allow the piping of gas to the power plant, as planned at the time. To this end, changes were made to the gas infrastructure and the commercial terms and conditions. The agreement includes provisions that are customary in agreements with INGL and is essentially similar to the agreements of OPC-Rotem, OPC-Hadera and Tzomet with INGL. The agreement term is 15 years from the gas piping date, including a 5-year extension option, subject to advance notice, under terms and conditions that are customary in gas transmission agreements signed by INGL at that time. Under the agreement, partial connection fees were defined in respect of the connection planning and procurement. Upon the completion of the purchase of the power plant by OPC, the Transmission Agreement was assigned to OPC. Pursuant to the agreement, Gat Partnership is required to provide a guarantee for the benefit of INGL or choose an alternative arrangement, and Gat Partnership has provided INGL a guarantee. As of December 2022, the piping to natural gas to Tzomet started.
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, including identifying and assembling special equipment in certain facilities.
In respect of the Renewable Energy operations, on March 10, 2022, CPV entered into a framework purchase agreement of solar panels for a total capacity of approximately 530 MWdc. According to the agreement, the solar panels are 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 $185 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.
In 2023, the CPV Group started receiving deliveries of the solar panels. All panels that were allocated to Maple Hill and Stagecoach under the agreement have been delivered by the supplier. In addition, the solar panels allocated to Backbone under the agreement have been ordered with the corresponding deliveries set to be begin in the first half of 2024.
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 the 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 2022, the energy effectively generated by the power plants owned by OPC-Rotem and OPC-Hadera was 4.08 TWh, constituting about 5.3% of the total energy generated in Israel, and about 10.8% of the energy generated by independent power producers in Israel during that year (including renewable energies).
In February 2021, the EA made a decision regarding the 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. 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, this will further intensify the competition in the supply segment. As of March 2023, the main actors in the renewable energy supply segment are EDF Energies Israel Nouvelles Ltd., Meshek Energy Ltd., Shikun & Binui Energy Ltd., and Enlight Ltd.
From 2023, the electricity supply segment has included a retail channel, comprising the marketing of electricity to many end customers, the provision of services and ongoing management of customer accounts in an appropriate manner. At least regarding small customers (households and small businesses), players in this channel include mainly communications companies, utility companies, and other entities with experience and relative advantages in distribution to end customers (for example, Cellcom and Amisragas).
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. CPV believes that the CPV Group project’s share of the total capacity in their respective markets are not significant which allows for significant growth.
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 power 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 external and government 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” (or “TAOZ”) tariffs published by the EA. As updated by the EA’s decision , the seasons are divided into three in accordance with the resolution of the Israeli Electricity Authority to update the demand hours clusters in 2023, as follows: (i) summer—June to 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 2024 based on seasons and demand hours, published by the EA.
| | | | Weighted production rate (AGOROT per kWh) | |
| | | | | | | | | | | | | | |
Winter | | Off—peak | | | 19.66 | | | | 19.42 | | | | 19.16 | | | | 18.98 | |
| | Mid-peak | | | - | | | | - | | | | - | | | | - | |
| | On-peak | | | 73.75 | | | | 72.85 | | | | 71.87 | | | | 71.17 | |
Spring or Fall | | Off—peak | | | 18.87 | | | | 18.64 | | | | 18.38 | | | | 18.21 | |
| | Mid-peak | | | - | | | | - | | | | - | | | | - | |
| | On-peak | | | 29.54 | | | | 22.27 | | | | 21.97 | | | | 21.76 | |
Summer | | Off—peak | | | 23.07 | | | | 22.79 | | | | 22.49 | | | | 22.27 | |
| | Mid-peak | | | - | | | | - | | | | - | | | | - | |
| | On-peak | | | 118.5 | | | | 117.05 | | | | 115.48 | | | | 114.35 | |
Weighted Average Rate | | |
| 31.19 | | |
| 30.81 | | |
| 30.39 | | |
| 30.07 |
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.
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 2022 and 2023. These figures have not been audited or reviewed.
| | | | | | | |
Summer (2 months) | | | 338 | | Summer (4 months) | | | 982 | |
Winter (3 months) | | | 458 | | Winter (3 months) | | | 495 | |
Transitional Seasons (7 months) | | | 838 | | Spring and fall (5 months) | | | 688 | |
Total for the year | | | 1,634 | | Total for the year | | | 2,165 | |
United States
The revenues from generation of electricity are seasonal and are impacted by weather. In general, in natural gas-fueled 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, 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.
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, 2023, see “—Our Businesses—OPC—Operations Overview—OPC’s Description of Operations—Israel.”
OPC leases its principal executive offices in Israel. OPC owns all of its power generation facilities.
As of December 31, 2023, the consolidated net book value of OPC’s property, plant and equipment was $1,713 million.
The table below sets forth a 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 Agreement of Rotem 2 |
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 2 |
Land on which Sorek 2 is being constructed | | Sorek 2 Desalination Facility | | Right of use | | About 2 dunams |
Land held through Kiryat Gat |
Land on which Kiryat Gat is being constructed | | Kiryat Gat | | Ownership | | About 12 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 interconnection and transmission. In addition to the project lands, CPV leases office space for use by the headquarters in Silver Spring, Maryland, Sugar Land, Texas, and in Braintree, Massachusetts pursuant to multi-year lease agreements.
CPV plants in commercial operation
| | | | The right in the property | | | | |
Conventional Energy Projects |
Shore |
Land on which the Shore power plant was constructed | | Middlesex County, New Jersey | | Ownership | | About 111,290 square meters (28 acres) | | N/A |
Maryland |
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 |
Valley |
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 |
Fairview |
| | | | | | | | |
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 |
Three Rivers |
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 |
Keenan II |
Land on which the Keenan II wind farm was constructed | | Woodward County, Oklahoma | | Contractual easements | | Rights to land and the equipment | | December 31, 2040 |
Mountain Wind |
Land on which the CPV Mountain Wind wind farms were constructed (information is aggregated for the four wind farms of Mountain Wind) | | Franklin, Oxford and Waldo Counties, Maine | | Contractual easements and leases | | Approx. 15,000,000 square meters (3,700 acres) | | Forty years (Thirty years for 20% of Spruce Mountain) Various 2046—2055 |
Maple Hill |
Land on which the Maple Hill power plant was 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, 2058 |
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 |
Land on which the Backbone power plant will be built | | Garrett County, Maryland | | Lease agreement | | Approximately 2,559 acres | | The earlier of March 31, 2025 or commencement of the operating period, plus an option to extend by five consecutive periods of seven years during operations. |
________________________________
| (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. OPC’s sites (similar to most private business activities in Israel) could be exposed to physical damage as a result of the War in Israel. 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. Insurance policies for OPC-Rotem, OPC-Hadera will expire at the end of July 2024. Insurance policies for Tzomet will expire at the end of May 2024 and for Kiryat Gat—at the end of April 2024. 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, 2023, in Israel, OPC had a total of 169 employees, of which 114 employees are in the OPC Israel division (including plant operation, corporate management, finance, commercial and other), and 55 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 | | | 55 | | | | 50 | | | | 34 | |
Plant operation, corporate management, finance, commercial and other | | | 114 | | | | 100 | | | | 86 | |
OPC Total (in Israel) | | | 169 | | | | 150 | | | | 120 | |
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. The term of the OPC-Rotem collective agreement ended on March 31, 2023, and a revised collective agreement was signed in respect of OPC-Rotem’s employees for a period of four years until March 31, 2027. Approximately 70 of the employees in OPC-Hadera are employed under a collective agreement which was signed in December 2022 and will be in effect through March 2026.
United States
As of December 31, 2023, CPV had a total of 150 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
A shareholders’ agreement is in place between OPC and Veridis regarding OPC Israel. The shareholders’ agreement regarding OPC Israel includes customary terms and conditions, including, inter alia provisions 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.
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) 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.
The agreement provides for additional rights in the event of the sale of OPC Israel’s 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.
An amendment to the shareholders’ loan agreement was signed as part of the Veridis transaction, such that OPC Israel provided to OPC-Rotem (whether directly or indirectly) NIS 400 million (approximately $118 million) for repayment purposes as stated above, and provisions were set regarding the repayment of the Shareholder Loans in the future, taking into account OPC-Rotem’s free cash flow in accordance with provisions of the agreement.
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 Hapoalim Capital Markets Group (4.5% interest) (together, 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 $1,215 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 confirmed their participation in an additional undertaking to invest in developing and expanding CPV’s operations, each according to their proportional share, an additional $400 million. In 2023, CPV and the Financial Investors invested in the equity of the Partnership OPC Power (both directly and indirectly) a total of approximately $150 million, and extended it approximately $45 million in loans, respectively, based on their stake in the Partnership. As of March 22, 2024, total investments in the Partnership’s equity and the outstanding balance of the loans (including accrued interest) amount to approximately $927 million, and approximately $339 million, respectively. In March 2023, CPV and the Financial Investors approved their participation in a facility for 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 proportionate share, as outlined above, for a total of approximately $75 million. In September 2023, after utilizing the entire investment commitment and the shareholder loans advanced, the facility was increased by $100 million, in accordance with each partner’s proportionate share (the CPV’s share in the facility is $70 million). As of March 22, 2024, the total balance of investment undertakings and shareholders’ loans advanced by all partners under the facility is estimated at approximately $100 million (excluding the guarantee facility).
The general partner of the Partnership, an entity wholly-owned by OPC, manages the ownership of CPV, with certain material actions (or actions 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 18 to our financial statements included in this annual report.
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). None of the actions provided in the Electricity Sector Law shall be carried out except pursuant to a license, subject to legal restrictions, and in accordance with activity in each of the segments requiring a relevant license. As of December 31, 2022, the installed electricity production capacity in Israel (of the IEC and independent producers) was 17,434 MW excluding renewable energies, and approximately 4,800 MW of renewable energies, with actual generation constituting approximately 10.1% of total actual consumption in the economy in 2022. According to publications of the EA, the annual rate of increase in demand for electricity in 2023 is expected to be at less than 1%. According to the Electricity Sector Status Report, in 2022 the sectoral generation amounted to 76.9 TWh; in 2025, the annual generation forecast is expected to be 81.7 TWh. In 2023, the EA reviewed key points of progress in the renewable energy market, and stated that at the end of 2023 the rate of actual consumption of renewable energy in the Israeli economy was 12.5%; the rate of renewable energy installed capacity out of total capacity in Israel as of the end of 2023 was 24.4%.
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 power producers and suppliers and electricity consumers.
The Ministry of Energy oversees 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. 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 (including private 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 Noga as well as independent power 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.
The 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, the 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. Noga is a government company, whose operations commenced in November 2021, and is in charge of the management of the electricity system in the generation and transmission segments, including constant balancing out between the supply of electricity and the demand for planning of the transmission system, including, among other things, drawing up a development plan for the transmission and generation segments. Pursuant to the Electricity Sector Law, the IEC and Noga are each defined as an “essential service provider” and as such, they are subject to the criteria and tariffs set by the EA. As of 2022, the IEC’s share amounted to 51.5% in the generation segment and 69% in the supply segment.
According to the Electricity Market Report, as of 2022, independent power producers (including OPC power plants), including those using renewable energy, active in Israel have an aggregate generation capacity of approximately 11,706 MW, constituting 53% of the total installed generation capacity in Israel. According to Electricity Market Report, at the end of 2025 (the end of the IEC Reform), the market share of the independent power producers, including renewable energies, is expected to amount to approximately 66% of the total installed capacity in the sector. In generation terms, in 2025 the market share of the independent power producers (including OPC power plants), and including renewable energies, is expected to amount to approximately 60% of the total generation in the market.
The generation component and changes in the 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. The generation component is based on, inter alia, 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 such costs of the IEC. The generation component may also change based on the 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 load and time tariff (the “DSM Tariff”), net of the generation component discount. Since the electricity price in the agreements between OPC-Rotem, OPC-Hadera and Kiryat Gat (and of the generation facilities) 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 the IEC, including the price of coal and the 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. In general, an increase in the generation component has a positive effect on OPC’s results.
In Israel, the TAOZ tariffs are supervised (controlled) and published by the EA. Generally, the electricity tariffs in Israel in the summer and the winter are higher than those in the transition seasons. Acquisition of the gas, which constitutes the main cost in this business operations, is not impacted by seasonality of the TAOZ (or the demand hours’ brackets). The hourly demand brackets change the breakdown of OPC revenues over the quarters in such a manner that it increases the summer months (and mainly the third quarter) at the expense of the other quarters, and particularly the first and fourth quarters. The summer on-peak (August) high voltage tariff for 2023 indicates that the generation component in 2023 accounted for about 91% of TAOZ. In addition, the TAOZ includes system costs at the rate of 7% and public utilities at the rate of about 2%.
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 resolution, the high cost of coal was the main reason for the increase in electricity tariffs. 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 was changed to NIS 0.3081 per kWh, approximately 1.2% decrease compared to the tariff set on January 1, 2023. 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 decline in coal prices, and increase in other costs. The tariff of NIS 0.3081 which came into effect on April 1, 2023 was reduced by approximately 1.4% from the tariff set in February 2023 to NIS 0.3039.
An update to the hourly demand brackets, which became effective from January 2023, had a negative impact on our results from Israel activities and caused a change in the seasonality of our revenues, which resulted in a significant increase in our results during the summer period at the expense of the other months of the year (particularly the first quarter).
On February 1, 2024, an annual update of the tariff for 2024 came into effect for the IEC’s electricity consumers. According to the decision, the generation component was updated to NIS 0.3007 per KWh, a decline of 1.1%, mainly due to the excess proceeds expected from the sale of the Eshkol power plant, which led to a reduction in the generation segment. Furthermore, as part of the resolution regarding the updating of the tariff, and according to a decision about the designation of proceeds from the sale of Eshkol, the surplus proceeds from the sale will be first used to cover costs incurred during the War, including diesel fuel costs, and only then will the surplus proceeds be used to cover past one-off costs.
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 DSM tariff, such that it integrates a significant portion of solar energy and storage. According to the published resolution, the following key revisions were set: (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; and (iv) defining a maximum of two clusters for each day of the year (without the mid-peak cluster that was in force until the resolution went into effect). 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 DSM 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 stipulated 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.
The revision of the demand hour clusters had a negative effect on OPC’s results, mainly in view of the consumption profile of OPC’s customers (who are mostly industrial and commercial customers), which generally have low level of consumption fluctuations during the day compared to the sectoral consumption profile as reflected in the tariffs and regulations set as part of the revision for off-peak and on-peak hours. In addition, a change of the demand hour clusters changes the breakdown of OPC’s revenues and profits from its operations in Israel between the different quarters, such that revenues and profits in the summer (June-September), and mainly the third quarter, increase at the expense of the other quarters.
The IEC Reform and development of the private electricity market in Israel
The entrance of the independent power producers and suppliers has led to a significant decrease in the IEC’s market share in the sale of electricity to large electricity consumers (high and medium voltage consumers). The market share of independent producers in the generation and supply segments is expected continue to grow in coming years as a result of, inter alia, 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 power plants and their transfer from the IEC to independent producers, and imposed limitations on the IEC with respect to construction of new power plants, as well as a result of opening 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 power producers and the IEC in the electricity market, as well as renewable energy production in 2021 and 2022, as published by the EA.
| | | | | | |
| | | | | % of Total Installed Capacity in the Market | | | | | | % of Total Installed Capacity in the Market | |
IEC | | | 11,615 | | | | 54 | % | | | 10,527 | | | | 47 | % |
Independent power producers (without renewable energy) | | | 6,231 | | | | 29 | % | | | 6,907 | | | | 31 | % |
Renewable energy (independent power producers) | | | | | | | | | | | | | | | | |
Total in the market | | | 21,502 | | | | 100 | % | | | 22,233 | | | | 100 | % |
| | Energy generated (thousands of MWh) | | | % of total energy produced in Israel | | | Energy generated (thousands of MWh) | | | % of total energy produced in Israel | |
IEC | | | 38,223 | | | | 52 | % | | | 39,224 | | | | 51 | % |
Independent power producers (without renewable energy) | | | 30,077 | | | | 41 | % | | | 30,155 | | | | 39 | % |
Renewable energy (independent power producers) | | | | | | | | | | | | | | | | |
Total in the market | | | 73,975 | | | | 100 | % | | | 76,886 | | | | 100 | % |
Set forth below are data about the distribution of consumers between private suppliers and the default supplier (in accordance with the IEC’s data):
Pursuant to the IEC Reform, an 8-year plan was formed, under which the IEC was required, among other things, to sell certain generation sites (including the Eshkol, which is under a process of completing a sale to an independent producer)), 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. The Reading power plant, was also supposed to be sold as part of the IEC Reform; a government taskforce was set up, which considered alternatives to such power plant in order to secure the supply of electricity to Gush Dan. A final decision as to the selected alternative is expected to be made in July 2024.
In May 2023, OPC submitted, through a joint special-purpose corporation, held in equal parts by OPC Power Plants and a corporation held by the Noy Fund ("OPC Eshkol"), a bid to purchase the Eshkol Power Plant as part of an IEC tender. In June 2023, OPC was notified that the Tenders Committee declared that an offer submitted by Eshkol Power Energies Ltd. is the winning offer in the Tender, and that OPC Eshkol was declared a "second qualifier" according to the tender documents. Since the winning bidder did not complete the signing of the acquisition agreement, in July 2023, the IEC announced the cancellation of the tender, and its decision to hold a new tender between the bidders that took part in the first bid (and which includes a minimum price of NIS 9 billion (approximately $2 billion) (the "Tender"). In August 2023, OPC Eshkol filed an administrative petition to the Tel Aviv Administrative Court. On September 14, 2023, the Administrative Court rejected the petition. OPC Eshkol did not submit a bid as part of the tender that took place on October 30, 2023.
Forecast of potential growth in natural gas in the Israeli electricity market
According to the hearings and resolutions of the EA, four gas-powered conventional generation units are expected to be constructed, including the unit that is expected to be constructed as part of the Sorek tender, with a capacity of up to 900 MW, the replaced generation unit in the Eshkol site with a capacity of up to 850 MW, and two conventional units with a capacity of up to 900 MW each.
The assessment as to the growth potential in natural gas generation units in the upcoming decade is conditional upon compliance with the renewable energy targets. According to external data available to OPC, OPC believes new natural gas generation capacity of 5,400 to 9,000 MW will be required between 2030 and 2040.
In September 2022, Noga published a long-term demand forecast for 2022-2050, according to which the demand is expected to increase by 3.1% per year by 2030 and 3.7% in 2030-2040, based mainly on growth forecasts in connection with the introduction of electric vehicles into Israel.
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. OPC began entering into virtual supply agreements with customers for a total capacity of 50 MW. OPC also entered into a virtual supply agreement with Noga. 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.
OPC-Hadera
OPC-Hadera operates a cogeneration power plantstation in Israel, with capacity of approximately 144 MWMW. The cogeneration power plant reached its COD on July 1, 2020. OPC-Hadera holds a permanent license for generation of electricity using cogeneration technology and a supply license. The generation license has been granted by the EA for a period of 20 years which may be extended by an additional 10 years. OPC-Hadera also holds the supply license which is in effect for as long as OPC-Hadera holds a valid generation license. OPC-Hadera 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. OPC Israel owns 100% of OPC-Hadera. The cogeneration power plant reached its COD on July 1, 2020. In June 2020,total consideration under the EA granted a permanent license toEPC contract for the project was approximately $185 million. OPC-Hadera power plant for generationis “two‑fuels” generator of electricity (capable of 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). Certain components of theboth natural gas and steam turbines werediesel oil, in its operations, subject to replacement, repair or improvement work during December 2020 and early 2021, and additional necessary work is expected in the rest of 2021. During performance of such work, the power plant is expected to be operated partially.required adjustments).
OPC-Hadera leases from Hadera PaperInfinya the land on which the power generation plant is located for a period of 24 years and 11 months from December 2018.
Below are the key elements of OPC-Hadera business operations:
EPC Contract
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, iswas 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. Furthermore, IDOM has provided bank guarantees and
On July 1, 2020, the commercial operation date of the Hadera power plant commenced after a corporate guarantee has been provided by its parent company to secure IDOM's obligations, and OPC has provided IDOM a guarantee to secure part of OPC-Hadera's liabilities. Due to delaysdelay in the plant’s COD, OPC estimates that partcompletion of construction as a result of, among other things, components replaced or repaired. Payments under the costs resultinginsurance policies and/or compensation from the delay, including lost profits, are expected to be covered by its insurance policy as well as the construction contractor but haswere not received such reimbursements(except for amounts unilaterally offset by OPC against payments to date. Therethe construction contractor in respect of the delay in operation, and non-compliance with the power plant’s performance). OPC-Hadera had filed an arbitration proceeding against the contractor. In December 2023, OPC-Hadera signed a settlement agreement the construction contractor, which provides for a settlement of the parties' claims and termination of related arbitration proceedings, and compensation payable by the construction contractor to OPC-Hadera of approximately $21 million. The net compensation payable to OPC-Hadera is no certainty that OPC be ableapproximately $7 million after offset of amounts payable by OPC-Hadera to receive reimbursements and/or compensation for the full amount of its direct and indirect damages.construction contractor.
Sales of Electricity and Steam
OPC-Hadera’s power plant supplies the electricity and steam needs of Hadera Paper’sInfinya’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. As aIn order to benefit from the fixed arrangements for cogeneration plant which supplies electricity and steamproducers, each generation unit in a single production process,power plant must meet the minimum energy utilization conditions set forth in the Cogeneration Regulations, and if it does not meet them, other less favorable tariff arrangements will apply. OPC-Hadera is entitled, if it complies with the terms and conditions of the regulations arrangements, to sell to the System Operator up to 50% of the electrical energy generated during on-peak and mid-peak hours, based on an 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 construction contractor’s estimatespermanent 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 power plantgas 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. The annual tariff is expectedset according to have a relatively high levelthe actual amount of energy utilization.electricity provided during on-peak and off-peak hours. 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 Hadera PaperInfinya for supply of all of Hadera Paper’sInfinya’s electricity and steam needs for a period of 25 years.years starting in July 2020. The agreement provides a minimum quantity of steam to be purchased by Hadera Paper (“take-or-pay”)Infinya (take or pay), which will be subject to adjustment. The Energy Center currently serves as back‑uptariff paid by Infinya for the OPC-Hadera power plant’s supplyelectricity purchased by it for the agreement term is based on the DSM Tariff, with a discount on the generation component, plus a fixed payment in respect of the steam.
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size of the connection.
In addition to this agreement, OPC-Hadera has entered into PPAs with otheradditional private customers. SuchThese agreements are essentially similar to OPC-Rotem’s PPAs and include a compensation mechanism inearly termination and/or extension provisions (as the case of delay in the COD of the power plant and for non-availability of the power plant below a minimum level. In light of the delay in the COD of the power plant to July 2020, Hadera has paid its customers compensation. In addition, some of OPC-Hadera’s customers have entered into agreements with OPC for construction and operation of energy generation facilities, whereby supply of the electricity will be made by the energy generation facility and OPC-Hadera, see “—Construction of energy generation facilities on the premises of consumers.”may be).
Gas Supply Agreements
In 2012, Hadera PaperInfinya 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-paytake or pay obligation, by OPC-Hadera. In addition, according to the agreement,June 2022, OPC-Hadera has theexercised an option to effectively reduce the purchased gas quantities by approximately 50%, subject to certain conditions.with effect from March 2023.
In September 2016, OPC-Hadera entered into another gas supply agreement with the Tamar Group. The gasOPC-Hadera exercised an early termination right in June 2022 and this 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. OPC-Hadera also has the right to terminate this agreement, which it may elect to doterminated in connection with the Energean agreement described below. The price of gas is linked to the weighted average of the generation component tariff published by the EA, and it is also subject to a price floor. 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 — see below- 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.June 30, 2023.
In December 2017, OPC-Hadera signed an agreement for the purchase of natural gas from Energean (the “OPC-Hadera Energean Agreement” and, together with Energean.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). Further to notices issued to OPC in 2020 byIn August 2022, OPC-Hadera informed Energean claiming “force majeure events” under its agreement, in September 2020, Energean issuedof an additional notice to OPC claiming force majeure events under its agreement and indicating that it expects flowingincrease of the firstcontractual gas quantity under the original terms and conditions of the OPC-Hadera Energean Agreement, which increases the take or pay commitment under the agreements.
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. Commercial operation of the Karish Reservoir began in March 2023, and since that time OPC-Hadera has reduced purchases of quantities under the Tamar Agreement, and started acquiring a substantial portion of the gas from Energean, and thereby reducing its gas acquisition costs.
Since the beginning of the War in Israel and up to November 12, 2023, supply of the natural gas from the Tamar reservoir was suspended. There was no change in the activities of the Karish reservoir that belongs to Energean as a result of the War. During the suspension period of the Tamar reservoir, OPC has acquired natural gas mainly from Energean as well as under short‑term agreements and by means of transactions in the secondary market, where in this period there has been no significant change in OPC’s natural gas costs compared with the situation existing prior to the start of the War. A shortage or interruption in the supply of natural gas from the Karish reservoir to take place in the second half of 2021. OPC rejected the force majeure contentions under the agreements. As stated in Energean's January 2021 publications, flowing of(without compensatory agreements) could have a significant negative impact on OPC’s natural gas from the Karish reservoir is expected to take place during the fourth quarter of 2021. This projection requires an increase in workforce in order to be attained, and if such increase is not effected the flowing of gas may be further delayed. In February 2021, as part of issuance of bonds by Energean, Moody’s published a report stating that the full operation of the Karish reservoir may be delayed to the second quarter of 2022. There is no guarantee that the gas supply will be available by the stated timeframes or at all. For further information on OPC-Hadera’s gas supply agreements, see “—OPC’s Raw Materials and Suppliers.”costs.
Maintenance Agreement
Maintenance
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: (a)(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 (b)(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. In 2023, planned and unplanned maintenance work was conducted in the power plant’s gas turbine over an aggregate period of approximately 40 days. During that maintenance work, the power plant continued to operate on a partial basis. In 2023, the performance and capacity of the power plant improved compared to 2022. Certain planned maintenance work is expected to take place in 2024 in one of the gas turbines and in the steam turbine, which will take approximately 35 days in total.