TABLE OF CONTENTS
INTRODUCTION
AND USE OF CERTAIN TERMS
We have prepared this annual report using a number
of conventions, which you should consider when reading the information contained herein. In this annual report, the “Company,”
“we,” “us” and “our” shall refer to Kenon Holdings Ltd., or Kenon, and each of our subsidiaries and
associated companies, collectively, as the context may require, including:
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“CPV” means the CPV Group (i.e., CPV Power Holdings LP, Competitive
Power Ventures Inc. and CPV Renewable Energy Company Inc.), a business engaged in the development, construction and management of power
plants running conventional energy (powered by natural gas) and renewable energy in the United States, which was acquired in January 2021
by CPV Group LP, an entity in which OPC indirectly holds a 70% interest; |
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OPC Energy Ltd. (“OPC”), an owner, developer and operator
of power generation facilities in the Israeli and United States power markets, in which Kenon has an approximately 55% interest;
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Qoros Automotive Co., Ltd. (“Qoros”), a Chinese automotive
company based in China, in which Kenon, through its 100%-owned subsidiary Quantum (as defined below), has a 12% interest; and |
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ZIM Integrated Shipping Services, Ltd. (“ZIM”), an Israeli
global container shipping company, in which Kenon has an approximately 21% interest. |
This annual report uses the following conventions:
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“Ansonia” means Ansonia Holdings Singapore B.V., a company
organized under the laws of Singapore, which owns approximately 62% of the outstanding shares of Kenon; |
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“Chery” means Chery Automobile Co. Ltd., a supplier to and
shareholder of Qoros; |
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“IC” means Israel Corporation Ltd., an Israeli corporation
traded on the Tel Aviv Stock Exchange, or the “TASE,” and Kenon’s former parent company; |
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“IC Power” means IC Power Ltd., formerly IC Power Pte. Ltd,
a Singaporean company and a wholly-owned subsidiary of Kenon; |
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“Inkia” means Inkia Energy Limited, a Bermuda corporation,
which was wholly-owned subsidiary of IC Power. In December 2017, Inkia sold all of its Latin American and Caribbean businesses and has
since been wound up; |
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“Inkia Business” means Inkia’s Latin American and Caribbean
power generation and distribution businesses, which were sold in December 2017; |
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“Kallpa” means Kallpa Generación SA, a company within
the Inkia Business. Kallpa was owned by Inkia until December 2017; |
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“Majority Qoros Shareholder” means the China-based investor
related to Shenzhen Baoneng Investment Group Co., Ltd. (“Baoneng Group”) that holds 63% of Qoros; |
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“our businesses” shall refer to each of our subsidiaries
and associated company, collectively, as the context may require; |
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“Quantum” means Quantum (2007) LLC, a Delaware limited liability
company, a wholly-owned subsidiary of Kenon, which is the direct owner of our interest in Qoros; |
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“Spin-off” shall refer to (i) IC’s January 7, 2015
contribution to Kenon of its interests in IC Power, Qoros, ZIM and other entities, and (ii) IC’s January 9, 2015 distribution of
Kenon’s issued and outstanding ordinary shares, via a dividend-in-kind, to IC’s shareholders; and |
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“Tower” means Tower Semiconductor Ltd., an Israeli specialty
foundry semiconductor manufacturer, listed on the NASDAQ stock exchange and the TASE, in which Kenon used to hold an interest until June
30, 2015. |
Additionally, this annual report uses the following
conventions for OPC and ZIM.
OPC
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“availability factor” refers to the number of hours that
a generation facility is available to produce electricity divided by the total number of hours in a year; |
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“BCM” means a billion cubic meters of natural gas, a unit
of energy, specifically natural gas production and distribution; |
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“Carbon capture” technology refers to a set of chemical processes
that are designed to capture CO2 from the exhaust gas stream of a fossil fuel power generation or industrial process, often referred to
as point source carbon capture technology; the primary goal of this technology is to reduce the release of CO2 into the atmosphere;
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“COD” means the commercial operation date of a development
project; |
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“distribution” refers to the transfer of electricity from
the transmission lines at grid supply points and its delivery to consumers at lower voltages through a distribution system; |
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“EA” means Israeli Electricity Authority; |
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“EPC” means engineering, procurement and construction;
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“Energean” means Energean Israel Ltd which holds 100% interest
in Karish and Tanin gas fields. |
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“firm capacity” means the amount of energy available for
production that, pursuant to applicable regulations, must be guaranteed to be available at a given time for injection to a certain power
grid; |
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“Gat Partnership” means Alon Energy Centers—Gat Limited
Partnership, a limited partnership that holds interests in the Kiryat Gat Power Plant; |
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“Gnrgy” means Gnrgy Ltd.; |
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“GWh” means gigawatt per hour (one GWh is equal to 1,000
MWh); |
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“Hadera Energy Center” means OPC Hadera’s boilers and
a steam turbine. The Hadera Energy Center currently serves as back-up for the OPC-Hadera power plant’s supply for steam; |
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the “IEC” means Israel Electric Corporation, a government-owned
entity, which generates and supplies the majority of electricity in Israel, transmits and distributes all of the electricity in Israel,
acts as the system operator of Israel’s electricity system, determines the dispatch order of generation units, grants interconnection
surveys, and sets spot prices, among other roles; |
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“Infinya” means Infinya Ltd. (formerly Hadera Paper Ltd.),
an Israeli corporation; |
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“installed capacity” means the intended full-load sustained
output of energy that a generation unit is designed to produce (also referred to as name-plate capacity); |
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“IPP” means independent power producer, excluding co-generators
and generators for self-consumption; |
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“Karish Reservoir” refers to the Karish and Tanin natural
gas fields situated in the Mediterranean Sea offshore Israel and are owned and operated by Energean; Karish reservoir is estimated to
contain 1.41 tcf of gas and 317 Mboe, the Tanin field is estimated to hold 921 bcf of gas and 171.7 Mboe; |
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“Kiryat Gat Power Plant” or “Kiryat Gat” means
a combined-cycle power plant powered by conventional energy with installed capacity of 75 MW located in the Kiryat Gat area, which began
commercial operation in November 2019; |
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“kWh” means kilowatt per hour; |
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“Mboe” means one thousand barrels of oil equivalent;
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“Minimum Price” means the minimum price of gas in USD set
forth in gas purchase agreements between Tamar Group and each of OPC-Hadera and OPC-Rotem based on a natural gas price formula described
in the agreements that may be affected by generation component tariff; |
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“MW” means megawatt (one MW is equal to 1,000 kilowatts or
kW); |
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“MWdc” means megawatts, direct current; |
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“MWh” means megawatt per hour; |
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“Noga” means Noga – Independent System Operator Ltd,
which acts as the System Operator company; |
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“capacity” or “installed capacity” means, with
respect to each asset, 100% of the capacity of such asset, regardless of OPC’s ownership interest in the entity that owns such asset;
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“OPC-Hadera” is an Israeli corporation, in which OPC has
a 100% interest; |
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“OPC-Rotem” means O.P.C. Rotem Ltd., an Israeli corporation,
in which OPC Israel has an 100% interest; |
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“OPC Israel” or OPC Holdings Israel Ltd, is an Israeli corporation
which owns and operates OPC’s businesses in Israel, in which OPC holds an 80% interest; |
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“OPC Power” means OPC Power Ventures LP; |
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“PPA” means power purchase agreement; |
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“Samay I” means Samay I S.A., a Peruvian corporation;
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“Sorek 2” means OPC Sorek 2 Ltd.; |
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the “System Operator” has the meaning as defined in Section
1 of the Israeli Electricity Sector Regulations (Private Conventional Electricity Producer), 2005 entrusted by the Israeli government
to manage and operate Israeli electrical grid; currently Noga acts as the System Operator; |
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“Tamar” means Tamar reservoir, a gas field located 90 km
west of Haifa, Israel with estimated reserves of natural gas of approximately 13.17 tcf or approximately 373 BCM; the gas field is owned
and operated by the Tamar Group consisting of Isramco Negev 2 Limited Partnership, Chevron Mediterranean Ltd., Tamar Investment 1 RSC
Limited, Tamar Investment 2 RSC Limited, Dor Gas Exploration Limited Partnership, Everest Infrastructure Limited Partnership and Tamar
Petroleum Ltd.; |
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“tcf” means trillion cubic feet, a volume measurement
of natural gas; |
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“Title V” refers to a United States federal program designed
to standardize air quality permits and the permitting process for major sources of emissions across the country. which requires the Environmental
Protection Agency (“EPA”) to establish a national, operating permit program; |
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“transmission” refers to the bulk transfer of electricity
from generating facilities to the distribution system at load center station in which the electricity is stabilized by means of the transmission
grid; |
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“Tzomet” means Tzomet Energy Ltd., an Israeli corporation
in which OPC has a 100% interest; |
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“Veridis” means Veridis Power Plants Ltd which owns 20% of
OPC Israel; OPC and Veridis are party to a shareholders’ agreement which governs the relationship between OPC and Veridis in OPC
Israel; and |
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the “War” refers to a deadly attack by the Hamas terrorist
organization on communities in the Gaza Strip in the southern part of Israel on October 7, 2023 and the military actions that followed.
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ZIM
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“cooperation agreements” means one or more vessel sharing
arrangements, swap agreements and slot sharing arrangements; |
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“LNG” means liquified natural gas; |
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“strategic alliance” means a more extensive type of cooperation
arrangement and is longer-term than a strategic cooperation. It involves cooperation arrangements and usually includes all of ZIM’s
East/West routes, such as Asia-Europe, Asia-Med, Cross Atlantic and Trans Pacific; |
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“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 |
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“TEU” means twenty-foot equivalent unit. |
FINANCIAL INFORMATION
We produce financial statements in accordance with
the International Financial Reporting Standards issued by the International Accounting Standards Board, or IFRS, and all financial information
included in this annual report is derived from our IFRS financial statements, except as otherwise indicated. In particular, this annual
report contains certain non-IFRS financial measures which are defined under “Item 5 Operating and
Financial Review and Prospects” and “Item
4.B Business Overview—Our Businesses—OPC.”
Our consolidated financial statements included
in this annual report comprise the consolidated statements of profit and loss, other comprehensive income (loss), changes in equity, and
cash flows for the years ended December 31, 2023, 2022 and 2021 and the consolidated statements of financial position as of December 31,
2023 and 2022. We present our consolidated financial statements in U.S. Dollars.
All references in this annual report to (i) “NIS”
or “New Israeli Shekel” are to the legal currency of the State of Israel, or Israel); (ii) “RMB” are to Yuan,
the legal currency of the People’s Republic of China, or China; and (iii) “U.S. Dollars,” “$” or “USD”
are to the legal currency of the United States of America (“United States” or “U.S.”).
This annual report contains translations of certain
RMB and NIS amounts into USD at certain foreign exchange rates solely for the convenience of the reader. All convenience translations
from RMB or NIS to USD are based on the certified foreign exchange rates published by the Federal Reserve Board of Governors and foreign
exchange rates published by the Bank of Israel, respectively, on December 31, 2023, which was RMB 7.100 per USD and NIS 3.627 per USD,
respectively. In our consolidated financial statements, convenience translations into U.S. Dollars are made at the prevailing exchange
rate at the time of the relevant transaction or agreement. The convenience translations contained in this annual report should not be
construed as representations that the RMB or NIS amounts referred to herein actually represent the USD amounts in the convenience translations
presented or that they could have been or could be converted into USD at the exchange rate used in the convenience translations or at
any particular rate.
We have made rounding adjustments to reach some of the figures included in this annual
report. Consequently, numerical figures shown as totals in some tables may not be arithmetic aggregations of the figures that precede
them.
NON-IFRS FINANCIAL
INFORMATION
In this annual report, we disclose non-IFRS financial
measures, namely EBITDA and Adjusted EBITDA for OPC and ZIM, respectively, each as defined under “Item
5 Operating and Financial Review and Prospects.” Each of these measures are important measures used by us, and our businesses,
to assess financial performance. We believe that the disclosure of EBITDA and Adjusted EBITDA provide transparent and useful information
to investors and financial analysts in their review of these businesses’ operating performance and in the comparison of such operating
performance to the operating performance of other companies in the same industry or in other industries that have different capital structures,
debt levels and/or income tax rates.
MARKET AND
INDUSTRY DATA
Certain information relating to the industries
in which each of our subsidiaries and associated companies operate and their position in such industries used or referenced in this annual
report were obtained from internal analysis, surveys, market research, publicly available information and industry publications. Unless
otherwise indicated, all sources for industry data and statistics are estimates or forecasts contained in or derived from internal or
industry sources we believe to be reliable. Market data used throughout this annual report was obtained from independent industry publications
and other publicly available information. Such data, as well as internal surveys, industry forecasts and market research, while believed
to be reliable, have not been independently verified. In addition, in certain cases we have made statements in this annual report regarding
the industries in which each of our subsidiaries and associated companies operate and their position in such industries based upon the
experience of our businesses and their individual investigations of the market conditions affecting their respective operations. We cannot
assure you that any of these statements are accurate or correctly reflect the position of subsidiaries and associated companies in such
industries, and none of our internal surveys or information has been verified by independent sources.
Market data and statistics are inherently predictive
and speculative and are not necessarily reflective of actual market conditions. Such statistics are based upon market research, which
itself is based upon sampling and subjective judgments by both the researchers and the respondents. In addition, the value of comparisons
of statistics for different markets is limited by many factors, including that (i) the markets are defined differently, (ii) the underlying
information was gathered by different methods and (iii) different assumptions were applied in compiling the data. Accordingly, although
we believe and operate as though all market and industry information presented in this annual report is accurate, the market statistics
included in this annual report should be viewed with caution.
PRESENTATION
OF OPC CAPACITY AND PRODUCTION FIGURES
Unless otherwise indicated, statistics provided
throughout this annual report with respect to power generation units are expressed in MW, in the case of the capacity of such power generation
units, and in GWh, in the case of the electricity production of such power generation units. One GWh is equal to 1,000 MWh, and one MWh
is equal to 1,000 kWh. Statistics relating to aggregate annual electricity production are expressed in GWh and are based on a year of
8,760 hours. Unless otherwise indicated, OPC’s capacity figures provided in this annual report reflect 100% of the capacity of all
of OPC’s assets, regardless of OPC’s ownership interest in the entity that owns each such asset. For information on OPC’s
ownership interest in each of its operating companies, see “Item 4.B Business Overview—Our
Businesses—OPC.”
SPECIAL NOTE
REGARDING FORWARD-LOOKING STATEMENTS
This annual report contains forward-looking statements
within the meaning of Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). These forward-looking statements
include statements relating to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar
expressions concerning matters that are not historical facts and are principally contained in the sections entitled “Item
3.D Risk Factors” “Item 4 Information on the Company” and “Item
5 Operating and Financial Review and Prospects.” These statements are made under the “safe harbor” provisions
of the U.S. Private Securities Litigation Reform Act of 1995. Some of these forward-looking statements can be identified by terms and
phrases such as “anticipate,” “should,” “likely,” “foresee,” “believe,” “estimate,”
“expect,” “intend,” “continue,” “could,” “may,” “plan,” “project,”
“predict,” “will,” and similar expressions.
These forward-looking statements include statements
relating to:
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our goals and strategies; |
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the strategies, business plans and funding requirements of our businesses;
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expected trends in the industries and markets in which each of our businesses
operate; |
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our tax status and treatment and expected status and treatment under
relevant regulations; |
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our share repurchase program; |
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our treasury activities; |
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statements relating to litigation and arbitration; and |
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critical accounting estimates and the expected effect of new accounting
standards on Kenon; |
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OPC’s and CPV’s strategy; |
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the expected cost and timing of commencement and completion
of development and construction projects and projects under development, as well as the anticipated installed capacities and expected
performance (e.g., efficiency) of such projects, including the required license and approvals for the development of and financing for
projects; |
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expected macroeconomic trends in Israel and the US, including the expected
growth in energy demand; |
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potential new projects and existing projects; |
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expected trends in energy consumption; |
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regulatory developments; |
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anticipated capital expenditures, and the expected sources of funding
for capital expenditures; |
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projections for growth and expected trends in the electricity market
in Israel and the US; |
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the gas supply arrangements; and |
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statements relating to the agreement to sell Kenon’s remaining
interest in Qoros to the Majority Qoros Shareholder; and |
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statements with respect to the litigation and arbitration relating to
Qoros. |
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expectations regarding general market conditions; |
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expectations regarding trends related to the global container shipping
industry, including with respect to fluctuations in vessel and container supply, industry consolidation, demand for containerized shipping
services, bunker and alternative fuel prices, charter and freights rates, container values and other factors affecting supply and demand;
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plans regarding ZIM’s business strategy, areas of possible expansion
and expected capital spending or operating expenses; |
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anticipated ability to obtain additional financing in the future to fund
expenditures; |
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expectation of modifications with respect to ZIM’s and other shipping
companies’ operating fleet and lines, including the utilization of larger vessels within certain trade zones and modifications made
in light of environmental regulations; |
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the expected benefits of cooperation agreements and strategic partnerships;
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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; |
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anticipated insurance costs; |
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beliefs regarding the availability of crew; |
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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;
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beliefs regarding potential liability from current or future litigation;
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plans regarding hedging activities; |
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ability to pay dividends in accordance with ZIM’s dividend policy;
and |
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expectations regarding ZIM’s competition and ability to 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. You should
read this annual report, and each of the documents filed or incorporated by reference as exhibits to the annual report, completely, with
this cautionary note in mind, and with the understanding that our actual future results may be materially different from what is indicated
in such forward-looking statements.
PART I
| ITEM 1. |
Identity of Directors, Senior Management and Advisers
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| 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. The risks discussed 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
We may raise
financing or provide guarantees or collateral to make investments in or otherwise support existing or new businesses.
Our business may require additional financing and
may seek to raise debt or equity financing. Kenon may also seek to raise financing at the Kenon level to meet its obligations or make
investments or acquisitions in its existing or new businesses. In the event that Kenon or one or more of our businesses requires capital,
Kenon may provide financing by (i) utilizing cash on hand, (ii) issuing equity in the form of shares or convertible instruments (through
a pre-emptive offering or otherwise), (iii) raising debt financing at the Kenon level, (iv) using funds received from distributions from
its interests in its businesses, (v) selling part, or all, of its interest in any of its businesses and using the proceeds from such sales,
or (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.
Funds from its businesses or external financing
may not be available to us to make investments we seek to make or to meet our obligations on reasonable terms or at all. Kenon may sell
assets to fund any investments it seeks to make or to meet Kenon’s obligations, and its ability to sell assets may be limited. Any
sales of assets may not be at attractive prices, particularly if such sales must be made 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 OPC (including equity investments in 2022 and 2021), and may provide additional loans to or make other investments in
or provide guarantees in support of its businesses. Kenon’s liquidity requirements will increase to the extent it makes additional
investments in or grants additional guarantees to support its businesses. To 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 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,
and/or provides collateral, this could reduce our liquidity. For further information on our capital resources and requirements 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 access capital markets
for various purposes, which may include raising funding for the repayment of indebtedness, acquisitions, capital expenditures or for general
corporate purposes. Kenon may seek to access the capital or lending markets to obtain financing in the future, including to support its
businesses or to make new investments. The ability of Kenon or its businesses to access capital markets, and the cost of such capital,
could be negatively impacted by disruptions in those markets. Disruptions in the capital or credit markets could make it more difficult
or expensive for our businesses to access the capital or lending markets if the need arises and may make financing terms for borrowers
less attractive or available. Furthermore, a decline in the value of any of our businesses, which are or may be used as collateral in
financing agreements, could also impact access to 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.
The availability of financing and the terms thereof
is impacted by many factors, including: (i) our financial performance, (ii) credit ratings or absence of a credit rating, (iii) the liquidity
of capital markets generally, (iv) the state of the 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 deem it necessary to access financing and are 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 NYSE. The ability of one or more of our businesses to complete a public
offering, distribution or listing is heavily dependent upon the public equity markets. Financial market conditions were volatile in 2023
and remain volatile and these conditions could become worse.
As our holdings in OPC and ZIM are publicly traded
(and to the extent any of our other holdings in companies are listed in the future), we are exposed to risks of downward movement in market
prices. In addition, large holdings of securities can often be disposed only over a substantial length of time. Accordingly, under certain
conditions, we may be forced to either sell our equity interest in a particular business at lower prices than expected to effect or defer
such a sale, potentially for a long period of time.
We have in the past, and may in the future enter
into lockup agreements with respect to our shares in listed companies in connection with offerings by those companies, and in some cases,
we may be required to enter into a lockup agreement. In addition, we are subject to securities laws restrictions on resales, including
in the United States, 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 and we do not conduct
independent operations or possess significant assets other than investments in and advances to our businesses and our cash on hand and
treasury investments. As a result, we depend on funds from our businesses or external financing to make distributions, to make investments
or acquisitions, to pursue our strategy and for our other liquidity requirements.
In addition, as Kenon’s businesses are legally
distinct from it and will generally be required to service their debt and other obligations before making distributions to Kenon, Kenon’s
ability to access such cash flows from its businesses may be limited in some circumstances and it may not have the ability to cause its
subsidiaries and associated companies to make distributions to Kenon, even if they are able to do so. Additionally, the terms of existing
and future joint venture, financing, or cooperative operational agreements and/or the laws and jurisdictions under which each of Kenon’s
businesses are organized may also limit the timing and amount of any dividends, other distributions, loans or loan repayments to Kenon.
Additionally, as dividends are generally taxed
and governed by the relevant authority in the jurisdiction in which each respective company is incorporated, there may be numerous and
significant tax or other legal restrictions on the ability of Kenon’s businesses to remit funds to us, or to remit such funds without
incurring significant tax liabilities or incurring a ratings downgrade.
We do not have
the right to manage, and in some cases do not control, some of our businesses, and therefore we may not be able to realize some or all
of the benefits that we expect to realize from our businesses.
As we own minority interests in Qoros and ZIM,
we are subject to the operating and financial risks of these businesses, the risk that these businesses may make business, operational,
financial, legal or regulatory decisions that we do not agree with, and the risk that we may have objectives that differ from those of
the applicable business itself or its other shareholders. In addition, OPC’s CPV business holds minority interests in most of its
operations. Our ability to control the development and operation of these investments may be limited, and we may not be able to realize
some or all of the benefits that we expect to realize from these investments. For example, we may not be able to cause these businesses
to make distributions to us in the amount or at the time that we may need or want such distributions.
In addition, we rely on the internal controls and
financial reporting controls of our businesses and any failure by our businesses to maintain effective controls or to comply with applicable
standards could make it difficult to comply with applicable reporting and audit standards. For example, the preparation of our consolidated
financial statements requires the prompt receipt of financial statements that comply with applicable accounting standards and legal requirements
from each of our subsidiaries and associated companies, some of whom rely on the prompt receipt of financial statements from each of their
subsidiaries and associated 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, 2023:
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• |
OPC had $1,530 million of outstanding indebtedness and OPC’s proportionate
share of debt (including accrued interest) of CPV associated companies was $839 million, and |
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• |
ZIM had outstanding indebtedness (mostly lease liabilities) of approximately
$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
their ability to use their cash flows to fund operations, capital expenditures, or future business opportunities.
Our businesses will generally have to service their
debt obligations before making distributions to us or to any other shareholder. In addition, many of the financing agreements relating
to the debt facilities of our operating companies contain covenants and limitations, including the following:
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• |
debt service coverage ratio; |
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• |
limits on the incurrence of liens or the pledging of certain assets;
|
|
• |
limits on the incurrence of debt; |
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• |
limits on the ability to enter into transactions with affiliates, including
us; |
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• |
limits on the ability to pay dividends to shareholders, including us;
|
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• |
limits on the ability to sell assets; and |
|
• |
other non-financial covenants and limitations and various reporting obligations.
|
If any of our businesses are unable to repay or
refinance their indebtedness as it becomes due, or if they are unable to comply with their covenants, they may decide to sell assets or
to take other actions, including (i) reducing financing in the future for investments, acquisitions or general corporate purposes or (ii)
dedicating an unsustainable level of cash flow from operations to the payment of principal and interest on their indebtedness. As a result,
the ability of our businesses to withstand competitive pressures and to react to changes in the various industries in which we operate
could be impaired. A breach of any of our businesses’ debt instruments and/or covenants could result in a default under the relevant
debt instruments, which could lead to an event of default. Upon the occurrence of such an event of default, the lenders could elect to
declare all amounts outstanding thereunder to be immediately due and payable and, in the case of credit facility lenders, terminate all
commitments to extend further credit. If the lenders accelerate the repayment of the relevant borrowings, the relevant business may not
have sufficient assets to repay any outstanding indebtedness, which could result in a complete loss of that business for us. Furthermore,
the acceleration of any obligation under certain debt instrument may permit the holders of other material debt to accelerate their obligations
pursuant to “cross default” provisions, which could have a material adverse effect on our business, financial condition and
liquidity.
We understand that Qoros continues to have significant external loans and borrowings,
all of 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.
We
face risks in relation to our remaining 12% interest in Qoros, including risks relating to collection of the arbitration award in connection
with this agreement.
Kenon holds a 12% interest in Qoros.
In April 2021, Kenon’s subsidiary Quantum (which holds Kenon’s share in Qoros) entered into
an agreement (the “Sale Agreement”) with the Majority Qoros Shareholder to sell its remaining 12% interest in Qoros for RMB
1.56 billion (approximately $220 million), and Baoneng Group has provided a guarantee of the Majority Qoros Shareholder’s obligations
under the Sale Agreement. The Majority Qoros Shareholder did not make any of the 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 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 award 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 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
is dependent upon the efforts of our directors and executive officers.
Our success is 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.
Our businesses 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 U.S. Dollars. The predominance
of certain currencies varies from business to business, with many of our businesses generating revenues or incurring indebtedness in more
than one currency. For example, most of ZIM’s revenues and a significant portion of its expenses are denominated in the U.S. Dollars.
However, a material portion of ZIM’s expenses are denominated in local currencies. In addition, OPC is subject to exchange rate
fluctuations in its operations in Israel, and a portion of its PPAs and its supply arrangements are determined by reference to the NIS
to USD exchange rate. OPC 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 which 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 exchange rates under such currency forwards, and OPC incurs costs in respect
of 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 that we may make 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 affiliates or otherwise
convert local currencies into U.S. Dollars.
Consequently, as with any international business,
our liquidity, earnings, expenses, asset book values, and/or equity may be materially affected by short-term or long-term exchange rate
movements or controls. Such movements may give rise to one or more of the following risks, any of which could have a material adverse
effect on our business, financial condition, results of operations or liquidity:
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Transaction Risk—exists
where sales or purchases are denominated in overseas currencies and the exchange rate changes after our entry into a purchase or sale
commitment but prior to the completion of the underlying transaction itself; |
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Translation Risk—exists
where the currency in which the results of a business are reported differs from the underlying currency in which the business’ operations
are transacted; |
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• |
Economic Risk—exists where
the manufacturing cost base of a business is denominated in a currency different from the currency of the market into which the business’
products are sold; and |
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Reinvestment Risk—exists
where our ability to reinvest earnings from operations in one country to fund the capital needs of operations in other countries becomes
limited. |
If our businesses
do not manage their interest rate risks effectively, our cash flows and operating results may suffer.
Certain of our businesses’ indebtedness bears
interest at variable, floating rates. In particular, some of this indebtedness is in the form of Consumer Price Index (the “CPI”)-linked,
NIS-denominated bonds. We, or our businesses, may incur further indebtedness in the future that also bears interest at a variable rate
or at a rate that is linked to fluctuations in a currency in the form of other than the U.S. Dollar. Although our businesses attempt to
manage their interest rate risk, there can be no assurance that they will hedge such exposure effectively or at all in the future. Accordingly,
increases in interest rates or changes in the CPI that are greater than changes anticipated based upon historical trends could have a
material adverse effect on our or any of our businesses’ business, financial condition, results of operations or liquidity.
Risks Related to the Industries
in which Our Businesses Operate
Conditions
in the global economy, and in the industries in which our businesses operate in particular, could have a material adverse effect on us.
The business and operating results of each of our
businesses are affected by worldwide economic conditions, particularly conditions in the energy generation and shipping industries in
which our businesses operate. The operating results and profitability of our businesses may be adversely affected by global economic conditions,
credit market crises, levels of consumer and business confidence, inflation, unemployment levels, levels of capital expenditures, fluctuating
commodity prices (particularly prices for electricity, natural gas, bunker, gasoline, and crude oil), bankruptcies, government deficit
reduction and austerity measures, heightened volatility, increased import and export tariffs and other forms of trade protectionism, geopolitical
events such as the War or the Russian invasion of Ukraine and other developments affecting the global economy. Volatility in global financial
markets and in prices for oil and other commodities and geopolitical events could result in a deterioration of global economic conditions
which could impact our business and could lead to deterioration of business, cash flow shortages, or difficulty in obtaining financing.
In addition, the business and operating results
of each of our businesses have been and may continue to be adversely affected by the effects of a widespread outbreak of contagious disease,
such 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. Further outbreaks and spread and new variants of COVID-19
could cause additional quarantines, reduction in business activity, labor shortages and other operational disruptions.
Furthermore, the 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 U.S. government
and other governments in jurisdictions in which we operate have imposed severe sanctions and export controls against Russia and Russian
interests and threatened additional sanctions and controls. The impact of these measures, as well as potential responses to them by Russia,
is currently unknown and they could adversely affect our business.
We are exposed to interest rate
risk because 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 financing 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 borrowings, our cost of capital would reflect the 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 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:
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unfavorable changes in laws or regulations; |
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fluctuations in revenues, operating margins and/or other financial measures
due to currency exchange rate fluctuations and restrictions on currency and earnings repatriation; |
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unfavorable changes in regulated electricity tariffs; |
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import or export restrictions or other trade protection measures and/or
licensing requirements; |
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costs and risks associated with managing a number of operations across
a number of countries; |
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issues related to occupational safety, work hazard, and adherence to
local labor laws and regulations; |
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adverse tax developments; |
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geopolitical events such as military actions; |
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changes in the general political, social and/or economic conditions in
the countries where we operate; and |
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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.
Our businesses
require qualified personnel to manage and operate their various businesses.
Our businesses require a number of qualified and
competent management to independently direct the day-to-day business activities of each of our businesses, execute their respective business
plans, and service their respective customers, suppliers and other stakeholders, in each case across numerous geographic locations. Our
businesses must be able to retain employees and professionals with the skills necessary to understand the continuously developing needs
of our customers and to maximize the value of each of our businesses. Changes in demographics, training requirements and/or the unavailability
of qualified personnel could negatively impact the ability of each of our businesses to meet these demands. 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 hire and retain qualified
personnel, or if they experience excessive turnover, this 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 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 for ZIM), parts, components and sub-systems used in
their products or services exposes us to volatility in the prices and availability of these materials, parts, components, systems and
services. Some of these suppliers or their sub-suppliers are limited or sole source suppliers. For more information on the risks relating
to supplier concentration in relation to OPC, see “Item 3.D Risk Factors—Risks Related to
OPC’s Israel Operations—OPC depends on infrastructure, securing space on the grid and infrastructure providers.”
A disruption in deliveries from these and other
third-party suppliers, contract manufacturers or service providers, capacity constraints, production disruptions, price increases, or
decreased availability of raw materials or commodities, including as a result of the War in Israel, catastrophic events or global inflation,
could have an adverse effect on the ability of our businesses to meet their commitments to customers or could increase their operating
costs. Our businesses could encounter supply problems and may be unable to replace a supplier that is not able to meet their demand in
either the short- or the long-term; these risks are exacerbated in the case of raw materials or component parts that are sourced from
a single-source supplier. 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.
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, 2023, OPC employed 169 employees
in Israel and 150 employees in the United States, and ZIM employed 6,460 employees. Our businesses have experienced and could experience
strikes, industrial unrest, work stoppages or labor disruptions. Any disruptions in the operations of any of our businesses could materially
and adversely affect our or the relevant businesses’ reputation and could adversely affect operations. Additionally, a work stoppage
or other disruption at any one of the suppliers of any of our businesses could materially and adversely affect our operations if an alternative
source of supply were not readily available. 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 operations.
Our business operations, and the operations of
our businesses, rely upon the accuracy, availability and security of information technology systems for data processing, storage and reporting.
As a result, we and our businesses maintain information security policies and procedures for managing such information technology systems.
However, such security measures may be ineffective and our information technology systems, or those of our businesses, may be subject
to cyber-attacks. A number of companies around the world have been the subject of cyber security attacks in recent years, including in
Israel where we have a large part of our businesses. Other Israeli businesses are facing cyber-attack campaigns, and it is believed the
attackers may be from hostile countries. These attacks are increasing and becoming more sophisticated, and may be perpetrated by computer
hackers, cyber terrorists or other perpetrators of corporate espionage.
Cyber security attacks could include malicious
software (malware), attempts to gain unauthorized access to data, social media hacks and leaks, ransomware attacks and other electronic
security breaches of our and our business’ information technology systems as well as the information technology systems of our customers
and other service providers that could lead to disruptions in critical systems, unauthorized release, misappropriation, corruption or
loss of data or confidential information. In addition, any system failure, accident or security breach could result in business disruption,
unauthorized access to, or disclosure of, customer or personnel information, corruption of our data or of our systems, reputational damage
or litigation. We or our operating companies may also be required to incur significant costs to protect against or repair the damage caused
by these disruptions or security breaches in the future, including, for example, rebuilding internal systems, implementing additional
threat protection measures, providing modifications to our services, defending against litigation, responding to regulatory inquiries
or actions, paying damages, providing customers with incentives to maintain the business relationship, or taking other remedial steps
with respect to third parties. These cyber security threats are constantly evolving. The increased reliance on remote access for employees
in recent years has increased the likelihood of cyber security attacks. We, therefore, remain potentially vulnerable to additional known
or yet unknown threats, as in some instances, we, our businesses and our customers may be unaware of an incident or its magnitude and
effects. Should we or any of our operating businesses experience a cyber-attack, this could have a material adverse effect on our, or
any of our operating companies’, business, financial condition or results of operations.
Risks Related to Legal, Regulatory
and Compliance Matters
We, and each
of our businesses, are subject to legal proceedings and legal compliance risks.
We are subject to a variety of legal proceedings
and legal compliance risks in every part of the world in which our businesses operate. We, our businesses, and the industries in which
we operate, are periodically reviewed or investigated by regulators and other governmental authorities, which could lead to enforcement
actions, fines and penalties or the assertion of private litigation claims and damages. Changes in laws or regulations could require us,
or any of our businesses, to change manners of operation or to utilize resources to maintain compliance with such regulations, which could
increase costs or otherwise disrupt operations. Changes in trade policies and or changes in the political and regulatory environment in
the markets in which we operate, such as foreign exchange import and export controls, sanctions, tariffs and other trade barriers and
price or exchange controls, could affect our businesses in such markets, impact our profitability and or our ability to repatriate profits,
and may expose us or any of our businesses to penalties, sanctions and reputational damage. In addition, the uncertainty of the legal
environment in some regions could limit our ability to enforce our rights.
The global and diverse nature of our operations
means that legal and compliance risks will continue to exist and additional legal proceedings and other contingencies, the outcome of
which cannot be predicted with certainty, will arise from time to time. No assurances can be made that we will be found to be operating
in compliance with, or be able to detect violations of, any existing or future laws or regulations. A failure to comply with or properly
anticipate applicable laws or regulations could have a material adverse effect on our business, financial condition, results of operations
or liquidity.
We may be subject
to further governmental regulation as a result of our regulatory status, which could subject us to restrictions that could make it impractical
for us to continue our business as contemplated and could have a material adverse effect on our business.
The U.S. Investment Company Act of 1940, or the
“Investment Company Act,” regulates “investment companies,” which includes, in relevant part, issuers that are,
or that hold themselves out as being, primarily engaged in the business of investing, reinvesting and trading in securities or that are
engaged, or propose to engage, in the business of investing, reinvesting, owning, holding or trading in securities and own, or propose
to acquire, investment securities (as defined in the Investment Company Act) having a value exceeding 40% of the value of the issuer’s
total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis. Pursuant to a rule adopted under the
Investment Company Act, notwithstanding the 40% test described above, an issuer is excluded from the definition of investment company
if no more than 45% of the value of the issuer’s total assets (exclusive of U.S. government securities and cash items) consists
of, and no more than 45% of the issuer’s net income after taxes (for the last four fiscal quarters combined) is derived from, securities
other than (i) U.S. government securities, (ii) securities issued employees’ securities companies, (iii) securities issued by majority-owned
subsidiaries of the issuer that are not investment companies and not relying on certain exclusions from the definition of investment company
and (iv) securities issued by companies that are not investment companies and are controlled primarily by the issuer through which the
issuer engages in a business other than that of investing, reinvesting, owning, holding or trading in securities. We do not believe that
we are subject to regulation under the Investment Company Act. We are organized as a holding company that conducts its businesses primarily
through majority owned and primarily controlled subsidiaries. We intend to continue to conduct our operations so that we will not be deemed
to be an investment company under the Investment Company Act. However, maintaining such status may impose limits on our operations and
on the assets that we and our subsidiaries may acquire or dispose of. If, at any time, we meet the definition of investment company, including
as a result of a company in which we have an ownership interest ceasing to be majority owned or primarily controlled, including as a result
of dispositions or dilution of interests in majority owned and primarily controlled subsidiaries, we could, among other things, be required
to substantially change the manner in which we conduct our operations to avoid being required to register as an investment company, which
could have an adverse effect on us and the market price of our securities. If we were to be deemed an “inadvertent” investment
company, we may seek to rely on Rule 3a-2 under the Investment Company Act, which provides that an issuer will not be treated as an investment
company subject to the provisions of the Investment Company Act provided the issuer has the requisite intent to be engaged in a non-investment
business, evidenced by the issuer’s business activities and an appropriate resolution of the issuer’s board of directors,
during a one year cure period.
The Investment Company Act contains substantive
legal requirements that regulate the manner in which an “investment company” is permitted to conduct its business activities.
Among other things, the Investment Company Act and the rules thereunder limit or prohibit transactions with affiliates, impose limitations
on the issuance of debt and equity securities, prohibit the issuance of stock options, and impose certain governance requirements. In
any case, the U.S. Investment Company Act of 1940 generally only allows U.S. entities to register. If we were required to register as
an investment company but failed to do so, we could be prohibited from engaging in our business in the United States or offering and selling
securities in the United States or to U.S. persons, unable to comply with our reporting obligations in the United States as a foreign
private issuer, subject to the delisting of the Kenon shares from the NYSE, and subject to criminal and civil actions that could be brought
against us, any of which would have a material adverse effect on the liquidity and value of the Kenon shares.
We could be
adversely affected by violations of the U.S. Foreign Corrupt Practices Act and similar anti-bribery laws outside of the United States.
The U.S. Foreign Corrupt Practices Act, or the
“FCPA”, and similar anti-bribery laws in other jurisdictions generally prohibit companies and their intermediaries from making
improper payments to government officials or other persons for the purpose of obtaining or retaining business. Recent years have seen
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, post-acquisition integration efforts may not
be adequate to ensure our system of internal controls and procedures are fully adopted and adhered to by acquired entities, resulting
in increased risks of non-compliance with applicable anti-bribery laws.
We could be
adversely affected by international sanctions and trade restrictions.
We have geographically diverse businesses, which
may expose our business and financial affairs to political and economic risks, including operations in areas subject to international
restrictions and sanctions. Legislation and rules governing sanctions and trade restrictions are complex and constantly evolving. Moreover,
changes in these laws and regulations can be unpredictable and happen swiftly. Part of our global operations necessitate the importation
and exportation of goods and technology across international borders on a regular basis. From time to time, we, or our businesses, may
receive information alleging improper activity in connection with such imports or exports. Our policies mandate strict compliance with
applicable sanctions laws and trade restrictions. Nonetheless, our policies and procedures may not always protect us from actions that
would violate U.S. and/or foreign laws. Such improper actions could subject us to civil or criminal penalties, including material monetary
fines, denial of import or export privileges, or other adverse actions. The occurrence of any of the aforementioned factors could have
a material adverse effect on our business, financial condition, results of operations or liquidity.
Risks Related to OPC’s Israel
Operations
OPC’s
profitability depends on the EA’s electricity rates 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.
Existing regulation, such as antitrust laws, regulations
under the Israeli Law for Promotion of Competition and Reduction of Concentration, enacted in 2013 (the “Market Concentration Law”)
or regulations under the Israeli Electricity Sector Law, 5756-1996 (the “Electricity Sector Law”) with respect to holding
generation licenses impose restrictions, including restrictions on maximum capacity, which may limit 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 Market Concentration Law, when
issuing and determining the terms of certain rights, including the right to an electricity generation license under certain circumstances,
the regulator must consider the promotion of competition in the relevant industry sector and the Israeli economy generally. If the right
is on the list of rights that may have a material impact on competition, the regulator must consult with the Israel Competition Commissioner
regarding sector concentration. Kenon, OPC, and OPC’s subsidiaries are considered concentration entities under the Israel Corporation
group for purposes of sector-specific and economy-wide concentration. The list of concentration entities also includes Mr. Idan Ofer,
who is the beneficiary of entities that indirectly hold a majority of the shares in Kenon, and includes a list of other entities which
may be affiliated with Mr. Idan Ofer, including ZIM. With respect to economy-wide concentration, this may affect OPC’s or its subsidiaries’
ability to receive a generation license if it involves the construction and operation of power plants exceeding 175 MW. For example, in
August 2017, the Israel Competition Authority and the Chairman of the Committee for the Reduction of Concentration, or the Concentration
Committee, recommended to the EA not to grant a conditional license for the Tzomet project. The conditional license was eventually approved
after OPC and the Idan Ofer group had complied with certain conditions agreed with the Concentration Committee, including the completion
of the sale of the Idan Ofer group’s shares in Reshet Media Ltd. in April 2019. Therefore, OPC’s expansion activities and
future projects have been and could in the future be limited by the Market Concentration Law.
Following the Israeli Government’s electricity
sector reform, the Israel Competition Authority issued regulations for sector concentration consultation in such sale process. The regulations
were published under a temporary order and are in effect for three years. According to regulations, a person will not be granted a generation
license or approval in accordance with Sections 12 or 13 of the Electricity Sector Law if, following the issuance, the person will hold
generation licenses or connection commitment for gas-fired power plants the total capacity of which exceeds 20% of the planned capacity
for this type of power plant. The planned capacity for 2025 for gas-fired power generation units is 16,700 MW. In addition, the regulations
set restrictions on the allocation of rights 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 the electricity sector. Furthermore, the EA may refrain from granting a generation
license or from approving a connection to the grid if it believes that the allocation is likely to prevent or reduce competition in the
electricity sector after taking into account additional considerations, including the impact of holdings of a person in other generation
licenses that do not constitute a holding of a right as defined in the regulations, the impact of joint holdings in companies with a holder
of other rights, as well as the impact of holdings of a person in holders of licenses that were granted under the Natural Gas Market Law.
These regulations may impose limitations on OPC’s ability to expand its business in Israel. The aggregate MW currently attributable
to OPC as well as Israel Chemicals Ltd., as a party with generation licenses that are related to OPC, is approximately 1,500 MW (including
the Sorek 2), based on OPC’s assessment.
OPC faces risks
in connection with entry (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 market, identifying
transactions that will suit OPC, conducting due diligence studies, recruiting suitable employees and securing any required financing.
Failure of one or more of the foregoing factors may adversely affect the success of projects in such markets and OPC’s operations
and results.
Furthermore, the integration of significant new
operations into the existing operations requires the integration of various processes, including control and information flow processes,
integration of management processes, integration of financial reporting, the integration of the new operations and human resources,
as well as OPC’s understanding of the market in which the acquired activity operates and the integration of its business strategy
and development plans.
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.
OPC does not own and will not own all the rights
to all of OPC’s existing projects (including OPC Israel, Gnrgy, OPC Power and projects of CPV Group) and future projects. A less
than 100% stake in projects might restrict OPC’s flexibility when conducting its activities, including entering into agreements
with other holders of rights in such projects. This can also restrict OPC’s ability to take actions that would be available as a
100%-owner of a project.
Changes in
the CPI in Israel, interest rates, or exchange rates could adversely affect OPC.
OPC is exposed to changes in the CPI, directly
and indirectly, due to the linkage of a substantial portion of its revenues to the generation tariff (which is partly affected by changes
in the CPI) and to the CPI. Natural gas purchase prices are also linked to the generation tariff and include a US Dollar floor price.
Furthermore, some of OPC’s capital costs and investments are linked to the CPI, directly or indirectly. OPC is further exposed
to changes in the CPI through OPC’s debentures (Series B) and some of the 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 lead 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 portion of its revenues
to the generation tariff (which is partly affected by changes in such exchange rate). Also, some of OPC’s natural gas purchases
are either linked to the exchange rate and/or are denominated in U.S. Dollars, and are linked to the generation tariff and include floor
prices denominated in U.S. Dollars.
Therefore, an appreciation of the U.S. Dollar increases
the cost of natural gas purchased by OPC, 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 year, there may be timing gaps between the effect of the U.S. Dollar’s appreciation on OPC’s gas
cost and its effect on OPC’s gross margin. Such timing difference may adversely affect OPC’s profitability and cash flows
in the short term. In the long term, an appreciation of the U.S. Dollar will lead to a higher generation tariff, and accordingly to higher
revenues for OPC, but also to a corresponding increase in gas costs, such that OPC’s profitability may be adversely affected. Furthermore,
from time to time, OPC also enters into construction and maintenance contracts in various currencies, specifically the U.S. Dollar and
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 incur costs associated with such forwards.
With respect to OPC’s investment in CPV Group,
which operates in the United States, and whose functional currency is the 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 trigger
outflows to finance the investments.
OPC
faces risks relating to liquidity and potential difficulty in securing the funding resources required to achieve the future strategic
plans of the OPC group, including risks relating to high leverage levels.
As a group that is engaged in initiation,
development and acquisition of power generation projects, OPC may need to raise large amounts of financing in the next few years in connection
with execution of its strategic plans. The financing agreements of the OPC group, including OPC’s debentures, restrict the amount
of debt OPC group is permitted to incur and provision of collateral to secure such debt. In addition, raising capital involves risks relating
to high leverage levels and financing costs. High leverage exposes OPC group 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 repay their obligations, comply
with the terms of the financing agreements or distribute dividends. High leverage levels may also require provision of collateral
or guarantees by 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 undertaken, 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 failure to maintain an optimal debt structure may have an adverse
effect on OPC’s ability to execute its future 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 investments 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 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 and malfunctions.
OPC’s
activities and operations may be affected by natural disasters, climate damages, and fire.
Natural disasters, such as flood, extreme
climate conditions, earthquakes, or fire, may damage OPC’s facilities in Israel and the United States and impair its operations
including the reliable supply of electricity to customers, which could adversely impact OPC’s results and activities (severe cold
or heat waves in Israel or the United States). In addition, in light of the nature of OPC’s activities, including its use of flammables,
operations involving high temperatures and pressures and storage of fuels, OPC’s facilities are exposed to fires and explosion risks,
and as a result, to environmental risks as well. If OPC’s facilities are damaged due to natural disasters or fire, renovation of
affected facilities may require significant investments of resources and may take significant amounts of time to complete, which may cause
full or partial shutdown of the damaged electricity generation facilities causing loss of income. OPC purchases insurance policies required
to cover risks associated with its activity, as required in the licenses it was granted and under the financing agreements to which it
is a party, however there is no certainty that in such cases OPC will be compensated for some or all the damages it may suffer.
The political
and security situation in Israel may affect OPC.
A deterioration in the political and security situation
in Israel may adversely affect OPC’s activities and harm its assets 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 cause damage to the facilities
used by OPC, including damage to the power stations owned by OPC, OPC’s projects under construction, IT systems, facilities for
transmission of natural gas to the power stations and the electricity grid. In addition, such acts may cause damage to OPC’s material
suppliers, 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 Israel’s economic situation, specifically Israel’s
credit rating and financial system (banks and institutional entities) and accordingly on OPC’s ability to execute 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 undertakings 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 trigger the imposition of boycotts by various parties and may lead to claims by parties
with whom OPC has contracted, for example, that contracts have terminated due to the occurrence of force majeure events as well as limited
availability of various experts. In addition, personnel availability issues may arise as some of OPC’s employees may be drafted
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 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 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 restrictions implemented as a result thereof, could have a material impact on OPC’s main suppliers
(such as suppliers of natural gas, construction and maintenance contractors) or OPC’s main customers, may adversely affect OPC’s
activities and performance, as well as its ability to complete projects under construction on time or at all and/or on its ability to
execute future projects. A pandemic (such as COVID-19) might lead to disruptions in the global supply chain of various commodities and
raw materials due to overload, as well as delays in the supply of equipment and a rise in the budgets of projects under construction and
development.
OPC requires
a skilled workforce.
OPC requires professional and skilled personnel in order to manage its operating activities
and its projects, and to provide services customers, suppliers and other 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 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 advisors employed by OPC (whether as employees or
as external service providers) are experts in their respective fields and are recruited by OPC from different countries. 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 political and/or security situation,
including the War, may lead to shortage of expert employees, which may lead to delays in the construction of the power plants and have
an adverse effect on OPC’s activity and results of operations. In case of a shortage of professionally trained employees, OPC will
be required to find alternative employees, make changes to the required training or find other solutions by using external service providers.
However, there is no certainty that the alternatives will fully meet OPC’s needs.
Similarly, the success of CPV rests on its ability
to recruit and retain talented and skilled employees, both in technical/operative positions and in headquarter/management positions. CPV
depends, 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 OPC-Hadera’s
workers are employed under collective agreements. The collective agreements may restrict OPC’s management’s ability to conduct
operations in a flexible manner, and may 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’s activity in Israel and its operating results. For further information
on these collective agreements, see “Item 4.B Business Overview—Our Businesses—OPC—OPC’s
Description of Operations—Employees.”
An interruption
or failure of OPC’s information technology, communication and processing systems or external attacks and invasions of these systems,
including incidents relating to cyber security, could have an adverse effect on OPC.
OPC uses information technology systems, telecommunications
and data processing systems to operate its businesses.
Although OPC is taking actions to enhance protection
against cyber events in its organizational networks and power plants, it is uncertain how much OPC would be able to prevent any cyber-attacks
or damage to OPC’s IT and data systems. Such physical, technical, or logical damage to the administrative and/or operational systems,
for any reason whatsoever, might expose OPC to harm and disruptions in OPC’s electricity production and supply, in OPC’s IT
systems, or in OPC’s reputation and may also result in data theft or leaks (including private information). In addition, a lack
of compatibility between IT systems, management and business departments and the existence of technological gaps, increase cyber risks.
The fact that OPC is an Israeli company puts it at a higher risk of cyber-attacks. In the event that a major cyber-attack against OPC
occurs and is not prevented by the defense systems, this may have a material adverse effect on OPC’s operations and reputation.
In addition, OPC may incur costs to protect itself against damage to its IT systems and to recover from such damage, including, for example,
a system recovery, protection against any legal actions or compensation to affected third parties.
OPC is exposed
to litigation and administrative proceedings.
OPC is involved in various litigation proceedings,
and may be subject to future litigation proceedings, which could have adverse consequences on its business, see note 18 to our financial
statements included in this annual report.
Legal disputes, litigation and/or regulatory proceedings
are inherently unpredictable (including against regulatory entities such as Israel Independent System Operator Ltd., a system management
company (“Noga”), the IEC, Israel Tax Authority, or ILA), and outcomes may be materially different from the parties’
expectations. Adverse outcomes in lawsuits and investigations could result in significant monetary damages, including indemnification
payments, or injunctive relief that could adversely affect OPC’s ability to conduct its business and may have a material adverse
effect on OPC’s financial condition and results of operations. In addition, such investigations, claims and lawsuits could involve
significant expense and diversion of OPC’s management’s attention and resources from other matters, each of which could also
have a material adverse effect on its business, financial condition, results of operations or liquidity.
OPC’s
insurance policies may not fully cover damage, and OPC may not be able to obtain insurance against certain risks.
OPC and its subsidiaries maintain various
insurance policies that cover damages customary in the industry. However, not all risks and/or potential exposures are covered and/or
may be covered by OPC’s various insurance policies. Furthermore, insurance policies place 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 will not necessarily
cover the full extent of the potential damages and/or losses and/or liabilities. The decision as to the type and scope of the insurance
is made taking into account, among other things, the cost of the insurance, its nature and scope, regulatory and contractual requirements
(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 to 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 are inferior than those of its existing
policies). Any damages that are not partially or fully covered by OPC’s insurance policies may have an adverse effect on OPC,
and there is no certainty that OPC or its subsidiaries and investees will receive full compensation under its policies in the event of
damage. In addition, OPC’s failure to renew insurance policies may constitute a breach of OPC’s licenses and/or financing
agreements.
OPC is subject
to health and safety risks.
OPC’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 that change regularly. Legislative changes and stricter environmental
standards may affect OPC’s operations and facilities and its costs. Deficiencies and/or non-compliance with environmental
and safety laws and the terms of permits and licenses granted to OPC thereunder might expose OPC and its management to criminal and administrative
sanctions, including the imposition of penalties and sanctions, issuance of closure orders to facilities, and expenses relating to cleaning
and remediation of environmental damages, which might have an adverse effect on the operations and operating results of OPC.
OPC faces risks
in the construction and development of its projects.
Projects under construction or development involve
specific risks in addition to general or industry-specific risks, including Tzomet which has only recently begun operations. The construction
of a power plant involves a range of construction risks, such as risks associated with the development stages and advancement of the planning
procedures, the construction contractor and its financial strength, the supply of key equipment and the condition of such 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 quality and on time, receipt of the services required for the construction of the power
plant and its connection to the grid, the applicable regulation and obtaining the permits required 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 other 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, 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
in its operations.
The policies of governments where the OPC group
operates is to open the electricity market to competition. In Israel, such a policy reduces the IEC’s market share in the generation
and supply segment, it has and may further lead to an increase in the number of electricity producers and intensify competition in the
Israeli electricity generation and supply market, which may have an adverse effect on OPC’s competitive position. Regulations set
by the EA with the aim of opening the Israeli electricity supply market further intensify competition in the supply segment, and this
trend is expected to increase in the next few years. In recent years, competition in the supply to customers in Israel has intensified,
which may have an adverse effect on the terms of engagement between OPC and its customers. Furthermore, the activity of the CPV Group
is also exposed to competition in the market in which it operates. In recent years, competition in the supply to customers segment
in Israel has intensified, which may adversely affect OPC.
OPC is dependent
on certain material customers.
OPC has a number of material customers, characterized
by high consumption rates of the total generation capacity in Israel. OPC’s revenues from electricity generation in Israel are highly
sensitive to the consumption of material customers. Therefore, expiration of an agreement with a material customer or where there is no
or lower demand for electricity by a material customer or where a material customer does not fulfil its obligations including payment
default by such customer or disputes, or where OPC fails to fulfill its obligations to customers, may have a material effect on OPC’s
revenues and its 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 such agreements if they are renewed (due to,
among others, increased the competition in the market in which OPC operates). In addition, OPC is exposed to collection risks and/or consumption
risks in connection with the material customers.
Furthermore, OPC-Hadera is dependent on Infinya’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 customers, including its material customers, and an 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 result of the foregoing, may disrupt the electricity 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). Due to the EA’s interpretive approach
to regulations of compensation of operators in the event of shortages of natural gas in Israel, as applicable to 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.
Furthermore, 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 a state of emergency), there is no certainty regarding the price which OPC will be required to pay for the purchase of
additional gas or 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 power plants and generation facilities built
or operated by OPC are fully reliant on long-term construction and/or maintenance agreements with suppliers of essential equipment in
connection with maintenance and servicing of the power plant and facilities, including the maintenance of generators and gas and steam
turbines. In the event of failure to comply with performance targets, or if the key suppliers’ undertakings under the maintenance
agreements are breached, their liability in respect of compensation shall be limited in amount, as is generally accepted in agreements
of this type. 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 profits. 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 the project, the project’s
performance and OPC’s ability to fulfill its undertakings as of the relevant commercial activation dates in accordance with agreements
or the regulation applicable to the project. A delay or failure by the construction contractor to meet its undertakings or any other difficulties
it faces in the construction of the project, may have a material adverse effect on OPC. Furthermore, OPC is dependent upon infrastructure
suppliers such as Israel National Gas Lines Ltd. (“INGL”) and the IEC in Israel and on suppliers of electricity and gas infrastructure
in the United States.
OPC depends
on infrastructure, securing space on the grid 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 IEC (which
manages the transmission and distribution network) and the System Operator in Israel and on the electrical grid and regulator in the relevant
operating markets in the United States. Unavailability or damage to the grid infrastructures or disruptions in their operations or inadequate
supply may damage OPC’s facilities and impair its ability to transmit the electricity generated in the power plant to the electricity
grid, which may have material adverse effect on OPC’s businesses. Similarly, pressures on the transmission and distribution networks
(including due to the introduction of renewable energies), and delays in the development of infrastructure that will support 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, 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 risks associated with U.S. federal and local
regulations and legislation, mainly relating to the U.S. electricity market and natural gas market, 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 be impacted, from time to time, by changes in political
and governmental policies at the federal, state and local levels. As a result, CPV’s projects 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 Compliance 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 CPV Group, or any change in any of the
above could adversely affect OPC’s activity or results.
In addition, CPV is subject to policies and decisions
made by Regional Transmission Organizations (“RTO”) or Independent System Operator (“ISO”) of the markets in which
it operates or expects to operate. Changes in such policies or decisions may affect active projects (for example, the capacity prices
tenders) and/or projects under development (for example, steps pertaining to interconnection and transmission agreements) could have an
adverse effect on CPV’s results and activity.
Furthermore, as 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 permits.
In case such incentives are minimized or revoked, such change will adversely affect the profitability of such projects.
CPV is subject
to market risks, including energy price fluctuations and any hedging may not be effective.
CPV’s activities are subject to market risks,
including inflation and price fluctuations, mainly related to prices of electricity, natural gas, emission allowances and Renewable Energy
Certificates (the “RECs”). In addition, the CPV Group is exposed to fluctuations in the price indices associated with the
projects’ hedging agreements. The projects may enter into commodity price hedging agreements to mitigate some of the exposure to
price fluctuations and/or to ensure minimum cash flows as an inherent part of the activities. However, hedging arrangements may not always
be available (or may be on non-profitable terms, involving high costs or strict requirements for collateral) and may not provide full
protection, due to, among other things, hedging less than the total amount of electricity being sold, the delivery point or prices in
the hedge agreement being different than the delivery points in the CPV Group’s project operations, 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 counterparty may not fulfill its financial obligations due to financial distress or
other factors. Hedging may also offset the energy margins of the CPV Group as a result of market conditions and hedging 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 disruptions, 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 OPC is not the investor), which would indirectly dilute Kenon’s interest in CPV.
An inability
to extend or renew certain agreements could have an adverse impact on CPV’s business, financial condition and results of operation.
Most of the CPV Group’s material agreements
(including hedging agreements, financing agreements, gas supply agreements, gas transmission agreements and asset management agreements)
are for the short- to medium terms, as is customary in the market in which it operates. Difficulties in renewing or extending agreements
that are close to expiration and/or entering into new undertakings on inferior commercial terms could adversely affect the results and
activities of the CPV Group.
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, tornadoes or severe rain/snow events) could adversely affect the CPV Group’s profits,
operations and results. Such severe weather conditions could also affect suppliers and the pipelines supplying natural gas to gas-fired
facilities. In addition, severe weather conditions could cause damage to facilities, increase repair costs and loss of revenue if CPV
fails to supply electricity to the markets in which it operates or exposes the CPV Group to capacity penalties in PJM or ISO-NE and liquidated
damages to counterparties. To the extent that these losses are not covered by the CPV Group’s insurance or are not recovered by
CPV through electricity prices, this could have a materially adverse effect on the financial results, operating results and cash flows
of the CPV Group.
CPV faces risks
of difficulties in obtaining financing and meeting the terms of financing agreements.
The CPV Group’s results and business
plans are materially impacted by the CPV Group’s ability to obtain financing on attractive terms, to comply with the terms and conditions
of the financing agreements entered into by the projects or the CPV Group and its ability to refinance existing debt and credit. 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 include restrictions, covenants and obligations that limit distributions or require or accelerate
making of repayments upon occurrence of certain events (such as cash sweeps provisions) which are currently in effect. Difficulty in obtaining
financing or refinancing on terms that are worse than the prior financing may adversely affect the ability of the CPV Group to refinance
existing financing agreements and/or carry out projects under development and ultimately effecting whether projects are 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 under certain circumstances - even a demand for immediate repayment of the loans and enforcement of collateral given to lenders (projects
assets, projects rights and guarantees, as applicable), thus adversely affecting the CPV Group’s results and its financial strength.
Risks Related to Our Interest in
ZIM
ZIM predominantly
operates in the container segment of the shipping industry, and the container shipping industry is dynamic and volatile.
ZIM’s principal operations are in the container
shipping market and ZIM is significantly dependent on conditions in this market, which are for the most part beyond its control. For example,
ZIM’s results in any given period are substantially impacted by supply and demand in the container shipping market, which impacts
freight rates, bunker prices, and the prices ZIM pays under the charters for its vessels. Unlike some of its competitors, ZIM does not
own any ports or similar ancillary assets (except for minority ownership rights in a company operating a terminal in Tarragona, Spain,
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 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, 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, the
comprehensive Shanghai (Export) Containerized Freight Index (SCFI) increased from 818 points on April 23, 2020, with the global outbreak
of COVID-19, to 5,047 as of December 31, 2021, but as of December 31, 2023, was 1,760. In 2022 and 2023, 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 depending on future supply and demand curves, bottlenecks around the world and other factors. Furthermore, rates within the charter
market, through which ZIM sources most of ZIM’s capacity, may fluctuate significantly based upon changes in supply and demand for
shipping services. The severe shortage of vessels available for hire during 2021 and the first half of 2022 has resulted in a significant
increase of charter rates and longer charter periods dictated by owners, however, since September 2022, charter hire rates have been normalizing,
with vessel availability for hire still low. Charter hire rates in 2023 have fallen to pre-COVID-19 levels on average, as additional capacity
entered the market 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 charter
market, and as a result of its dependency on the vessel charter market, the costs associated with chartering vessels are unpredictable.”
As global trends continue to change, it remains
difficult to predict their impact on the container shipping industry and on ZIM’s business. If ZIM is unable to adequately predict
and respond to market changes, they could have a material adverse effect on ZIM’s business, financial condition, results of operations
and liquidity.
Global economic
downturns and geopolitical challenges throughout the world could have a material adverse effect on ZIM’s business, financial condition
and results of operations.
ZIM’s business and operating results have
been, and will continue to be, affected by worldwide and regional economic and geopolitical challenges, including global economic downturns.
In particular, the outbreak of the war between Israel and Hamas in October 2023, which has led to military, political and economic instability
in the Middle East, may affect ZIM’s business operations as an Israeli-based company. Additional armed conflicts between Israel
and other terror groups such as Hezbollah 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 proactive measures by re-routing some of
ZIM’s vessels and restructuring ZIM’s services on the Indian subcontinent to East Mediterranean trade. An escalation of this
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 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 geopolitical
instabilities may cause global markets to plummet, affect global trade, increase bunker prices and may have a material adverse effect
on ZIM’s business a financial condition, results of operations and liquidity.
Currently, global demand for container shipping
is highly volatile across regions and remains subject to downside risks stemming mainly from factors such as reduction in consumption,
the geopolitical situation, increase of interest rates, possible long term effects of 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.
According 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.
According to the world shipping council (WSC),
the Asia trade regions represent approximately 70% of the total TEUs of international container trade, and the Intra-Asia trade alone
accounts for at least one quarter of the global market. Although ZIM also operates in many 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 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 ZIM’s vessels profitably.
According to Alphaliner, as of December 31, 2023,
global container ship capacity was approximately 28 million TEUs, spread across approximately 6,000 vessels. Furthermore, global container
ship capacity is expected to increase by 9.9% in 2024, with a vessel order book of 7.1 million TEU, while demand for shipping services
is projected to increase only by 2.2%, therefore the increase in vessel capacity is expected to be much higher than the increase in demand
for container shipping.
ZIM endeavors to adapt ZIM’s vessel fleet
capacity to the supply and demand 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 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 face oversupply in the coming years and numerous other factors beyond ZIM’s
control may also contribute to increased capacity, including deliveries of new, refurbished or converted vessels, as a response to, among
other factors, port and canal congestion, any change in the practice of slow steaming, a reduction in the number of void voyages and a
decrease in the number of vessels that are out of service (e.g., vessels that are laid-up, drydocked, or are otherwise not available for
hire), as well as decreased scrapping levels of older vessels. In the event of overcapacity, there is no guarantee that measures of blank
sailings and redelivery of chartered vessels will prove successful, partially or at all in mitigating the gap between excess supply and
demand. Excess capacity generally depresses freight rates and can lead to lower utilization of vessels, which may adversely affect ZIM’s
revenues and costs of operations, profitability and asset values. Overcapacity can cause the industry to experience downward pressure
on freight rates and such prolonged pressure could have a material adverse effect on ZIM’s financial condition, results of operations
and liquidity.
Access to ports
and canals could be limited or unavailable, 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.
Global development of new terminals continues to
be outpaced by the increase in demand. In addition, the increasing vessel size of containership newbuilding has forced adjustments to
be made to existing container terminals. As such, existing terminals are coping with high berth utilization and space limitations of stacking
yards, which are at near-full capacity. This results in longer cargo operations times for the vessels and port congestion, which could
increase operational costs and have a material adverse effect on affected shipping lines. Decisions about container terminal expansion
and port access are made by national or local governments and are outside of ZIM’s control. Such decisions are based on local policies,
priorities and concerns and the interests of the container shipping industry may not be considered.
ZIM’s access to ports may also be limited
or unavailable due to other reasons. As industry capacity and demand for container shipping continue to grow, ZIM may have difficulty
in securing sufficient berthing windows to expand ZIM’s operations in accordance with ZIM’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. For example, the COVID-19 pandemic has caused disruptions to global trade and severe congestion at ports and inland
supply chains. Ports and terminals may implement certain measures 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 ZIM’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 its
land transportation activities and services. If ZIM is unable to successfully match demand for container capacity with available capacity
in nearby locations, it may incur significant balancing costs to reposition its containers in other areas where there is demand for capacity.
It is not guaranteed that ZIM will always be successful in minimizing the costs resulting from the counter-dominant leg trade, which could
have a material adverse effect on ZIM’s business, financial condition and results of operations. Furthermore, sharpening imbalances
in world trade patterns — rising trade deficits of net import regions in relation to net export regions — may exacerbate imbalances
between the dominant and counter-dominant legs of ZIM’s services. This could have a material adverse effect on ZIM’s business,
financial condition and results of operations.
ZIM’s
ability to participate in operational partnerships in the shipping industry is limited, which may adversely affect 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.
The container shipping industry has experienced
a reduction in the number of major carriers, and until recently, a continuation and increase of the trends of strategic alliances and
partnerships among container carriers, which can result in more efficient and better coverage for shipping companies participating in
such arrangements. For example, in 2016 CSCL was acquired by COSCO, APL-NOL was acquired by CMA CGM, United Arab Shipping Company merged
with Hapag-Lloyd and Hanjin Shipping exited the market as a result of a bankruptcy, during 2017, Hamburg Sud was acquired by Maersk, three
large Japanese carriers, K-Line, MOL and NYK merged into ONE and OOCL was acquired by COSCO, and in April 2020, Hyundai Merchant Marine
(HMM) consummated the termination of its strategic cooperation with 2M and joined THE Alliance. Past consolidation in the industry has
affected the existing strategic alliances between shipping companies. For example, the Ocean Three alliance, which consisted of CMA CGM
Shipping, United Arab Shipping Company and China Shipping Container Lines, was terminated in 2019 and replaced by the Ocean Alliance,
consisting of COSCO Shipping Group (including China Shipping and OOCL), CMA CGM Shipping Group (including APL) and Evergreen Marine. In
January 2023, the 2M Alliance members, MSC and Maersk, announced that the 2M Alliance will be terminated in January 2025, and 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 are unable to do so, ZIM may be unable to achieve the cost and other synergies that
can result from such alliances. However, ZIM is party to operational partnerships with other carriers in some of the trade zones in which
ZIM 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. The unilateral termination of ZIM’s existing operational agreements,
including with the 2M Alliance, or any future cooperation agreement it may enter into, could adversely affect its business, financial
condition and results of operations.
These strategic cooperation agreements and other
arrangements, 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
other trade zones in which other alliances operate, ZIM is still unable to benefit from the economies of scale that many of its competitors
are able to achieve through participation in strategic arrangements (i.e., strategic alliances or operational agreements). ZIM’s
status as an Israeli company has limited, and may continue to limit, its ability to call on certain ports and has therefore limited, and
may continue to limit, its ability to enter into alliances or operational partnerships with certain shipping companies. In addition, ZIM’s
existing collaboration with the 2M Alliance may limit its ability to enter into alliances or other certain operational agreements. If
ZIM is not successful in expanding or entering into additional operational partnerships which are beneficial to ZIM, this could adversely
affect its business.
ZIM’s
business may be adversely affected by trade protectionism in the markets that ZIM serves, particularly in China.
ZIM’s operations are exposed to the risk
of increased trade protectionism. Governments may use trade barriers in an effort to protect their domestic industries against foreign
imports, thereby further depressing demand for container shipping services. In recent years, increased trade protectionism in the markets
that ZIM accesses and serves, particularly in China, where a significant portion of its business originates, has caused, and may continue
to cause, increases in the cost of goods exported and the risks associated with exporting goods as well as a decrease in the quantity
of goods shipped. In November 2020 China and 15 additional countries in the Asia-Pacific region entered into the largest free trade pact,
the RCEP Regional Comprehensive Economic Partnership), which is expected to strengthen China’s position on trade protectionism related
matters. China’s import and export of goods may continue to be affected by trade protectionism, specifically the ongoing U.S.-China
trade dispute, which has been characterized by escalating trade barriers between the U.S. and China as well as trade relations among other
countries. These risks may have a direct impact on demand in the container shipping industry. In January 2020 China and the U.S. reached
an agreement aimed at easing the trade war. However, tensions between China and the U.S. continue, and there is no assurance that further
escalation will be avoided.
The U.S. administration has advocated greater restrictions
on trade generally and significant increases on tariffs on certain goods imported into the United States, particularly from China and
has taken steps toward restricting trade in certain goods. China and other countries have retaliated in response to new trade policies,
treaties and tariffs implemented by the United States. China has imposed significant tariffs on U.S. imports since 2018. Such trade escalations
have had, and may continue to have, an adverse effect on manufacturing levels, trade levels and specifically, may cause an increase in
the cost of goods exported from Asia Pacific and the risks associated with exporting goods from the region. Such increases may also affect
the quantity of goods to be shipped, shipping time schedules, voyage costs and other associated costs. Further, increased tensions may
adversely affect oil demand, which would have an adverse effect on shipping rates. They could also result in an increased number of vessels
sailing from China with less than their full capacity being met. These restrictions may encourage local production over foreign trade
which may, in turn, affect the demand for maritime shipping. In addition, there is uncertainty regarding further trade agreements such
as with the EU, trade barriers or restrictions on trade in the United States. Any increased trade barriers or restrictions on trade may
affect the global demand for ZIM’s services and could have a material adverse effect on 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.
Crew members, suppliers of goods and services to
a vessel, shippers or receivers of cargo, vessel owners and lenders and other parties may be entitled to a maritime lien against a vessel
for unsatisfied debts, claims or damages, including, in some jurisdictions, for debts incurred by previous owners. In many jurisdictions,
a maritime lienholder may enforce its lien by vessel arrest proceedings. Unless such claims are settled, vessels may be subject to foreclosure
under the relevant jurisdiction’s maritime court regulations. In some jurisdictions, under the “sister ship” theory
of liability, a claimant may arrest both the vessel that is subject to the claimant’s maritime lien and any “associated”
vessel, which is any vessel owned or controlled by the same owner. Claimants could try to assert “sister ship” liability against
one vessel in ZIM’s fleet for claims relating to another of its vessels. The arrest or attachment of one or more of ZIM’s
vessels could interrupt ZIM’s business or require ZIM to pay or deposit large sums to have the arrest lifted, which could have a
material adverse effect on ZIM’s business, financial condition and results of operations.
Governments,
including that of Israel, could requisition ZIM’s vessels during a period of war or emergency, resulting in loss of earnings.
A government of the jurisdiction where one or more
of ZIM’s vessels are registered, as well as a government of the jurisdiction where the beneficial owner of the vessel is registered,
could requisition for title or seize ZIM’s vessels. Requisition for title occurs when a government takes control of a vessel and
becomes its owner. A government could also requisition ZIM’s vessels for hire. Requisition for hire occurs when a government takes
control of a ship and effectively becomes the charterer at dictated charter rates. Requisitions generally occur during periods of war
or emergency, although governments may elect to requisition vessels in other circumstances. ZIM would expect to be entitled to compensation
in the event of a requisition of one or more of ZIM’s vessels; however, the amount and timing of payment, if any, would be uncertain
and beyond its control. For example, ZIM’s chartered-in and owned vessels, including those that do not sail under the Israeli flag,
may be subject to control by Israeli authorities in order to protect the security of, or bring essential supplies and services to, the
State of Israel. Government requisition of one or more of ZIM’s vessels could have a material adverse effect on its business, financial
condition and results of operations.
Risks related to regulation
The shipping
industry is subject to extensive government regulation and standards, international treaties and trade prohibitions and sanctions.
The shipping industry is subject to extensive regulation
that changes from time to time and that applies in the jurisdictions in which shipping companies are incorporated, the jurisdictions in
which vessels are registered (flag states), the jurisdictions governing the ports at which vessels call, as well as regulations by virtue
of international treaties and membership in international associations. As a global container shipping company, ZIM is subject to a wide
variety of international, national and local laws, regulations and agreements. As a result, ZIM is subject to extensive government regulation
and standards, customs inspections and security checks, international treaties and trade prohibitions and sanctions, including laws and
regulations in each of the jurisdictions in which ZIM 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 ZIM to fines, penalties
and other sanctions. For additional information, see “Item 4.B—Business Overview—Our
Businesses—ZIM—ZIM’s Regulatory Matters.”
ZIM is subject
to competition and antitrust regulations in the countries where 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.
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 ZIM operates. In some 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. 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 ZIM’s business and results of operations. Specifically, Commission Regulation
(EC) No 906/2009, or the Consortia Block Exemption Regulation, or CBER), exempts certain cooperation agreements in the liner shipping
sector (such as operational cooperation agreements), from the prohibition on anti-competitive agreements contained at Article 101 of the
Treaty on the Functioning of the European Union, 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 the U.S. President
Biden’s administration and the FMC, as well as the ministry of transportation in China. In the U.S., the Ocean Shipping Reform Act
of 2022 (OSRA) signed into law in June 2022 mandates a series of rulemaking projects by the Federal Maritime Commission, or the “FMC,”
and 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.
ZIM could be
adversely affected by violations of the U.S. Foreign Corrupt Practices Act and similar anti-bribery laws outside of the United States.
The U.S. Foreign Corrupt Practices Act, or the
FCPA, and similar anti-bribery laws in other jurisdictions generally prohibit companies and their intermediaries from making improper
payments to government officials or other persons around the world for the purpose of obtaining or retaining business. Recent years have
seen a substantial increase in anti-bribery law enforcement activity, with more frequent and aggressive investigations and enforcement
proceedings by both the Department of Justice and the SEC, increased enforcement activity by non-U.S. regulators, and increases in criminal
and civil proceedings brought against companies and individuals. ZIM’s anti-bribery and anti-corruption compliance plan mandates
compliance with these anti-bribery laws, establishes anti-bribery and anti-corruption policies and procedures, imposes mandatory training
on its employees and enhances reporting and investigation procedures. ZIM operates in many parts of the world that are recognized as having
governmental and commercial corruption. ZIM cannot 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 event that ZIM believes or
has reason to believe that its employees or agents have or may have violated applicable anti-corruption laws, including the FCPA, ZIM
may be required to investigate or have outside counsel investigate the relevant facts and circumstances, which can be expensive and require
significant time and attention from senior management. Violations of these laws may result in criminal or civil sanctions, inability to
do business with existing or future business partners (either as a result of express prohibitions or to avoid the appearance of impropriety),
injunctions against future conduct, profit disgorgements, disqualifications from directly or indirectly engaging in certain types of businesses,
the loss of business permits or other restrictions which could disrupt its business and have a 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 loading, offloading, transshipment, or delivery of containers, and the levying
of customs duties, fines or other penalties against ZIM as well as damage to ZIM’s reputation. Changes to existing inspection and
security procedures, including as a result of political or public pressure, could impose additional financial and legal obligations on
ZIM or its customers and may, in certain cases, render the shipment of certain types of cargo uneconomical or impractical. Any such changes
or developments may have a material adverse effect on ZIM’s business, financial condition and results of operations.
The operation of its vessels is also affected by
the requirements set forth in the International Ship and Port Facility Security Code, or the ISPS Code. The ISPS Code requires vessels
to develop and maintain a ship security plan that provides security measures to address potential threats to the security of ships or
port facilities. Although each of ZIM’s vessels is ISPS Code-certified, any failure to comply with the ISPS Code or maintain such
certifications may subject ZIM to increased liability and may result in denial of access to, or detention in, certain ports. Furthermore,
compliance with the ISPS Code requires ZIM to incur certain costs. Although such costs have not been material to date, if new or more
stringent regulations relating to the ISPS Code are adopted by the International Maritime Organization (the IMO) and the flag states,
these requirements could require significant additional capital expenditures by ZIM or otherwise increase the costs of ZIM’s operations.
ZIM is subject
to environmental regulations and failure to comply with these regulations could have a material adverse effect on ZIM’s business.
In addition, Environmental, Social and Governance (ESG) regulation and reporting is expected to intensify in the future, which could increase
its operational costs.
ZIM’s operations are subject to international
conventions and treaties, national, state and local laws and national and international regulations in force in the jurisdictions in which
its vessels operate or are registered relating to the protection of the environment. Such requirements are subject to ongoing developments
and amendments and relate to, among other things, the storage, handling, emission, transportation and discharge of hazardous and non-hazardous
substances, such as sulfur oxides, nitrogen oxides and the use of low- sulfur fuel or shore power voltage, and the remediation of contamination
and liability for damages to natural resources. ZIM is subject to the International Convention for the Prevention of Pollution from Ships
(or, MARPOL Convention, including designation of Emission Control Areas thereunder), the International Convention for the Control and
Management of Ships Ballast Water & Sediments, the International Convention on Liability and Compensation for Damage in Connection
with the Carriage of Hazardous and Noxious Substances by Sea of 1996, the Oil Pollution Act of 1990, the 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.
If ZIM fails to comply with any environmental requirements
applicable to it, it could be exposed to, among other things, significant environmental liability damages, administrative and civil penalties,
criminal charges or sanctions, and could result in the termination or suspension of, and substantial harm to, ZIM’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 ZIM 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 ZIM’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, including
Israeli privacy laws and the European Union’s General Data Protection Regulation (2016/679), or the GDPR, which relates to the collection,
use, retention, security, processing and transfer of personally identifiable information about ZIM’s customers and employees in
the countries where ZIM operates. ZIM has also been certified as compliant with ISO27001 in Israel (information security management standard)
and ISO27701 (extension to the information security management standard).
The EU data protection regime expands the scope
of the EU data protection law to all companies processing data of EEA individuals, imposes a stringent data protection compliance regime,
including administrative fines of up to the greater of 4% of worldwide turnover or €20 million (as well as the right to compensation
for financial or non-financial damages claimed by any individuals), and includes new data subject rights such as the “portability”
of personal data. Although ZIM is generally a business that serves other businesses (B2B), ZIM still process and obtain certain personal
information relating to individuals, and any failure by ZIM to comply with the GDPR or other data privacy laws where applicable could
result in proceedings or actions against ZIM, which could subject ZIM to significant fines, penalties, judgments and negative publicity.
Labor shortages
or disruptions could have an adverse effect on ZIM’s business and reputation.
ZIM employs, directly and indirectly, approximately
6,460 employees around the globe (including contract workers) as of December 31, 2023. ZIM, ZIM’s subsidiaries, and the independent
agencies with which ZIM has agreements could experience strikes, industrial unrest or work stoppages. Several of ZIM’s employees
are members of unions. In recent years, ZIM has experienced labor interruptions as a result of disagreements between management and unionized
employees and have entered into collective bargaining agreements addressing certain of these concerns. If such disagreements arise and
are not resolved in a timely and cost-effective manner, such labor conflicts could have a material adverse effect on 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 of these effects could adversely affect
ZIM’s business, financial condition and results of operations.
Risks related to ZIM’s ordinary
shares
The State of
Israel holds a Special State Share in ZIM, which imposes certain restrictions on ZIM’s operations and gives Israel veto power over
transfers of certain assets and shares above certain thresholds, and may have an anti-takeover effect.
The State of Israel holds a Special State Share
in ZIM, which imposes certain limitations on ZIM’s operating and managing activities and could negatively affect ZIM’s business
and results of ZIM’s operations. These limitations include, among other things, transferability restrictions on ZIM’s share
capital, restrictions on ZIM’s ability to enter into certain merger transactions or undergo certain reorganizations and restrictions
on the composition of ZIM’s Board of Directors and the nationality of ZIM’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 ZIM’s ordinary shares or otherwise negatively affect ZIM’s business and results of operations. In addition, the
terms of the Special State Share dictate that ZIM maintains a minimum fleet of 11 wholly-owned seaworthy vessels. As of March 1, 2024,
ZIM owned 14 vessels.
ZIM’s
dividend policy is subject to change at the discretion of ZIM’s Board of Directors and there 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 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 the
satisfaction of the applicable relevant tests under the Israeli Companies law at the time of these distributions. ZIM paid a cash dividend
of approximately $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 approximately $3.30 billion. During 2021, ZIM paid a special cash dividend of approximately
$237 million, and a cash dividend of approximately $299 million.
Any dividends must be declared by ZIM’s board
of directors, which will take into account various factors including ZIM’s profits, ZIM’s investment plan, ZIM’s financial
position and additional factors it deems appropriate. While ZIM initially intends to distribute 30–- 50% of ZIM’s annual net
income, the actual payout ratio could be anywhere from 0% to 50% of ZIM’s net income, and may fluctuate depending on ZIM’s
cash flow needs and such other factors. There can be no assurance that dividends will be declared in accordance with ZIM’s board’s
policy or at all, and ZIM’s board of directors may decide, in its absolute discretion, at any time and for any reason, not to pay
dividends, to reduce the amount of dividends paid, to pay dividends on an ad-hoc basis or to take other actions, which could include share
buybacks, instead of or in addition to the declaration of dividends. Accordingly, ZIM expects that the amount of any cash dividends ZIM
distributes will vary 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 pay dividends is limited
by Israeli law, which permits the distribution of dividends only out of distributable profits and only if there is no reasonable concern
that such distribution will prevent ZIM from meeting ZIM’s existing and future obligations when they become due.
Risks Related to Our Ordinary Shares
Our ordinary
shares are traded on more than one stock exchange and this may result in price variations between the markets.
Our ordinary shares are listed on each of the NYSE
and the TASE. Trading of our ordinary shares therefore takes place in different currencies (U.S. Dollars on the NYSE and New Israeli Shekels
on the TASE), and at different times (resulting from different time zones, different trading days and different public holidays in the
United States and Israel). The trading prices of our ordinary shares on these two markets may differ as a result of these, or other, factors.
Any decrease in the price of our ordinary shares on either of these markets could also cause a decrease in the trading prices of our ordinary
shares on the other market.
A significant
portion of our outstanding ordinary shares may be sold into the public market, which could cause the market price of our ordinary shares
to drop significantly, even if our business is doing well.
A significant portion of our shares are
held by Ansonia, which holds approximately 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. Sales of our shares by Ansonia or
the perception that any such sales may occur 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
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,
a merger or other sale of our company or our assets, and all matters requiring shareholder approval. In certain circumstances, Ansonia’s
interests as a principal shareholder may conflict with the interests of our other shareholders and Ansonia’s ability to exercise
control, or exert significant influence, over us may have the effect of causing, delaying, or preventing changes or transactions that
our other shareholders may or may not deem to be in their best interests.
We may not
pay dividends or make other distributions 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, dividends, whether in cash or in specie, must be paid out of our profits available for distribution.
The availability of distributable profits is assessed on the basis of Kenon’s stand-alone accounts (which are based upon the Singapore
Financial Reporting Standards (the “SFRS”)). We may incur losses and we may not have sufficient distributable income that
can be distributed to our shareholders as a dividend or other distribution in the foreseeable future. Therefore, we may be unable to pay
dividends to our shareholders unless and until we have generated sufficient distributable reserves. Accordingly, it may not be legally
permissible for us to pay dividends to our shareholders.
Under Singapore law, it is possible to effect either
a court-free or court-approved capital reduction exercise to return cash and/or assets to our shareholders. Further, the completion of
a court-free capital reduction exercise will depend on whether our directors are comfortable executing a solvency statement attesting
to our solvency, as well as whether there are any other creditor objections raised. We have completed capital reduction exercises in connection
with some prior distributions, but there is no assurance that we will be able to complete further capital reductions in the future.
If we do not declare dividends with respect to
our ordinary shares, a holder of our ordinary shares will only realize income from an investment in our ordinary shares if there is an
increase in the market price of our ordinary shares. Such potential increase is uncertain and unpredictable.
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 or other cash distributions in respect of our ordinary shares would be declared in U.S. Dollars, and any shareholder whose principal
currency is not the U.S. Dollar would be subject to exchange rate fluctuations.
The ordinary shares are, and any cash dividends
or other distributions to be declared in respect of them, if any, will be denominated in U.S. Dollars. For example, in every year between
2018 and 2023, we have made cash distributions to our shareholders. Although a significant percentage of our shareholders hold their shares
through the TASE, each of these distributions was denominated in U.S. Dollars. Shareholders whose principal currency is not the U.S. Dollar
are exposed to foreign currency exchange rate risk. Any depreciation of the U.S. Dollar in relation to such foreign currency will reduce
the value of such shareholders’ ordinary shares and any appreciation of the U.S. Dollar will increase the value in foreign currency
terms. In addition, we will not offer our shareholders the option to elect to receive dividends, if any, in any other currency. Consequently,
our shareholders may be required to arrange their own foreign currency exchange, either through a brokerage house or otherwise, which
could incur additional commissions or expenses.
We are a “foreign
private issuer” under U.S. securities laws and, as a result, are subject to disclosure obligations that are different from those
applicable to U.S. domestic registrants listed on the NYSE.
We are incorporated under the laws of Singapore
and, as such, will be considered a “foreign private issuer” under U.S. securities laws. Although we will be subject to the
reporting requirements of the Exchange Act, the periodic and event-based disclosure required of foreign private issuers under the Exchange
Act is different from the disclosure required of U.S. domestic registrants. Therefore, there may be less publicly available information
about us than is regularly published by or about other public companies in the United States. We are also exempt from certain other sections
of the Exchange Act that U.S. domestic registrants are otherwise subject to, including the requirement to provide our shareholders with
information statements or proxy statements that comply with the Exchange Act. In addition, insiders and large shareholders of ours are
exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act and are not obligated
to file the reports required by Section 16 of the Exchange Act.
As a foreign
private issuer, we follow home country corporate governance practices instead of otherwise applicable SEC and NYSE corporate governance
requirements, and this may result in less investor protection than that accorded to investors under rules applicable to domestic U.S.
issuers.
As a foreign private issuer, we are permitted to
follow certain home country corporate governance practices instead of those otherwise required under the NYSE’s rules for domestic
U.S. issuers, provided that we disclose which requirements we are not following and describe the equivalent home country requirement.
For example, foreign private issuers are permitted to follow home country practice with regard to director nomination procedures and the
approval of compensation of officers.
In addition, we are not required to maintain a
board comprised of a majority of independent directors and a fully independent nominating and corporate governance committee. We generally
seek to apply the corporate governance rules of the NYSE that are applicable to U.S. domestic registrants that are not “controlled”
companies. We may, in the future, decide to rely on other foreign private issuer exemptions provided by the NYSE and follow home country
corporate governance practices in lieu of complying with some or all of the NYSE’s requirements.
Following our home country governance practices,
as opposed to complying with the requirements that are applicable to a U.S. domestic registrant, may provide less protection to you than
is accorded to investors under the NYSE’s corporate governance rules. Therefore, any foreign private exemptions we avail ourselves
of in the future may reduce the scope of information and protection to which you are otherwise entitled as an investor.
It may be difficult
to enforce a judgment of U.S. courts for civil liabilities under U.S. federal securities laws against us, our directors or officers in
Singapore.
We are incorporated under the laws of Singapore
and certain of our officers and directors are or will be residents outside of the United States. Moreover, most of our assets are located
outside of the United States. Although we are incorporated outside of the United States, we have agreed to accept service of process in
the United States through our agent designated for that specific purpose. Additionally, for so long as we are listed in the United States
or in Israel, we have undertaken not to claim that we are not subject to any derivative/class action that may be filed against us in the
United States or Israel, as may be applicable, solely on the basis that we are a Singapore company. However, since most of the assets
owned by us are located outside of the United States, any judgment obtained in the United States against us may not be collectible within
the United States.
Furthermore, there is no treaty between the United
States and Singapore providing for the reciprocal recognition and enforcement of judgments in civil
and commercial matters. Therefore, a final judgment for the payment of money rendered by any federal or state court in the United States
based on civil liability, whether or not predicated solely upon the federal securities laws, would not be automatically enforceable in
Singapore. Additionally, there is doubt as to whether a Singapore court would impose civil liability on us or our directors and officers
who reside in Singapore in a suit brought in the Singapore courts against us or such persons with respect to a violation solely of the
federal securities laws of the United States, unless the facts surrounding such a violation would constitute or give rise to a cause of
action under Singapore law. We have undertaken not to oppose the enforcement in Singapore of judgments or decisions rendered in Israel
or in the United States in a class action or derivative action to which Kenon is a party. Notwithstanding such an undertaking, it may
still be difficult for investors to enforce against us, our directors or our officers in Singapore, judgments obtained in the United States
which are predicated upon the civil liability provisions of the federal securities laws of the United States.
We are incorporated
in Singapore and our shareholders may have greater difficulty in protecting their interests than they would as shareholders of a corporation
incorporated in the United States.
Our corporate affairs are governed by our Constitution
and by the laws governing companies incorporated or, as the case may be, registered in Singapore. The rights of our shareholders and the
responsibilities of the members of our board of directors under Singapore law are different from those applicable to a corporation incorporated
in the United States. Therefore, our public shareholders may have more difficulty in protecting their interest in connection with actions
taken by our management or members of our board of directors than they would as shareholders of a corporation incorporated in the United
States. For information on the differences between Singapore and Delaware corporation law, see “Item
10.B Constitution.”
Singapore corporate
law may delay, deter or prevent a takeover of our company by a third party, but as a result of a waiver from application of the Code,
our shareholders may not have the benefit of the application of the Singapore Code on Take-Overs and Mergers, which could adversely affect
the value of our ordinary shares.
The Singapore Code on Take-overs and Mergers and
Sections 138, 139 and 140 of the Securities and Futures Act 2001 contain certain provisions that may delay, deter or prevent a future
takeover or change in control of our company for so long as we remain a public company with more than 50 shareholders and net tangible
assets of $5 million or more. Any person acquiring an interest, whether by a series of transactions over a period of time or not, either
on his own or together with parties acting in concert with such person, in 30% or more of our voting shares, or, if such person holds,
either on his own or together with parties acting in concert with such person, between 30% and 50% (both inclusive) of our voting shares,
and such person (or parties acting in concert with such person) acquires additional voting shares representing more than 1% of our voting
shares in any six-month period, must, except with the consent of the Securities Industry Council of Singapore, extend a mandatory takeover
offer for the remaining voting shares in accordance with the provisions of the Singapore Code on Take-overs and Mergers.
In October 2014, the Securities Industry Council
of Singapore waived the application of the Singapore Code on Take-overs and Mergers to the Company, subject to certain conditions. Pursuant
to the waiver, for as long as Kenon is not listed on a securities exchange in Singapore, and except in the case of a tender offer (within
the meaning of U.S. securities laws) where the offeror relies on a Tier 1 exemption to avoid full compliance with U.S. tender offer regulations,
the Singapore Code on Take-overs and Mergers shall not apply to Kenon.
Accordingly, Kenon’s shareholders will not
have the protection or otherwise benefit from the provisions of the Singapore Code on Take-overs and Mergers and the Securities and Futures
Act to the extent that this waiver is available.
Our directors
have general authority to allot and issue new shares on terms and conditions and with any preferences, rights or restrictions as may be
determined by our board of directors in its sole discretion, which may dilute our existing shareholders. We may also issue securities
that have rights and privileges that are more favorable than the rights and privileges accorded to our existing shareholders.
Under Singapore law, we may only allot and issue
new shares with the prior approval of our shareholders in a general meeting. Other than with respect to the issuance of shares pursuant
to awards made under our Share Incentive Plan 2014 or Share Option Plan 2014, and subject to the general authority to allot and issue
new shares provided by our shareholders annually, the provisions of the Companies Act 1967, or the Singapore Companies Act, and our Constitution,
our board of directors may allot and issue new shares on terms and conditions and with the rights (including preferential voting rights)
and restrictions as they may think fit to impose. Any such offering may be on a pre-emptive or non-pre-emptive basis. Subject to the prior
approval of our shareholders for (i) the creation of new classes of shares and (ii) the granting to our directors of the authority to
issue new shares with different or similar rights, additional shares may be issued carrying such preferred rights to share in our profits,
losses and dividends or other distributions, any rights to receive assets upon our dissolution or liquidation and any redemption, conversion
and exchange rights. At the annual general meeting (the “AGM”) of shareholders held in 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 2024, or the 2024 AGM, or the expiration of the period by which the 2024 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 2023 AGM and shareholders will be asked to renew this authority at the 2024 AGM. Ansonia, our significant
shareholder, may use its ability to control to approve a grant of such authority to our board of directors, or exert influence over, our
board of directors to cause us to issue additional ordinary shares, which would dilute existing holders of our ordinary shares, or to
issue securities with rights and privileges that are more favorable than those of our ordinary shareholders. There are no statutory pre-emptive
rights for new share issuances conferred upon our shareholders under the Singapore Companies Act. Furthermore, any additional issuances
of new shares by our directors could adversely impact the market price of our ordinary shares.
Risks Related to Taxation
We may be treated
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 own, directly or indirectly, 25% or more (by value) of the stock, we believe that we were not a PFIC for U.S.
federal income tax purposes for the taxable year ended December 31, 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 such
year. In 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 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 also affect our PFIC status.
Although we believe that we were not a PFIC
for the taxable year ended December 31, 2023, we were likely treated as a PFIC for the taxable year ended December 31, 2022 and we may
again be treated as a PFIC for U.S. federal income tax purposes for foreseeable future taxable 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, the U.S. federal income tax consequences to a
U.S. Holder of the ownership, and disposition of our ordinary shares will depend on whether or not such U.S. Holder makes a “qualified
electing fund” or “QEF” election (the “QEF Election”) or makes a mark-to-market election (the “Mark-to-Market
Election”) with respect to our ordinary shares. 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 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.”
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.
There can be no assurance that our shareholders,
solely as a result of owning our ordinary shares, will not be subject to certain taxes, including non-U.S. taxes, imposed by the various
jurisdictions in which we and our businesses do business or own property now or in the future, even if our shareholders do not reside
in any of these jurisdictions. Consequently, our shareholders may also be required to file 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 55% interest in OPC, an owner, developer and operator
of power generation facilities in the Israeli and US power market; |
|
• |
an approximately 20.7% interest in ZIM, a large provider of global container
shipping services; and |
|
• |
a 12% interest in Qoros, a China-based automotive company. |
The legal and commercial name of the Company is
Kenon Holdings Ltd. Our principal place of business is located at 1 Temasek Avenue #37-02B, Millenia Tower, Singapore 039192. Our telephone
number at our principal place of business is + 65 6351 1780. Our internet address is www.kenon-holdings.com.
We have appointed Gornitzky & Co., Advocates and Notaries, as our agent for service of process in connection with certain claims which
may be made in Israel.
Our ordinary shares are listed on the NYSE and
the TASE under the symbol “KEN.”
The SEC also maintains a website that contains
reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at http://www.sec.gov.
We are a holding company initially established
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 well-positioned to take advantage of
such opportunities, which may include investments or acquisitions in new businesses. We expect that such acquisitions or other investments,
if any, would be in established industries, would be substantial and that we would be actively involved in the operations and promoting
the growth and development of such businesses. In addition, we do not expect that any such acquisitions or other investments would be
in start-up companies or focused on emerging markets.
In addition to new investments in new businesses,
we have made significant investments and may make further investments in OPC, in which Kenon holds a 55% stake. OPC remains a growth business
with projects under development and OPC’s strategy contemplates continued development of projects and potentially acquisitions in
Israel, the U.S., and elsewhere. The U.S. market presents significant opportunities in areas such as renewable energy and carbon capture
projects, particularly in light of the Inflation Reduction Act (the “IRA”), and OPC’s subsidiary CPV is actively pursuing
these opportunities. OPC’s growth strategy could require significant equity investments at the OPC level, which may present opportunities
for Kenon to participate in such capital raises.
We may fund any such acquisition or investments
in new or existing businesses through cash on hand, sales of interests in other businesses or by raising new financing.
Kenon holds 20.7% of ZIM, as compared to 32% at
the time of the Spin-off, and remains the largest shareholder in ZIM. ZIM has experienced significant value appreciation and paid substantial
dividends under Kenon’s ownership. Kenon has sold a portion of its interest in ZIM in 2022 at attractive price levels while retaining
a significant interest in ZIM, and Kenon continues to evaluate its interest in ZIM.
In addition, Kenon will continue to consider the return of capital to shareholders,
based on market conditions, capital requirements, potential investment opportunities and other relevant considerations. 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 100% of our revenues in
the year ended December 31, 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 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. |
|
• |
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 |
|
• |
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). |
Furthermore, OPC (through CPV) is engaged
in additional business activities (U.S. Other) in the United States that are complementary to electricity generation activity of the CPV
Group. These additional activities include initiation and development of projects for generation of electricity (highly-efficient power
planning running on natural gas) integrating carbon capturing capabilities, under various development stages; the provision of assets
and energy management services to power plants in the U.S., which it holds, and which are owned by third parties, and a retail operation
to sell electricity from renewable sources to commercial and industrial customers which started in 2023 and which is designed to supplement
the generation activities of electricity from renewable sources of CPV.
Operations Overview
The following tables set forth summary operational
information regarding OPC’s main operations in Israel (held and operated through OPC Israel) and the United States (held and operated
by CPV).
Israel
The following table sets forth summary operational
information regarding OPC’s main operations in Israel (held and operated through OPC Israel):
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. |