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Wind shares trading well

When Kenetech Corp went public last year significant players in America's financial market bought into the company -- major money and mutual fund managers. Some bought more than $5.5 million in shares at $16.50 each. And with the stock now hovering around $23.00, down from its peak of just over $26.50 -- and with Kenetech announcements of new projects emerging with regularity -- it appears that financial analysts remain bullish about the future of the company itself and wind energy in general.

Some experts say Kenetech is a good bet because of utility interest in renewables, because the San Francisco company is signing contracts regularly, and because oil prices have probably bottomed out. "All kinds of people are buying the stock," says Leonard Hyman, a utility analyst with Merrill Lynch, the company that underwrote the stock offering last summer. "They expect to make money on it." He says buyers include institutional and individual investors. Merrill Lynch, not surprisingly for an underwriter, rates the investment as above-average for the next few years. "They're about to sign contracts and get earnings as their production increases," he says of Kenetech.

The downside is that the stock is speculative, there is no dividend, Kenetech has yet to turn a profit, and if the market falls the company will probably be among those that plummet. "It could tumble rather far in the wrong kind of market," says Hyman, adding that the problem is generic for most small companies going public and not specifically linked to wind energy. The stock could also plummet if something goes wrong with the production process, or if no one wants to buy wind turbines. "But I think people are going to buy windmills -- renewables look good and windmills are the most economic of renewables."

A Kenetech source backs this viewpoint: "It's a generally accepted utility technology." He adds that it is not just green or environmental analysts who are recommending buying Kenetech stock -- but utility analysts as well. "It's because the utilities themselves are looking at wind," he says. "It's also a question of Kenetech's backlog." The company has signed a number of contracts in recent months.

When the stock was released some of those buying were major financial players (see table). An analyst with one of the buyers which still owns most of its stock remains bullish for the next few years. "We thought it was very attractive at the price," he says. "There has been a nice string of successes in the market-place. The backlog looks very solid for a couple of years." He adds, however, that his company is waiting to see how Kenetech executes some of the contracts with mass production of the 33M-VS. "Their expected level of profitability has not been verified in the market-place," he cautions. He also says that because the market is looking so good, other suppliers will emerge. "All that demand creates a fertile ground for competitors." He admits, though, that it will probably be four or five years before there is serious competition.

But an analyst with one of the money managers, which sold the Kenetech stock after a few weeks, was less bullish. "They're selling equipment rather than owning the wind farms," he comments. He says such a situation means less recurring revenues and a less-predictable earnings stream. "It's better if they get revenues from selling the electricity not just from selling the equipment." Even so, he points out, the company has done an "outstanding" job in terms of getting contracts signed. "If they keep getting the orders, I think they'll be quite successful." Does it matter there is no dividend being offered? "It's not a factor." Buyers are looking for capital appreciation with such smaller companies, not dividends. If there is no dividend, he says, that means there are uses for the money within the company. "There are ways for the money to grow."

In January, Kenetech announced it had secured partial financing for wind energy projects to sell power to Southern California Edison and Northern States Power Co of Minnesota. The $82 million capital cost of the projects -- 22 MW near Palm Springs and 25 MW in Minnesota -- will be financed through 50% debt and 50% equity. The Palm Springs project will be operating this spring, while the Minnesota one -- the largest using the 33M-VS in a cold-weather setting -- will be on line this month. Twelve-year non-recourse fixed-rate debt has been provided by John Hancock Mutual Life Insurance Co of Boston. About 75% of the limited partnership equity is provided by LG&E Energy Corp of Louisville, Kentucky and Allstate Project Finance of Northbrook, Illinois. LG&E, which will co-manage the partnerships through a subsidiary, has 23 power plants in the Louisville, Kentucky area. Allstate Insurance Co is a principal shareholder of Kenetech.

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