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BANKRUPTCY LOOMING AFTER HUGE LOSSES; Cost effective fix to technology uncertain admits Kenetech

An unexpectedly high loss of $250.1 million for 1995, or $7.12 per share for the year, was reported last month by Kenetech Corp. The publicly traded company also reported it had axed 100 more jobs and that its liquidity crisis is "severe" and will force it to further curtail operations or sell assets to survive. For months, the San Francisco wind manufacturer and developer has faced massive financial problems that have pushed it close to bankruptcy or liquidation. Some financial observers say this could happen within a matter of weeks.

Not long after Kenetech's financial results hit the streets, its stock reached a new low of $0.625 a share, down from a high last year of $16.75 on the Nasdaq exchange. The size of Kenetech's loss essentially meant the value of its common stock and the majority of its preferred stock was erased. No respite seemed to be in sight last month. Bad news had rocked the firm earlier in April when CEO and turn-around specialist Richard Saunders, who replaced Gerald Alderson in December, quit or was ousted in what many saw as a sign that he thought a turn around too tough or was recommending liquidation. Newly-appointed CEO Mark Lerdal, the firm's former general counsel, refused all comment.

Nor had a buyer emerged by late April, although Kenetech had indicated as long ago as mid December that its assets were for sale. Although a number of buyers have been rumoured, nothing seemed imminent. Specifically, Kenetech is trying to sell its 20 MW Costa Rica wind plant, now under construction, and its 25% interest in the 35 MW Texas plant, among other assets, according to its Form 10-K, filed with the US Securities and Exchange Commission on April 16.

"The company is unable to borrow money and is delaying all payments except for essential services while it attempts to raise cash through asset sales, financing or other means," is one particularly blunt part of the Form 10-K, a report on annual finances a publicly traded firm makes to the US government. Kenetech employment at Livermore, apparently at 485 in mid 1995, is now thought to be down to 200 or less following the most recent round of lay-offs, of which 60 were at Livermore.

Major retrofits required

Problems with Kenetech's technology clearly remained unsolved. As many as half of the gearboxes in the KVS-33 fleet may need to be replaced because of cracking. On the same turbines, as many as 1200 to 1400 of the blades may also need replacing because of a serious design flaw where the root is bonded to the insert, according to knowledgeable sources. Blades recently failed again in Spain and California (see pages 6 & 10).

Even Kenetech's Form 10-K admits that in 1995 its KVS-33 turbines encountered "cracking and breaking of blades, failures in pitch and yaw drive systems and cracks in the transmission housing of machines." Kenetech has installed, operates and maintains some 600 of the machines, while 238 have been shipped to third parties in India and 55 to Costa Rica.

The company reportedly no longer sees the KVS-33 as competitive, because of its price and poor reputation, and indeed in the 10-K admits it may never have economic solutions for all the design's failures. Even so, hundreds of thousands of dollars worth of parts -- transmissions, bearings and other mechanical components were last month still in a warehouse in Livermore.

In a further sign that Kenetech's priorities do not include the KVS-33, late last month the company said it was unable to finance a bird study -- costing in the five figure range -- that is required for its 70.5 MW proposal of KVS-33 units in Wyoming, a situation that could seriously delay the start date. Citing financial problems, Kenetech missed the deadline to start research on passerine or perching birds as planned on April 15, says Walt George of the Bureau of Land Management. If the firm still could not start by May 1, George says an entire year of data would be lost because nesting would be missed -- and that could lead to a permitting delay of a year and a doubling of the "reclamation fee" for the 201 turbines sited on federal land, he adds. The project has been described as the key to Kenetech's wind plans in the Northwest. Two others plants in the region, at Columbia Hills and Vansycle Ridge in Oregon, would apparently follow Carbon County.

Despite rumours that Kenetech had abandoned its second generation turbine, the Model KVS-45, the company was apparently actively seeking buyers last month of this "advanced technology." Even so, the two prototype KVS-45 turbines, operating in west Texas since September, were turned off early last month and the test team, also based in Texas, laid off. The development team for the technology, once 22 strong and based in Livermore, has also been dismantled.

Kenetech, however, was trying to renegotiate last month its much needed $1.5 million three-year contract with Wisconsin Public Service (WPS) and other upper Midwest utilities, for installation of two new KVS-45 units by the end of July. Kenetech was trying to negotiate using "partly-used" KVS-45 machines for WPS instead, so that components from Texas could be used under the contract, which is in part funded by the utility sector's Electric Power Research Institute.

Even some poor results from Kenetech's workhorse Model 56-10 wind turbine, now known as the KVS56-100, were in bald print after the revealing Form 10-K was filed last month. Although average availability in California for the approximately 4050 turbines was 97% in 1994, the best wind year since development in the Altamont Pass began 15 years ago, output was 78% compared to long term expectations.

Compounding Kenetech's problems further were more allegations in the class-action securities fraud lawsuit, first filed in the US District Court in San Francisco in September 1995 (Windpower Monthly, November 1995). In an amended complaint filed March 29, the plaintiffs allege that -- from September 1993 to August 1995 -- the KVS-33 turbine's productions costs were up to 20% higher than projected and that Kenetech had been advised by some component suppliers that operating the KVS-33 in winds over 44 mph would void their warranties.

Shareholders push fraud suit

Among other new allegations, the Kenetech shareholders allege that production data from the 1992, 1993 and 1994 wind seasons did not verify Kenetech's design goals, but instead revealed certain design limitations and component problems. Siting difficulties, because of bird kills and other environmental issues, were also leading to a less-rosy project outlook than the company was suggesting.

The suit is on behalf of buyers of Kenetech stock. It more broadly accuses Kenetech, ten of its senior officers or directors and its underwriters of artificially inflating stock prices by lying or misrepresenting or omitting information about the firm's finances, business and prospects. Defendants include former CEO Gerald Alderson, former president Joel Canino, former chief financial officer Maurice Miller, and director Angus Duthie, now chairman of the board.

Kenetech's 10-K also reveals that Milwaukee Gear Co and two of its affiliates had sued Kenetech Windpower on February 9 seeking $3 million for payments due to breach of contract. Although the lawsuit is not withdrawn, an agreement was reached on March 1 that Kenetech would make certain payments and Milwaukee Gear, in exchange, would release certain components.

Yet last month it was the news of Kenetech's 1995 loss that was most startling. In an April 16 statement Kenetech announced that last year's loss of $250.1 million, after earning $4.3 million in 1994, was mostly due to restructuring. Financial observers had predicted a lower but still substantial loss of $75 million to $150 million for the company. Sales were also down to $327.6 million in 1995 from $338.2 million a year earlier. "The company is currently faced with severe liquidity constraints and negative working capital," stated Lerdal, the new president. "In order to address these critical issues and sustain future operations, the company's strategic plans include the sale of certain development projects and non-wind power assets."

Kenetech says strategic plans include: cutting certain operating expenses and restructuring some operating, maintenance and other obligations; continuation of retrofits for installed KVS-33 units; the "manufacturing" of additional KVS-33 units out of inventory; and the continued development of an advanced wind turbine. As long ago as December, Kenetech had halted manufacture of the KVS-33 (Windpower Monthly, January, 1996).

Kenetech had also warned some weeks ago it would take unspecified charges against its 1995 results for write-down of assets, warranty costs and job cuts. Those charges, disclosed in the Form 10-K, were $224.6 million. of which about one-third was a write-off of the KVS-33 technology. Kenetech also named Jim Eisen as new general counsel, a long-time in-house counsel, and Steve Kern, a long-time officer formerly in charge of turbine operation, president of its wind power unit.

But with no buyer, some financial observers were speculating that the current crisis could push the firm into liquidation within weeks or months. Deadlines for financial obligations were nearing in late April. Most imminent was a $6.4 million interest payment due on June 15, followed by a $12.1 million payment on a two-year revolving credit agreement due on September 30 to a consortium of seven banks headed by JP Morgan. In addition, on the revolving credit agreement with Netherlands based ABN-AMRO Bank NV, Kenetech is pledging the sale of its CNF construction subsidiary against the $7.5 million loan, which is now payable as soon as the subsidiary is sold.

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