The company attributed its decision to an inability to meet maintenance and warranty obligations, as well as lack of capital, repair costs, deregulation of the electricity market, sales declines, and difficulty in re-scheduling contract obligations. It was not immediately clear whether the wind division would be reorganised (to keep creditors at bay while the company sorts out a financial mess) or entirely liquidated. A Kenetech spokesman said it would take "many millions of dollars" to fix a "hodgepodge of problems" associated with the KVS-33, according to Reuters news agency.
Meanwhile, staff at both the Livermore plant and in San Francisco were laid off in huge numbers. An estimated skeleton crew of about 50 remained in Livermore -- only a minimum of field technicians and some employees to oversee computerised control of its wind farms. An unknown number of executives and support staff remained at the San Francisco corporate offices of Kenetech Corp, which said it had no plans to seek relief of its own under the Bankruptcy Code. Earlier in the week, an estimated 150 staff in Livermore had reportedly been fired, some without severance pay.
Kenetech Windpower is the corporation's main subsidiary. During 1995, it accounted for $231 million of the $327 million in revenues, and virtually the entire $250 million corporate loss for the year. But it had also quit making wind turbines at the beginning of the year because of poor demand and technical problems. "Kenetech's liquidityÉ will continue to be severely constrained," the company stated.
As a result of the bankruptcy, Kenetech Corp will default on $100 million of junk bonds. The corporation says it does not plan to pay interest in two instalments totalling $6.4 million due on June 15 and December 15. Because of the company's problems, widely-reported in the US financial press, the notes had been trading at about 40% of their face value. Kenetech also said it would probably not make any debt payments for the rest of the year, but that it was hopeful that note-holders would "refrain from taking any action" that would force the entire company into bankruptcy.
In addition to its looming instalment payment, Kenetech was hit on May 15 by the loss of the second phase of the Sacramento Municipal Utility District wind project (see box). On the day before the SMUD bombshell, Kenetech had disclosed yet-again poor first quarter earnings. The wind company revealed a bigger than expected loss of $16.8 million or 52 cents a share, compared with $3.1 million or 14 cents for the same period a year ago. Even the most pessimistic analysts had expected a loss of only 25 cents a share.
For some time Kenetech, founded in 1980, had been facing widespread technical problems in its Model KVS-33 and a disastrous market in the US for utility-scale projects. In December, it announced it had hired Smith Barney to explore a possible sale, but said on May 29 that it had not been able to sell enough assets to meet obligations.
But nowhere was the crisis more apparent than in one simple but striking item in the quarterly "10-Q" report filed with the US government. In the first quarter, Kenetech's only sale of wind turbines was to an affiliate to replace ones destroyed during high winds in Texas. Other than that, the only sales during the three months were of turbine parts.
Negative outlook
Reaction was swift to the long anticipated bankruptcy filing, made after the stock market closed. The next day Kenetech shares closed up $0.04 to $0.76 a share, down from a high of $16.75 last year in Nasdaq trading. Standard & Poor's almost immediately lowered its rating of Kenetech's secured debt to "double-C" and stated that the outlook is negative.
The American Wind Energy Association's Randy Swisher released a grim statement on May 30 warning that Kenetech Windpower's bankruptcy is a clear signal that the US is in danger of losing out in a growing multi-billion dollar global market. "Kenetech's failure should in no way be taken as a failure of the wind industry as a whole," he stated. "Despite Kenetech's missteps, our government's inconsistent policies and its overwhelming emphasis on short term fixes to problems at the expense of long term policies has made managing a growing company in the renewable energy business far more difficult than it should be."
The bankruptcy does not, however, defer all problems for Kenetech. Despite the bankruptcy filing, a class action securities fraud lawsuit will proceed, says a law office representative. He notes the suit, filed by shareholders, is against Kenetech Corp, not Kenetech Windpower, several of its various officers and the company's financial underwriters.
In other cases the bankruptcy changes the situation drastically. Walt George of the US Bureau of Land Management in Wyoming says the portion of a 70.5 MW Kenetech project planned on his agency's land was on "indefinite hold." "We can't issue a permit to someone in Chapter 11," he said on May 30, noting rumours that Kenetech might try to bring in a new developer or a more reliable turbine than its own. "We just need to see who emergesÉ obviously we'd have to scrutinise a new proposal with a new company," he cautions.
Kenetech had strongly hinted in its 18-page "10-Q" Quarterly Report, that it might soon seek bankruptcy. The 10-Q also revealed the company's worsening finances were significantly exacerbated by a drop in turbine sales for the quarter, ended March 30, to $3.4 million, compared with $47 million a year ago. That difference knocked total revenues for the quarter down by some two-thirds, from $74.8 million to $27.7 million. Still, the firm's cash position rose by about $2 million to $19 million for the quarter.
In addition to the deadline for interest on its junk bonds, Kenetech faces a $12.1 million payment on a two-year revolving credit agreement due on September 30 to a consortium of banks headed by JP Morgan. And on a revolving credit agreement with Netherlands ABN-AMRO Bank, Kenetech is pledging the sale of its CNF Construction subsidiary against the $7.5 million loan, payable on the sale.
Even if Kenetech Corp survives, life may not improve much, with predictions of negative operating cash flow for the rest of 1996 in the 10-Q. After noting that some creditors and lenders are seeking repayment, Kenetech concludes: "These factors raise substantial doubt about the company's ability to continue as a going concern." Kenetech warns -- in contrast to previous overly-optimistic statements -- that it may fail to sell assets or subsidiaries fast enough or for enough money, that it may not find a fix for the KVS-33, that utilities may continue to pay less for electricity, that an adequate market may not be found, and that it may fail to restructure certain contractual and debt obligations. "There can be no assurance that the company will be successful in implementing its plans."
Assets sold
In the 10-Q, Kenetech announced four sales made in April and May. It signed a purchase and sale agreement for a subsidiary that holds equity investments in several funds which make investments in power projects. Kenetech says the asset is worth $9 million and that it does not expect to make a loss on the sale. Also, Kenetech says it signed an agreement to sell its demand side management business. The buyer has paid $400,000 cash and assumed the business's debts. In May, Kenetech agreed to sell its subsidiary that sells wood fuel to electric power plants for about $1.5 million and its manufacturing facility in Waco, Texas -- which was to have been used to manufacture wind turbines -- for $1.2 million cash.
A fifth sale, announced separately, was of Kenetech Energy Management -- which apparently consists of some 40 contracts -- to energy and engineering managers Xenergy Inc of Burlington, Massachusetts. Kenetech also noted again that it is implementing fixes for the KVS-33, including engineering and software improvements. It still cautioned that an economically feasible fix might never be found.
More general problems are also apparent in the document. Although the production for the company's own account increased, from some 167 MW of installed capacity to 178 MW because of buy-backs of wind turbines from partnerships, Kenetech was hit by the "year 11 price cliff" in California, as its lucrative ten year contracts for sales of electricity from nearly 75% of its wind plant expired. The average price received for electricity in the quarter dropped from $0.087 to $0.053/kWh and for the remaining 27% of its plant, the fixed price from Pacific Gas & Electric will end in December 1997.
