UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the thirteen weeks ended March 30, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 33-53132
KENETECH CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 94-3009803
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
500 Sansome Street, Suite 300
San Francisco, California 94111
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (415) 398-3825
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes x No
On April 30, 1996, there were 36,826,098 shares of the issuer's Common
Stock, $.0001 par value outstanding.
1
<PAGE>
PART I - FINANCIAL INFORMATION
Part I
Item 1. Financial Statements.
KENETECH Corporation Consolidated Financial Statements Page
Consolidated Statements of Operations for the thirteen weeks
ended March 30, 1996 and April 1, 1995 3
Consolidated Balance Sheets, March 30, 1996 and
December 31, 1995 4
Consolidated Statement of Stockholders' Deficiency
for the thirteen weeks ended March 30, 1996 5
Consolidated Statements of Cash Flows for the thirteen
weeks ended March 30, 1996 and April 1, 1995 6
Notes to Consolidated Financial Statements 7 - 11
Item 2. Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operations. 12 - 18
--------------------------
Part II
Item 4. Submission of Matters to a Vote of Security Holders. 18
----------------------------------------------------
Item 6. Exhibits and Reports on Form 8-K. 18
---------------------------------
2
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KENETECH CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS for the thirteen weeks
ended March 30, 1996 and April 1, 1995
(unaudited, in thousands, except per share amounts)
March 30, April 1,
1996 1995
Revenues:
Construction services $10,895 $12,948
Maintenance, management fees and other 7,270 7,092
Energy sales 4,755 4,355
Windplant sales 3,383 47,046
Energy management services 738 2,128
Interest on partnership notes and funds in escrow 668 1,237
------- -------
Total revenues 27,709 74,806
Costs of revenues:
Construction services 9,309 12,139
Energy plant operations 14,473 15,261
Windplant sales 3,344 34,304
Energy management services 186 1,067
------- -------
Total costs of revenues 27,312 62,771
Gross margin 397 12,035
Project development and marketing expenses 1,982 1,626
Engineering expenses 2,602 2,713
General and administrative expenses 7,117 7,588
------- -------
Income (Loss) from operations (11,304) 108
Interest income 475 992
Interest expense (5,734) (5,086)
Equity loss of unconsolidated affiliates (187) (1,116)
------- -------
Loss before taxes (16,750) (5,102)
Income tax benefit - (2,051)
------- -------
Net loss $(16,750) $(3,051)
======== =======
Net loss per common share - Primary $(0.52) $(0.14)
Weighted average number of common shares used in computing
per share amounts - Primary 36,638 36,073
The accompanying notes are an integral part of
these consolidated financial statements.
3
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KENETECH CORPORATION
CONSOLIDATED BALANCE SHEETS
March 30, 1996 and December 31, 1995
(unaudited, in thousands, except share amounts)
ASSETS
March 30, December 31,
1996 1995
Current assets:
Cash and cash equivalents $ 18,722 $ 16,842
Funds in escrow, net 9,089 12,531
Accounts receivable 27,502 52,593
Partnership notes and interest receivable, net 738 1,477
Inventories 36,642 38,684
Investment in power plant held for sale 19,991 19,951
Deferred tax assets, net 2,764 2,764
Other 5,963 5,980
-------- ---------
Total current assets 121,411 150,822
Accounts receivable and funds in escrow, net 20,455 21,031
Partnership notes and interest receivable, net 22,570 22,566
Inventory, net 18,431 18,431
Property, plant and equipment, net 115,303 118,214
Power plants under development 16,102 14,956
Investments in affiliates 10,853 9,686
Deferred tax assets, net 38,235 38,235
Other assets 7,241 7,308
-------- ---------
Total assets $370,601 $ 401,249
======== =========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable $ 30,027 $ 38,663
Bank loan payable 17,050 13,200
Accrued liabilities 55,821 59,065
Debt associated with power plant held for sale 16,958 16,958
Other notes payable 18,604 18,794
Estimated warranty costs 7,286 7,374
-------- ---------
Total current liabilities 145,746 154,054
Senior secured notes payable 98,917 98,887
Accrued losses on contracts 35,835 36,992
Other notes payable 49,094 53,161
Estimated warranty costs and other
long-term obligations 64,968 63,714
-------- ---------
Total liabilities 394,560 406,808
Commitments and contingencies
Stockholders' deficiency:
Convertible preferred stock - 10,000,000 shares
authorized, $.01 par value; issued and
outstanding 102,492, $106,984 liquidation
preference 99,561 99,561
Common stock - 110,000,000 shares authorized,
$.0001 par value; issued and
outstanding 36,826,098 in 1996 and
36,533,836 in 1995 4 4
Additional paid-in capital 142,644 144,551
Unearned compensation (253) (281)
Cumulative foreign exchange 315 86
Accumulated deficit (266,230) (249,480)
-------- ---------
Total stockholders' deficiency (23,959) (5,559)
-------- ---------
Total liabilities and stockholders' deficiency $370,601 $ 401,249
======== =========
The accompanying notes are an integral part of
these consolidated financial statements.
4
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KENETECH CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY
for the thirteen weeks ended March 30, 1996
(unaudited, in thousands, except share amounts)
<TABLE>
<CAPTION>
Effect of
Convertible Common Stock Additional Cumulative
Preferred Stock Series A Paid-In Unearned Foreign Accumulated
Shares Amount Shares Amount Capital Compensation Exchange Deficit Total
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 102,492 $ 99,561 36,533,836 $ 4 $ 144,551 $ (281) $ 86 $(249,480) $ (5,559)
Issuance of common stock - - 292,262 - 234 - - - 234
Recognition of unearned
compensation - - - - - 28 - - 28
Preferred stock dividends - - - - (2,141) - - - (2,141)
Foreign exchange - - - - - - 229 - 229
Net loss - - - - - - - (16,750) (16,750)
-------- -------- -------- --------- -------- --------- -------- --------- --------
Balance, March 30, 1996 102,492 $ 99,561 36,826,098 $ 4 $ 142,644 $ (253) $ 315 $(266,230) $(23,959)
======== ======== ========== ========= ======== ========= ======== ========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
5
<PAGE>
KENETECH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS for the
thirteen weeks ended March 30, 1996 and April 1, 1995
(unaudited, in thousands)
March 30, April 1,
1996 1995
Cash flows from operating activities:
Net loss $(16,750) $ (3,051)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Deferred income taxes - (2,012)
Depreciation, amortization and other 3,578 5,414
Capitalized development costs allocated to
cost of sales - 5,088
Changes in assets and liabilities:
Funds in escrow, net 3,491 5,138
Accounts receivable 25,618 (4,311)
Partnership notes and interest receivable, net 735 (689)
Inventories (1,223) (11,268)
Other assets 86 567
Accounts payable and accrued liabilities (8,524) (4,403)
Accrued loss on contracts (1,157) -
Estimated warranty costs (966) 1,065
------- -------
Net cash provided by (used in) operating
activities 4,888 (8,462)
Cash flows from investing activities:
Sales of marketable securities - 19,949
Purchases of marketable securities - (481)
Acquisition of Century Contractors West, Inc. - (1,360)
Additions to property, plant and equipment (202) (3,172)
Power plants under development (1,146) (5,303)
Investments in affiliates:
Contributions (1,814) (5,469)
Distributions 512 327
------- -------
Net cash provided by (used in) investing
activities (2,650) 4,491
Cash flows from financing activities:
Proceeds from other notes payable - 1,678
Payments on other notes payable (4,442) (5,744)
Proceeds from bank loan 3,850 -
Proceeds from issuance of common stock, net 234 1,702
------- -------
Net cash used in financing activities (358) (2,364)
------- -------
Increase (Decrease) in cash and cash equivalents 1,880 (6,335)
Cash and cash equivalents at beginning of period 16,842 42,618
------- -------
Cash and cash equivalents at end of period $18,722 $36,283
======= =======
The accompanying notes are an integral part of these consolidated
financial statements.
6
<PAGE>
KENETECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) for the thirteen weeks ended March 30, 1996
and April 1, 1995
1. General
The interim consolidated financial statements presented herein include the
accounts of KENETECH Corporation and its subsidiaries (the "Company"). These
interim consolidated financial statements should be read in conjunction with
the Company's consolidated financial statements and the notes thereto for the
year ended December 31, 1995, which include information as to significant
accounting policies. Such interim consolidated financial statements are
unaudited but, in the opinion of management, reflect all adjustments
necessary (consisting of items of a normal recurring nature) for a fair
presentation of the Company's interim financial position, results of
operations and cash flows. Results of operations for interim periods are not
necessarily indicative of those for a full year. The Company's thirteen weeks
represent thirteen weeks of operations; accordingly, the first quarter of
1996 and 1995 ended March 30, 1996 and April 1, 1995, respectively.
2. Liquidity and Going Concern
The consolidated financial statements as of and for the periods ending March
30, 1996 and December 31, 1995 have been prepared assuming the Company will
continue as a going concern. The Company incurred a significant loss in 1995,
a substantial portion of which was as a result of special charges. The
Company also incurred a loss during the first quarter ended March 30, 1996,
has negative working capital and its liquidity is severely constrained. The
Company projects negative operating cash flows for the remainder of 1996 and
certain lenders and creditors are seeking repayment and/or restructuring of
the amounts due them. These factors raise substantial doubt about the
Company's ability to continue as a going concern in this current form.
Management's plans to address its liquidity and its future operations
include:
1) The sale of certain assets, primarily development projects and
subsidiaries not engaged in windpower activities, for which it
expects to receive substantial cash proceeds and gains. (See Note 9).
2) The reduction of certain operating expenditures (see Item 2 -
Management's Discussion and Analysis of Financial Condition and Results
of Operations) and use of alternative strategies to maximize
opportunities on development projects.
3) Negotiations of certain operating, maintenance and other obligations
where feasible with partnerships, third party owners, lenders,
suppliers and other creditors.
4) The continuation of a significant retrofit program for KVS-33 turbines.
5) The manufacturing of additional KVS-33 turbines out of inventory
(See Item 2 - Management's Discussion and Analysis of Financial
Conditions and Results of Operations).
6) The continued development of an advanced wind turbine.
There are numerous risks and uncertainties which may prevent the Company from
successfully implementing its strategy. These include the failure to sell
assets or subsidiaries within the necessary time frame or for the estimated
amounts, failure of the retrofits to resolve the KVS-33 performance problems,
continued declines in the amount that utilities will pay for electricity
based upon "avoided costs", failure to find an adequate market for the sale
of wind turbines produced by the Company, failure to repay or restructure
certain contractual and debt obligations and the impacts of certain
litigation. Although the Company intends to aggressively market for sale
certain of its assets and subsidiaries for which it anticipates substantial
proceeds, there is no assurance as to whether they will be sold or the price
or timing of such sales. There can be no assurance that the Company will be
successful in implementing its plans and that the Company will continue as a
going concern.
7
<PAGE>
KENETECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) for the thirteen weeks ended March 30, 1996
and April 1, 1995
3. Net Loss Per Share
Net loss per share amounts (in thousands, except per share amounts) were
calculated as follows:
March 30, April 1,
1996 1995
Net loss $(16,750) $(3,051)
Less preferred stock dividends (2,141) (2,141)
-------- -------
Net loss used in per share calculations $(18,891) $(5,192)
======== =======
Weighted average shares used in per share
calculations 36,638 36,073
Net loss per share $ (0.52) $ (0.14)
======== =======
Preferred stock dividends are deducted from net loss for the calculation of
net loss per share. Since the Company incurred net losses during the periods,
common stock equivalents are not included in weighted average shares used in
the calculations of net loss per share since they would be anti-dilutive
(reducing the amount of net loss per share).
4. Cash Flow Information
Short term investments purchased with original maturities of three months or
less are considered cash equivalents. Additional cash flow information (in
thousands) is presented below:
March 30, April 1,
1996 1995
Non cash investing activities:
Capital leases for equipment $ - $ 163
======= ======
Supplemental cash flow information: Cash paid (received) for:
Income taxes paid $ 13 $ 68
Income taxes refunded (420) (124)
------- ------
Net cash flow from income taxes $ (407) $ (56)
======= ======
Interest paid $ 2,768 $2,459
Capitalized interest (337) (299)
Interest accrued but not paid, net 4,578 3,730
Interest paid but accrued in prior periods (1,414) (1,235)
Amortization of deferred financing costs 139 431
------- ------
Interest expense $ 5,734 $5,086
======= ======
Capitalized interest charged to costs of revenues totaled $337 for the
thirteen weeks ended March 30, 1996 and $443 for the comparable 1995 period.
8
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KENETECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) for the thirteen weeks ended March 30, 1996
and April 1, 1995
5. Inventories
Inventories (in thousands) at March 30, 1996 and December 31, 1995 consisted
of:
March 30, December 31,
1996 1995
Current inventories:
Work-in-process $ 5,750 $5,616
Unassembled parts and supplies 10,692 15,114
Projects held for sale:
Texas Windplant 3,568 3,568
Costa Rica Windplant 16,959 14,386
Reserve (327) -
------- -------
Total current inventories $36,642 $38,684
======= =======
Long-term inventories:
Long-term inventories $33,177 $33,177
Reserve (14,746) (14,746)
------- -------
Total long-term inventories $18,431 $18,431
======= =======
Work-in-process consists of parts which have been assigned to a work order
and are in the process of being assembled. Projects held for sale include a
25% ownership interest in a 35 megawatt Windplant which the Company completed
construction of in Texas in September 1995 and a 20 megawatt Windplant the
Company is currently constructing in Costa Rica under an agreement with a
third-party developer. The Company's intention is to sell substantially all
of its investment in these Windplants in the near term. However, there can be
no assurance that the Company will be successful in marketing these projects.
In addition, the amount outstanding on the Windplant construction line (see
Note 6) relates to the Costa Rica Windplant.
6. Revolving Credit Agreements
On September 30, 1994, the Company entered into a two year revolving credit
agreement (the Windplant construction line) to finance the construction of
Windplants with a group of seven banks. This agreement requires the Company
to meet certain financial ratios and net worth tests. As of March 30, 1996,
the Company was not in compliance with these financial ratios or net worth
requirements. In February 1996 the Company entered into a Waiver Agreement
with the banks that did not include waivers of the financial ratios and
tests. Under terms of the Waiver Agreement, the Company agreed to suspend
payment of dividends on its preferred stock so long as borrowings remain
outstanding. Also, any borrowings under the line require unanimous consent of
the bank group. The maximum available under the line is $75,000,000 depending
upon the collateral available from projects sold and under construction. As
of March 30 and May 1, 1996, there was $12,050,000 in borrowings outstanding
which is included in current liabilities and no amounts committed as letters
of credit or bankers' acceptances under this revolving credit agreement.
Amounts borrowed under this line bear interest, at the Company's discretion,
at the higher of the bank's prime rate or federal funds rate plus 0.5% or at
LIBOR. The effective interest rate at March 30, 1996 was 8.25%. It is
unlikely that future borrowings will be available under this bank line.
The Company maintains an additional revolving credit agreement for working
capital purposes. As of March 30, 1996 there was $5,000,000 in borrowings
outstanding which bears interest at the prime rate (8.25% at March 30, 1996)
and $2,500,000 was committed under letters of credit. This agreement requires
the Company to meet certain financial ratios, net worth tests and
indebtedness tests. At March 30, 1996 the Company was not in compliance with
the covenants of this agreement. In April 1996, the Company renegotiated the
revolving credit agreement to provide for up to $5,000,000 for working
capital purposes for the Company's construction subsidiary through April 30,
1997. Amounts borrowed under this line bear interest at 1% above the bank's
prime rate. The renegotiated agreement also provided a term loan of
$7,500,000 which was used to pay the
9
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KENETECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) for the thirteen weeks ended March 30, 1996
and April 1, 1995
$5,000,000 which was outstanding at March 30, 1996 and which also provided
cash collateral for up to $2,500,000 in outstanding letters of credit. The
term loan is amortized quarterly over a seven year period. However, the loan
becomes immediately payable on the sale of the Company's construction
subsidiary. The agreement requires the Company's construction subsidiary to
meet certain net worth, financial ratio and debt service coverage tests.
Amounts borrowed under this term loan bear interest at the bank's prime rate
through August 31, 1996 and at 2% above the bank's prime rate thereafter. The
ability of the construction subsidiary to transfer cash to KENETECH
Corporation is limited by provisions of this line of credit. The amount
subject to such restriction was $7,300,000 at March 30, 1996.
7. Senior Secured Notes Payable and Other Notes Payable
In December 1992 the Company sold $100,000,000 of 12-3/4% Senior Secured
Notes due 2002. The notes were sold at a discount of $1,389,000. Such
discount is being amortized on the effective yield method through 2002. The
unamortized discount was $1,113,000 at December 31, 1995. Interest on these
notes is due June 15 and December 15 of each year. The Notes are secured by
the stock of all material subsidiaries representing net assets at December
31, 1995 of approximately $39,755,000. The Notes are redeemable, at the
option of the Company, beginning December 15, 1997 at 106% of par, beginning
December 15, 1998 at 103% of par, and beginning December 15, 1999 at par.
Under the terms of the note indenture, the Company is restricted from paying
cash dividends on its common stock and must comply with certain convenants,
the most restrictive of which place limitations on payments of such
dividends, repurchasing common stock, incurring additional indebtedness,
pledging of assets and advances or loans to affiliates.
The Company is not in compliance with the covenants of its Windplant
construction line, however; no demand for payment of the amounts outstanding
has been made. The senior secured note indenture provides for an event of
default (including the acceleration of the repayment of the Notes) should
other debt of the Company be accelerated because the other debt was in
default. Certain agreements related to other notes payable contain events of
default which allow the lenders to accelerate repayment of that debt should
an event of default occur on debt of the Company which could cause such other
debt to be accelerated.
8. Contingencies
On September 28, 1995 a complaint was filed against the Company and certain
of its officers and directors in the United States District Court for the
Northern District of California alleging federal securities laws violations.
On November 2, 1995 an amended complaint was filed naming additional
defendants, including underwriters of the Company's securities. The amended
complaint alleges claims under sections 11 and 15 of the Securities Act of
1933, and sections 10(b) and 20(b) of the Securities Exchange Act of 1934 and
Rule 10b-5 thereunder, based on alleged misrepresentations and omissions in
the Company's public statements, on behalf of a class consisting of persons
who purchased the Company's common stock during the period from September 21,
1993 (the date of the Company's initial public offering) through August 8,
1995 and persons who purchased the Company's preferred stock during the
period from April 28, 1994 (the public offering date of the preferred stock)
through August 8, 1995. The amended complaint alleges that the defendants
misrepresented the Company's progress on the development of its Model KVS-33
wind turbines and the Company's future prospects. The amended complaint seeks
unspecified damages and other relief. The Company intends to contest the
action vigorously. It is not feasible to predict or determine whether the
ultimate outcome of these matters will have a material adverse effect on the
Company's financial position.
The Company is a party to various legal proceedings normally incident to its
business activities. The Company intends to defend itself vigorously against
those actions in which the Company is a defendant. After reviewing such
proceedings with counsel, management believes that the ultimate resolution of
these matters will not have a material adverse effect on the Company's
financial position or results of operations.
10
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KENETECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) for the thirteen weeks ended March 30, 1996
and April 1, 1995
9. Subsequent Events
In conjunction with management's plans to address its liquidity the following
transactions were entered into after March 30, 1996.
1) In April 1996, the Company signed a purchase and sale agreement for
its subsidiary which holds equity investments in several funds which
make investments in power projects. The price is subject to
adjustment after due diligence; however the Company does not
anticipate incurring a loss on the sale of this approximately
$9,000,000 asset.
2) Also in April 1996 the Company signed an agreement to sell its demand
side management business. The buyer paid and deposited approximately
$400,000 in cash and assumed the debt associated with these
operations. The final sales price will be adjusted for operations
during the period between the end of the first month and closing.
However, the Company does not anticipate incurring a loss on this
sale.
3) In May 1996 the Company signed a binding term sheet for the sale of
its subsidiary which supplies wood fuel to wood-fired electric power
plants for net book value plus $100,000 or approximately $1,500,000.
4) Also in May 1996 the Company sold a manufacturing facility in Waco,
Texas. The Company received approximately $1,200,000 in cash from the
sale of this building.
11
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Overview
As a provider of products and services to the utility industry, KENETECH
participates in the electric utility market in two principal ways. First,
the Company is a manufacturer, developer and operator of utility-scale
wind powered electric powerplants. The Company manufactures wind turbines
and designs and constructs Windplants which incorporate large arrays of
such turbines. Second, the Company develops, constructs, sells, and
operates thermal power projects. These projects utilize environmentally
preferred generating technologies, principally combined cycle cogeneration
facilities fueled by natural gas and medium-sized steam turbine units
fired by biomass fuels (primarily wood). The output from these projects is
sold under long-term power purchase contracts. The Company sells these
projects to third parties and, generally, retains a minority interest.
Seasonality and variability of the wind. The Company's revenues from
Windplant energy sales and management and maintenance fees from Windplants
reflect the seasonality and variability of the wind resource. A
substantial portion of the Company's installed base is currently located
in California, where approximately 80% of the wind and associated revenues
typically occur in the second and third quarters of the year. As a result,
the Company has historically experienced losses from Windplant operations
in the first and last quarters of the year. In addition to these seasonal
patterns, the wind resource and associated revenues have varied from year
to year. Windplant design is based on the average winds expected at a site
over an extended period of time, based on governmental data and
site-specific data collected by the Company. However, for shorter periods
of time, variations from average winds are likely and can be significant.
Results of Operations
KENETECH incurred a net loss of $16.8 million during the first quarter of
1996 compared to $3.1 million for the first quarter of 1995. As expected,
the same factors which resulted in a significant change in the Company's
short-term prospects during 1995 continue to reflect themselves in 1996's
first quarter of operations. These factors are:
i. Mechanical problems with the KVS-33 turbine. Sales of the Company's
model KVS-33 turbine commenced in late 1993 and the Company believed
this variable speed machine would generate substantial growth for the
Company. During 1995, mechanical problems with the machines installed
in 1994 and 1995 began to appear, especially in more severe weather
environments. The Company incurred substantial costs in 1995 as a
result of the problems with the KVS-33. During 1995 the fleet of
KVS-33's experienced a number of technical failures. These include
cracking and breaking of blades, failures in pitch and yaw drive
systems and cracks in the transmission housing of machines. The Company
is putting in place, both on a specific location and fleet wide basis,
several engineering improvements and software design changes intended
to address these problems and continues to work on long-term solutions
in areas where exposure to the fleet continues. Nonetheless, the
Company is not certain that it has economically feasible solutions for
all of the failures of the KVS-33.
ii.Fundamentals of the domestic electric power industry. During 1995 the
domestic electric power industry was subjected to the uncertainties and
pressures of deregulation. In the United States, utilities are
experiencing significant changes in their businesses. A market
structure transitioning from regulated monopolies to open competition
may result in significant restructuring of utilities in the long run
and has resulted in exceptionally low prices for power in the short
run. The price which utilities will pay for electric power based upon
their avoided costs is at a historical low and is forecasted to remain
lower for the foreseeable future than the Company previously
anticipated.
12
<PAGE>
The individual and interactive effects of these events have significant
effects on the financial condition and results of operations of the
Company as discussed below.
Quarter ended March 30, 1996 and April 1, 1995
Quarter Ended
March 30, 1996 April 1, 1995
(in millions)
Gross Gross
Revenues Costs Margins Revenues Costs Margins
Windplant sales $ 3.4 $ 3.3 $ 0.1 $ 47.0 $ 34.3 $ 12.7
Construction services 10.9 9.3 1.6 13.0 12.1 0.9
Maintenance, management
fees and other (1) 7.3 n/a 7.3 7.1 n/a 7.1
Energy sales (1) 4.8 n/a 4.8 4.4 n/a 4.4
Energy plant
operations (1) n/a 14.5 (14.5) n/a 15.3 (15.3)
------ ------ ------ ------ ------ ------
Total energy plant
operations 12.1 14.5 (2.4) 11.5 15.3 (3.8)
Energy management services 0.7 0.2 0.5 2.1 1.1 1.0
Interest on partnership notes
and funds in escrow 0.6 n/a 0.6 1.2 n/a 1.2
------ ------ ------ ------ ------ ------
Total $ 27.7 $ 27.3 $ 0.4 $ 74.8 $ 62.8 $ 12.0
====== ====== ====== ====== ====== ======
(1)Maintenance, management fees and other revenues are earned by the
Company for maintaining and operating Windplants and thermal power
plants owned by third parties and from the sale of fuel to wood-fired
electric power plants. Energy sales are the revenues generated by
Windplants and a thermal power plant owned by the Company. Energy plant
operations expenses are incurred to generate these revenues.
Windplant sales decreased to $3.4 million for the quarter ended March
30, 1996 from $47.0 million for the comparable period in 1995 due to
decreased activity in 1996. During the first quarter of 1996 the
Company sold wind turbines to an affiliated partnership to replace
machines which had been destroyed by a severe wind storm in West Texas.
The Company received cash to cover its direct costs and has deferred
any margin until receipt of cash related to such. The only other
Windplant sales that occurred during the first quarter of 1996 were
miscellaneous parts sales. By comparison 1995's first quarter
activities included continued construction on a Windplant in Texas, the
sale of Windplants under construction in Spain and The Netherlands and
the sale of Windplant equipment to a third party developer in India.
Gross margin decreased for the quarter ended March 30, 1996 to 3% of
Windplant sales from 27% for the comparable period in 1995 primarily
due to the deferral of margin for 1996's turbine sales.
Construction services revenues (recorded under the
percentage-of-completion method) decreased to $10.9 million for the
quarter ended March 30, 1996 from $13.0 million for the comparable
period in 1995; however the gross margin increased to 15% for the
quarter ended March 30, 1996 from 7% for the comparable period in 1995.
Both of these are attributable to a 126 MW cogeneration plant
construction job with a low margin which was completed during 1995. The
size and low margin on this project impacted the results of
construction service activities in the first quarter of 1995. Also, the
gross margin for the first quarter of 1996 was favorably impacted by
the resolution of change orders on another cogeneration project. The
Company intends to sell this operation in 1996.
Energy plant operations. The discussion regarding energy plant
operations aggregates revenues earned from maintaining and managing
Windplants and thermal power plants owned by third parties, energy
sales from Windplants and a thermal power plant owned by the Company,
and sales of fuel to wood-fired electric power plants with the expenses
incurred to generate these revenues.
13
<PAGE>
Maintenance, management fees and other revenues increased $0.2
million to $7.3 million for the quarter ended March 30, 1996
compared to $7.1 million for the comparable period in 1995. This
small increase is the net effect of:
i. an increase in maintenance and management fees resulting from
the additional capacity the Company is operating for others.
This additional capacity relates to the KVS-33 Windplants
which were sold and began operations in 1995.
ii. a decrease in deferred revenue recognized. This deferred
revenue relates to Windplants sold prior to 1990 which was being
recognized as the principal on the related partnership notes was
received. The Company has been reacquiring Windplants from the
partnerships to which these Windplants were originally sold. The
Company purchased substantially all the assets of four affiliated
windpower partnerships (subsidiaries of the Company had general
partner interests of 1%) in the later part of 1994 and of two
affiliated windpower partnerships in 1995. In conjunction with
these buybacks, full payment of the partnership notes is received
and the related deferred revenue reduces the cost basis of the
Windplant asset recorded on the Company's books.
Energy sales increased to $4.8 million for the quarter ended March
30, 1996 from $4.4 million due to the interaction of:
i. an increase in production. The increased production results from
the interaction of the capacity operated for the Company's
accounts and the wind resource. Through the aforementioned
buybacks, the Windplant capacity producing energy for the
Company's accounts increased to approximately 178 MW during the
first quarter of 1996 from approximately 167 MW during the first
quarter of 1995. The average wind speed was 12.4 miles per hour
(mph) in the Altamont Pass region of California during the first
quarter of 1996 compared to 10 mph during the comparable 1995
period. The majority of the Windplants generating energy for the
Company's accounts are located in the Altamont Pass region of
California.
ii.a decrease in the price received for energy. The average price
earned per kWh for energy generated by Windplants owned or leased
by the Company was 5.3 cents during the first quarter of 1996
compared to 8.7 cents during 1995's comparable period. All
Windplants located in California which are owned or leased by the
Company (with the exception of a Windplant in the Tehachapi
region of California) sell electricity under the Power Purchase
Agreements (PPA's) that require Pacific Gas and Electric Company,
Inc. (PG&E) to take and pay for all electricity produced and
delivered. Each PPA has a term of approximately 30 years and, for
the first nine to ten years, provides for specified fixed prices
to be paid for the electrical energy and capacity delivered based
on short-run avoided cost of energy, and a capacity payment
determined by a formula set forth in the PPA.
As of January 1996 the fixed price period had ended for 73% of
the capacity generating energy for the Company's accounts. For
the remaining 27%, the fixed price period will end December 1997.
After the fixed price period, the price paid is based on a
combination of capacity and energy payments. The energy portion
is based on the utilities short run avoided cost of energy and
the capacity portion is based on a formula set forth in the PPA.
Based on today's "avoided cost" energy prices, revenues will
materially decline when fixed price periods end.
Energy plant operations, the expenses related to energy sales,
maintenance and management fees, and wood fuel sales decreased $0.8
million to $14.5 million for the quarter ended March 30, 1996 from
$15.3 million for the comparable period in 1995. This decrease is
the net effect of:
i. a decrease in lease expenses of $1.4 million since the Company
acquired a Windplant it had previously leased, and
14
<PAGE>
ii.an increase in activity since the Company maintains and
operates additional KVS-33 Windplants which were sold and
began operations in 1995, as mentioned above.
Energy management services revenues decreased to $0.7 million for the
quarter ended March 30, 1996 from $2.1 million for the comparable period
in 1995. This operation was sold in the second quarter of 1996 (see Note 7
to the consolidated financial statements).
Interest on partnership notes and funds in escrow decreased to $0.6
million for the quarter ended March 30, 1996 from $2.1 million for the
comparable period in 1995, as a result of lower outstanding balances of
notes and escrowed amounts on which such interest is earned. The decreases
in interest bearing balances are primarily related to the payments
received on partnership notes in conjunction with the Company's
acquisition of such partnerships. These are the transactions which
increased the Company's capacity (mentioned previously in the discussion
regarding energy sales) and decreased the deferred revenue recognized as
discussed above in regards to maintenance, management fees and other
revenues.
Project development and marketing expenses increased for the quarter ended
March 30, 1996 to $2.0 million from $1.6 million for the comparable period
in 1995. However, during the first quarter of 1995 the Company incurred
$4.2 million of expenditures related to project development and marketing
of which $2.6 million was capitalized or allocated to cost of sales. By
comparison the Company incurred $2.2 million in the first quarter of 1996
of which only $0.2 million was allocated to cost of sales.
Engineering expenses decreased to $2.6 million for the quarter ended March
30, 1996 compared to $2.7 million for the comparable period in 1995.
However, during the first quarter of 1995 the Company incurred $3.7
million of engineering expenditures of which $1.0 million was capitalized.
By comparison the Company capitalized no engineering expenditures in the
first quarter of 1996.
General and administrative expenses decreased to $7.1 million for the
quarter ended March 30, 1996 from $7.6 million for the comparable period
in 1995. However, during the first quarter of 1995 the Company incurred
$10.8 million of general and administrative expenditures of which $3.2
million was allocated to projects (allocated to cost of sales or
capitalized). By comparison, the Company incurred $9.0 million in the
first quarter of 1996 of which only $1.9 million was allocated to
projects. Legal expense was the component of general and administrative
expenses which increased the most for the first quarter of 1996 when
compared to the first quarter of 1995 primarily due to implementation of
management's plan to address its liquidity and future operations.
Furthermore legal expenses can be expected to be a significant cost during
1996.
Interest income decreased to $0.5 million for the quarter ended March 30,
1996 from $1.0 million for the comparable period in 1995 due to lower
interest earned as a result of declining cash and investment balances.
Interest expense increased to $5.7 million for the quarter ended March 30,
1996 from $5.1 million for the comparable period in 1995 due to increased
bankline borrowings. There were no bankline borrowings outstanding during
the first quarter of 1995. By comparison there was $13.2 million and $17.1
million outstanding at December 31, 1995 and March 30, 1996, respectively
under this agreement.
Equity loss of unconsolidated affiliates. Equity investments in affiliates
resulted in a net loss of $0.2 million for the quarter ended March 30,
1996, compared to a net loss of $1.1 million for the comparable period in
1995 due to the differing performance of investments accounted for on the
equity method.
Income taxes. The Company uses the asset and liability approach for
financial accounting and reporting for income taxes. The Company recorded
no tax benefit for the quarter ended March 30, 1996 as compared to a
benefit of $2.1 million for the comparable period in 1995. Although a loss
was incurred, no tax benefit was recorded because of the uncertainty about
the Company's ability to utilize such a benefit.
15
<PAGE>
Liquidity and Capital Resources
The Company develops and sells Windplants and thermal power plants rather
than retaining significant ownership in them. The Company generally
retains a small equity interest in its projects. As the project developer,
the Company incurs costs prior to the commencement of construction.
Ordinarily, sale proceeds are received upon completion of construction
from investors and secured project financing sources. The Company requires
substantial capital resources for the construction of Windplants and
thermal power plants. The time required to develop and complete the
Company's projects has become longer due to regulatory approvals and other
factors; therefore, holding costs and working capital requirements have
increased.
Operating activities
During the first quarter of 1996 operations activities provided cash of
$4.9 million primarily from the collection of $25.6 million of
receivables. These receipts were for the sale of the Windplant project in
The Netherlands, construction services, and operations and maintenance
work. The Company expects a loss from operations in 1996.
Investing activities
During the first quarter of 1996 the Company contributed $1.8 million to
affiliates. Of this amount $1.5 million related to investments in
affiliates that were sold in the second quarter of 1996 (see Note 9). The
Company, also, capitalized $1.1 million of its development activities for
the continued work on a thermal power project in Puerto Rico.
Financing activities
During the first quarter of 1996 the Company borrowed $3.9 million on the
revolving credit agreement to finance the construction of Windplants for
work being performed on a 20 megawatt Windplant the Company is
constructing in Costa Rica under an agreement with a third-party developer
(see Note 5). Also during the first quarter of 1996 the Company paid $3.8
million of principal on other notes payable.
Liquidity
Status
At March 30, 1996 the Company's working capital deficit is $24.3 million,
which is $21.1 million greater than at December 31, 1995. Included in
working capital at March 30, 1996 are $10.7 million of inventory
components of the KVS-33. The Company intends to use its remaining
inventory for future sales or in existing Windplant projects. Accordingly
the Company utilized inventory during the first quarter of 1996 for
turbines sold to an affiliated partnership to replace machines which had
been destroyed by a severe wind storm in West Texas (see discussion
regarding Windplant sales). Also included in inventory are projects held
for sale of $20.5 million, including a Windplant in Costa Rica which is
nearly complete and a 25% interest in a 35 megawatt Windplant in Texas.
During the first quarter of 1996 the Company's liquidity became severely
constrained. The Company projects negative operating cash flows in 1996
and certain lenders and other creditors are seeking repayment and or
restructuring of the amounts due them. 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 (see note 9), financing or
other means. In that regard, the Company has targeted certain
subsidiaries, projects held for sale in inventory and other assets. The
Company believes substantial proceeds (and gains) could result from these
sales; however, there can be no assurances that such sales can be
consummated or that substantial proceeds can be received. If the Company
is unable to sell these or other assets its liquidity will be further
constrained.
Non-recourse project financing is obtained prior to construction for 80%
to 90% of the costs of thermal power plants and is assumed by the
purchaser when the Company sells its interest. In September 1994 the
Company entered into a two year revolving credit agreement to finance
construction of Windplants with a group of seven banks. This agreement
requires the Company to meet certain financial ratios and net worth tests.
16
<PAGE>
As of March 30, 1996 the Company was not in compliance with these
financial ratios or net worth requirements. In February 1996 the Company
entered into a Waiver Agreement with the banks that did not include
waivers of the financial ratios and net worth tests. Under terms of the
Waiver Agreement, the Company agreed to suspend payment of dividends on
its preferred stock so long as borrowings under this agreement remain
outstanding. Also, any borrowings under the line require unanimous consent
of the bank group. This construction line has an availability in the form
of cash borrowings, letters of credit and bankers' acceptances up to $75.0
million depending upon the collateral available from projects sold and
under construction. As of March 30 and May 1, 1996, there was $12.1
million outstanding (the maximum under collateral available) and no
amounts committed as letters of credit or bankers' acceptances. It is
unlikely that future borrowings will be available under this bank line.
The Company also maintains a revolving credit agreement for working
capital purposes. As of March 30, 1996 there was $5.0 million in
borrowings outstanding which bears interest at the prime rate (8.25% at
March 30, 1996) and $2.5 million was committed under letters of credit.
This agreement requires the Company to meet certain financial ratios, net
worth tests and indebtedness tests. As of March 30, 1996 the Company was
not in compliance with the agreement. During the second quarter of 1996,
the Company renegotiated the revolving credit agreement to provide for up
to $5.0 million for working capital purposes for the Company's
construction subsidiary through April 30, 1997. Amounts borrowed under
this line bear interest at 1% above the bank's prime rate. The
renegotiated agreement also provided a term loan of $7.5 million which was
used to pay the $5.0 million which was outstanding at March 30, 1996 and
which also provided cash collateral for up to $2.5 million in outstanding
letters of credit. The term loan is amortized quarterly over a seven year
period. However, the loan becomes immediately payable on the sale of the
Company's construction subsidiary. The agreement requires the Company's
construction subsidiary to meet certain net worth, financial ratio and
debt service coverage tests. Amounts borrowed under this term loan bear
interest at the bank's prime rate through August 31, 1996 and at 2% above
the bank's prime rate thereafter. The ability of the construction
subsidiary to transfer cash to KENETECH Corporation is limited by
provisions of this line of credit. The amount subject to such restriction
was $7.3 million at March 30, 1996.
The Company is not in compliance with the covenants of its Windplant
construction line, however; no demand for payment of the amounts
outstanding has been made. The senior secured note indenture provides for
an event of default (including the acceleration of the repayment of the
Notes) should other debt of the Company be accelerated because the other
debt was in default. Certain agreements related to other notes payable
contain events of default which allow the lenders to accelerate repayment
of that debt should an event of default occur on debt of the Company which
could cause such other debt to be accelerated.
Strategy
The consolidated financial statements as of and for the quarterly period
ended March 30, 1996 and as of and for the year ended December 31, 1995
have been prepared assuming the Company will continue as a going concern.
The Company incurred significant losses in the first quarter of 1996 and
in 1995, has negative working capital and its liquidity has become
severely constrained. The Company projects negative operating cash flows
in 1996 and certain lenders and creditors are seeking repayment and/or
restructuring of the amounts due them. These factors raise substantial
doubt about the Company's ability to continue as a going concern in its
current form.
Management's plans to address its liquidity and its future operations
include:
1) The sale of certain assets, primarily development projects and
subsidiaries not engaged in windpower activities, for which it
expects to receive substantial cash proceeds and gains.
2) The reduction of certain operating expenditures and use of
alternative strategies to maximize opportunities on development
projects.
3) Negotiations of certain operating, maintenance and other obligations
where feasible with partnerships, third party owners, lenders,
suppliers and other creditors.
4) The continuation of a significant retrofit program for KVS-33
turbines.
5) The manufacturing of additional KVS-33 turbines out of inventory.
6) The continued development of an advanced wind turbine.
There can be no assurance that the Company will be successful in
implementing its plans and that the Company will continue as a going
concern.
17
<PAGE>
Risks and Uncertainties
There are numerous risks and uncertainties which may prevent the Company
from successfully implementing its strategy. These include the failure to
sell assets or subsidiaries within the necessary time frame or for the
estimated amounts, failure of the retrofits to resolve the KVS-33
performance problems, continued declines in the amount that utilities will
pay for electricity based upon "avoided costs", failure to find an
adequate market for the sale of wind turbines produced by the Company and
failure to repay or restructure certain contractual and debt obligations.
Although the Company intends to aggressively market for sale certain of
its assets and subsidiaries for which it anticipates substantial proceeds,
there is no assurance as to whether they will be sold or the price or
timing of such sales. The Company continues to evaluate other strategies
and opportunities which include merger, sale or bankruptcy.
The mechanical problems associated with the KVS-33 model turbine have only
recently been diagnosed and although the Company believes it has developed
solutions that can be implemented to restore operational integrity to the
turbines, these solutions have not been fully evaluated. The Company is
obligated for the long term performance of the turbine and the actual
costs to retrofit the previously sold and installed KVS-33 turbines could
be higher or lower than the amounts accrued at December 31, 1995.
The current mechanical problems with the KVS-33 and the decline in the
price paid domestically for electricity make marketing wind turbines and
financing Windplant projects more difficult and will impact the sales
price and margins of future sales including sales of units to be completed
with inventory on hand. These events combined with future negative cash
flows on certain maintenance and management contracts decrease the
Company's liquidity.
Part II
Item 4. Submission of Matters to a Vote of Security Holders.
(a) None.
Item 6. Exhibits and Reports on Form 8-K.
(a) None.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned therewith duly authorized.
KENETECH Corporation
By: /s/ Mark D. Lerdal
Date Mark D. Lerdal
President and
Chief Executive Officer
By: /s/ Nicholas H. Politan
Date Nicholas H. Politan
Chief Financial Officer
By: /s/ Mervin E. Werth
Date Mervin E. Werth
Corporate Controller and
Principal Accounting Officer
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THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE KEN10-Q AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-30-1996
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