KENETECH CORP, 10-Q, 1998-08-13

KENETECH CORP
10-Q, 1998-08-13
COGENERATION SERVICES & SMALL POWER PRODUCERS

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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 quarterly period ended June 30, 1998

[ ] 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 August 10, 1998, there were 41,954,218 shares of the issuer's Common
Stock, $.0001 par value, outstanding.

2
<PAGE>

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

KENETECH Corporation Consolidated Financial Statements Page

Consolidated Statements of Operations for the
Quarters ended June 30, 1998 and June 28, 1997 4

Consolidated Statements of Operations for the
six months ended June 30, 1998 and June 28, 1997 5

Consolidated Balance Sheets, June 30, 1998 and
December 31, 1997 6

Consolidated Statement of Stockholders' Deficiency for
the six months ended June 30, 1998 7

Consolidated Statements of Cash Flows for the six months
ended June 30, 1998 and June 28, 1997 8

Notes to Consolidated Financial Statements 9-15

Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. 16-21

Part II - OTHER INFORMATION

Item 1. Legal Proceedings. 22

Item 2. Changes in Securities. 22

Item 3. Defaults Upon Senior Securities. 22

Item 6. Exhibits and Reports on Form 8-K. 22

3
<PAGE>

PART I - FINANCIAL INFORMATION

KENETECH CORPORATION
--------------------

CONSOLIDATED STATEMENTS OF OPERATIONS
for the quarterly periods ended June 30, 1998 and June 28, 1997
(unaudited, in thousands, except per share amounts)

June 30, June 28,
1998 1997
--------- --------
Revenues:
Construction services ............................ $ 487 $ 11,380
Maintenance, management fees and other ........... 570 40
Energy sales ..................................... 295 1,498
--------- --------
Total revenues ................................. 1,352 12,918

Costs of revenues:
Construction services ............................ 373 11,418
Energy plant operations .......................... 954 1,541
--------- --------

Total costs of revenues ........................ 1,327 12,959

Gross margin (Excess of expenses over revenues) .... 25 (41)

Project development and marketing expenses ......... 26 5
General and administrative expenses ................ 755 2,589
--------- --------

Loss from operations ............................. (756) (2,635)

Interest income .................................... 284 367
Interest expense ................................... (4,704) (3,011)
Equity loss of unconsolidated affiliates ........... (22) (6)
Gain on disposition of subsidiaries and assets ..... 25 411
-------- --------

Loss before taxes .................................. (5,173) (4,874)
Income tax benefit ................................. -- --
-------- --------

Net loss ..................................... $ (5,173) $ (4,874)
======== ========

Net loss per common share - Basic and Diluted $ (0.16) $ (0.19)

Weighted average number of common shares used in
computing per share amounts - Basic and Diluted 39,506 36,830

The accompanying notes are an integral part of these consolidated financial
statements.

4
<PAGE>

KENETECH CORPORATION
--------------------

CONSOLIDATED STATEMENTS OF OPERATIONS
for the six months ended June 30, 1998 and June 28, 1997
(unaudited, in thousands, except per share amounts)

June 30, June 28,
1998 1997
--------- --------
Revenues:
Construction services ............................ $ 3,382 $ 21,531
Maintenance, management fees and other ........... 985 527
Energy sales ..................................... 472 2,840
--------- --------
Total revenues ................................. 4,839 24,898

Costs of revenues:
Construction services ............................ 2,543 21,388
Energy plant operations .......................... 2,218 3,256
--------- --------

Total costs of revenues ........................ 4,761 24,644

Gross margin ....................................... 78 254

Project development and marketing expenses ......... 383 26
General and administrative expenses ................ 1,600 8,275
--------- --------

Loss from operations ............................... (1,905) (8,047)

Interest income .................................... 385 575
Interest expense ................................... (8,318) (7,760)
Equity loss of unconsolidated affiliates ........... (57) (11)
(Loss) Gain on disposition of subsidiaries and assets (43) 463
--------- ---------

Loss before taxes .................................. (9,938) (14,780)
Income tax benefit ................................. -- --
--------- ---------

Net loss ..................................... $ (9,938) $ (14,780)
========= =========

Net loss per common share - Basic and Diluted $ (0.34) $ (0.52)

Weighted average number of common shares used in
computing per share amounts - Basic and Diluted 38,168 36,830

The accompanying notes are an integral part of these consolidated financial
statements.

<PAGE>

KENETECH CORPORATION
--------------------
CONSOLIDATED BALANCE SHEETS
June 30, 1998 and December 31, 1997
(unaudited, in thousands, except share amounts)

ASSETS
June 30, December 31,
1998 1997
--------- ------------
Current assets:
Cash and cash equivalents ......................... $ 11,907 $ 7,294
Funds in escrow, net .............................. 478 1,997
Accounts receivable ............................... 1,598 4,669
Inventories ....................................... -- 135
Hartford Hospital Project ......................... -- 15,642
Investment in EcoElectrica Project, net............ 20,958 19,830
Investment in Chateaugay Project .................. 15,812 16,128
Deferred tax assets, net .......................... 17,913 17,913
Other assets ...................................... 1,980 3,026
--------- ------------
Total current assets ............................. 70,646 86,634

Property, plant and equipment, net ................... 50 3,252
Other assets ......................................... -- 700
--------- ------------
Total assets ................................... $ 70,696 $ 90,586
========= ============

LIABILITIES AND STOCKHOLDERS' DEFICIENCY

Current liabilities:
Accounts payable .................................. $ 4,372 $ 12,579
Accrued liabilities ............................... 8,914 13,147
Hartford Hospital Project debt .................... -- 7,689
EcoElectrica Project development loan payable ..... 25,778 24,236
Chateaugay Project debt ........................... 15,882 16,128
Other notes payable ............................... 1,111 1,189
Senior secured notes payable ...................... 99,205 99,139
Accrued interest on senior secured notes payable .. 36,972 28,044
Accrued losses on contracts ....................... 1,944 1,944
--------- ------------
Total current liabilities ...................... 194,178 204,095

Accrued dividends on preferred stock ................. 21,384 18,196
--------- ------------
Total liabilities ................................ 215,562 222,291

Commitments and contingencies

Stockholders' deficiency:
Convertible preferred stock - 10,000,000 shares
authorized, $.01 par value; issued and outstanding
102,492 until May 14, 1998 ........................ -- 99,561
Common stock - 110,000,000 shares authorized,
$.0001 par value; 36,829,618 issued and outstanding
December 31, 1997 and until May 14, 1998; after
May 14, 1998, 41,954,218 issued and outstanding ... 4 4
Additional paid-in capital ........................ 224,031 127,658
Cumulative foreign exchange ....................... -- 35
Accumulated deficit ............................... (368,901) (358,963)
--------- ------------
Total stockholders' deficiency ................... (144,866) (131,705)
--------- ------------
Total liabilities and
stockholders' deficiency ...................... $ 70,696 $ 90,586
========= ============

The accompanying notes are an integral part of these consolidated financial
statements.

6
<PAGE>

KENETECH CORPORATION
--------------------

CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY
for the six months ended June 30, 1998
(unaudited, in thousands, except share amounts)

<TABLE>
<CAPTION>
Effect of
Convertible Common Stock Additional Cumulative
Preferred Stock Paid-In Foreign Accumulated
Shares Amount Shares Amount Capital Exchange Deficit Total

Balance, December 31, 1997 102,492 $99,561 36,829,618 $4 $127,658 $35 $(358,963) $(131,705)
Mandatory preferred stock
conversion (102,492) ($99,561) 5,124,600 - $99,561 -- -- --
Preferred stock dividends -- -- -- - (3,188) -- -- (3,188)
Net loss -- -- -- - -- -- (9,938) (9,938)
Write off of cumulative
foreign exchange -- -- -- - -- (35) -- (35)
------- ------- ---------- -- -------- --- --------- ---------
Balance, June 30, 1998 -- $ -- 41,954,218 $4 $224,031 $-- $(368,901) $(144,866)
======= ======= ========== == ======== === ========= =========

The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>

7
<PAGE>

KENETECH CORPORATION
--------------------

CONSOLIDATED STATEMENTS OF CASH FLOWS
for the six months ended June 30, 1998 and June 28, 1997
(unaudited, in thousands)

June 30, June 28,
1998 1997
--------- ---------

Cash flows from operating activities:
Net loss ....................................... $ (9,938) $ (14,780)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation, amortization and other ........ 12,679 6,699
Loss on sale of assets ...................... 43 --
Changes in assets and liabilities:
Funds in escrow, net ....................... 1,519 1,844
Accounts receivable ........................ 2,894 8,859
Other assets ............................... -- 2,317
Accounts payable and accrued liabilities ... (12,090) (4,386)
Accrued loss on contracts .................. -- (652)
--------- ---------
Net cash used in operating activities ..... (4,893) (99)

Cash flows from investing activities:
Proceeds from sales of subsidiaries
and assets ................................. 7,701 1,268
Expenditures on EcoElectrica Project ........ (1,128) (7,117)
Investments in affiliates:
Distributions .............................. -- 14
--------- ---------
Net cash provided by (used in) investing
activities ........................... 6,573 (5,835)

Cash flows from financing activities:
Borrowings on Hartford Hospital Project debt. 3,011 1,376
Payments on other notes payable ............. (78) (1,097)
--------- ---------
Net cash provided by financing activities . 2,933 279
--------- ---------

Increase (Decrease) in cash and cash equivalents 4,613 (5,655)
Cash and cash equivalents at
beginning of period ....................... 7,294 17,208
--------- ---------

Cash and cash equivalents at
end of period ............................. $ 11,907 $ 11,553
========= =========

The accompanying notes are an integral part of these consolidated financial
statements.

<PAGE>

1. General

The interim consolidated financial statements presented herein include the
accounts of KENETECH Corporation and its consolidated 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, 1997. These 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 consolidated financial statements of KENETECH Corporation and certain
subsidiaries as of June 30, 1998 and December 31, 1997 and for the six
months ending June 30, 1998 and June 28, 1997, have been prepared assuming
the Company will continue as a going concern. Intercompany balances and
transactions for consolidated subsidiaries are eliminated in consolidation.
On May 29, 1996, the Company's windpower subsidiary, KENETECH Windpower,
Inc. ("KWI"), filed for protection under chapter 11 of the Federal
Bankruptcy Code and reported an excess of liabilities over its assets.
Although the Company continues to own the common stock of KWI and provides
certain services under the jurisdiction of the Bankruptcy Court, the
Company believes it is probable that such ownership will not exist after
completion of the bankruptcy proceedings. Accordingly, as of May 29, 1996
KWI ceased to be accounted for as a consolidated subsidiary of the Company
for financial reporting purposes and no activities of KWI have been
reflected in the consolidated financial statements of the Company since
that date. The Company's investment in KWI is recorded as zero in
"Investments in Affiliates" in the accompanying June 30, 1998 and December
31, 1997 consolidated balance sheets.

2. Significant Accounting Policies

Revenues: Revenues from construction services are recognized on the
percentage-of-completion, cost-to-cost method. Costs of such revenues
include all direct material and labor costs and those indirect costs
related to contract performance such as indirect labor, supplies and tool
costs that can be attributed to specific contracts. Indirect costs not
specifically allocable to contracts and general and administrative expenses
are charged to operations as incurred. Revisions to contract revenue and
cost estimates are recognized in the accounting period in which they are
determined. Provision for estimated losses on uncompleted contracts is made
in the period in which such losses are determined.

Maintenance and management fees: Maintenance and management fees are
recognized as earned under various long-term agreements to manage or
operate and maintain certain energy production facilities.

<PAGE>

2. Significant Accounting Policies (continued)

Energy sales revenue: Energy sales revenue is recognized when electrical
power or steam is supplied to a purchaser, generally the local utility
company or site host, at the contract rate in place at the time of
delivery.

Depreciation: Depreciation is recorded on a straight-line basis over the
estimated useful lives as shown below:

Buildings and improvements 30 years
Hartford Hospital Project 30 years
Machinery and equipment 2 to 10 years
Furniture and fixtures 3 to 5 years
Leasehold improvements Shorter of estimated life or
term of lease

Income Taxes: The Company accounts for income taxes using the liability
method under which deferred income taxes arise from temporary differences
between the tax basis of assets and liabilities and their reported amounts
in the consolidated financial statements. Changes in deferred tax assets
and liabilities include the impact of any tax rate changes enacted during
the year and changes in the valuation allowance. To the extent, if any, the
Company realizes a substantial gain on the sale of its investment in the
EcoElectrica Project, a portion of the valuation allowance may be reversed.

Inventories: Inventories are stated at the lower of cost or market,
principally using the average-cost method.

Reclassified Amounts: Based upon management's plan to dispose of assets
during 1998, certain assets have been classified as current. Related 1997
amounts have been reclassified for comparative purposes.

3. Liquidity and Going Concern

The consolidated financial statements as of and for the six months ended
June 30, 1998 and as of December 31, 1997 have been prepared assuming the
Company will continue as a going concern. The Company incurred significant
losses in 1997, 1996 and 1995, has incurred a significant loss for the
first six months of 1998, has negative working capital and its liquidity is
severely constrained. In 1998 the Company expects to generate losses before
the sale of assets due to administrative expenses and interest expense on
debt in excess of gross margin. These factors raise substantial doubt about
the Company's ability to continue as a going concern.

Management plans to improve the Company's liquidity and to facilitate the
continuation of its energy project development business by selling its
investment in the EcoElectrica Project for substantial cash proceeds. In
furtherance of that plan, the Company is actively marketing its interests
in the EcoElectrica Project and as of July 31, 1998 had received definitive
bids from two qualified potential purchasers. In addition, in June 1998 the
Company sold the Hartford Hospital Project (see Note 6).

The Settlement Agreement and Release among the Company, KWI and others has
been approved by the KWI Bankruptcy Court. In exchange for a maximum cash
payment of $6.5 million upon the occurrence of certain circumstances, KWI
has released the Company from certain claims in bankruptcy and continues to
be a member of the Company's consolidated group for income tax purposes. No
amounts are due until the Company receives proceeds from the sale of its
interest in the EcoElectrica Project.

There can be no assurance that the Company will successfully complete its
sale of the EcoElectrica Project, or that, even if the planned sale of the
EcoElectrica Project is completed, the Company will realize sufficient cash
proceeds to discharge current liabilities and to provide additional working
capital to enable the Company to continue as a going concern. Consequently,
the Company may be required to seek protection from its creditors under the
Federal Bankruptcy Code.

<PAGE>

4. Construction Subsidiary

The Company's construction subsidiary is completing its projects in process
and is in the process of disposing of its remaining assets and liabilities.
The Company's consolidated statement of operations for the six months ended
June 30, 1998 and consolidated balance sheet as of June 30, 1998 include
the following amounts relating to its construction subsidiary:

Six months ended June 30, 1998
(in thousands)

Revenues $ 3,382
Costs of revenues 2,543
-------
Gross margin 839

General and administrative expenses 477
-------
Income from operations 362

Gain on sale of assets 13
Interest income 99
-------
Income before income taxes $ 474
=======

As of
June 30, 1998
(in thousands)

Assets: Liabilities and owner's deficiency:
Current assets $ 3,842 Current liabilities $ 6,859
Owner's deficiency (3,017)
------- --------
Total assets $ 3,842 Total liabilities & deficiency $ 3,842
======= ========

5. Net Loss Per Share

Net loss per share amounts for the periods ended June 30, 1998 and June 28,
1997 were calculated as follows:

<TABLE>
Basic and Diluted
(in thousands, except per share amounts)

Quarters Ended Six months Ended
June 30, June 28, June 30, June 28,
1998 1997 1998 1997
--------- --------- --------- ---------

Net loss $ (5,173) $ (4,874) $ (9,938) $ (14,780)
Less preferred stock dividends (1,047) (2,141) (3,188) (4,282)
--------- --------- --------- ---------
Net loss used in per share calculations $ (6,220) $ (7,015) (13,126) (19,062)
========= ========= ========= =========
Weighted average shares used in per share
calculations 39,506 36,830 38,168 36,830
========= ========= ========= =========
Net loss per share $ (0.16) $ (0.19) $ (0.34) $ (0.52)
========= ========= ========= =========
</TABLE>

Preferred Stock dividends increase the net loss for the calculation of net
loss per share. Common Stock equivalents are not included in weighted
average shares used in the calculations because they would be anti-dilutive
(reduce the loss per share). On May 14, 1998, the Preferred Stock was
mandatorily converted into 5,124,600 shares of Common Stock, $.0001 par
value, and dividends on the Preferred Stock ceased to accrue.

11
<PAGE>

6. Hartford Hospital Project and Associated Debt

The Company indirectly owned a cogeneration plant located in Hartford,
Connecticut (the "Hartford Hospital Project"). In May 1998 the Company and
the utility with which the Company had an Electricity Purchase Agreement
(the "EPA") through 2006 completed a Termination Agreement providing for
the termination of the EPA in exchange for a stream of monthly payments
payable with respect to the Hartford Hospital Project through December 1,
2000. In June 1998 the Company sold the Hartford Hospital Project,
including the rights to the aforementioned monthly stream of payments, for
$4,891,000 in cash (net) and assumption of the $10,700,000 note payable
collateralized by the Project and approximately $350,000 of other
liabilities. The Company incurred no gain or loss on this transaction.

7. Investment in EcoElectrica Project and Associated Development Loan Payable

The Company indirectly owns a 50% interest in an industrial complex
currently under construction that will consist of a liquified natural gas
import terminal and storage facility, a gas-fired cogeneration facility of
approximately 540 MW, a desalination plant and assorted ancillary
facilities located in Penuelas, Puerto Rico (collectively, the
"EcoElectrica Project"). On August 30, 1996, the Company entered into a
$30,000,000 loan agreement with loan proceeds principally applied to the
development of the EcoElectrica Project. Throughout 1996 and most of 1997,
amounts borrowed under this agreement bore interest at the 90 day LIBOR
plus 7.5%. This rate was reduced to the 90 day LIBOR plus 5.9% upon the
Project receiving construction financing in December 1997. The loan is
collateralized by the stock of a special purpose entity formed to hold
through affiliates the Company's interests in the EcoElectrica Project. No
further funds are available under this agreement since the remaining
funding capacity is structured to accommodate accrued and unpaid interest
for the remaining term of the loan. This loan matures in conjunction with
commercial operation of the EcoElectrica Project.

8. Investment in Chateaugay Project and Associated Debt

The Company indirectly owns a 50% interest in a partnership which owns a
17.0 megawatt wood-fired electric power plant it constructed in Chateaugay,
New York in September, 1993 (the "Chateaugay Project"). Debt associated
with the Chateaugay Project consists primarily of tax-exempt bonds. In July
1991, the partnership entered into an agreement with the County of Franklin
(New York) Industrial Development Authority (the Authority) whereby the
Authority loaned the partnership the proceeds of the Authority's Series
1991A Bonds issued of $34,800,000 (supported by a letter of credit from the
partnership's nonrecourse lender) to finance the construction of the
Chateaugay Project. The bonds are due July 1, 2021. As the Partnership
makes debt payments, the Company reduces its pro rata 50% share of the debt
accordingly.

9. Other Notes Payable

Other notes payable at June 30, 1998 and December 31, 1997 consisted of the
following:

June 30, December 31,
1998 1997
--------- ------------
(in thousands)
Borrowings under a $1,200,000 loan agreement,
due in 1999 bearing interest at prime plus 3%
(11.25% at June 30, 1998 and December 31, 1997). $ 1,085 $ 1,144

Notes bearing interest at 7.0% due through 1999. 6 6

Other obligations bearing interest at 8.2% to
9.9% due through 1999, collateralized by equipment. 20 39
--------- ------------
$ 1,111 $ 1,189
========= ============

<PAGE>

10. Senior Secured 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.
Interest on these notes is due June 15 and December 15 of each year. 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
covenants, the most restrictive of which place limitations on payment of
such dividends, repurchasing common stock, incurring additional
indebtedness, pledging of assets and advances or loans to affiliates. The
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 such other debt is in default. The Company did not pay the interest
due June 15, 1998, June 15 and December 15, 1997 or June 15 and December
15, 1996, and is in default. At June 30, 1998 and December 31, 1997 the
debt was classified as a current liability.

11. Contingencies

Preferred Stock Litigation: On May 6, 1998, Quadrangle Offshore (Cayman)
LLC, and Cerberus Partners, L.P. ("Plaintiffs"), filed a Verified Complaint
for Declaratory Judgment and Injunctive Relief, in the Court of Chancery of
the State of Delaware In and For New Castle County (Civil Action No.
16362-NC). Plaintiffs allege that they were beneficial owners of Preferred
Redeemable Increased Dividend Equity Securities, 8-1/4% PRIDES, Convertible
Preferred Stock, par value $0.01 per share (the "Preferred Stock") of the
Company, that mandatorily converted, on May 14, 1998, into common stock,
par value $0.0001 per share ("Common Stock") of the Company and the right
to receive cash in an amount equal to any accrued and unpaid dividends on
the Preferred Stock as of such date. A motion seeking a temporary
restraining order enjoining the Company from, among other things,
mandatorily converting the Preferred Stock into Common Stock on May 14,
1998, was denied on May 11, 1998 on a finding by the Court that plaintiffs
had not demonstrated any imminent, irreparable injury.

Plaintiffs filed an amended complaint on July 7, 1998. Generally, the
amended complaint alleges that the Company is currently in liquidation and
was in liquidation prior to May 14, 1998, that the plaintiffs are entitled
to receive the liquidation preference of $1,012.50 per share set forth in
the Company's Certificate of Designations, Preferences, Rights and
Limitations of Preferred Redeemable Increased Dividend Equity Securities,
8-1/4% PRIDES, Convertible Preferred Stock (the "Certificate of
Designations") in any distribution of assets the Company may make
notwithstanding that the Preferred Stock mandatorily converted and ceased
to be outstanding on May 14, 1998, and that the Company breached an implied
covenant of good faith and fair dealing under the Certificate of
Designations. Plaintiffs are seeking, among other things, (i) a declaration
that they are entitled to receive the liquidation preference in any
distribution of assets before any distribution is made to holders of Common
Stock and that the mandatory conversion of the Preferred Stock does not
operate to eliminate their right to receive the liquidation preference,
(ii) related injunctive relief, and (iii) other unspecified damages.

The Company is responding to discovery and has moved to dismiss the amended
complaint on the grounds that the plaintiffs' claims are not ripe for
adjudication and that the complaint fails to state a claim. Pending a
ruling on the motion to dismiss, the parties have entered into a
stipulation providing for, among other things, the completion of discovery
by October 1998 and a January 1999 trial date. The Company intends to
continue to contest the action vigorously.

<PAGE>

Shareholders' Class Action: On September 28, 1995, a class action complaint
was filed against the Company and certain of its officers and directors
(namely, Stanley Charren, Maurice E. Miller, Joel M. Canino and Gerald R.
Alderson), in the United States District Court for the Northern District of
California, alleging federal securities laws violations. On November 2,
1995, a First Amended Complaint was filed naming additional defendants,
including underwriters of the Company's securities and certain other
officers and directors of the Company (namely, Charles Christenson, Angus
M. Duthie, Steven N. Hutchinson, Howard W. Pifer III and Mervin E. Werth).
Subsequent to the Court's partial grant of the Company's and the
underwriter defendants' motions to dismiss, a Second Amended Complaint was
filed on March 29, 1996. 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 latest
generation of wind turbines and the Company's future prospects. The amended
complaint seeks unspecified damages and other relief.

In separate orders dated March 24, 1997 and April 16, 1997, the Court
granted plaintiffs' motion for certification of a plaintiff class
consisting of all persons or entities who purchased KENETECH common stock
between September 21, 1993 and August 8, 1995 or KENETECH depository shares
between April 28, 1994 and August 8, 1995, appointed representatives of the
certified plaintiff class, appointed counsel for the certified class and
denied without prejudice plaintiffs' motion for certification of an
underwriter defendant class. The plaintiffs then filed a Third Amended
Complaint adding additional plaintiffs alleged to have claims based on
section 11 of the Securities Act of 1933. On October 15, 1997, the Court
issued an order certifying a plaintiff and defendant underwriter class as
to the section 11 claim.

There have been two unsuccessful attempts at mediation to settle the action
and one unsuccessful settlement conference. Defendants' motion for summary
judgement is pending and no trial date has been set.

Enercon Litigation: In 1996, Enercon GmbH ("Enercon") filed suit in Federal
Court against the Company, individual officers of the Company and/or
KENETECH Windpower, Inc. ("KWI"), and KWI's expert witness in proceedings
before the U.S. International Trade Commission (the "ITC"), for alleged
misconduct related to patent infringement proceedings instituted by KWI
against Enercon and The New World Power Corporation ("New World Power")
that resulted in issuance of an exclusion order by the ITC that barred
Enercon and New World Power from importing infringing wind turbines
products into the United States. In its suit, Enercon alleges malicious
prosecution, patent misuse and anti-trust violations. Enercon has appealed
the ITC's exclusion order to the Federal Circuit Court of Appeals in
addition to filing this suit. Upon motion of the defendants, this suit has
been stayed by the Federal District Court pending the outcome of the appeal
of the exclusion order.

<PAGE>

Puerto Rico Litigation: In connection with the LNG-fired power plant being
constructed in Penuelas, Puerto Rico by EcoElectrica, L.P., a partnership
whose partners are subsidiaries of the Company and Enron Corporation,
certain environmental groups, citizens and the union which represents
electrical workers for the Puerto Rico Electric Power Authority ("PREPA")
brought a civil action challenging the procedure used by PREPA to select,
among others, EcoElectrica to design, finance, construct, own and operate
the Penuelas, Puerto Rico project, and requesting injunctive and
declaratory relief. EcoElectrica intervened in the action before the trial
court. On January 21, 1997, the Ponce Superior Division of the Court of
First Instance of Puerto Rico (the trial court) (No. JPE 96- 0345)
dismissed the complaint, holding that PREPA's selection of the independent
power producers need not have been done through public bidding pursuant to
section 205 of PREPA's Organic Act. On March 13, 1997, the plaintiffs,
Mision Industrial de Puerto Rico, Inc., the Union de Trabajadores de la
Industria Electrica y Riego (UTIER), Guayamenses Pro-Salud y Buen Ambiente,
Bartolome Diana, SURCCO, Inc. and Jose E. Olivieri Antonmarchi
(Appellants), filed an appeal before the Circuit Court of Appeal of Puerto
Rico (No. KLAN 97-00236), appealing the judgment entered against them.

On May 19, 1998, the Circuit Court of Appeal confirmed the trial court's
dismissal of the complaint and, on June 15, 1998, denied Plaintiffs' motion
for reconsideration. Plaintiffs did not file for a Writ of Certiorari to
the Supreme Court of Puerto Rico within the statutory time period and the
dismissal of the complaint is now a final judgement.

Westinghouse Litigation: C. N. Flagg Incorporated, a wholly-owned
subsidiary of CNF Industries, Inc., instituted legal proceedings against,
among others, Westinghouse Electric Corporation ("Westinghouse") in March,
1997, in the U.S. Federal District Court in Minnesota (No. 97-617 JRT/RLE)
to recover $6.0 million as compensation for a termination of convenience of
a project C. N. Flagg was building on behalf of Westinghouse. Westinghouse
has filed a counter-claim for $2.6 million alleging overpayment. Discovery
is proceeding in the action.

Wrongful Termination Litigation: On December 31, 1987, a former employee of
CN Flagg Power, Inc. ("CN Power") (formerly, a wholly-owned subsidiary of
CNF Industries, Inc.) filed a complaint with the State of Connecticut
Commission of Human Rights and Opportunities (the "Commission") alleging
that he was wrongfully terminated from his position at Millstone Point, a
nuclear energy generation facility owned and operated by Northeast
Utilities ("Northeast"). CN Flagg's motion to dismiss the complaint has
been denied by the Commission; Northeast's motion to dismiss is pending.
Damages are alleged to be in the area of $300,000.

Eemsmond: Certain companies have threatened to bring suit against CNF
Constructors, Inc. ("CNF") (a wholly-owned subsidiary of CNF Industries,
Inc.) alleging CNF's failure to make payments on certain equipment or civil
construction services supplied in connection with the construction of a
windplant in The Netherlands. The amounts alleged to be unpaid are in the
area of $2,000,000.

Other: The Company is also a party to various other legal proceedings
normally incident to its business activities. The Company intends to defend
itself vigorously against these actions.

It is not feasible to predict or determine whether the ultimate outcome of
the above-described matters will have a material adverse effect on the
Company's financial position.

<PAGE>

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.

OVERVIEW

KENETECH Corporation ("KENETECH"), a Delaware corporation, is a holding
company which has participated through its subsidiaries in the electric
utility market. As used in this document, "Company" refers to KENETECH and
its wholly-owned subsidiaries (excluding KENETECH Windpower, Inc. ("KWI")).

Historically, the Company developed, constructed, financed, sold, operated
and managed independent power projects with an emphasis on windpower
generation. The Company's windpower subsidiary, KWI, manufactured wind
turbines and designed wind-powered electric power plants which incorporated
large arrays of such turbines. On May 29, 1996, KWI filed for protection
under chapter 11 of the Federal Bankruptcy Code and reported an excess of
liabilities over the fair value of its assets. Although the Company
continues to own the common stock of KWI and provides certain services
under the jurisdiction of the Bankruptcy Court, the Company believes it is
probable that such ownership will not exist after the completion of the KWI
bankruptcy proceedings. Accordingly, as of May 29, 1996, KWI ceased to be
accounted for as a consolidated subsidiary of the Company for financial
reporting purposes. The Company's financial statements exclude all
activities of KWI after that date.

A Settlement Agreement and Release ("Release") was entered into as of May
13, 1998, by and among KWI, the Official Unsecured Creditor's Committee of
KWI, KENETECH, KENETECH Energy Systems, Inc., a wholly-owned subsidiary of
KENETECH ("KES"), CNF Industries, Inc., a wholly-owned subsidiary of
KENETECH, CNF Constructors, Inc., a wholly-owned subsidiary of CNF
Industries, Inc. (collectively with CNF Industries, Inc. ("CNF")), and The
Bank of New York, in its capacity as successor Indenture Trustee for the
Senior Secured Notes (the "Trustee"). In the Release, CNF, KENETECH and the
Trustee released the claims filed against KWI in the KWI bankruptcy
proceedings. KWI released KENETECH, KES and the Trustee from all claims
against those entities including those for preferential payments prior to
the filing of the bankruptcy petition, alter ego claims, and any claim for
substantive consolidation. KES and KENETECH agreed to pay KWI $6.5 million
upon the occurrence of certain circumstances. While the obligation to KWI
is joint and several between KES and KENETECH, no amounts are due or
payable from KES until it receives proceeds from the sale of its interest
in EcoElectrica as more fully described below. Additionally, KWI will
continue to be a member of the Company's consolidated group for income tax
purposes. The Release was approved by the Bankruptcy Court on May 26, 1998.

Through CNF, the Company constructed independent power projects since 1988.
This subsidiary competed for contracts for engineering, procurement and
construction (EPC) and for construction only. Historically, the Company had
constructed all of the thermal energy power projects it developed and many
of the Windplants it developed. Substantially all construction work
performed by the Company for third parties was competitively bid and most
was performed under turnkey contracts. The chapter 11 filing of KWI
discussed above has materially adversely affected CNF and its ability to
procure contracts. CNF had joint venture interests in the EPC contracts for
the EcoElectrica Project described below which were sold in December 1997.
CNF is completing the projects in progress.

Through KES, the Company developed and financed independent power projects.
KES currently indirectly holds interests in the independent power projects
described below:

The EcoElectrica Project

KES owns an indirect 50% interest (the "EcoElectrica Interest") in
EcoElectrica, L.P., a Bermuda limited partnership ("EcoElectrica"). The
remaining 50% equity interest in EcoElectrica is owned by affiliates of
Enron Corp.

16
<PAGE>

EcoElectrica was formed to pursue the development, construction, operation
and ownership of an industrial complex consisting of a liquefied natural
gas import terminal and storage facility, a gas-fired cogeneration facility
of approximately 540MW, a desalination plant, and assorted ancillary
facilities located in Penuelas, Puerto Rico (collectively, the
"EcoElectrica Project"). The EcoElectrica Project will produce electricity
to be sold to the Puerto Rico Electric Power Authority ("PREPA") pursuant
to a 22-year Power Purchase and Operating Agreement. The desalination plant
will produce water for the EcoElectrica Project and also for sale to the
Puerto Rico Aqueduct and Sewer Authority for further sale to local markets
and to PREPA for use in its generating plants.

In August 1996, a single purpose subsidiary of KES entered into a $30
million non-recourse loan agreement to provide proceeds to continue the
development of the EcoElectrica Project. The loan matures in conjunction
with commercial operations of the EcoElectrica Project and contains
adequate remaining capacity to fund interest charges on the principal
balance through maturity when the entire $30 million would be utilized.

EcoElectrica closed its construction financing, including up to $603
million of non-recourse debt, in December 1997. Construction, under a
turnkey contract guaranteed as to payment by Enron Corp. and as to payment
and performance by Enron Power Corp., is underway with initial commercial
power deliveries expected in the fourth quarter of 1999. The Company has
secured its $33.5 million equity commitment to EcoElectrica with a
cash-collateralized irrevocable letter of credit. This equity commitment is
due when the EcoElectrica Project begins commercial operations.

In February 1998, the Company and KES retained Fieldstone Private Capital
Group ("Fieldstone") as their financial advisor with respect to the
proposed sale by the Company of the EcoElectrica Interest. In April 1998,
Fieldstone commenced a confidential solicitation of proposals from a
limited number of qualified potential purchasers of the EcoElectrica
Interest. As of May 15, 1998, Fieldstone had received preliminary
indications of interest in acquiring the EcoElectrica Interest from ten
qualified potential purchasers. As of July 31, 1998, Fieldstone had
received definitive bids from two qualified potential purchasers.
Fieldstone, the Company and KES are currently evaluating these bids.
Although the Company currently plans to sell the EcoElectrica Project in
1998, there can be no assurance that current efforts will ultimately result
in a disposition of the EcoElectrica Interest on terms acceptable to the
Company or as of any specified date.

The Chateaugay Project

Through KES, the Company owns a 50% indirect interest in KES Chateaugay,
L.P., a Delaware limited partnership, which owns a 17.8MW wood-fired
electric generating project (the "Chateaugay Project") in Chateaugay, New
York developed by KES. The remaining 50% equity interest is owned by
affiliates of CMS Generation Company. The Chateaugay Project delivers
electric energy to New York State Electric & Gas Company under a long-term
Power Purchase Agreement.

The Hartford Hospital Project

<PAGE>

CAUTIONARY STATEMENT

Certain information included in this report contains forward looking
statements within the meaning of the Securities Act of 1933, as amended,
and the Securities Act of 1934, as amended. Such forward looking
information is based on information available when such statements are made
and is subject to risks and uncertainties that could cause actual results
to differ materially from those expressed in the statements.

Results of Operations
---------------------

The consolidated financial statements of KENETECH Corporation and certain
subsidiaries as of and for the quarterly periods ending June 30, 1998 and
June 28, 1997 have been prepared assuming the Company will continue as a
going concern.

The Company incurred a net loss for the second quarter of 1998 of $5.2
million as compared to a net loss for the second quarter of 1997 of $4.9
million. In 1998 the Company expects to generate operating losses before
the sale of assets described above in "Overview" due to administrative
expenses and interest expense on debt in excess of gross margin.

Quarters ended June 30, 1998 and June 28, 1997
<TABLE>
<CAPTION>

Quarter Ended
June 30, 1998 June 28, 1997
------------------------ ------------------------
(in millions)
Gross Gross
Revenues Costs Margins Revenues Costs Margins
-------- ----- ------- -------- ----- -------
<S> ............................ <C> <C> <C> <C> <C> <C>
Construction services ..............$ 0.5 $ 0.4 $ 0.1 $ 11.4 $11.4 $ --

Energy sales <F1> ................ 0.3 1.0 (0.7) 1.5 1.5 --

Maintenance, management
fees and other <F1>.............. 0.6 -- 0.6 -- -- --
-------- ----- ------- -------- ----- -------
Total ...............................$ 1.4 $ 1.4 $ -- $ 12.9 $12.9 $ --
======== ===== ======= ======== ===== =======

</FN> </TABLE>

Construction services revenues (recorded under the percentage-of-completion
method) decreased to $0.5 million for the quarter ended June 30, 1998 from
$11.4 million for the comparable period in 1997 because the Company's
construction subsidiary is completing its projects in process and is in the
process of disposing its remaining assets and liabilities.

Energy plant operations experienced an excess of expenses over revenues of
$0.7 million for the second quarter of 1998 compared to breaking even in
the second quarter of 1997 because in June and July of 1997 the Hartford
Hospital Project experienced, through force majeure events, catastrophic
failures of both its turbines. The cost of repairing the individual units
was prohibitive and there were no lease engines available for short term
installation. The Company assembled one turbine, which operated
sporadically, from the serviceable parts of the two failed turbines. The
Company sold the Hartford Hospital Project in June 1998 (see discussion at
Note 6 and Gain on disposition of subsidiaries and assets).

General and administrative expenses decreased to $0.8 million for the
quarter ended June 30, 1998 from $2.6 million for the comparable period in
1997 due to downsizing of the Company's operations.

Interest expense increased to $4.7 million for the quarter ended June 30,
1998 from $3.0 million for the comparable period in 1997 due to higher
average interest bearing balances and rates in effect during the period.

18
<PAGE>

Gain on disposition of subsidiaries and assets. In June 1998 the Company
sold the Hartford Hospital Project, including the rights under the
Termination Agreement (see Note 6) for $4.9 million in cash (net) and the
assumption of a $10.7 million note payable collateralized by the Project
and approximately $0.4 million of other liabilities. The Company incurred
no gain or loss on this transaction. The $25 thousand gain reflected in the
quarterly income statement was primarily generated by the disposition of
various assets of the Company's construction subsidiary. In conjunction
with sale of the Hartford Hospital Project, the operations and maintenance
contract held by KENETECH Facilities Management, Inc. ("KFM"), a
wholly-owned subsidiary of the Company, was terminated. In addition, on
June 30, 1998, KFM's sole remaining contract for operation and maintenance
service expired and was not renewed by the owner of the power plant. As a
result, KFM has no further business activity or employees and will be wound
up in due course.

Income taxes. The Company uses the asset and liability approach for
financial accounting and reporting for income taxes was recorded for the
periods ended June 30, 1998 and June 28, 1997. Although a loss was
incurred, no tax benefit was recorded because of the uncertainty about the
Company's ability to utilize such a benefit. To the extent, if any, the
Company realizes a substantial gain on the sale of its investment in the
EcoElectrica Project, a portion of the valuation allowance may be reversed.

Six months ended June 30, 1998 and June 28, 1997
<TABLE>
<CAPTION>

Six months ended
June 30, 1998 June 28, 1997
------------------------ ------------------------
(in millions)
Gross Gross
Revenues Costs Margins Revenues Costs Margins
-------- ----- ------- -------- ----- -------
<S> ............................ <C> <C> <C> <C> <C> <C>
Construction services ..............$ 3.4 $ 2.6 $ 0.8 $ 21.5 $21.4 $ 0.1

Energy sales <F1> ................ 0.5 2.2 (1.7) 2.9 3.3 (0.4)

Maintenance, management
fees and other <F1>.............. 1.0 -- 1.0 0.5 -- 0.5
-------- ----- ------- -------- ----- -------
Total ...............................$ 4.9 $ 4.8 $ 0.1 $ 24.9 $24.7 $ 0.2
======== ===== ======= ======== ===== =======

</FN> </TABLE>

Construction services revenues (recorded under the percentage-of-completion
method) decreased to $3.4 million for the six months ended June 30, 1998
from $21.5 million for the comparable period in 1997 because the Company's
construction subsidiary is completing its projects in process and is in the
process of disposing of its remaining assets and liabilities.

Energy plant operations experienced an excess of expenses over revenues of
$1.7 million for the first six months of 1998 compared to a $0.4 million in
the first six months of 1997 because in June and July of 1997 the Hartford
Hospital Project experienced, through force majeure events, catastrophic
failures of both its turbines. The cost of repairing the individual units
was prohibitive and there were no lease engines available for short term
installation. The Company assembled one turbine, which operates
sporadically, from the serviceable parts of the two failed turbines. The
Company sold the Hartford Hospital Project in June 1998 (see discussion at
Note 6 and (Loss) Gain on disposition of subsidiaries and assets).

<PAGE>

Project development and marketing expenses increased to $0.4 million for
the twenty-six weeks ended June 30, 1998 from $26 thousand for the
comparable period in 1997. Project development expenses increased due to
the Company's marketing of its EcoElectrica Project.

General and administrative expenses decreased to $1.6 million for the
twenty-six weeks ended June 30, 1998 from $8.3 million for the comparable
period in 1997 due to downsizing of the Company's operations.

Interest expense increased to $8.3 million for the twenty-six weeks ended
June 30, 1998 from $7.8 million for the comparable period in 1997 due to
higher average interest bearing balances and rates in effect during the
period.

(Loss) Gain on disposition of assets and subsidiaries. In June 1998 the
Company sold the Hartford Hospital Project, including the rights under the
Termination Agreement (see Note 6) for $4.9 million in cash (net) and the
assumption of a $10.7 million note payable collateralized by the Project
and approximately $0.4 million of other liabilities. The Company incurred
no gain or loss on this transaction. The $43 thousand loss reflected in the
twenty-six week period was primarily generated by the disposition of
various assets of the Company's construction subsidiary. In conjunction
with sale of the Hartford Hospital Project, the operations and maintenance
contract held by KENETECH Facilities Management, Inc. ("KFM"), a
wholly-owned subsidiary of the Company, was terminated. In addition, on
June 30, 1998, KFM's sole remaining contract for operation and maintenance
service expired and was not renewed by the owner of the power plant. As a
result, KFM has no further business activity or employees and will be wound
up in due course.

Liquidity and Capital Resources
-------------------------------

Operating activities

During the first six months of 1998 operations activities used cash of $4.9
million. As previously stated, the Company expects a loss from operations
in 1998 before the sale of the assets described above in "Overview" due to
administrative expenses and interest on debt in excess of gross margin.

Investing activities

During the first six months of 1998 the Company sold the building and land
owned by its construction subsidiary for $2.8 million in cash and the
Hartford Hospital Project for $4.9 million (net) in cash.

Financing activities

During the first six months of 1998 the Company borrowed an additional $3.0
million from the lender to the Hartford Hospital Project as discussed under
energy plant operations above.

20
<PAGE>

Status
------

During 1996 the Company's liquidity became severely constrained as it
consumed its cash. On February 2, 1996 the Company announced that it would
not pay the dividend scheduled for February 15, 1996 on its Preferred
Stock. The Company paid no dividends on the Preferred Stock in 1996, 1997
or 1998. Dividends ceased to accrue on May 14, 1998 when the Preferred
Stock mandatorily converted to 5,124,600 shares of Common Stock. In
December 1992 the Company sold $100.0 million of 12 3/4% Senior Secured
Notes due 2002. Interest on these notes is due June 15 and December 15 of
each year. The Company did not make the 1996, 1997, or June 1998 payments
and is in default.

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 additional asset sales.

Risks and Uncertainties
-----------------------

The consolidated financial statements as of and for the quarter ended June
30, 1998 have been prepared assuming the Company will continue as a going
concern. The Company incurred significant losses in 1997, 1996, and 1995,
has incurred a significant loss for the first six months of 1998, has
negative working capital and its liquidity is severely constrained. Certain
lenders and creditors are seeking repayment and/or restructuring of the
amounts due them. In 1998 the Company expects to generate operating losses
before the sale of assets due to administrative expenses in excess of gross
margin and interest expense on debt. These factors raise substantial doubt
about the Company's ability to continue as a going concern in its current
form.

Management plans to improve the Company's liquidity and to facilitate the
continuation of its energy project development business by selling assets.

In furtherance of that plan, the Company is actively marketing its
interests in the EcoElectrica Project and has received two definitive bids
from qualified potential purchasers. In addition, the Company entered into
a Settlement Agreement and Release with, among others, KWI, pursuant to
which, KWI released the Company from certain claims in bankruptcy and
continues to be a member of the Company's consolidated group for income tax
purposes.

There can be no assurance that the Company will successfully complete its
planned asset sales, or that, even if planned asset sales are completed,
the Company will realize sufficient net asset sales cash proceeds to
discharge current liabilities and provide additional working capital to
enable the Company to continue as a going concern. Consequently, the
Company may be required to seek protection from its creditors under the
Federal Bankruptcy Code.

21
<PAGE>

Part II OTHER INFORMATION

Item 1. Legal Proceedings.
------------------

See discussion under Note 11 of Item 1, Part I incorporated herein by
reference.

Item 2. Changes in Securities.
----------------------

Pursuant to the terms and conditions of the Restated Certificate of
Incorporation, as amended (the "Restated Certificate"), of the Company
and the Deposit Agreement, dated as of May 5, 1994 (the "Deposit
Agreement"), among the Company, Chemical Trust Company of California,
a California trust company (predecessor of ChaseMellon Shareholder
Services, L.L.C.), and the holders from time to time of the depositary
receipts described in the Deposit Agreement (the "Depositary
Receipts") in respect of the Preferred Redeemable Increased Dividend
Equity Securities, 8-1/4% PRIDES, Convertible Preferred Stock, par
value $0.01 per share (the "Preferred Stock") of the Company, each
outstanding share of the Preferred Stock, on May 14, 1998 (the
"Mandatory Conversion Date"), mandatorily converted into (i) 50 shares
of the Company's authorized common stock, par value $0.0001 per share
("Common Stock"), and (ii) the right to receive, from and after the
Mandatory Conversion Date, cash in an amount equal to all accrued and
unpaid dividends on such share of Preferred Stock to and including the
Mandatory Conversion Date, whether or not declared, out of funds
legally available for the payment of dividends on the Preferred Stock.

Ownership of the Preferred Stock was held in the form of depositary
shares (the "Depositary Shares") with each Depositary Share
representing one-fiftieth of a share of the Preferred Stock. In
accordance with the Restated Certificate and the Deposit Agreement,
the Depositary Shares were exchanged for shares of Common Stock (and
the right to receive cash for any accrued and unpaid dividends payable
on such shares) at a rate per Depositary Share equal to one-fiftieth
of the number of shares of Common Stock (and the right to receive
one-fiftieth of any accrued and unpaid dividends) exchanged for each
share of the Preferred Stock.

Dividends on the Preferred Stock and Depositary Shares ceased to
accrue from and after the Mandatory Conversion Date. The Preferred
Stock and Depositary Shares ceased to be outstanding from and after
the Mandatory Conversion Date, and all rights with respect thereto
ceased and terminated, except the right of holders of record of
Depositary Receipts to receive shares of Common Stock and evidence of
the right to receive cash in an amount equal to all accrued and unpaid
dividends on the Preferred Stock, to and including the Mandatory
Conversion Date, without interest, if and when declared by the Board
of Directors of the Company out of funds legally available therefor.

Item 3. Defaults Upon Senior Securities.
--------------------------------

See discussion under Note 10 of Item 1, Part I and discussion under
the heading "status" of Item 2, Part I incorporated herein by
reference.

Item 6. Exhibits and Reports on Form 8-k.
---------------------------------

(b) The Company filed a Report on Form 8-K dated May 8, 1998 that
disclosed the filing of the Preferred Stock litigation described in
Note 11 of Item 1, Part I.

22
<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:
Date: August 12, 1998 Mark D. Lerdal
President, Chief Executive Officer,
and Director

Date: August 12, 1998 By:
Michael U. Alvarez
Chief Financial Officer
and Vice-President

By:
Date: August 12, 1998 Mervin E. Werth
Corporate Controller, Chief Accounting
Officer, and Assistant Treasurer

23
<PAGE>

SIGNATURES

Pursuant to the requirements 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: August 12, 1998 Mark D. Lerdal
President, Chief Executive Officer,
and Director

By: /s/ Michael U. Alvarez
Date: August 12, 1998 Michael U. Alvarez
Chief Financial Officer
and Vice-President

By: /s/ Mervin E. Werth
Date: August 12, 1998 Mervin E. Werth
Corporate Controller, Chief Accounting
Officer, and Assistant Treasurer

<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
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<CIK> 0000807708
<NAME> KENETECH CORPORATION
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<CURRENCY> U.S. DOLLARS

<S> <C>
<PERIOD-TYPE> 6-mos
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 11,907
<SECURITIES> 0
<RECEIVABLES> 1,598
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 70,646
<PP&E> 729
<DEPRECIATION> 679
<TOTAL-ASSETS> 70,696
<CURRENT-LIABILITIES> 194,178
<BONDS> 0
0
0
<COMMON> 4
<OTHER-SE> (144,870)
<TOTAL-LIABILITY-AND-EQUITY> 70,696
<SALES> 4,839
<TOTAL-REVENUES> 4,839
<CGS> 4,761
<TOTAL-COSTS> 4,761
<OTHER-EXPENSES> (1,983)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (8,318)
<INCOME-PRETAX> (9,938)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,938)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,938)
<EPS-PRIMARY> (0.34)
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</TABLE>