Kenetech Corporation

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Kenetech Corporation

500 Sansome Street
San Francisco, CA 94111
U.S.A.
(415) 398-3825
Fax: (415) 391-7740

Public Company
Incorporated: 1979 as U.S. Windpower
Employees: 1,200
Sales: $.25 billion
Stock Exchanges: NASDAQ

SICs: 1510 Energy Resources; 8340 Electric, Gas, and Water
Utilities; 8370 Construction and Related Services

Kenetech Corporation is a leading developer and provider of environmentally preferred electric power—principally wind, biomass, and natural gas. It has installed more wind turbines than any other company in the world and is a recognized technological leader in the field of wind energy. Kenetech also builds and operates power production facilities on a fee basis.

Kenetech’s precursor was founded in 1974 in Cambridge, Massachusetts. Stanley Chairen and a group of forward-thinking associates, recognizing the future potential of generating electric power by means other than fossil fuels, hoped to create an energy company that utilized wind as its power source. The company was incorporated in 1979 as U.S. Windpower to design and sell wind turbines and wind power. During the early 1980s, U.S. Windpower designed and produced its first-generation wind turbine.

U.S. Windpower’s entry into the alternative energy market was made possible by the political and economic environment of the 1970s and early 1980s. Utilities during that period were predicting a long-term escalation of fossil fuel prices. As a result, the federal government and certain state governments began offering financial incentives for companies to begin developing new energy sources. Oil prices did, in fact, balloon at a feverish pitch during the late 1970s and early 1980s in the wake of efforts by the Organization of Petroleum Exporting Countries (OPEC).

The Federal Government responded to the energy crunch by bolstering its efforts to foster alternative power projects. In addition to tax breaks for companies like U.S. Windpower, the government also began requiring public utilities to purchase power from qualifying energy producers, and it offered them inducements to acquire and own non-fossil fuel energy projects. Some states, particularly California, augmented federal initiatives with their own promotional programs. Besides offering state tax breaks, the California Public Utilities Commission required utilities to enter into long-term power purchase agreements with alternative suppliers that assured them fixed rates for the energy they sold to the utilities.

Spurred by California’s favorable regulatory environment, U.S. Windpower relocated its operations to the San Francisco Bay area. As oil prices continued to rise and alternative energy projects achieved fad status, U.S. Windpower was able to ride the industry wave. Between 1981 and 1984 the burgeoning enterprise entered into power purchase agreements for approximately 420 megawatts of generating capacity in California—one megawatt of capacity is roughly sufficient to power 350 households for one year. It also tried to market its windmills and enter into agreements in a few other states.

During the early 1980s “wind farms” sprang up east of San Francisco, as well as in many other regions of the country, by the thousands. Windmill manufacturers, many of them undercapitalized, rushed to the market. They erected hordes of relatively rudimentary turbines, many of which were powered by simple helicopter blades. Sales of wind-powered electricity soared from $21 million in 1981 to $748 million by 1985. Spurred by its success, U.S. Windpower (and many of its industry peers) even began seeking profits from other forms of energy, such as biomass (burning plant material) and natural gas.

Despite an influx of competitors during the early 1980s, U.S. Windpower was able to assume a leadership role in the wind power industry through technological prowess and sound management. Chairman and co-founder Chairen, himself a graduate of Brown University with a masters in engineering from Harvard University, was joined by an adept management and technical team. For example, Gerald R. Alderson, a Harvard M.B.A., became president and chief executive officer in 1981. The board of directors also included several Harvard and Yale graduates.

U.S. Windpower’s technical competence was reflected in its second-generation wind turbine system, the Model 56-100, which it began marketing in 1983. That windmill represented a vast improvement over helicopter blade-type systems and proved to be more cost-effective than even the majority of the most advanced turbines introduced during the early 1980s. During the mid-1990s, U.S. Windpower installed approximately 4,000 of those units, most of which were located in two locations 50 miles east of San Francisco. In most instances, U.S. Windpower installed the turbines for third-party owners and operated them in return for a percentage of energy sales. About one-fifth of the units, though, were actually owned and operated by U.S. Windpower.

Although the Model 56-100 was soon to be succeeded by Kenetech’s third generation turbine, it performed admirably during the 1980s and contributed to U.S. Windpower’s status as an industry trend-setter. As advertised, the 56-100 units produced about 200 kilowatt-hours of power annually during the 1980s and achieved a mechanical availability rate of about 98 percent—good by industry standards. By the late 1980s, the Model 56-100 was generating about 25 percent of all the wind power being sold in California—wind power accounted for approximately 1.5 percent of that state’s total power production.

Unfortunately for U.S. Windpower and other alternative energy pioneers, markets began to sour in the mid-1980s. By 1985, the Reagan administration had successfully dismantled many of the energy tax incentives created by President Carter. Most state enticements had also been withdrawn. Oil prices had fallen dramatically from the early 1980s highs, and new energy technologies were significantly boosting the efficiency of traditional power generating systems. As a result, the industry was beaten into submission by severely depressed markets. By 1988, in fact, wind power sales plunged over 1,000 percent from their 1985 peak to a measly $67 million per year. As visions of wind power grandeur faded, many companies were forced out of business.

U.S. Windpower was buoyed during the lean late 1980s by its guaranteed long-term contracts in California, the only state in which it was selling wind power during that period. More importantly, however, the company successfully supplanted lagging wind power revenue growth by emphasizing its diversification into energy-related ventures. It particularly stepped up its offerings of construction services, most of which were provided through its CNF Industries division; CNF provided engineering, procurement, and construction services for utility and industrial projects. Similarly, the company offered energy management services, including the development and implementation of cost-effectiveness programs for large industrial, commercial, and institutional energy users.

In 1988, U.S. Windpower reorganized its organization to reflect its growing diversification. It created Kenetech Corporation as a holding company for its subsidiaries, the most important of which remained Kenetech Windpower, or U.S. Windpower. Indeed, despite ailing alternative energy markets, Kenetech remained committed to the concept of wind power and believed that its future lay in that arena. Kenetech’s senior management quickly steered the company into a new direction designed to continue the growth Kenetech had achieved since its inception.

Kenetech’s reorganization was prompted, in part, by its recognition of the fact that earnings from its important wind power division were at risk. Despite the success of its Model 56-100, that turbine was no longer cost-competitive with many other means of generating electricity. Although Kenetech achieved 1988 sales of $148 million, the fixed-price purchase contracts it had signed in the mid-1980s were set to gradually expire by 1991, throwing doubt on the future of the company’s core business. In response to the dilemma, Kenetech embarked on an ambitious venture in 1988 to develop a third-generation wind turbine that would allow it to compete with other energy sources on a level playing field, with government incentives.

After spending two years developing a new turbine, Kenetech began marketing its breakthrough Model 33M-VS in late 1991. Although the new windmill closely resembled the old 56-100—the Model 33M-VS stands 90-120 feet high, and has three 54-foot fiberglass blades—it is the gearing inside the giant turbine that makes it a major industry innovation. Prior to 1991, wind turbines operated at a single, constant speed. Regardless of how hard the wind blew, the rotor would spin at the same speed in order to deliver the required alternating current frequency of 50 or 60 hertz. As a result, high winds quickly wore out the machinery and significant wind energy was wasted.

The Model 33M-VS solved the problems of its predecessors. It used a variable-speed turbine that adjusted to the wind’s speed, thus capturing more energy. Wear and tear was reduced, as was the costly maintenance required by traditional turbines. Furthermore, because the torque level was lower, the 33M-VS used less expensive parts and was about 25 percent less expensive to manufacture than the 56-100. The end result of Kenetech’s efforts was that it had reduced the cost of generating a kilowatt-hour of electricity from $.075 to below $.05, suddenly making wind power cost-competitive with systems utilizing coal, natural gas, hydropower, or geothermal energy.

Kenetech invested nearly $40 million on research and development to create the Model 33M-VS. At the same time, its wind power revenues were coming under increasing pressure from falling natural gas and oil prices. Nevertheless, the company managed to stabilize its financial performance by increasing receipts from its management and construction services and by sustaining steady cash flow from its installed base of 56-100 turbines. In addition, Kenetech added a wood recycling subsidiary in 1991 and later constructed two biomass energy plants. As revenues swelled from $162 million in 1989 to $257 million in 1990, net income rose from $3.6 million to a hefty $15.4 million. Aggregate sales and income dipped in 1991, however, as Kenetech exited some of its long-term wind power contracts.

Kenetech’s net income fell to $2.6 million in 1992 before tumbling to a net loss of $18.1 million in 1993. Energy sales fell 28 percent in 1993 and construction services sales dropped similarly as a result of lost wind power contracts. Nevertheless, Kenetech’s management and investors were enthused about the company’s performance; Kenetech began selling the 33M-VS system in 1993 and immediately realized a strong interest in the turbine. Windplant sales increased 267 percent in 1993, to about $17.7 million, despite the fact that the Model 56-100 had been completely phased out of production in the United States by 1992.

To fund its anticipated growth, Kenetech sold six million shares of stock in 1993 and raised $92 million for expansion. However, as interest and orders in its new generating system continued to rise, company management began to wonder if those new funds were enough to support the company’s sudden growth. By 1993, the first year in which Kenetech had actually manufactured and installed the first of its commercial 33M-VS turbines, it had accrued more than $600 million in firm orders. Furthermore, Kenetech had been negotiating with numerous potential customers since 1992 to build and operate several massive projects. In short, Kenetech was poised on the brink of a major-league expansion of its business.

Kenetech was enjoying a huge interest in its new turbine by several states in the union after sweating out declining demand in its sole California market for more than a decade. In addition, the company was suddenly finding itself engaged in projects around the globe. In 1993, for example, Kenetech entered into an agreement to sell two windplant systems valued at $100 million to a Canadian utility. That project would entail construction of 150 to 200 turbines by 1995. Shortly before that deal was closed, Kenetech had entered into an agreement to supply a proposed $225 million wind power project in Maine.

Perhaps Kenetech’s most ambitious project in the early 1990s was its construction of one of the largest wind energy facilities in the world. In 1993, Kenetech Windpower and a Ukrainian partner began building a 500-megawatt windplant on the Crimea Peninsula. It was designed to hasten the closing of the Chernobyl nuclear plant and provide power to about 400,000 Ukrainians. Interestingly, this particular project utilized Kenetech’s old 56-100 turbines—Kenetech has formed a Ukraine-based joint venture to mass-produce 5,000 of the windmills, which it planned to install over a five-year period. In addition to the Ukrainian project, Kenetech had also cultivated business and had projects under development or in operation in Spain, Holland, the United Kingdom, Germany, Honduras, Costa Rica, New Zealand, India, China, Guatemala, and Egypt by 1993.

As Kenetech amassed contracts to manufacture, sell, and service its new Model 33M-VS, some critics observed that the technology was still unproved and threatened to hurt the industry’s reputation. “There is a fear that they may be overselling what they have to offer,” said David Torrey, assistant professor of electric power engineering at Rensselaer Polytechnic Institute, in the October 24, 1993, issue of Boston Globe. ’ They are the big name out there. If they fail, there is a good likelihood they will take the rest of the industry with them.” Added wind power engineer, James Carter, “I don’ t think anyone has perfected this technology.... If they fall on their face, so will the rest of us.”

Despite their detractors, Kenetech’s managers remained optimistic going into the mid-1990s and were looking forward to massive growth. As Alderson pointed out in Kenetech’s 1993 annual report, if the company transacted only the contracts that it was in the process of negotiating at the end of 1993 and no new customers were added, its revenues would explode from $250 million annually to more than $2 billion within a few years. To prepare for such growth, Kenetech was planning to double its work force during 1994 and to possibly double it again by 1995 or 1996.

“If we supplied just one percent of the world’s electricity by the end of the century, we’ d be trucking along at $3 billion to $4 billion in sales per year,” Alderson estimated in a November 1993 issue of Business Week. Less than 1 percent of the United States’ energy needs was supplied by wind power in 1993, making that estimation optimistic. Still, rising oil prices and increasing overseas energy demand in 1994 boded well for Kenetech’s long-fought-for dream of making wind power an accepted technology.

Principal Subsidiaries

CNF Industries; Kenetech Energy Management; Kenetech Energy Systems; Kenetech Facilities Management; Kenetech Windpower (U.S. Windpower); Kenetech Resource Recovery.