UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K

(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

For the transition period from to
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

Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK
12 3/4% SENIOR SECURED NOTES DUE 2002
8 1/4% PREFERRED REDEEMABLE INCREASED DIVIDEND EQUITY SECURITIES
(Title of Class)

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

Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of this chapter) is not
contained herein, and will not be contained, to the best of registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K.
[ ]

Based on the market price of the Common Stock at March 13, 1998
($0.055), the aggregate market value of the Common Stock of non-affiliates
of the Registrant was approximately $1.3 million. As of March 13, 1998,
there were 36,829,618 shares of Common Stock outstanding. The aggregate
market value of holdings of non-affiliates of the Registrant's 8.25%
Preferred Redeemable Increased Dividend Equity Securities (with the right
of 4/5 vote for each Depositary Share owned) based on the market price at
March 13, 1998 ($2.5625) was approximately $13.1 million. There were
5,124,600 Depositary Shares outstanding as of March 13, 1998.

Page 2

PART I

Item 1. Business
- ----------------

KENETECH Corporation ("KENETECH"), a Delaware corporation, is a holding
company which participated through its subsidiaries in the electric utility
market in two principal ways. As used in this document "Company" refers to
KENETECH and its wholly-owned subsidiaries (including KENETECH Windpower,
Inc. (KWI) only through May 29, 1996).

Historically, the Company developed, constructed, financed, sold and
operated and managed independent power projects. A wholly-owned development
subsidiary is a joint venture partner with an affiliate of Enron
Corporation in a project under construction in Puerto Rico. In December
1997 the project obtained construction and term debt financing. The project
is a 507 MW (net) natural gas cogeneration facility and associated
liquified natural gas facility which will produce electricity to be sold to
Puerto Rico Electric Power Authority pursuant to a 22 year Power Purchase
Agreement dated March 10, 1995.

The power plant will be a combined cycle cogeneration facility consisting
of two combustion turbines capable of operating on LNG, LPG, or fuel oil to
generate electricity, and is expected to produce approximately 4 million
megawatt hours of electricity annually under baseload conditions. Steam
generated will also be used to convert sea water into fresh water in a
desalination plant, which is expected to produce approximately 4 million
gallons of potable water per day, of which approximately 1 million gallons
per day will be required by the project, with the remainder being available
for sale to local entities. This is the only project the Company (through
its wholly-owned development subsidiary) has in process. The Company's
wholly-owned development subsidiary intends to sell its interest in this
project in 1998.

One of the Company's subsidiaries is a general contractor which has
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 more recently had
constructed all 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 below has materially adversely affected
the Company's construction subsidiary and its ability to procure contracts.
This construction subsidiary had joint venture interests in the EPC
contracts for the Puerto Rico project described above which were sold in
December 1997. The Company is completing the projects in progress and
intends to dispose of its construction subsidiary in 1998.

KWI manufactured wind turbines and designed and operated utility-scale wind
powered electric powerplants 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 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. The Company's financial statements exclude all KWI activities
after that date.

EMPLOYEES: At March 10, 1998, the Company employed 53 persons (excluding
KWI).

Item 2. Property
- -----------------

The Company maintains its corporate headquarters in San Francisco,
California. The lease for approximately 7,404 square feet of corporate
office space expires in 1998. The annual lease payment is approximately
$119,000. The Company owns the Hartford Hospital cogeneration plant, a 17
MW combined cycle plant. The Company also has a 50% partnership interest in
a 17 MW wood-fired electric power plant it constructed in Chateaugay, New
York. In 1998 the Company's construction subsidiary sold its two buildings
consisting of 46,300 square feet of office space and 14,700 square feet of
industrial space which it owned in Meriden, Connecticut. Properties of KWI
are not included in this discussion.

Page 3

Item 3. Legal Proceedings
- -------------------------

LITIGATION

Shareholders' Litigation: 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 ordered by the federal judge
presiding over the action. Trial in this action is scheduled for the summer
of 1998. The Company intends to continue to contest the action vigorously.

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.

Puerto Rico Litigation: In connection with the LNG-fired power plant being
constructed in Penuelas, Puerto Rico by EcoElectricia, 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. 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

Page 4

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.
EcoElectrica intervened in the action before the trial court and the appeal
is currently pending.

Westinghouse Litigation: C. N. Flagg Incorporated, a wholly-owned
subsidiary of CNF Industries, Inc., has instituted legal proceedings
against Westinghouse Electric Corporation ("Westinghouse") in the U.S.
Federal District Court in Minnesota 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. C. N. Flagg filed a motion for summary
judgment which was denied.

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 Litigation: 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.

General Motors Litigation: Plaintiffs CCF-1, Inc., Flagg Energy Development
Corporation (each a direct or indirect wholly-owned subsidiary of KENETECH
Energy Systems, Inc.) and Process Construction Supply, Inc. (a wholly-owned
subsidiary of CNF Industries, Inc.) brought suit against defendant General
Motors ("GM") in Connecticut State Court alleging breach of contract,
breach of express warranty, breach of implied warranty, breach of repair
warranty, misrepresentation and unfair trade practices involving gas
turbine engines installed at the Hartford Hospital co-generation plant
owned by CCF-1. The trial court either struck or granted summary judgment
in GM's favor on all causes of action, except the claim for breach of
repair warranty. A directed verdict was entered in favor of GM upon trial
of the one remaining cause of action. An appeal by the plaintiffs to the
Supreme Court of the State of Connecticut seeking reversal of the directed
verdict, the trial court's order to strike and the grant of summary
judgment and remand of the matter for trial on all causes of action is
pending.

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.

TERMINATED LITIGATION

Tennessee Pipeline Litigation: On January 6, 1996, a breach of contract
action was filed in the Superior Court for Middlesex County, Massachusetts,
by Tennessee Gas Pipeline Company ("Tennessee") against Pepperell Power
Associates Limited Partnership (the "Pepperell Partnership"), its general
partner, KES Pepperell, Inc. (each in whole or in part directly or
indirectly owned by KENETECH Energy Systems, Inc. ("KES"), a wholly-owned
subsidiary of the Company), and another non-affiliated general partner, in
connection with the termination of a natural gas transportation agreement.

Page 5

The action sought to recover alleged unpaid charges of approximately
$1,800,000. KES Pepperell, Inc. filed a counterclaim in the action. On
December 2, 1996, Tennessee filed another action in the Superior Court for
Middlesex County, Massachusetts, against KES Pepperell, Inc. and KES, among
others, seeking to recover an $810,000 payment made to the Pepperell
Partnership plus treble damages and attorneys' fees. In June 1997, the
parties reached a tentative settlement which included resolution of claims
pending in a related regulatory proceeding before the Federal Energy
Regulatory Commission ("FERC") involving Flagg Energy Development
Corporation ("FEDCO"), a wholly-owned subsidiary of KES, which obtains gas
transportation services from Tennessee for the Hartford Hospital
co-generation plant. The settlement was to be finalized and executed by
July 15, 1997, but was not finalized or executed by such date due to
Tennessee's delay. On July 16, 1997 in the related regulatory proceeding,
FERC ordered Tennessee to refund in excess of $2,500,000 to FEDCO in
connection with the gas transportation services agreement for the Hartford
Hospital plant. After a request for a re-hearing by Tennessee, FERC ordered
payment of the refund by Tennessee within 30 days. Tennessee filed a motion
in the Superior Court seeking an emergency order to compel KES and its
subsidiaries to complete the tentative settlement as well as filing, on
September 30, 1997, a complaint in the district court of Harris County,
Texas, against KES and FEDCO alleging essentially the same causes of action
as in the Massachusetts actions.

On November 19, 1997, the parties entered into a Settlement and Release
Agreement whereby the Flagg gas transportation services agreement was
terminated and by netting amounts alleged to be owing thereunder to
Tennessee against refunds owed by Tennessee under the FERC order, Tennessee
was paid the sum of $1,000,000. Pursuant to such settlement, all of the
above-described actions have been dismissed with prejudice.

BANKRUPTCY OF KWI

On May 29, 1996, KWI filed a voluntary petition in the United States
Bankruptcy Court for the Northern District of California, Oakland,
California to reorganize under chapter 11 of the Bankruptcy Code. KWI's
management attributed its filing to continuing losses and lack of operating
capital. The Bankruptcy Petition filed by KWI stated that as of March 30,
1996 (the latest available information prior to the filing), KWI had
liabilities, as defined by bankruptcy filing procedures which include
certain commitments, claims and other liabilities not recognized under
generally accepted accounting principles, significantly in excess of
assets. Neither KWI nor the Company had been able to complete the sale of
certain assets or subsidiaries on a basis to provide additional capital for
KWI's ongoing operations and KWI believed that it would be unable to meet,
among other things, its existing maintenance and warranty obligations under
contracts undertaken in connection with the sale of its wind turbines.

The filing of the chapter 11 case by KWI resulted in an event of default
occurring under the Company's 12-3/4% Senior Secured Notes Due 2002 (the
"Notes") in the principal amount of $100 million. Furthermore, interest
under the Notes in the approximate amount of 6.4 million is due June 15 and
December 15 and the Company has not made an interest payment on the Notes
since December 15, 1995 and does not presently anticipate making its 1998
interest payments when due. The Notes are secured by all of the capital
stock of KWI, KENETECH Energy Systems, Inc. and KENETECH Facilities
Management, Inc. There have been continuing periodic discussions with
representatives of the holders of the Notes and the holders have not
commenced remedies or notified the Company of their intention to do so.

Since the filing of the chapter 11 case, KWI has sold certain development
assets, operating assets, technology rights and other assets under the
supervision of the Bankruptcy Court.

Representatives and members of the Official Unsecured Creditors' Committee,
have asserted their intention to commence litigation against the Company
and certain of its subsidiaries, as well as against officers and directors
thereof, with respect to facts which may constitute preferences under the
United States Bankruptcy Code and for other conduct engaged in assertedly
by the Company or its officers and directors which may give rise to direct
or indirect liability of the Company or its officers and directors to KWI
or to its creditors. Such proceedings could give rise to indemnification
claims against the Company by its officers and directors.

Page 6

The bar date for filing claims in the chapter 11 case was January 31, 1997.
A claim against KWI was filed by the trustee of the holders of the Notes on
behalf of the Company in an amount in excess of $206.0 million. The Company
also filed a claim against KWI in an amount in excess of $8.0 million. In
addition, certain of the Company's direct and indirect subsidiaries and
affiliated, or formerly-affiliated, partnerships have filed claims against
KWI totaling in excess of $1.0 billion. Total claims filed against KWI are
in excess of $1.5 billion. It is unknown at present whether or not any
claims of the Company against KWI will be allowed in the chapter 11 case or
if allowed the extent of any distribution with respect thereto. The Company
believes that KWI may assert certain claims in bankruptcy against the
Company.

Item 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------

None

Page 7

PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
- -----------------------------------------------------------------------------

Prior to September 21, 1993, the date the Company's Common Stock began
trading on The Nasdaq National Market under the symbol "KWND", there was no
public market for the Common Stock. The Company was advised by the National
Association of Securities Dealers, Inc. that the Company's Common Stock was
delisted from The Nasdaq National Market effective July 1, 1996. The
Company understands that bid and ask quotations continue to be entered by
market makers in the over-the-counter market for the Common Stock. The
Company has no current plans to cause the Common Stock to be listed with
The Nasdaq National Market or on any exchange. The following table sets
forth, for the periods indicated, the range of high and low bid and ask
quotations for the Common Stock as reported by a market maker in the stock.
Such over-the-counter market quotations do not include retail markups(1),
markdowns or commissions and may not represent actual transactions.

Year High Low
-------------- ------- -------

1996
----
First Quarter $ 1.875 $ 0.813
Second Quarter 1.937 0.172
Third Quarter 0.625 0.190
Fourth Quarter 0.300 0.040

1997
----
First Quarter $ 0.047 $ 0.000
Second Quarter 0.000 0.000
Third Quarter 0.125 0.000
Fourth Quarter 0.250 0.000

1998
----
First Quarter (to March 13, 1998) $ 0.125 $ 0.055

(1) The market maker from which the Company obtained high and low bid and
ask quotations for 1997 and 1996 does not report quotations under $0.125.

The closing sale price of the Company's Common Stock as of a recent date is
set forth on the cover page hereof. There were approximately 586 holders of
record of the Common Stock as of March 1, 1998.

DIVIDEND POLICY

The Company has never paid a dividend on its Common Stock and does not
intend to pay Common Stock dividends in the foreseeable future. Also, the
Company's 12 3/4% Senior Secured Notes due 2002, and the provisions of the
Certificate of Incorporation under which the Company issued its 8 1/4%
Preferred Redeemable Increased Dividend Equity Securities restrict the
payment of Common Stock dividends except under specified circumstances. See
Item 7 and Item 8 of this Form 10-K for further restrictions on the
Company's ability to pay dividends on its Common Stock in the future.

Page 8

Item 6. Selected Financial Data.
- --------------------------------

The following selected consolidated financial data is qualified in its
entirety by, and should be read in conjunction with, the Consolidated
Financial Statements of the Company and the Notes thereto and with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" contained elsewhere in this Form 10-K. The selected
consolidated financial data as of and for each of the five years in the
period ended December 31, 1997 have been derived from the audited
Consolidated Financial Statements of the Company. (Dollar amounts in
thousands, except per share amounts.)

Year Ended December 31,
----------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------

INCOME STATEMENT DATA (1):
Revenues........................................... $ 40,993 $ 91,890 $327,589 $338,211 $236,424
Total costs of revenues (2)........................ 45,000 83,705 504,696 278,778 188,208
Gross margin (excess of expenses over revenues).... (4,007) 8,185 (177,107) 59,433 48,216
Project development and marketing,
engineering, general and administrative expenses. 16,034 40,559 71,368 44,677 41,428
Income (loss) from operations...................... (20,041) (32,374) (248,475) 14,756 6,788
Income (loss) before taxes......................... (25,242) (60,850) (271,647) 1,426 (18,132)
Net income (loss).................................. (25,242) (84,241) (250,148) 4,348 (7,584)
Income (loss) per share:
Basic....................................... (0.92) (3) (2.52)(3) (7.12)(3) (0.03)(3) (0.27)(4)
Diluted..................................... (0.92) (3) (2.52)(3) (7.12)(3) (0.03)(3) (0.22)(5)

Year Ended December 31,
---------------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- -------- -------- --------

BALANCE SHEET DATA:
Working capital.................................... $(148,781) $(141,621) $ (3,232) $140,766 $ 91,461
Property, plant and equipment, net................. 18,894 24,735 118,214 148,374 119,915
Total assets....................................... 90,586 123,311 401,249 517,168 417,332
Other long term debt (excludes current portion).... - - 152,048 158,522 166,276
Stockholders' equity (deficiency).................. (131,705) (97,900) (5,559) 248,718 147,790

(1) Excludes operations of KWI after bankruptcy filing (May 29, 1996).
(2) In 1995 includes special charges of $224,551. See discussion in Item 7.
(3) Includes effect of deducting dividends earned on convertible preferred stock
issued in 1994.
(4) Includes effect of deducting cash dividends earned on convertible preferred
stock issued in 1992 and the actual conversion of such preferred stock and
convertible notes to common stock.
(5) Includes the effect of reducing the net loss by the interest on the
convertible notes (net of the related tax effect), and the conversion of
such notes and convertible preferred stock to common stock as if such
conversion occurred at the beginning of 1993.

Page 9

Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
- ----------------------------------

OVERVIEW

KENETECH Corporation ("KENETECH"), a Delaware corporation, is a holding
company which participated through its subsidiaries in the electric utility
market. As used in this document "Company" refers to KENETECH and its
wholly-owned subsidiaries (including KENETECH Windpower, Inc. (KWI) only
through May 29, 1996).

KWI manufactured wind turbines and designed and operated utility-scale wind
powered electric powerplants 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 completion of the bankruptcy proceedings. Accordingly,
as of May 29, 1996 KWI ceased to be accounted for as a consolidated
subsidiary of the Company. The Company's financial statements exclude all
KWI activities after that date.

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.

Page 10

RESULTS OF OPERATIONS

The consolidated financial statements of KENETECH Corporation and certain
subsidiaries as of December 31, 1997 and 1996 and for the three years
ending December 31, 1997 have been prepared assuming the Company will
continue as a going concern (see Note 3). As mentioned previously, as of
May 29, 1996 KWI ceased to be accounted for as a consolidated subsidiary of
KENETECH 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 at zero in "Investments in Affiliates" in the
accompanying December 31, 1997 and 1996 consolidated balance sheets.
Revenues and expenses of KWI from January 1, 1996 through May 29, 1996 are
reflected in consolidated statements of operations and cash flows.

The Company incurred a net loss for 1997 of $25.2 million as compared to
net losses for 1996 of $84.2 million and for 1995 of $250.1 million. This
does not indicate an improvement in the Company's prospects. Instead this
decrease reflects the elimination of activities associated with divested
assets and subsidiaries, and the deconsolidation of KWI and downsizing. 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. The Company has few revenue generating activities
at December 31, 1997.

YEARS 1997 AND 1996

Year Ended December 31,
1997 1996
-------- --------
(in millions)
Gross Gross
Revenues Costs Margins Revenues Costs Margins
-------- ------- ------- -------- ------- -------
............................
Construction services ........... $ 36.0 $ 36.1 $ (0.1) $ 51.0 $ 46.6 4.4

Energy sales (1) ................ 3.2 N/A N/A 14.4 N/A N/A
Maintenance, management
fees and other (1).............. 1.8 N/A N/A 16.3 N/A N/A
Energy plant operations (1)...... N/A 8.9 N/A N/A 31.9 N/A
-------- ------- ------- -------- ------- -------
Total energy plant operations 5.0 8.9 (3.9) 30.7 31.9 (1.2)

Windplant sales ................. -- -- -- 8.1 5.0 3.1
Interest on partnership notes
and funds in escrow ........... -- -- -- 1.1 N/A 1.1
Energy management services ...... -- -- -- 1.0 0.2 0.8
-------- ------- ------- -------- ------- -------
Total ............................ $ 41.0 $ 45.0 $ (4.0) $ 91.9 $ 83.7 $ 8.2
======== ======= ======= ======== ======= =======

(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.

Construction services revenues (recorded under the percentage-of-completion
method) decreased to $36.0 million for 1997 from $51.0 million for 1996 due
to the continued work-off of existing back-log. Construction services also
incurred an excess of expenses over revenues due to unrecoverable cost
overruns of approximately $2.3 million on one of the projects under
construction in 1997. The Company intends to dispose of its construction
subsidiary in 1998.

Energy plant operations experienced an excess of expenses over revenues of
$3.9 million for 1997 compared to a $1.2 million excess of expenses over
revenues in 1996 because in June and July of 1997 the Company's
cogeneration facility 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. An expense of approximately $3.0 million was
recorded in energy plant operations to write-off these two turbines. The
Company assembled one turbine, which operates sporadically, from the
serviceable parts of the two failed turbines. In 1998 additional funding

Page 11

was obtained from the lender to the facility to purchase one new turbine,
to replace the reassembled one, and procure a backup boiler. This new
turbine is scheduled to be installed in July 1998. The Company has reached
agreement with the purchasing utility to terminate the power purchase
agreement in exchange for a stream of payments through the year 2000. Under
this agreement the Company will continue to sell electricity and steam to
the site host using the new turbine. This agreement is currently in escrow
and is expected to close in the first week of April 1998 when the appeal
period for public utility commission approval of this arrangement expires.

Windplant sales, interest on partnership notes and funds in escrow and
engineering expenses were zero in 1997 because of the deconsolidation of
KWI.

Energy management services revenues decreased to zero for 1997 from $1.0
million for 1996. This operation was sold in the second quarter of 1996.

Project development and marketing expenses decreased to $2.2 million for
1997 from $7.1 million for 1996. Project development expenses declined
significantly because the only project the Company had in active
development in 1997 was the Puerto Rico project. The costs expensed in 1997
represent expenditures to market assets and/or to keep various assets
marketable.

General and administrative expenses decreased to $13.8 million for 1997
from $29.3 million for 1996 due to the deconsolidation of KWI and
downsizing of the Company.

Interest expense decreased to $16.3 million for 1997 from $19.6 million for
1996 due to the deconsolidation of KWI, the sale of subsidiaries and
increased capitalization of interest to the Puerto Rico project.

Sale of subsidiaries and fixed assets: During 1997 the Company sold fixed
assets, some projects in the initial stages of development and the
construction subsidiary's joint venture interests in the construction
contracts for the Puerto Rico project. On an aggregated basis, these
transactions generated cash of $20.9 million and a net gain of $10.0
million. During 1996 the Company sold its demand side management business,
its wood-fuel business, a manufacturing facility, several investments
accounted for on the equity basis, a subordinated note receivable, and
various fixed assets. On an aggregated basis these transactions generated
cash of $13.5 million and a net loss of $9.6 million.

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 1997 because of the uncertainty about the Company's
ability to utilize such a benefit.

Page 12

YEARS 1996 AND 1995

Year Ended December 31,
1996 1995
-------------------------- --------------------------
(in millions)
Gross Gross
Revenues Costs Margins Revenues Costs Margins
-------- ------- ------- -------- ------- -------
............................
Construction services ........... $ 51.0 $ 46.6 $ 4.4 $ 63.2 $ 55.7 7.5

Energy sales (1) ................ 14.4 N/A N/A 38.0 N/A N/A
Maintenance, management
fees and other (1).............. 16.3 N/A N/A 41.4 N/A N/A
Energy plant operations (1)...... N/A 31.9 N/A N/A 62.6 N/A
-------- ------- ------- -------- ------- -------
Total energy plant operations 30.7 31.9 (1.2) 79.4 62.6 16.8

Windplant sales ................. 8.1 5.0 3.1 172.5 157.2 15.3
Interest on partnership notes
and funds in escrow ........... 1.1 -- 1.1 5.3 -- 5.3
Energy management services ...... 1.0 0.2 0.8 7.2 4.6 2.6
Special charges.................. -- -- -- -- 224.6 (224.6)
-------- ------- ------- -------- ------- -------
Total ............................ $ 91.9 $ 83.7 $ 8.2 $ 327.6 $ 504.7 $(177.1)
======== ======= ======= ======== ======= =======

Construction services revenues (recorded under the percentage-of-completion
method) decreased to $51.0 million for 1996 from $63.2 million for 1995 and
gross margin decreased to 9% for 1996 from 12% for 1995. The decrease in
revenue is attributable to a decrease in backlog of new projects. The
ability to secure new construction work has been impeded by the declaration
of bankruptcy by the Company's windpower subsidiary. The decrease in gross
margin is primarily due to a negative 1% gross margin on a cogeneration
plant construction job from which the Company was terminated for
convenience during 1996. This project accounted for 38% of the construction
revenues during 1996.

Energy plant operations, Windplant sales, Interest on partnership notes and
funds in escrow and Engineering expenses all declined significantly in 1996
because of the deconsolidation of KWI. As mentioned previously, on May 29,
1996 KWI filed for protection under chapter 11 of the Federal Bankruptcy
Code, reported an excess of liabilities over its assets, and ceased to be
accounted for as a consolidated subsidiary of the Company.

Energy management services revenues decreased to $1.0 million in 1996 from
$7.2 million in 1995. The Company sold this business in the second quarter
of 1996.

Special charges in 1995 relate to performance problems with the KVS-33 and
the domestic energy price environment as follows:

(i) Performance problems with the KVS-33. During 1995 mechanical problems
with the KVS-33 model wind turbines installed in 1994 and 1995 began
to appear, especially in the more severe weather environments. The
Company incurred substantial operating costs in 1995 as a result of
the problems with the KVS-33. As a result of these problems, the
Company wrote off all of its deferred engineering costs, reserved
certain inventory costs related to the KVS-33, reserved a significant
portion of the capitalized development costs for projects which were
going to be completed using the KVS-33 and accrued the estimated
retrofit costs attributable to the KVS-33. The aggregated amounts of
writedowns and asset reserves were $54.6 million and accruals of
liabilities of $86.8 million expected to be incurred over the next
several years were based on the best information available at December
31, 1995. It is possible that actual losses may be higher or lower
than the amount recognized.

Page 13

(ii) Energy prices. During 1995, the energy prices utilities pay based upon
their "avoided costs" continued to decrease. These energy prices have
a significant effect on the Company's financial condition and
operations through two channels: (1) the Windplant assets owned by the
Company, and (2) the profitability of maintenance and management
contracts the Company has with third parties. Maintenance and
management fees generally are based on a percentage of the owners'
energy sales.

The Company used current energy prices based upon PG&E's "avoided costs"
prices (after fixed price contract periods expire in 1997-2004), increased
by modest inflation, to compute future cash flows for assessing the
impairment of Windplant assets and the profitability of the Company's
maintenance and management agreements with third party owners of
Windplants. The Company used modest inflation because most experts expect
PG&E's avoided cost to increase at or below the inflation rate. Based on
the calculations, using the principles of SFAS No. 121 and a present value
of future net cash flows discounted at 16% to approximate fair value,
certain Windplant assets and investments were written down by approximately
$50.3 million. In addition, projected negative cash flows on certain
maintenance and management contracts from 1996-2015 were discounted at 7%
to approximate a risk free rate and a loss accrual was recognized of $32.9
million. Based on the calculations, projected negative cash flows on
certain maintenance and management contracts commenced in 1996.

These writedowns and reserves were based on the best information available
as of December 31, 1995. It is possible that actual losses may be higher or
lower than the amounts recognized. The range of variance, if any, from such
amounts cannot be reasonably estimated.

Project development and marketing expenses decreased in 1996 to $7.1
million from $18.6 million in 1995. During 1996 the Company stopped
pursuing all new projects (except for the Puerto Rico project). The
expenses in 1996 represent costs to keep existing projects viable and
marketable and write-downs of the projects being marketed to the estimated
market value.

General and administrative expenses decreased to $29.3 million for 1996
from $40.4 million for 1995. Included in 1996's amount is $2.3 million
related to a writedown of buildings and land owned by the construction
subsidiary. The decrease is due to the termination of employees and the
deconsolidation of KWI.

Interest income decreased to $1.2 million in 1996 from $2.6 million in 1995
due to lower cash and investment balances.

Interest expense decreased to $19.6 million in 1996 from $23.4 million in
1995 due to the deconsolidation of KWI.

Equity income (loss) of unconsolidated affiliates. Equity investments in
affiliates resulted in a net loss of $409 thousand in 1996, compared to a
net loss of $2.4 million in 1995 due to the deconsolidation of KWI's
operations and the sale by the Company of several equity investments.

Loss on disposition of subsidiaries and assets. During 1996 the Company
sold its demand side management operations, its wood-fuel operations, a
manufacturing facility, several investments accounted for on the equity
basis, a subordinated note receivable, and various fixed assets. On an
aggregated basis these transactions generated cash of $13.5 million and a
net loss of $9.6 million. As mentioned previously, KWI filed for protection
on May 29, 1996 under chapter 11 of the Federal Bankruptcy Code and
reported an excess of liabilities over its assets. Although KENETECH
continues to own the common stock of KWI and provides certain services
under the jurisdiction of the Bankruptcy Court, KENETECH 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 KENETECH.

Income taxes. The Company uses the asset and liability approach for
financial accounting and reporting for income taxes. The Company recorded a
tax provision of $23.4 million in 1996 attributable to the effect of
deconsolidating the net deferred tax assets relating to KWI as compared to
a benefit of $21.5 million in 1995. The remaining net deferred tax asset of
$17.9 million is expected to be realized by the generation of taxable
income from the sales of assets with appreciated values. The valuation
allowance was based on the best information available at December 31, 1996.
The actual tax assets realized may be higher or lower than the amount
recognized.
Page 14

LIQUIDITY AND CAPITAL RESOURCES

1997 Activities
---------------

Operating Activities

During 1997 operating activities used cash of $11.1 million because general
and administrative and interest expenses exceeded the Company's gross
margin.

Investing Activities

During 1997 investing activities provided cash of $10.0 million through the
sale by the Company's construction subsidiary of its joint venture
interests in the construction contracts for the Puerto Rico project and the
sale of various other fixed assets partially offset by funds invested in
the 507 MW (net) Puerto Rico project jointly developed with an affiliate of
Enron Corporation.

Financing Activities

During 1997 financing activities used $8.8 million of cash. Approximately
$10.0 million of the construction subsidiary's proceeds from the sale of
the aforementioned joint venture interests in the construction contracts
for the Puerto Rico project was used to pay off the construction
subsidiary's secured debt. In August 1996 a wholly-owned subsidiary of the
Company entered into a $30.0 million loan facility related to the
aforementioned Puerto Rico project. The interest rate on this loan
decreased because certain milestones were reached by the Puerto Rico
project. As a result additional funds became available under this facility
and the Company borrowed an additional $2.5 million in 1997. As of December
31, 1997, the outstanding balance of this loan was $24.2 million. No
further funds are available under this agreement because the remaining
funding capacity is structured to accommodate accrued and unpaid interest
for the remaining term of the loan.

Status
------

At December 31, 1997 the Company's working capital deficit was $148.8
million, which is $7.2 million greater than at December 31, 1996 because of
the decreases in cash and accounts receivable.

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 1997 and
1996 and does not expect to be able to for the foreseeable future. Under
the terms of the preferred stock, dividends accrue until paid. 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 1997 and 1996 payments and is in default. The
Company does not expect to make the 1998 interest payments when due.

The Company has been able to continue its activities because:

i). It generated $13.5 million in 1996 by selling assets and drew $18.9
million from the $30.0 million Puerto Rico project loan obtained by a
wholly-owned subsidiary. This loan is collateralized by the stock of a
special purpose entity formed to hold, through affiliates, the
Company's interest in the Puerto Rico power project. No further funds
are available under this agreement because the remaining funding
capacity must accommodate accrued and unpaid interest for the
remaining term of the loan.

ii). In December 1997 the Company's construction subsidiary sold its joint
venture interests in construction contracts for the Puerto Rico
project for $18.7 million cash which was used to pay off the secured
loans of the construction subsidiary, fund the construction costs of
the remaining jobs the construction subsidiary is completing and other
operational expenses of the construction subsidiary. The ability of
the construction subsidiary to reestablish its backlog is hampered by
the Company's financial condition and KWI's bankruptcy filing. The
Company intends to dispose of its construction subsidiary in 1998.
There can be no assurance that the construction subsidiary will be
successful in disposing of its remaining assets.

Page 15

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.

There can be no assurances that asset sales can be consummated or that
substantial proceeds can be received. If the Company is unable to sell
assets its liquidity will be further constrained. Management believes that
such sales, even if consummated, will not generate sufficient proceeds to
ultimately provide any return of invested capital to the holders of the
Company's common stock and that proceeds received from asset sales will be
used in operations or paid to creditors. Consequently, after, or as part of
a sale of the Company's subsidiaries' interests in the Puerto Rico project
(the only project in process), the Company believes that it is likely that
it, or certain of its subsidiaries, will seek protection under the Federal
Bankruptcy Code.

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

The consolidated financial statements as of and for the year ended 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 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 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's plan to address its liquidity involves the sale of its
interests in the Puerto Rico project for which it expects to receive
substantial cash proceeds. 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. Management believes that such sales, even if
consummated, will not generate sufficient proceeds to ultimately provide
any return of invested capital to the holders of the Company's common
stock. In addition, the Company believes KWI may assert certain claims in
bankruptcy against the Company. Consequently, after, or as a part of a sale
of the Company's subsidiaries' interests in the Puerto Rico project (the
Company's only project in process), the Company believes that it is likely
that it, or certain of its subsidiaries, will seek protection under the
Federal Bankruptcy Code.

Year 2000 Problem
-----------------

The Year 2000 problem is the result of computer programs being written
using two digits rather than four to define the applicable year. The
Company's management has made no evaluation regarding the anticipated
costs, problems and uncertainties associated with the Year 2000 issue.

New Accounting Standards
------------------------

In June 1997, the Financial Accounting Standards Board issued Financial
Accounting Standards No. 130 "Reporting Comprehensive Income" (SFAS No.
130) effective for the fiscal years ending after December 15, 1998. SFAS
No. 130, requires the presentation of comprehensive income in an entity's
financial statements. Comprehensive income represents all changes in equity
of an entity during the reporting period, including net income and charges
directly to equity which are excluded from the net income. This statement
is not anticipated to have any impact on the Company as the Company
currently does not enter into any transactions which result in charges (or
credits) directly to equity (such as additional minimum pension liability
changes, currency translation adjustments, unrealized gain or loss on
available for sale securities, etc.). SFAS No. 130 will be adopted by the
Company during 1998.

In June 1997, the Financial Accounting Standards Board also issued
Financial Accounting Standards No. 131 "Disclosures about Segments of an
Enterprise and Related Information" (SFAS No. 131) effective for the
fiscal years ending after December 15, 1998. SFAS No. 131, provides revised
disclosure guidelines for segments of an enterprise based on management
approach to defining operating segments. The management of the Company
believes that it currently operates in only one industry segment and
analyzes operations on a Company-wide basis, therefore the statement is not
expected to impact the Company.
Page 16

Item 8. Financial Statements and Supplementary Data.
- ----------------------------------------------------

KENETECH Corporation Consolidated Financial Statements Page
----
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995 19

Consolidated Balance Sheets, December 31, 1997 and 1996 20

Consolidated Statements of Stockholders' Deficiency for the
years ended December 31, 1997, 1996 and 1995 21

Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995 22

Notes to Consolidated Financial Statements 23 - 39

Page 17

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of KENETECH Corporation:

We have audited the accompanying consolidated balance sheets of KENETECH
Corporation and subsidiaries (the "Company") as of December 31, 1997 and
1996 and the related consolidated statements of operations, stockholders'
deficiency, and cash flows for each of the years in the three-year period
ended December 31, 1997. Our audits also included the financial statement
schedules for 1997, 1996 and 1995 of KENETECH Corporation listed in the
Index at Item 14(a)(2). These consolidated financial statements and
financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on the consolidated
financial statements and financial statement schedules based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements present fairly, in
all material respects, the financial position of KENETECH Corporation and
subsidiaries at December 31, 1997 and 1996 and the results of its
operations and its cash flows for each of the years in the three-year
period ended December 31, 1997, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial
statement schedules, when considered in relation to the basic consolidated
financial statements taken as a whole, present in all material respects the
information set forth therein.

The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern (see Note 3). The
Company incurred significant losses in 1997, 1996 and 1995, 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. The Company has indicated that after or as part
of a sale of its subsidiaries' interests in the Puerto Rico project (the
only project in process) that it is likely that it, or certain of its
subsidiaries, will seek protection under the Federal Bankruptcy Code. In
addition, the Company believes KENETECH Windpower, Inc. (KWI), a
wholly-owned subsidiary which filed for Chapter 11 protection under the
Bankruptcy Code, will assert certain claims in bankruptcy against the
Company. These factors raise substantial doubt about the Company's ability
to continue as a going concern. The consolidated financial statements do
not include any adjustments that might result from the outcome of these
uncertainties.

KPMG Peat Marwick LLP

San Francisco, California
March 27, 1998

Page 18

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

CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended December 31, 1997, 1996 and 1995
(in thousands, except per share amounts)

1997 1996 1995
---------- ---------- ----------

Revenues:
Construction services................................$ 35,994 $ 50,958 $ 63,178
Energy sales......................................... 3,170 14,434 38,034
Maintenance, management fees and other............... 1,829 16,219 41,371
Windplant sales...................................... - 8,107 172,490
Interest on partnership notes and funds in escrow.... - 1,125 5,320
Energy management services........................... - 1,047 7,196
---------- ---------- ----------
Total revenues..................................... 40,993 91,890 327,589

Costs of revenues:

Construction services................................ 36,105 46,557 55,674
Energy plant operations.............................. 8,895 31,886 62,649
Windplant sales...................................... - 5,012 157,250
Energy management services........................... - 250 4,572
Special charges...................................... - - 224,551
---------- ---------- ----------
Total costs of revenues............................ 45,000 83,705 504,696

Gross margin (Excess of expenses over revenues)......... (4,007) 8,185 (177,107)

Project development and marketing expenses.............. 2,230 7,072 18,574
Engineering expenses.................................... - 4,206 12,401
General and administrative expenses..................... 13,804 29,281 40,393
---------- ---------- ----------

Loss from operations.................................... (20,041) (32,374) (248,475)

Interest income......................................... 988 1,176 2,575
Interest expense........................................ (16,291) (19,620) (23,387)
Equity (loss) income of unconsolidated affiliates....... 66 (409) (2,360)
Gain (loss) on disposition of subsidiaries and assets... 10,036 (9,623) -
---------- ---------- ----------

Loss before taxes....................................... (25,242) (60,850) (271,647)
Income tax (benefit) provision.......................... - 23,391 (21,499)
---------- ---------- ----------

Net loss.........................................$ (25,242) $ (84,241) $ (250,148)
========== ========== ==========

Net loss per common share:
Basic and Diluted............................ $ (0.92) $ (2.52) $ (7.12)

Weighted average number of common shares
used in computing per share amounts:
Basic and Diluted.......................... 36,830 36,781 36,341

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

Page 19

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

CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
(in thousands, except share amounts)

ASSETS

1997 1996
---------- ----------

Current assets:
Cash and cash equivalents..................................$ 7,294 $ 17,208
Funds in escrow, net....................................... 1,997 5,221
Accounts receivable........................................ 4,669 17,940
Inventories................................................ 135 135
Investment in power plant held for sale.................... 16,128 19,209
Investment in Puerto Rico project, net..................... 19,830 -
Deferred tax assets, net................................... 4,300 4,300
Other...................................................... 961 3,986
---------- ----------
Total current assets.................................... 55,314 67,999

Property, plant and equipment, net........................... 18,894 24,735
Investment in Puerto Rico project, net....................... - 11,507
Investments in affiliates.................................... - 32
Deferred tax assets, net..................................... 13,613 13,613
Other assets................................................. 2,765 5,425
---------- ----------
Total assets..........................................$ 90,586 $ 123,311
========== ==========

LIABILITIES AND STOCKHOLDERS' DEFICIENCY

Current liabilities:
Accounts payable...........................................$ 12,579 $ 18,841
Bank loans payable......................................... 24,236 18,860
Accrued interest........................................... 26,103 13,462
Accrued liabilities........................................ 15,088 21,010
Debt associated with power plant held for sale............. 16,128 16,578
Other notes payable........................................ 8,878 20,165
Senior secured notes payable............................... 99,139 99,005
Accrued losses on contracts................................ 1,944 1,699
---------- ----------
Total current liabilities............................... 204,095 209,620

Accrued losses on contracts.................................. - 897
Estimated warranty costs and other long-term obligations..... - 1,061
Accrued dividends on preferred stock......................... 18,196 9,633
---------- ----------
Total liabilities....................................... 222,291 221,211

Stockholders' deficiency:
Convertible preferred stock - 10,000,000 shares
authorized, $.01 par value; issued and outstanding
102,492, $121,970 liquidation preference................... 99,561 99,561
Common stock - 110,000,000 shares authorized,
$.0001 par value; issued and outstanding
36,829,618 in 1997 and in 1996............................. 4 4
Additional paid-in capital................................... 127,658 136,221
Cumulative foreign exchange.................................. 35 35
Accumulated deficit.......................................... (358,963) (333,721)
---------- ----------
Total stockholders' deficiency.......................... (131,705) (97,900)
---------- ----------

Total liabilities and stockholders' deficiency........$ 90,586 $ 123,311
========== ==========

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

Page 20

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

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
for the years ended December 31, 1997, 1996 and 1995
(in thousands, except share amounts)

Effect of Retained
Convertible Common Stock Additional Cumulative Earnings
Preferred Stock Series A Paid-in Unearned Foreign (Accumulated
Shares Amount Shares Amount Capital Compensation Exchange Deficit) Total
------- ------- ---------- ------ ---------- ------------- -------- ------------ ---------

Balance, December 31, 1994 102,492 $99,561 35,930,430 $ 4 $ 142,933 $ (870) $ - $ 7,090 $ 248,718
Exercise of stock options - - 316,805 - 469 - - - 469
Issuance of common stock - - 286,601 - 2,219 - - - 2,219
Recognition of unearned
compensation - - - - - 589 - - 589
Preferred stock dividends - - - - (1,070) - - (6,422) (7,492)
Foreign exchange - - - - - - 86 - 86
Net loss - - - - - - - (250,148) (250,148)
------- ------- ---------- ------ ---------- ------------- -------- ------------ ---------
Balance, December 31, 1995 102,492 99,561 36,533,836 4 144,551 (281) 86 (249,480) (5,559)

Issuance of common stock - - 295,782 - 233 - - - 233
Recognition of unearned
compensation - - - - - 281 - - 281
Preferred stock dividends - - - - (8,563) - - - (8,563)
Foreign exchange - - - - - - (51) - (51)
Net loss - - - - - - - (84,241) (84,241)
------- ------- ---------- ------ ---------- ------------- -------- ------------ ---------
Balance, December 31, 1996 102,492 99,561 36,829,618 4 136,221 - 35 (333,721) (97,900)

Preferred stock dividends - - - - (8,563) - - - (8,563)
Net loss - - - - - - - (25,242) (25,242)
------- ------- ---------- ------ ---------- ------------- -------- ------------ ---------
Balance, December 31, 1997 102,492 $99,561 36,829,618 $ 4 $ 127,658 $ - $ 35 $ (358,963) $(131,705)
======= ======= ========== ====== ========== ============= ======== ============ =========

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

Page 21

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

CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 1997, 1996 and 1995
(in thousands)

1997 1996 1995
---------- ---------- ----------

Cash flows from operating activities:
Net loss.................................................$ (25,242) $ (84,241) $ (250,148)
Adjustments to reconcile net loss to net cash used
in operating activities:
(Gain) loss on disposition of subsidiaries and assets... (10,036) 9,623 -
Accrued and unpaid interest............................. 15,517 - -
Depreciation, amortization and other, net............... 8,406 3,117 1,672
Special charges......................................... - - 224,551
Deferred income taxes................................... - 23,391 (21,579)
Change in assets and liabilities
excluding special charges:
Funds in escrow, net................................... 3,224 2,382 (1,742)
Accounts receivable.................................... 9,171 16,688 31,237
Partnership notes and interest receivable, net......... - 290 (3,251)
Inventories............................................ - 2,468 (9,712)
Other assets........................................... 4,204 (56) (1,031)
Accrued warranties..................................... - (1,394) (262)
Accrued loss on contracts.............................. (652) (692) 5,872
Accounts payable and accrued liabilities............... (15,714) 3,701 (4,977)
---------- ---------- ----------
Net cash used in operating activities...................... (11,122) (24,723) (29,370)

Cash flows from investing activities:
Sales of marketable securities........................... - 3,536 19,949
Purchases of marketable securities....................... - (3,536) (481)
Additions to property, plant and equipment............... - (390) (11,489)
Proceeds from sale of subsidiaries and assets............ 20,877 13,471 3,021
Proceeds from sale of power plant, net................... - - 4,069
Expenditures on power plants under
development or construction............................. (10,896) (4,036) 3,643
Acquisition of Century Contractors West, Inc.,
net of cash received.................................... - - (1,360)
Investment in affiliates - Contributions................. - (1,814) (11,000)
Investment in affiliates - Distributions................. 14 605 723
---------- ---------- ----------
Net cash provided by investing activities................ 9,995 7,836 7,075

Cash flows from financing activities:
Proceeds from other notes payable........................ 503 7,780 16,359
Payments on other notes payable.......................... (11,790) (6,791) (27,248)
Proceeds from bank loan.................................. 2,500 21,030 90,500
Bank loan repayments, net................................ - (5,000) (77,300)
Proceeds from issuance of common stock, net.............. - 234 2,771
Payment of preferred stock dividends..................... - - (8,563)
---------- ---------- ----------
Net cash provided by (used in) financing activities........ (8,787) 17,253 (3,481)
---------- ---------- ----------

Increase (Decrease) in cash and cash equivalents........... (9,914) 366 (25,776)
Cash and cash equivalents at beginning of year........... 17,208 16,842 42,618
---------- ---------- ----------
Cash and cash equivalents at end of year.................$ 7,294 $ 17,208 $ 16,842
========== ========== ==========

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

Page 22

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 1997, 1996 and 1995

1. ORGANIZATION AND BASIS OF PRESENTATION

These financial statements have been prepared on the accrual basis of
accounting in accordance with generally accepted accounting principles.
This requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

The consolidated financial statements of KENETECH Corporation and certain
subsidiaries as of and for the periods ending December 31, 1997 and 1996
have been prepared assuming the Company will continue as a going concern.
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.
Intercompany balances and transactions for consolidated subsidiaries are
eliminated in consolidation. The Company's investment in KWI is recorded as
zero in "Investments in Affiliates" in the accompanying December 31, 1997
and 1996 consolidated balance sheets. Revenues and expenses of KWI from
January 1, 1996 through May 29, 1996 are reflected in consolidated
statements of operations and cash flows.

The Company's construction subsidiary, CNF, 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
year ended December 31, 1997 and consolidated balance sheet as of December
31, 1997 include the following amounts relating to CNF:

Year ended December 31, 1997
(in thousands)

Revenues $35,994
Costs of revenues 36,105
-------
Gross margin (111)

General and administrative expenses 7,376
-------
Loss from operations (7,487)

Gain on disposition of subsidiaries and assets 15,110
Other (286)
-------
Income before income taxes $ 7,337
=======

As of
December 31, 1997
(in thousands)

Assets: Liabilities and owner's deficiency:
Current assets $ 6,935
Property plant and Current liabilities $ 13,621
equipment 2,820
Other long term assets 510 Owner's deficiency (3,356)
------- --------
Total assets $10,265 Total liabilities & deficiency $ 10,265
======= ========

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KENETECH CORPORATION
----------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 1997, 1996 and 1995

2. SIGNIFICANT ACCOUNTING POLICIES

Export Sales: Windplant export sales were zero in 1997 and 1996, and 43% of
total revenues in 1995.

Unaffiliated Major Customers: The Company's energy sales to Pacific Gas and
Electric Company (PG&E) were zero in 1997, 6% of total revenues in 1996,
and 9% in 1995. Construction revenues from major customers were 82% of
total revenues in 1997, 21% in 1996, and 6% in 1995.

Revenues: Revenues from Windplant sales and 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.
Estimated future warranty costs are recognized as units are sold and
adjusted as circumstances require. 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 are recognized as earned under various
long-term agreements to operate and maintain the energy plants which the
Company has developed. Many of these fees are a percentage of owners'
energy sales which fluctuate based on production and price. Other revenues
include development fees earned under various independent power plant
development activities.

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. Certain contracts
have fixed prices for the first few years after which the prices are based
on the "avoided costs" price of utility purchasers.

Revenue from energy management services is recognized on certain long-term
contracts during the installation period of customer agreements structured
as sales-type leases using the percentage-of-completion, cost-to-cost
method and over the financing period of such leases using the
effective-interest method.

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

Buildings and improvements 30 years
Cogeneration and substation facilities 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

Research and Development: Expenditures for research and development are
recorded as engineering expense when incurred and totaled zero in 1997 and
1996 and $13,408,000 in 1995.

Interest Expense: Interest is capitalized on independent power plants under
construction and self-constructed assets and totaled $2,636,000 in 1997,
$587,000 in 1996 and $3,793,000 in 1995.

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.

Accounts Receivable/Accrued Liabilities: Costs incurred and estimated
earnings in excess of billings on uncompleted contracts are included in
accounts receivable. Billings in excess of costs and estimated earnings on
uncompleted contracts are included in accrued liabilities.

Page 24

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 1997, 1996 and 1995

Power Plant Held for Sale: Power plant held for sale represents the
Company's share of a completed power plant (see Note 12).

Investment in Puerto Rico Project: Investment in the Puerto Rico project
represents the Company's share of a project under construction in Puerto
Rico. (See Note 9).

Other Assets: Other assets include debt issuance costs of $2,252,000 and
$3,860,000 at December 31, 1997 and 1996 which are amortized on a
straight-line basis over the term of the related debt. Such amortization
expense was $1,582,000 in 1997, $1,176,000 in 1996 and $2,390,000 in 1995.

Cash Flow Information: Short-term investments purchased with original
maturities of three months or less are considered cash equivalents. In
1997, the Company capitalized $1,052,000 more in interest than was paid out
in cash. Cash paid for interest (net of amounts capitalized) was $4,683,000
in 1996 and $18,520,000 in 1995. In 1997, 1996 and 1995 the Company
received income tax refunds of $40,000, $1,343,000 and $1,393,000
respectively. Cash paid for income taxes was $146,000 in 1997 and zero in
1996 and 1995. The Company entered into capital leases for equipment of
$3,205,000 in 1995, which are included in other notes payable.

New Accounting Standards: In June 1997, the Financial Accounting Standards
Board issued Financial Accounting Standards No. 130 "Reporting
Comprehensive Income" (SFAS No. 130) effective for the fiscal years ending
after December 15, 1998. SFAS No. 130, requires the presentation of
comprehensive income in an entity's financial statements. Comprehensive
income represents all changes in equity of an entity during the reporting
period, including net income and charges directly to equity which are
excluded from the net income. This statement is not anticipated to have any
impact on the Company as the Company currently does not enter into any
transactions which result in charges (or credits) directly to equity (such
as additional minimum pension liability changes, currency translation
adjustments, unrealized gain or loss on available for sale securities,
etc.).

In June 1997, the Financial Accounting Standards Board also issued
Financial Accounting Standards No. 131 "Disclosures about Segments of an
Enterprise and Related Information" (SFAS No. 131) effective for the fiscal
years ending after December 15, 1998. SFAS No. 131, provides revised
disclosure guidelines for segments of an enterprise based on management
approach to defining operating segments. The management of the Company
believes that it currently operates in only one industry segment and
analyzes operations on a Company-wide basis, therefore the statement is not
expected to impact the Company.

3. LIQUIDITY AND GOING CONCERN

Management's plan to generate cash flow involves the sale of assets,
primarily its interests in the Puerto Rico project for which it expects to
receive substantial cash proceeds. 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. Management believes that such sales, even
if consummated, will not generate sufficient proceeds to ultimately provide
any return of invested capital to the holders of the Company's common stock
and that any proceeds received from asset sales will be used in operations
or paid to creditors. In addition, the Company believes KWI may assert
certain claims in bankruptcy against the Company. Consequently, after, or
as a part of a sale of the Company's subsidiaries' interests in the Puerto
Rico project (the Company's only project in process), the Company believes
that it is likely that it, or certain of its subsidiaries, will seek
protection under the Federal Bankruptcy Code.

Page 25

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 1997, 1996 and 1995

4. DECONSOLIDATION OF KWI

As mentioned previously, KWI filed for protection on May 29, 1996 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. The condensed results of operations
for the year ending December 31, 1996 of the Company as if KWI had been
deconsolidated at the beginning of that period and without giving effect to
any other changes is as follows:

KENETECH CORPORATION
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended December 31, 1996
(unaudited, in thousands)

Revenues $ 72,608
Costs of revenues (68,556)
--------
Gross margin 4,052
Marketing & general & administrative expenses (28,115)
--------
Loss from operations (24,063)
Loss on sale of subsidiaries and assets (9,651)
Interest expense and other (15,816)
--------
Loss before income taxes (49,530)
Income tax provision 23,391
--------
Net loss $(72,921)
========

The above pro forma information is for illustrative purposes and does not
necessarily reflect what would have happened had KWI actually been
deconsolidated at the beginning of 1996.

Included in the consolidated statements of operations for the year ended
December 31, 1995 were revenues, excess of expenses over revenues and loss
before taxes of KWI of approximately $231,000,000, approximately
$188,000,000 and approximately $234,000,000 respectively.

KWI's 1996 operations through May 29, 1996 (a loss of approximately $14
million) are reflected in the accompanying consolidated financial
statements. The Company's investment in KWI is recorded as zero in
"Investments in Affiliates" in the accompanying December 31, 1996
consolidated balance sheet.

5. DISPOSITION OF SUBSIDIARIES AND ASSETS

In conjunction with management's plans to address its liquidity the
following transactions were entered into during 1997:

1) In December 1997 the Company's construction subsidiary sold its joint
venture interests in the EPC contracts for the Puerto Rico project for
$18,700,000 cash and incurred a net gain of $15,842,000 on this
transaction.

2) The Company sold various fixed assets for which it received cash of
$1,399,000 and incurred a net gain of $700,000.

3) In 1997 the Company sold a 1% general partner interest in a
cogeneration plant in Jamaica for $16,000 and incurred a loss of
$6,000 on this transaction.

4) Additionally the Company wrote various other assets held for
disposal down to management's estimate of fair market value.

Page 26

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 1997, 1996 and 1995

6. LOSS PER SHARE

Loss per share amounts were calculated as follows for the years ended
December 31, 1997, 1996, and 1995 (in thousands, except for per share
amounts).
Basic and Diluted
---------------------------------
1997 1996 1995
--------- --------- ---------
Net loss $ (25,242) $ (84,241) $(250,148)
Less preferred stock dividends (8,563) (8,563) (8,563)
--------- --------- ---------
Net loss used in per
share calculations $ (33,805) $ (92,804) $(258,711)
========= ========= =========
Weighted average shares used
in per share calculations 36,830 36,781 36,341
========= ========= =========
Net loss per share $ (0.92) $ (2.52) $ (7.12)
========= ========= =========

Preferred stock dividends are added to the net loss. The Company incurred
net losses after preferred stock dividends for all periods presented,
therefore common stock equivalents are not included in weighted average
shares used in the loss per share calculation because they would be
anti-dilutive (reduce the loss per share).

During February 1997, The Financial Accounting Standards Board issued
Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS No.128)
and is effective for the fiscal years ending after December 15, 1997, and
accordingly the Company has adopted SFAS No. 128 in the accompanying
financial statements. SFAS No. 128 requires the presentation of basic and
diluted earnings per share in financial statements of public enterprises
rather than primary and fully diluted earnings as previously required.

7. SPECIAL CHARGES

The Company recorded a special charge of approximately $224,600,000 as of
December 31, 1995. Of this charge approximately $218,900,000 related to
KWI. The special charge is primarily related to two items:

(i) Performance problems with the KVS-33. During 1995 mechanical problems
with the KVS-33 model wind turbines installed in 1994 and 1995 began
to appear, especially in the more severe weather environments. The
Company incurred substantial operating costs in 1995 as a result of
the problems with the KVS-33. As a result of these problems, the
Company wrote off all of its deferred engineering costs, reserved
certain inventory costs related to the KVS-33, reserved a significant
portion of the capitalized development costs for projects which were
going to be completed using the KVS-33 and accrued the estimated
retrofit costs attributable to the KVS-33. The aggregated amounts of
writedowns and asset reserves were approximately $54,600,000 and
accruals of liabilities of approximately $86,800,000 expected to be
incurred over the next several years were based on the best
information available at December 31, 1995. It is possible that actual
losses may be higher or lower than the amount recognized.

The Company used current energy prices at December 31, 1995 based upon
PG&E's "avoided costs" prices (after fixed price contract periods expire in
1997-2004), increased by modest inflation, to compute future cash flows for
assessing the impairment of Windplant assets and the profitability of the
Company's maintenance and management agreements with third party owners of
Windplants. The Company used modest inflation because most experts expect

Page 27

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 1997, 1996 and 1995

PG&E's avoided cost to increase at or below the inflation rate. Based on
the calculations, using the principles of SFAS No. 121 and a present value
of future net cash flows discounted at 16% to approximate fair value,
certain Windplant assets and investments were written down by approximately
$50,300,000. In addition, projected negative cash flows on certain
maintenance and management contracts from 1996-2015 were discounted at 7%
to approximate a risk free rate and a loss accrual was recognized of
$32,900,000. Based on the calculations, projected negative cash flows on
certain maintenance and management contracts commenced in 1996.

8. RELATED PARTY TRANSACTIONS

The Company had transactions with related parties in the ordinary course of
business. Related parties consist primarily of energy plant investments in
which the Company owned partnership interests ranging from less than 1% to
50% with most such investments being 1% or less. The 1996 amounts include
KWI amounts through May 29, 1996 (see Note 4). Pursuant to contracts either
to provide Windplants, construction services or power plant management and
maintenance, the Company had the following revenues from related parties,
after elimination in consolidation of the Company's ownership interest:

1997 1996 1995
-------- -------- --------
` (in thousands)

Windplant sales $ - $ 5,324 $128,626
Maintenance, management fees
and other 167 8,939 19,209
Interest on partnership notes
and funds in escrow - 1,125 3,313
-------- -------- --------
$ 167 $ 15,388 $151,148
======== ======== ========

In addition, the Company has insignificant transactions with KWI relating
to shared services.

9. INVESTMENT IN PUERTO RICO PROJECT

A wholly-owned development subsidiary is a 50% joint venture partner with
an affiliate of Enron Corporation in a project under construction in Puerto
Rico. In December 1997 the project obtained construction and term debt
financing. The project is a 507 MW (net) natural gas cogeneration facility
and associated liquified natural gas facility which will produce
electricity to be sold to Puerto Rico Electric Power Authority pursuant to
a 22 year Power Purchase Agreement dated March 10, 1995.

Investment in the Puerto Rico project includes project development costs
related to the Puerto Rico project, representing preconstruction costs
incurred to complete the design of cogeneration facilities, to secure the
necessary permits, to negotiate the contracts to construct and operate the
project, to obtain construction financing and for other development
services. Project development costs are capitalized once a project has
reached the design and permitting stage and the Company has obtained a

Page 28

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 1997, 1996 and 1995

power purchase agreement or other enforceable right to sell power. Also
included are the cash deposited into escrow for equity, a note receivable
from the project entity for the development fee, net of deferred revenue
related to the note and funds received from the first financial closing.
When it is probable that future projects will not be completed or costs may
not be recovered, such costs are written off or reserved for.

The balance sheet of the project entity (excluding escrowed cash provided
by the partners) as of December 31, 1997 was:

Balance Sheet
December 31, 1997
(unaudited, in thousands)

Cash and funds Accounts Payable $ 1,548
in escrow $ 1,690 Interest and notes payable
to affiliates 34,319
Construction Construction loan payable 115,954
in progress 150,131 Equity -
-------- --------
$151,821 $151,821
======== ========

10. FUNDS IN ESCROW

The Company has various long-term debt agreements which have escrow fund
requirements (see Note 15). The Company is required, under these
agreements, to establish escrow accounts. Debt service payments are made
from the escrow account. The escrow account balances at December 31, 1997
and 1996 were as follows:
1997 1996
------ -------
(in thousands)

Other notes payable $ 345 $ 1,581
Letters of credit collateral - 1,086
Project collateral 1,652 2,554
------ -------
$1,997 $ 5,221
====== =======

As of December 31, 1997, funds in escrow were invested in short-term cash
investments at rates ranging from zero to 5.1%. As previously discussed
KWI's funds in escrow are not reflected in the December 31, 1996 balance
sheet.

11. ACCOUNTS RECEIVABLE

Accounts Receivable: Accounts receivable at December 31, 1997 and 1996
consisted of: 1997 1996
-------- --------
(in thousands)
Contracts - Billed:
Completed contracts $ 1,342 $ 1,981
Contracts in progress 529 9,106
Retained 1,614 2,216
Contracts - Unbilled 2,175 2,782
Operations and other 554 1,855
Less: Allowance for
doubtful collections (1,546) -
-------- --------
$ 4,668 $ 17,940
======== ========

At December 31, 1997 and 1996 billed and unbilled receivables did not
include any amounts from related parties. Operations and other receivables
include zero and $33,000 respectively from related parties at December 31,
1997 and 1996.

Page 29

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 1997, 1996 and 1995

A summary of costs incurred and estimated earnings on uncompleted contracts
at December 31, 1997 and 1996 follows:
1997 1996
-------- --------
(in thousands)
Costs incurred and estimated earnings
on uncompleted contracts $ 66,444 $151,850
Billings to date 64,999 157,346
-------- --------
$ 1,445 $ (5,496)
======== ========

Such amounts were included in the consolidated balance sheets at December
31, 1997 and 1996 as follows:
1997 1996
-------- --------
(in thousands)
Costs incurred and estimated earnings
in excess of billings on uncompleted
contracts (accounts receivable) $ 2,175 $ 2,782
Billings in excess of costs and
estimated earnings on uncompleted
contracts (accrued liabilities) ( 730) (8,278)
-------- --------
$ 1,445 $ (5,496)
======== ========

12. INVESTMENT IN POWER PLANT HELD FOR SALE AND DEBT ASSOCIATED WITH POWER
PLANT HELD FOR SALE

Investment in power plant held for sale at December 31, 1997 and 1996
consisted of:
1997 1996
-------- --------
(in thousands)

Chateaugay power plant $ 16,128 $ 19,209
======== ========

The Company 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. Debt associated with this project held for sale at
December 31, 1997 and 1996 consisted 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) 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 ($16,128,000
outstanding at December 31, 1997).

In 1997, the carrying value of this investment was written down to the
balance of the associated debt.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 1997, 1996 and 1995

13. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment at December 31, 1997 and 1996 consisted of:

1997 1996
-------- --------
(in thousands)

Land $ 580 $ 580
Buildings and improvements 3,235 2,966
Cogeneration facility 22,282 26,467
Machinery, equipment and other 2,607 6,122
-------- --------
28,704 36,135
Less accumulated depreciation 9,810 11,400
-------- --------
$ 18,894 $ 24,735
======== ========

Depreciation expense was $1,481,000 in 1997, $6,814,000 in 1996, and
$14,527,000 in 1995. As previously discussed property, plant and equipment
of KWI are not reflected in the December 31, 1997 and 1996 balance sheets.

14. BANK LOAN PAYABLE

On August 30, 1996, the Company entered into a $30,000,000 loan agreement
to be used for the Puerto Rico project being jointly developed by the
Company. 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 90 day LIBOR rate was 5.8% at
December 31, 1997. The loan is collateralized by the stock of a special
purpose entity formed to hold through affiliates the Company's interest in
this thermal power plant. 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. The
outstanding balance on this bank loan was $24,236,000 at December 31, 1997.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 1997, 1996 and 1995

15. OTHER NOTES PAYABLE

Other notes payable at December 31, 1997 and 1996 consisted of the
following:

1997 1996
-------- --------
(in thousands)

Note bearing interest at 11.3%, due in equal annual installments of principal and interest through
2002, collateralized by a cogeneration facility owned by the Company and requiring an escrow account. $ 7,689 $ 8,667

Borrowings under a $5,000,000 revolving credit agreement bearing interest at 1% above the bank's prime
rate through November 1997. (1) - 166

Borrowings under a $7,500,000 term loan agreement bearing interest at the bank's prime rate through
August 31, 1996 and at 1% above the bank's prime rate thereafter, due in quarterly installments of
$267,857 plus interest through December 31, 2000 and $2,142,860 due on March 31, 2001. (1) - 6,351

Borrowings under a $4,400,000 revolving loan agreement, interest rate selected by the Company from
specified alternatives (7.4% and 7.6% at December 31, 1997 and 1996, respectively), convertible to a
15-year term loan, payable semi-annually, collateralized by land, building and equipment. (1) - 3,645

Borrowings under a $1,200,000 loan agreement, due in 1999 bearing interest at prime plus 3% (11.25% at
December 31, 1997). 1,144 641

Notes bearing interest at 7.0% due through 1999.(2) 6 504

Other obligations bearing interest at 8.2% to 9.9% due through 1999, collateralized by equipment. 39 191
-------- --------
$ 8,878 $ 20,165
======== ========

(1) Facility was associated with the Company's construction subsidiary and was paid off and terminated in December 1997.

(2) The Company did not make the required principal and interest payment on December 1, 1996 and the holders of the
notes notified the Company of their collective intention to accelerate the obligation to pay the unpaid balance
of the notes plus accrued interest. In 1997, the Company paid $360,000 in full settlement of $540,000 of unpaid
principal and interest.

Certain of the debt agreements provide events of default including
provisions which allow the lenders to accelerate repayment of the debt
should other debt of the Company experience an event of default which would
cause such other debt to be accelerated. Because of these provisions all
other notes payable are considered current.

The Company maintained a revolving credit agreement for working capital
purposes which was due to expire on May 30, 1996. This agreement required
the Company to meet certain financial ratios, net worth tests and
indebtedness tests. 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 (CNF) through April 30,
1997. The renegotiated agreement also provided a term loan of $7,500,000
which was used to pay the $5,000,000 outstanding at March 30, 1996 and to
provide cash collateral for up to $2,500,000 in outstanding letters of
credit. The loan would have become immediately payable upon the sale of
CNF. The agreement required CNF to meet certain net worth, financial ratio
and debt service coverage tests. At December 31, 1996 CNF was not in
compliance with these covenants. The bank issued a notice of default letter
which stated that due to KWI's bankruptcy filing and certain covenant
violations it would not make any further advances under the revolving
credit agreement. The balance due under this facility was paid off in
December 1997 and the facility was terminated.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 1997, 1996 and 1995

16. 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. The
unamortized discount was $861,000 at December 31, 1997. 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 the other debt was in default. The Company did not pay the interest
due June 15 and December 15, 1997 or June 15 and December 15, 1996 totaling
$12,750,000 for each year respectively, and is in default. At December 31,
1997 and 1996 the debt was classified as a current liability.

17. STOCKHOLDERS' DEFICIENCY

Convertible Preferred Stock: In May and June 1994, the Company sold 102,492
shares of 8 1/4% convertible preferred stock with a stated value of
$1,012.50 per share resulting in net proceeds of approximately $99,561,000
after underwriting discount and expenses. Dividends are cumulative from the
date of original issuance and are payable quarterly in arrears, when and as
declared by the Company's board of directors. The voluntary and involuntary
liquidation value of each preferred share is equal to the stated value plus
unpaid dividends. Preferred stockholders have the same voting rights as
common stockholders at the rate of 40 votes per preferred share.

The holders of the preferred stock may convert their shares into common
stock at any time at the rate of 41.665 common shares for each preferred
share. The preferred stock is not convertible by the Company prior to May
15, 1997. However, after that date and prior to May 15, 1998, the Company
may convert the preferred stock and should be expected to do so if the then
current market value exceeds the call price as defined. At such time the
preferred shareholder would receive the number of common shares equal to
the call price (initially $1,033.40, declining ratably to $1,012.50)
divided by the market price of the common stock, but in no event fewer than
41.665 common shares for each share of preferred stock. If not previously
converted, on May 14, 1998, each preferred share will mandatorily convert
into 50 shares of common stock and the right to receive cash equal to all
accrued and unpaid dividends. The Company has recorded a liability as of
December 31, 1997 and 1996 for unpaid dividends of $18,196,000 and
$9,633,000 respectively.

The preferred stock is held by a depositary and 5,124,600 depositary shares
have been issued. Each depositary share represents one-fiftieth of a
preferred share, with the holder entitled, proportionately, to all the
rights and preferences of the underlying preferred stock.

Stock Options: The Company currently has various stock option plans and
programs under which both qualified and non-qualified incentive stock
options have been granted. Options authorized and available for grant at
December 31, 1997 totaled approximately 4,097,000 shares in addition to
2,019,300 shares granted and outstanding at December 31, 1997.

Page 33

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 1997, 1996 and 1995

Stock option activity during 1997, 1996 and 1995 was as follows:

Exercise
Options Price
--------- ---------------
Outstanding December 31, 1995 2,135,000 1.25 - 23.25
Granted 1,750,000 0.81
Canceled (1,378,000) 1.25 - 23.25
---------
Outstanding December 31, 1996 2,507,000 0.81 - 19.75
Canceled (487,700) 0.81 - 19.75
---------
Outstanding December 31, 1997 2,019,300 0.81 - 19.75
=========

The weighted average exercise price of outstanding options at December 31,
1997 was $3.4825. Stock options vest as follows:
Exercise
Shares Price
--------- ----------------
Currently exercisable 425,000 $ 1.25 - $19.75
1998 44,100 12.81 - 16.50
1999 25,200 12.81 - 16.50
2000 25,000 16.50
2001 -
2002 1,500,000 0.81
---------
2,019,300
=========

The Financial Accounting Standards Board (FASB) has issued Statement No.
123. "Accounting for Stock-Based Compensation" which is effective for 1996
financial statements. SFAS No. 123 requires either recognition of
compensation expenses for stock options and other stock-based compensation
or supplemental disclosure of the impact such expense recognition would
have had on the Company's results of operations had the Company recognized
such expense. The Company has elected the supplemental disclosure option.
The Company believes that the effects on the reported net loss for 1997,
1996 and 1995 had stock-based compensation been recognized as expense under
the provisions of SFAS No. 123 would not be material.

18. INCOME TAXES

The provision (benefit) for income taxes consists of the following:

1997 1996 1995
-------- -------- --------
(in thousands)
Current:
Federal $ - $ 54 $ (590)
State - 150 105
Foreign - 100 -
-------- -------- --------
- 304 (485)
-------- -------- --------
Deferred:
Federal - 20,201 (17,965)
State - 2,886 (3,049)
-------- -------- --------
- 23,087 (21,014)
-------- -------- --------
Total income tax provision (benefit) $ - $ 23,391 $(21,499)
======== ======== ========

Page 34

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 1997, 1996 and 1995

A reconciliation of the total income tax (benefit) to income taxes
calculated at the federal statutory tax rate of 35% is as follows:

1997 1996 1995
-------- -------- ---------
(in thousands)

(Loss) before income taxes $(25,242) $(61,568) $(271,647)
======== ========= =========

Statutory federal income tax
(benefit) provision $ (8,835) $(21,549) $ (95,076)
State income taxes, less
federal tax benefit (1,262) (2,928) (16,136)
Change in valuation allowance due to
current operations 10,097 24,627 89,705
Reduction of net deferred tax asset
attributable to deconsolidation of KWI - 23,087 -
Other - 154 8
-------- -------- ---------
Total income tax provision (benefit) $ - $ 23,391 $ (21,499)
======== ======== =========

As of December 31, 1997 and 1996, the deferred tax balances consisted of
the following:

1997 1996
-------- --------
(in thousands)

Current assets $ 4,340 $ 4,340
-------- --------
4,340 4,340

Current liabilities (40) (40)
-------- --------
Current deferred tax assets, net $ 4,300 $ 4,300
======== ========
Noncurrent assets:
Dealer installment sales $ - $ -
Federal and state net operating loss
and tax credit carryforwards 45,759 37,662
Gain on sale of fixed assets
and investment interests 3,461 3,061
Project development costs 5,855 4,655
Other 800 800
-------- --------
55,875 46,178
Valuation allowance (32,273) (22,176)
-------- --------
23,602 24,002
Noncurrent liabilities:
Depreciation and basis differences (4,742) (5,142)
Other (5,247) (5,247)
-------- --------
(9,989) (10,389)
-------- --------
Noncurrent deferred tax assets, net $ 13,613 $ 13,613
======== ========

Deferred income tax assets and liabilities reflect the tax effects of
temporary differences between the tax basis of assets and liabilities and
the reported amounts of these assets and liabilities for financial
reporting purposes. SFAS No. 109 requires that a valuation allowance be
recorded against tax assets which are more likely than not to not be
realized which resulted in $10,097,000 and $24,627,000 being recognized in
1997 and 1996. After the deconsolidation of KWI, the Company's recorded net
deferred tax asset is $17,913,000. This amount will be realized if taxable
net gains of approximately $50,000,000 are recognized, which management
believes is more likely than not to be realized from the sale of the
Company's interests in the Puerto Rico project. It is possible that the
actual deferred tax assets realized may be higher or lower than the amounts
currently recognized.
Page 35

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 1997, 1996 and 1995

The following table summarizes carryforwards (including KWI) available for
income tax purposes at December 31, 1997 (in thousands):

Expiration Dates
-----------------

Investment tax credits $ 1,706 2003 through 2005
Research and development tax credits,
federal and state 2,307 2003 and 2008
California solar tax credits 7,693 Indefinite
Alternative minimum tax credit 1,784 Indefinite
Net operating loss - federal 137,462 2007 through 2012
Net operating losses of acquired
subsidiaries subject to restrictions 2,202 2001 through 2005
Production Tax Credit 1,675 2009 through 2011

The Company's tax position could be adversely effected by changes in the
Company's ownership or the resolution of KWI's bankruptcy.

19. FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amount and estimated fair values of the Company's financial
instruments at December 31, 1997 and 1996 were as follows:

1997 1996
------------------- -------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- --------- -------- ---------
(in thousands)
Assets:
Cash and cash equivalents $ 7,294 $ 7,294 $ 17,208 $ 17,208
Funds in escrow 1,997 1,997 5,221 5,221

Liabilities:
Power plant construction
financing 16,128 - 16,958 -
Senior secured notes payable 99,139 - 99,005 -
Other notes payable 8,878 - 20,165 -

The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:

Cash and cash equivalents: The carrying amount is a reasonable estimate of
fair value.

Funds in escrow: Fair value represents market value as reported by the
financial institution holding the funds in escrow.

Power plant construction financing, Senior secured notes payable, and Other
notes payable: For 1997 and 1996, the fair value is undeterminable.

The fair value estimates presented herein are based on pertinent
information available to management as of December 31, 1997 and 1996.
Although management is not aware of any factors that would significantly
affect the estimated fair value amounts, such amounts have not been
comprehensively revalued for purposes of these financial statements since
those dates, and estimates of fair value subsequent to those dates may
differ significantly from the amounts presented herein.

Page 36

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 1997, 1996 and 1995

20. COMMITMENTS AND CONTINGENCIES

Leases: At December 31, 1997 the Company had various operating lease
agreements covering facilities and equipment. Substantially all leases
provide for renewal options which give the Company the right to extend the
leases at reduced rentals. Minimum rental commitments for future years are
as follows (in thousands):

1998 $ 527
1999 453
2000 316
2001 102
2002 86
Thereafter 1,634

Lease expense totaled $411,000 in 1997, $1,689,000 in 1996, and $8,699,000
in 1995.

Litigation: 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.

Page 37

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 1997, 1996 and 1995

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.

Puerto Rico Litigation: In connection with the LNG-fired power plant being
developed in Penuelas, Puerto Rico by EcoElectricia, 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. 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.
EcoElectrica intervened in the action before the trial court and the appeal
is currently pending.

Page 38

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 1997, 1996 and 1995

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.

Employment Contracts: Certain officers have employment contracts.

21. QUARTERLY INFORMATION (UNAUDITED)

Unaudited quarterly information for 1997 and 1996 was as follows (in
thousands, except per share amounts):

Year Ended December 31, 1997 - Quarters
First Second Third Fourth
------- -------- ------- --------
Total revenues $11,980 $ 12,918 $ 8,624 $ 7,471
Gross margin (Excess of
expenses over revenues) 295 (41) (3,954) (307)
Net income (loss) (9,906) (4,874) (10,250) (212)
Per common share:
Basic & Diluted
- net income (loss) $ (0.33) $ (0.19) $ (0.34) $ (0.06)

Year Ended December 31, 1996 - Quarters
First Second Third Fourth
------- -------- ------- --------
Total revenues $27,709 $ 29,491 $16,455 $ 18,235
Gross margin (Excess of
expenses over revenues) 397 8,163 242 (617)
Net loss (16,750) (32,435) (10,155) (24,901)
Per common share:
Basic & Diluted
- net loss $ (0.52) $ (0.94) $ (0.33) $ (0.73)

1997: In the fourth quarter the Company's construction subsidiary sold its
joint venture interests in the Puerto Rico EPC contracts for a net gain. In
the third quarter the Company wrote off the two turbines which failed at
its wholly-owned cogeneration plant causing the excess of expenses over
revenues to increase significantly.

1996: As mentioned previously, KWI filed for protection on May 29, 1996
under chapter 11 of the Federal Bankruptcy Code and reported an excess of
liabilities over its assets. Although KENETECH continues to own the common
stock of KWI and provides certain services under the jurisdiction of the
Bankruptcy Court, KENETECH 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 KENETECH. The effect of the deconsolidation was the recognition of a
loss, a substantial portion of which primarily related to $23,087,000
million of net deferred tax assets relating to KWI.

Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
--------------------

Not applicable.

Page 39

PART III

Item 10. Directors and Executive Officers of the Registrant
- --------------------------------------------------------------

Directors and Executive Officers of the Company as of March 1, 1998, their
ages and their present titles:

Name Age Position
---- --- --------

Gerald R. Alderson 51 Director
Charles Christenson 67 Director
Angus M. Duthie 58 Chairman of the Board of Directors
Mark D. Lerdal 39 Director, Chief Executive Officer
and President
Michael U. Alvarez 41 Vice President
James J. Eisen 42 General Counsel, Vice President and
Assistant Secretary
Nicholas H. Politan 36 Chief Financial Officer, Vice
President and Assistant Secretary
Mervin E. Werth 51 Controller, Chief Accounting
Officer and Assistant Treasurer

BIOGRAPHICAL INFORMATION

KENETECH Corporation, a Delaware corporation, was formed in 1986 as a
holding company of KENETECH Windpower, Inc. (formerly, U.S. Windpower,
Inc.). References to KENETECH are, prior to 1986, references to KENETECH
Windpower, Inc.

GERALD R. ALDERSON is a Director and the President of National Kilowatt, an
unregulated electric retailer, and of Wattmonitor, an information services
company for the electric industry. Mr. Alderson has served as a Director of
KENETECH since September 1983 and served as Chairman of the Board from
March 1995 until March 1996. He served as KENETECH's President and Chief
Executive Officer from August 1981 until October 1995 and December 1995,
respectively. He received his B.A. from Occidental College and his M.B.A.
from the Harvard University Graduate School of Business Administration. He
is a Class I Director.

CHARLES CHRISTENSON is the Royal Little Professor of Business
Administration, Emeritus, at the Harvard University Graduate School of
Business Administration and has served as a Director of KENETECH since
January 1980. In the past, he was Deputy for Management Systems in the
Office of the Assistant Secretary of the Air Force, and held a variety of
teaching and administrative positions at the Harvard University Graduate
School of Business Administration. He received his B.S. from Cornell
University and his M.B.A. and D.B.A. from Harvard University. He is a Class
III Director.

ANGUS M. DUTHIE is a general partner of Prince Ventures and has served as a
Director of KENETECH since December 1980. He was elected as Chairman of the
Board of KENETECH in March 1996. Prince Ventures manages various capital
funds, in all of which F.H. Prince & Co., Inc. is a significant investor.
F.H. Prince & Co., Inc. is a privately held corporation with business
interests in real estate, as well as investments, both private and public.
Mr. Duthie is also a director of Occupational Health and Rehabilitation,
Inc., a publicly held company. Mr. Duthie holds a B.A. from Miami
University (Ohio). He is a Class III Director.

MARK D. LERDAL has served as a Director of KENETECH since March 1996 and as
Chief Executive Officer and President since April 1996. He served as Vice
President and General Counsel of KENETECH from April 1992 until March 1996.
From April 1990 to March 1992 he served as Vice President and Counsel of
KENETECH Energy Systems, Inc. He received his A.B. from Stanford University
and his J.D. from Northwestern University School of Law. He is a Class III
Director.

MICHAEL U. ALVAREZ has served as Vice President of KENETECH since July
1994. He has served as President of KENETECH Energy Systems, Inc. since
December 1993 and served as its Vice President from September 1991 until
his election as President. He received his B.A. and J.D. from the
University of Virginia.

JAMES J. EISEN has served as Vice President and General Counsel of KENETECH
and Vice President of KENETECH Windpower, Inc. since April 1996. He has
served as General Counsel of KENETECH Windpower, Inc. since April 1991 and

Page 40

served as Counsel from 1986 to 1991. He received two Bachelor of Science
degrees from the Massachusetts Institute of Technology and his J.D. from
New York University School of Law.

NICHOLAS H. POLITAN has served as Vice President and Chief Financial
Officer of KENETECH since April 1996. He served as Vice President and Chief
Financial Officer of KENETECH Windpower, Inc. from August 1995 and April
1996, respectively, until June 1998. He has served as Vice President of
KENETECH Energy Systems, Inc. since March 1995, and served as Counsel from
September 1992 until March 1995. He received his B.A. from Duke University
and his J.D. from Stanford Law School.

MERVIN E. WERTH has served as Controller of KENETECH since August 1991.
Prior to that time, he was a Senior Manager for Deloitte & Touche LLP and
Treasurer of Friends of Photography. He received his B.S. from University
of California, Berkeley.

Each officer is generally elected to hold office until the next Annual
Meeting of the Company's Board of Directors. Directors are elected for a
three-year term.

Each of Gerald R. Alderson and Mark D. Lerdal were directors of and Gerald
R. Alderson, Mark D. Lerdal, Michael U. Alvarez, James J. Eisen and
Nicholas H. Politan were executive officers of KENETECH Windpower, Inc.
within the two-year period prior to KENETECH Windpower, Inc.'s chapter 11
filing in the United States Bankruptcy Court.

COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934

Section 16(a) of the Securities Exchange Act of 1934 and regulations of the
Securities and Exchange Commission thereunder require the Company's
executive officers and directors and persons who own more than ten percent
of the Company's stock, as well as certain affiliates of such persons, to
file initial reports of ownership and changes in ownership with the
Securities and Exchange Commission ("SEC"). Executive officers, directors
and persons owning more than ten percent of the Company's stock are
required by the SEC's regulations to furnish the Company with copies of all
Section 16(a) forms they file. Based solely on its review of the copies of
Forms 3, 4 and 5 and amendments thereto received by the Company and written
representations that no other reports were required for those persons, the
Company believes that, during the fiscal year ended December 31, 1997, all
filing requirements applicable to its executive officers, directors and
owners of more than ten percent of the Company's stock were complied with,
except that Mervin E. Werth filed one late report covering one transaction.

Item 11. Executive Compensation
- ----------------------------------

Each Director of the Company receives a quarterly retainer of $5,000 plus a
$500 fee for each board meeting attended. In addition, each Director who
serves on either of the Audit Committee or the Compensation Committee
receives a meeting fee of $500 for attending any meeting of such Committees
not held in conjunction with a meeting of the Board of Directors (see also
footnote 1 to Summary Compensation Table). Directors were also eligible to
receive automatic stock option grants under the Automatic Option Grant
Program of the Company. The Automatic Option Grant Program has been
discontinued and the Directors have not received any automatic option
grants since 1995. See "Stock Plans" below.

The following table sets forth, for the fiscal years ended December 31,
1997, 1996 and 1995, all compensation, for services rendered in all
capacities to KENETECH and its consolidated subsidiaries (except as
otherwise noted), awarded to, earned by or paid to (i) all individuals
serving as Chief Executive Officer during 1997, (ii) the four most highly
compensated executive officers of the Company in addition to the Chief
Executive Officer who were serving as executive officers at the end of
1997, and (iii) a former executive officer of the Company for whom
disclosure would have been provided but for the fact that such individual
was not serving as an executive officer at the end of 1997. The table
excludes compensation paid by KENETECH Windpower, Inc. in 1996 and 1997
since it ceased to be accounted for as a consolidated subsidiary in 1996.

Page 41

SUMMARY COMPENSATION TABLE
================================================================================================================
Long-Term
Compensation All Other Compensation
Annual Compensation Awards ($)(3)
------------------------------------------- ------------ ----------------------
Securities
Other Annual Underlying
Name Compensation Options
Principal Position Year Salary Bonus ($)(1) (#)(2)
========================== ---- --------- --------- ------------ ------------ ----------------------

Mark D. Lerdal 1997 $ 401,295 $ 250,000 $ 21,500 - $ 1,165,071
Chief Executive Officer, 1996 $ 387,762 $ 300,000 $ 21,500 500,000 $ 1,152
President and Director 1995 $ 202,432 $ 20,000 - - -
========================== ---- --------- --------- ------------ ------------ ----------------------
Michael U. Alvarez 1997 $ 351,134 $ 364,920 - - $ 1,388
Vice President 1996 $ 380,152 $ 200,000 - 250,000 $ 1,388
1995 $ 225,729 $ 170,000 - - -
========================== ---- --------- --------- ------------ ------------ ----------------------
James J. Eisen 1997 $ 90,407 $ 59,880 - - $ 165,750
General Counsel, 1996 $ 144,395 $ 31,000 - 250,000 -
Vice President and 1995 $ 105,572 $ 20,772 - - -
Assistant Secretary (4)
========================== ---- --------- --------- ------------ ------------ ----------------------
Nicholas H. Politan 1997 $ 175,567(5)$ 540,440(5) - - $ 175,000
Chief Financial Officer, 1996 $ 178,261 $ 214,240 - 250,000 -
Vice President and 1995 $ 125,488 - - - -
Assistant Secretary
========================== ---- --------- --------- ------------ ------------ ----------------------
Mervin E. Werth 1997 $ 125,405 - - - -(6)
Controller, 1996 $ 125,405 $ 125,000 - - -(6)
Chief Accounting Officer 1995 $ 125,405 $ 9,375 - - -
and Assistant Treasurer
========================== ---- --------- --------- ------------ ------------ ----------------------
Michael A. Haas 1997 $ 40,857 $ 252,597 - - $ 95,700
(Vice President until 1996 $ 93,780 $ 59,100 - 250,000 -
4/11/97) (7) 1995 $ 95,419 $ 50,000 - - -
================================================================================================================

(1) Includes $21,500 in 1997 and 1996 for director's fees for Mark D. Lerdal.
(2) Shares of Common Stock subject to stock options granted during the fiscal year. No stock appreciation
rights were granted during 1997, 1996 or 1995.
(3) Includes $1,152 and $1,388 for 1997 and 1996 for insurance premiums paid by the
Company with respect to term life insurance for the benefit of Mark D. Lerdal and Michael U. Alvarez,
respectively, a pre-paid severance payment of $1,163,919 for Mark D. Lerdal, and severance payments of
$175,000 paid to Nicholas H. Politan, $165,750 paid to James J. Eisen and $95,700 paid to Michael Haas
upon termination of such individual's respective Employment Agreement with the Company.
(4) In addition, KENETECH Windpower, Inc. paid Mr. Eisen a bonus of $50,999 from gross proceeds of certain asset
sales occurring in 1996, $82,766 in salary, and $21,250 in bonus from gross proceeds of certain asset sales in 1997
and $183,582 in bonuses primarily earned in 1997 from proceeds of certain asset sales occurring in January 1998.
(5) Includes a bonus of $267,163 primarily earned in 1997 from proceeds of certain asset sales occurring in January
1998. Although all of Mr. Politan's compensation is paid by KENETECH Corporation, approximately $640,000 was
funded by KENETECH Windpower, Inc.
(6) All of the defendant officers and directors (including Mr. Werth) and KENETECH Corporation are jointly represented
by the same counsel in the securities class action described in Item 3 to this 10-K. A portion of such counsel's legal fees
has been paid by the Company, however, such fees have not been apportioned among the individual defendants.
(7) In addition, KENETECH Windpower, Inc. paid Mr. Haas $33,441 in salary and $406,823 in bonus from gross proceeds of
certain asset sales in 1996 and $15,480 in salary and $19,500 in bonus from gross proceeds of certain asset sales in 1997.

No options or stock appreciation rights were awarded to the Chief Executive
Officer or the named executive officers of the Company during the fiscal
year ended December 31, 1997.

The following table sets forth information concerning option exercises and
option holdings for the fiscal year ended December 31, 1997, with respect
to the Chief Executive Officer and the named executive officers of the
Company. No stock appreciation rights were outstanding during such fiscal
year.

Page 42

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
==================================================================================================================
Number of Securities Value of Unexercised
Shares Underlying Unexercised Options In-the-Money Options
Acquired on Value At Fiscal Year-End At Fiscal Year-End
Name Exercise (#) Realized ($) Exercisable/Unexercisable Exercisable/Unexercisable (1)
=================== ------------ ------------ ------------------------------ -----------------------------

Mark D. Lerdal - - 31,000/535,000 -/-
=================== ------------ ------------ ------------------------------ -----------------------------
Michael U. Alvarez - - 130,000/280,000 -/-
=================== ------------ ------------ ------------------------------ -----------------------------
James J. Eisen - - -/250,000 -/-
=================== ------------ ------------ ------------------------------ -----------------------------
Nicholas H. Politan - - 2,400/250,600 -/-
=================== ------------ ------------ ------------------------------ -----------------------------
Mervin E. Werth - - 20,000/2,500 -/-
=================== ------------ ------------ ------------------------------ -----------------------------
Michael A. Haas - - 000,000/000,000 -/-
=================== ------------ ------------ ------------------------------ -----------------------------

(1) The exercise price of all options exceeds the market price of the underlying shares at December 31, 1997.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

During 1997, Messrs. Christenson, Duthie and Pifer(1), served as members of
the Compensation Committee of the Company. None of the members of the
Compensation Committee have ever been officers or employees of the Company.
Mr. Lerdal may have attended meetings of the committee, but was not present
during deliberations or discussions regarding his own compensation.

(1) Howard W. Pifer III resigned effective February 21, 1997 from the Board
of Directors.

EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS

Messrs. Alvarez, Lerdal and Werth are the only executive officers of the
Company currently under an employment agreement. Messrs. Eisen, Haas and
Politan were under employment agreements during part of the fiscal year
ended December 31, 1997 and entered into the severance agreements described
below.

KENETECH Energy Systems, Inc. and certain direct or indirect wholly-owned
subsidiaries entered into an Employment Agreement with Mr. Alvarez that
became effective December 1, 1997 (such agreement superseded Mr. Alvarez's
prior employment agreement). The Employment Agreement provides that Mr.
Alvarez is to be employed (unless terminated for cause) at his annual base
salary of $350,000 until the later of i) December 31, 1998, (ii) 90 days
following the sale of the Company's interests in the Penuelas, Puerto Rico
project, or (iii) the date on which all payments under the Agreement have
been made. In the event of a change in control, Mr. Alvarez will receive a
lump sum payment equal to his annual base salary. Under the terms of the
Employment Agreement, Mr. Alvarez was paid a $350,000 bonus in 1997 upon
the closing of the construction financing for the Penuelas, Puerto Rico
project, and may earn a bonus of up to $1,920,000 from the proceeds of the
sale of the Company's interests in the Penuelas, Puerto Rico project, if
such proceeds exceed $100 million and up to $262,500 from the proceeds of
the sale of certain assets of KENETECH Energy Systems, Inc.

The Company entered into an Employment Agreement with Mr. Eisen on April
12, 1996 that provided that Mr. Eisen would be (i) employed by the Company
at annual base salary of $165,000, and (ii) entitled to receive a lump sum
severance payment equal to his base salary for one year and continue to be
covered by the Company health care and life insurance for one year. Upon a
Change in Control, Mr. Eisen would receive a lump sum payment equal to one
year's base salary. Pursuant to the terms of a Separation Agreement and
Mutual Release entered into by the Company and Mr. Eisen on June 30, 1997,
Mr. Eisen's Employment Agreement was terminated and he received a lump sum
payment of $165,750. Mr. Eisen continues to be employed as an at-will
employee of KENETECH Windpower, Inc.

Page 43

The Company entered into an Employment Agreement with Mr. Lerdal on April
1, 1996. Mr. Lerdal's initial employment period runs for a period of three
years ending March 31, 1999 and is automatically renewable upon mutual
agreement for an unlimited series of one-year periods. Pursuant to the
terms and conditions of the Agreement, Mr. Lerdal (i) received a bonus of
$100,000 upon execution of the Agreement, (ii) will receive a minimum
annual base salary of $400,000 (subject to yearly adjustment), (iii) will
be eligible to receive an annual bonus of up to 25% of his base salary, and
(iv) will be eligible to earn additional bonuses of up to $450,000 upon the
occurrence of certain stated objectives. All of the objective payments have
been earned including the $250,000 paid as a bonus in 1997. In the event of
Mr. Lerdal's involuntary termination (other than for cause) including
non-renewal of the employment period, he will receive a severance payment
equal to two years base salary plus health care and life insurance coverage
for an additional two years. In the event of Mr. Lerdal's involuntary
termination or resignation within six months of a Change in Control, Mr.
Lerdal will receive a lump sum payment equal to one year's salary in
addition to the payments set forth in the immediately preceding sentence.
The severance provisions of such agreement were pre-funded in March 1997.

The Company entered into an Employment Agreement with Mr. Politan on April
12, 1996 that provided that Mr. Politan would be (i) employed by the
Company at an annual base salary of $175,000, (ii) entitled to receive a
lump sum severance payment equal to his base salary for one year and
continue to be covered by the Company health care and life insurance for
one year, (iii) entitled to receive a bonus in the amount of $75,000 on
December 31, 1996, and (iv) entitled to a bonus of $75,000 upon the
occurrence of certain stated objectives. Upon a Change in Control, Mr.
Politan would receive a lump sum payment equal to one year's base salary
plus all unpaid bonuses. Pursuant to the terms of a Separation Agreement
and Mutual Release entered into by the Company and Mr. Politan on August 1,
1997, Mr. Politan's Employment Agreement was terminated and he received a
lump sum payment of $175,000. Mr. Politan was re-hired as an at-will
employee of the Company.

The Company has agreed to enter into a Retention Incentive Agreement with
Mr. Werth which will provide that Mr. Werth will receive an incentive
payment of $25,000 for each calendar quarter that he remains employed by
the Company.

The Company entered into a Separation Agreement and Mutual Release with Mr.
Haas on March 12, 1997 that terminated Mr. Haas's Employment Agreement
effective April 11, 1997. Pursuant to the terms and conditions of the
Separation Agreement, Mr. Haas received a single lump sum payment of
$95,700.

STOCK PLANS

The 1993 Option Plan and the 1993 Stock Purchase Plan (the "Purchase Plan")
were implemented in September 1993. The Purchase Plan was discontinued
following the August 1996 semi-annual purchase date. No Options were
granted under the 1993 Option Plan during 1997.

The Company has registered shares of Common Stock reserved for issuance
under the 1993 Option Plan and the Purchase Plan thus permitting the resale
of such shares by non-affiliates in the public market without restriction
under the Securities Act of 1933.

The 1993 Option Plan

Under the 1993 Option Plan, key employees (including officers), consultants
to the Company and directors are provided an opportunity to acquire equity
interests in the Company. The 1993 Option Plan contains three separate
components: (i) a Discretionary Option Grant Program, under which key
employees (including officers) and consultants may be granted options to
purchase shares of Common Stock at an exercise price not less than 85% of
the fair market value of such shares on the grant date; (ii) an Automatic
Option Grant Program, under which option grants were automatically made at
periodic intervals to directors to purchase shares of Common Stock at an
exercise price equal to 100% of the fair market value of the option shares
on the grant date (this part of the plan has been discontinued); and (iii)
a Stock Issuance Program, under which eligible individuals may be issued
shares of Common Stock directly, either through the immediate purchase of
the shares (at fair market value or at discounts of up to 15%) or as a
bonus tied to the performance of services or the Company's attainment of
prescribed milestones.

Page 44

The options granted under the Discretionary Option Grant Program may be
either incentive stock options designed to meet the requirements of Section
42 of the Internal Revenue Code of 1986, as amended (the "Code"), or
non-statutory options not intended to satisfy such requirements. All grants
under the Automatic Option Grant Program were non-statutory options.
Options may be granted or shares issued in the Discretionary Option Grant
and Stock Issuance Programs to eligible individuals in the employ or
service of the Company or any parent or subsidiary corporation now or
subsequently existing.

Under the Automatic Option Grant Program, each person who was a director at
the time of the Company's initial public offering, received at the
commencement of such offering, and each new director thereafter was, at the
time he or she became a director, to receive an automatic option grant for
5,000 shares of Common Stock. In addition, at each annual stockholders'
meeting, beginning with the 1994 annual meeting, each person who had been a
director for at least six months was to be granted an option to purchase
1,000 shares of Common Stock. If more than 50% of the outstanding Common
Stock were to be acquired in a hostile tender offer, each option granted
under the Automatic Option Grant Program that has been outstanding for at
least six months is to be automatically converted into the right to receive
from the Company the excess of the tender offer price over the option
price. No grants under the Automatic Option Grant Program have been made
since 1995.

A total of 6,688,020 shares of Common Stock were originally reserved for
issuance over the ten year term of the 1993 Option Plan.

Options will have maximum terms of ten years measured from the grant date.
Options will not be assignable or transferable other than by will or by the
laws of inheritance following the optionee's death, and the option may,
during the optionee's lifetime, be exercised only by the optionee. The
optionee will not have any stockholder rights with respect to the option
shares until the option is exercised and the option price is paid for the
purchased shares. Individuals holding shares under the Stock Issuance
Program will, however, have full stockholder rights with respect to those
shares, whether the shares are vested or unvested. The Plan Administrator
under the 1993 Option Plan has the authority to cancel outstanding options
under the Discretionary Option Grant Program (including options
incorporated from the Predecessor Plan) in return for the grant of new
options for the same or a different number of shares with an exercise price
based on the lower fair market value of the Common Stock on the new grant
date. The Board of Directors may terminate the 1993 Option Plan at any
time, and the 1993 Option Plan will in all events terminate on June 20,
2003.

All of the Company's employees are eligible to participate in the
Discretionary Grant Program. Non- employee directors are not eligible to
participate in the Discretionary Option Grant and Stock Issuance Programs.

If the Company is acquired by merger, consolidation or asset sale, or there
is a hostile change in control of the Company, each option granted under
the Discretionary Option Grant Program will automatically accelerate in
full, and all unvested shares under the Stock Issuance Program will
immediately vest.

The Purchase Plan

The Purchase Plan was discontinued following the August 1996 semi-annual
purchase date. Prior to discontinuation of the Purchase Plan, each
full-time employee upon meeting certain conditions was eligible to
participate in the Purchase Plan for one or more offering periods. The
Purchase Plan was intended to be an "employee stock purchase plan" within
the meaning of Section 423 of the Code. The Purchase Plan was implemented
in a series of successive offering periods, each with a maximum duration of
twenty-four (24) months. The purchase price per share for any offering
period was 85% of the lower of (i) the fair market value of the Common
Stock on the start date of the offering period (or, if a participant joined
the Purchase Plan after the start date of an offering period, on the date
of the participant's entry into the Purchase Plan, provided that such
amount was not less than the fair market value of the Common Stock on the
start date of the offering period), and (ii) the fair market value on the
semi-annual purchase date.

Page 45

LIMITATION OF LIABILITY AND INDEMNIFICATION

The Company's Restated Certificate of Incorporation limits, to the maximum
extent permitted by Delaware law, the personal liability of directors for
monetary damages for breach of their fiduciary duties as a director.
Delaware law does not permit a corporation to eliminate a director's duty
of care, nor does it permit elimination of liability for monetary damages
for breach of a director's duty of loyalty. Further, the provisions of the
Company's Restated Certificate of Incorporation have no effect on the
availability of equitable remedies such as injunction or recession or
monetary damages for a breach of a director's duty of care. Moreover,
non-monetary equitable remedies may not provide effective protection due to
factors such as procedural limitations on obtaining such relief and the
timeliness of any such sought relief. The Company's Restated Bylaws provide
that the Company shall indemnify its officers and directors and may
indemnify its employees and other agents to the fullest extent permitted by
law. Some current and former Directors and Officers of the Company have
entered into employment agreements or severance agreements that provide
that the indemnification provisions for directors and officers under the
Company's Restated Bylaws (to the maximum extent permitted by law) and/or
insurance coverage will be extended to such Director or Officer following
termination of his or her employment with respect to matters occurring
during his or her employment period.

In December 1995, the Company entered into indemnification agreements with
certain of its Directors and Officers whereby the Company agreed to
indemnify such Directors and Officers, subject to the exceptions set forth
therein, to the fullest extent permitted by the Delaware General
Corporation Law and the Restated Bylaws of the Company and against expenses
incurred by such Directors or Officers in connection with any liability
which he or she may incur in his or her capacity as such.

Section 145 of the Delaware General Corporation Law provides that a
corporation may indemnify a director, officer, employee or agent made a
party to an action by reason of the fact that he was director, officer,
employee or agent of the corporation or was serving at the request of the
corporation against expenses actually and reasonably incurred by him in
connection with such action, if he acted in good faith and in a manner he
reasonably believed to be in, or not opposed to, the best interests of the
corporation and, with respect to any criminal action, had no reasonable
cause to believe was unlawful.

Insofar as the liability of directors for monetary damages for breach of
fiduciary duty of care under state law may be limited as aforesaid, such
limitations do not apply to liabilities of directors under federal
securities laws.

Insofar as the Company's Restated Certificate of Incorporation or Restated
Bylaws provide for indemnification of directors, officers and persons
controlling the Company against certain liabilities as aforesaid, it is the
opinion of the staff of the SEC that such indemnification is against public
policy as applied to liabilities under federal securities laws and is
therefore unenforceable. In accordance with such position of the staff, no
indemnification is available to directors, officers or controlling persons
for liabilities under federal securities laws.

The Company provides directors and officers liability insurance and
reimbursement insurance policies for its Officers and Directors.

See Item 3 of this 10-K regarding pending or threatened litigation
involving any director or officer of the Company where indemnification will
be required or permitted.

Item 12. Security Ownership of Certain Beneficial Owners and Management
--------------------------------------------------------------

The following table sets forth certain information to the knowledge of the
Company regarding the beneficial ownership of the Company's Common Stock
and PRIDES as of March 1, 1998 for (i) each person known to the Company
beneficially to own 5% or more of the outstanding shares of its Common
Stock or PRIDES, (ii) each of the Company's directors, the Chief Executive
Officer and the named executive officers, and (iii) all directors and
executive officers as a group. Except as otherwise indicated, the Company
believes that the beneficial owners of the Common Stock and PRIDES listed
below, based on information furnished by such owners, have sole investment
and voting power with respect to such shares, subject to community property
laws where applicable.

Page 46

SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
===================================================================================================================
Number of Shares Number of Shares
Of Common Stock of PRIDES Percentage of
Beneficial Owners (1) Beneficially Owned (2) Beneficially Owned Shares Outstanding
============================================== ---------------------- ------------------ ------------------

Grace Brothers Ltd. 3,103,825(3) 5,000 8.4% Common
1560 Sherman Avenue 4.9% PRIDES
Suite 900
Evanston, IL 60201
============================================== ---------------------- ------------------ ------------------
Lawrence A. Heller 356,236(4) 8,550 0.96% Common
Quadrangle Offshore 8.34% PRIDES
(Cayman) LLC
31 West 52nd Street
New York, NY 10019
=============================================== ---------------------- ------------------ ------------------
Gerald R. Alderson 287,000 - *(5)
=============================================== ---------------------- ------------------ ------------------
Charles Christenson 67,000 - *
=============================================== ---------------------- ------------------ ------------------
Angus M. Duthie 59,720 - *
=============================================== ---------------------- ------------------ ------------------
Mark D. Lerdal 12,896,458 - 35% Common
=============================================== ---------------------- ------------------ ------------------
Michael U. Alvarez 131,441 - *
=============================================== ---------------------- ------------------ ------------------
James J. Eisen - - *
=============================================== ---------------------- ------------------ ------------------
Nicholas H. Politan 2,400 - *
=============================================== ---------------------- ------------------ ------------------
Mervin E. Werth 20,000 - *
=============================================== ---------------------- ------------------ ------------------
Michael A. Haas 6,462(6) 70(6) *
=============================================== ---------------------- ------------------ ------------------
All Directors and Executive Officers as a Group 13,464,019 - 36% Common
(the above-listed 8 persons, excluding
Michael A. Haas)
=============================================== ---------------------- ------------------ ------------------

(1) Information for beneficial owners of 5% or more of the Company's Common Stock or PRIDES is reported from and as
of the date of such owner's latest Schedule 13D or 13G (as amended) provided to the Company.
(2) Except as otherwise specifically noted, the number of shares stated as being beneficially owned includes
(a) all options under which officers or directors could acquire common stock currently and within 60 days following
March 1, 1998 (i.e., Gerald R. Alderson (287,000 shares), Charles Christenson (47,000 shares), Angus M. Duthie
(47,000 shares), Mark D. Lerdal (31,000 shares), Michael U. Alvarez (130,000 shares), Nicholas H. Politan (2,400
shares), Mervin E. Werth (20,000 shares) and all directors and officers as a group (564,400 shares)), and
(b) shares believed by the Company to be held beneficially by spouses.
The inclusion of shares herein, however, does not constitute an admission that the persons named as stockholders are
direct or indirect beneficial owners of such shares.
(3) According to a Statement on Schedule 13G/A filed with the Commission on January 27, 1998, includes 208,325 shares
obtainable upon conversion of 5,000 shares of the Company's 8-1/4% Preferred Redeemable Increased Dividend Equity
Securities (250,000 depositary shares) at the conversion rate of 41.665 shares of Common Stock per share. According
to such Statement on Schedule 13G/A, Grace Brothers Ltd. is an Illinois limited partnership that is a Broker or Dealer
registered under Section 15 of the Securities Exchange Act of 1934.
(4) According to a Statement on Schedule 13D/A filed with the Commission on November 17, 1997, includes 356,236 shares
obtainable upon conversion of 8,550 shares of the Company's 8-1/4% Preferred Redeemable Increased Dividend Equity
Securities (427,500 depositary shares) at the conversion rate of 41.665 shares of Common Stock per share.
(5) Does not exceed one percent of the class so owned.
(6) Based on the latest information provided to the Company by Mr. Haas.

REGISTRATION RIGHTS

The beneficial holders (or their transferees) of approximately 14,000,000
shares of Common Stock, are entitled to certain rights with respect to the
registration of such shares under the Securities Act of 1933 (the
"Securities Act"). Under the terms of the Registration Rights Agreements
dated as of June 28, 1985 (the "Registration Rights Agreement"), between
the Company and such holders, if the Company proposes to register any of
its securities under the Securities Act, either for its own account or the
account of other security holders exercising registration rights, such
holders are entitled to notice of such registration and are entitled to
include shares of such Common Stock therein; provided, among other

Page 47

conditions, that the underwriters of any offering have the right to limit
the number of shares included in such registration. In addition, for a
period of eight years after September 21, 1993, the date of the Company's
initial public offering of its Common Stock, a holder or holders of an
aggregate of 40% or more of the shares subject to such registration rights
may require the Company on not more than six occasions to file a
registration statement under the Securities Act with respect to their
shares of Common Stock.

Additionally, parties to the Stock Purchase Agreement dated as of June 30,
1992, and the Note Purchase Agreement dated as of June 25, 1992 (the
"Notes"), are entitled to notice of any registration of Common Stock
proposed by the Company, either for its own account or the account of other
security holders exercising registration rights, and, are entitled to
include shares of the Common Stock which they own by virtue of the
conversion of the preferred stock and/or Notes obtained pursuant to such
agreements, subject to (i) the underwriters' limitations, and (ii) in the
case of a secondary offering on behalf of holders of registration rights
pursuant to the Registration Rights Agreement, the consent of the holders
of such rights. The parties to such agreements are also given the right to
require the Company to register their shares of Common Stock, but may
exercise such right not more than once every two years.

Item 13. Certain Relationships and Related Transactions
- -------------------------------------------------------

KWI entered into certain Asset Sale Compensation Agreements with each of
James J. Eisen, and Nicholas H. Politan and KWI and KENETECH International
Ltd. ("KIL") entered into a certain Asset Sale Compensation Agreement with
Michael A. Haas pursuant to which such executive officers of the Company
have received or will receive a percentage ranging from 0.5% to 3% of the
gross proceeds derived from the disposition of certain specified assets of
KWI or KIL (see footnotes to the Summary Compensation Table for amounts
earned in 1996 and 1997).

All of the defendant officers and directors and KENETECH Corporation are
jointly represented by the same counsel in the securities class action
described in Item 3 to this 10-K. A portion of such counsel's legal fees
has been paid by the Company, however, such fees have not been apportioned
among the individual defendants.

Page 48

PART IV

Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------

(a) (1)FINANCIAL STATEMENTS

KENETECH Corporation:

The consolidated financial statements of KENETECH Corporation are
included in Part II, Item 8 as follows:

KENETECH Corporation Consolidated Financial Statements Page
------------------------------------------------------ ------

Independent Auditors' Reports 18

Consolidated Statements of Operations for the years ended
December 31, 1997, 1996, and 1995 19

Consolidated Balance Sheets, December 31, 1997 and 1996 20

Consolidated Statements of Stockholders' Equity (Deficiency)
for the years ended December 31, 1997, 1996 and 1995 21

Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995 22

Notes to Consolidated Financial Statements 23 - 39

(a) (2)KENETECH Corporation Financial Statement Schedules
--------------------------------------------------

I. Condensed Financial Information of Registrant for the
years ended December 31, 1997, 1996 and 1995 54

II. Valuation and Qualifying Accounts for the years ended
December 31, 1997, 1996 and 1995 55

Financial statements and supplemental schedules not included have been
omitted because of the absence of conditions under which they are
required or because the information is included elsewhere in this report.

Page 49

(a)(3) EXHIBITS - All of the Exhibits (except 10.51 - 10.56 and 21.1) listed
below were previously filed with Registration Statements or Reports on Form
10-K of KENETECH Corporation as specified below.

Number Description
3 ARTICLES OF INCORPORATION AND BYLAWS
3.1(3) Restated Certificate of Incorporation of KENETECH Corporation
("KENETECH").
3.2(10) Restated Bylaws of KENETECH, as amended November 16, 1995 and February
27, 1997.

10 MATERIAL CONTRACTS

FINANCING AGREEMENTS AND RELATED DOCUMENTS

10.1(4) Third Amended and Restated Line of Credit and Security Agreement dated
as of March 31, 1994, among KENETECH, CNF Industries, Inc., Process
Construction Supply, Inc., CNF Construction, Inc., KENETECH Windpower, Inc.
and Shawmut Bank Connecticut, N.A.
10.2(5) Indenture dated as of December 28, 1992, between Meridian Trust Company
of California, as Trustee, and KENETECH Corporation.
10.3(7) Indenture of Trust and Security Agreement dated as of February 13, 1992,
between Meridian Trust Company of California, as Trustee, and KENETECH
Windpower, Inc. ("Windpower") (formerly U.S. Windpower, Inc.).
10.4(4) First Supplemental Indenture of Trust and Security Agreement dated as of
June 15, 1993, between Meridian Trust Company of California, as Trustee,
and KENETECH Windpower, Inc.
10.5(7) Term Loan Agreement dated as of October 31, 1991, among KEM Partners
1991, L.P., Banque Paribas, as a bank and agent, and certain other banks
named therein.
10.6(4) Amended and Restated Term Loan Agreement dated June 7, 1993, between KC
One Company and U.S. West Financial Services, Inc. (which restates the Term
Loan Agreement dated as of November 20, 1992).

POWER SALES AGREEMENTS

10.7(7) Pacific Gas & Electric Co. ("PG&E") Standard Offer #4 Power Purchase
Agreement (PG&E Log No. 01W004) dated March 5, 1984, between PG&E and
KENETECH Windpower, Inc. relating to a 110,0000 KW facility, filed as an
exemplar pursuant to Instruction 2 to Item 601 of Regulation S-K.
10.8(7) Electricity Purchase Agreement dated as of April 10, 1987, between
CCF-1, Inc. and The Connecticut Light and Power Company, amended and
restated as of March 3, 1987.
10.9(7) Power Sale Agreement dated April 13, 1987, between Commonwealth Electric
Company and Pepperell Power Associates Limited Partnership.
10.10(7) Agreement (Power Purchase) dated September 30, 1988, between New York
State Electric & Gas Corporation and Northern Energy Group, Inc. ("NEG"),
as amended by Amendment No. 1 and Amendment No. 2, each dated September 30,
1988, and Amendment No. 3 approved July 27, 1989, as assigned by NEG and
Chateaugay Energy Limited Partnership to KES Chateaugay, L.P., pursuant to
an Assignment and Assumption of Power Purchase Agreement dated as of July
1, 1991.
10.11(7) Power Purchase Agreement dated as of April 29, 1992, between KENETECH
Windpower, Inc. and NV Energiebedrjf voor Groningen en Drenthe.
10.12(5) Power Purchase Agreement dated as of June 23, 1993, among The
Narragansett Electric Company, Massachusetts Electric Company and Granite
State Electric Company (all of which are wholly-owned subsidiaries of New
England Electric System).
10.13(3) Power Purchase Agreement dated November 18, 1993, between Lower
Colorado River Authority and KENETECH Windpower, Inc.
10.14(3) Power Purchase Agreement dated as of April 2, 1993, between KENETECH
Windpower, Inc. and TransAlta Utilities Corporation.
10.15(7) Power Savings Agreement dated as of September 28, 1990, between
KENETECH Energy Management, Inc. ("KEM") (previously Econoler/USA, Inc.)
and Orange and Rockland Utilities, Inc., filed as an exemplar pursuant to
Item 2 of Section 601 of Regulation S-K.
10.16(3) Electricity Purchase Agreement dated December 13, 1993, between
KENETECH Ltd. and Hydro-Quebec (Site No. 1).
10.17(7) Form of Energy Service Agreement between KEM and the Host Customer.
10.18(3) Restatement of the Project Agreement dated January 29, 1993, between
USW and the Sacramento Municipal Utility District.

Page 50

DEVELOPMENT AGREEMENTS

10.19(6) Mutual Services and Financing Agreement dated April 28, 1989, between
PG&E, Electric Power Research Institute, Inc. and KENETECH Windpower, Inc.
and Sponsor Accession Agreement dated April 28, 1989, among PG&E, EPRI,
KENETECH Windpower, Inc. and Niagara Mohawk Power Corporation.
10.20(7) Demonstration Agreement dated as of October 1, 1991, between Her
Majesty the Queen in Right of Alberta and KENETECH Windpower, Inc.
10.21(6) Wind Energy Facility Sales Agreement made as of June 29, 1992, among
Krimenergo, Ukrenerguresuorsy, PHB Ukraine Ltd. and KENETECH Windpower,
Inc.
10.22(3) Development Agreement dated as of February 7, 1994, between KENETECH
Windpower, Inc. and Sacramento Municipal Utility District.
10.23(3) Development Agreement dated as of February 14, 1994, among Puget Sound
Power & Light Company, PacifiCorp, Portland General Electric Company and
KENETECH Windpower, Inc.
10.24(3) Joint Development Agreement dated as of June 21, 1993, among Central
Power Limited, The Wing-Merrill Group, Ltd., and KENETECH Windpower, Inc.
10.25(2) Development Agreement dated as of March 7, 1994, between PacifiCorp and
KENETECH Windpower, Inc.

OTHER AGREEMENTS

10.26(7) Seaboard Surety Company Contractor's General Agreement of Indemnity
dated November 15, 1989, among KENETECH, CNF Constructors, and C.N. Flagg &
Co., Incorporated.
10.27(4) Stock Purchase Agreement dated as of June 30, 1993, among KENETECH,
Weiss, Peck & Greer ("WP&G") and certain affiliates of WP&G.
10.28(1) $75,000,000 Credit Agreement among KENETECH Windpower, Inc.,
(Borrower), Morgan Guaranty Trust Company of New York (Administrative
Agent, Issuing Bank and Lender, ABN AMRO Bank N.V. San Francisco
International Branch (Collateral Agent and Lender) and The Bank of Nova
Scotia, Sanwa Bank California, Shawmut Bank Connecticut, N.A., Banque
Nationale de Paris, Banco Central Hispanoamericano, S.A., and San Francisco
Agency (Lenders) dated as of September 30, 1994.
10.29(8) Wind Operated Electricity Generator Purchase Order - Order No: 1
between KENETECH Windpower, Inc. and ABAN Loyd Chiles Offshore Ltd. dated
November 11, 1994.
10.30(8) Wind Operated Electricity Generator Purchase Order - Order No: 2
between KENETECH Windpower, Inc. and ABAN Loyd Chiles Offshore Ltd. dated
December 22, 1994.
10.31(8) Amendment to Purchase Order dated December 15, 1994 between KENETECH
Windpower, Inc. and ABAN Loyd Chiles Offshore Ltd.
10.32(8) Amendment No. 1 to Purchase Documents between KENETECH Windpower, Inc.
and ABAN Loyd Chiles Offshore Ltd. dated December 22, 1994.

EMPLOYMENT AND SEVERANCE AGREEMENTS

10.33(8) Employment Agreement dated as of March 1, 1995 between KENETECH and
Gerald R. Alderson.
10.34(8) Employment Agreement dated as of December 1, 1994 between KENETECH and
Joel M. Canino.
10.35(8) Severance Agreement and Offer Letters both dated January 23, 1995
between KENETECH and Ralph B. Muse.
10.36(9) Employment Agreement dated as of December 31, 1995 between KENETECH
and Mark D. Lerdal.
10.37(9) Employment Agreement, dated as of January 1, 1996, between KENETECH
Energy Systems, Inc. and Michael U. Alvarez.
10.38(9) Agreement, dated November 1, 1995, between KENETECH and GGG Inc.
10.39(9) Agreement, dated April 2, 1996, between KENETECH and GGG Inc.
10.40(9) Separation Agreement and Mutual Release, dated as of October 12, 1995,
between KENETECH and Jean-Yves Dexmier.
10.41(10) Employment Agreement Amendment, dated as of December 11, 1996, between
KENETECH Energy Systems, Inc. and Michael U. Alvarez.
10.42(10) Employment Agreement, dated as of April 12, 1996, between KENETECH
Corporation and James J. Eisen.
10.43(10) Employment Agreement, dated as of April 12, 1996, between KENETECH
Corporation and Michael A. Haas.
10.44(10) Employment Agreement, dated as of April 1, 1996, between KENETECH
Corporation and Mark D. Lerdal.
10.45(10) Employment Agreement, dated as of April 12, 1996, between KENETECH
Corporation and Nicholas H. Politan.
10.46(10) Separation Agreement and Mutual Release, dated as of April 9, 1996,
between KENETECH Corporation and Gerald R. Alderson.
10.47(10) Separation Agreement and Release, dated October 7, 1996, among
KENETECH Corporation, CNF Industries, Inc. and Joel M. Canino.

Page 51

10.48(10) First Amendment to Separation Agreement and Release, dated October 28,
1996, among KENETECH Corporation, CNF Industries, Inc. and Joel M. Canino.
10.49(10) Retention Agreement, dated February 2, 1996, by and between KENETECH
Corporation and Mervin E. Werth.
10.50(10) Employment Agreement, dated as of April 12, 1996, between KENETECH
Windpower, Inc. and Steven A. Kern.
10.51 Employment Agreement, effective December 1, 1997, among KENETECH
Corporation, KENETECH Energy Systems, Inc., certain direct and in-direct
subsidiaries of KENETECH Energy Systems and Michael U. Alvarez.
10.52 Separation Agreement and Mutual Release, dated as of June 30, 1997,
between KENETECH Corporation and James J. Eisen.
10.53 Separation Agreement and Mutual Release, dated as of August 1, 1997,
between KENETECH Corporation and Nicholas H. Politan.
10.54 Separation Agreement and Mutual Release, dated as of March 12, 1997,
between KENETECH Corporation and Michael A. Haas.

ASSET SALE AGREEMENTS

10.55 Master Agreement of Dissolution, Distribution and Assignment, dated as
of August 27, 1997, between Enron Power I (Puerto Rico), Inc. and CNF
Penuelas, Inc.
10.56 Master Agreement of Dissolution, Distribution and Assignment, dated as
of August 27, 1997, between Enron Equipment Procurement Company and CNF
Equipment, Inc.

16 LETTER RE: CHANGE IN CERTIFYING ACCOUNTANT

16.1 (9) Letter from Deloitte & Touche, LLP dated May 11, 1995.
16.2 (9) Letter from Deloitte & Touche, LLP dated May 17, 1995.

21 SUBSIDIARIES OF THE REGISTRANT

21.1 Subsidiaries

(1) Incorporated by reference to Form 10-Q filed with the Securities and
Exchange Commission & by Registrant on November 16, 1994.
(2) Incorporated by reference to Amendment No. 3 to Form S-1, File No. 33-76590
filed April 27, 1994.
(3) Incorporated by reference to Form S-1, File No. 33-76590 filed with the
Securities and Exchange Commission by the Registrant on March 18, 1994.
(4) Incorporated by reference to Amendment No. 1 to Form S-1, File No.
33-65902, filed with the Securities and Exchange Commission by the
Registrant on August 19, 1993.
(5) Incorporated by reference to Form S-1, File No. 33-65902, filed with the
Securities and Exchange Commission by Registrant on July 7, 1993.
(6) Incorporated by reference to Amendment No. 2 to Form S-1, file No.
33-53132, filed with the Securities and Exchange Commission by the
Registrant on December 19, 1992.
(7) Incorporated by reference to Form S-1, File No. 33-53132, filed with the
Securities and Exchange Commission by the Registrant on October 9, 1992.
(8) Incorporated by reference to Form 10-K, File No. 33-53132, filed with the
Securities and Exchange Commission by the Registrant on April 5, 1995.
(9) Incorporated by reference to Form 10-K, File No. 33-53132, filed with the
Securities and Exchange Commission by the Registrant on April 15, 1996.
(10) Incorporated by reference to Form 10-K, File No. 33-53132, filed with the
Securities and Exchange Commission by the Registrant on April 1, 1997.

(b) Reports on Form 8-K:

The Registrant filed a Report on Form 8-K, dated December 17, 1997,
annexing a press release issued on December 15, 1997 announcing the closing
of the construction financing for the Penuelas, Puerto Rico project.

Other than items 10.51 - 10.56 and 21.1, the documents and agreements
listed in Item 14(a)3 have been previously filed with the Securities and
Exchange Commission and are hereby incorporated by reference.

(d) Financial Statement Schedules:

The financial statements and financial statement schedules listed in item
14(a)(1) and (2) are filed as part of this report.

Page 52

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
Mark D. Lerdal
President, Chief Executive Officer, and Director

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the date indicated:

Signature Title Date
/s/ Mark D. Lerdal President, Chief Executive March 30, 1998
Officer, and Director

Mark D. Lerdal

/s/ Nicholas H. Politan Chief Financial Officer, March 30, 1998
Vice President and
Assistant Secretary

Nicholas H. Politan

/s/ Mervin E. Werth Corporate Controller, March 30, 1998
Chief Accounting Officer
and Assistant Treasurer

Mervin E. Werth

/s/ Gerald R. Alderson Director March 30, 1998

Gerald R. Alderson

/s/ Charles Christenson Director March 30, 1998

Charles Christenson

/s/ Angus M. Duthie Chairman of the Board March 30, 1998
of Directors

Angus M. Duthie

Page 53

SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(in thousands)

CONDENSED STATEMENTS OF OPERATIONS
for the years ended December 31, 1997, 1996 and 1995

1997 1996 1995
--------- --------- ---------
Equity in earnings of consolidated
subsidiaries $(16,676) $ (28,597) $(257,313)
General and administrative (expenses) (4,624) (12,619) (6,513)
reimbursement
Interest income 118 4,061 7,210
Interest expense (14,096) (14,072) (15,031)
Gain (loss) on sales of
subsidiaries and assets 10,036 (9,623) -
-------- --------- ---------
Income (Loss) before taxes (25,242) (60,850) (271,647)
Income tax expense (benefit) - 23,391 (21,499)
-------- --------- ---------
Net income (loss) $(25,242) $ (84,241) $(250,148)
======== ========= =========

CONDENSED BALANCE SHEETS
December 31, 1997 and 1996

ASSETS

Current assets: 1997 1996
-------- --------
Cash and cash equivalents $ 2,383 $ 2,865
Other 72 3,076
-------- --------
Total current assets 2,455 5,941

Investments in subsidiaries (22,346) (14,427)
Due from affiliates 30,342 27,673
Other assets 16,171 15,700
-------- -------
Total assets $ 26,622 $ 34,887
======== ========

LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable $ 340 $ 814
Accrued liabilities 35,462 17,760
Senior secured notes payable 99,139 99,005
Other 5,190 5,575
-------- --------
Total current liabilities 140,131 123,154

Accrued dividends on preferred stock 19,196 9,633
-------- --------
Total liabilities 158,327 132,787

Stockholders' deficiency:
Preferred Convertible Stock 99,561 99,561
Common stock 4 4
Other stockholders' deficiency (231,270) (197,465)
-------- --------
Total stockholders' deficiency (131,705) (97,900)
-------- --------
Total liabilities and stockholders' deficiency $ 26,622 $ 34,887
======== ========

Page 54

SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(in thousands)

CONDENSED STATEMENTS OF CASH FLOWS for the
years ended December 31, 1997, 1996 and 1995

1997 1996 1995
-------- -------- --------
Net cash used in operating activities $ (972) $ (7,122) $(40,346)
Net cash provided by investing activities 1,140 11,205 16,299
Net cash provided by (used in)
financing activities (650) (5,089) 949
-------- -------- --------
Increase (Decrease) in cash and
cash equivalents (482) (1,006) (23,098)
Cash and cash equivalents at
beginning of year 2,865 3,871 26,969
-------- -------- --------
Cash and cash equivalents at end of year $ 2,383 $ 2,865 $ 3,871
======== ======== ========

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(in thousands)

Balance Charged to Balance
Beginning Costs & Deductions at End
Description of Period Expenses (1) of Period
- ----------- --------- ---------- ---------- ---------
Warranty reserves:
Year ended December 31, 1995 $ 2,157 $ 73,586 $ 9,831 $ 65,912
Year ended December 31, 1996 65,912 - 65,912 -
Year ended December 31, 1997 - - - -

Project development allowance (2):
Year ended December 31, 1995 $ - $ 24,805 $ 3,279 $ 21,526
Year ended December 31, 1996 21,526 1,557 21,526 1,557
Year ended December 31, 1997 1,557 1,943 - 3,500

Allowance for doubtful accounts:
Year ended December 31, 1997 $ - $ 1,546 $ - $ 1,546

- ---------------
(1) 1996 deductions result from the deconsolidaiton of KWI and the
write-off of wood project in Illinois.
(2) Deducted from power plants under development.

Page 55