UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q
(Mark One)

[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 1998

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

Commission file number 33-53132

KENETECH CORPORATION
(Exact name of registrant as specified in its charter)

Delaware 94-3009803
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)

500 Sansome Street, Suite 300
San Francisco, California 94111
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (415)
398-3825

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes x No

On May 15, 1998, there were 41,954,218 shares of the issuer's Common Stock,
$.0001 par value outstanding, including 5,124,600 shares resulting from the
mandatory conversion, on May 14, 1998, of the issuer's Preferred Redeemable
Increased Dividend Equity Securities, 8-1/4% PRIDES, Convertible Preferred
Stock, par value $0.01 per share.

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

KENETECH Corporation Consolidated Financial Statements Page

Consolidated Statements of Operations for the
periods ended March 31, 1998 and March 29, 1997 4

Consolidated Balance Sheets, March 31, 1998 and
December 31, 1997 5

Consolidated Statement of Stockholders' Deficiency for
the period ended March 31, 1998 6

Consolidated Statements of Cash Flows for the periods
ended March 31, 1998 and March 29, 1997 7

Notes to Consolidated Financial Statements 8-14

Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. 15-20

Part II - OTHER INFORMATION

Item 1. Legal Proceedings. 21

Item 2. Changes in Securities. 21

Item 3. Defaults Upon Senior Securities. 21

Item 6. Exhibit and Reports on Form 8-K 21

PART I - FINANCIAL INFORMATION

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

CONSOLIDATED STATEMENTS OF OPERATIONS
for the quarterly periods ended March 31, 1998 and March 29, 1997
(unaudited, in thousands, except per share amounts)

March 31, March 29,
1998 1997
--------- ---------
Revenues:
Construction services ............................ $ 2,894 $ 10,151
Energy sales ..................................... 177 1,342
Maintenance, management fees and other ........... 416 487
--------- --------
Total revenues ................................. 3,487 11,980

Costs of revenues:
Construction services ............................ 2,170 9,970
Energy plant operations .......................... 1,264 1,715
--------- --------

Total costs of revenues ........................ 3,434 11,685

Gross margin ....................................... 53 295

Project development and marketing expenses ......... 357 21
General and administrative expenses ................ 845 5,686
--------- --------

Loss from operations ............................... (1,149) (5,412)

Interest income .................................... 101 208
Interest expense ................................... (3,615) (4,749)
Equity loss of unconsolidated affiliates ........... (35) (5)
(Loss) Gain on disposition of subsidiaries and assets (67) 52
--------- --------

Loss before taxes .................................. (4,765) (9,906)
Income tax benefit ................................. -- --
--------- --------

Net loss ..................................... $ (4,765) $ (9,906)
========= ========

Net loss per common share - Basic and Diluted $ (0.19) $ (0.33)

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

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

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

ASSETS
March 31, December 31,
1998 1997
--------- ------------
Current assets:
Cash and cash equivalents ......................... $ 7,869 $ 7,294
Funds in escrow, net .............................. 84 1,997
Accounts receivable ............................... 2,014 4,669
Inventories ....................................... 120 135
Hartford Hospital Project ......................... 15,434 15,642
Investment in EcoElectrica Project, net............ 20,663 19,830
Investment in Chateaugay Project .................. 15,967 16,128
Deferred tax assets, net .......................... 17,913 17,913
Other assets ...................................... 2,577 3,026
--------- ------------
Total current assets ............................. 82,641 86,634

Property, plant and equipment, net ................... 656 3,252
Other assets ......................................... 647 700
--------- ------------
Total assets ................................... $ 83,944 $ 90,586
========= ============

LIABILITIES AND STOCKHOLDERS' DEFICIENCY

Current liabilities:
Accounts payable .................................. $ 7,024 $ 12,579
Accrued liabilities ............................... 10,298 13,147
Hartford Hospital Project debt .................... 8,826 7,689
EcoElectrica Project development loan payable ..... 24,997 24,236
Chateaugay Project debt ........................... 16,006 16,128
Other notes payable ............................... 1,211 1,189
Senior secured notes payable ...................... 99,172 99,139
Accrued interest on senior secured notes payable .. 32,740 28,044
Accrued losses on contracts ....................... 1,944 1,944
--------- ------------
Total current liabilities ...................... 202,218 204,095

Accrued dividends on preferred stock ................. 20,337 18,196
--------- ------------
Total liabilities ................................ 222,555 222,291

Commitments and contingencies

Stockholders' deficiency:
Convertible preferred stock - 10,000,000 shares
authorized, $.01 par value; issued and outstanding
102,492, $124,111 liquidation preference ......... 99,561 99,561
Common stock - 110,000,000 shares authorized,
$.0001 par value; 36,829,618 issued and
outstanding in 1998 and 1997 ...................... 4 4
Additional paid-in capital ........................ 125,517 127,658
Cumulative foreign exchange ....................... 35 35
Accumulated deficit ............................... (363,728) (358,963)
--------- ------------
Total stockholders' deficiency ................... (138,611) (131,705)
--------- ------------
Total liabilities and
stockholders' deficiency ...................... $ 83,944 $ 90,586
========= ============

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

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

CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY
for the quarterly period ended March 31, 1998
(unaudited, in thousands, except share amounts)

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

Balance, December 31, 1997 102,492 $99,561 36,829,618 $4 $127,658 $35 $(358,963) $(131,705)
Preferred stock dividends -- -- -- - (2,141) -- -- (2,141)
Net loss -- -- -- - -- -- (4,765) (4,765)
------- ------- ---------- -- -------- --- --------- ---------
Balance, March 31, 1998 102,492 $99,561 36,829,618 $4 $125,517 $35 $(363,728) $(138,611)
======= ======= ========== == ======== === ========= =========

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

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

CONSOLIDATED STATEMENTS OF CASH FLOWS
for the quarterly periods ended March 31, 1998 and March 29, 1997
(unaudited, in thousands)

March 31, March 29,
1998 1997
--------- ---------

Cash flows from operating activities:
Net loss ....................................... $ (4,765) $ (9,906)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation, amortization and other ........ 635 1,097
Accrued but unpaid interest ................. 4,696 --
Loss on sale of land, building and equipment (67) --
Changes in assets and liabilities:
Funds in escrow, net ....................... 1,913 640
Accounts receivable ........................ 2,655 436
Inventories ................................ 15 4
Other assets ............................... -- 2,100
Accounts payable, accrued liabilities
and accrued interest ...................... (7,305) 5,926
Accrued loss on contracts .................. -- (442)
--------- ---------
Net cash used in operating activities ..... (2,223) (145)

Cash flows from investing activities:
Proceeds from sale of property .............. 2,810 --
Expenditures on EcoElectrica Project ........ (833) (3,414)
Investments in affiliates:
Distributions .............................. -- 10
--------- ---------
Net cash provided by (used in) investing
activities ........................... 1,977 (3,404)

Cash flows from financing activities:
Borrowings on Hartford Hospital Project debt. 827 --
Payments on other notes payable ............. (6) (606)
--------- ---------
Net cash provided by (used in) financing
activities ............................ 821 (606)
--------- ---------

Increase (Decrease) in cash and cash equivalents 575 (4,155)
Cash and cash equivalents at
beginning of period ....................... 7,294 17,208
--------- ---------

Cash and cash equivalents at
end of period ............................. $ 7,869 $ 13,053
========= =========

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

1. General

The interim consolidated financial statements presented herein include the
accounts of KENETECH Corporation and its consolidated subsidiaries (the
"Company"). These interim consolidated financial statements should be read
in conjunction with the Company's consolidated financial statements and the
notes thereto for the year ended December 31, 1997. These interim
consolidated financial statements are unaudited but, in the opinion of
management, reflect all adjustments necessary (consisting of items of a
normal recurring nature) for a fair presentation of the Company's interim
financial position, results of operations and cash flows. Results of
operations for interim periods are not necessarily indicative of those for
a full year.

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

2. Significant Accounting Policies

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

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

2. Significant Accounting Policies (continued)

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

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

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

Income Taxes: The Company accounts for income taxes using the liability
method under which deferred income taxes arise from temporary differences
between the tax basis of assets and liabilities and their reported amounts
in the consolidated financial statements. Changes in deferred tax assets
and liabilities include the impact of any tax rate changes enacted during
the year and changes in the valuation allowance.

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

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

3. Liquidity and Going Concern

The consolidated financial statements as of and for the quarter ended March
31, 1998 and as of December 31, 1997 have been prepared assuming the
Company will continue as a going concern. The Company incurred significant
losses in 1997, 1996 and 1995, has 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 and interest expense on debt in excess of gross
margin. These factors raise substantial doubt about the Company's ability
to continue as a going concern.

Management plans to improve the Company's liquidity and to facilitate the
continuation of its energy project development business by selling assets
for substantial cash proceeds and by resolving significant claims between
the Company and KWI arising from KWI's bankruptcy.

In furtherance of that plan, the Company is actively marketing its
interests in the EcoElectrica Project and has received several indications
of interest from qualified potential purchasers. Management has also signed
a letter agreement for the sale of the Hartford Hospital Project. In
addition, the Company has recently entered into a Settlement Agreement and
Release with, among others, KWI, pursuant to which, upon approval of the
KWI Bankruptcy Court in exchange for a cash payment, KWI will release the
Company from certain claims in bankruptcy and continue to be a member of
the Company's consolidated group for income tax purposes.

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

4. Construction Subsidiary

The Company's construction subsidiary is completing its projects in process
and is in the process of disposing of its remaining assets and liabilities.
The Company's consolidated statement of operations for the quarter ended
March 31, 1998 and consolidated balance sheet as of March 31, 1998 include
the following amounts relating to its construction subsidiary:

Quarter ended March 31, 1998
(in thousands)

Revenues $ 2,894
Costs of revenues 2,170
-------
Gross margin 724

General and administrative expenses 281
-------
Income from operations 443

Gain on disposition of subsidiaries and assets (2)
Interest income 74
-------
Income before income taxes $ 515
=======

As of
March 31, 1998
(in thousands)

Assets: Liabilities and owner's deficiency:
Current assets $ 4,869
Property plant and Current liabilities $ 8,329
equipment 6
Other assets 476 Owner's deficiency (2,978)
------- --------
Total assets $ 5,351 Total liabilities & deficiency $ 5,351
======= ========

5. Net Loss Per Share

Net loss per share amounts for the quarters ended March 31, 1998 and March
29, 1997 were calculated as follows:

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

March 31, March 29,
1998 1997
--------- ---------
Net loss $ (4,765) $ (9,906)
Less preferred stock dividends (2,141) (2,141)
--------- ---------
Net loss used in per share calculations $ (6,906) $ (12,047)
========= =========
Weighted average shares used in per share
calculations 36,830 36,830
========= =========
Net loss per share $ (0.19) $ (0.33)
========= =========

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). On May 14, 1998, the preferred
stock was mandatorily converted into 5,124,600 shares of common stock,
$.0001 par value, and dividends on the preferred stock ceased to accrue.

6. Hartford Hospital Project and Associated Debt

The Company indirectly owns a 16.6 MW cogeneration plant located in
Hartford, Connecticut (the "Hartford Hospital Project"). Debt associated
with the Hartford Hospital Project bears interest at 11.3%, amortizes
beginning in 1999 with the last principal payment due in 2007, is
colleratlized by the Hartford Hospital Project and requires an escrow
account. In the first quarter of 1998, the terms of this note were
renegotiated with the lender allowing the Company to borrow additional
funds and defer principal payments.

7. Investment in EcoElectrica Project and Associated Development Loan Payable

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

8. Investment in Chateaugay Project and Associated Debt

The Company indirectly owns a 50% interest in a partnership which owns a
17.0 megawatt wood-fired electric power plant it constructed in Chateaugay,
New York in September, 1993 (the "Chateaugay Project"). Debt associated
with the Chateaugay Project 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 make
debt payments, the Company reduces its prorata 50% share of the debt
accordingly.

9. Other Notes Payable

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

March 31, December 31,
1998 1997
--------- ------------
(in thousands)
Borrowings under a $1,200,000 loan agreement,
due in 1999 bearing interest at prime plus 3%
(11.25% at March 31, 1998 and December 31, 1997). $ 1,174 $ 1,144

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

Other obligations bearing interest at 8.2% to
9.9% due through 1999, collateralized by equipment. 31 39
--------- ------------
$ 1,211 $ 1,189
========= ============

10. Senior Secured Notes Payable

In December 1992 the Company sold $100,000,000 of 12-3/4% Senior Secured
Notes due 2002. The notes were sold at a discount of $1,389,000. Such
discount is being amortized on the effective yield method through 2002.
Interest on these notes is due June 15 and December 15 of each year. The
Notes are redeemable, at the option of the Company, beginning December 15,
1997 at 106% of par, beginning December 15, 1998 at 103% of par, and
beginning December 15, 1999 at par.

Under the terms of the note indenture, the Company is restricted from
paying cash dividends on its common stock and must comply with certain
covenants, the most restrictive of which place limitations on payment of
such dividends, repurchasing common stock, incurring additional
indebtedness, pledging of assets and advances or loans to affiliates. The
indenture provides for an event of default (including the acceleration of
the repayment of the Notes) should other debt of the Company be accelerated
because 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, and is
in default. At March 31, 1998 and December 31, 1997 the debt was classified
as a current liability.

11. Contingencies

Preferred Stock Litigation: On May 6, 1998, Quadrangle Offshore (Cayman)
LLC, and Cerberus Partners, L.P. ("Plaintiffs"), filed a Motion for a
Temporary Restraining Order (the "Motion") and Verified Complaint for
Declaratory Judgment and Injunctive Relief (the "Complaint"), in the Court
of Chancery of the State of Delaware In and For New Castle County (Civil
Action No. 16362-NC). Plaintiffs allege in the Motion and the Complaint
that they are beneficial owners of Preferred Redeemable Increased Dividend
Equity Securities, 8-1/4% PRIDES, Convertible Preferred Stock, par value
$0.01 per share (the "Preferred Stock") of the Company.

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

Plaintiffs were seeking a temporary restraining order, pending the filing
of a motion for a preliminary injunction, enjoining the Company from, among
other things, mandatorily converting the Preferred Stock into Common Stock
on the Mandatory Conversion Date and from taking any action to interfere
with or otherwise impair Plaintiffs' alleged rights to receive the sum of
$1,012.50 per share (the "Liquidation Preference"), plus an amount equal to
any accrued and unpaid dividends thereon, out of the assets of the Company
available for distribution to stockholders, before any distribution of
assets is made to holders of Common Stock, in the event of any voluntary or
involuntary liquidation, dissolution, or winding up of the Company as set
forth in the Restated Certificate.

For the reasons set forth in the Motion and the Complaint, Plaintiffs
allege, among other things, that the Company is currently in liquidation,
that Plaintiffs' rights to the Liquidation Preference are now fixed and
attached, and may not be eliminated, altered or otherwise adversely
affected and that if the conversion occurred, the Plaintiffs would be
deprived of their fixed rights to the Liquidation Preference because any
available funds that would otherwise have been distributed to the holders
of the Preferred Stock would be distributed to the owners of Common Stock
instead.

On May 11, 1998, the court denied the Plaintiffs' Motion for a Temporary
Restraining Order. The Company answered the Complaint on May 14, 1998 and
intends to contest the action vigorously.

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. The case was recently reassigned to the
Honorable Jeremy Fogel. The parties are waiting for the new judge to reset
the date for hearing of defendents' motion for summary judgment as well as
the dates for trial in this action.

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
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. Plaintiffs then appealed to the
Supreme Court of the State of Connecticut. The appellate court held in a
decision released March 17, 1998, that the trial court properly granted
defendant's motion to strike and correctly granted summary judgment on
other counts because such counts were barred by the statue of limitations
and affirmed the trail court's judgment.

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.

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

OVERVIEW

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

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

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

Through CNF, the Company constructed independent power projects since 1988.
This subsidiary competed for contracts for engineering, procurement and
construction (EPC) and for construction only. Historically, the Company had
constructed all of the thermal energy power projects it developed and many
of the Windplants it developed. Substantially all construction work
performed by the Company for third parties was competitively bid and most
was performed under turnkey contracts. The chapter 11 filing of KWI
discussed above has materially adversely affected CNF and its ability to
procure contracts. CNF had joint venture interests in the EPC contracts for
the EcoElectrica Project described below which were sold in December 1997.
CNF is completing the projects in progress and the Company intends to
dispose of CNF in 1998.

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

The EcoElectrica Project

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

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

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

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

In February 1998, the Company and KES retained Fieldstone Private Capital
Group ("Fieldstone") as their financial advisor with respect to the
proposed sale by the Company of the EcoElectrica Interest. In April 1998,
Fieldstone commenced a confidential solicitation of proposals from a
limited number of qualified potential purchasers of the EcoElectrica
Interest. As of May 15, 1998, Fieldstone had received preliminary
indications of interest in acquiring the EcoElectrica Interest from ten
qualified potential purchasers. Fieldstone, the Company and KES are
currently evaluating such indications of interest and expect to continue
discussions and diligence with most of such potential purchasers through
mid-June 1998, when the final negotiations with a final list of bidders is
expected to occur. Although the Company currently plans to sell the
EcoElectrica Project in 1998, there can be no assurance that current
efforts will ultimately result in a disposition of the EcoElectrica
Interest on terms acceptable to the Company or as of any specified date.

The Hartford Hospital Project

Through KES, the Company owns an indirect 100% equity in CCF-1, Inc., a
Connecticut corporation ("CCF-1"). CCF-1 was formed to pursue the
development, construction, operation and ownership of a gas-fired
cogeneration facility of 16.6MW located in Hartford, Connecticut (the
"Hartford Hospital Project"). The Hartford Hospital Project commenced
commercial operations in December 1988 and produced electricity for sale to
The Connecticut Light & Power Company ("CL&P") under a 20-year Electricity
Purchase Agreement (the "EPA") expiring in 2006 and steam and electricity
for sale to Hartford Hospital pursuant to a Project Development Agreement
(the "PDA") expiring in 2006.

In 1996, operation of the Hartford Hospital Project, and therefore the
production of electricity, was significantly reduced due to operating
failures of the existing gas turbines. In January 1998, CIGNA, the lender
for the Hartford Hospital, agreed to advance sufficient additional
financing to CCF-1 under its first mortgage lien to permit CCF-1 to repower
the Hartford Hospital with a new turbine and to procure a back-up boiler to
meet its commitments to CL&P and Hartford Hospital. On May 4, 1998, CCF-1
and CL&P completed a Termination Agreement proving for the termination of
the EPA with CCF-1 entitled to receive a fixed monthly stream of payments
until December 31, 2006. These payments would be used in part to satisfy
CCF-1's obligations to CIGNA. CCF-1 remains obligated to provide steam and
electricity to Hartford Hospital under the PDA.

On May 15, 1998, CCF-1 executed a letter agreement (the "Letter Agreement")
for the sale of substantially all the assets, including its rights under
the Termination Agreement, comprising the Hartford Hospital Project to The
Energy Network, Inc. ("TEN"). The Letter Agreement is subject to completion
of definitive documentation and the approval of the parties' respective
Boards of Directors and provides for the assumption by TEN of CCF-1's
obligations to Hartford Hospital, the payment by TEN of the outstanding
CIGNA debt (currently approximately $8.9 million), and the payment of $6.25
million of cash to CCF-1 and affiliates on or before June 30, 1998. While
the transaction has been approved by the Board of Directors of CCF-1 and
the Company expects to conclude the transaction in accordance with its
terms, there is no assurance that the transaction will be completed as
contemplated. If consummated, the net proceeds from this transaction should
approximate the net assets.

The Chateaugay Project

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

CAUTIONARY STATEMENT

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

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

The consolidated financial statements of KENETECH Corporation and certain
subsidiaries as of and for the quarterly periods ending March 31, 1998 and
March 29, 1997 have been prepared assuming the Company will continue as a
going concern.

The Company incurred a net loss for the first quarter of 1998 of $4.8
million as compared to a net loss for the first quarter of 1997 of $9.9
million. This loss reflects the elimination of activities associated with
divested assets and subsidiaries 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 in excess of gross margin.

Quarters ended March 31, 1998 and March 29, 1997

Quarter Ended
March 31, 1998 March 29, 1997
------------------------ ------------------------
(in millions)
Gross Gross
Revenues Costs Margins Revenues Costs Margins
-------- ----- ------- -------- ----- -------
............................
Construction services ..............$ 2.9 $ 2.2 $ 0.7 $ 10.2 $10.0 $ 0.2

Energy sales <F1> ................ 0.2 1.2 (1.0) 1.3 1.7 (0.4)

Maintenance, management
fees and other <F1>.............. 0.4 -- 0.4 0.5 -- 0.5
-------- ----- ------- -------- ----- -------
Total ...............................$ 3.5 $ 3.4 $ 0.1 $ 12.0 $11.7 $ 0.3
======== ===== ======= ======== ===== =======

</FN>

Construction services revenues (recorded under the percentage-of-completion
method) decreased to $2.9 million for the quarter ended March 31, 1998 from
$10.2 million for the comparable period in 1997. The gross margin during
the first quarter of 1998 results from change orders that were finalized
during that period. Management expects nominal construction activity during
the balance of 1998. The Company's construction subsidiary is completing it
projects in process and is in the process of disposing of its remaining
assets and liabilities.

Energy plant operations experienced an excess of expenses over revenues of
$1.0 million for the first quarter of 1998 compared to a $0.4 million in
the first quarter of 1997 because in June and July of 1997 the Hartford
Hospital Project experienced, through force majeure events, catastrophic
failures of both its turbines. The cost of repairing the individual units
was prohibitive and there were no lease engines available for short term
installation. The Company assembled one turbine, which operates
sporadically, from the serviceable parts of the two failed turbines. In
1998 additional funding 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.
As noted above 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 closed in the first week of April 1998 when the
appeal period for public utility commission approval of this arrangement
expired.

Project development and marketing expenses increased to $0.4 million for
the quarter ended March 31, 1998 from $21 thousand for the comparable
period in 1997. Project development expenses increased due to the Company's
marketing of its EcoElectrica Project.

General and administrative expenses decreased to $0.8 million for the
quarter ended March 31, 1998 from $5.7 million for the comparable period in
1997 due to downsizing of the Company's operations.

Interest expense decreased to $3.6 million for the quarter ended March 31,
1998 from $4.7 million for the comparable period in 1997 due to increased
capitalization, lower outstanding debt balances, and a lower interest rate
on the EcoElectrica Project Development loan.

Income taxes. The Company uses the asset and liability approach for
financial accounting and reporting for income taxes was recorded for the
periods ended March 31, 1998 and March 29, 1997. Although a loss was
incurred, no tax benefit was recorded because of the uncertainty about the
Company's ability to utilize such a benefit.

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

Operating activities

During the first quarter of 1998 operations activities used cash of $2.2
million. As previously stated, the Company expects a loss from operations
in 1998 before the sale of the assets described above in "Overview" due to
administrative expenses and interest on debt in excess of gross margin.

Investing activities

During the first quarter of 1998 the Company sold the building and land
owned by its construction subsidiary for $2.8 million in cash and
recognized a small loss on the transaction.

Financing activities

During the first quarter of 1998 the Company borrowed an additional $0.8
million from the lender to the Hartford Hospital facility as discussed
under energy plant operations above.

Status
------

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

Certain lenders and other creditors are seeking repayment and/or
restructuring of the amounts due them. The Company is unable to borrow
money and is delaying all payments except for essential services while it
attempts to raise cash through additional asset sales.

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

The consolidated financial statements as of and for the quarter ended March
31, 1998 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 operating
losses before the sale of assets due to administrative expenses in excess
of gross margin and interest expense on debt. These factors raise
substantial doubt about the Company's ability to continue as a going
concern in its current form.

In furtherance of that plan, the Company is actively marketing its
interests in the EcoElectrica Project and has received several indications
of interest from qualified potential purchasers. Management has also signed
a letter agreement for the sale of the Hartford Hospital Project. In
addition, the Company has recently entered into a Settlement Agreement and
Release with, among others, KWI, pursuant to which, upon approval of the
KWI Bankruptcy Court and in exchange for a cash payment, KWI will release
the Company from certain claims in bankruptcy and continue to be a member
of the Company's consolidated group for income tax purposes.

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

Part II OTHER INFORMATION

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

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

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

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

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

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

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

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

Item 6. Reports on Form 8-k

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

SIGNATURES

Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned therewith duly authorized.

KENETECH Corporation

By:
Date: May 20, 1998 Mark D. Lerdal
President, Chief Executive Officer,
and Director

By:
Date: May 20, 1998 Mervin E. Werth
Corporate Controller, Chief Accounting
Officer, and Assistant Treasurer

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned therewith duly
authorized.

KENETECH Corporation

By: /s/ Mark D. Lerdal
Date: May 20, 1998 Mark D. Lerdal
President, Chief Executive Officer,
and Director

By: /s/ Mervin E. Werth
Date: May 20, 1998 Mervin E. Werth
Corporate Controller, Chief Accounting
Officer, and Assistant Treasurer