Magma Power Company
Magma Power Company
Incorporated: 1981 as Magma Development Corporation
Sales: $167.1 million
Stock Exchanges: NASDAQ
SICs: 4961 Steam & Air-Conditioning Supply
One of California’s largest geothermal power companies, Magma Power Company explores for, develops, and sells or leases geothermal resources used to generate electric power. A pioneer in its field, Magma is largely responsible for creating the U.S. geothermal industry, first drilling for naturally produced steam in the mid-1950s. In addition to developing geothermal resources, the company also constructs and operates geothermal electric power plants using its proprietary process and production technologies, the success of which have enabled Magma to begin pursuing geothermal projects around the world.
Throughout much of the 20th century, the utilization of geothermal energy in the United States was virtually nonexistent, except for several isolated instances that were more curiosities than serious efforts to harness the steam created below the earth’s surface. Elsewhere in the world, the beds of steam heated by molten rock, or magma, attracted more serious attention, beginning in 1904 with the construction of the world’s first plant to generate electricity from geothermal steam in Larderello, Italy. Other countries began to explore the possibilities of tapping into these natural boilers as well, but in the United States, where energy needs were sufficiently met with low-cost coal and natural gas, geothermal steam was largely ignored as a commercially viable source of energy.
This indifference reigned until the 1960s, when rising coal and natural gas prices persuaded oil and utility companies, the likely investors in geothermal exploration, to examine alternative energy sources. What followed was a period of intense interest in geothermal steam; utility and oil companies hurried to find suitable locations for drilling, almost all of which were located in the western United States, where underground reservoirs of water were positioned closer to the Earth’s surface. At that time, the nascent U.S. geothermal industry was attempting to effect the difficult transformation from a fragmented group of speculators, haphazardly selecting drilling sites and hoping for success and riches to follow, to an enterprise based on science and technology, an endeavor shed of its speculative risk and predicated on reliable and predictable methods. The oil industry had undergone the same evolution more than a half century earlier.
The sudden acceptance in the United States of geothermal energy as a feasible alternative to coal and gas in the late 1960s could be traced primarily to one individual, Barkman C. McCabe, a former stock broker from Los Angeles and the man many referred to as “the father of the geothermal industry.” McCabe, by this time, had been drilling for geothermal steam through several joint ventures for more than decade and had already acquired most of the prime geothermal areas in the West, much to the dismay of those now willing to explore this alternative energy source. McCabe was drawn initially to a region in Sonoma County, California, 90 miles north of San Francisco, known as the Geysers. It was an inaccurate name for a region that contained no geysers, or water spouts, but did contain fumaroles, holes in the ground from which steam emanated; these fumaroles were sources of wonder for guests at a nearby resort during the 1920s and the objects of fear for a bear hunter who inadvertently came upon the area in 1847. Though it was known natural steam was below and that the steam could be used to generate electricity—the owners of the nearby resort had constructed a small generating plant, powered by two reciprocating steam engines, to supply their own electricity during the 1920s—the fumaroles were not used as useful indicators of geothermal steam located below until McCabe drilled his first well in 1955.
That year, McCabe and his lifelong friend and partner in a lumber business, Dan McMillan, purchased leases on 5,500 acres in the Geysers region and began drilling test wells. To finance their leasing and drilling operations, McCabe and McMillan each decided to form a drilling company and then sell stock, which served as the premise for McCabe’s company, Magma Power Company, founded in 1955, and McMillan’s company, Thermal Power Company, started a year later. After three years and six productive test wells, the two businessmen, in 1958, convinced Pacific Gas & Electric, the region’s giant utility company, to purchase their steam and establish a pilot generating plant. This joint venture between Magma Power and Thermal Power became the first successful geothermal project in the United States. By 1960, the merits of generating electricity from geothermal steam had been sufficient to convince Pacific Gas & Electric to construct a turbine-powered geothermal plant, which began operation that year, specifically for the steam produced from McCabe’s and McMillan’s wells.
Encouraged by his initial success, McCabe formed a subsidiary company in 1961 to search for possible geothermal well sites beyond the Geysers region. Named Magma Energy Company, the subsidiary focused its efforts primarily in a southern California region known as Imperial Valley. Profits, however, were slow to develop, particularly in contrast to Magma’s rapid expansion. Although the actual operation of the wells required little labor and incurred little cost, the construction costs were considerable, stifling Magma’s ability to record any appreciable profit, an ability that was further reduced by the creation of Magma Energy and the expansion into Imperial Valley. Also, except for the association with Pacific Gas & Electric, business relationships with corporations boasting large reservoirs of cash were difficult to establish; geothermal energy continued to be a speculative risk, attracting few established investors.
This skepticism would change as the decade progressed and coal and natural gas prices rose, giving way to a dramatic increase in the interest directed toward geothermal energy. By the late 1960s, oil companies and other geothermal companies were scouting for suitable drilling sites, attempting to grab a share of what promised to be a lucrative market. One such newcomer, Union Oil Company of California, found a practiced partner to facilitate its entry into the geothermal market: Magma Power. For McCabe’s company, the 1967 agreement with Union Oil, which gave the large oil concern a 50 percent stake in the portion of the Geysers region controlled by Magma and Thermal, infused the struggling geothermal company with much-needed working capital, albeit at a costly price. Magma, however, had essentially little choice. Now, as other interested parties searched for fumaroles and other signs of geothermal steam percolating underground, none looked as promising as those found in the region controlled by Magma, Thermal, and Union Oil.
The deal with Union Oil was costly for Magma partly because the agreement between the two ceded a share in the three wells now in operation in Imperial Valley, but primarily because the geothermal fields in Northern California were extremely valuable, the only successful fields in the United States despite the rash of geothermal projects sprouting up across the western states during the latter part of the decade. During the energy crisis in the early and mid-1970s, these fields would hold Magma in good stead and would continue to support the only geothermal project in the country to generate electricity. The energy crisis pushed the price of conventional fuels upward, increasing interest in geothermal energy, for which Magma’s wells at the Geysers stood as a shining example. By the end of the decade, the geothermal leases held by Magma had become objects of considerable attention for companies wishing to claim a stake in the geothermal market. Aside from the 50 percent interest in the Geysers fields held by Union Oil, the oil concern also owned 9.2 percent of Magma itself, roughly the same percentage of Magma’s stock that Dow Chemical Co. possessed. In addition to these investors, Natomas Co., a natural resource, energy, and transportation company based in San Francisco, owned a 25 percent interest in the Geysers fields, the same percentage held by Magma. Natomas augmented its investment in Magma, to the chagrin of McCabe and other members of Magma’s management, by increasing its stake in the geothermal company to 7.5 percent in 1980.
With its purchase of additional Magma stock, Natomas announced that a greater investment in the company was imminent, that it was seeking to attain, as a company spokesperson related to the Wall Street Journal,” a significant minority investment” in Magma. For McCabe, his company’s relationship with Union Oil was an association of necessity, essential to Magma’s financial ability to continue drilling for geothermal steam, and the increasing interest owned by Dow Chemical was received with open arms. However, he could not abide Natomas’ bid to control a larger portion of Magma and flatly said as much, terming a possible merger between Natomas and Magma as ’ ’ most undesirable.” For its part, Natomas was not to be dissuaded from its objective and in March 1981 went well beyond its stated intent of attaining “a significant minority investment” by offering $390 million, or $42 a share to purchase Magma. McCabe responded by declaring, in the Wall Street Journal, that Natomas’ offer was “totally inadequate” and that Magma’s assets were worth at least $80 a share, or perhaps as much as $200 a share. The following month Natomas sued Magma, charging that McCabe had purposefully mislead Magma shareholders about the company’s worth to prejudice their decision regarding Natomas’ offer. Amid these charges of fraud, stock manipulation, and various other securities violations, McCabe announced he was actively engaged in seeking a more favorable offer, but his efforts were in vain, for one year later, in April 1982, Natomas completed its purchase of Magma for $45 a share.
Six months before the purchase was completed, in late 1981, when it became evident that the acquisition was indeed going to occur, another company was formed and incorporated as Magma Development Corp. Its purpose was to acquire all of the assets, excluding the geothermal assets connected with the Geysers, formerly owned by Magma Power. These properties, essentially all of Magma’s geothermal assets in Southern California, were acquired in June 1982, two months after Magma Development had changed its name to Magma Power Company. In the end, Magma Power, with assets principally located in Northern California, had been absorbed into Natomas, and a new Magma Power had emerged, with geothermal assets principally located in Southern California’s Imperial Valley, the region controlled by Magma Energy, the subsidiary formed in 1961.
Bereft of the valuable Geysers assets, the new Magma Power was smaller than the former Magma Power, recording slightly more than $3 million in revenues in 1984. Geothermal exploration and development continued to be a costly endeavor, and Magma, with a modest sales volume, needed greater financial resources to expand its operations in the Imperial Valley. Dow Chemical provided the solution, acquiring additional percentages of Magma stock during the mid-1980s, first in 1984, when its increased its stake in Magma to 20 percent, then in 1986, when it became a 25.5 percent owner of the company. Magma used the proceeds to finance work on a geothermal plant at East Mesa in the Imperial Valley and quickly watched its annual sales grow. In 1988, when Magma generated $26 million in revenues, it merged Magma Energy into the company and sold another subsidiary, Magma Electric Company, to an affiliate of Geothermal Resources International.
Magma’s sales volume recorded encouraging jumps through the late 1980s, reaching $85.5 million by the beginning of the 1990s. Perhaps more important, the company’s profit total enjoyed commensurate gains, the result of Magma’s unrivaled experience in the geothermal development field and its efficient proprietary process and production technologies. In 1992, Magma announced its intent to purchase three geothermal power plants, located in the Imperial Valley, Nevada, and Northern California, from Unocal Corp. for $225 million. The deal was completed the following year, in 1993, when annual sales reached $167.1 million, more than double the total recorded three years earlier. The three plants, which generated $70 million in annual sales before the acquisition, bolstered Magma’s position in the Southern California market, where it provided geothermal steam to Southern California Edison, one of the region’s utility companies. The acquisition was timely as well, putting Magma in an enviable position for gaining additional business later that year, when Southern California Edison and San Diego Gas & Electric were obliged under state regulations to seek bids for renewable energy supplies.
As Magma entered the mid-1990s, its future appeared bright. Remarkable gains in the company’s sales volume—from $3 million to $167 million in less than a decade—were underpinned by equally robust increases in the company’s earnings. In 1993, Magma earned 46 cents for every $1 generated in revenue, a ratio that ranked it as one of the leading performers in California industry and established it as a company for investors and competitors alike to monitor in the future.
Imperial Magma; Vulcan Power Company; Desert Valley Company; Fish Lake Power Company; Saltón Sea Power Company; Peak Power Corporation; Magma Netherlands B.V.; Vulcan/BN Geothermal Power Co. (50%).
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—Jeffrey L. Covell