7
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20559
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended March 31, 1994 Commission file number: 0-
10533
MAGMA POWER COMPANY
(Exact name of registrant as specified in its charter)
NEVADA 95-3694478
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization)
Identification No.)
4365 Executive Drive, Suite 900, San Diego, CA.
92121
(Address of principal executive offices) (Zip
Code)
Registrant's telephone number, including area code: (619)622-7800
Not applicable
(Former name, former address and former fiscal year if changed since last
report.)
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 .
24,008,155 shares of Magma Power Company common stock, par value $.10 per
share, were outstanding at March 31, 1994.
The total number of pages in this report is 15.
(This Page Intentionally Blank)
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The consolidated balance sheets of Magma Power Company and its
subsidiaries as of March 31, 1994 and December 31, 1993, the
consolidated statements of operations for the three months ended
March 31, 1994 and 1993, and cash flows for the three months ended
March 31, 1994 and 1993, and the notes thereto, appear on page 4
through 8 of this report.
The unaudited interim financial statements reflect all adjustments
(consisting of normal recurring accruals) which, in the opinion of
management, are considered necessary for a fair presentation of the
results of the periods covered.
MAGMA POWER COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
March 31, December 31,
1994 1993
(Unaudited)
ASSETS
Current Assets
Cash $ 4,959 $ 18,017
Marketable securities 31,971 32,086
Partnership cash and marketable securities 38,229 22,919
Accounts receivable:
Trade 12,368 18,199
Other 18,845 14,073
Prepaid expenses and other assets 11,978 11,922
Total Current Assets118,350 117,216
Land 6,265 6,225
Property plant and equipment, net of accumulated depreciation
of $57,100 and $53,166, respectively 262,799 265,215
Exploration and development costs, net of accumulated
amortization of $15,171 and $13,682, respectively 103,529
107,069
Acquisition and new project costs 17,324 13,721
Other investments 46,934 47,642
Power purchase contracts, net of accumulated amortization
of $1,236 and $946, respectively 21,895 22,185
Other assets and deferred charges 26,581 22,762
Goodwill, net of accumulated amortization of $2,228 and $2,122, respectively
9,193 9,276
$612,870 $611,311
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Trade accounts payable $ 9,159 $ 7,235
Accrued and other liabilities 10,036 3,463
Current portion of loans payable 39,832 36,799
Total Current Liabilities59,027 47,497
Loans payable 170,654 189,209
Deferred income taxes 10,712 11,387
Other long-term liabilities 11,596 11,300
Total Non-Current Liabilities192,962 211,896
Shareholders' Equity
Preferred stock, $.10 par value, 1,000,000 shares authorized, none issued
and outstanding
Common stock, $.10 par value, 30,000,000 shares authorized,
issued and outstanding 24,008,155 and 23,989,763 shares, respectively
2,400 2,399
Additional paid-in capital 145,179 144,996
Unrealized gains from marketable securities 7 583
Retained earnings 213,295 203,940
Total Shareholders' Equity360,881 351,918
$612,870 $611,311
The accompanying notes are an integral part of these statements.
MAGMA POWER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share amounts)
(Unaudited)
For the Three Months
Ended March 31,
1994 1993
REVENUES
Sales of electricity $33,592 $15,313
Royalties 4,873 4,327
Interest and other income 1,085 1,996
Management services 869 822
40,419 22,458
COSTS AND EXPENSES
Plant operating costs 14,991 7,919
Depreciation and amortization 5,910 3,058
Other non-plant costs 151 170
General and administrative 2,874 2,039
Interest incurred 2,836 1,446
26,762 14,632
Income from operations
Transmission credits realized 734 369
Gain from the disposition of investments -- (684)
Other, net 573 28
Changes in components of working capital:
Accounts receivable 1,059 895
Partnership cash and marketable securities(15,310) 3,770
Prepaid expenses and other assets (2,603) (41)
Accounts payable and accrued liabilities4,608 1,882
Accrued interest payable (838) (620)
Income taxes payable 4,727 3,273
Deferred taxes from operations (425) (924)
Total adjustments (1,565) 11,006
Net cash provided by operating activities7,790 16,483
Cash Flows From Investing Activities
Proceeds from the sale of investments 68,286 157,453
Purchase of investments (68,146) (89,816)
Capital expenditures (2,154) (1,801)
Power plant acquisition costs -- (215,038)
New project development costs (1,216) (3,580)
Other, net 285 450
Net cash used in investing activities(2,945) (152,332)
Cash Flows From Financing Activities
Repayment of loans payable (144,845) (4,502)
Borrowing from banks 130,000 140,000
Loan fees (3,225) --
Proceeds from the issuance of common stock 184 2,519
Other, net (17) 80
Net cash provided (used) by financing activities (17,903)
138,097
Net increase (decrease) in cash (13,058) 2,248
Cash at beginning of period 18,017 2,106
Cash at end of period $ 4,959 $ 4,354
The accompanying notes are an integral part of these statements.
MAGMA POWER COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands)
(Unaudited)
Note 1. Summary of Significant Accounting Policies:
Basis of Consolidation - The consolidated financial statements
present the assets, liabilities, revenues, costs and expenses of
Magma Power Company (the "Company") and its 100%-owned subsidiaries
and its proportionate share of partnerships in which it has
invested.
All significant intercompany transactions and accounts have been
eliminated.
Note 2. Loans Payable:
Loans payable consisted of the following:
March 31, December 31,
1994 1993
Pro-rata share of partnership
non-recourse debt $ 68,982 $ 75,149
Bridge loan -- 140,000
Salton Sea debt 130,000 --
Other loans 11,504 10,859
210,486 226,008
Less amounts due within one year 39,832 36,799
Loans payable due after one year $170,654 $189,209
Loans payable at March 31, 1994 and December 31, 1993 included the
Company's pro-rata share of the debt of the Del Ranch, L.P.,
Elmore, L.P., and Leathers, L.P. partnerships. The partnership
loans are non-recourse to Magma Power Company and subsidiaries,
however, it is collateralized by substantially all of the assets of
these partnerships.
On March 19, 1993, Magma entered into a $140 million unsecured one-
year term loan ("Bridge Loan") with a group of commercial banks.
Proceeds from the loan were used to finance the acquisition of the
Salton Sea Plants from Unocal. On February 28, 1994, the Company
replaced the Bridge Loan with a $130,000,000 non-recourse project
level loan which is collarteralized by substantially all of the
assets and power purchase contracts of the newly acquired Salton
Sea Plants. A secured credit agreement with a group of
international banks, with Credit Suisse as the agent bank, provides
for direct loans at LIBOR plus 1.25%. Restrictions in the secured
credit agreement place limits on distribution of cash from the
Salton Sea Plants to the Company.
Note 3 . Deferred Income Taxes:
Deferred income taxes as of March 31, 1994 and December 31, 1993
represent estimated income taxes payable in the future years as
determined in accordance with SFAS 109 "Accounting for Income
Taxes."
Note 4. Net Income per Common Share:
The calculation of primary earnings per common share is based on
the weighted average number of outstanding common shares. In
computing primary earnings per common share, adjustment has been
made for common shares issuable for shares under option.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
Operations and development activities have been financed with working
capital, the sale of Company Common Stock for cash and services, and loans
from commercial banks.
The Company has geothermal projects in the development stage, both domestic
and international, which it intends to finance with a combination of Company
supplied equity and non-recourse project debt. These development stage
projects will require significant equity contributions from the Company
during the next five years. The Company believes that its cash reserves,
augmented by cash flow from its current operations, and unsecured corporate
loans will be sufficient to fund these equity contributions.
The Company financed the Unocal acquisition with its own cash and with the
proceeds from the $140,000,000 Bridge Loan. On February 28, 1994 the Bridge
Loan was repaid, utilizing both Company cash and the proceeds from a non-
recourse project level six-year term loan of $130,000,000 (the "$130,000,000
Term Loan") collateralized by substantially all of the assets and power
purchase contracts of the three Salton Sea Plants acquired from Unocal. In
addition, a $5,000,000 working capital line of credit has been provided to
the subsidiaries owning the plants by two of the banks participating in the
$130,000,000 Term Loan.
Cash and marketable securities at March 31, 1994 totaled $75,159,000 of which
$36,930,000 was available for general corporate uses. The remainder of
$38,229,000 is Magma's share of the cash and marketable securities of
Vulcan/BNG, Del Ranch, Elmore and Leathers partnerships (the "Magma
Partnerships") which own the Vulcan, Hoch, Elmore and Leathers geothermal
power plants (the "Partnership Plants"), respectively, and the cash and
marketable securities of the "Salton Sea Partnerships" which own the Salton
Sea plants acquired from Unocal (the "Salton Sea Plants"). Certain portions
of these funds are earmarked for the working capital needs of the plants. In
addition, the Secured Credit Agreements for three of the Magma Partnerships
and the $130,000,000 Term Loan for the Salton Sea Partnerships place
restrictions on distributions of cash to the Company.
In addition, at March 31, 1994, the Company had non-current investments
totaling $46,934,000 consisting of $31,468,000 in marketable securities with
maturities greater than one year and $15,466,000 of other investments, which
are not liquid.
At March 31, 1994, long-term obligations (including amounts currently due)
were $210,486,000, a $15,522,000 decrease over year end 1993. The decrease
reflects a $10,000,000 reduction resulting from the replacement of the
$140,000,000 Bridge Loan with the $130,000,000 Term Loan as of February 28,
1994, a reduction of $4,862,000 in the Company's pro-rata share of
partnership debt and a reduction in other long-term obligations. Partnership
debt and the Salton Sea debt is non-recourse to Magma Power Company and its
subsidiaries. The ratio of debt to debt-plus-equity at March 31, 1994
(inclusive of non-recourse debt) was 38 percent compared to 40 percent at
December 31, 1993. The Company has an unused and available line of credit
with Morgan Guaranty Trust Company of $25,000,000 at March 31, 1994.
Six of the seven geothermal power plants operated by the Company sell
electricity to Southern California Edison ("SCE") under ISO4 long-term power
purchase contracts. Each ISO4 contract provides for both capacity payments
and energy payments. The capacity payments are fixed at a time period
weighted average price of approximately 2.5 cents
per kWh for the full 30-year
term. For the first 10 years of operation (the "Initial Term"), the energy
payments are fixed pursuant to the terms of the ISO4 contract. Thereafter,
the energy payments are SCE's then-current published avoided cost of energy.
In 1994 the time period weighted average price for energy for the six plants
combined is approximately 10.6
cents per kWh. For March 1994, SCE's avoided cost
of energy was 2.8 cents
per kWh. The time period weighted average energy payment
for the Partnership Plants is 10.9 cents
per kWh in 1994 and increases each year
thereafter during its initial term. The time period weighted average price
of energy for the remaining two ISO4 contracts are levelized at 9.8 cents
and
10.6 cents
per kWh for their respective initial terms. Estimates of SCE's future
avoided cost of energy vary substantially, but it is expected to remain
substantially below such contract energy prices. Thus, the revenues
generated by each of the Company's six plants operating under ISO4 contracts
are likely to decline significantly after their respective initial terms
expire. Such decline could have a material adverse effect on the Company's
results of operation. The initial terms expire in 1996 as to 34 megawatts of
nameplate generation, in 1999 for 126 megawatts of nameplate generation and
in 2000 for the remaining 58 megawatts of nameplate generation under ISO4
contracts.
The seventh plant sells electricity to SCE under a negotiated power purchase
contract (the "Negotiated Contract"). The energy payment under the
Negotiated Contract was 4.8 cents
per kWh in the first quarter of 1994. The
capacity payments was approximately 1.7 cents
per kWh in the first quarter of
1994. Both the energy and capacity payments escalate quarterly based on a
basket of indices for the 30-year term of the Negotiated Contract.
The Company's strategy is to mitigate this adverse impact through expansion
of its core business of producing electricity with geothermal resources, both
through development of new projects in the United States and abroad and
through strategic acquisitions. However, competition for power purchase
contracts is intense and any contracts the Company is able to secure in the
future, whether in the United States or abroad, are likely to be on terms and
conditions that are less favorable than those provided in the Company's
current ISO4 contracts.
Other than as described above, the Company is not aware of any trends or
demands, events or uncertainties that would result in or that are reasonably
likely to result in, a material change in the Company's liquidity or capital
resources.
Results of Operations
First Quarter 1994 Compared to First Quarter 1993.
Revenues
Total revenues for the first quarter of 1994 were up $17,961,000 or 80% to
$40,419,000 as compared to $22,458,000 for the same period last year. This
increase was made up primarily of an increase in the sales of electricity and
a decrease in interest and other income.
Sales of Electricity
Revenues from the sale of electricity increased $18,279,000 in the first
quarter of 1994 to $33,592,000. The Salton Sea Plants which were acquired
from Unocal on March 31, 1993, contributed $15,985,000 of the revenue gain.
The balance of the revenue gain of $2,294,000 was produced by the Partnership
Plants and was due to an increase in both the price paid for "energy" under
their ISO4 contracts and the number of kilowatts produced. The annual time
period weighted average price of "energy" under the Partnership Plants ISO4s
increased 7.9% in 1994 to 10.9 cents
per kWh. Megawatt production during the
first quarter for the Partnership Plants was 11% greater in 1994 as compared
to 1993.
The "capacity" payments received by the Partnership Plants were essentially
unchanged during the first quarter. Each of the Partnership Plants receives
a separate payment for "capacity", which is fixed for the full 30-year term
of its ISO4, as follows: Vulcan - $158 per kilowatt year, Hoch - $198 per
kilowatt year, Elmore - $198 per kilowatt year and Leathers - $187 per
kilowatt year.
The "contract" capacities specified in the ISO4s for the Vulcan, Hoch, Elmore
and Leathers plants, are 29,500, 34,000, 34,000, and 34,000 kilowatts,
respectively. The "nameplate" ratings specified in the ISO4 contracts are
34,000, 38,000, 38,000 and 38,000 kilowatts, respectively. During the first
quarter of 1994 and 1993, the "contract" and "nameplate" capacity factors of
the Magma Partnership Plants combined are shown in the table below:
First Quarter
Fiscal Year
1994 1993 1993
Total Kilowatt Hours produced
(kWh amounts in 000s)
319,926
288,200
1,305,700
Contract Capacity Factor(1)
112.6%
101.5%
113.3%
Nameplate Capacity Factor(1)
100.1%
90.2%
100.7%
(1) Does not exclude scheduled maintenance hours. Calculation is based on a
90 day (2,160 hour) first quarter in 1994 and 1993.
Two of the Salton Sea Plants have an ISO4 with SCE and the third has a
Negotiated Contract with SCE. For the 20 MW Salton Sea Plant 2 and the 49.8
MW Salton Sea Plant 3, the energy payments under their ISO4 contracts are
levelized at a time period-weighted average of 10.6 cents
and 9.8 cents per kWh,
respectively, for the first 10 years (the "Initial Period") of their power
purchase agreements. For the 10 MW Salton Sea Plant 1, the energy payment
under its Negotiated Contract was 4.8 cents
per kWh in the first quarter of 1994,
which amount adjusts quarterly based on a basket of indices for the 30-year
life of its power purchase agreement with SCE.
Each of the Salton Sea Plants also receives a capacity payment as follows:
Salton Sea Plant 1 - $123.69 per kilowatt year, Salton Sea Plant 2 - $187.00
per kilowatt year and Salton Sea Plant 3 - $175.00 per kilowatt year. The
"capacity" payments for Salton Sea Plants 2 and 3 are fixed for the full 30-
year term of their ISO4s, while the capacity payment for Salton Sea Plant 1
adjusts quarterly based on a basket of indices for the 30-year life of its
Negotiated Contract.
The "contract" capacities for the Salton Sea Plants 1, 2 and 3 are 10,000,
15,000 and 47,500 kilowatts, respectively. The "nameplate" ratings of these
plants are 10,000, 20,000 and 49,800 kilowatts, respectively. During the
first quarter of 1994, the "contract" and "nameplate" capacity factors of the
three Salton Sea Plants combined are as shown in the table below:
First Quarter
1994 Nine Months
1993
Total Kilowatt Hours produced
(kWh amounts in 000s)
155,944
495,800
Contract Capacity Factor (1)
99.6%
103.6%
Nameplate Capacity Factor (1)
90.5%
94.1%
(1) Does not exclude scheduled maintenance hours. Calculation is based on a
90-day (2,160 hours) first quarter in 1994 and a nine month period (6600
hours) ended December 31, 1993.
Interest and Other Income
Interest and other income decreased $911,000, a 46% decrease compared to
interest and other income for the same period of the prior year, primarily
due to lower investment earnings, reflecting the lower short-term interest
rate environment, and the substantial reduction in cash and marketable
securities due to the use of cash in connection with the acquisition of the
Salton Sea Plants from Unocal.
Costs and Expenses
In the first quarter of 1994, total costs and expenses increased $12,130,000,
an 83% increase, compared to costs and expenses for the same period in 1993.
This increase was composed primarily of a $7,072,000 increase in plant
operating costs, a $2,852,000 increase in depreciation, a $835,000 increase
in general and administrative expense, and a $1,390,000 increase in interest
expense.
The increase in plant operating costs and depreciation primarily reflects the
additional cost of operating the Salton Sea Plants acquired from Unocal.
The $835,000 increase in general and administrative costs reflects the
Company's continued devotion of more of its resources towards expansion of
business development activities by increasing staff and related costs, which
is directed toward development of international geothermal power projects,
and support services to facilitate the planned growth of the Company.
The $1,390,000 increase in interest expense reflects the cost of the
additional borrowings incurred to finance the acquisition of the Salton Sea
Plants. For the Partnership Plants interest expense declined as a result of
both a reduction in partnership weighted-average borrowings and the effect of
lower borrowing costs due to lower market interest rates.
Provision for Income Taxes
The Company's effective tax rate in the first quarter increased to 31.5% from
the 1993 rate of 30% primarily due to higher expected profitability in 1994,
as a result of the acquisition of the Salton Sea Plants. The tax effect of
permanent differences, which include depletion deductions, are diluted
relative to higher expected operating profits.
Net Income
Net income was 71% higher at $9,355,000 in the first quarter of 1994 as
compared to $5,477,000 in the corresponding period of the prior year. The
increase in net income reflects the addition of the earnings of the Salton
Sea Plants, as well as the higher ISO4 electricity revenues received by the
Partnership Plants.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Richard Antunez v. Magma Power Company, et al. On December 11, 1992, a law
suit was filed against Magma, Dow Engineering Company ("DEC"), Gulf States,
Inc. and Coastal Conveyor Systems, Inc. by Richard Antunez, a former employee
of Red Hill Geothermal, Inc. (now Magma Operating Company) who was injured
while working at the plant owned by Leathers, L.P. The primary contention of
plaintiff is that the conveyor belt equipment he was working on when injured
was designed and/or constructed in violation of OSHA requirements and/or
without regard to the safety of the individuals required to use the
equipment. Coastal Conveyor Systems, Inc. manufactured the conveyor belt
system. Gulf States, Inc. erected the conveyor belt system at the Leathers
Facility, and DEC designed the facility and supervised construction under
contract with Magma. The plaintiff alleges that Magma participated in the
design and construction of the facility. In a statement filed with the court
in mid-1993 the plaintiff claimed special damages of $750,000 and general
damages of $3.5 million. However, Mr. Antunez's attorneys have indicated an
intention to increase the total of such claimed damages to $10 million. At
the time of the incident, Magma was insured under a policy of general
liability insurance issued by Lloyd's Underwriters but Lloyd's has denied
coverage. The Company is contesting this denial. In the event Magma is found
to have any liability to Mr. Antunez, it is possible Magma Power Company will
be entitled to be indemnified by DEC or others. The Company believes that
the complaint against Magma is without merit but no assurances can be given
as to the resolution of this matter.
Ruffy Corporation v. Magma Power Company. On June 14, 1993, a purported
shareholder class action complaint was filed in the United States District
Court for the Southern District of California against the Company, its
directors, Dow and the B.C. McCabe Foundation alleging that the information
regarding proposed amendments to the Company's articles of incorporation
included in the proxy statement for use at the 1993 annual meeting of
stockholders was misleading. This complaint was dismissed in April 1994
without cost to the Company, other than payment of Magma's attorneys fees.
In addition, Magma is subject to other litigation in the normal course of its
business none of which is expected to have a material effect on the financial
condition of Magma.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(b) Reports on Form 8-K: There were no Form 8-K's filed during the
three months ended March 31, 1994.
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 thereunto duly authorized.
MAGMA POWER COMPANY
(Registrant)
Date: May, 12 1994 s/ Jon R. Peele
Jon R. Peele,
Executive Vice President,
Secretary and General Counsel
Date: May, 12 1994 s/ Wallace C. Dieckmann
Wallace C. Dieckmann
Vice President, Chief Financial Officer