Business Context and Reporting Period
This Form 8-K was filed by MGE Energy, Inc. and Madison Gas and Electric Company on December 23, 2008. The report addresses a formal claim for schedule and cost relief received by the project manager, Elm Road Services, LLC (ERS), from Bechtel Power Corporation regarding the construction of the two 615 megawatt coal-fired Elm Road Units in Oak Creek, Wisconsin. MGE Energy holds an 8.33% interest in each unit.
Key Financial Metrics and Claims
The filing details two specific claims made by Bechtel. The filing does not provide general revenue, profit, or cash flow metrics for the reporting period, as this is a current report on a specific event.
- Claim 1 (Weather and Labor): Bechtel seeks approximately $413 million in total compensation. MGE Energy's share would be approximately $34.4 million if the claim is successful in full. This includes $45 million in projected future costs.
- Claim 2 (Pre-FNTP Delays and Changes): Bechtel seeks approximately $72 million in total compensation. MGE Energy's share would be approximately $6 million if the claim is successful in full.
- Total Potential Exposure: Approximately $40.4 million for MGE Energy's share of the combined claims.
Material Changes and Project Status
Bechtel has requested schedule relief that would result in six months of relief from liquidated damages for Unit 1 and three months for Unit 2 beyond the guaranteed contract dates. Bechtel currently targets an in-service date for Unit 1 three months beyond the guaranteed date of September 29, 2009, and for Unit 2 one month earlier than the guaranteed date of September 29, 2010. The filing notes that additional costs attributable to force majeure events are subject to Public Service Commission of Wisconsin (PSCW) review and do not count against the construction cost cap passed through to customers.
Outlook, Risks, and Management Commentary
ERS believes both claims are without merit, asserting that the owners retain price adjustment risk only for specific circumstances such as force majeure, wage escalation over 4%, ERS-caused delays, scope changes, and unforeseen sub-surface conditions. ERS expects the claims to be resolved through the formal dispute resolution process outlined in the contract, involving informal resolution, mediation, and binding arbitration. Management states it is unable to predict the ultimate outcome of the claims or their effect on costs recoverable under existing facility leases if total construction costs exceed the PSCW authorized amounts.
Investor Verification Checklist
- Verify the status of the dispute resolution process between ERS and Bechtel.
- Confirm the PSCW's stance on the recoverability of costs exceeding the construction cap if the claims are upheld.
- Monitor updates on the in-service dates for Elm Road Units 1 and 2 and potential liquidated damages.
- Review the 10-K and 10-Q filings referenced in the forward-looking statements for broader risk factors.