Duke Energy 2011 Annual Report Download - page 165

PART II
DUKE ENERGY CORPORATION •DUKE ENERGY CAROLINAS, LLC •DUKE ENERGY OHIO, INC. •DUKE ENERGY INDIANA, INC.
Combined Notes to Consolidated Financial Statements – (Continued)
7. GUARANTEES AND INDEMNIFICATIONS
Duke Energy and its subsidiaries have various financial and
performance guarantees and indemnifications which are issued in the
normal course of business. As discussed below, these contracts
include performance guarantees, stand-by letters of credit, debt
guarantees, surety bonds and indemnifications. Duke Energy and its
subsidiaries enter into these arrangements to facilitate commercial
transactions with third parties by enhancing the value of the
transaction to the third party.
On January 2, 2007, Duke Energy completed the spin-off of its
natural gas businesses to shareholders. Guarantees that were issued
by Duke Energy or its affiliates, or were assigned to Duke Energy prior
to the spin-off remained with Duke Energy subsequent to the spin-off.
Guarantees issued by Spectra Energy Capital, LLC (Spectra Capital)
or its affiliates prior to the spin-off remained with Spectra Capital
subsequent to the spin-off, except for certain guarantees that are in
the process of being assigned to Duke Energy. During this
assignment period, Duke Energy has indemnified Spectra Capital
against any losses incurred under these guarantee obligations. The
maximum potential amount of future payments associated with the
guarantees issued by Spectra Capital is $206 million.
Duke Energy has issued performance guarantees to customers
and other third parties that guarantee the payment and performance
of other parties, including certain non-wholly-owned entities, as well
as guarantees of debt of certain non-consolidated entities and less
than wholly-owned consolidated entities. If such entities were to
default on payments or performance, Duke Energy would be required
under the guarantees to make payments on the obligations of the less
than wholly-owned entity. The maximum potential amount of future
payments Duke Energy could have been required to make under
these guarantees as of December 31, 2011 was $291 million. Of
this amount, $50 million relates to guarantees issued on behalf of
less than wholly-owned consolidated entities, with the remainder
related to guarantees issued on behalf of third parties and
unconsolidated affiliates of Duke Energy.
Of the guarantees noted above, $330 million of the guarantees
expire between 2012 and 2028, with the remaining performance
guarantees having no contractual expiration.
Included in the maximum potential amount of future payments
discussed above is $40 million of maximum potential amounts of
future payments associated with guarantees issued to customers or
other third parties related to the payment or performance obligations
of certain entities that were previously wholly-owned by Duke Energy
but which have been sold to third parties, such as DukeSolutions,
Inc. (DukeSolutions) and Duke Engineering & Services, Inc. (DE&S).
These guarantees are primarily related to payment of lease
obligations, debt obligations, and performance guarantees related to
provision of goods and services. Duke Energy has received
back-to-back indemnification from the buyer of DE&S indemnifying
Duke Energy for any amounts paid related to the DE&S guarantees.
Duke Energy also received indemnification from the buyer of
DukeSolutions for the first $2.5 million paid by Duke Energy related
to the DukeSolutions guarantees. Further, Duke Energy granted
indemnification to the buyer of DukeSolutions with respect to losses
arising under some energy services agreements retained by
DukeSolutions after the sale, provided that the buyer agreed to bear
100% of the performance risk and 50% of any other risk up to an
aggregate maximum of $2.5 million (less any amounts paid by the
buyer under the indemnity discussed above). Additionally, for certain
performance guarantees, Duke Energy has recourse to subcontractors
involved in providing services to a customer. These guarantees have
various terms ranging from 2012 to 2021, with others having no
specific term.
Duke Energy has guaranteed certain issuers of surety bonds,
obligating itself to make payment upon the failure of a former
non-wholly-owned entity to honor its obligations to a third party, as
well as used bank-issued stand-by letters of credit to secure the
performance of non-wholly-owned entities to a third party or
customer. Under these arrangements, Duke Energy has payment
obligations which are triggered by a draw by the third party or
customer due to the failure of the non-wholly-owned entity to perform
according to the terms of its underlying contract. Substantially all of
these guarantees issued by Duke Energy relate to projects at Crescent
that were under development at the time of the joint venture creation
in 2006. Crescent filed Chapter 11 petitions in a U.S. Bankruptcy
Court in June 2009. During 2009, Duke Energy determined that it
was probable that it will be required to perform under certain of these
guarantee obligations and recorded a charge of $26 million
associated with these obligations, which represented Duke Energy’s
best estimate of its exposure under these guarantee obligations. At the
time the charge was recorded, the face value of the guarantees was
$70 million, which has since been reduced to $18 million as of
December 31, 2011, as Crescent continues to complete some of its
obligations under these guarantees.
Duke Energy has entered into various indemnification
agreements related to purchase and sale agreements and other types
of contractual agreements with vendors and other third parties. These
agreements typically cover environmental, tax, litigation and other
matters, as well as breaches of representations, warranties and
covenants. Typically, claims may be made by third parties for various
periods of time, depending on the nature of the claim. Duke Energy’s
potential exposure under these indemnification agreements can range
from a specified amount, such as the purchase price, to an unlimited
dollar amount, depending on the nature of the claim and the
particular transaction. Duke Energy is unable to estimate the total
potential amount of future payments under these indemnification
agreements due to several factors, such as the unlimited exposure
under certain guarantees.
At December 31, 2011, the amounts recorded on the
Consolidated Balance Sheets for the guarantees and indemnifications
mentioned above, including performance guarantees associated with
projects at Crescent for which it is probable that Duke Energy will be
required to perform, is $19 million. This amount is primarily recorded
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