Duke Energy 2011 Annual Report Download - page 90

PART II
Credit Risk
Credit risk represents the loss that the Duke Energy Registrants
would incur if a counterparty fails to perform under its contractual
obligations. To reduce credit exposure, the Duke Energy Registrants
seek to enter into netting agreements with counterparties that permit
them to offset receivables and payables with such counterparties. The
Duke Energy Registrants attempt to further reduce credit risk with
certain counterparties by entering into agreements that enable
obtaining collateral or terminating or resetting the terms of
transactions after specified time periods or upon the occurrence of
credit-related events. The Duke Energy Registrants may, at times, use
credit derivatives or other structures and techniques to provide for
third-party credit enhancement of their counterparties’ obligations.
The Duke Energy Registrants also obtain cash or letters of credit from
customers to provide credit support outside of collateral agreements,
where appropriate, based on a financial analysis of the customer and
the regulatory or contractual terms and conditions applicable to each
transaction. See Note 14 to the Consolidated Financial Statements,
“Risk Management, Derivative Instruments and Hedging Activities,”
for additional information regarding credit risk related to derivative
instruments.
The Duke Energy Registrants’ industry has historically operated
under negotiated credit lines for physical delivery contracts. The Duke
Energy Registrants frequently use master collateral agreements to
mitigate certain credit exposures. The collateral agreements provide
for a counterparty to post cash or letters of credit to the exposed party
for exposure in excess of an established threshold. The threshold
amount represents a negotiated unsecured credit limit for each party
to the agreement, determined in accordance with the Duke Energy
Registrants’ internal corporate credit practices and standards.
Collateral agreements generally also provide that the inability to post
collateral is sufficient cause to terminate contracts and liquidate all
positions.
The Duke Energy Registrants’ principal customers for its electric
and gas businesses are commodity clearinghouses, regional
transmission organizations, industrial end-users, marketers,
distribution companies, municipalities, electric cooperatives and
utilities located throughout the U.S. and Latin America. The Duke
Energy Registrants have concentrations of receivables from such
entities throughout these regions. These concentrations of customers
may affect the Duke Energy Registrants’ overall credit risk in that risk
factors can negatively impact the credit quality of the entire sector.
Where exposed to credit risk, the Duke Energy Registrants analyze
the counterparties’ financial condition prior to entering into an
agreement, establish credit limits and monitor the appropriateness of
those limits on an ongoing basis.
Duke Energy has a third-party insurance policy to cover certain
losses related to Duke Energy Carolinas’ asbestos-related injuries and
damages above an aggregate self insured retention of $476 million.
Duke Energy Carolinas’ cumulative payments began to exceed the
self insurance retention on its insurance policy during the second
quarter of 2008. Future payments up to the policy limit will be
reimbursed by Duke Energy’s third party insurance carrier. The
insurance policy limit for potential future insurance recoveries for
indemnification and medical cost claim payments is $968 million in
excess of the self insured retention. Insurance recoveries of $813
million and $850 million related to this policy are classified in the
Consolidated Balance Sheets in Other within Investments and Other
Assets and Receivables as of December 31, 2011 and 2010,
respectively. Duke Energy is not aware of any uncertainties regarding
the legal sufficiency of insurance claims. Management believes the
insurance recovery asset is probable of recovery as the insurance
carrier continues to have a strong financial strength rating.
The Duke Energy Registrants also have credit risk exposure
through issuance of performance guarantees, letters of credit and
surety bonds on behalf of less than wholly-owned entities and third
parties. Where the Duke Energy Registrants have issued these
guarantees, it is possible that the Duke Energy Registrants could be
required to perform under these guarantee obligations in the event the
obligor under the guarantee fails to perform. Where the Duke Energy
Registrants have issued guarantees related to assets or operations
that have been disposed of via sale, they attempt to secure
indemnification from the buyer against all future performance
obligations under the guarantees. See Note 7 to the Consolidated
Financial Statements, “Guarantees and Indemnifications,” for further
information on guarantees issued by Duke Energy or its subsidiaries.
TheDukeEnergyRegistrantsarealsosubjecttocreditriskof
their vendors and suppliers in the form of performance risk on
contracts including, but not limited to, outsourcing arrangements,
major construction projects and commodity purchases. The Duke
Energy Registrants’ credit exposure to such vendors and suppliers
may take the form of increased costs or project delays in the event of
non-performance.
Based on the Duke Energy Registrants’ policies for managing
credit risk, their exposures and their credit and other reserves, the
Duke Energy Registrants do not currently anticipate a materially
adverse effect on their consolidated financial position or results of
operations as a result of non-performance by any counterparty.
Retail.
Credit risk associated with the Duke Energy Registrants’ service
to residential, commercial and industrial customers is generally
limited to outstanding accounts receivable. The Duke Energy
Registrants mitigate this credit risk by requiring customers to provide
a cash deposit or letter of credit until a satisfactory payment history is
established, at which time the deposit is typically refunded. Charge-
offs for retail customers have historically been insignificant to the
operations of the Duke Energy Registrants and are typically recovered
through the retail rates. Management continually monitors customer
charge-offs and payment patterns to ensure the adequacy of bad debt
reserves. Duke Energy Ohio and Duke Energy Indiana sell certain of
their accounts receivable and related collections through CRC, a Duke
Energy consolidated variable interest entity. Losses on collection are
first absorbed by the equity of CRC and next by the subordinated
retained interests held by Duke Energy Ohio, Duke Energy Kentucky
and Duke Energy Indiana. See Note 17 to the Consolidated Financial
Statements, “Variable Interest Entities.”
Wholesale Sales.
To reduce credit exposure related to wholesale sales, the Duke
Energy Registrants seeks to enter into netting agreements with
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