Duke Energy 2013 Annual Report Download - page 35

PART I
17
Potential terrorist activities or military or other actions, including cyber
attacks and data security breaches, could adversely affect the Duke Energy
Registrants’ businesses.
The continued threat of terrorism and the impact of retaliatory military
and other action by the U.S. and its allies may lead to increased political,
economic and financial market instability and volatility in prices for natural
gas and oil, which may have material adverse effects in ways the Duke Energy
Registrants cannot predict at this time. In addition, future acts of terrorism and
possible reprisals as a consequence of action by the U.S. and its allies could be
directed against companies operating in the U.S. or their international affiliates.
Information technology systems, infrastructure and generation facilities such
as nuclear plants could be potential targets of terrorist activities or harmful
activities by individuals or groups. The potential for terrorism has subjected the
Duke Energy Registrants’ operations to increased risks and could have a material
adverse effect on their businesses. In particular, the Duke Energy Registrants
may experience increased capital and operating costs to implement increased
security for their cyber systems and plants, including nuclear power plants under
the NRC’s design basis threat requirements. These increased costs could include
additional physical plant security and security personnel or additional capability
following a terrorist incident.
Information security risks have generally increased in recent years as a
result of the proliferation of new technologies and the increased sophistication
and frequency of cyber attacks and data security breaches. The utility industry
requires the continued operation of sophisticated information technology systems
and network infrastructure, which are part of an interconnected regional grid.
Additionally, connectivity to the Internet continues to increase through smart
grid and other initiatives. Because of the critical nature of the infrastructure,
increased connectivity to the Internet and technology systems’ inherent
vulnerability to disability or failures due to hacking, viruses, acts of war or
terrorism or other types of data security breaches, the Duke Energy Registrants
face a heightened risk of cyber attack. In the event of such an attack, the Duke
Energy Registrants could (i) have business operations disrupted, property
damaged, customer information stolen and other private information accessed
(ii) experience substantial loss of revenues, repair and restoration costs,
implementation costs for additional security measures to avert future cyber
attacks and other financial loss, and (iii) be subject to increased regulation,
litigation and reputational damage.
Failure to attract and retain an appropriately qualified workforce could
unfavorably impact the Duke Energy Registrants’ results of operations.
Certain events, such as an aging workforce, mismatch of skill set or
complement to future needs, or unavailability of contract resources may lead
to operating challenges and increased costs. The challenges include lack
of resources, loss of knowledge base and the lengthy time required for skill
development. In this case, costs, including costs for contractors to replace
employees, productivity costs and safety costs, may rise. Failure to hire and
adequately train replacement employees, including the transfer of significant
internal historical knowledge and expertise to new employees, or future
availability and cost of contract labor may adversely affect the ability to manage
and operate the business, especially considering the workforce needs associated
with nuclear generation facilities. If the Duke Energy Registrants are unable
to successfully attract and retain an appropriately qualified workforce, their
financial position or results of operations could be negatively affected.
Duke Energy’s investments and projects located outside of the U.S. expose
it to risks related to fluctuations in currency rates. These risks, and Duke
Energy’s activities to mitigate such risks, may adversely affect its cash
flows and results of operations.
Duke Energy’s operations and investments outside the U.S. expose it to
risks related to fluctuations in currency rates. As each local currency’s value
changes relative to the U.S. dollar, the value in U.S. dollars of Duke Energy’s
assets and liabilities in such locality and the cash flows generated in such
locality, expressed in U.S. dollars, also change. Duke Energy’s primary foreign
currency rate exposure is to the Brazilian Real.
Duke Energy selectively mitigates some risks associated with foreign
currency fluctuations by, among other things, indexing contracts to the U.S. dollar
and/or local inflation rates, hedging through debt denominated or issued in the
foreign currency and hedging through foreign currency derivatives. These efforts,
however, may not be effective and, in some cases, may expose Duke Energy to
other risks that could negatively affect its cash flows and results of operations.
The costs of retiring Duke Energy Florida’s Crystal River Unit 3 could prove
to be more extensive than is currently identified.
Exit costs to wind down operations and ultimately to retire and decommission
the plant could exceed estimates and, if not recoverable through the regulatory
process, could adversely affect Duke Energy’s, Progress Energy’s and Duke Energy
Florida’s financial condition, results of operations and cash flows.
Duke Energy Ohio’s and Duke Energy Indiana’s membership in an RTO
presents risks that could have a material adverse effect on their results of
operations, financial condition and cash flows.
The price at which Duke Energy Ohio can sell its generation capacity and
energy is dependent on a number of factors, which include the overall supply
and demand of generation and load, other state legislation or regulation,
transmission congestion, and its business rules. As a result, the prices in
day–ahead and real–time energy markets and RTO capacity markets are
subject to price volatility. Administrative costs imposed by RTOs, including
the cost of administering energy markets, are also subject to volatility. PJM
conducts Reliability Pricing Model (RPM) base residual auctions for capacity
on an annual planning year basis. The results of the PJM RPM base residual
auction are impacted by the supply and demand of generation and load and
also may be impacted by congestion and PJM rules relating to bidding for
Demand Response and Energy Efficiency resources. Auction prices could
fluctuate substantially over relatively short periods of time. Duke Energy Ohio
cannot predict the outcome of future auctions, but if the auction prices are
sustained at low levels, its results of operations, financial condition and cash
flows could be adversely impacted.
The rules governing the various regional power markets may also
change, which could affect Duke Energy Ohio’s and Duke Energy Indiana’s
costs and/or revenues. To the degree Duke Energy Ohio and Duke Energy
Indiana incur significant additional fees and increased costs to participate in
an RTO, their results of operations may be impacted. Duke Energy Ohio and
Duke Energy Indiana may be allocated a portion of the cost of transmission
facilities built by others due to changes in RTO transmission rate design.
Duke Energy Ohio and Duke Energy Indiana may be required to expand their
transmission system according to decisions made by an RTO rather than
their own internal planning process. While RTO transmission rates were
initially designed to be revenue neutral, various proposals and proceedings
currently taking place by the FERC may cause transmission rates to change
from time to time. In addition, RTOs has been developing rules associated
with the allocation and methodology of assigning costs associated with
improved transmission reliability, reduced transmission congestion and firm
transmission rights that may have a financial impact on Duke Energy Ohio and
Duke Energy Indiana.
As a members of an RTO, Duke Energy Ohio and Duke Energy Indiana are
subject to certain additional risks, including those associated with the allocation
among RTO members, of losses caused by unreimbursed defaults of other
participants in the RTO markets and those associated with complaint cases filed
against an RTO that may seek refunds of revenues previously earned by RTO
members.