Duke Energy 2013 Annual Report Download - page 36

PART I
18
NUCLEAR GENERATION RISKS
Duke Energy Carolinas, Duke Energy Progress and Duke Energy Florida may
incur substantial costs and liabilities due to their ownership and operation
of nuclear generating facilities.
Ownership interest in and operation of nuclear stations by Duke Energy
Carolinas, Duke Energy Progress and Duke Energy Florida subject them to
various risks. These risks include, among other things: the potential harmful
effects on the environment and human health resulting from the operation
of nuclear facilities and the storage, handling and disposal of radioactive
materials; limitations on the amounts and types of insurance commercially
available to cover losses that might arise in connection with nuclear
operations; and uncertainties with respect to the technological and financial
aspects of decommissioning nuclear plants at the end of their licensed lives.
Ownership and operation of nuclear generation facilities requires
compliance with licensing and safety-related requirements imposed by the NRC.
In the event of non-compliance, the NRC may increase regulatory oversight,
impose fines, and/or shut down a unit, depending upon its assessment of the
severity of the situation. Revised security and safety requirements promulgated
by the NRC, which could be prompted by, among other things, events within
or outside of the control of Duke Energy Carolinas, Duke Energy Progress and
Duke Energy Florida, such as a serious nuclear incident at a facility owned by
a third party, could necessitate substantial capital and other expenditures, as
well as assessments to cover third-party losses. In addition, if a serious nuclear
incident were to occur, it could have a material adverse effect on the results
of operations and financial condition of Duke Energy Carolinas, Duke Energy
Progress and Duke Energy Florida.
LIQUIDITY, CAPITAL REQUIREMENTS AND COMMON STOCK RISKS
The Duke Energy Registrants rely on access to short-term borrowings and
longer-term capital markets to finance their capital requirements and
support their liquidity needs. Access to those markets can be adversely
affected by a number of conditions, many of which are beyond the Duke
Energy Registrants’ control.
The Duke Energy Registrants’ businesses are financed to a large
degree through debt. The maturity and repayment profile of debt used to
finance investments often does not correlate to cash flows from their assets.
Accordingly, as a source of liquidity for capital requirements not satisfied
by the cash flow from their operations and to fund investments originally
financed through debt instruments with disparate maturities, the Duke Energy
Registrants rely on access to short-term money markets as well as longer-term
capital markets. The Subsidiary Registrants also rely on access to short-term
intercompany borrowings. If the Duke Energy Registrants are not able to access
capital at competitive rates or at all, the ability to finance their operations and
implement their strategy and business plan as scheduled could be adversely
affected. An inability to access capital may limit the Duke Energy Registrants’
ability to pursue improvements or acquisitions that they may otherwise rely on
for future growth.
Market disruptions may increase the cost of borrowing or adversely
affect the ability to access one or more financial markets. Such disruptions
could include: economic downturns, the bankruptcy of an unrelated energy
company, capital market conditions generally, market prices for electricity
and gas, terrorist attacks or threatened attacks on their facilities or unrelated
energy companies, or the overall health of the energy industry. The availability
of credit under Duke Energy’s revolving credit facilities depends upon the
ability of the banks providing commitments under such facilities to provide
funds when their obligations to do so arise. Systematic risk of the banking
system and the financial markets could prevent a bank from meeting its
obligations under the facility agreement.
Duke Energy maintains a revolving credit facility to provide back-up for
its commercial paper program and letters of credit to support variable rate
demand tax-exempt bonds that may be put to the Duke Energy Registrant issuer
at the option of the holder. The facility includes borrowing sublimits for the Duke
Energy Registrants, each of whom is a party to the credit facility, and financial
covenants that limit the amount of debt that can be outstanding as a percentage
of the total capital for the specific entity. Failure to maintain these covenants at
a particular entity could preclude Duke Energy from issuing commercial paper or
the Duke Energy Registrants from issuing letters of credit or borrowing under the
revolving credit facility.
The Duke Energy Registrants must meet credit quality standards and there
is no assurance they will maintain investment grade credit ratings. If the
Duke Energy Registrants are unable to maintain investment grade credit
ratings, they would be required under credit agreements to provide collat-
eral in the form of letters of credit or cash, which may materially adversely
affect their liquidity.
Each of the Duke Energy Registrants’ senior long-term debt issuances is
currently rated investment grade by various rating agencies. The Duke Energy
Registrants cannot ensure their senior long-term debt will be rated investment
grade in the future.
If the rating agencies were to rate the Duke Energy Registrants below
investment grade, their borrowing costs would increase, perhaps significantly.
In addition, their potential pool of investors and funding sources would likely
decrease. Further, if the short-term debt rating were to fall, access to the
commercial paper market could be significantly limited. A reduction in liquidity
and borrowing availability could ultimately impact the ability to indefinitely
reinvest the earnings of Duke Energy’s international operations, which could
result in significant income taxes that would have a material effect on its results
of operations.
A downgrade below investment grade could also require the posting of
additional collateral in the form of letters of credit or cash under various credit,
commodity and capacity agreements and trigger termination clauses in some
interest rate derivative agreements, which would require cash payments. All
of these events would likely reduce the Duke Energy Registrants’ liquidity and
profitability and could have a material effect on their financial position, results of
operations or cash flows.
Non-compliance with debt covenants or conditions could adversely affect
the Duke Energy Registrants’ ability to execute future borrowings.
The Duke Energy Registrants’ debt and credit agreements contain
various financial and other covenants. Failure to meet those covenants beyond
applicable grace periods could result in accelerated due dates and/or termination
of the agreements.
Market performance and other changes may decrease the value
of the NDTF investments of Duke Energy Carolinas, Duke Energy
Progress and Duke Energy Florida, which then could require
significant additional funding.
Ownership and operation of nuclear generation facilities also requires the
maintenance of funded trusts that are intended to pay for the decommissioning
costs of the respective nuclear power plants. The performance of the capital
markets affects the values of the assets held in trust to satisfy these future