Chapter 11 Certified Supplier Guidebook

Certified Supplier Guidebook Chapter 11: Credit Requirements Introduction

This chapter describes the credit requirements and process for obtaining credit approval from Duke Energy. The chapter includes these topics:

• Registration and Credit Application
• Determination of Creditworthiness
• Credit Arrangements and Collateral Options
• Interest on Cash Deposits
• Ongoing Credit Evaluation

Registration and Credit Application

All certified suppliers must complete and sign a registration and credit application to be considered for participation in Duke Energy’s Customer Choice Program. A copy of the registration and credit application may be found in Appendix E: Registration and Participation Forms of this guidebook.

Determination of Creditworthiness

Duke Energy will apply, on a non-discriminatory and consistent basis, reasonable financial standards to assess and examine a certified supplier’s creditworthiness. These standards will take into consideration the scope of operations of each certified supplier and the level of risk to Duke Energy. This determination will be aided by appropriate data concerning the certified supplier, including load data or reasonable estimates thereof, where applicable.

A supplier shall satisfy its creditworthiness by demonstrating that it has and maintains investment-grade bond or issuer ratings from the following agencies:

If a certified supplier has an investment grade rating by  the agencies mentioned above, it will be granted an unsecured credit limit determined by Duke Energy through fundamental analysis of the certified supplier's financial and operational conditions.

The certified supplier will provide Duke Energy with its or its parent’s most recent independently audited financial statements, (if applicable) and, its or its parent's most recent Form 10-K and Form 10-Q (if applicable).

Duke Energy shall make reasonable alternative credit arrangements with a certified supplier that is unable to meet the aforementioned criteria or who causes Duke Energy's exposure to rise above the certified supplier's unsecured credit limit.

Absent special circumstances based on the financial risk presented by the supplier, Duke Energy will calculate the amount of the supplier's collateral requirement by multiplying forty-five (45) days of Duke Energy's estimate of the summer usage of the suppliers' end-use customers by a price set at the next July forward index price as established by a genernally accepted industry price index for wholesale power delivered to the "Cinergy Hub."

If Duke Energy is purchasing the supplier's receivables and holds a first secured interest in the receivable, Duke Energy will reduce the collateral it requires from the supplier by an amount equal to fifteen (15) days of the estimate of the summer kilowatt-hours used by the supplier's customers, multiplied by a supplier's specific price per kWh, multiplied by the remainder of one minus a percentage representing Duke Energy's current experience with uncollectible accounts. The fifteen (15) days of summer kilowatt-hours will be calculated by dividing the forty-five (45) days of usage in the collateral formula by three.

A supplier may appeal Duke Energy's determination of credit requirement to the Commission or seek staff mediation as to any dispute.

Credit Arrangements and Collateral Options

The certified supplier may choose from any of the following credit arrangements in a format acceptable to Duke Energy:

• A guarantee of payment

The parent company providing the guaranty on behalf of the certified supplier must have an investment grade rating by the agencies listed previously and the parent guaranty must be in Duke Energy’s prescribed format for an amount covering 45 days of estimated summer usage.

• An irrevocable letter of credit

If an irrevocable letter of credit is used, the letter of credit must be in Duke Energy’s prescribed format for an amount covering 45 days of estimated summer usage, and from a financial institution with at least an "A-" or higher rating as rated by the agencies.

• A cash deposit established with Duke Energy

If a cash deposit is used, the certified supplier must make arrangements acceptable to Duke Energy for an amount covering 90 days of estimated summer usage.

• Other mutually agreeable security or arrangements

The amount of the security required must be and remain commensurate with the financial risks placed on Duke Energy by that certified supplier, including recognition of that certified supplier's performance.

Please contact the Certified Supplier Business Center for other arrangements.

After power has flowed for the initial 30 days, the collateral amount will be adjusted up or down to the nearest integral multiple of $50,000. The Company will notify the certified supplier of any such needed adjustments. The initial collateral enhancement shall be valid for a period of not less than one year after the date on which the certified supplier applies to participate in Duke Energy's Customer Choice Program and shall be renewed annually. Collateral requirements and credit exposure are monitored daily. Any certified supplier whose credit exposure exceeds its credit limit will be required to provide additional collateral.

Interest on Cash Deposits

Duke Energy will allow simple interest on cash deposits calculated at the lower of the average of the Federal Reserve lending rate over the time period the cash is on deposit or 4.5% annually. In cases of discontinuance or termination of services, cash deposits will be returned with accrued interest upon payment of all unpaid accounts.

Ongoing Credit Evaluation

Duke Energy reserves the right to review each certified supplier’s creditworthiness at any time. The certified supplier must provide current financial and credit information. In addition, the certified supplier may request re-evaluation at any time. It is anticipated that demand, unanticipated market movements, and economic reasons will result in the exposure of a certified supplier nearing or exceeding the prescribed credit limits or collateral originally in place. It is also noted that additional collateral may be required due to a degradation of credit rating or repayment ability of a certified supplier. Any subsequent review or re-evaluation of a certified supplier’s creditworthiness may result in the certified supplier being required to post collateral not previously requested. The new additional or change in collateral requirement will be necessary to enhance, restore or maintain Duke Energy’s credit protection. In the alternative, Duke Energy may limit a certified supplier’s level of participation or remove the certified supplier from further participation in Duke Energy’s Customer Choice Program.

Failure of the certified supplier to establish or re-establish credit will lead to Duke Energy rejecting transactions. Re-establishing credit constitutes covering prior obligations, meeting increased coverage, and any new business obligations.