POWER-RELATED DERIVATIVES

3 Months Ended

Mar. 31, 2011

POWER-RELATED DERIVATIVES [Abstract]

POWER-RELATED DERIVATIVES

NOTE 10 - POWER-RELATED DERIVATIVES

We are exposed to certain risks in managing our power supply resources to serve our customers, and we use derivative financial instruments to manage those risks.  The primary risk managed by using derivative financial instruments is commodity price risk.  Currently, our power supply forecast shows energy purchase and production amounts in excess of our load requirements through 2011.  Because of this projected power surplus, we entered into one forward power sale contract for 2011.  This forward sale was initially structured as a physical sale of excess power.  In January 2011 the sale contract was renegotiated as a rate swap that settles financially.  We have concluded that neither the original physical sale nor the subsequent rate swap contract is a derivative, since a notional amount does not exist under the terms of either contract.

On occasion, we will forecast a temporary power supply shortage such as when Vermont Yankee becomes unavailable.  We typically enter into short-term forward power purchase contracts to cover a portion of these expected power supply shortages, which helps to reduce price volatility in our net power costs.  In July 2011, we entered into a contract for the 2011 Vermont Yankee refueling outage.  Our power supply forecast shows that in March 2012, when our long-term contract with Vermont Yankee expires, our load requirements will begin to exceed the level of energy we currently purchase and produce.  In July 2011, we entered into a contract for the Vermont Yankee refueling outage that is scheduled to begin in October 2011.  We also entered into two contracts that will fill power supply shortages expected between April and December 2012.

On August 12, 2010, we executed a significant long-term power purchase contract with HQUS and we have concluded that this contract meets the “normal purchase, normal sale” exception to derivatives accounting; therefore, we are not required to calculate the fair value of this contract.  For additional information on this contract, see Note 13 - Commitments and Contingencies - New Hydro-Québec Agreement.

We are able to economically hedge our exposure to congestion charges that result from constraints on the transmission system with FTRs.  FTRs are awarded to the successful bidders in periodic auctions administered by ISO-NE.

We do not use derivative financial instruments for trading or other purposes.  Accounting for power-related derivatives is discussed in Note 2- Summary of Significant Accounting Policies - Derivative Financial Instruments.

Outstanding power-related derivative contracts at June 30 are as follows:

	MWh (000s)
	2011		2010
Commodity
Forward Energy Contracts		0		293.6
Financial Transmission Rights		1,051.9		1,043.9
Hydro-Quebec Sellback #3		0		136.9

We recognized the following amounts in the Condensed Consolidated Statements of Income in connection with derivative financial instruments (dollars in thousands):

	Three months ended June 30						Six months ended June 30
	2011			2010			2011			2010
Net realized gains (losses) reported in operating revenues	$	0		$	1,028		$	0		$	2,700
Net realized gains (losses) reported in purchased power		(3	)		(559	)		(10	)		(581	)
Net realized gains (losses) reported in earnings	$	(3	)	$	469		$	(10	)	$	2,119

Realized gains and losses on derivative instruments are conveyed to or recovered from customers through the PCAM and have no net impact on results of operations.  Derivative transactions and related collateral requirements are included in net cash flows from operating activities in the Condensed Consolidated Statements of Cash Flows.  For information on the location and amounts of derivative fair values on the Condensed Consolidated Balance Sheets see Note 6 - Fair Value.

Certain of our power-related derivative instruments contain provisions for performance assurance that may include the posting of collateral in the form of cash or letters of credit, or other credit enhancements.  Our counterparties will typically establish collateral thresholds that represent credit limits, and these credit limits vary depending on our credit rating.  If our current credit rating were to decline, certain counterparties could request immediate payment and full, overnight ongoing collateralization on derivative instruments in net liability positions.  We had no derivative instruments with credit-risk-related contingent features that were in a liability position on June 30, 2011 or December 31, 2010.  For information concerning performance assurance, see Note 13 - Commitments and Contingencies - Performance Assurance.