NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation These unaudited financial statements have been prepared pursuant to the rules and regulations of the SEC and in accordance with U.S. GAAP. The accompanying unaudited condensed consolidated interim financial statements contain all normal, recurring adjustments considered necessary to present fairly the financial position as of June 30, 2011, and the results of operations and cash flows for the three and six months ended June 30, 2011 and 2010. The results of operations for the interim periods presented herein may not be indicative of the results that may be expected for any other period or the full year. These financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in our annual report on Form 10K for the year ended December 31, 2010.

We consider subsequent events or transactions that occur after the balance sheet date, but before the financial statements are issued, to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure.

Financial Statement Presentation The focus of the Condensed Consolidated Statements of Income is on the regulatory treatment of revenues and expenses of the regulated utility as opposed to other enterprises where the focus is on income from continuing operations. Operating revenues and expenses (including related income taxes) are those items that ordinarily are included in the determination of revenue requirements or amounts recoverable from customers in rates. Operating expenses represent the costs of rendering service to be covered by revenue, before coverage of interest and other capital costs. Other income and deductions include non-utility operating results, certain expenses judged not to be recoverable through rates, related income taxes and costs (i.e. interest expense) that utility operating income is intended to cover through the allowed rate of return on equity rather than as a direct cost-of-service revenue requirement.

The focus of the Condensed Consolidated Balance Sheets is on utility plant and capital because of the capital-intensive nature of the regulated utility business. The prominent position given to utility plant, capital stock, retained earnings and long-term debt supports regulated ratemaking concepts in that utility plant is the rate base and capitalization (including long-term debt) is the basis for determining the rate of return that is applied to the rate base.

Please refer to the Glossary of Terms following the Table of Contents for frequently used abbreviations and acronyms that are found in this report.

Regulatory Accounting Our utility operations are regulated by the PSB, FERC and the Connecticut Department of Public Utility and Control, with respect to rates charged for service, accounting, financing and other matters pertaining to regulated operations. As required, we prepare our financial statements in accordance with FASB's guidance for regulated operations. The application of this guidance results in differences in the timing of recognition of certain expenses from those of other businesses and industries. In order for us to report our results under the accounting for regulated operations, our rates must be designed to recover our costs of providing service, and we must be able to collect those rates from customers. If rate recovery of the majority of these costs becomes unlikely or uncertain, whether due to competition or regulatory action, we would reassess whether this accounting standard should continue to apply to our regulated operations. In the event we determine that we no longer meet the criteria for applying the accounting for regulated operations, the accounting impact would be a charge to operations of an amount that would be material unless stranded cost recovery is allowed through a rate mechanism. Based on a current evaluation of the factors and conditions expected to impact future cost recovery, we believe future recovery of our regulatory assets is probable. Criteria that could give rise to the discontinuance of accounting for regulated operations include: 1) increasing competition that restricts a company's ability to establish prices to recover specific costs, and 2) a significant change in the manner in which rates are set by regulators from cost-based regulation to another form of regulation. See Note 9 - Retail Rates and Regulatory Accounting for additional information.

Derivative Financial Instruments We account for certain power contracts as derivatives under the provisions of FASB's guidance for derivatives and hedging. This guidance requires that derivatives be recorded on the balance sheet at fair value. Derivatives are recorded as current and long-term assets or liabilities depending on the duration of the contracts. Our derivative financial instruments are related to managing our power supply resources to serve our customers, and are not for trading purposes. Contracts that qualify for the normal purchase and sale exception to derivative accounting are not included in derivative assets and liabilities. Additionally, we have not elected hedge accounting for our power-related derivatives.

Based on a PSB-approved accounting order, we record the changes in fair value of all power-related derivative financial instruments as deferred charges or deferred credits on the balance sheet, depending on whether the change in fair value is an unrealized loss or gain. Realized gains and losses on sales are recorded as increases to or reductions of operating revenues, respectively. For purchase contracts, realized gains and losses are recorded as reductions of or additions to purchased power expense, respectively. For additional information about power-related derivatives, see Note 6 - Fair Value and Note 10 - Power-Related Derivatives.

Government Grants We recognize government grants when there is reasonable assurance that we will comply with the conditions attached to the grant arrangement and the grant will be received. Government grants are recognized in the Condensed Consolidated Statements of Income over the periods in which we recognize the related costs for which the government grant is intended to compensate. When government grants are related to reimbursements of operating expenses, the grants are recognized as a reduction of the related expense in the Condensed Consolidated Statements of Income. For government grants related to reimbursements of capital expenditures, the grants are recognized as a reduction of the basis of the asset and recognized in the Condensed Consolidated Statements of Income over the estimated useful life of the depreciable asset as reduced depreciation expense.

We record government grants receivable in the Condensed Consolidated Balance Sheets in Accounts Receivable. For additional information see Note 9 – Retail Rates and Regulatory Accounting – CVPS SmartPower(R).

Our current rates include the recovery of costs that are eligible for government grant reimbursement by the DOE under the ARRA; however, prior to January 1, 2011, the grant reimbursements were not reflected in our current rates. The grant reimbursements were recorded to a regulatory liability. Effective January 1, 2011 grant reimbursements are reflected in our rates.

Supplemental Financial Statement Data Supplemental financial information for the accompanying financial statements is provided below.

Prepayments: The components of Prepayments on the Condensed Consolidated Balance Sheets follow (dollars in thousands):

	June 30, 2011		December 31, 2010
Taxes	$	7,202	$	14,662
Insurance		1,295		412
Miscellaneous		832		788
Total	$	9,329	$	15,862

Other Current Liabilities: The components of Other current liabilities on the Condensed Consolidated Balance Sheets follow (dollars in thousands):

	June 30, 2011		December 31, 2010
Deferred compensation plans and other	$	828	$	2,596
Accrued employee-related costs		3,523		4,660
Other taxes and Energy Efficiency Utility		4,665		4,105
Cash concentration account - outstanding checks		0		2,358
Obligation under capital leases		936		942
Provision for rate refund		1,579		5,137
Accrued Interest		938		938
Common dividends declared		3,087		0
Miscellaneous accruals		8,493		10,027
Total	$	24,049	$	30,763