NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation These financial statements have been prepared pursuant to the rules and regulations of the SEC and in accordance with U.S. GAAP. The accompanying consolidated financial statements contain all normal, recurring adjustments considered necessary to present fairly the financial position as of December 31, 2011 and 2010, and the results of operations and cash flows for the years ended December 31, 2011, 2010 and 2009. 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 consolidated financial statements should be read in conjunction with the accompanying notes.

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 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 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.

Basis of Consolidation The accompanying consolidated financial statements include the accounts of the company and its wholly owned subsidiaries. Inter-company transactions have been eliminated in consolidation. Jointly owned generation and transmission facilities are accounted for on a proportionate consolidated basis using our ownership interest in each facility. Our share of the assets, liabilities and operating expenses of each facility are included in the corresponding accounts on the accompanying consolidated financial statements.

Investments in entities over which we do not maintain a controlling financial interest are accounted for using the equity method when we have the ability to exercise significant influence over their operations. Under this method, we record our ownership share of the net income or loss of each investment in our consolidated financial statements. We have concluded that consolidation of these investments is not required under FASB's consolidation guidance for variable interest entities. See Note 4 - Investments in Affiliates.

Variable Interest Entities The primary beneficiary of a variable interest entity must consolidate the financial statements of that entity. Transco and VYNPC are variable interest entities; however, we are not the primary beneficiary of either of these entities because we do not control the activities that are most relevant to their operating results. Our maximum exposure to loss is the amount of our equity investments in Transco and VYNPC. See Note 4 - Investments in Affiliates.

Use of Estimates The preparation of financial statements in accordance with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities, and revenues and expenses. Actual results could differ from those estimates. In our opinion, areas where significant judgment is exercised include the valuation of unbilled revenue, pension plan assumptions, nuclear plant decommissioning liabilities, environmental remediation costs, regulatory assets and liabilities, and derivative contract valuations.

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 increasing competition that restricts a company's ability to establish prices to recover specific costs, and 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.

Unregulated Business Our non-regulated business, SmartEnergy Water Heating Services, Inc., is a water heater rental business operating in portions of Vermont and New Hampshire. This non-regulated business is a subsidiary of CRC. Results of operations are included in Other Income and Other Deductions on the Consolidated Statements of Income.

Income Taxes In accordance with FASB's guidance for income tax accounting, we recognize deferred tax assets and liabilities for the cumulative effect of all temporary differences between financial statement carrying amounts and the tax basis of existing assets and liabilities using the tax rate expected to be in effect when the differences are expected to reverse. Investment tax credits associated with utility plant are deferred and amortized ratably to income over the lives of the related properties. We record a valuation allowance for deferred tax assets if we determine that it is more likely than not that such tax assets will not be realized.

We follow FASB's guidance and methodology for estimating and reporting amounts associated with uncertain tax positions, including interest and penalties.

Revenue Recognition Revenues from the sale of electricity to retail customers are recorded when service is rendered or electricity is distributed. These are based on monthly meter readings, and estimates are made to accrue unbilled revenue at the end of each accounting period. We record contractual or firm wholesale sales in the month that power is delivered. We also engage in hourly sales and purchases in the wholesale markets administered by ISO-NE through the normal settlement process. On a monthly basis, we aggregate these hourly sales and hourly purchases and report them as operating revenue and operating expenses.

Allowance for Uncollectible Accounts We record allowances for uncollectible accounts based on customer-specific analysis, current assessments of past due balances and economic conditions, and historical experience. Additional allowances for uncollectible accounts may be required if there is deterioration in past due balances, if economic conditions are less favorable than anticipated, or for customer-specific circumstances, such as financial difficulty or bankruptcy. At December 31, 2011, our allowance for uncollectible accounts was $3.3 million, compared to $2.6 million at December 31, 2010.

The changes in the allowance for uncollectible accounts were as follows (dollars in thousands):

	Balance at		Charged
	beginning of		to income and								Balance at
	year		expenses				Deductions				end of year
2011
Reserve for uncollectible accounts receivable	$	2,649		2,624				1,968			$	3,305
2010
Reserve for uncollectible accounts receivable	$	3,577		723	(2	)		1,651	(1	)	$	2,649
2009
Reserve for uncollectible accounts receivable	$	2,184		3,179	(2	)		1,786	(1	)	$	3,577

(1) Write-offs, net of recoveries

(2) In 2009, we provided an allowance of approximately $1 million for a commercial customer that declared bankruptcy. We reversed the allowance in 2010 as a result of favorable bankruptcy proceedings and subsequent collection of the pre-bankruptcy receivable in 2011.

Purchased Power We record the cost of power obtained under long-term contracts as operating expenses. These contracts do not convey to us the right to use the related property, plant or equipment. We engage in short-term purchases with other third parties and record them as operating expenses in the month the power is delivered. We also engage in hourly purchases through ISO-NE's normal settlement process. These are included in operating expenses.

Valuation of Long-Lived Assets We periodically evaluate the carrying value of long-lived assets, including our investments in nuclear generating companies, our unregulated investments, and our interests in jointly owned generating facilities, when events and circumstances warrant such a review. The carrying value of such assets is considered impaired when the anticipated undiscounted cash flow from the asset is separately identifiable and is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the long-lived asset. No impairments of long-lived assets were recorded in 2011, 2010, or 2009.

Utility Plant Utility plant is recorded at cost. Replacements of retirement units of property are charged to utility plant. Maintenance and repairs, including replacements not qualifying as retirement units of property, are charged to maintenance expense. The costs of renewals and improvements of property units are capitalized. The original cost of units retired, net of salvage value, are charged to accumulated provision for depreciation. The primary components of utility plant at December 31 follow (dollars in thousands):

	2011			2010
Wholly owned electric plant in service:
Distribution	$	331,797		$	319,847
Hydro facilities		94,832			50,692
Transmission		63,474			57,998
General		38,626			36,393
Intangible plant		12,860			6,837
Other		4,952			4,695
Sub-total wholly owned electric plant in service		546,541			476,462
Jointly owned generation and transmission units		116,001			115,748
Completed construction		21,924			19,493
Held for future use		43			43
Utility plant		684,509			611,746
Accumulated depreciation		(297,441	)		(266,649	)
Property under capital leases, net		3,395			4,425
Construction work-in-progress		23,376			20,234
Nuclear fuel, net		2,749			1,737
Total Utility Plant, net	$	416,588		$	371,493

Property Under Capital Leases We record our commitments with respect to the Hydro-Québec Phase I and II transmission facilities, and other equipment, as capital leases. At December 31, 2011, Property under Capital Leases was comprised of $24.8 million of original cost less $21.4 million of accumulated amortization. At December 31, 2010, Property under Capital Leases was comprised of $24.9 million of original cost less $20.5 million of accumulated amortization. See Note 18 - Commitments and Contingencies.

Depreciation We use the straight-line remaining life method of depreciation. The total composite depreciation rate was 2.81 percent of the cost of depreciable utility plant in 2011, 2.88 in 2010 and 2.85 percent in 2009.

Allowance for Funds Used During Construction AFUDC is a non-cash item that is included in the cost of utility plant and represents the cost of borrowed and equity funds used to finance construction. Our AFUDC rates were 5 percent in 2011, 7.7 percent in 2010 and 7.8 percent in 2009. The portion of AFUDC attributable to borrowed funds is recorded as a reduction of interest expense on the Consolidated Statements of Income. The cost of equity funds is recorded as other income on the Consolidated Statements of Income.

Asset Retirement Obligations Changes to asset retirement obligations follow (dollars in thousands):

	2011			2010
Asset retirement obligations at January 1	$	3,609		$	3,247
Revisions in estimated cash flows		62			246
Accretion		149			136
Liabilities settled during the period		(14	)		(20	)
Asset retirement obligations at December 31	$	3,806		$	3,609

We have legal retirement obligations for decommissioning related to our joint-owned nuclear plant, Millstone Unit #3, and have an external trust fund dedicated to funding our share of future costs. The year-end aggregate fair value of the trust fund was $5.9 million in 2011 and $5.7 million in 2010, and is included in Investments and Other Assets on the Consolidated Balance Sheets.

Non-legal Removal Costs: Our regulated operations collect removal costs in rates for certain utility plant assets that do not have associated legal asset retirement obligations. Non-legal removal costs of about $12.1 million in 2011 and $11.5 million in 2010 are included in Other Deferred Credits and Other Liabilities on the Consolidated Balance Sheets.

Environmental Liabilities We are engaged in various operations and activities that subject us to inspection and supervision by both federal and state regulatory authorities including the United States Environmental Protection Agency. Our policy is to accrue a liability for those sites where costs for remediation, monitoring and other future activities are probable and can be reasonably estimated. See Note 18 - Commitments and Contingencies.

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 15 - 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 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 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 Consolidated Statements of Income over the estimated useful life of the depreciable asset as reduced depreciation expense.

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

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.

Fair Value We use a fair value hierarchy to indicate the relative reliability of the fair value measure. The highest priority is given to quoted prices in active markets, and the lowest to unobservable data, such as our internal information. Fair value measurements are applicable to financial instruments that are subject to mark-to-market accounting such as our investments in available-for-sale securities, restricted cash, cash equivalents and derivative contracts. See Note 5 – Financial Instruments and Note 6 – Fair Value.

Share-Based Compensation Share-based compensation costs are measured at the grant date based on the fair value of the award and recognized as expense on a straight-line basis over the requisite service period. See Note 10 - Share-Based Compensation.

Pension and Benefits Our defined benefit pension plans and postretirement welfare benefit plans are accounted for in accordance with FASB's guidance for employee retirement benefits. We use the fair value method to value all asset classes included in our pension and postretirement medical benefit trust funds. See Note 16 - Pension and Postretirement Medical Benefits for more information.

Accumulated Other Comprehensive Loss Accumulated other comprehensive loss on the Consolidated Balance Sheets is related to employee benefits.

Cash and Cash Equivalents We consider all liquid investments with an original maturity of three months or less when acquired to be cash and cash equivalents. Cash and cash equivalents consist primarily of cash in banks and money market funds.

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

Other Income: The components of Other income on the Consolidated Statements of Income for the years ended December 31 follow (dollars in thousands):

	2011		2010		2009
Interest on temporary investments	$	4	$	7	$	61
Non-utility revenue and non-operating rental income		1,761		1,801		1,862
Amortization of contributions in aid of construction - tax adder		891		938		975
Other interest and dividends		62		178		16
Gain on sale of non-utility property		1		4		2
Miscellaneous other income		75		315		19
Total	$	2,794	$	3,243	$	2,935

Other Deductions: The components of Other deductions on the Consolidated Statements of Income for the years ended December 31 follow (dollars in thousands):

	2011		2010		2009
Supplemental retirement benefits and insurance	$	830	$	344	$	(249	)
Non-utility expenses		1,421		1,300		1,320
Miscellaneous other deductions		770		640		514
Total	$	3,021	$	2,284	$	1,585

Merger-related Expenses: The components of Merger-related expenses on the Consolidated Statements of Income for 2011 includes a $19.5 million Fortis termination fee and $6.5 million of other merger-related costs.

Prepayments: The components of Prepayments on the Consolidated Balance Sheets at December 31 follow (dollars in thousands):

	2011		2010
Taxes	$	12,550	$	14,662
Insurance		434		412
Miscellaneous		982		788
Total	$	13,966	$	15,862

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

	2011		2010
Deferred compensation plans and other	$	764	$	2,596
Accrued employee-related costs		3,244		4,660
Other taxes and Energy Efficiency Utility		4,633		4,105
Cash concentration account - outstanding checks		4,131		2,358
Obligation under capital leases		917		942
Provision for rate refund		390		5,137
Fortis termination reimbursement		19,500		0
Tropical storm Irene expense accrual		1,178		0
Goods received but not invoiced		3,374		2,344
Miscellaneous accruals		11,238		8,621
Total	$	49,369	$	30,763

Other Deferred Credits and Other Liabilities: The components of Other deferred credits and other liabilities on the Consolidated Balance Sheets at December 31 follow (dollars in thousands):

	2011		2010
Environmental reserve	$	0	$	505
Non-legal removal costs		12,126		11,531
Contribution in aid of construction - tax adder		3,785		4,245
Reserve for loss on power contract		3,588		4,784
Accrued income taxes and interest		282		0
Provision for rate refund		0		4
VMPD rate phase in		702		0
Deferred compensation		3,265		0
Other		40		36
Total	$	23,788	$	21,105

Dividends Declared Per Share of Common Stock: The timing of common stock dividend declarations fluctuates whereas the dividend payments are made on a quarterly basis. In 2011, 2010 and 2009, we declared and paid cash dividends of 92 cents per share of common stock.

Supplemental Cash Flow Information: Cash paid (received) for interest and income tax as of December 31 follows (dollars in thousands):

	2011			2010			2009
Interest (net of amounts capitalized)	$	13,561		$	11,356		$	11,614
Net income taxes refunded	$	(9,148	)	$	(5,703	)	$	(1,244	)

Construction and plant expenditures on the Consolidated Statements of Cash Flows reflect actual payments made during the periods. Construction and plant-related expenditures and CVPS SmartPower® reimbursements are accrued at the end of each reporting period. At December 31, 2011, $0.5 million of construction and plant-related accruals was included in Accounts Payable, and $1.6 million was included in Other current liabilities. At December 31, 2010, $1.5 million of construction and plant-related accruals was included in Accounts Payable, and $1.7 million was included in Other Current Liabilities. At December 31, 2011, Accounts Receivable included $0.7 million representing the capital component of CVPS SmartPower® reimbursements not yet received from the DOE, and Other current assets included $0.3 million of estimated DOE capital reimbursements. We reduced Construction work-in-progress during 2011 for these pending reimbursements. At December 31, 2010, Accounts Receivable included $0.3 million representing the capital component of CVPS SmartPower® reimbursements not yet received from the DOE. We reduced Construction work-in-progress during 2010 for this pending reimbursement.

We maintain a cash concentration account for payments related to our routine business activities. The book overdraft amount resulting from outstanding checks is recorded as a current liability at the end of each reporting period. Changes in the book overdraft position are reflected in operating activities on the Consolidated Statements of Cash Flows.

Other non-cash expense and (income), net includes provision for uncollectible accounts, provision for rate refunds, the change in cash surrender value of whole life and variable life insurance policies held in our Rabbi Trust, share-based compensation, non-utility property depreciation and allowance for funds used during construction. Other investing activities include return of capital from investments in affiliates, non-utility capital expenditures, premiums paid on Rabbi Trust life insurance policies and death benefits received from such policies. Other financing activities include reductions in capital lease obligations, shares repurchased for mandatory tax withholdings and excess tax benefits relating to share-based compensation.