POWER-RELATED DERIVATIVES

3 Months Ended

Mar. 31, 2012

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.  Throughout most of 2011 and early 2012, before our Vermont Yankee contract expired, our power supply forecast showed energy purchase and production amounts in excess of our load requirements.  Because of this surplus, we entered into one forward power sale contract that settled financially for all of 2011.  In the fourth quarter of 2011, we entered into a similar rate swap for the sale of excess power in January and February 2012.  Neither the 2011 or 2012 rate swaps were derivatives, since a notional amount did not exist under the terms of either contract.

The company regularly monitors forecasts of available power supply and retail customer load, and attempts to balance our power supply portfolio with expected load requirements.  If we forecast power supply shortages, we will typically enter into either short-term or long-term forward power purchase contracts to cover the expected power supply shortages, which helps reduce price volatility in our net power costs.  In July 2011, we entered into two contracts to fill what would have been power supply shortages expected between April and December 2012 due to the expiration of our long-term contract with Vermont Yankee in March 2012.

In September 2011, in connection with the Vermont Marble acquisition, we assumed two forward purchase contracts.  The Vermont Marble contracts provide for nominal deliveries of physical power between September 2011 and December 2012, and we determined that these purchase contracts are derivatives.

We have determined that the power purchase contracts we entered into for 2012 are derivatives.  We did not elect the "normal purchase, normal sale" exception for any of these short-term power purchase contracts.

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.

In 2009, we also elected the "normal purchase, normal sale" exception for a three-year forward purchase contract that begins in 2013.

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.

Outstanding power-related derivative contracts are as follows:

	MWh (000s)
	March 31, 2012		December 31, 2011
Commodity
Forward Energy Purchase Contracts		530.9		535.3
Financial Transmission Rights		212.7		326.9

We recognized the following amounts in the Condensed Consolidated Statements of Income in connection with derivative financial instruments for the three months ended March 31 (dollars in thousands):

	2012			2011
Net realized gains (losses) reported in operating revenues	$	0		$	0
Net realized gains (losses) reported in purchased power		(163	)		(7	)
Net realized gains (losses) reported in earnings	$	(163	)	$	(7	)

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 Consolidated Statements of Cash Flows.  For information on the location and amounts of derivative fair values on the 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.  The aggregate fair value of all derivative instruments with credit-risk related contingent features that were in a liability position at March  31, 2012 was $6.8 million, for which we were not required to post collateral since our issuer credit rating from Moody's is Baa3.  If Moody's were to lower our issuer credit rating to Ba1, we would be required to post $6.3 million of collateral with our counterparties, upon their request.   If our Moody's credit rating were further lowered to Ba2, our counterparties could request an additional $0.5 million of collateral.   For information concerning performance assurance, see Note 13 - Commitments and Contingencies.