POWER-RELATED DERIVATIVES

12 Months Ended

Dec. 31, 2011

POWER-RELATED DERIVATIVES [Abstract]

POWER-RELATED DERIVATIVES

NOTE 15 - 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 early 2012.  Because of this projected power surplus, we entered into one forward power sale contract for 2011.  The 2011 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 recently entered into a similar rate swap for the sale of excess power in January and February 2012.  We have concluded that neither the 2011 or 2012 rate swaps are derivatives, 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 2011, we entered into a 26-day purchase contract to cover the expected power supply shortage during the 2011 Vermont Yankee refueling outage, which ended November 3, 2011.

Our power supply forecast shows that in early 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 two contracts to fill what would have been power supply shortages expected between April and December 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 2011 and 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 18 - Commitments and Contingencies.

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 at December 31 are as follows:

	MWh (000s)
	2011		2010
Commodity
Forward Energy Purchase Contracts		535.3		0
Financial Transmission Rights		326.9		1,958.3

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

	2011			2010			2009
Net realized gains (losses) reported in operating revenues	$	0		$	4,581		$	23,226
Net realized gains (losses) reported in purchased power		(659	)		(600	)		(113	)
Net realized gains (losses) reported in earnings	$	(659	)	$	3,981		$	23,113

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 December 31, 2011 was $3.8 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 $3.3 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 18 - Commitments and Contingencies.