DERIVATIVE INSTRUMENTS

The Regulated companies purchase and procure energy and energy-related products, which are subject to price volatility, for their customers. The costs associated with supplying energy to customers are recoverable from customers in future rates. The Regulated companies manage the risks associated with the price volatility of energy and energy-related products through the use of derivative and non-derivative contracts.

Many of the derivative contracts meet the definition of, and are designated as, normal and qualify for accrual accounting under the applicable accounting guidance. The costs and benefits of derivative contracts that meet the definition of normal are recognized in Operating Expenses or Operating Revenues on the statements of income, as applicable, as electricity or natural gas is delivered.

Derivative contracts that are not designated as normal are recorded at fair value as current or long-term Derivative Assets or Derivative Liabilities on the balance sheets. For the Regulated companies, regulatory assets or regulatory liabilities are recorded to offset the fair values of derivatives, as contract settlement amounts are recovered from, or refunded to, customers in their respective energy supply rates.

The gross fair values of derivative assets and liabilities with the same counterparty are offset and reported as net Derivative Assets or Derivative Liabilities, with current and long-term portions, on the balance sheets. The following table presents the gross fair values of contracts, categorized by risk type, and the net amounts recorded as current or long-term derivative assets or liabilities:



	As of September 30, 2017									As of December 31, 2016
(Millions of Dollars)	Commodity Supply and Price Risk Management			Netting ⁽¹⁾			Net Amount Recorded as a Derivative			Commodity Supply and Price Risk Management			Netting ⁽¹⁾			Net Amount Recorded as a Derivative
Current Derivative Assets:
Level 2:
Eversource	$	—		$	—		$	—		$	6.0		$	—		$	6.0
Level 3:
CL&P	10.4			(7.7		)	2.7			13.9			(9.4		)	4.5
Long-Term Derivative Assets:
Level 2:
Eversource	$	—		$	—		$	—		$	0.3		$	(0.1	)	$	0.2
Level 3:
CL&P	74.3			(6.9		)	67.4			77.3			(11.7		)	65.6
Current Derivative Liabilities:
Level 2:
Eversource	$	(1.5	)	$	0.4		$	(1.1	)	$	—		$	—		$	—
Level 3:
Eversource	(62.2		)	—			(62.2		)	(79.7		)	—			(79.7		)
CL&P	(59.9		)	—			(59.9		)	(77.8		)	—			(77.8		)
NSTAR Electric	(2.3		)	—			(2.3		)	(1.9		)	—			(1.9		)
Long-Term Derivative Liabilities:
Level 3:
Eversource	$	(391.9	)	$	—		$	(391.9	)	$	(413.7	)	$	—		$	(413.7	)
CL&P	(391.8		)	—			(391.8		)	(412.8		)	—			(412.8		)
NSTAR Electric	(0.1		)	—			(0.1		)	(0.9		)	—			(0.9		)


⁽¹⁾	Amounts represent derivative assets and liabilities that Eversource elected to record net on the balance sheets. These amounts are subject to master netting agreements or similar agreements for which the right of offset exists.

For further information on the fair value of derivative contracts, see Note 1D, "Summary of Significant Accounting Policies - Fair Value Measurements," to the financial statements.

Derivative Contracts at Fair Value with Offsetting Regulatory Amounts

Commodity Supply and Price Risk Management: As required by regulation, CL&P, along with UI, has capacity-related contracts with generation facilities. CL&P has a sharing agreement with UI, with 80 percent of the costs or benefits of each contract borne by or allocated to CL&P and 20 percent borne by or allocated to UI. The combined capacity of these contracts is 787 MW. The capacity contracts extend through 2026 and obligate both CL&P and UI to make or receive payments on a monthly basis to or from the generation facilities based on the difference between a set capacity price and the capacity market price received in the ISO-NE capacity markets. In addition, CL&P has a contract to purchase 0.1 million MWh of energy per year through 2020.

NSTAR Electric has a renewable energy contract to purchase 0.1 million MWh of energy per year through 2018 and a capacity-related contract to purchase up to 35 MW per year through 2019.

As of September 30, 2017 and December 31, 2016, Eversource had New York Mercantile Exchange ("NYMEX") financial contracts for natural gas futures in order to reduce variability associated with the purchase price of approximately 10.4 million and 9.2 million MMBtu of natural gas, respectively.

For the three months ended September 30, 2017 and 2016, there were gains of $0.6 million and losses of $53.4 million, respectively, deferred as regulatory costs, which reflect the change in fair value associated with Eversource's derivative contracts. For the nine months ended September 30, 2017 and 2016, these losses were $30.3 million and $127.8 million, respectively.

Fair Value Measurements of Derivative Instruments

Derivative contracts classified as Level 2 in the fair value hierarchy relate to the financial contracts for natural gas futures. Prices are obtained from broker quotes and are based on actual market activity. The contracts are valued using NYMEX natural gas prices. Valuations of these contracts also incorporate discount rates using the yield curve approach.

The fair value of derivative contracts classified as Level 3 utilizes significant unobservable inputs. The fair value is modeled using income techniques, such as discounted cash flow valuations adjusted for assumptions relating to exit price. Significant observable inputs for valuations of these contracts include energy and energy-related product prices in future years for which quoted prices in an active market exist. Fair value measurements categorized in Level 3 of the fair value hierarchy are prepared by individuals with expertise in valuation techniques, pricing of energy and energy-related products, and accounting requirements. The future power and capacity prices for periods that are not quoted in an active market or established at auction are based on available market data and are escalated based on estimates of inflation in order to address the full term of the contract.

Valuations of derivative contracts using a discounted cash flow methodology include assumptions regarding the timing and likelihood of scheduled payments and also reflect non-performance risk, including credit, using the default probability approach based on the counterparty's credit rating for assets and the Company's credit rating for liabilities. Valuations incorporate estimates of premiums or discounts that would be required by a market participant to arrive at an exit price, using historical market transactions adjusted for the terms of the contract.

The following is a summary of Eversource's, including CL&P's and NSTAR Electric's, Level 3 derivative contracts and the range of the significant unobservable inputs utilized in the valuations over the duration of the contracts:



	As of September 30, 2017						As of December 31, 2016
	Range					Period Covered	Range					Period Covered
Capacity Prices:
CL&P	$	5.00	—	8.70	per kW-Month	2021 - 2026	$	5.50	—	8.70	per kW-Month	2020 - 2026
Forward Reserve:
CL&P	$	1.00	—	2.00	per kW-Month	2017 - 2024	$	1.40	—	2.00	per kW-Month	2017 - 2024
REC Prices:
NSTAR Electric	$	15.75	—	22.00	per REC	2017 - 2018	$	24.00	—	29.00	per REC	2017 - 2018

Exit price premiums of 1 percent through 18 percent are also applied on these contracts and reflect the uncertainty and illiquidity premiums that would be required based on the most recent market activity available for similar type contracts.

Significant increases or decreases in future energy or capacity prices in isolation would decrease or increase, respectively, the fair value of the derivative liability. Any increases in risk premiums would increase the fair value of the derivative liability. Changes in these fair values are recorded as a regulatory asset or liability and do not impact net income.

Valuations using significant unobservable inputs: The following table presents changes in the Level 3 category of derivative assets and derivative liabilities measured at fair value on a recurring basis. The derivative assets and liabilities are presented on a net basis.



	For the Three Months Ended September 30,
	2017									2016
(Millions of Dollars)	Eversource			CL&P			NSTAR Electric			Eversource			CL&P			NSTAR Electric
Derivatives, Net:
Fair Value as of Beginning of Period	$	(397.1	)	$	(394.8	)	$	(2.3	)	$	(412.6	)	$	(411.3	)	$	(1.3	)
Net Realized/Unrealized Gains/Losses Included in Regulatory Assets and Liabilities	0.5			(0.7		)	1.2			(52.3		)	(49.8		)	(2.5		)
Settlements	12.6			13.9			(1.3		)	21.2			20.1			1.1
Fair Value as of End of Period	$	(384.0	)	$	(381.6	)	$	(2.4	)	$	(443.7	)	$	(441.0	)	$	(2.7	)

	For the Nine Months Ended September 30,
	2017									2016
(Millions of Dollars)	Eversource			CL&P			NSTAR Electric			Eversource			CL&P			NSTAR Electric
Derivatives, Net:
Fair Value as of Beginning of Period	$	(423.3	)	$	(420.5	)	$	(2.8	)	$	(380.9	)	$	(380.8	)	$	(0.1	)
Net Realized/Unrealized Losses Included in Regulatory Assets and Liabilities	(17.9		)	(15.9		)	(2.0		)	(128.9		)	(122.0		)	(6.9		)
Settlements	57.2			54.8			2.4			66.1			61.8			4.3
Fair Value as of End of Period	$	(384.0	)	$	(381.6	)	$	(2.4	)	$	(443.7	)	$	(441.0	)	$	(2.7	)