NSTAR Form 10-Q for period ended September 30, 2007

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q


[X]		Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
		For the quarterly period ended September 30, 2007
		Or
[ ]		Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
		For the transition period from to


Commission File Number:	1-14768

NSTAR

(Exact name of registrant as specified in its charter)



Massachusetts		04-3466300
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)
800 Boylston Street, Boston, Massachusetts		02199
(Address of principal executive offices)		(Zip Code)

(617) 424-2000

(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.


	[X]	Yes		[ ]	No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated (as defined in Rule 12b-2 of the Exchange Act).


Large accelerated filer	[ X ]			Accelerated filer	[ ]		Non-accelerated filer		[ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).


	[ ]	Yes		[ X ]	No

The number of shares outstanding of the registrant's class of common stock was 106,808,376 Common Shares, par value $1 per share, as of October 30, 2007.

NSTAR

Form 10-Q

Quarterly Period Ended September 30, 2007

Table of Contents


				Page No.
Glossary of Terms				2

Cautionary Statement Regarding Forward-Looking Information				3

Part I. Financial Information:
	Item 1.	Financial Statements
			Consolidated Statements of Income	4
			Consolidated Statements of Retained Earnings	5
			Consolidated Statements of Comprehensive Income	5
			Consolidated Balance Sheets	6 - 7
			Consolidated Statements of Cash Flows	8
			Notes to Consolidated Financial Statements	9 - 19

	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations		19 - 40

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		40

	Item 4.	Controls and Procedures		40

Part II. Other Information:
	Item 1.	Legal Proceedings		41

	Item 1A.	Risk Factors		41

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		41

	Item 6.	Exhibits		42

	Signature			43

Important Shareholder Information

NSTAR files its Forms 10-K, 10-Q and 8-K reports, proxy statements and other information with the Securities and Exchange Commission (SEC). You may access materials NSTAR has filed with the SEC on the SEC's website at www.sec.gov. In addition, NSTAR's Board of Trustees has various committees, including an Audit, Finance and Risk Management Committee, an Executive Personnel Committee and a Board Governance and Nominating Committee. The Board also has a standing Executive Committee. The Board has adopted the NSTAR Board of Trustees Corporate Guidelines on Significant Corporate Governance Issues, a Code of Ethics for the Principal Executive Officer, General Counsel, and Senior Financial Officers pursuant to Section 406 of the Sarbanes-Oxley Act of 2002, and a Code of Ethics and Business Conduct for Directors, Officers and Employees ("Code of Ethics"). NSTAR intends to disclose any amendment to, and any waiver from, a provision of the Code of Ethics that applies to the Chief Executive Officer or Chief Financial Officer or any other executive officer and that relates to any element of the Code of Ethics definition enumerated in Item 406(b) of Regulation S-K, on Form 8-K, within five business days following the date of such amendment or waiver. NSTAR's SEC filings and Corporate Governance documents, including charters, guidelines and codes, and any amendments to such charters, guidelines and codes that are applicable to NSTAR's executive officers, senior financial officers or trustees can be accessed free of charge on NSTAR's website at www.nstar.com. Copies of NSTAR's SEC filings may also be obtained by writing to NSTAR's Investor Relations Department at the address on the cover of this Form 10-Q or by calling 781-441-8338. The certifications of NSTAR's Chief Executive Officer and Chief Financial Officer pursuant to Sections 302 and 906 of the Sarbanes -Oxley Act of 2002 are attached to this Quarterly Report on Form 10-Q as Exhibits 31.1, 31.2, 32.1 and 32.2.

Glossary of Terms

The following is a glossary of abbreviations or acronyms frequently used throughout this report.


NSTAR Companies
NSTAR		NSTAR (Parent company), Company or NSTAR and its subsidiaries (as the context requires)
NSTAR Electric		NSTAR Electric Company
NSTAR Gas		NSTAR Gas Company
NSTAR Electric & Gas		NSTAR Electric & Gas Corporation
MATEP		Medical Area Total Energy Plant, Inc.
AES		Advanced Energy Systems, Inc. (Parent company of MATEP)
NSTAR Com		NSTAR Communications, Inc.
Hopkinton		Hopkinton LNG Corp.

Regulatory and State Authorities
AG		Attorney General of the Commonwealth of Massachusetts
CUC		Commonwealth Utilities Commission
DPU		Massachusetts Department of Public Utilities (Prior to April 11, 2007, the DPU was known as the MDTE. The Company uses the acronym DPU interchangeably throughout this report to refer to both the DPU and MDTE.)
FASB		Financial Accounting Standards Board
FERC		Federal Energy Regulatory Commission
IRS		Internal Revenue Service
ISO-NE		ISO (Independent System Operator) - New England Inc.
MDTE		Massachusetts Department of Telecommunications and Energy (now known as DPU)
NYMEX		New York Mercantile Exchange
PCAOB		Public Company Accounting Oversight Board (United States)
SEC		Securities and Exchange Commission

Other
AFUDC		Allowance for Funds Used During Construction
BBtu		Billions of British thermal units
CGAC		Cost of Gas Adjustment Clause
CPSL		Capital Projects Scheduling List
DSM		Demand-Side Management
EPS		Earnings Per Common Share
FIN		FASB Interpretation Number
GAAP		Generally accepted accounting principles in the United States of America
LDAC		Local Distribution Adjustment Clause
MD&A		Management's Discussion and Analysis of Financial Condition and Results of Operations
MGP		Manufactured gas plant
MWh		Megawatthour (equal to one million watthours)
NEMA		Northeastern Massachusetts
OATT		Open Access Transmission Tariff
PBR		Performance Based Distribution Rates
RMR		Reliability Must Run
SFAS		Statement of Financial Accounting Standards
SIP		Simplified Incentive Plan
SQI		Service Quality Indicators
SSCM		Simplified Service Cost Method

Cautionary Statement Regarding Forward-Looking Information

This Quarterly Report on Form 10-Q contains statements that are considered forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. These forward-looking statements may also be contained in other filings with the SEC, in press releases and oral statements. You can identify these statements by the fact that they do not relate strictly to historical or current facts. They use words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe” and other words and terms of similar meaning in connection with any discussion of future operating or financial performance. These statements are based on the current expectations, estimates or projections of management and are not guarantees of future performance. Some or all of these forward-looking statements may not turn out to be what NSTAR expected . Actual results could differ materially from these statements. Therefore, no assurance can be given that the outcomes stated in such forward-looking statements and estimates will be achieved.

Examples of some important factors that could cause our actual results or outcomes to differ materially from those discussed in the forward-looking statements include, but are not limited to, the following:


·		financial market conditions including, but not limited to, changes in interest rates and the availability and cost of capital
·		weather conditions that directly influence the demand for electricity and natural gas and impact from major storms
·		future economic conditions in the regional and national markets
·		changes to prevailing local, state and federal governmental policies and regulatory actions (including those of the DPU and FERC) with respect to allowed rates of return, rate structure, continued recovery of regulatory assets and energy costs, financings, municipalization acquisition and disposition of assets, operation and construction of facilities, changes in tax laws and policies and changes in, and compliance with, environmental and safety laws and policies
·		new governmental regulations or changes to existing regulations that impose additional operating requirements or liabilities
·		changes in available information and circumstances regarding legal issues and the resulting impact on our estimated litigation costs
·		impact of continued cost control procedures on operating results
·		ability to maintain current credit ratings
·		impact of uninsured losses
·		impact of union contract negotiations
·		impact of conservation measures and self-generation by our customers
·		changes in financial accounting and reporting standards
·		changes in specific hazardous waste site conditions and the specific cleanup technology
·		prices and availability of operating supplies
·		the impact of terrorist acts
·		impact of performance service quality measures

Any forward-looking statement speaks only as of the date of this filing and NSTAR undertakes no obligation to publicly update forward-looking statements, whether as a result of new information, future events, or otherwise. You are advised, however, to consult all further disclosures NSTAR makes in its filings to the SEC. Other factors in addition to those listed here could also adversely affect NSTAR. This Quarterly Report also describes material contingencies and critical accounting policies and estimates in the accompanying MD&A and in the accompanying Notes to Consolidated Financial Statements and NSTAR encourages a review of these items.

Part I. Financial Information

Item 1. Financial Statements

NSTAR

Consolidated Statements of Income

(Unaudited)

(in thousands, except per share amounts)


	Three Months Ended							Nine Months Ended
		September 30,						September 30,
		2007			2006			2007			2006

Operating revenues	$	804,919		$	956,279		$	2,514,432		$	2,775,635

Operating expenses:
Purchased power and transmission		360,734			518,085			1,099,345			1,411,115
Cost of gas sold		29,799			34,132			273,172			253,203
Operations and maintenance		112,385			108,008			330,043			321,499
Depreciation and amortization		89,716			87,771			277,041			270,461
DSM and renewable energy programs		18,562			18,364			53,199			52,318
Property and other taxes		22,834			23,688			70,566			72,455
Income taxes		49,828			44,924			108,098			98,138
Total operating expenses		683,858			834,972			2,211,464			2,479,189

Operating income		121,061			121,307			302,968			296,446

Other income (deductions):
Other income, net		2,410			3,205			7,712			8,705
Other deductions, net		(1,177	)		(385	)		(2,600	)		(1,913	)
Total other income, net		1,233			2,820			5,112			6,792

Interest charges:
Long-term debt		29,134			31,245			87,537			91,375
Transition property securitization		9,037			11,122			28,182			34,552
Short-term debt and other		720			6,834			12,292			15,044
AFUDC		(1,285	)		(2,269	)		(3,519	)		(5,621	)
Total interest charges		37,606			46,932			124,492			135,350

Preferred stock dividends of subsidiary		490			490			1,470			1,470
Net income	$	84,198		$	76,705		$	182,118		$	166,418
											;
Weighted average common shares outstanding:
Basic		106,808			106,808			106,808			106,808
Diluted		107,047			107,166			107,120			107,098

Earnings per common share:
Basic	$	0.79		$	0.72		$	1.71		$	1.56
Diluted	$	0.79		$	0.72		$	1.70		$	1.55
											;
Dividends declared per common share	$	0.325		$	0.3025		$	0.975		$	1.21
											;

The accompanying notes are an integral part of the consolidated financial statements.

Table of Contents

NSTAR

Consolidated Statements of Retained Earnings

(Unaudited)

(in thousands)


	Three Months Ended					Nine Months Ended
		September 30,				September 30,
		2007		2006		2007		2006

Balance at the beginning of the period, as previously reported	$	739,428	$	614,284	$	664,323	$	621,500
Adoption of FIN 48 adjustment		-		-		46,610		-
Adjusted balance at the beginning of the period		739,428		614,284		710,933		621,500
Add:
Net income		84,198		76,705		182,118		166,418
Subtotal		823,626		690,989		893,051		787,918
Deduct:
Dividends declared:
Common shares *		34,713		32,309		104,138		129,238
Balance at the end of the period	$	788,913	$	658,680	$	788,913	$	658,680


*	As a result of a change in NSTAR's Board of Trustees meetings schedule in 2005, the fourth quarter dividend typically declared in December was approved on January 26, 2006. The dividend payment schedule remains unchanged.

The accompanying notes are an integral part of the consolidated financial statements.

NSTAR

Consolidated Statements of Comprehensive Income

(Unaudited)

(in thousands)


		Three Months Ended					Nine Months Ended
		September 30,					September 30,
		2007			2006		2007			2006

Net income	$	84,198		$	76,705	$	182,118		$	166,418
Other comprehensive income, net:
Pension and postretirement benefits costs		561			-		1,680			-
Deferred income tax expense		(231	)		-		(692	)			-
Comprehensive income	$	84,528		$	76,705	$	183,106		$	166,418

The accompanying notes are an integral part of the consolidated financial statements.

NSTAR

Consolidated Balance Sheets

(Unaudited)

(in thousands)


		September 30,		December 31,
		2007		2006
Assets
Utility Plant:
Electric and gas plant in service, at original cost	$	5,259,159	$	5,033,562
Less: accumulated depreciation		1,303,945		1,244,163
		3,955,214		3,789,399
Construction work in progress		126,565		155,862
Net utility plant		4,081,779		3,945,261

Other property and investments:
Non-utility property, net		143,524		140,866
Equity investments		7,468		8,113
Other investments		85,439		74,482
		236,431		223,461

Current assets:
Cash and cash equivalents		21,022		16,132
Restricted cash		4,237		7,010
Accounts receivable, net of allowance of $26,463 and $27,240, respectively		317,145		317,220
Accrued unbilled revenues		55,649		58,976
Regulatory assets		448,850		418,724
Inventory, at average cost		117,592		124,874
Other		10,323		16,514
		974,818		959,450

Deferred debits:
Regulatory assets		2,145,227		2,434,737
Other		85,410		77,062
		2,230,637		2,511,799

Refundable income tax		129,120		129,120
Total assets	$	7,652,785	$	7,769,091

The accompanying notes are an integral part of the consolidated financial statements.

Table of Contents

NSTAR

Consolidated Balance Sheets

(Unaudited)

(in thousands)


		September 30,			December 31,
		2007			2006
Capitalization and Liabilities

Common equity:
Common shares, par value $1 per share, 200,000,000 shares
authorized, 106,808,376 issued and outstanding	$	106,808		$	106,808
Premium on common shares		815,591			823,450
Retained earnings		788,913			664,323
Accumulated other comprehensive loss		(11,030	)		(12,018	)
		1,700,282			1,582,563

Long-term debt and preferred stock:
Long-term debt		1,719,592			1,723,558
Transition property securitization		483,958			637,217
Cumulative non-mandatory redeemable preferred stock of subsidiary, par value $100 per share, 2,890,000 shares authorized, 430,000 shares outstanding		43,000			43,000
		2,246,550			2,403,775

Current liabilities:
Long-term debt		6,889			83,999
Transition property securitization		133,989			92,083
Notes payable		547,000			436,400
Income taxes		138,785			17,485
Accounts payable		243,800			302,240
Energy contracts		144,743			204,470
Accrued interest		27,783			37,742
Dividends payable		35,039			35,039
Accrued expenses		14,159			15,125
Other		59,757			47,721
		1,351,944			1,272,304

Deferred credits:
Accumulated deferred income taxes		1,132,108			1,209,734
Unamortized investment tax credits		20,521			21,785
Energy contracts		504,056			563,936
Pension and other postretirement liability		264,333			264,246
Regulatory liability - cost of removal		264,427			260,198
Other		168,564			190,550
		2,354,009			2,510,449

Commitments and contingencies

Total capitalization and liabilities	$	7,652,785		$	7,769,091

The accompanying notes are an integral part of the consolidated financial statements.

Table of Contents

NSTAR

Consolidated Statements of Cash Flows

(Unaudited)

(in thousands)


		Nine Months Ended
		September 30,
		2007			2006
Operating activities:
Net income	$	182,118		$	166,418
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization		277,985			271,402
Deferred income taxes		15,586			4,523
Gain on sale of non-utility property		-			(4,101	)
Noncash stock-based compensation		6,637			6,107
Impact of nonmonetary transactions		-			(5,936	)
Premium paid on long-term debt redemption		(17,647	)		-
Purchase power contract buyouts		(119,250	)		(101,539	)
Net changes in:
Accounts receivable and accrued unbilled revenues		(2,134	)		(40,881	)
Accounts payable		(42,510	)		(29,498	)
Other current assets		(16,653	)		114,668
Other current liabilities		62,684			154,408
Net change from other operating activities		128,352			(3,539	)
Net cash provided by operating activities		475,168			532,032

Investing activities:
Plant expenditures (including AFUDC)		(269,671	)		(334,766	)
Decrease in restricted cash		2,755			3,005
Proceeds from sale of non-utility property		-			6,033
Investments		(2,855	)		(2,162	)
Net cash used in investing activities		(269,771	)		(327,890	)

Financing activities:
Long-term debt redemptions		(82,017	)		(10,156	)
Issuance of long-term debt, net of discount		-			197,886
Transition property securitization redemptions		(111,353	)		(118,733	)
Debt issue costs		-			(1,750	)
Net change in notes payable		110,600			(161,000	)
Change in disbursement accounts		(3,782	)		(11,996	)
Dividends paid		(104,138	)		(96,929	)
Cash received for exercise of equity options		7,748			3,664
Cash used to settle equity compensation		(20,027	)		(9,992	)
Windfall tax effect of settlement of equity compensation		2,462			663
Net cash used in financing activities		(200,507	)		(208,343	)

Net increase (decrease) in cash and cash equivalents		4,890			(4,201	)
Cash and cash equivalents at the beginning of the year		16,132			15,612
Cash and cash equivalents at the end of the period	$	21,022		$	11,411

Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest, net of amounts capitalized	$	138,626		$	140,588
Income taxes, net of refunds	$	56,212		$	23,528

Noncash investing activities:
Plant expenditures included in accounts payable	$	29,821		$	24,012
Noncash plant additions	$	5,536		$	1,800

The accompanying notes are an integral part of the consolidated financial statements.

Table of Contents

Notes to Consolidated Financial Statements

(Unaudited)

The accompanying notes should be read in conjunction with Notes to Consolidated Financial Statements included in NSTAR's 2006 Annual Report on Form 10-K.

Note A. Business Organization and Summary of Significant Accounting Policies

1. About NSTAR

NSTAR (or the Company) is a holding company engaged through its subsidiaries in the energy delivery business. The Company serves approximately 1.4 million customers in Massachusetts, including approximately 1.1 million electric distribution customers in 81 communities and approximately 300,000 natural gas distribution customers in 51 communities. NSTAR's retail electric and natural gas utility distribution subsidiaries are NSTAR Electric and NSTAR Gas, respectively. Reference in this report to "NSTAR" shall mean the registrant NSTAR or NSTAR and its subsidiaries as the context requires. NSTAR also has ownership and conducts unregulated non-utility operations.

2. Basis of Accounting

The accompanying financial information presented as of September 30, 2007 and for the three and nine-month periods ended September 30, 2007 and 2006 has been prepared from NSTAR's books and records without audit by an independent registered public accounting firm. However, NSTAR's independent registered public accounting firm has performed a review of these interim financial statements in accordance with standards established by the PCAOB. Financial information as of December 31, 2006 was derived from the audited consolidated financial statements of NSTAR, but does not include all disclosures required by GAAP. In the opinion of NSTAR's management, all adjustments (which are of a normal recurring nature) necessary for a fair presentation of the financial information for the periods indicated have been included. Certain immaterial reclassifications have been made to prior period amounts to conform with the current presentation.

NSTAR's utility subsidiaries follow accounting policies prescribed by the FERC and the DPU. Effective April 11, 2007, the MDTE was restructured as the DPU. In addition, NSTAR and its subsidiaries are subject to the accounting and reporting requirements of the SEC. NSTAR's utility subsidiaries are subject to SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation" (SFAS 71). The application of SFAS 71 results in differences in the timing of recognition of certain expenses from those of other businesses and industries. The distribution and transmission businesses are subject to rate-regulation and meet the criteria for application of SFAS 71.

The preparation of financial statements in conformity with GAAP requires management of NSTAR and its subsidiaries to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

The results of operations for the three and nine-month periods ended September 30, 2007 and 2006 are not indicative of the results that may be expected for an entire year. The demand for electricity and natural gas is affected by weather conditions and our customers' conservation measures caused by increases in global energy costs. Electric energy sales and revenues are typically higher in the winter and summer months than in the spring and fall months. Natural gas energy sales and revenues are typically higher in the winter months than during other periods of the year.

3. Stock-Based Compensation

NSTAR applies the recognition and measurement principles of SFAS No. 123(R), "Share-Based Payments" (SFAS 123R) to account for its share-based compensation. Under the fair value recognition provision of SFAS 123R, share-based compensation cost is measured at the grant date based on the fair value of the award. Determining the fair value of its share-based awards at the grant date requires judgment and the use of assumptions including estimating expected dividends and stock price volatility. NSTAR recognizes the expense of its share-based compensation over the period during which an employee is required to provide services.

On May 3, 2007, the shareholders of NSTAR approved the NSTAR 2007 Long Term Incentive Plan (the 2007 Plan), effective as of that date. The 2007 Plan replaces the NSTAR 1997 Share Incentive Plan (the 1997 Plan), which expired by its terms in January 2007. The 2007 Plan is similar in design to the 1997 Plan. The 2007 Plan limits the terms of awards to ten years and prohibits the granting of awards beyond ten years after its effective date. The following awards were granted to executives and senior managers on May 3, 2007 under the terms of the 2007 Plan:


	Total Awards Granted	Exercise Price
Deferred Shares	173,100	-
Stock Options	422,000	$36.89

Deferred shares and stock options granted on May 3, 2007 have a grant date fair value of $36.89 and $4.79, respectively. The grant date fair value of deferred shares and the exercise price of stock options is equal to the closing price of the Company's common shares on May 3, 2007. The fair value of stock options was estimated using the Black-Scholes option-pricing model incorporating the assumptions in the table below. The expected option lives were based on the average historical time frame that options are expected to remain unexercised. Expected volatilities were based on the historical performance of NSTAR's stock price. The risk-free interest rate was based on the U.S. Treasury Strip in effect on the grant date. The fair value of stock options was computed using the following assumptions:


Expected life (years)	6.0
Risk-free interest rate	4.56	%
Volatility	14.60	%
Dividends	3.85	%

4. Pension and Other Postretirement Benefits

NSTAR applies the funded status recognition provisions of SFAS No. 158, "Employers' Accounting for Deferred Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106, and 132(R),” to record the funded status of the pension and other postretirement benefit plans. The net periodic pension and other postretirement benefit costs for the third quarter were based on the latest available participant census data. An annual actuarial valuation was completed during the second quarter and cost estimates were adjusted based on actual results.

SFAS No. 132R, "Employers' Disclosures about Pensions and Other Postretirement Benefits," requires disclosure of the net periodic pension and postretirement benefit costs.

Pension

NSTAR sponsors a defined benefit retirement plan, the NSTAR Pension Plan (the Plan), that covers substantially all employees. During the nine months ended September 30, 2007, NSTAR did not contribute to the Plan and does not anticipate contributing to the Plan during the remainder of 2007 due to its current funded status.

Components of net periodic pension benefit cost were as follows:


		Three Months Ended						Nine Months Ended
		September 30,						September 30,
(in millions)		2007			2006			2007			2006
Service cost	$	5.4		$	5.1		$	16.1		$	15.5
Interest cost		15.5			14.9			46.6			44.6
Expected return on Plan assets		(20.9	)		(19.5	)		(62.5	)		(58.5	)
Amortization of prior service cost		0.1			-			0.3			-
Recognized actuarial loss		5.2			6.9			15.5			20.5
Net periodic pension benefit cost	$	5.3		$	7.4		$	16.0		$	22.1

Other Postretirement Benefits

NSTAR also provides health care and other benefits to retired employees who meet certain age and years of service eligibility requirements. Under certain circumstances, eligible retirees are required to contribute for postretirement benefits. During the nine months ended September 30, 2007, NSTAR contributed $9.3 million to this plan and anticipates making an additional $5.7 million in contributions during the remainder of 2007.

Components of net periodic postretirement benefit cost were as follows:


		Three Months Ended						Nine Months Ended
		September 30,						September 30,
(in millions)		2007			2006			2007			2006
Service cost	$	1.4		$	1.4		$	4.3		$	4.2
Interest cost		8.9			8.1			26.7			24.6
Expected return on Plan assets		(7.0	)		(6.8	)		(21.1	)		(20.3	)
Amortization of prior service cost		(0.4	)		-			(1.1	)		-
Amortization of transition obligation		0.2			0.3			0.6			0.6
Recognized actuarial loss		2.8			2.7			8.3			8.0
Net periodic postretirement benefit cost	$	5.9		$	5.7		$	17.7		$	17.1

5. Future Accounting Requirement

In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities" (SFAS 159). This statement provides companies with an option to report selected financial assets and liabilities at fair value. SFAS 159 will apply to fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact SFAS 159 may have, if any, on its financial position.

Note B. Cost of Removal

For NSTAR's regulated utility businesses, the ultimate cost to remove utility plant from service (cost of removal) is recognized as a component of depreciation expense in accordance with approved regulatory treatment. As of September 30, 2007 and December 31, 2006, the estimated amount of the cost of removal included in regulatory liabilities was approximately $264 million and $260 million, respectively, based on the cost of removal component in current depreciation rates.

Note C. Derivative Instruments

Energy Contracts

NSTAR accounts for its energy contracts in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (SFAS 133) and SFAS No. 149, "Amendment of Statement No. 133 on Derivative Instruments and Hedging Activities" (SFAS 149). NSTAR has determined that its electricity supply contracts qualify for, and NSTAR has elected to apply, the normal purchases and sales exception. As a result, these agreements are not reflected as either an asset or liability on the accompanying Consolidated Balance Sheets. The majority of NSTAR's gas supply contracts do not qualify for the normal purchases and sales exception; however, these contracts contain market based pricing mechanisms, and therefore, no adjustments are required.

Hedging Agreements

NSTAR Gas purchases financial contracts based upon NYMEX natural gas futures in order to reduce cash flow variability associated with the purchase price for approximately one-third of its natural gas purchases. The objective of this practice is to minimize fluctuations in prices to NSTAR firm gas sales customers. These financial contracts do not procure gas supply and therefore NSTAR Gas does not take physical delivery of gas. These contracts qualify as derivative financial instruments, specifically cash flow hedges, under SFAS 133, as amended by SFAS 149. Accordingly, the fair value of these instruments is recognized on the accompanying Consolidated Balance Sheets as an asset or liability representing amounts due from or payable to the counter parties of NSTAR Gas, as if such contracts were settled currently. All actual costs and benefits incurred are included in the firm sales CGAC and are fully recoverable from customers. As a result, NSTAR Gas records an offsetting regulatory asset or liability for the market price changes, in lieu of recording the adjustment to Other Comprehensive Income. Currently, these derivative contracts extend through April 2008. At September 30, 2007 and December 31, 2006, NSTAR has recorded a liability and a corresponding regulatory asset of $9.4 million and $32.7 million, respectively, reflecting the fair value of these contracts. During the nine months ended September 30, 2007, approximately $25 million of these financial contracts were settled.

Note D. Service Quality Indicators

SQI are established performance benchmarks for certain identified measures of service quality relating to customer service and billing performance, safety and reliability and consumer division statistics performance for all Massachusetts utilities. NSTAR Electric and NSTAR Gas are required to report annually to the DPU concerning their performance as to each measure and are subject to maximum penalties of up to two percent of total transmission and distribution revenues should performance fail to meet the applicable benchmarks.

NSTAR monitors its service quality continuously to determine if a liability has been triggered. If it is probable that a liability has been incurred and is estimable, a liability is accrued. Annually, each NSTAR utility subsidiary makes a service quality performance filing with the DPU. Any settlement or rate order that would result in a different liability level from what has been accrued would be adjusted in the period that the DPU issues an order determining the amount of any such liability.

On March 1, 2007, NSTAR Electric and NSTAR Gas filed their 2006 Service Quality Reports with the DPU that demonstrated the Companies achieved sufficient levels of reliability and performance; the reports indicate that no penalty was assessable for 2006.

matter. NSTAR Electric had responded to the DPU, including providing updates in September 2006 on detailed electric circuit data. For 2006, NSTAR Electric determined that its performance related to these applicable circuits has exceeded the established benchmarks and therefore, has accrued its incentive entitlement of $0.5 million. For 2007, no circuit performance incentive or penalty has been accrued during the nine months ended September 30, 2007.

Note E. Income Taxes

Income taxes are accounted for in accordance with SFAS No. 109, "Accounting for Income Taxes" (SFAS 109). SFAS 109 requires the recognition of deferred tax assets and liabilities for the future tax effects of temporary differences between the carrying amounts and the tax basis of assets and liabilities. In accordance with SFAS 71 and SFAS 109, net regulatory assets of $30.2 million and $30.9 million and corresponding net increases in accumulated deferred income taxes were recorded as of September 30, 2007 and December 31, 2006, respectively. The regulatory assets represent the additional future revenues to be collected from customers for deferred income tax deficiencies at the adoption of SFAS 109.

The following table reconciles the statutory federal income tax rate to the annual estimated effective income tax rate for 2007 and the actual effective income tax rate for the year ended December 31, 2006:


	2007		2006
Statutory tax rate	35	%	35	%
State income tax, net of federal income tax benefit	5	%	5	%
Other	(2	)%	(2	)%
Effective tax rate	38	%	38	%

Uncertain Tax Positions

In July 2006, the FASB issued Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes,” an Interpretation of SFAS No. 109, “Accounting for Income Taxes." FIN 48 prescribes guidance to address inconsistencies in the methods used to measure and recognize income tax positions for financial statement purposes. Specifically, FIN 48 establishes criteria for the recognition of income tax benefits. FIN 48 requires the financial statement recognition of an income tax benefit when the company determines that it is more-likely-than-not that the tax position will be ultimately sustained.

NSTAR adopted FIN 48 effective January 1, 2007. NSTAR’s tax accounting policy prior to the adoption of FIN 48 was to recognize uncertain tax positions taken on its income tax returns only if the likelihood of prevailing was probable. FIN 48 establishes a recognition standard of more-likely-than-not, which is a lower threshold than NSTAR’s previous tax recognition policy.

Upon the adoption, and in accordance with FIN 48, NSTAR recognized the cumulative effect of approximately $46.6 million as an increase to its beginning retained earnings related to the deduction from the loss on the abandonment of NSTAR's investment in the stock of RCN Corporation (RCN) and the deduction of construction-related costs. This adjustment consisted primarily of $39.6 million representing the net unrecognized benefit of the RCN share abandonment. This adjustment also included the reversal of previously accrued interest expense on the RCN deduction and interest income accrued on the deduction of construction-related costs, as discussed further in this note, which combined netted to $7 million after tax. NSTAR's assessment of the RCN uncertain tax position has consistently been that it is more-likely-than-not of prevailing.

As of January 1, 2007, the date of adoption, and September 30, 2007, there were no unrecognized tax benefits of a permanent tax nature that if recognized would have an impact on the Company’s effective tax rate. The total amount of unrecognized tax benefits as of September 30, 2007 and January 1, 2007 was $15 million and $12 million, respectively, relating to temporary differences of tax benefits reflected on previous income tax returns. These amounts have been recognized as FIN 48 liabilities on the accompanying Consolidated Balance Sheets in Deferred Credits - Other.

In addition to its FIN 48 tax liability, NSTAR has unrecognized benefits associated with interest on construction-related uncertain tax positions of approximately $14 million and $9 million at January 1, 2007 and September 30, 2007, respectively. The decrease of $5 million during 2007 reflects interest income on tax positions taken during prior periods recognized during the three months ended September 30, 2007. The amount recognized reflects a change in management's estimate of its tax position resulting from recent settlement discussions with the IRS and additional information available during the third quarter.

It is possible that the amount of unrecognized tax benefits relating to the deduction for construction-related costs in the form of interest income could significantly change within twelve months of this reporting date. This would occur if NSTAR were to reach a final resolution with the IRS Office of Appeals on this issue. The estimated range of the unrecognized potential change is zero to approximately $9 million as of September 30, 2007.

NSTAR recognizes interest accrued related to uncertain tax positions in Interest charges: Short-term debt and other. NSTAR also recognizes related penalties, if applicable, in Other deductions, net on the accompanying Consolidated Statements of Income. This accounting policy is consistent with the recognition of these items prior to the adoption of FIN 48.

For the nine months ended September 30, 2007, the amount of related interest income, net, recognized on the accompanying Consolidated Statements of Income was $8 million and the total amount of accrued interest receivable on the accompanying Consolidated Balance Sheets was $12 million. No penalties were recognized during the nine months ended September 30, 2007.

As of September 30, 2007, the 2001 through 2006 federal and state tax years remain open. Years 2001 and 2002 are currently at the IRS Office of Appeals and years 2003 and 2004 are under examination by the IRS.

RCN Share Abandonment Tax Treatment

On December 24, 2003, NSTAR exited its investment in RCN by formally abandoning its 11.6 million shares of RCN common stock. NSTAR determined that the abandonment at that time was the most tax efficient, cost effective and expedient means to exit its RCN investment. NSTAR also determined that the benefit of a tax realization event at that time and in that manner outweighed any benefit that it would likely realize from any other alternative, including the future sale of such shares in an orderly fashion consistent with all laws, rules and regulations. Based on NSTAR's assessment and its tax accounting policy at that time, NSTAR accrued a tax reserve so as not to recognize the tax benefit of the uncertain tax position.

As of December 31, 2006, the potential tax loss contingency was approximately $39.6 million. Upon the adoption of FIN 48, as previously discussed, NSTAR recognized the entire amount as an adjustment to its January 1, 2007 retained earnings balance.

Deduction of Construction-Related Costs

In 2004, NSTAR filed an amended federal income tax return for 2002 to change the method of accounting for certain construction-related overhead costs previously capitalized to plant using SSCM. This resulted in accelerated deductions. NSTAR claimed additional deductions related to the tax accounting method change in its 2002-2004 returns of $369 million. In 2005, NSTAR received formal notification from the IRS that the claim on its amended income tax return would be denied and NSTAR would not receive the requested refund amount due.

to the IRS of $129.1 million in 2006 representing the tax benefit related to the disallowed SSCM deductions for 2002-2004 even though the tax refund was not received. This payment will be fully refunded with interest to NSTAR once this tax position is settled. As of September 30, 2007 and December 31, 2006, this refund has been recorded as a non-current Refundable income tax on the accompanying Consolidated Balance Sheets.

Prior to the adoption of FIN 48, NSTAR assessed its tax position related to this tax benefit as less than more-likely-than-not. However, in measuring the benefit in conjunction with the adoption of FIN 48 as of January 1, 2007, NSTAR recognized $2.3 million, net of tax, of interest income to its January 1, 2007 retained earnings balance.

Note F. Earnings Per Common Share

Basic EPS is calculated by dividing net income, which includes a deduction for preferred dividends of a subsidiary, by the weighted average common shares outstanding during the respective period. Diluted EPS is similar to the computation of basic EPS except that the weighted average common shares are increased to include the impact of potential deferred (nonvested) shares and stock options granted.

The following table summarizes the reconciling amounts between basic and diluted EPS:


		Three Months Ended				Nine Months Ended
		September 30,				September 30,
(in thousands, except per share amounts)		2007		2006		2007		2006
Net income	$	84,198	$	76,705	$	182,118	$	166,418
Basic EPS	$	0.79	$	0.72	$	1.71	$	1.56
Diluted EPS	$	0.79	$	0.72	$	1.70	$	1.55

Weighted average common shares
outstanding for basic EPS		106,808		106,808		106,808		106,808
Effect of diluted shares:
Weighted average dilutive potential common shares		239		358		312		290
Weighted average common shares outstanding for diluted EPS		107,047		107,166		107,120		107,098

Note G. Long-Term Debt Redemption

On January 2, 2007, NSTAR Electric redeemed $77.7 million of long-term debt notes previously held by the former NSTAR subsidiary, Commonwealth Electric Company, in conjunction with NSTAR's merger of its electric subsidiaries. The payment totaled $95.3 million inclusive of a make-whole redemption premium of $17.6 million. This premium was recorded as a regulatory asset and is amortized over the recovery period through 2036. At December 31, 2006, this debt was classified as due within one year on the accompanying Consolidated Balance Sheets.

Note H. Segment and Related Information

For the purpose of providing segment information, NSTAR's principal operating segments are its traditional core businesses, the electric and natural gas retail transmission and distribution utilities that provide energy delivery services in 107 cities and towns in Massachusetts. The unregulated operating segment engages in business activities that include district energy operations, telecommunications and a liquefied natural gas service. Amounts shown on the following table for the three and nine-month periods ended September 30, 2007 and 2006 include the allocation of NSTAR's (parent company) results of operations and assets, net of inter-company transactions, and primarily consist of interest charges and investment assets, respectively, to each business segment. The allocation of parent company charges is based on an allocation of the parent company's investment relating to these various business segments.

Financial data for the operating segments were as follows:


		Utility Operations					Unregulated		Consolidated
(in thousands)		Electric			Gas		Operations		Total
Three months ended September 30,
2007
Operating revenues	$	718,313	$	51,717			$	34,889	$	804,919
Segment net income (loss)	$	86,755	$	(7,577		)	$	5,020	$	84,198
2006
Operating revenues	$	861,227	$	57,110			$	37,942	$	956,279
Segment net income (loss)	$	75,496	$	(5,641		)	$	6,850	$	76,705

Nine months ended September 30,
2007
Operating revenues	$	2,005,200	$	404,304			$	104,928	$	2,514,432
Segment net income	$	162,428	$	10,279			$	9,411	$	182,118
2006
Operating revenues	$	2,283,840	$	378,602			$	113,193	$	2,775,635
Segment net income	$	145,610	$	8,056			$	12,752	$	166,418

Total assets
September 30, 2007	$	6,736,395	$	710,191			$	206,199	$	7,652,785
December 31, 2006	$	6,764,098	$	805,635			$	199,358	$	7,769,091

Note I. Commitments and Contingencies

1. Environmental Matters

NSTAR subsidiaries face possible liabilities as a result of involvement in several multi-party disposal sites, state-regulated sites or third party claims associated with contamination remediation. NSTAR generally expects to have only a small percentage of the total potential liability for the majority of these sites. As of September 30, 2007 and December 31, 2006, NSTAR had a reserve of $0.9 million and $2.9 million, respectively, for these environmental sites. This estimated recorded liability is based on an evaluation of all currently available facts with respect to these sites.

NSTAR Gas is participating in the assessment or remediation of certain former MGP sites and alleged MGP waste disposal locations to determine if and to what extent such sites have been contaminated and whether NSTAR Gas may be responsible to undertake remedial action. The DPU has approved recovery of costs associated with MGP sites over a 7-year period, without carrying costs. As of September 30, 2007 and December 31, 2006, NSTAR recorded a liability of approximately $3.7 million and $3.2 million, respectively, as an estimate for site cleanup costs for several MGP sites for which NSTAR Gas was previously cited as a potentially responsible party. A corresponding regulatory asset was recorded that reflects the future rate recovery for these costs.

Estimates related to environmental remediation costs are reviewed and adjusted as further investigation and assignment of responsibility occurs and as either additional sites are identified or NSTAR's responsibilities for such sites evolve or are resolved. NSTAR's ultimate liability for future environmental remediation costs may vary from these estimates. Based on NSTAR's current assessment of its environmental responsibilities, existing legal requirements and regulatory policies, NSTAR does not believe that these environmental remediation costs will have a material adverse effect on NSTAR's consolidated financial position, results of operations or cash flows.

2. 345kV Transmission Project

Phase one of this project involved the construction of two 345kV transmission lines from a switching station in Stoughton, Massachusetts to substations in the Hyde Park section of Boston and to South

Boston. The first line of this project was placed in service in October 2006. The second 345kV line of phase one was placed in service in April 2007. Phase two of the 345kV project, which will add a third and final 345kV line to the project, is expected to be in service in 2009. Expenditures on phase two of the project are expected to be approximately $30 million in 2007 and $65 million through 2009. These transmission lines ensure continued reliability of electric service and improvement of power import capability in the Northeast Massachusetts area. A substantial portion of the cost of this project will be shared by other utilities in New England based on ISO-NE's approval and will be recovered by NSTAR through wholesale and retail transmission rates.

3. Regulatory and Legal Proceedings

a. Changes in Massachusetts' Regulatory Structure

In February 2007, the Massachusetts Governor enacted legislation amending Massachusetts utility regulation. The Legislation bifurcated the Department of Telecommunications and Energy into two distinct components - (1) energy and (2) telecommunications and cable television. The DPU replaces the MDTE and has jurisdiction over electric, natural gas, water and transportation matters. The DPU is headed by the newly established Commonwealth Utilities Commission, comprised of three commissioners.

b. Regulatory Proceedings - MDTE/DPU

Proposed Rate Decoupling

On June 22, 2007, the DPU opened a generic investigation into rate structures and revenue recovery mechanisms in order to promote efficient deployment of demand resources in Massachusetts. Demand resources are installed equipment, measures or programs that reduce end-use demand for electricity or natural gas. This investigation will include, in part, a review of whether and how existing rate mechanisms may be changed to better align a company's financial interests with the needs to provide greater energy efficiencies and foster the advancement of price-responsive demand in regional wholesale energy markets. Historically, Massachusetts retail electric and natural gas distribution companies have sponsored customer-funded energy efficiency and load reduction programs. The DPU has proposed to implement a base revenue adjustment mechanism that "decouples" the link between a utility’s revenues and its sales to eliminate a utility’ s disincentive to sponsor such programs.

NSTAR supports the DPU’s objectives that would promote greater levels of energy efficiencies and alternative energy resources. It is important that the outcome of this generic decoupling proceeding effectively achieve these objectives in balance with other rate policy objectives. NSTAR Electric anticipates working to achieve an effective rate mechanism with the DPU. NSTAR cannot predict the timing or the ultimate outcome of this proceeding.

c. Current Rate Settlement Agreement Matters

On December 30, 2005, the DPU approved the seven-year Rate Settlement Agreement (through 2012) between NSTAR Electric, the AG and several interveners. As a component of the Rate Settlement Agreement, NSTAR Electric is entitled to certain incentives related to Wholesale Power Cost Savings Initiatives. Under the terms of the agreement, NSTAR Electric was to share in 25% of the savings applicable to its customers. The recovery of NSTAR Electric's share of benefits is to be collected over three years, and the aggregate annual recovery is capped at 2% of the annual distribution and transmission service revenues. As a result of NSTAR's role in two RMR cases, NSTAR Electric had sought to collect $9.8 million annually for three years and began recognizing and collecting these incentive revenues from its customers effective January 1, 2007, subject to final DPU approval. Public hearings were held by the DPU in early 2007 to investigate the basis a nd support for the incentive payments. After these hearings NSTAR Electric began discussions with the staff of the newly elected AG and a revised Settlement Agreement was executed on July 23, 2007. This revised Settlement Agreement allows NSTAR Electric to collect $6.3 million of the savings annually for three years effective January 1,

2007. In addition, the Settlement Agreement stipulates that NSTAR Electric will share 12.5% of the savings applicable to its customers in its future efforts related to new wholesale energy cost savings cases. The revision of the Settlement Agreement did not have a material impact on NSTAR’s results of operations, financial position or cash flows. Approval of this Settlement Agreement and of the incentives is required by the DPU. A ruling on this Settlement is expected during the fourth quarter 2007.

NSTAR Electric made its 2006 Distribution Rate Adjustment/Reconciliation Filing on September 29, 2006. The filing implements the provisions of the Rate Settlement Agreement that supports the establishment of new distribution and transition rates that became effective January 1, 2007. Also effective on this date, NSTAR Electric's distribution rates include elements of a SIP and a CPSL program that require an offsetting adjustment to its transition rate. The performance-based SIP is based on the gross domestic product price index minus a productivity offset and rate adjustment factor that resulted in a 2.64% increase in distribution rates. The CPSL program relates to incremental spending for double pole replacements and underground electric safety programs, which include stray-voltage remediation and manhole inspections, repairs and upgrades. For 2006, the CPSL cost recovery was estimated to be $13.3 million and is being collected during 2007. &n bsp;A reconciliation of final 2006 CPSL cost recovery of $14.3 million was filed with the DPU. On October 1, 2007, NSTAR Electric filed for recovery of its estimated 2007 CPSL cost of $24 million to be collected during 2008. This balance includes the under-collection of 2006 final CPSL amounts. Recovery of CPSL costs is subject to DPU review and reconciliation to actual costs. NSTAR cannot predict the timing or the ultimate outcome of these filings.

In addition, the Rate Settlement Agreement provided for a preliminary agreement to certain terms of a merger and asset transfer of NSTAR's electric subsidiaries that became effective on January 1, 2007, and implemented a 50% / 50% earnings sharing mechanism based on NSTAR Electric's aggregate return on equity should it exceed 12.5% or fall below 8.5%. Should the return on equity fall below 7.5%, NSTAR Electric may file a request for a general rate increase. NSTAR Electric also adopted certain new SQI performance incentives and penalties effective January 1, 2007.

d. Rate Settlement Agreement and Basic Service Bad Debt Adder

On July 1, 2005, in response to a generic DPU order that required electric utilities to recover the energy-related portion of bad debt costs in their basic service rates, NSTAR Electric increased its basic service rates and reduced its distribution rates for those bad debt costs. In furtherance of this generic DPU order, NSTAR Electric included a bad debt cost recovery mechanism as a component of its Rate Settlement Agreement. This recovery mechanism (bad debt adder) allowed NSTAR Electric to recover its basic service bad debt costs on a fully reconciling basis. These rates were implemented, effective January 1, 2006, as part of NSTAR Electric’s Rate Settlement Agreement approved by the DPU on December 30, 2005.

On February 7, 2007, NSTAR Electric filed its 2006 basic service reconciliation with the DPU proposing an adjustment related to the increase of its basic service bad debt charge-offs. This proposed rate adjustment was anticipated to be implemented effective July 1, 2007. However, on June 28, 2007, the DPU issued an order approving the implementation of a revised basic service rate but required NSTAR Electric to reduce base rates by the increase in its basic service bad debt charge-offs. Such action would effectively eliminate the fully reconciling nature of the basic service bad debt adder.

NSTAR Electric has not implemented the components of the June 28, 2007 DPU order. Implementation of this order would require NSTAR Electric to write-off a previously recorded regulatory asset related to its basic service bad debt costs. NSTAR Electric filed a Motion for Reconsideration of the DPU’s order on July 18, 2007. In addition, NSTAR Electric filed a request for extension of the judicial appeal period with the DPU. On July 27, 2007, the extension was granted. NSTAR Electric believes its position is appropriate and that it will ultimately prevail. However, in the event that its Motion for Reconsideration is denied, NSTAR Electric intends to pursue all legal options. As of September 30, 2007, the potential impact to earnings of eliminating the bad debt adder was approximately $12 million, pre-tax. NSTAR cannot predict the timing or the ultimate outcome of this proceeding.

e. Regulatory Proceedings - FERC

On July 9, 2007, FERC issued an Order that in part approved NSTAR Electric's 2007 proposed consolidated transmission rates as filed on February 14, 2007, subject to refund, pending the conclusion of subsequent proceedings. As a result of these proceedings, NSTAR reached an agreement in principle with the FERC staff and the AG. NSTAR anticipates a final Settlement will be executed with the AG during the fourth quarter. The Settlement will be subject to FERC approval. NSTAR does not expect the impact of this Settlement to be material to the Company's financial position, results of operations or cash flows.

NSTAR's former subsidiaries Cambridge Electric and Commonwealth Electric filed proposed changes to their OATT with the FERC on March 30, 2005 to provide for consistent application of the OATT among all NSTAR Electric companies. These tariffs became effective on June 1, 2005 and expired on December 31, 2006; however, the FERC set certain rate-related issues raised in the proceeding for hearing, but held the hearing in abeyance pending settlement discussions with the AG, the sole intervener. On November 17, 2006, a settlement agreement that resolved all issues in the proceeding was filed at FERC. The settlement was approved by the full Commission on March 1, 2007.

f. Legal Matters

In the normal course of its business, NSTAR and its subsidiaries are involved in certain legal matters, including civil litigation. Management is unable to fully determine a range of reasonably possible court-ordered damages, settlement amounts, and related litigation costs ("legal liabilities") that would be in excess of amounts accrued and amounts covered by insurance. Based on the information currently available, NSTAR does not believe that it is probable that any such legal liabilities will have a material impact on its consolidated financial position. However, it is reasonably possible that additional legal liabilities that may result from changes in circumstances could have a material impact on its results of operations, cash flows and financial condition for a reporting period.

Table of Contents

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A)

The accompanying MD&A focuses on factors that had a material effect on the financial condition, results of operations and cash flows of NSTAR during the periods presented and should be read in conjunction with the accompanying consolidated financial statements and related notes and with the MD&A in NSTAR's 2006 Annual Report on Form 10-K.

Business Overview

NSTAR is a holding company engaged through its subsidiaries in the energy delivery business serving approximately 1.4 million customers in Massachusetts, including approximately 1.1 million electric distribution customers in 81 communities and approximately 300,000 natural gas distribution customers in 51 communities. NSTAR's core business is a traditional "pipes and wires" company with a continuing focus on shareholder value and a continued commitment for safe and reliable energy delivery to customers. NSTAR also focuses on providing accurate information and other helpful assistance to its customers, thereby providing a superior customer experience. NSTAR's strategy is to invest in transmission and distribution assets that will align with its core business competencies.

Electric utility operations. NSTAR derives 80% of its operating revenues from the transmission and distribution of electric energy through its NSTAR Electric retail distribution subsidiary.

Gas utility operations. NSTAR derives 16% of its operating revenues from the distribution of natural gas through its NSTAR Gas retail natural gas distribution subsidiary.

Unregulated operations. NSTAR derives 4% of its operating revenues from non-utility, unregulated operating subsidiaries in the telecommunications and district energy operations.

Earnings. NSTAR's earnings are impacted by its customers' requirements for energy in the form of unit sales of electricity and natural gas, which directly determine the level of distribution and transmission revenues recognized. In accordance with the regulatory rate structure in which NSTAR operates, its recovery of energy and energy related costs are fully reconciled with the level of energy revenues currently recorded and, therefore, do not have an impact on earnings.

Net income for the three and nine-month periods ended September 30, 2007 amounted to $84.2 million and $182.1 million, or $0.79 and $1.70 diluted earnings per share, respectively, as compared to $76.7 million and $166.4 million, or $0.72 and $1.55 diluted earnings per share for the same periods in 2006, as further explained in this discussion.

Critical Accounting Policies and Estimates

For a complete discussion of critical accounting policies, refer to "Critical Accounting Policies and Estimates" in Item 7 of NSTAR's 2006 Form 10-K. Other than NSTAR's change in its tax accounting policy as a result of the adoption of FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes,” an Interpretation of SFAS No. 109, “Accounting for Income Taxes," there have been no substantive changes to those policies and estimates.

Uncertain Tax Positions

In July 2006, the FASB issued FIN 48 that prescribes guidance to address inconsistencies in the methods used to measure and recognize income tax positions for financial statement purposes. Specifically, FIN 48 establishes criteria for the recognition of income tax benefits. FIN 48 requires the financial statement recognition of an income tax benefit when the company determines that it is more-likely-than-not that the tax position will be ultimately sustained.

Upon the adoption, and in accordance with FIN 48, NSTAR recognized the cumulative effect of approximately $46.6 million as an increase to its beginning retained earnings related to the deduction from the loss on the abandonment of NSTAR's investment in the stock of RCN Corporation (RCN) and the deduction of construction-related costs. This adjustment consisted primarily of $39.6 million representing the net unrecognized benefit of the RCN share abandonment. This adjustment also included the reversal of previously accrued interest expense on the RCN deduction and interest income accrued on the deduction of construction-related costs, as discussed further in this section, which combined netted to $7 million after tax. NSTAR's assessment on the RCN uncertain tax position has consistently been that it is more-likely-than-not of prevailing.

2007. The amount recognized reflects a change in management's estimate of its tax position resulting from recent settlement discussions with the IRS and additional information available during the third quarter.

RCN Share Abandonment Tax Treatment

Deduction of Construction-Related Costs

In August 2005, the IRS issued Revenue Ruling 2005-53 and Treasury Regulations under Code Section 263A related to the SSCM to curtail these levels of construction-related cost deductions by utilities and others. Under this Regulation, the SSCM is not available for the majority of NSTAR’s constructed property for the years 2005 and forward. As a result, NSTAR was required to make a cash tax payment to the IRS of $129.1 million in 2006 representing the tax benefit related to the disallowed SSCM deductions for 2002-2004 even though the tax refund was not received. This payment will be fully refunded with interest to NSTAR once this tax position is settled. As of September 30, 2007 and December 31, 2006, this refund has been recorded as a non-current Refundable income tax on the accompanying Consolidated Balance Sheets.

January 1, 2007, NSTAR recognized $2.3 million, net of tax, of interest income to its January 1, 2007 retained earnings balance.

FIN 48 requires the use of judgment in identifying and determining uncertain tax positions. Therefore, actual results could differ materially from previous estimates.

Future Accounting Requirement

In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities" (SFAS 159). This statement provides companies with an option to report selected financial assets and liabilities at fair value. SFAS 159 will apply to fiscal years beginning after November 15, 2007. Management is currently evaluating the impact SFAS 159 may have, if any, on its financial position.

Rate Structure

a. Retail Electric Rates

Electric distribution companies in Massachusetts are required to obtain and resell power through basic service for retail customers who choose not to buy energy from a competitive energy supplier. NSTAR Electric solicits bids from available wholesale energy suppliers in order to procure the lowest electricity prices for its customers. Basic service rates are reset every six months (every three months for large commercial and industrial customers). The price of basic service is intended to reflect the average competitive market price for power. As of September 30, 2007 and December 31, 2006, customers of NSTAR Electric had approximately 56% and 51%, respectively, of their load requirements provided by competitive suppliers. NSTAR Electric fully recovers its energy costs through DPU-approved rate mechanisms. Though energy delivery charges vary slightly by region, the basic service price for all residential customers decreased an avera ge of 8%, from $0.1186 to $0.1084 per kilowatt-hour effective July 1, 2007. Medium and large commercial customers decreased an average of 17% from $0.1142 cents to $0.0947 cents per kilowatt-hour effective October 1, 2007.

Current Rate Settlement Agreement Matters

On December 30, 2005, the DPU approved the seven-year Rate Settlement Agreement (through 2012) between NSTAR Electric, the AG and several interveners. As a component of the Rate Settlement Agreement, NSTAR Electric is entitled to certain incentives related to Wholesale Power Cost Savings Initiatives. Under the terms of the Agreement, NSTAR Electric was to share in 25% of the savings applicable to its customers. The recovery of NSTAR Electric's share of benefits is to be collected over three years, and the aggregate annual recovery is capped at 2% of the annual distribution and transmission service revenues. As a result of NSTAR's role in two RMR cases, NSTAR Electric had sought to collect $9.8 million annually for three years and began recognizing and collecting these incentive revenues from its customers effective January 1, 2007, subject to final DPU approval. Public hearings were held by the DPU in early 2007 to investigate the basis and sup port for the incentive payments. After these hearings NSTAR Electric began discussions with the staff of the newly elected AG and a revised Settlement Agreement was executed on July 23, 2007. This revised Settlement Agreement allows NSTAR Electric to collect $6.3 million of the savings annually for three years effective January 1, 2007. In addition, the Settlement Agreement stipulates that NSTAR Electric will share 12.5% of the savings applicable to its customers in its future efforts related to new wholesale energy cost savings cases. The revision of the Settlement Agreement did not have a material impact on NSTAR’s results of operations, financial position or cash flows. Approval of this Settlement Agreement and of the incentives is required by the DPU. A ruling on this Settlement is expected during the fourth quarter 2007.

offsetting adjustment to its transition rate. The performance-based SIP is based on the gross domestic product price index minus a productivity offset and rate adjustment factor that resulted in a 2.64% increase in distribution rates. The CPSL program relates to incremental spending for double pole replacements and underground electric safety programs, which include stray-voltage remediation and manhole inspections, repairs and upgrades. For 2006, the CPSL cost recovery was estimated to be $13.3 million and is being collected during 2007. A reconciliation of final 2006 CPSL cost recovery of $14.3 million was filed with the DPU. On October 1, 2007, NSTAR Electric filed for recovery of its estimated 2007 CPSL cost of $24 million to be collected during 2008. This balance includes the under-collection of 2006 final CPSL amounts. Recovery of CPSL costs is subject to DPU review and reconciliation to actual costs. NSTAR cannot predict the timing or the ultimate outcome of these filings.

Rate Settlement Agreement and Basic Bad Debt Adder

NSTAR Electric has not implemented the components of the June 28, 2007 DPU order. Implementation of this order would require NSTAR Electric to write-off a previously recorded regulatory asset related to its basic service bad debt costs. NSTAR Electric filed a Motion for Reconsideration of the DPU’s order on July 18, 2007. In addition, NSTAR Electric filed a request for extension of the judicial appeal period with the DPU. On July 27, 2007, the extension was granted. NSTAR Electric believes its position is appropriate and that it will ultimately prevail. However, in the event that its Motion of Reconsideration is denied, NSTAR Electric intends to pursue all legal options. As of September 30, 2007, the potential impact to earnings of eliminating the bad debt adder was approximately $12 million, pre-tax. NSTAR cannot predict the timing or the ultimate outcome of this proceeding.

b. Massachusetts Regulatory Environment

In January 2007, a newly elected Governor and Attorney General took office. The Governor and Attorney General have a very significant influence on energy regulatory policy in Massachusetts. While it is premature to assess how such policies may change, the Governor has taken steps that suggest some degree of change is likely.

The Governor has identified energy policy as a key initiative of his administration, and has functionally reorganized key energy offices. His reorganization plan, which took effect on April 11, 2007, created a

new cabinet position - the Secretary of Energy and Environmental Affairs. The Secretary now oversees a newly formed CUC, consisting of three commissioners. The CUC leads the DPU, a newly formed agency that has jurisdiction over electric, natural gas, water and transportation matters. The agency previously responsible for such functions, the MDTE, was eliminated.

The Governor’s administration has taken action to include Massachusetts in the Regional Greenhouse Gas Initiative, a multi-state group that supports implementation of programs to reduce the production of greenhouse gases by electric power plants. The administration has also announced that it favors increased investment in energy efficiency initiatives and renewable energy resources. The administration also favors the use of rate mechanisms that would encourage utilities to undertake such activities.

NSTAR is an active participant in the development of energy policy in Massachusetts and is working cooperatively with the Governor, Attorney General, and other key stakeholders in this area.

NSTAR cannot determine what impact, if any, future changes in regulatory policy or proposed new initiatives relating to energy efficiency or renewable resources will have on its results of operations, cash flows or its financial position.

c. Proposed Rate Decoupling

d. Regulatory Proceedings - FERC

e. Natural Gas Rates

NSTAR Gas generates revenues primarily through the sale and/or transportation of natural gas. Gas sales and transportation services are divided into two categories: firm, whereby NSTAR Gas must supply gas and/or transportation services to customers on demand; and interruptible, whereby NSTAR Gas may, generally during colder months, temporarily discontinue service to high volume commercial and industrial customers. Sales and transportation of gas to interruptible customers do not materially affect NSTAR Gas' operating income because substantially the entire margin for such service is returned to its firm customers as rate reductions.

In addition to delivery service rates, NSTAR Gas' tariffs include a seasonal CGAC and a LDAC. The CGAC provides for the recovery of all gas supply costs from firm sales customers. The LDAC provides for the recovery of certain costs applicable to both gas sales and transportation customers. The CGAC is filed semi-annually for approval by the DPU. The LDAC is filed annually for approval. In addition, NSTAR Gas is required to file interim changes to its CGAC factor when the actual costs of gas supply vary from projections by more than 5%.

Effective May 1, 2007, the DPU approved a summer period CGAC factor of $0.8726/therm, a 27% decline in cost from the previous rate level. The DPU has approved the CGAC factor to be effective November 1, 2007 for the winter heating season of $0.9799/therm that is 18% lower than last year's rate of $1.1949/therm. These rates reflect normal differences between winter and summer prices and the continued volatility of fuel prices on the NYMEX. Changes in the cost of gas supply have no impact on the Company's earnings due to the CGAC and LDAC rate recovery mechanisms.

NSTAR Gas purchases financial contracts based upon NYMEX natural gas futures in order to reduce cash flow variability associated with the purchase price for approximately one-third of its natural gas purchases. The objective of this practice is to minimize fluctuations in prices to NSTAR firm gas sales customers. These financial contracts do not procure gas supply and therefore NSTAR Gas does not take physical delivery of gas. These contracts qualify as derivative financial instruments, specifically cash flow hedges under SFAS 133, as amended by SFAS 149, "Amendment of Statement No. 133 on Derivative Instruments and Hedging Activities." Accordingly, the fair value of these instruments is recognized on the accompanying Consolidated Balance Sheets as an asset or liability representing amounts due from or payable to the counter parties of NSTAR Gas, as if such contracts were settled currently. All actual costs and ben efits incurred are included in the firm sales CGAC and are fully recoverable from customers. As a result, NSTAR Gas records an offsetting regulatory asset or liability for the market price changes, in lieu of recording the adjustment to Other Comprehensive Income. Currently, these derivative contracts extend through April 2008. At September 30, 2007 and December 31, 2006, NSTAR has recorded a liability and a corresponding regulatory asset of $9.4 million and $32.7 million, respectively, reflecting the fair value of these contracts. During the nine months ended September 30, 2007, approximately $25 million of these financial contracts were settled.

f. Service Quality Indicators

The Rate Settlement Agreement approved by the DPU on December 30, 2005 established additional performance measures applicable to NSTAR's rate regulated subsidiaries. The Rate Settlement Agreement establishes, for NSTAR Electric, a performance benchmark relating to its poor performing circuits, with a maximum penalty or incentive of up to $0.5 million. As part of NSTAR Electric's filing of its 2005 Annual Service Quality performance measures earlier in 2006, it included benchmark information related to this new circuit performance. The DPU issued several sets of discovery questions in this matter. NSTAR Electric has responded to the DPU, including providing updates in September 2006 on detailed electric circuit data. For 2006, NSTAR Electric determined that its performance related to these applicable circuits has exceeded the established benchmarks and therefore, has accrued its incentive entitlement of $0.5 million. For 2007, no cir cuit performance incentive or penalty has been accrued during the nine months ended September 30, 2007.

Union Labor Contracts

Substantially all management, engineering, finance and support services are provided to the operating subsidiaries of NSTAR by employees of NSTAR Electric & Gas. NSTAR has the following labor union contracts:


Union	Percent of Union to Total NSTAR Employees	Supports	Contract Expiration Date

Local 369 of the Utility Workers of America (AFL-CIO)	61%	Utility Operations	June 1, 2009

Local 12004 of the United Steelworkers of America	8%	Utility Operations	March 31, 2010

Local 877 of the International Union of Operating Engineers (AFL-CIO)	2%	MATEP	September 30, 2009

Management believes it has satisfactory relations with its employees.

Results of Operations

The following section of MD&A compares the results of operations for each of the three and nine-month periods ended September 30, 2007 and 2006 and should be read in conjunction with the accompanying Consolidated Financial Statements and the accompanying Notes to Consolidated Financial Statements included elsewhere in this report.

Three Months Ended September 30, 2007 compared to Three Months Ended September 30, 2006

Executive Summary

Earnings per common share were as follows:


	Three Months Ended September 30,
		2007		2006	% Change
Basic and Diluted	$	0.79	$	0.72	9.7

Net income was $84.2 million for the quarter ended September 30, 2007 compared to $76.7 million for the same period in 2006. Major factors (after-tax) that contributed to the $7.5 million, or 9.8%, increase in 2007 earnings include:


·	Higher electric distribution revenues primarily as a result of the Rate Settlement Agreement and an increase in energy sales of 0.7% ($5.4 million)
·	New energy mitigation incentive revenues representing NSTAR Electric's share of customer wholesale energy cost savings ($0.9 million)
·	Higher transmission revenues as a result of increased investment in the Company's transmission infrastructure, most notably the 345kV project ($5.4 million)
·	Recognition of interest income, net of fees, on certain tax benefits ($2.4 million)

These increases in earnings factors were partially offset by:


·	Increase in Operations and Maintenance expenses, including higher labor and labor related costs and bad debt expense ($4.2 million)
·	Lower earnings from unregulated operations that primarily reflect the absence in the current quarter of gains realized in 2006 from non-monetary transactions ($1.8 million)
·	Higher depreciation and amortization expense in 2007 related to higher depreciable electric and gas distribution plant in service ($1.2 million)

Significant cash flow events during the quarter include the following:


·	Cash flows from operating activities provided $137.8 million primarily from cash received from electric operations offset by purchase power contract buyout payments and the purchase of gas inventory for the upcoming winter season
·	NSTAR invested approximately $98.4 million in capital projects to improve capacity and system reliability
·	NSTAR paid approximately $34.7 million in common share dividends and retired approximately $40.2 million in securitized debt

Energy sales

The following is a summary of retail electric and firm gas energy sales for the periods indicated:


Retail Electric Sales - MWh	Three Months Ended September 30,
		2007	2006	% Change

Residential		1,815,187	1,832,737	(1.0)
Commercial		3,713,513	3,619,550	2.6
Industrial		382,220	418,663	(8.7)
Street Lighting		35,089	35,978	(2.5)
Total retail sales		5,946,009	5,906,928	0.7


Firm Gas Sales and Transportation - BBtu	Three Months Ended September 30,
		2007	2006	% Change

Residential		1,384	1,454	(4.8)
Commercial		1,942	1,736	11.9
Industrial		760	840	(9.5)
Municipal		158	163	(3.1)
Total firm sales		4,244	4,193	1.2

Weather Conditions

The demand for electricity and natural gas is affected by weather conditions. In terms of customer sector characteristics, industrial sales are less sensitive to weather than residential and commercial sales. Industrial sales are primarily influenced by economic conditions. Electric residential and commercial customers represented approximately 31% and 62%, respectively, of NSTAR's total sales mix for the third quarter of 2007 and provided approximately 35% and 59% of distribution and transmission revenues, respectively. Refer to the "Electric revenues" section below for a more detailed discussion.

Weather, conservation measures and economic conditions affect sales to NSTAR's residential and small commercial customers. Economic conditions and conservation measures affect NSTAR's large commercial and industrial customers.


			Normal
			30-Year
	2007	2006	Average

Heating Degree-Days	161	195	177
Percentage (warmer) colder than prior year	(17.4)%	132.1%
Percentage (warmer) colder than 30-year average	(9.0)%	14.7%

Cooling Degree-Days	645	621	593
Percentage warmer (cooler) than prior year	3.9%	(11.0)%
Percentage warmer than 30-year average	8.8%	4.7%

Heating Degree-Days measure changes in daily temperature levels in explaining demand for electricity and natural gas, based on weather conditions. Weather conditions impact electric sales primarily during the summer and gas sales during the winter season in NSTAR's service area. The comparative information above relates to heating and cooling degree-days for the third quarter of 2007 and 2006 and the number of heating and cooling degree-days in a "normal" third quarter as presented by a 30-year average. A degree-day is a unit measuring how much the outdoor mean temperature falls below or rises above a base of 65 degrees. Each degree below or above the base temperature is measured as one heating or cooling degree-day.

The 0.7% or 39,000 MWh energy sales increase in the third quarter of 2007 reflects a warmer August and September than 2006. Industrial sales continue to lag due to the weak manufacturing segment of the economy. The 1.2% increase in firm gas and transportation sales is due to greater use of gas-fired equipment in the commercial sector.

Operating revenues

Operating revenues for the third quarter of 2007 decreased $151.4 million or 15.8% from the same period in 2006 as follows:


(in millions)	Three Months Ended September 30,						Increase/(Decrease)
			2007		2006	Amount			Percent
Electric revenues
Retail distribution and transmission		$	294.5	$	327.8	$	(33.3	)		(10.2	)
Energy, transition and other			423.8		533.4		(109.6	)		(20.5	)
Total retail electric revenues			718.3		861.2		(142.9	)		(16.6	)
Gas revenues
Firm and transportation			16.7		16.7		-			-
Energy supply and other			35.0		40.4		(5.4	)		(13.4	)
Total gas revenues			51.7		57.1		(5.4	)		(9.5	)

Unregulated operations revenues			34.9		38.0		(3.1	)		(8.2	)
Total operating revenues		$	804.9	$	956.3	$	(151.4	)		(15.8	)

Electric revenues

NSTAR's largest earnings sources are the revenues derived from distribution and transmission rates approved by the DPU and FERC. Electric retail distribution revenues primarily represent charges to customers for recovery of the Company's capital investment, including a return component, and operation and maintenance related to its electric distribution infrastructure. The transmission revenue component represents charges to customers for the recovery of costs to move the electricity over high voltage lines from the generator to the Company's substations.

The decrease of $33.3 million in retail distribution and transmission revenues primarily reflects:

The impact of NSTAR's efforts in the Wholesale Power Cost Savings Initiative on behalf of its customers that decreased regional RMR costs. As approved by the DPU, decreased regional RMR costs resulted in a decrease in retail transmission billing of approximately $42.4 million for the three months ended September 30, 2007 as compared to the same period in 2006. This reflects the refund from the ISO-NE of previously billed RMR costs offset by higher transmission revenues as a result of higher transmission investments. NSTAR Electric lowered its retail transmission rates effective on March 1, 2007, as approved by the DPU, in order to refund amounts previously collected from customers. These RMR costs are collected from customers on a fully reconciling basis. Therefore, there is no earnings impact.

This decrease in retail distribution and transmission revenues was partially offset by:

In accordance with the Rate Settlement Agreement of December 30, 2005, NSTAR Electric increased its distribution rates by an annual rate of $30 million effective May 1, 2006 and by an annual inflation-adjusted rate increase effective January 1, 2007, with corresponding reductions in transition rates. These factors and a 0.7% increase in energy sales, increased distribution revenues by $5.6 million for the three months ended September 30, 2007, as compared to 2006.


·	Higher transmission revenues of $3.9 million as a result of increased investment in the Company's transmission infrastructure, most notably the 345kV project.

Energy, transition and other revenues primarily represent charges to customers for the recovery of costs incurred by the Company in order to acquire the energy supply on behalf of its customers and a transition charge for recovery of the Company's prior investments in generating plants and the costs related to long-term power contracts. The energy revenues relate to providing customers energy supply under basic service. These revenues are fully reconciled to the costs incurred and have no impact on the Company's consolidated net income. Energy, transition and other revenues also reflect revenues related to the Company's ability to effectively reduce stranded costs (incentive entitlements), rental revenue from electric property and annual cost reconciliation true-up adjustments. The $109.6 million decrease in energy, transition and other revenues is primarily attributable to a $60 million decrease in energy supply costs and by a reduction of $49 .9 million in transition-related revenues resulting from the December 30, 2005 Rate Settlement Agreement. Uncollected transition charges as a result of the reductions in transition rates are being deferred and collected through future rates with a carrying charge at a rate of 10.88%.

Gas Revenues

Firm and transportation gas revenues primarily represent charges to customers for NSTAR Gas' recovery of costs of its capital investment in its gas infrastructure, including a return component, and for the recovery of costs for the ongoing operation and maintenance of that infrastructure. The transportation revenue component represents charges to customers for the recovery of costs to move the natural gas over pipelines from gas suppliers to take stations located within NSTAR Gas' service area. Firm and transportation revenues were flat despite the slight increase in sales volumes of 1.2% due to certain step rate components that are not aligned with sales volumes.

Energy supply and other gas revenues primarily represent charges to customers for the recovery of costs to the Company in order to acquire the natural gas in the marketplace and a charge for recovery of the Company's gas supplier service costs. The energy supply and other revenue decrease of $5.4 million primarily reflects the 8.2% decrease in the cost of gas per therm purchased, partially offset by the impact of the 1.2% increase in energy sales. These revenues are fully reconciled with the cost currently recognized by the Company and, as a result do not have an effect on the Company's earnings.

Unregulated Operations Revenues

Unregulated operating revenues are derived from NSTAR's unregulated businesses that include district energy and telecommunications operations. Unregulated revenues were $34.9 million for the quarter ended September 30, 2007 compared to $38 million in 2006, a decrease of $3.1 million, or 8.2%. The decrease in unregulated revenues is primarily the result of lower electricity, steam and chilled water prices and slightly lower electricity, steam and chilled water sales.

Operating expenses

Purchased power and transmission costs were $360.7 million in the third quarter of 2007 compared to $518.1 million in the same period of 2006, a decrease of $157.4 million, or 30%. Despite higher energy sales of 0.7%, the decrease in expense reflects lower basic service and other energy supply costs of $160 million for both NSTAR's regulated and unregulated companies. Slightly offsetting this decrease, transmission costs increased $2.7 million as a result of higher regional network support costs of $5.9 million partially offset by a $3.7 million decline in transmission-related congestion costs. NSTAR Electric adjusts its rates to collect the costs related to energy supply and transmission from customers on a fully reconciling basis. Due to these rate adjustment mechanisms, changes in the amount of energy supply and transmission expense have no impact on earnings.

Cost of gas sold, representing NSTAR Gas' supply expense, was $29.8 million in the third quarter of 2007 compared to $34.1 million in 2006, a decrease of $4.3 million, or 13%. The decrease in cost

reflects the 8.2% lower cost of gas supply per therm. NSTAR Gas maintains a flexible resource portfolio consisting of gas supply contracts, transportation contracts on interstate pipelines, market area storage and peaking services. NSTAR Gas adjusts its rates to collect costs related to gas supply from customers on a fully reconciling basis and therefore changes in the amount of energy supply expense have no impact on earnings.

Operations and maintenance expense was $112.4 million in the third quarter of 2007 compared to $108 million in the same period of 2006, an increase of $4.4 million, or 4%. This increase primarily relates to higher bad debt expense, an increase in labor and labor related costs, higher DPU safety and reliability costs and higher claims/litigation expense.

Depreciation and amortization expense was $89.7 million in the third quarter of 2007 compared to $87.8 million in the same period of 2006, an increase of $1.9 million or 2%. The increase primarily reflects higher depreciable distribution and transmission plant in service.

DSM and renewable energy programs expense was $18.6 million in the third quarter of 2007 compared to $18.4 million in the same period of 2006, an increase of $0.2 million, or 1%, which is consistent with the collection of conservation and renewable energy revenues. These costs are in accordance with program guidelines established by the DPU and are collected from customers on a fully reconciling basis plus a small incentive return.

Property and other taxes were $22.8 million in the third quarter of 2007 compared to $23.7 million in the same period of 2006, a decrease of $0.9 million, or 4% reflecting overall lower property tax rates.

Income tax expense attributable to operations was $49.8 million in the third quarter of 2007 compared to $44.9 million in the same period of 2006, an increase of $4.9 million, or 11%, reflecting the impact of higher pre-tax operating income in 2007.

Other income, net

Other income, net was approximately $2.4 million in the third quarter of 2007 compared to $3.2 million in the same period of 2006, a decrease in other income of $0.8 million. The decrease primarily reflects the absence in 2007 of after-tax gains realized on a non-utility property associated with an asset exchange ($1.1 million) and the sale of land ($0.3 million).

Other deductions, net

Other deductions, net were approximately $1.2 million in the third quarter of 2007 compared to $0.4 million in the same period of 2006. The increase in other deductions of $0.8 million is primarily due to higher charitable donation expense.

Interest charges

Interest on long-term debt and transition property securitization certificates was $38.2 million in the third quarter of 2007 compared to $42.4 million in the same period of 2006, a decrease of $4.2 million, or 10%. The decrease in interest expense reflects:


·	Lower interest cost of $2.2 million as a result of the redemption of all debt of the former Commonwealth Electric and Cambridge Electric subsidiaries' long-term debt on January 2, 2007 and the fourth quarter of 2006, respectively
·	Lower interest costs on transition property securitization debt of $2.1 million due to current maturities. Securitization interest represents interest on securitization certificates of BEC Funding, BEC Funding II and CEC Funding collateralized by the future income stream associated primarily with NSTAR's stranded costs

Short-term and other interest expense was $0.7 million in the third quarter of 2007 compared to $6.8 million in the same period of 2006, a decrease of $6.1 million, or 90%. The decrease is due to lower net interest expense on income tax deficiencies of $6 million primarily as a result of the recognition, in the current year, of interest income of $4.7 million on uncertain tax positions coupled with slightly lower average bank borrowing rates. Also contributing to the decrease is lower interest on the under recovery of regulatory deferrals. Partially offsetting these decreases was the impact of higher average level of borrowed funds as compared to the same period in 2006. The weighted average short-term interest rates including fees were 5.43% and 5.70% in the three-month periods ended September 30, 2007 and 2006, respectively. The higher average borrowing during 2007 reflects the impact of NSTAR Electric f inancing the redemption of $77.7 million in long-term debt in January 2007 with short-term debt.

Common Share Dividends

On September 27, 2007, NSTAR's Board of Trustees declared a quarterly cash dividend of $0.325 per share for shareholders of record on October 10, 2007, payable November 1, 2007. NSTAR's current quarterly cash dividend rate is $0.325 per share or $1.30 per share on an annualized basis.

Nine Months Ended September 30, 2007 compared to Nine Months Ended September 30, 2006

Executive Summary

Earnings per common share were as follows:


	Nine Months Ended September 30,
		2007		2006	% Change
Basic	$	1.71	$	1.56	9.6
Diluted	$	1.70	$	1.55	9.7

Net income was $182.1 million for the nine-month period ended September 30, 2007 compared to $166.4 million for the same period in 2006. Major factors (after-tax) that contributed to the $15.7 million, or 9.4%, increase in 2007 earnings include:


·	Higher electric distribution revenues primarily as a result of the Rate Settlement Agreement and increased energy sales of 1.1% ($16.5 million)
·	Higher firm gas revenues due to higher energy sales of 9.6% primarily caused by colder weather (heating degree-days increased by 9%) ($3.8 million)
·	New energy mitigation incentive revenues representing NSTAR Electric's share of customer wholesale energy cost savings ($2.7 million)
·	Higher transmission revenues primarily as a result of increased investment in the Company's transmission infrastructure, most notably the 345kV project ($9 million)
·	Recognition of interest income, net, on certain tax benefits ($5.9 million)

These increases in earnings factors were partially offset by:


·	Higher operations and maintenance expenses in 2007 primarily related to the absence of a cumulative pre-tax adjustment of $6.9 million reduction in bad debt expense recorded in 2006 to reflect the implementation of a recovery rate mechanism ($9.3 million)
·	Lower earnings from NSTAR's unregulated operations primarily due to a customer pricing dispute, lower electric revenues and higher overall energy costs and the absence of gains realized in 2006 from non-monetary transactions ($3.4 million)
·	Higher depreciation and amortization expense in 2007 related to higher depreciable electric and gas distribution plant in service ($4.0 million)


·	Higher short-term interest expense as a result of increased borrowing rates and an increase in the average borrowing levels ($5.3 million)

Significant cash flow events during the nine months ended September 30, 2007 include the following:


·	Cash flows from operating activities provided $475.2 million primarily from operations offset by purchase power contract buyout payments
·	NSTAR invested approximately $269.7 million in capital projects to improve capacity and reliability
·	NSTAR paid approximately $104.1 million in common share dividends, retired approximately $193.4 million in securitized and other long-term debt, borrowed approximately $110.6 million of notes payable and paid approximately $12.3 million, net, to settle equity compensation obligations

Energy sales

The following is a summary of retail electric and firm gas energy sales for the periods indicated:


Retail Electric Sales - MWh	Nine Months Ended September 30,
		2007	2006	% Change

Residential		4,957,563	4,935,343	0.5
Commercial		10,215,171	9,987,325	2.3
Industrial		1,123,334	1,199,849	(6.4)
Street Lighting		115,004	116,442	(1.2)
Total retail sales		16,411,072	16,238,959	1.1


Firm Gas Sales and Transportation - BBtu	Nine Months Ended September 30,
		2007	2006	% Change

Residential		15,018	13,761	9.1
Commercial		11,777	10,505	12.1
Industrial		3,738	3,518	6.3
Municipal		2,009	1,912	5.1
Total firm sales		32,542	29,696	9.6

Weather Conditions

The demand for electricity and natural gas is affected by weather conditions. In terms of customer sector characteristics, industrial sales are less sensitive to weather than residential and commercial sales, which are influenced by temperature extremes. Industrial sales are primarily influenced by economic conditions. Electric residential and commercial customers represented approximately 30% and 62%, respectively, of NSTAR's total sales mix for the nine months ended September 30, 2007 and provided approximately 39% and 55% of distribution and transmission revenues, respectively. Refer to the "Electric revenues" section below for a more detailed discussion.


			Normal
			30-Year
	2007	2006	Average

Heating Degree-Days	4,508	4,146	4,453
Percentage colder (warmer) than prior year	8.7%	(7.6)%
Percentage colder (warmer) than 30-year average	1.2%	(6.7)%

Cooling Degree-Days	876	799	769
Percentage warmer (cooler) than prior year	9.6%	(9.2)%
Percentage warmer than 30-year average	13.9%	3.9%

Heating Degree-Days measure changes in daily temperature levels in explaining demand for electricity and natural gas, based on weather conditions. Weather conditions impact electric sales primarily during the summer and, to a greater extent, gas sales during the winter season in NSTAR's service area. The comparative information above relates to heating degree-days for the nine months ended September 30, 2007 and 2006 and the number of heating degree-days in a "normal" nine-month ended period of the year as presented by a 30-year average. A degree-day is a unit measuring how much the outdoor mean temperature falls below or rises above a base of 65 degrees. Each degree below or above the base temperature is measured as one heating or cooling degree-day.

The 1.1% or 172,000 MWh energy sales increase in the nine months ended September 30, 2007 primarily reflects colder winter temperatures and warmer weather in late August and September of 2007. Industrial sales continue to lag due to the weak manufacturing segment of the economy. The 9.6% increase in firm gas and transportation sales is due to the colder winter weather during 2007 and the shift of commercial and industrial customers returning to using natural gas from fuel oil. All gas customer segments showed positive sales growth despite continued customer conservation efforts.

Operating Revenues

Operating revenues for the nine months ended September 30, 2007 decreased $261.2 million or 9.4% from the same period in 2006 as follows:


(in millions)	Nine Months Ended September 30,						Increase/(Decrease)
			2007		2006	Amount				Percent
Electric revenues
Retail distribution and transmission		$	743.7	$	786.3	$		(42.6	)		(5.4	)
Energy, transition and other			1,261.5		1,497.5			(236.0	)		(15.8	)
Total retail electric revenues			2,005.2		2,283.8			(278.6	)		(12.2	)
Gas revenues
Firm and transportation			106.9		101.3			5.6			5.5
Energy supply and other			297.4		277.3			20.1			7.2
Total gas revenues			404.3		378.6			25.7			6.8

Unregulated operations revenues			104.9		113.2			(8.3	)		(7.3	)
Total operating revenues		$	2,514.4	$	2,775.6	$		(261.2	)		(9.4	)

Electric revenues

NSTAR's largest earnings sources are the revenues derived from distribution and transmission rates approved by the DPU and FERC. Electric retail distribution revenues primarily represent charges to customers for recovery of the Company's capital investment, including a return component, and operation and maintenance costs related to its electric distribution infrastructure. The transmission revenue component represents charges to customers for the recovery of costs to move the electricity over high voltage lines from the generator to the Company's substations.

The decrease in retail distribution and transmission revenues includes:

Lower transmission revenues related to decreased regional RMR costs reflecting the refund from the ISO-NE of previously billed RMR costs offset by higher transmission revenues as a result of higher transmission investments. This decrease reflects NSTAR's Wholesale Power Costs Savings Initiative. As approved by the DPU, this resulted in a decrease in retail transmission billing of approximately $74.7 million for the nine months ended September 30, 2007 as compared to the same period in 2006. NSTAR Electric lowered its retail transmission rates effective on March 1, 2007 in order to refund amounts previously over collected from customers and match the amount to be paid to generators. These RMR costs are fully reconciled and therefore there is no earnings impact.

This decrease in retail distribution and transmission revenues was partially offset by:

In accordance with the impact of the Rate Settlement Agreement of December 30, 2005, NSTAR Electric increased its distribution rates by an annual rate of $30 million effective May 1, 2006 and by an annual inflation-adjusted rate increase effective January 1, 2007, with a corresponding reduction in transition charges. These factors and a 1.1% increase in energy sales resulted in increased distribution revenues of $27.2 million for the nine-months ended September 30, 2007 as compared to 2006. In addition, higher transmission revenues as a result of increased investment in the Company's transmission infrastructure, most notably the 345kV project, also offset the overall decrease.

Energy, transition and other revenues primarily represent charges to customers for the recovery of costs incurred by the Company in order to acquire the energy supply on behalf of its customers and a transition charge for recovery of the Company's prior investments in generating plants and the costs related to long-term power contracts. The energy revenues relate to providing customers energy supply under basic service. These revenues are fully reconciled to the costs incurred and have no impact on the Company's consolidated net income. Energy, transition and other revenues also reflect revenues related to the Company's ability to effectively reduce stranded costs (incentive entitlements), rental revenue from electric property and annual cost reconciliation true-up adjustments. The $236.0 million decrease in energy, transition and other revenues is primarily attributable to a $202.5 million decrease in energy supply costs and by a reduction of $82.1 million in transition-related revenues resulting from the December 30, 2005 Rate Settlement Agreement. These amounts were partially offset by an increase in non-retail related regional transmission revenues of $26.1 million that are used to support NSTAR Electric's transmission assets. Uncollected transition charges as a result of the reductions in transition rates are being deferred and collected through future rates with a carrying charge at a rate of 10.88%.

Gas Revenues

Firm and transportation gas revenues primarily represent charges to customers for NSTAR Gas' recovery of costs of its capital investment in its gas infrastructure, including a return component, and for the recovery of costs for the ongoing operation and maintenance of that infrastructure. The transportation revenue component represents charges to customers for the recovery of costs to move the natural gas over pipelines from gas suppliers to take stations located within NSTAR Gas' service area. The $5.6 million increase in firm and transportation revenues is primarily attributable to colder winter weather conditions during 2007 and customers switching back to natural gas from alternate fuel sources as a result of higher energy price concerns. These factors resulted in the increase in sales volumes of 9.6% through September 30, 2007.

NSTAR Gas' sales are impacted by heating season weather because a substantial portion of its customer base uses natural gas for space heating purposes.

Energy supply and other gas revenues primarily represent charges to customers for the recovery of costs to the Company in order to acquire the natural gas in the marketplace and a charge for recovery of the Company's gas supplier service costs. The energy supply and other revenue increase of $20.1 million primarily reflects the impact of the 9.6% increase in energy sales offset by a 9% decline in the cost of gas per therm purchased from these suppliers. These revenues are fully reconciled with the cost currently recognized by the Company and, as a result do not have an effect on the Company's earnings.

Unregulated Operations Revenues

Unregulated operating revenues are derived from NSTAR's unregulated businesses that include district energy and telecommunications operations. Unregulated revenues were $104.9 million through September 30, 2007 compared to $113.2 million in 2006, a decrease of $8.3 million, or 7.3%. The decrease in unregulated revenues is primarily the result of a customer billing dispute, lower electricity, steam and chilled water prices and slightly lower electricity and chilled water sales offset by higher steam sales.

Operating expenses

Purchased power and transmission costs were $1,099.3 million in the nine months ended September 30, 2007 compared to $1,411.1 million in the same period of 2006, a decrease of $311.8 million, or 22%. Despite higher energy sales of 1.1%, the decrease in expense reflects lower basic service and other energy supply costs of $244.1 million for both NSTAR's regulated and unregulated companies. In addition, transmission costs declined $67.6 million as a result of a $108.8 million decline in transmission-related congestion costs partially offset by higher regional network support costs of $38.3 million. NSTAR Electric adjusts its rates to collect the costs related to energy supply and transmission from customers on a fully reconciling basis. Due to these rate adjustment mechanisms, changes in the amount of energy supply and transmission expense have no impact on earnings.

Cost of gas sold, representing NSTAR Gas' supply expense, was $273.2 million in the nine months ended September 30, 2007 compared to $253.2 million in 2006, an increase of $20 million, or 8%. The increase in cost reflects the 9.6% increase in firm gas sales and the settlement of cash flow hedging contracts during the current nine-month period of $25.3 million, partly offset by 9% lower cost of gas supply per therm. NSTAR Gas maintains a flexible resource portfolio consisting of gas supply contracts, transportation contracts on interstate pipelines, market area storage and peaking services. NSTAR Gas adjusts its rates to collect costs related to gas supply from customers on a fully reconciling basis and therefore changes in the amount of energy supply expense have no impact on earnings.

Operations and maintenance expense was $330 million in the nine months ended September 30, 2007 compared to $321.5 million in the same period of 2006, an increase of $8.5 million, or 3%. This increase primarily relates to higher bad debt expense due to the absence of a cumulative $6.9 million reduction in bad debt expense recorded in 2006 to reflect the implementation of a recovery rate mechanism. In

addition, higher DPU Safety and Reliability Program expense, higher material costs and higher labor and labor related costs contributed to the year-to-date increase.

Depreciation and amortization expense was $277 million in the nine months ended September 30, 2007 compared to $270.5 million in the same period of 2006, an increase of $6.5 million or 2%. The increase primarily reflects higher depreciable distribution and transmission plant in service.

DSM and renewable energy programs expense was $53.2 million in the nine months ended September 30, 2007 compared to $52.3 million in the same period of 2006, an increase of $0.9 million, or 2%, which is consistent with the collection of conservation and renewable energy revenues. These costs are in accordance with program guidelines established by the DPU and are collected from customers on a fully reconciling basis plus a small incentive return.

Property and other taxes were $70.6 million in the nine months ended September 30, 2007 compared to $72.5 million in the same period of 2006, a decrease of $1.9 million, or 3% reflecting lower overall property tax rates.

Income tax expense attributable to operations was $108.1 million in the nine months ended September 30, 2007 compared to $98.1 million in the same period of 2006, an increase of $10 million, or 10%, reflecting higher pre-tax operating income in 2007.

Other income, net

Other income, net was approximately $7.7 million in the nine months ended September 30, 2007 compared to $8.7 million in the same period of 2006, a decrease of $1 million. The decrease primarily reflects the absence in 2007 of the net gain realized in 2006 of $2.2 million on the sale of a parcel of non-utility land. In 2007, other income includes executive life insurance proceeds of $2 million and higher equity earnings from investments in the Yankee units and Hydro-Quebec, offset by lower revenues from the rental of heating equipment.

Other deductions, net

Other deductions, net were approximately $2.6 million in the nine months ended September 30, 2007 compared to $1.9 million in the same period of 2006. The $0.7 million increase primarily reflects higher costs attributable to the closeout of the gas appliances business.

Interest charges

Interest on long-term debt and transition property securitization certificates was $115.7 million in the nine months ended September 30, 2007 compared to $125.9 million in the same period of 2006, a decrease of $10.2 million, or 8%. The decrease in interest expense reflects:


·	Lower interest cost of $6.5 million as a result of the redemption of all debt of the former Commonwealth Electric and Cambridge Electric subsidiaries' long-term debt on January 2, 2007 and the fourth quarter of 2006, respectively
·	Lower interest costs on transition property securitization debt of $6.4 million due to current maturities. Securitization interest represents interest on securitization certificates of BEC Funding, BEC Funding II and CEC Funding that are collateralized by the future income stream associated primarily with NSTAR's stranded costs

These decreases were partially offset by:


·	Interest expense of $2.4 million associated with NSTAR Electric's $200 million Debentures issued in March 2006

Short-term and other interest expense was $12.3 million in the nine months ended September 30, 2007 compared to $15 million in the same period of 2006, a decrease of $2.7 million, or 18%. The decrease is due to lower net interest expense on income tax deficiencies of $9.6 million primarily as a result of recognizing, in the current year, interest income of $4.7 million on uncertain tax positions and lower interest on the under recovery of regulatory deferrals. Partially offsetting these decreases was a higher average level of borrowed funds as compared to the same period in 2006. Higher interest rates on short-term borrowings also slightly offset these decreases. The weighted average short-term interest rates including fees were 5.46% and 5.22% in the nine-month periods ended September 30, 2007 and 2006, respectively. The higher average borrowing during 2007 reflects the impact of NSTAR Electric financing the redemption of $77.7 million in long-term debt in January 2007 with short-term debt.

Liquidity and Capital Resources

Current Cash Flow Activity

NSTAR's primary uses of cash in the nine months ended September 30, 2007 included capital expenditures, dividend payments and payments of debt.

Net operating cash flow in the nine months ended September 30, 2007 provided $475.2 million. The Company used $269.8 million in net investing activities that consisted primarily of $269.7 million in plant expenditures. Additionally, the Company used $200.5 million in net financing activities primarily due to the redemption of long-term debt and transition property securitization and payment of dividends.

Operating Activities

The net cash provided by operating activities decreased by $56.9 million to $475.2 million in the nine months ended September 30, 2007 when compared to the same period in 2006 primarily due to an increased under-collection of the transition and basic service deferrals when compared to 2006, increased tax payments during the period and increased purchase power contract buyout payments offset by a decrease in accounts receivable when compared to 2006.

Investing Activities

The net cash used in investing activities in the nine months ended September 30, 2007 of $269.8 million consists primarily of capital expenditures related to infrastructure investments in transmission and distribution systems. Capital expenditures decreased $65.1 million from the prior year primarily due to the completion and placement in service of phase one of the 345kV transmission project.

Financing Activities

The net cash used in financing activities in the nine months ended September 30, 2007 of $200.5 million primarily reflects long-term debt redemptions of $82.0 million, transition property securitization redemptions of $111.4 million, and payment of dividends to common shareholders of $104.1 million, which was offset by higher short-term debt of $110.6 million. These 2007 financing activities are consistent with 2006.

NSTAR's banking arrangements provide for daily cash transfers to the Company's disbursement accounts as vendor checks are presented for payment and where the right of offset does not exist among accounts. Changes in the balances of the disbursement accounts are reflected in financing activities in the accompanying Consolidated Statements of Cash Flows.

Sources of Additional Capital and Financial Covenant Requirements

With the exception of bond indemnity agreements, NSTAR has no financial guarantees, commitments, debt or lease agreements that would require a change in terms and conditions, such as acceleration of payment obligations, as a result of a change in its credit rating. However, NSTAR's subsidiaries could be

required to provide additional security for power supply contract performance, such as a letter of credit for their pro-rata share of the remaining value of such contracts.

NSTAR and NSTAR Electric have no financial covenant requirements under their respective long-term debt arrangements. NSTAR Gas has financial covenant requirements under its long-term debt arrangements and was in compliance at September 30, 2007 and December 31, 2006. NSTAR's long-term debt other than its Mortgage Bonds, issued by NSTAR Gas and of MATEP, is unsecured.

NSTAR executed a five-year, $175 million revolving credit agreement that expires January 2, 2012. At September 30, 2007 and December 31, 2006, there were no amounts outstanding under the revolving credit agreement. This credit facility serves as a backup to NSTAR's $175 million commercial paper program that, at September 30, 2007 and December 31, 2006, had $119 million and $53.5 million outstanding, respectively. Under the terms of the credit agreement, NSTAR is required to maintain a maximum total consolidated debt to total capitalization ratio of not greater than 65% at all times, excluding Transition Property Securitization Certificates, and excluding accumulated other comprehensive income (loss) from common equity. Commitment fees must be paid on the total agreement amount. At September 30, 2007 and December 31, 2006, NSTAR was in full compliance with the aforementioned covenant as the ratios were 56.7% and 58.3%, respectively.

On May 18, 2007, NSTAR Electric filed with the DPU for approval to issue up to $400 million of long-term debt securities from time to time through December 31, 2008. On May 18, 2007, in connection with this filing, NSTAR Electric filed a registration statement on Form S-3 with the SEC to issue up to $400 million in debt securities. This registration statement became effective on June 1, 2007. NSTAR Electric will use the proceeds of the issuance of these securities for financing of capital expenditures, repayment of short-term debt, and/or general working capital purposes. The DPU approved this financing plan on August 9, 2007.

NSTAR Electric has approval from the FERC to issue short-term debt securities from time to time on or before October 23, 2008, with maturity dates no later than October 23, 2009, in amounts such that the aggregate principal does not exceed $655 million at any one time. NSTAR Electric has a five-year, $450 million revolving credit agreement that expires January 2, 2012. However, unless NSTAR Electric receives necessary approvals from the DPU, the credit agreement will expire 364 days from the date of the first draw under the agreement. At September 30, 2007 and December 31, 2006, there were no amounts outstanding under the revolving credit agreement. This credit facility serves as backup to NSTAR Electric's $450 million commercial paper program that had $322 million and $200 million outstanding balances at September 30, 2007 and December 31, 2006, respectively. On January 2, 2007, with the effect of the NSTAR Electric merger, the commercia l paper program had an outstanding balance of $326 million. Under the terms of the revolving credit agreement, NSTAR Electric is required to maintain a consolidated maximum total debt to capitalization ratio of not greater than 65% at all times, excluding Transition Property Securitization Certificates, and excluding accumulated other comprehensive income (loss) from common equity. At September 30, 2007 and December 31, 2006, NSTAR Electric was in full compliance with its covenants in connection with its short-term credit facilities as the ratios were 40.9% and 49.0%, respectively.

Effective with the NSTAR Electric merger, NSTAR Gas has $200 million available under a line of credit. As of September 30, 2007 and December 31, 2006, NSTAR Gas had $106.0 million and $150.7 million outstanding, respectively.

On November 29, 2006, Commonwealth Electric gave notice to the holders of its long-term debt securities of its intent to call all of the outstanding debt. As a result, NSTAR reclassified its Commonwealth Electric subsidiary's entire long-term debt balance of $77.7 million as due within one year on the accompanying Consolidated Balance Sheets at December 31, 2006. This is a result of NSTAR's merger of its electric subsidiaries. On January 2, 2007, NSTAR Electric paid off these Notes at a redemption price of approximately $95 million.

Historically, NSTAR and its subsidiaries have had a variety of external sources of financing available, as previously indicated, at favorable rates and terms to finance its external cash requirements. However, the availability of such financing at favorable rates and terms depends heavily upon prevailing market conditions and NSTAR's or its subsidiaries' financial condition and credit ratings.

NSTAR's goal is to maintain a capital structure that preserves an appropriate balance between debt and equity. Based on NSTAR's key cash resources available as previously discussed, management believes its liquidity and capital resources are sufficient to meet its current and projected requirements.

Commitments and Contingencies

NSTAR is exposed to uncertain tax positions and regulatory matters as discussed in this section under the caption "Critical Accounting Policies and Estimates."

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Item 3. Quantitative and Qualitative Disclosure About Market Risk

NSTAR's exposure to financial market risk results primarily from fluctuations in interest rates. There have been no material changes to NSTAR's market risks as disclosed in NSTAR's Annual Report on Form 10-K for the year ended December 31, 2006.

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Item 4. Controls and Procedures

NSTAR's disclosure controls and procedures are designed to ensure that information required to be disclosed in reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission.

As of the end of the period covered by this Quarterly Report on Form 10-Q, NSTAR carried out an evaluation, under the supervision and with the participation of NSTAR's management, including NSTAR's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of NSTAR's disclosure controls and procedures pursuant to Securities Exchange Act of 1934 Rules 13a-15(e) or 15d-15(e). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that NSTAR's disclosure controls and procedures were effective (1) to timely alert them to material information relating to NSTAR's information required to be disclosed by NSTAR in the reports that it files or submits under the Securities Exchange Act of 1934 and (2) to ensure that appropriate information is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms.

There have been no changes in NSTAR's internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) of the Securities Exchange Act of 1934) during NSTAR's most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, NSTAR's internal control over financial reporting.

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Part II. Other Information

Item 1. Legal Proceedings

In the normal course of its business, NSTAR and its subsidiaries are involved in certain legal matters, including civil litigation. Management is unable to fully determine a range of reasonably possible court-ordered damages, settlement amounts, and related litigation costs ("legal liabilities") that would be in excess of amounts accrued and amounts covered by insurance. Based on the information currently available, NSTAR does not believe that it is probable that any such legal liability will have a material impact on its consolidated financial position. However, it is reasonably possible that additional legal liabilities that may result from changes in estimates could have a material impact on its results of operations, cash flows and financial condition for a reporting period.

Item 1A. Risk Factors

Shareholders or prospective investors should carefully consider the risk factors that were previously disclosed in NSTAR's Annual Report on Form 10-K for the year ended December 31, 2006 and in other information in this Quarterly Report on Form 10-Q.

Item 2(c). Unregistered Sales of Equity Securities and Use of Proceeds

Common shares of NSTAR issued under the NSTAR Dividend Reinvestment and Direct Common Shares Purchase Plan, the 1997 Share Incentive Plan and 2007 Long-term Incentive Plan and the NSTAR Savings Plan may consist of newly issued shares from the Company or shares purchased in the open market by the Company or an independent agent. During the three-month period ended September 30, 2007, all shares listed below were acquired in the open market.


	Total Number of Common Shares Purchased	Average Price Paid Per Share

July	104,825	$31.56
August	117,888	$32.07
September	5,880	$33.50
Total third quarter	228,593	$31.87

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Item 6. Exhibits


Exhibit	4	-	Instruments Defining the Rights of Security Holders, Including Indentures

		-	Management agrees to furnish to the Securities and Exchange Commission, upon request, a copy of any agreement or instrument defining the rights of holders of any long-term debt whose authorization does not exceed 10% of total assets
Exhibits filed herewith:

Exhibit	15	-	Letter Re Unaudited Interim Financial Information

	15.1		PricewaterhouseCoopers LLP Awareness Letter

Exhibit	31	-	Rule 13a - 14(a)/15d-14(a) Certifications

	31.1		Certification Statement of Chief Executive Officer of NSTAR pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

	31.2		Certification Statement of Chief Financial Officer of NSTAR pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Exhibit	32	-	Section 1350 Certifications

	32.1		Certification Statement of Chief Executive Officer of NSTAR pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

	32.2		Certification Statement of Chief Financial Officer of NSTAR pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Exhibit	99	-	Additional Exhibits

	99.1		Report of Independent Registered Public Accounting Firm*

		*	Rule 436(c) of the 1933 Act provides that a report on unaudited interim financial information shall not be considered part of a registration statement prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of Section 7 or 11 of the 1933 Act. Therefore, the accountant is not subject to the liability provisions of Section 11 of the 1933 Act

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.




		NSTAR
		(Registrant)





Date: October 31, 2007		By: /s/ R. J. WEAFER, JR.
		Robert J. Weafer, Jr. Vice President, Controller and Chief Accounting Officer


I, Thomas J. May, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of NSTAR;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
	a)	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
	b)	designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
	c)	evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report, based on such evaluation; and
	d)	disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.
5.	The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
	a)	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
	b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.


I, James J. Judge, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of NSTAR;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
	a)	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
	b)	designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
	c)	evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report, based on such evaluation; and
	d)	disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.
5.	The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
	a)	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
	b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.


Date: October 31, 2007	By:	/s/ JAMES J. JUDGE
		James J. Judge
		Senior Vice President,
		Treasurer and Chief Financial Officer


The undersigned hereby certifies, in my capacity as an officer of NSTAR, for purposes of 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
(i)	the enclosed Quarterly Report of NSTAR on Form 10-Q for the period ended September 30, 2007, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and
(ii)	the information contained in such Quarterly Report fairly presents, in all material respects, the financial condition and results of operations of NSTAR.


Dated: October 31, 2007	By:	/s/ THOMAS J. MAY
		Thomas J. May
		Chairman, President and
		Chief Executive Officer