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 1934For the quarterly period ended   June 30, 2008Or[   ]Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934For the transition period from  to  Commission File Number:001-14768  NSTAR(Exact name of registrant as specified in its charter)  Massachusetts04-3466300(State or other jurisdiction of
incorporation or organization)(I.R.S.  Employer Identification Number)800 Boylston Street, Boston, Massachusetts02199(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, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).  Large accelerated filer[ X ]Accelerated filer[   ]Non-accelerated filer[    ]Smaller reporting company[   ](Do not check if a smaller reporting company)  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 July 31, 2008.    NSTAR Form 10-Q Quarterly Period Ended June 30, 2008  Table of Contents Page No.Glossary of Terms2Cautionary Statement Regarding Forward-Looking Information3Part I.  Financial Information:Item 1.Financial StatementsConsolidated Statements of Income4Consolidated Statements of Retained Earnings5Consolidated Statements of Comprehensive Income5Consolidated Balance Sheets6 - 7Consolidated Statements of Cash Flows8Notes to Consolidated Financial Statements9 - 17Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations18 - 34Item 3.Quantitative and Qualitative Disclosures About Market Risk34Item 4.Controls and Procedures35Part II.  Other Information:Item 1.Legal Proceedings35Item 1A.Risk Factors35Item 2.Unregistered Sales of Equity Securities and Use of Proceeds36Item 4.Submission of Matters to a Vote of Security Holders36Item 6.Exhibits37Signature38Exhibit 31.1Section 302 CEO CertificationExhibit 31.2Section 302 CFO CertificationExhibit 32.1Section 906 CEO CertificationExhibit 32.2Section 906 CFO CertificationImportant Shareholder InformationNSTAR 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:  Select "Investor Relations "Company Information.  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 filed with this Quarterly Report on Form 10-Q as Exhibits 31.1, 31.2, 32.1 and 32.2.   1    Glossary of Terms  The following is a glossary of abbreviated names or acronyms frequently used throughout this report.  NSTAR CompaniesNSTARNSTAR (Parent company), Company or NSTAR and its    subsidiaries (as the context requires)NSTAR ElectricNSTAR Electric CompanyNSTAR GasNSTAR Gas CompanyNSTAR Electric & GasNSTAR Electric & Gas CorporationMATEPMedical Area Total Energy Plant, Inc.AESAdvanced Energy Systems, Inc.  (Parent company of MATEP)NSTAR ComNSTAR Communications, Inc.HopkintonHopkinton LNG Corp.Regulatory and Other AuthoritiesAGAttorney General of the Commonwealth of MassachusettsDPUMassachusetts Department of Public UtilitiesFASBFinancial Accounting Standards BoardFERCFederal Energy Regulatory CommissionIRSInternal Revenue ServiceISO-NEISO (Independent System Operator) - New England Inc.NECPUCNew England Conference of Public Utilities Commissioners, Inc.NYMEXNew York Mercantile ExchangePCAOBPublic Company Accounting Oversight Board (United States)SECSecurities and Exchange CommissionOtherAFUDCAllowance for Funds Used During ConstructionBBtuBillions of British thermal unitsCGACCost of Gas Adjustment ClauseCPSLCapital Projects Scheduling ListDSMDemand-Side ManagementEPSEarnings Per Common ShareFINFASB Interpretation NumberGAAPGenerally Accepted Accounting Principles in the
United States of AmericaLDACLocal Distribution Adjustment ClauseMD&AManagement's Discussion and Analysis of Financial Condition
and Results of OperationsMGPManufactured Gas PlantMWhMegawatthour (equal to one million watthours)PAMPension Adjustment MechanismRMRReliability Must RunROEReturn on EquityRTORegional Transmission OrganizationSFASStatement of Financial Accounting StandardsSIPSimplified Incentive PlanSQIService Quality Indicators   2     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·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·damage from major storms·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·impact of terrorist acts, and·impact of service quality performance 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.   3     Part I.  Financial Information Item 1.  Financial Statements NSTAR Consolidated Statements of Income (Unaudited) (in thousands, except per share amounts)    Three Months EndedSix Months EndedJune 30,June 30,2008200720082007Operating revenues$743,715$725,135$1,639,296$1,709,513Operating expenses:Purchased power and transmission308,041304,810654,889738,611Cost of gas sold69,76064,933232,326243,373Operations and maintenance113,928103,629226,256217,658Depreciation and amortization93,24890,742192,462187,325DSM and renewable energy programs16,69516,67134,99534,637Property and other taxes23,08321,02950,09747,732Income taxes30,86130,60164,74758,270Total operating expenses655,616632,4151,455,7721,527,606Operating income88,09992,720183,524181,907Other income (deductions):Other income, net1,2151,5985,3055,302Other deductions, net(313)(659)(647)(1,423)Total other income, net9029394,6583,879Interest charges (income):Long-term debt33,34529,18766,73258,403Transition property securitization7,1279,15815,10819,145Short-term debt and other, net(1,701)5,427(3,174)11,572AFUDC(629)(703)(1,069)(2,234)Total interest charges38,14243,06977,59786,886Preferred stock dividends of subsidiary490490980980Net income$50,369$50,100$109,605$97,920Weighted average common shares outstanding:Basic106,808106,808106,808106,808Diluted107,038107,148107,024107,153Earnings per common share:Basic$0.47$0.47$1.03$0.92Diluted$0.47$0.47$1.02$0.91Dividends declared per common share$0.35$0.325$0.70$0.65    The accompanying notes are an integral part of the consolidated financial statements.  4     NSTAR Consolidated Statements of Retained Earnings (Unaudited) (in thousands)  Three Months EndedSix Months EndedJune 30,June 30,2008200720082007Balance at the beginning of the    period, as previously reported$812,779$724,040$790,926$664,323Adoption of FIN 48---46,610Adjusted balance at the
beginning of the period812,779724,040790,926710,933Add:Net income50,36950,100109,60597,920Subtotal863,148774,140900,531808,853Deduct:Dividends declared:Common shares37,38334,71274,76669,425Balance at the end of the period$825,765$739,428$825,765$739,428    The accompanying notes are an integral part of the consolidated financial statements.       NSTAR Consolidated Statements of Comprehensive Income (Unaudited) (in thousands)  Three Months EndedSix Months EndedJune 30,June 30,2008200720082007Net income$50,369$50,100$109,605$97,920Other comprehensive income, net:Pension and postretirement benefits
costs4816029591,119Deferred income tax expense(187)(248)(373)(461)Comprehensive income$50,663$50,454$110,191$98,578    The accompanying notes are an integral part of the consolidated financial statements.  5    NSTAR Consolidated Balance Sheets (Unaudited) (in thousands)  June 30,December 31,20082007AssetsUtility Plant:Electric and gas plant in service, at original cost$5,456,917$5,350,795Less: accumulated depreciation1,375,7241,321,0134,081,1934,029,782Construction work in progress161,890112,513Net utility plant4,243,0834,142,295Other property and investments:Nonutility property, net136,950143,930Equity investments7,0997,067Other investments83,18883,664227,237234,661Current assets:Cash and cash equivalents24,26234,121Restricted cash15,2333,938Accounts receivable, net of allowance of $35,539 and
$29,426, respectively309,363328,651Accrued unbilled revenues56,92559,859Regulatory assets509,070527,382Inventory, at average cost102,795120,251Other35,71114,3691,053,3591,088,571Deferred debits:Regulatory assets1,872,7852,041,600Other126,686123,2981,999,4712,164,898Refundable income taxes129,120129,120Total assets$7,652,270$7,759,545    The accompanying notes are an integral part of the consolidated financial statements.   6     NSTAR Consolidated Balance Sheets (Unaudited) (in thousands)  June 30,December 31,20082007Capitalization and LiabilitiesCommon equity:Common shares, par value $1 per share, 200,000,000 sharesauthorized, 106,808,376 issued and outstanding$106,808$106,808Premium on common shares814,918818,674Retained earnings825,765790,926Accumulated other comprehensive loss(12,007)(12,593)1,735,4841,703,815Long-term debt and preferred stock:Long-term debt2,014,2202,017,439Transition property securitization405,733483,961Cumulative non-mandatory redeemable preferred stock of
subsidiary, par value $100 per share, 2,890,000 shares
authorized, 430,000 shares outstanding43,00043,0002,462,9532,544,400Current liabilities:Long-term debt6,1065,124Transition property securitization95,79993,407Notes payable474,000403,400Income taxes86,51580,144Accounts payable262,115310,640Power contract obligations130,920147,841Accrued interest31,05330,956Dividends payable37,71037,710Accrued expenses13,84316,850Other68,34964,2401,206,4101,190,312Deferred credits:Accumulated deferred income taxes1,091,8661,116,073Unamortized investment tax credits19,26920,100Power contract obligations406,784467,932Pension and other postretirement liability279,978278,215Regulatory liability - cost of removal264,567258,948Other184,959179,7502,247,4232,321,018Commitments and contingenciesTotal capitalization and liabilities$7,652,270$7,759,545    The accompanying notes are an integral part of the consolidated financial statements.  7     NSTAR Consolidated Statements of Cash Flows (Unaudited) (in thousands)  Six Months EndedJune 30,20082007Operating activities:Net income$109,605$97,920Adjustments to reconcile net income to net cashprovided by operating activities:Depreciation and amortization195,902190,699Deferred income taxes(4,577)(2,725)Noncash stock-based compensation5,4034,359Premium paid on long-term debt redemption-(17,647)Purchase power contract buyout payments(78,870)(71,120)Net changes in:Accounts receivable and accrued unbilled revenues22,222259Inventory17,45638,030Accounts payable(23,763)(39,703)Other current assets(21,775)3,721Other current liabilities(9,352)1,647Regulatory assets87,968129,253Net change from other miscellaneous operating activities(5,808)2,701Net cash provided by operating activities294,411337,394Investing activities:Plant expenditures (including AFUDC)(196,028)(171,265)Proceeds from sale of utility property1,750-(Increase) decrease in restricted cash(11,295)1,330Investments(419)(2,279)Net cash used in investing activities(205,992)(172,214)Financing activities:Long-term debt redemptions(2,923)(80,521)Transition property securitization redemptions(75,836)(71,175)Net change in notes payable70,60064,500Change in disbursement accounts(10,226)(4,682)Dividends paid(74,766)(69,425)Cash received for exercise of equity compensation1637,406Cash used to settle equity compensation(5,596)(18,852)Windfall tax effect of settlement of equity compensation3062,396Net cash used in financing activities(98,278)(170,353)Net decrease in cash and cash equivalents(9,859)(5,173)Cash and cash equivalents at the beginning of the year34,12116,132Cash and cash equivalents at the end of the period$24,262$10,959Supplemental disclosures of cash flow information:Cash paid during the period for:Interest, net of amounts capitalized$84,149$91,722Income taxes$85,762$19,905Noncash financing activity:Plant expenditures included in ending accounts payable$32,833$35,119    The accompanying notes are an integral part of the consolidated financial statements.  8     Notes to Consolidated Financial Statements (Unaudited)  The accompanying notes should be read in conjunction with Notes to Consolidated Financial Statements included in NSTAR's 2007 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 is engaged in unregulated non-utility operations.   2.  Basis of Consolidation and Accounting  The accompanying financial information presented as of June 30, 2008 and for the three and six-month periods ended June 30, 2008 and 2007 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.  The review report is filed as Exhibit 99.1 to this Form 10-Q.  Financial information as of December 31, 2007 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 the prior period amounts to conform to the current periods presentation.  NSTAR's utility subsidiaries follow accounting policies prescribed by the FERC and 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 revenues and 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 six-month periods ended June 30, 2008 and 2007 are not indicative of the results that may be expected for an entire year.  The demand for electricity and natural gas is affected by seasonal weather conditions.  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.   9    3.  Pension and Other Postretirement Benefits  The net periodic pension and other postretirement benefit costs for the second 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 the actual results.  Pension  NSTAR sponsors a defined benefit retirement plan, the NSTAR Pension Plan (the Plan), that covers substantially all employees.  During the six months ended June 30, 2008, NSTAR contributed $7.5 million to the Plan.  NSTAR contributed an additional $7.5 million to the Plan in July 2008.  Components of net periodic pension benefit cost were as follows:  Three Months EndedSix Months EndedJune 30,June 30,(in millions)2008200720082007Service cost$5.1$5.1$10.6$10.8Interest cost15.814.931.831.1Expected return on Plan assets(21.7)(20.8)(43.1)(41.7)Amortization of prior service cost0.10.20.10.2Recognized actuarial loss3.94.68.010.3Net periodic pension benefit cost$3.2$4.0$7.4$10.7  The first quarter net periodic pension cost is typically estimated utilizing projections based on the previous years liability and asset levels.  The net periodic pension costs for the six months ended June 30, 2008 and 2007 have been adjusted to reflect the final cost amounts for 2008 and 2007.  This adjustment decreased the periodic pension benefit cost by approximately $0.5 million and $1.3 million for the three and six month periods ended June 30, 2008 and 2007, respectively, and was recognized in the second quarter of each year.  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 six months ended June 30, 2008, NSTAR contributed $6.2 million to this plan and anticipates contributing an additional $8.8 million for the remainder of 2008.  Components of net periodic postretirement benefit cost were as follows:  Three Months EndedSix Months EndedJune 30,June 30,(in millions)2008200720082007Service cost$1.3$1.2$2.9$2.9Interest cost9.18.818.117.8Expected return on Plan assets(7.0)(6.5)(14.2)(14.1)Amortization of prior service cost(0.4)(0.3)(0.8)(0.7)Amortization of transition obligation0.20.20.40.4Recognized actuarial loss2.42.94.55.5Net periodic postretirement benefit cost$5.6$6.3$10.9$11.8  The first quarter net periodic postretirement benefit cost is typically estimated based on the previous years liability and asset levels.  The net periodic postretirement benefit costs for the six months ended June 30, 2008 and 2007 have been adjusted to reflect the final cost amounts for 2008 and 2007.  This adjustment increased the periodic postretirement benefit costs by approximately $0.1 million and $0.4  10    million for the three and six month periods ended June 30, 2008 and 2007, respectively, and was recognized in the second quarter of each year.  4. New Accounting Standard  SFAS No. 161  On March 19, 2008, the FASB issued SFAS No. 161 (SFAS 161), Disclosures about Derivative Instruments and Hedging Activities, which is intended to improve financial reporting about derivatives and hedging activities by requiring enhanced disclosures.  This standard will be effective on January 1, 2009.  NSTAR is currently evaluating the impact SFAS 161 will have on its current disclosures.  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 June 30, 2008 and December 31, 2007, the estimated amount of the cost of removal included in regulatory liabilities was approximately $265 million and $259 million, respectively, based on the cost of removalcomponent 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, the normal purchases and sales exception. As a result, these agreements are not reflected on the accompanying Consolidated Balance Sheets.  NSTAR has only one significant gas supply contract.  This contract is an all-requirements portfolio asset management contract with a term of twelve months that expires in October 2008.  This contract does not qualify for the normal purchases and sales exception; however, it contains market based pricing terms, and therefore, no financial statement adjustments are required.  Gas supply costs incurred related to this contract were $98 million and $77 million for the three-month periods and $193 million and $149 million for the six-month periods ended June 30, 2008 and 2007, respectively, and have been recorded to cost of gas sold on the accompanying Consolidated Statements of Income.  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.  This practice minimizes the impact of fluctuations in prices to NSTARs firm gas 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 incurred or benefits realized are included in the CGAC.  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 2009.  As of June 30, 2008, NSTAR has recorded an asset and a corresponding regulatory liability of $24.1 million to reflect the fair value of these contracts.  As of December 31, 2007, NSTAR had recorded a liability and a corresponding regulatory asset of $10.5 million to reflect the fair value of these contracts.  During the six months ended June 30, 2008, $2.4 million of these financial contracts were settled and were recognized as an additional charge to cost of gas sold on the accompanying Consolidated Statements of Income.  11     Note D.  Service Quality Indicators  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.  The DPU has approved both filings without exception.  On February 29, 2008, NSTAR Electric and NSTAR Gas filed their 2007 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 2007.  These filings remain subject to final DPU approval.  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 established, for NSTAR Electric, a performance benchmark relating to its poor performing circuits, with a maximum penalty or incentive of $0.5 million.  On May 16, 2008, the DPU issued an order clarifying that the performance periods applicable to this benchmark were prospective three-year periods commencing with the effective date of the Rate Settlement Agreement on January 1, 2006.  Therefore, NSTAR Electric will not be able to determine its circuit performance results until the end of 2008.  On July 2, 2008, the Massachusetts Legislature passed the Green Communities Act, energy policy legislation that, among other things, increased the potential maximum service quality performance penalties provision from 2% to 2.5% of total transmission and distribution revenues.  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 $29.6 million and $30.2 million and corresponding net increases in accumulated deferred income taxes were recorded as of June 30, 2008 and December 31, 2007, 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 2008 and the actual effective income tax rate for the year ended December 31, 2007:  20082007Statutory tax rate35%35%State income tax, net of federal income tax benefit5%5%Other(2)%(2)%Effective tax rate38%38%  Uncertain Tax Positions  There were no changes to estimates of unrecognized tax benefits during the three and six month periods ended June 30, 2008.  12     Tax Matter  On July 3, 2008, the Governor of Massachusetts signed into law An Act Relative to Tax Fairness and Business Competitiveness (the Tax Act).  The Tax Act will become effective on January 1, 2009.  The major provisions of the Tax Act that are applicable to NSTAR and its subsidiaries include the adoption of unitary tax reporting, rate reductions for unregulated entities, and entity classification conformity.  NSTAR is currently reviewing the provisions of the Tax Act and does not expect that it will have a material impact on its results of operations, cash flows or financial position.  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 EndedSix Months EndedJune 30,June 30,(in thousands, except per share amounts)2008200720082007Net income$50,369$50,100$109,605$97,920Basic EPS$0.47$0.47$1.03$0.92Diluted EPS$0.47$0.47$1.02$0.91Weighted average common sharesoutstanding for basic EPS106,808106,808106,808106,808Effect of diluted shares:Weighted average dilutive potential    common shares230340216345Weighted average common shares    outstanding for diluted EPS107,038107,148107,024107,153  Note G.  Segment and Related Information  For the purpose of providing segment information, NSTAR's principal operating segments are its traditional core businesses of 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 six-month periods ended June 30, 2008 and 2007 include the allocation of NSTAR's (parent company) results of operations (primarily interest costs) and assets, net of inter-company transactions that primarily consist of interest charges and investment assets, respectively, to each business segment. The allocation of parent company charges is based on an indirect allocation of the parent company's investment relating to these various business segments.   13    Financial data for the operating segments were as follows:  Utility OperationsUnregulatedConsolidated(in thousands)ElectricGasOperationsTotalThree months ended June 30,2008Operating revenues$604,824$103,282$35,609$743,715Segment net income (loss)$47,790$(1,351)$3,930$50,3692007Operating revenues$592,361$99,800$32,974$725,135Segment net income$45,138$1,084$3,878$50,100Six months ended June 30,2008Operating revenues$1,224,015$337,939$77,342$1,639,296Segment net income$83,270$17,352$8,983$109,6052007Operating revenues$1,286,887$352,587$70,039$1,709,513Segment net income$75,672$17,857$4,391$97,920Total assetsJune 30, 2008$6,728,139$725,979$198,152$7,652,270December 31, 2007$6,760,380$799,768$199,397$7,759,545  Note H.  Fair Value Measurement  SFAS No. 157, "Fair Value Measurements(SFAS 157), defines fair value, establishes a framework for measuring fair value in accordance with GAAP and expands disclosures about fair value measurements. While the standard does not expand the use of fair value, it has applicability to several current accounting standards that require or permit measurement of assets and liabilities at fair value.  The Company prospectively adopted SFAS 157 on January 1, 2008, with no impact to its results of operations, cash flows, or financial position.  SFAS 157 establishes a fair value hierarchy that prioritizes the inputs used to determine fair value and requires the Company to classify assets and liabilities carried at fair value based on the observability of these inputs.  The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.  The three levels of the fair value hierarchy defined by SFAS 157 are as follows:  Level 1  Unadjusted quoted prices available in active markets for identical assets or liabilities as of the reporting date.  Financial assets utilizing Level 1 inputs include active exchange-traded equity securities.  Level 2  Quoted prices available in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, inputs other than quoted prices that are directly observable and inputs derived principally from market data.   Financial assets utilizing Level 2 inputs include non-exchange-based derivatives.  Level 3  Unobservable inputs from objective sources.  These inputs may be based on entity-specific inputs. Level 3 inputs include all inputs that do not meet the requirements of Level 1 or Level 2.   14    The following represents the fair value hierarchy of NSTARs financial assets and liabilities that were recognized at fair value on a recurring basis as of June 30, 2008.  As required by SFAS 157, financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement.  Recurring Fair Value Measures(in millions)Level 1Level 2TotalAssets:Deferred Compensation Assets (a)$30$-$30Investments (a)18-18Gas Hedges(b)-2424Total$48$24$72Liabilities:Deferred Compensation Liabilities(c)$43$-$43Total$43$-$43  (a)  -  Included in other investments on the accompanying Consolidated Balance Sheets (b)  -  Included in current assets-other on the accompanying Consolidated Balance Sheets (c)  -  Included in deferred credits-other on the accompanying Consolidated Balance Sheets  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 June 30, 2008 and December 31, 2007, NSTAR had a liability of approximately $0.8 million 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 sites 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 permits recovery of costs associated with MGP sites over a 7-year period, without carrying costs.  As of June 30, 2008 and December 31, 2007, NSTAR had a liability of approximately $10.1 million as an estimate for site cleanup costs for several MGP sites for which NSTAR Gas was previously identified 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.  Regulatory Matters  Wholesale Power Cost Savings Initiatives  The Rate Settlement Agreement encourages NSTAR Electric to continue its efforts to advocate on behalf of customers at the FERC to mitigate wholesale electricity cost inefficiencies that would be borne by  15    regional customers.  If NSTAR Electric's efforts to reduce customers costs are successful, it is allowed to retain a portion of those savings as an incentive, as well as recover related litigation costs.  Under the terms of the Rate Settlement 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. 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 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 allowed NSTAR Electric to collect $6.3 million of the savings annually for three years effective January 1, 2007 and it stipulated that NSTAR Electric would share 12.5% of the savings applicable to its customers in its future efforts related to new wholesale energy cost savings cases.  On February 29, 2008, the DPU issued an order that did not approve the revised Settlement Agreement.  The DPU re-established a procedural schedule and final briefs were filed in early May.  NSTAR is unable to predict the ultimate outcome of this proceeding.  In the event an adverse decision is issued, it would not have a material impact on the Company's reported results of operations for the three or six month periods ended June 30, 2008.  However, such a decision could have an impact on future results of operations and cash flows.  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.  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.  On June 28, 2007, the DPU issued an order approving the implementation of a revised basic service rate.  However, the DPU required NSTAR Electric to reduce distribution rates by the increase in its basic service bad debt charge-offs.  Such action would result in a further reduction to distribution rates from the adjustment NSTAR Electric made when it implemented the Settlement Agreement.  This adjustment to NSTAR Electrics distribution rate would 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.  On December 14, 2007, the Motion for Reconsideration was granted and the DPU reopened the case to hear additional evidence.  NSTAR Electric filed additional testimony in April 2008, an evidentiary hearing was held, and briefs were filed in June and early July 2008.  NSTAR Electric believes its position is appropriate and that it is probable that it will ultimately prevail.  However, in the event that it does not, NSTAR Electric intends to pursue all legal options.  As of June 30, 2008, the potential impact to earnings of eliminating the bad debt adder was approximately $14 million, pre-tax.  NSTAR cannot predict the timing or the ultimate outcome of this proceeding.   16    Regulatory Proceeding - FERC  On July 9, 2007, FERC issued an order that 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, the AG and a wholesale customer.  A final Settlement Agreement was filed on March 12, 2008 and approved by FERC on June 19, 2008.  The implementation of this Settlement Agreement did not have an impact on the Company's results of operations, financial position or cash flows.  FERC Transmission ROE  On October 31, 2006, the FERC authorized, for the participating New England Transmission Owners, including NSTAR Electric, an ROE on transmission facilities of 10.2% plus a 50 basis point adder on regional facilities for joining a RTO from February 1, 2005 (the RTO effective date) through October 31, 2006, and an ROE of 11.4% thereafter.  In addition, FERC granted a 100 basis point incentive adder to these ROEs for qualified investments made in new regional transmission facilities, that when combined with FERC's approved ROEs, provide 11.7% and 12.4% returns for the respective time frames.  ISO-NE ratepayers benefit from this order because it responds to the need to enhance the New England transmission grid to alleviate congestion costs and reliability concerns.  Transmission projects that are completed and in progress, including NSTAR Electric's 345kV project, have significantly reduced these congestion costs and enhanced reliability in the region.  The New England Transmission Owners accepted all but one of the terms of the October 31, 2006 FERC decision and filed a request for rehearing involving the calculation of the 10.2% base ROE.  The New England Transmission Owners contended that the base ROE should be 10.5%.  On March 24, 2008, the FERC issued an order approving, among other things, a 20 basis point increase, from 10.2% to 10.4%, to base ROE retroactive to February 1, 2005.  As a result of implementing this order, NSTAR Electric recognized $3.0 million of transmission revenue and $0.9 million of interest income related to the applicable carrying charge in the first quarter of 2008.  With this order, participating New England Transmission Owners, including NSTAR Electric, have the potential to earn an ROE of 12.64% on approved regional transmission facilities post-October 31, 2006.  On June 12, 2008, the New England Conference of Public Utilities Commissioners, Inc. (NECPUC) filed a complaint with the FERC against the New England Transmission Owners in which it asserts the 100 basis point incentive adder should only apply to original cost estimates for transmission projects and not to actual costs, unless actual costs are lower than original estimates.  If ultimately approved by FERC, NSTAR anticipates that any potential impact of this complaint would be prospective from the date the complaint is heard.  The New England Transmission Owners filed a response requesting that FERC reject the complaint.  NSTAR cannot predict the timing or ultimate outcome of this complaint.  3.  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.   17    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 2007 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 competencies.  Electric utility operations.For the six months ended June 30, 2008, NSTAR derived 75% of its operating revenues from the sale, transmission and distribution of electric energy through its NSTAR Electric retail distribution subsidiary.  Gas operations.For the six months ended June 30, 2008, NSTAR derived 20% of its operating revenues from the sale and distribution of natural gas through its NSTAR Gas retail natural gas distribution subsidiary.  Unregulated operations.For the six months ended June 30, 2008, NSTAR derived 5% of its operating revenues from non-utility, unregulated operating subsidiaries in 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 retail distribution and natural gas firm and transportation 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 six-month periods ended June 30, 2008 amounted to $50.4 million and $109.6 million, or $0.47 and $1.02 diluted earnings per share, respectively, as compared to $50.1 million and $97.9 million, or $0.47 and $0.91 diluted earnings per share for the same periods in 2007, 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 2007 Form 10-K.  There have been no substantive changes to those policies and estimates.   Rate Structure  a.  Rate Settlement Agreement  On December 30, 2005, the DPU approved a seven-year Rate Settlement Agreement ("Rate Settlement Agreement") between NSTAR, the AG, and several interveners.  Beginning January 1, 2007 and continuing through 2012, the Rate Settlement Agreement establishes annual inflation-adjusted distribution rate increases (SIP of 2.68% effective January 1, 2008).  These increases are generally offset  18    by an equal and corresponding reduction in transition rates.  Uncollected transition charges as a result of the reductions in transition rates are deferred and collected through future rates with a carrying charge of 10.88%.  b.  Retail Electric Rates  Electric distribution companies in Massachusetts are required to obtain and resell power to retail customers through basic service for those who choose not to buy energy from a competitive energy supplier.  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 electric power.  As of June 30, 2008 and December 31, 2007, customers of NSTAR Electric had approximately 45% and 47%, respectively, of their load requirements provided through basic service. NSTAR Electric fully recovers its energy costs through DPU-approved rate mechanisms.  Though energy delivery charges vary slightly by region, the basic delivery service price for all residential customers increased an average of 3%, from $0.1084 to $0.1117 per kilowatt-hour effective January 1, 2008 and to $0.1255 per kilowatt-hour, or an average increase of 12.4%, effective July 1, 2008.  Medium and large commercial and industrial customers rates increased an average of 17% from $0.0949 cents to $0.1106 cents per kilowatt-hour effective January 1, 2008 and decreased an average of 3% from $0.1106 cents to $0.1072 cents per kilowatt-hour effective April 1, 2008.  These customers rates were increased an average of 31.5% from $0.1072 to $0.1410 effective July 1, 2008.  c.  Regulatory Matters  Massachusetts Regulatory Environment  On July 2, 2008, the Governor of Massachusetts signed into law The Green Communities Act (the Act), an energy bill establishing policies designed to substantially increase energy efficiency and the development of renewable energy resources in Massachusetts.  The Act:  ·Creates a new Department of Energy Resources with expanded powers to oversee energy efficiency, renewable and alternative energy development, and other Green programs;·Mandates efficiency improvements in government buildings, and provides technical and financial assistance to communities that implement Green initiatives;·Requires electric and natural gas distribution companies to file three-year energy efficiency investment plans designed to implement all available cost-effective energy efficiency and demand reduction resources; the plans are to include fully reconciling funding mechanisms;·Requires utility distribution companies to undertake various Green programs, including the solicitation of bids for long-term renewable energy procurement contracts for which utilities would be allowed remuneration on certain contract commitments;·Establishes a smart grid pilot program;·Gives final approval to the States participation in the Regional Greenhouse Gas Initiative;·Increases the Renewable Portfolio Standard by 1% annually, requiring that by the year 2020 utilities and other electricity suppliers obtain 15% of the power they sell from renewable resources;·Authorizes electric distribution companies to construct, own and operate up to 50 megawatts of solar generating capacity; and·Modifies the service quality performance penalty provision (Refer to Note D of the accompanying Notes to Consolidated Financial Statements).  The Act provides for utilities to recover in rates the incremental costs associated with its various mandated programs.   19    Electric and Gas Rate Decoupling  On July 16, 2008, the DPU ordered all Massachusetts electric and gas distribution utility companies to develop plans to decouple their rates/revenues from sales volumes. This action is intended to encourage utility companies to help their customers reduce energy consumption.  Decoupling of rates will allow utility companies to carry out the mandates of the Act and at the same time collect the adequate level of revenues to maintain the quality and reliability of electric and gas services.  NSTAR Electric may continue to bill customers under its current approved Rate Settlement Agreement through its expiration in 2012.  However, this Order allows companies to file for recovery of lost base revenues caused by incremental energy efficiency spending until their decoupling rate plans are approved.  Once approved, revenues will be set at a level designed to recover the companys incurred costs plus a return on their investment. This revenue level will be reconciled with actual revenues received from decoupled rates on an annual basis and any over or under collection will be refunded to or recovered from customers in the subsequent year.  NSTAR expects to file for lost base revenues in 2009.  NSTAR currently does not expect to file for fully decoupled electric rates until after the Rate Settlement Agreement expires in 2012.  Wholesale Power Cost Savings Initiatives  The Rate Settlement Agreement encourages for NSTAR Electric to continue its efforts to advocate on behalf of customers at the FERC to mitigate wholesale electricity cost inefficiencies that would be borne by regional customers.  If NSTAR Electric's efforts to reduce customers costs are successful, it is allowed to retain a portion of those savings as an incentive, as well as recover related litigation costs.  Under the terms of the Rate Settlement 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. 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 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 allowed NSTAR Electric to collect $6.3 million of the savings annually for three years effective January 1, 2007 and it stipulated that NSTAR Electric would share 12.5% of the savings applicable to its customers in its future efforts related to new wholesale energy cost savings cases.  On February 29, 2008, the DPU issued an order that did not approve the revised Settlement Agreement.  The DPU re-established a procedural schedule and final briefs were filed in early May.  NSTAR is unable to predict the ultimate outcome of this proceeding.  In the event an adverse decision is issued, it would not have a material impact on the Company's reported results of operations for the three or six month periods ended June 30, 2008.  However, such a decision could have an impact on future results of operations and cash flows.  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.  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.  On June 28, 2007, the DPU issued an order approving the implementation of a revised basic service rate.  However, the DPU required  20    NSTAR Electric to reduce distribution rates by the increase in its basic service bad debt charge-offs.  Such action would result in a further reduction to distribution rates from the adjustment NSTAR Electric made when it implemented the Settlement Agreement.  This adjustment to NSTAR Electrics distribution rate would 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.  On December 14, 2007, the Motion for Reconsideration was granted and the DPU reopened the case to hear additional evidence.  NSTAR Electric filed additional testimony in April 2008, an evidentiary hearing was held, and briefs were filed in June and early July 2008.  NSTAR Electric believes its position is appropriate and that it is probable that it will ultimately prevail.  However, in the event that it does not, NSTAR Electric intends to pursue all legal options.  As of June 30, 2008, the potential impact to earnings of eliminating the bad debt adder was approximately $14 million, pre-tax.  NSTAR cannot predict the timing or the ultimate outcome of this proceeding.  Regulatory Proceeding - FERC  On July 9, 2007, FERC issued an order that 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, the AG and a wholesale customer.  A final Settlement Agreement was filed on March 12, 2008 and approved by FERC on June 19, 2008.  The implementation of this Settlement Agreement did not have an impact on the Company's results of operations, financial position or cash flows.  FERC Transmission ROE  On October 31, 2006, the FERC authorized, for the participating New England Transmission Owners, including NSTAR Electric, an ROE on transmission facilities of 10.2% plus a 50 basis point adder on regional facilities for joining a RTO from February 1, 2005 (the RTO effective date) through October 31, 2006, and an ROE of 11.4% thereafter.  In addition, FERC granted a 100 basis point incentive adder to these ROEs for qualified investments made in new regional transmission facilities, that when combined with FERC's approved ROEs, provide 11.7% and 12.4% returns for the respective time frames.  ISO-NE ratepayers benefit from this order because it responds to the need to enhance the New England transmission grid to alleviate congestion costs and reliability concerns.  Transmission projects that are completed and in progress, including NSTAR Electric's 345kV project, have significantly reduced these congestion costs and enhanced reliability in the region.  The New England Transmission Owners accepted all but one of the terms of the October 31, 2006 FERC decision and filed a request for rehearing involving the calculation of the 10.2% base ROE.  The New England Transmission Owners contended that the base ROE should be 10.5%.  On March 24, 2008, the FERC issued an order approving, among other things, a 20 basis point increase, from 10.2% to 10.4%, to base ROE retroactive to February 1, 2005.  As a result of implementing this order, NSTAR Electric recognized $3.0 million of transmission revenue and $0.9 million of interest income related to the applicable carrying charge in the first quarter of 2008.  With this order, participating New England Transmission Owners, including NSTAR Electric, have the potential to earn an ROE of 12.64% on approved regional transmission facilities post-October 31, 2006.  On June 12, 2008, the New England Conference of Public Utilities Commissioners, Inc. (NECPUC) filed a complaint with FERC against the New England Transmission Owners in which it asserts the 100 basis point incentive adder should only apply to original cost estimates for transmission projects and not to actual costs, unless actual costs are lower than original estimates.  If ultimately approved by FERC, NSTAR anticipates that any potential impact of this complaint would be prospective from the date the complaint is heard.  The New England Transmission Owners filed a response requesting that FERC reject the complaint.  NSTAR cannot predict the timing or ultimate outcome of this complaint.   21    d.  Tax Matter  On July 3, 2008, the Governor of Massachusetts signed into law An Act Relative to Tax Fairness and Business Competitiveness (the Tax Act).  The Tax Act will become effective on January 1, 2009.  The major provisions of the Tax Act that are applicable to NSTAR and its subsidiaries include the adoption of unitary tax reporting, rate reductions for unregulated entities, and entity classification conformity.  NSTAR is currently reviewing the provisions of the Tax Act and does not expect that it will have a material impact on its results of operations, cash flows or financial position.  e.  Natural Gas Rates  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 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%.  As a result, effective June 1, 2008 and again on July 1, 2008, the DPU approved revised CGAC factors of $1.201/therm and $1.6356/therm, respectively, or 21.2% and 36.2% increases from earlier approved rate levels.  The prior six-month CGAC factor of $0.9905/therm was effective May 1, 2008 and reflected a 1.1% increase from the previous rate effective November 1, 2007 of $0.9799/therm for the 2007-2008 winter season.  Changes in the cost of gas supply have no impact on the Company's earnings due to the CGAC and LDAC rate recovery mechanisms.  Results of Operations  The following section of MD&A compares the results of operations for each of the three and six-month periods ended June 30, 2008 and 2007 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 June 30, 2008 compared to Three Months Ended June 30, 2007  Executive Summary  Earnings per common share were as follows:  Three Months Ended June 30,20082007% ChangeBasic and Diluted$0.47$0.47-  Net income was $50.4 million for the quarter ended June 30, 2008 compared to $50.1 million for the same period in 2007.  Major factors (after-tax) that contributed to the $0.3 million, or less than 1%, increase in 2008 earnings include:  ·Higher electric distribution revenues as a result of the Rate Settlement Agreement and an increase in energy sales of 0.2% ($4.3 million)·Higher transmission revenues as a result of increased transmission investment base ($5.0 million)·Lower net interest expense primarily as a result of decreased interest rates and increased interest income related to regulatory assets ($1.3 million)   22    These increases in earnings factors were partially offset by:  ·Increased operation and maintenance expenses ($7.7 million) of which approximately $1.9 million relates to fluctuations in the fair value of deferred compensation liabilities and $1.5 million relates to the timing of maintenance and capital work.  The remaining increase is primarily due to higher labor costs and storm costs.  Higher labor costs are primarily a result of the timing of the Companys planned attrition replacement program·Higher depreciation and amortization expense in 2008 relates to higher depreciable electric and gas distribution plant in service ($1.4 million)·Lower firm gas revenues due to lower sales of 3.8% ($1.1 million)  Significant cash flow events during the quarter include the following:  ·Cash flows from operating activities provided approximately $93 million, a decrease of $77 million as compared to the same period in 2007.  The decrease primarily reflects a change in the timing of income tax payments.  During the second quarter of 2008, a $64 million incremental estimated income tax payment was made as compared to the same period of 2007·NSTAR invested approximately $88 million in capital projects to improve capacity and system reliability·NSTAR paid approximately $37.4 million in common share dividends and retired approximately $37.6 million in long-term and securitized debt  Energy sales  The following is a summary of retail electric and firm gas and transportation energy sales for the periods indicated:  Retail Electric Sales - MWhThree Months Ended June 30,20082007% Change
Increase/(decrease)Residential1,470,2171,452,0341.3Commercial, Industrial and other3,646,4403,651,998(0.2)Total retail sales5,116,6575,104,0320.2  Firm Gas Sales and Transportation - BBtuThree Months Ended June 30,20082007% Change
Increase/(decrease)Residential2,9323,475(15.6)Commercial and Industrial3,9133,6945.9Municipal4794447.9Total firm sales7,3247,613(3.8)  The 0.2% or 12,625 MWh energy sales increase in the second quarter of 2008 reflects increased residential sector demand partially offset by conservation and weather conditions.  The 3.8% decrease in firm gas and transportation sales is due to the warmer spring weather partially offset by the shift of commercial and industrial customers in several instances returning to using natural gas from fuel oil.  Weather and 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.  Refer to the "Electric revenues" and Gas revenues sections below for more detailed discussions.   23    Weather Conditions  The demand for electricity and natural gas is affected by weather conditions.  Customer heating or cooling usage may not directly correlate with historical levels or with the level of degree-days that occur (as further discussed below), particularly when weather patterns experienced are consistently cold or warm.  Also, NSTARs electric and gas businesses are sensitive to variations in daily weather, are highly influenced by New Englands seasonal variations and are susceptible to severe storm-related disasters that could adversely affect the Companys ability to provide energy.  Weather measured by cooling degree-days was 9.1% cooler for the second quarter of 2008 as compared to the same period in 2007.  Weather measured by heating degree-days was 14.1% warmer for the second quarter of 2008 as compared to the same period in 2007.  Three Months EndedNormalJune 30,30-Year20082007AverageHeating Degree-Days8741,017972Percentage (warmer) colder than prior year(14.1)%7.1%Percentage (warmer) colder than 30-year average(10.1)%4.6%Cooling Degree-Days210231175Percentage (cooler) warmer than prior year(9.1)%29.8%Percentage warmer than 30-year average20.0%32.0%  Degree-Days measure changes in daily mean temperature levels.  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.  A degree-day is a unit measuring how much the outdoor daily mean temperature falls below (in the case of heating) or rises above (in the case of cooling) a base of 65 degrees.  Operating revenues  Operating revenues for the second quarter of 2008 increased $18.6 million or 2.6% from the same period in 2007 as follows:  (in millions)Three Months Ended June 30,Increase/(Decrease)20082007AmountPercentElectric revenuesRetail distribution and transmission$231.9$220.2$11.75.3Energy, transition and other372.9372.20.70.2Total retail electric revenues604.8592.412.42.1Gas revenuesFirm and transportation24.725.7(1.0)(3.9)Energy supply and other78.674.14.56.1Total gas revenues103.399.83.53.5Unregulated operations revenues35.632.92.78.2Total operating revenues$743.7$725.1$18.62.6  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  24    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 increase of $11.7 million, or 5.3%, in retail distribution and transmission revenues primarily reflects:  ·Higher distribution revenues due to the impact of the annual inflation-adjustment to distribution rates and increased energy sales of 0.2% ($7.1 million).  This annual inflation-adjustment is generally offset by an equal and corresponding reduction in transition rates·Increased transmission revenues primarily due to increased transmission investment base ($8.2 million)  These increases were partially offset by:  ·Decreased transmission revenues related to lower forecasted RMR payments to energy generators ($3.6 million)  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 customers being provided energy supply under basic service.  These revenues are fully reconciled to the costs incurred and have no impact on NSTAR's consolidated earnings.  Energy, transition and other revenues also reflect revenues related to the Company's ability to effectively reduce stranded costs, rental revenue from electric property and annual cost reconciliation true-up adjustments.  The $0.7 million increase in energy, transition and other revenues is primarily attributable to slightly higher basic service rates in the second quarter of 2008.  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 decreased $1.0 million primarily attributable to the 3.8% decrease in BBtu sales.  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 revenues increase of $4.5 million primarily reflects an increase in the cost of gas per therm purchased, partially offset by a 3.8% decrease 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 district energy and telecommunications operations.  Unregulated revenues were $35.6 million for the quarter ended June 30, 2008 compared to $32.9 million in 2007, an increase of $2.7 million, or 8.2%.  The increase in unregulated revenues is primarily the result of increased energy sales prices.  Operating expenses  Purchased power and transmission were $308 million in the second quarter of 2008 compared to $304.8 million in the same period of 2007, an increase of $3.2 million, or 1%.  The increase in expense reflects higher transmission costs of $32.9 million primarily as a result of a $24.8 million increase in transmission-related congestion costs and higher regional network support costs of $8.2 million.  This  25    increase is partially offset by lower basic service and other energy supply costs for both NSTARs regulated and unregulated companies of $29.7 million.  This change in basic service costs is partially due to a higher proportion of customers receiving the energy portion of their service from competitive suppliers in 2008 than in 2007.  NSTAR Electric adjusts its rates to collect the costs related to energy supply from customers on a fully reconciling basis.  Due to this rate adjustment mechanism, changes in the amount of NSTAR Electrics energy supply expense have no impact on earnings.  Cost of gas sold, representing NSTAR Gas' supply expense, was $69.8 million in the second quarter of 2008 compared to $64.9 million in 2007, an increase of $4.9 million, or 7.6%.  Despite lower firm gas sales of 3.8%, the increase in expense reflects higher costs 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 $113.9 million in the second quarter of 2008 compared to $103.6 million in the same period of 2007, an increase of $10.3 million, or 10%.  This increase primarily relates to the impact of fluctuations in the fair value of deferred compensation liabilities of $3.2 million, the impact related to the timing of maintenance and capital work of approximately $3.1 million, increases in labor costs due to the timing of the Companys planned attrition replacement program and increased storm related costs.  Depreciation and amortization expense was $93.2 million in the second quarter of 2008 compared to $90.7 million in the same period of 2007, an increase of $2.5 million or 2.8%.  The increase primarily reflects slightly higher depreciable distribution and transmission plant in service and higher software amortization costs.  DSM and renewable energy programs expense was $16.7 million in the second quarter of 2008 and in the same period of 2007 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 $23.1 million in the second quarter of 2008 compared to $21.0 million in the same period of 2007, an increase of $2.1 million, or 10%, reflecting higher assessments due to increased overall property investment.  Income tax expenseattributable to operations was $30.9 million in the second quarter of 2008 compared to $30.6 million in the same period of 2007, an increase of $0.3 million, or 1%, reflecting the impact of higher pre-tax operating income in 2008.  Interest charges (income)  Interest on long-term debt and transition property securitization certificates was $40.5 million in the second quarter of 2008 compared to $38.3 million in the same period of 2007, an increase of $2.2 million, or 5.7%.  This increase in interest expense reflects:  ·$4.3 million in interest costs associated with NSTAR Electric's $300 million Debentures issued in November 2007  This increase was partially offset by:  ·Lower interest costs on transition property securitization debt of $2 million resulting from redemptions of these securities.  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  26       Short-term and other interest expense (income) was ($1.7 million) of interest income in the second quarter of 2008 compared to $5.4 million of expense in the same period of 2007, a change of $7.1 million, or 131%.  This change in short-term and other interest expense (income) reflects:  ·Lower short-term borrowing costs of $4.2 million resulting from an approximate 320 basis point decrease in the 2008 weighted average borrowing rate and, to a lesser extent, a lower average level of funds borrowed in 2008 as compared to the same period in 2007. The weighted average short-term interest rate including fees was 2.3% and 5.5% in the three-month periods ended June 30, 2008 and 2007, respectively·Increased interest income of $3.1 million related to the timing of the collection of regulatory assets  Common Share Dividends  NSTAR's current quarterly cash dividend rate is $0.35 per share or $1.40 per share on an annualized basis. On June 26, 2008, NSTAR's Board of Trustees declared a quarterly cash dividend of $0.35 per share for shareholders of record on July 10, 2008, payable August 1, 2008.  Six Months Ended June 30, 2008 compared to Six Months Ended June 30, 2007  Executive Summary  Earnings per common share were as follows:  Six Months Ended June 30,20082007% ChangeBasic$1.03$0.9212%Diluted$1.02$0.9112%  Net income was $109.6 million for the six-month period ended June 30, 2008 compared to $97.9 million for the same period in 2007.  Major factors (after-tax) that contributed to the $11.7 million, or 12%, increase in 2008 earnings include:  ·Higher electric distribution revenues as a result of the Rate Settlement Agreement and increased energy sales of 0.7% ($9.0 million)·Higher transmission revenues as a result of increased transmission investment base ($7.7 million)·Non-recurring cumulative impact of implementing the March 2008 FERC order ($2.4 million)·Higher earnings from NSTARs unregulated businesses ($4.6 million)·Environmental insurance settlement proceeds ($2.9 million)·Lower net interest expense primarily as a result of decreased interest rates and increased interest income related to regulatory assets ($2.9 million)  These increases in earnings factors were partially offset by:  ·Higher operations and maintenance expenses ($9.4 million) of which approximately $1.6 million relates to the timing of maintenance and capital work.  The remaining increase primarily relates to higher labor costs, bad debts and storm costs·Higher depreciation and amortization expense in 2008 related to higher depreciable electric and gas distribution plant in service ($2.9 million)·Lower firm gas revenues due to lower sales of 3.4% ($2.1 million)·The absence of executive life insurance proceeds recognized in 2007 ($1.8 million)   27    Significant cash flow events during the first half of 2008 include the following:  ·Cash flows from operating activities provided approximately $294.4 million, a decrease of $43 million, as compared to the same period in 2007.  The decrease primarily reflects a change in the timing of income tax payments and an increase in regulatory deferrals when compared to the same period in 2007.  $66 million of incremental estimated income tax payments were made during the period that were not made in 2007.  These decreases were partially offset by the timing of payables and energy supply payments·NSTAR invested approximately $196 million in capital projects to improve capacity and reliability·NSTAR paid approximately $74.8 million in common share dividends and retired approximately $78.8 million in long-term and securitized debt  Energy sales  The following is a summary of retail electric and firm gas and transportation energy sales for the periods indicated:  Retail Electric Sales - MWhSix Months Ended June 30,20082007% Change
IncreaseResidential3,162,8633,142,3770.7Commercial, Industrial and other7,378,5337,322,6840.8Total retail sales10,541,39610,465,0610.7  Firm Gas Sales and Transportation - BBtuSix Months Ended June 30,20082007% Change
Increase/(decrease)Residential12,64113,634(7.3)Commercial and Industrial12,84712,8130.3Municipal1,8581,8510.4Total firm sales27,34628,298(3.4)  The 0.7% or 76,335 MWh energy sales increase in the first half of 2008 reflects the impact of an additional day from the leap year in 2008 and increased residential sector demand partially offset by conservation and weather conditions.  The 3.4% decrease in firm gas and transportation sales is due to the milder winter weather offset by the leap year impact and the shift of commercial and industrial customers in several instances returning to using natural gas from fuel oil.  All gas customer segments are impacted by continued customer conservation efforts.  Weather, higher fuel costs, conservation measures and economic conditions affect sales to NSTAR's residential and small commercial customers.  Economic conditions, higher fuel costs and conservation measures affect NSTAR's large commercial and industrial customers.  Refer to the "Electric revenues" and Gas revenues sections below for more detailed discussions.  Weather Conditions  The demand for electricity and natural gas is affected by weather conditions.  Customer heating or cooling usage may not directly correlate with historical levels or with the level of degree-days that occur (as further discussed below), particularly when weather patterns experienced are consistently cold or warm.  Also, NSTARs electric and gas businesses are sensitive to variations in daily weather, are highly influenced by New Englands seasonal variations and are susceptible to severe storm-related disasters that could adversely affect the Companys ability to provide energy.   28    Weather measured by heating degree-days was 6.6% warmer for the first half of 2008 as compared to the same period in 2007.  Weather measured by cooling degree-days was 9.1% cooler for the first half of 2008 as compared the same period in 2007.  Six Months EndedNormalJune 30,30-Year20082007AverageHeating Degree-Days4,0604,3474,311Percentage (warmer) colder than prior year(6.6)%10.0%Percentage (warmer) colder than 30-year average(5.8)%1.7%Cooling Degree-Days210231176Percentage (cooler) warmer than prior year(9.1)%29.8%Percentage warmer than 30-year average19.3%31.3%  Degree-Days measure changes in daily mean temperature levels.  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.  A degree-day is a unit measuring how much the outdoor daily mean temperature falls below (in the case of heating) or rises above (in the case of cooling) a base of 65 degrees.  Operating revenues for the first half of 2008 decreased $70.2 million or 4.1% from the same period in 2007 as follows:  (in millions)Six Months Ended June 30,Increase/(Decrease)20082007AmountPercentElectric revenuesRetail distribution and transmission$446.3$449.2$(2.9)(0.6)Energy, transition and other777.7837.7(60.0)(7.2)Total retail electric revenues1,224.01,286.9(62.9)(4.9)Gas revenuesFirm and transportation85.186.9(1.8)(2.1)Energy supply and other252.8265.7(12.9)(4.8)Total gas revenues337.9352.6(14.7)(4.2)Unregulated operations revenues77.470.07.410.6Total operating revenues$1,639.3$1,709.5$(70.2)(4.1)  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 of $2.9 million, or 0.6%, in retail distribution and transmission revenues primarily reflects:  ·Decreased transmission revenues related to lower forecasted RMR payments to energy generators ($30.4 million)   29    This decrease was partially offset by:  ·Higher distribution revenues due to the impact of the annual inflation-adjustment to distribution rates and increased energy sales of 0.7% ($14.8 million).  This annual inflation-adjustment is generally offset by an equal and corresponding reduction in transition rates·Increased transmission revenues primarily due to increased transmission investment base ($12.7 million)  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 customers being provided energy supply under basic service.  These revenues are fully reconciled to the costs incurred and have no impact on NSTAR'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 $60.0 million decrease in energy, transition and other revenues is primarily attributable to the decrease in both energy supply costs and non-retail regional transmission revenues.  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 $1.8 million decrease in firm and transportation revenues is primarily attributable to warmer winter weather conditions offset by customers switching back to natural gas from alternate fuel sources as a result of higher energy price concerns.  These factors resulted in the decrease in sales volumes of 3.4% through June 30, 2008.  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 supply costs.  The energy supply and other revenues decrease of $12.9 million primarily reflects the impact of 3.4% decrease in energy sales partially offset by an increase in the CGAC factor for the current period.  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 primarily derived from NSTAR's district energy and telecommunications operations.  Unregulated revenues were $77.4 million through June 30, 2008 compared to $70 million in 2007, an increase of $7.4 million, or 10.6%.  The increase in unregulated revenues is primarily the result of the absence of a provision for a potential customer refund recorded in 2007 and increases in energy sales, prices and ISO-NE capacity revenues during 2008.   30    Operating expenses  Purchased power and transmission were $654.9 million in the first half of 2008 compared to $738.6 million in the same period of 2007, a decrease of $83.7 million, or 11.3%.  Despite higher energy sales of 0.7%, the decrease in expense reflects lower basic service and other energy supply costs of $104.6 million for both NSTAR's regulated and unregulated companies.  This decrease is further impacted by a higher proportion of customers receiving the energy portion of their service from competitive suppliers in 2008 than in 2007.  These decreases were partially offset by an increase in transmission costs of $20.9 million as a result of a $31.9 million increase in transmission-related congestion costs, offset by a decline in regional network support costs of $10.1 million.  NSTAR Electric adjusts its rates to collect the costs related to energy supply from customers on a fully reconciling basis.  Due to this rate adjustment mechanism, changes in the amount of NSTAR Electrics energy supply expense have no impact on earnings.  Cost of gas sold, representing NSTAR Gas' supply expense, was $232.3 million in the first half of 2008 compared to $243.4 million in 2007, a decrease of $11.1 million, or 4.6%.  The decrease in cost primarily reflects the 3.4% decrease in firm gas sales and the incremental settlement of cash flow hedging contracts during the current six-month period of $22.8 million, partly offset by higher costs 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 $226.3 million in the first half of 2008 compared to $217.7 million in the same period of 2007, an increase of $8.6 million, or 4%.  This increase primarily relates to the timing of maintenance and capital work, higher labor and labor related costs, higher bad debts and higher storm related costs.  Depreciation and amortization expense was $192.5 million in the first half of 2008 compared to $187.3 million in the same period of 2007, an increase of $5.2 million or 2.8%.  The increase primarily reflects higher depreciable distribution and transmission plant in service and higher software amortization costs.  DSM and renewable energy programs expense was $35.0 million in the first half of 2008 compared to $34.6 million in the same period of 2007, an increase of $0.4 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 $50.1 million in the first half of 2008 compared to $47.7 million in the same period of 2007, an increase of $2.4 million, or 5%, reflecting higher overall property investment.  Income tax expenseattributable to operations was $64.7 million in the first half of 2008 compared to $58.3 million in the same period of 2007, an increase of $6.4 million, or 11%, reflecting higher pre-tax operating income in 2008.  Other income, net  Total other income, net was approximately $4.7 million in the first half of 2008 compared to $3.9 million in the same period of 2007, an increase of $0.8 million, or 21%.  The increase primarily reflects income of $2.9 million, net of tax, from the proceeds of an environmental insurance settlement.  This was partially offset by the absence of executive life insurance proceeds of $1.8 million received in 2007.  31    Interest charges (income)  Interest on long-term debt and transition property securitization certificates was $81.8 million in the first half of 2008 compared to $77.6 million in the same period of 2007, an increase of $4.2 million, or 5.4%.  This increase in interest expense reflects:  ·$8.6 million in interest costs associated with NSTAR Electrics $300 million Debentures issued in November 2007.  This increase was partially offset by:  ·Lower interest costs on transition property securitization debt of $4 million resulting from redemptions of these securities.  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 (income) was ($3.2 million) of interest income in the first half of 2008 compared to $11.6 million of expense in the same period of 2007, a change of $14.8 million, or 128%.  This change in short-term and other interest expense (income) reflects:  ·Lower borrowing costs of $7.8 million resulting from an approximate 260 basis point decrease in the 2008 weighted average borrowing rate and, to a lesser extent, a lower average level of funds borrowed in 2008 as compared to the same period in 2007.  The weighted average short-term interest rate including fees was 2.9% and 5.5% in the six-month periods ended June 30, 2008 and 2007, respectively·Increased interest income of $6.5 million related to the timing of the collection of regulatory assets, including $0.9 million related to the implementation of the March 2008 FERC order  Liquidity and Capital Resources  Current Cash Flow Activity  NSTAR's primary uses of cash in the first half of 2008 included capital expenditures, dividend payments  and payments of securitized debt.  Net operating cash flow in the first half of 2008 provided $294.4 million.  The Company used $206 million in its net investing activities that consisted of $196 million of plant expenditures.  Additionally, the Company used $98.3 million in its net financing activities primarily due to the redemption of long-term and securitized debt and payment of dividends.  Operating Activities  The net cash provided by operating activities decreased by $43 million to $294.4 million in the first half of 2008 when compared to the same period in 2007.  The decrease is primarily due to the timing of estimated income tax payments, totaling $66 million, which were made during the current period but not made until the fourth quarter in 2007.  Also contributing to the overall decrease was an increase in the transmission and cost of gas under-collection from customers; partially offset by a reduction in the basic service energy costs under-collection from customers and the timing of payables and energy supply payments when compared to the same period in 2007.  Investing Activities  The net cash used in investing activities in the first half of 2008 of $206 million consists primarily of capital expenditures related to infrastructure investments in transmission and distribution systems. Capital  32    expenditures increased $24.8 million to $196 million primarily due to higher spending on transmission projects in 2008 compared to the same period in 2007.  Financing Activities  The net cash used in financing activities in the first half of 2008 of $98.3 million primarily reflects long-term and securitized debt redemptions of $78.8 million and payment of dividends to common shareholders of $74.8 million offset by an increase in short-term debt of $70.6 million.  NSTAR's banking arrangements provide for daily cash transfers to the Company's disbursement accounts as vendor checks are presented for payment and 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, in addition to the bond indemnity agreements, 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 June 30, 2008 and December 31, 2007.  NSTAR's long-term debt other than its Mortgage Bonds, issued by NSTAR Gas and MATEP, is unsecured.  NSTARs $175 million revolving credit agreement expires December 31, 2012.  At June 30, 2008 and December 31, 2007, 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 June 30, 2008 and December 31, 2007, had $123 million and $4 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 June 30, 2008 and December 31, 2007, NSTAR was in full compliance with the aforementioned covenant as the ratios were 58.3% and 58.2%, respectively.  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.  On April 11, 2008, NSTAR Electric filed to extend this authorization until October 23, 2010.  This filing is pending FERC approval.  NSTAR Electric has a five-year, $450 million revolving credit agreement that expires December 31, 2012.  However, unless NSTAR Electric receives the necessary approvals from the DPU for long-term borrowings under the credit agreement, the credit agreement will expire 364 days from the date of the first draw under the agreement.  At June 30, 2008 and December 31, 2007, 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 $351 million and $257.0 million outstanding at June 30, 2008 and December 31, 2007, respectively.  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 June 30, 2008 and December 31, 2007, NSTAR Electric was in full compliance with its covenants in connection with its short-term credit facilities as the ratios were 47.1% and 46.2%, respectively.   33    As of December 31, 2007, NSTAR Gas had a $200 million line of credit.  This line was reduced to $100 million on January 4, 2008 and is due to expire on November 20, 2008.  As of June 30, 2008 and December 31, 2007, NSTAR Gas had $0 and $142.4 million outstanding, respectively.  As of December 31, 2007, NSTAR had approximately $0.8 billion of restricted net assets of consolidated and equity method investees.  Historically, NSTAR and its subsidiaries have had a variety of external sources of financing available, as indicated above, 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 discussed above, management believes its liquidity and capital resources are sufficient to meet its current and projected requirements.  Commitments and Contingencies  NSTAR is exposed to certain matters as discussed in this section under the caption "Critical Accounting Policies and Estimates."  Item 3.  Quantitative and Qualitative Disclosure About Market Risk  Although NSTAR has material commodity purchase contracts, these instruments are not subject to market risk.  NSTARs electric and gas distribution subsidiaries have rate-making mechanisms that allow for the recovery of energy supply costs from customers, who make commodity purchases from NSTARs electric and gas subsidiaries, rather than from the competitive market.  All energy supply costs incurred by NSTARs electric and gas subsidiaries to provide electricity for retail customers purchasing basic service or retail gas customers are recovered on a fully reconciling basis.  NSTAR has minimal cash flow risk due to the short-term nature of these contracts and the rate-making mechanics that permit recovery of these costs in a timely manner.  NSTAR Electrics commodity purchase contracts range in term from three to twelve months.  NSTAR Electric has the ability to seek cost recovery and adjust its rates as frequently as every three months for its large commercial and industrial customers and every six months for its residential customers.  NSTAR Gas has the ability to seek cost recovery as required if costs exceed 5% of the current projected cost recovery level.  Both NSTAR Electric and NSTAR Gas earn a carrying charge on under-collected commodity balances that would mitigate any incremental short-term borrowings costs.  NSTAR believes it is remote that it would be exposed to a liquidity risk resulting from significant market price increases based on the recovery mechanisms currently in place.   34    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.  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, 2007 and in other information in this Quarterly Report on Form 10-Q.   35    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 NSTAR 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 June 30, 2008, all shares listed below were acquired in the open market.  Total Number of 
Common SharesPurchasedAverage PricePaid Per ShareApril118,920$31.69May108,879$32.60June33,961$33.81Total second quarter261,760$32.34  Item 4.  Submission of Matters to a Vote of Security Holders  NSTARs Annual Meeting of Shareholders was held on May 1, 2008.  Proxies representing 91,896,658 shares, or 86%, of the 106,808,376 outstanding shares entitled to vote were present at the Annual Meeting, constituting a quorum.  The shareholder voting results of the election of four Class III trustees and the ratification of the appointment of NSTARs independent registered public accounting firm are presented as follows:  Proposal 1.  The following four Class III trustees were elected to serve until the 2011 Annual Meeting and until the election and qualification of their respective successors:  NomineesForWithheldCharles K. Gifford89,774,5692,122,089Paul A. La Camera89,474,1272,422,531Sherry H. Penney89,149,4172,747,241William C. Van Faasen89,370,6132,526,045  Proposal 2.  Shareholders ratified the appointment of PricewaterhouseCoopers LLP as NSTARs independent registered public accounting firm for the 2008 fiscal year, as follows:  ForAgainstAbstainNo Vote90,137,19398.1%1,010,9381.1%748,5270.8%--   36    Item 6.  Exhibits  Exhibit4-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 of NSTAR and its subsidiaries defining the rights of holders of any non-registered debt whose authorization does not exceed 10% of total assets.Exhibits filed herewith:Exhibit15-Letter Re Unaudited Interim Financial Information15.1PricewaterhouseCoopers LLP Awareness LetterExhibit31-Rule 13a - 14(a)/15d-14(a) Certifications31.1Certification Statement of Chief Executive Officer of NSTAR pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2Certification Statement of Chief Financial Officer of NSTAR pursuant to Section 302 of the Sarbanes-Oxley Act of 2002Exhibit32-Section 1350 Certifications32.1Certification Statement of Chief Executive Officer of NSTAR pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2Certification Statement of Chief Financial Officer of NSTAR pursuant to Section 906 of the Sarbanes-Oxley Act of 2002Exhibit99-Additional Exhibits99.1Report 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.  37      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:   August 1, 2008By: /s/ R.  J.  WEAFER, JR.Robert J.  Weafer, Jr.
Vice President, Controller and
Chief Accounting Officer
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