**UNITED STATESSECURITIES AND EXCHANGE COMMISSION****Washington, D.C. 20549**

 

**Form 10-Q**

 

 

| [X]                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934  |
|----------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------|
|                 | For the quarterly period ended   **June 30, 2005**

                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|                 | or

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| [   ] |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
|                 | For the transition period from                                     to                                          |

 

| Commission File Number: |      **1-14768** |
|-------------------------|-------------------------------------------|

 

 

 

**            NSTAR           **

*(Exact name of registrant as specified in its charter)*

 

 

 

 

**Massachusetts**

 

**04-3466300**

*(State or other jurisdiction of incorporation or organization)*

 

 

 

*(IRS Employer Identification Number)*

**800 Boylston Street, Boston, Massachusetts**

 

**02199**

*(Address of principal executive offices)*

 

*(Zip code)*

 

**(617) 424-2000**

*(Registrant's telephone number, including area code)*

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrantwas 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 an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

 

[X]

Yes

 

[  ]

No

The number of shares outstanding of the registrant's class of common stock was 106,808,376 Common Shares, par value $1, as of July 29, 2005.

 

**NSTARForm 10-Q - Quarterly Period Ended June 30, 2005**

**Table of Contents**

 

**Part I.  Financial Information:**

 

 

**Page No**.

 

**Item 1.**

Financial Statements

 

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Income

 

2

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Retained Earnings

 

3

 

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets

 

4 - 5

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows

 

6

 

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

7 - 15

 

 

 

 

 

 

**Item 2.**

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 16 – 31

 

 

 

 

 

 

**Item 3.**

Quantitative and Qualitative Disclosures about Market Risk

 

31

 

**** ****

 

 

 

 

**Item 4.**

Controls and Procedures

 

31

 

**** ****

 

 

 

**Part II.  Other Information:**

 

 

 

**** ****

 

 

 

 

**Item 1.**

Legal Proceedings

 

31-32

 

**** ****

 

 

 

 

**Item 2.**

Unregistered Sales of Equity Securities and Use of Proceeds

 

32

 

**** ****

 

 

 

 

**Item 4.**

Submission of Matters to a Vote of Security Holders

 

32

 

**** ****

 

 

 

 

**Item 6.**

Exhibits

 

33

 

 

 

 

 

Signature

 

34

                                                                                     

 

Important Shareholder Information

 

 

 

 

NSTAR files its Forms 10-K, 10-Q and 8-K reports, proxy statements and other information with the Securities and Exchange Commission (SEC).  You may access materials NSTAR has filed with the SEC on the SEC’s website atwww.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 standingExecutive 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, and a Code of Ethicsand Business Conduct for Directors, Officers and Employees.  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’sexecutive officers, senior financial officers or trustees can be accessed free of charge on NSTAR’s website at www.nstaronline.com.  Copies of NSTAR’s SEC filings may also be obtained by writing or calling NSTAR’s Investor Relations Departmentat One NSTAR Way, Westwood, MA 02090 or (781) 441-8100.

 

 

 

Table of Contents

 

**Part I.  Financial InformationItem 1.  Financial Statements**

NSTARCondensed Consolidated Statements of Income(Unaudited)(in thousands, except earnings and dividends declared per share data)

 

 

Three Months Ended

 

 

 

Six Months Ended

 

 

 

 

June 30,

 

 

 

June 30,

 

 

 

 

2005

 

 

 

2004

 

 

 

2005

 

 

 

2004

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating revenues

 

$

  692,005

 

 

$

  649,787

 

 

$

1,572,050

 

 

$

 1,459,695

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Purchased power and cost of gas sold

 

 

357,531

 

 

 

346,721

 

 

 

879,530

 

 

 

817,791

 

  Operations and maintenance

 

 

111,327

 

 

 

103,156

 

 

 

231,410

 

 

 

209,651

 

  Depreciation and amortization

 

 

84,849

 

 

 

61,057

 

 

 

159,592

 

 

 

126,596

 

  Demand side management and renewable energy programs

 

 

15,696

 

 

 

15,598

 

 

 

33,365

 

 

 

33,068

 

  Property and other taxes

 

 

25,367

 

 

 

25,016

 

 

 

54,987

 

 

 

53,773

 

  Income taxes

 

 

     21,147

 

 

 

    24,832

 

 

 

       50,946

 

 

 

      57,902

 

    Total operating expenses

 

 

   615,917

 

 

 

  576,380

 

 

 

  1,409,830

 

 

 

 1,298,781

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

     76,088

 

 

 

    73,407

 

 

 

    162,220

 

 

 

    160,914

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (deductions):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Other income, net

 

 

1,332

 

 

 

3,211

 

 

 

2,241

 

 

 

4,174

 

  Other deductions, net

 

 

        (377

)

 

 

       (273

)

 

 

         (570

)

 

 

         (417

)

    Total other income, net

 

 

         955

 

 

 

     2,938

 

 

 

       1,671

 

 

 

       3,757

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest charges:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Long-term debt

 

 

29,986

 

 

 

29,352

 

 

 

60,688

 

 

 

58,289

 

  Transition property securitization

 

 

12,696

 

 

 

7,174

 

 

 

21,385

 

 

 

14,757

 

  Short-term debt and other

 

 

1,697

 

 

 

2,100

 

 

 

2,939

 

 

 

4,028

 

  Allowance for borrowed funds used during

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    construction (AFUDC)

 

 

        (977

)

 

 

      (296

)

 

 

       (1,521

)

 

 

          (624

)

      Total interest charges

 

 

    43,402

 

 

 

   38,330

 

 

 

      83,491

 

 

 

      76,450

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stock dividends of subsidiary

 

 

         490

 

 

 

       490

 

 

 

          980

 

 

 

           980

 

Net income

 

$

33,151 ======

 

 

$

37,525 =====

 

 

$

79,420 ======

 

 

$

87,241 ======

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Basic

 

 

106,767 ======

 

 

 

106,169 =====

 

 

 

106,702 ======

 

 

 

106,117 ======

 

  Diluted

 

 

107,567 ======

 

 

 

107,165 =====

 

 

 

107,481 ======

 

 

 

107,067 ======

 

Earnings per common share (Note G):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Basic

 

$

0.31 =====

 

 

$

0.35 =====

 

 

$

0.74 =====

 

 

$

0.82 =====

 

  Diluted

 

$

0.31 =====

 

 

$

0.35 =====

 

 

$

0.74 =====

 

 

$

0.81 =====

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.29 =====

 

 

$

0.2775 =====

 

 

$

0.58 =====

 

 

$

0.555 =====

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**** ****

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

 

 

 

NSTARCondensed Consolidated Statements of Retained Earnings(Unaudited)(in thousands)

 

 

Three Months Ended

 

 

 

Six Months Ended

 

 

 

 

June 30,

 

 

 

June 30,

 

 

 

 

2005

 

 

 

2004

 

 

 

2005

 

 

 

2004

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at the beginning of the period

 

$

533,581

 

 

$

469,397

 

 

$

518,252

 

 

$

449,114

 

Add:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Net income

 

 

    33,151

 

 

 

    37,525

 

 

 

    79,420

 

 

 

     87,241

 

     Subtotal

 

 

566,732

 

 

 

506,922

 

 

 

597,672

 

 

 

536,355

 

Deduct:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Dividends declared:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Common shares

 

 

    30,973

 

 

 

    29,481

 

 

 

    61,913

 

 

 

     58,914

 

Balance at the end of the period

 

$

535,759 ======

 

 

$

477,441 =====

 

 

$

535,759 ======

 

 

$

477,441 ======

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

Table of Contents

 

NSTARCondensed Consolidated Balance Sheets(Unaudited)(in thousands) 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

 

 

December 31,

 

 

 

 

2005

 

 

 

2004

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Utility plant in service, at original cost

 

$

4,481,312

 

  

$

4,412,073

 

  

Less: accumulated depreciation

 

 

    1,108,322

 

  

 

    1,090,924

 

 

 

 

3,372,990

 

 

 

3,321,149

 

Construction work in progress

 

 

       153,230

 

 

 

       103,866

 

  

Net utility plant

 

 

3,526,220

 

 

 

3,425,015

 

 

 

 

 

 

 

 

 

 

Non-utility property, net

 

 

149,669

 

 

 

154,963

 

 

 

 

 

 

 

 

 

 

Goodwill

 

 

420,744

 

 

 

426,870

 

 

 

 

 

 

 

 

 

 

Equity and other investments

 

 

75,295

 

 

 

72,983

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

  

Cash and cash equivalents

 

 

11,085

 

 

 

12,497

 

  

Restricted cash

 

 

18,681

 

 

 

10,254

 

  

Accounts receivable, net and accrued unbilled revenues

 

 

380,619

 

 

 

355,946

 

  

Regulatory assets

 

 

366,945

 

 

 

280,078

 

  

Inventory, at average cost

 

 

74,688

 

 

 

86,397

 

 

Income taxes

 

 

169,185

 

 

 

21,063

 

  

Other

 

 

         12,050

 

 

 

         11,434

 

  

  

Total current assets

 

 

    1,033,253

 

 

 

       777,669

 

 

 

 

 

 

 

 

 

 

Deferred debits:

 

 

 

 

 

 

 

 

  

Regulatory assets - power contracts

 

 

741,539

 

 

 

1,269,651

 

  

Regulatory assets - retiree benefit costs

 

 

3,220

 

 

 

11,897

 

  

Regulatory assets - other

 

 

1,006,233

 

 

 

595,140

 

 

Prepaid pension

 

 

315,796

 

 

 

297,746

 

  

Other

 

 

         82,470

 

 

 

         85,295

 

  

    Total deferred debits

 

 

    2,149,258

 

 

 

    2,259,729

 

 

 

 

 

 

 

 

 

 

 

    Total assets

 

$

7,354,439 ========

 

 

$

7,117,229 ========

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

Table of Contents

 

NSTARCondensed Consolidated Balance Sheets(Unaudited)(in thousands)

 

  

 

 

 

   

 

 

 

 

  

 

June 30,

 

   

 

December 31,

 

 

  

 

2005

 

   

 

2004

 

Capitalization and Liabilities

  

 

 

 

   

 

 

 

 

  

 

 

 

   

 

 

 

Common equity:

  

 

 

 

   

 

 

 

  Common shares, par value $1 per share,

  

 

 

 

   

 

 

 

    200,000,000 shares authorized; 106,808,376 shares in 2005 and

  

 

 

 

   

 

 

 

        106,550,282 shares in 2004 issued and outstanding (Note G)

  

$

106,808

 

   

$

106,550

 

  Premium on common shares

  

 

815,965

 

   

 

819,454

 

  Retained earnings

  

 

535,759

 

   

 

518,252

 

  Accumulated other comprehensive loss

  

 

        (3,374

)

   

 

         (3,374

)

    Total common equity

  

 

  1,455,158

 

   

 

   1,440,882

 

 

  

 

 

 

   

 

 

 

Cumulative non-mandatory redeemable preferred

  

 

 

 

   

 

 

 

  stock of subsidiary

  

 

       43,000

 

   

 

        43,000

 

 

 

  

 

 

 

   

 

 

 

 

 

  

 

 

 

   

 

 

 

Long-term debt

  

 

1,638,671

 

   

 

1,792,654

 

Transition property securitization

  

 

     864,188

 

   

 

      308,748

 

  Total long-term debt

  

 

  2,502,859

 

   

 

   2,101,402

 

     Total capitalization

  

 

  4,001,017

 

   

 

   3,585,284

 

 

  

 

 

 

   

 

 

 

Current liabilities:

  

 

 

 

   

 

 

 

  Long-term debt

  

 

109,150

 

   

 

108,197

 

  Transition property securitization

  

 

108,735

 

   

 

41,048

 

  Notes payable

  

 

239,400

 

   

 

161,400

 

  Deferred income taxes

  

 

6,707

 

   

 

8,072

 

  Accounts payable

  

 

199,273

 

   

 

239,613

 

  Power contracts

 

 

174,478

 

 

 

171,312

 

  Accrued expenses

  

 

     271,820

 

   

 

       231,490

 

    Total current liabilities

  

 

  1,109,563

 

   

 

       961,132

 

 

  

 

 

 

   

 

 

 

 

  

 

 

 

   

 

 

 

Deferred credits:

  

 

 

 

   

 

 

 

  Accumulated deferred income taxes and unamortized

  

 

 

 

   

 

 

 

    investment tax credits

  

 

1,036,516

 

   

 

840,461

 

  Power contracts

  

 

738,179

 

   

 

1,269,651

 

  Pension liability

  

 

32,210

 

   

 

31,296

 

  Regulatory liability - cost of removal

 

 

263,713

 

 

 

258,722

 

  Other

  

 

      173,241

 

   

 

       170,683

 

      Total deferred credits

  

 

   2,243,859

 

   

 

    2,570,813

 

 

  

 

 

 

   

 

 

 

Commitments and contingencies

  

 

 

 

   

 

 

 

 

  

 

 

 

   

 

 

 

  Total capitalization and liabilities

  

$

7,354,439 =======

 

   

$

    7,117,229 ========

 

 

 

 

 

 

 

 

 

 

 

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

 

Table of Contents

NSTARCondensed Consolidated Statements of Cash Flows(Unaudited)(in thousands)

 

 

 

Six Months Ended

 

 

 

 

June 30,

 

 

  

 

2005

 

  

 

2004

 

Operating activities:

  

 

 

 

  

 

 

 

  Net income

  

$

79,420

 

  

$

87,241

 

  Adjustments to reconcile net income to net cash

  

 

 

 

  

 

 

 

    (used in) provided by operating activities:

  

 

 

 

  

 

 

 

    Depreciation and amortization

  

 

160,200

 

  

 

126,983

 

    Deferred income taxes

  

 

198,497

 

  

 

51,829

 

    AFUDC

  

 

(1,521

)

  

 

(624

)

    Effects of purchase power contract buy-outs

 

 

(554,270

)

 

 

-

 

  Net changes in:

  

 

 

 

  

 

 

 

    Accounts receivable and accrued unbilled revenues

  

 

(24,673

)

  

 

(9,217

)

    Accounts payable

  

 

(25,247

)

  

 

(16,734

)

    Other current assets

  

 

(207,512

)

  

 

(11,106

)

    Other current liabilities

  

 

42,057

 

  

 

69,011

 

  Net change from other operating activities

  

 

       41,508

 

  

 

   (114,644

)

Net cash (used in) provided by operating activities

  

 

    (291,541

)

  

 

    182,739

 

 

  

 

 

 

  

 

 

 

Investing activities:

  

 

 

 

  

 

 

 

  Plant expenditures (excluding AFUDC)

  

 

(169,350

)

  

 

(120,304

)

  (Increase) decrease in restricted cash

 

 

(8,427

)

 

 

  2,911

 

  Proceeds from sale of property

 

 

-

 

 

 

14,252

 

  Investments

  

 

       (2,303

)

  

 

       (3,290

)

Net cash used in investing activities

  

 

   (180,080

)

  

 

   (106,431

)

 

 

  

 

 

 

  

 

 

 

Financing activities:

  

 

 

 

  

 

 

 

  Long-term debt redemptions

  

 

(153,636

)

  

 

(184,519

)

  Transition property securitization redemptions

  

 

(51,375

)

  

 

(35,317

)

  Issuance of transition property securitization

 

 

674,500

 

 

 

-

 

  Issuance of long-term debt

 

 

-

 

 

 

300,000

 

  Debt issue costs

 

 

(6,513

)

 

 

(1,851

)

  Net change in notes payable

  

 

78,000

 

  

 

(79,500

)

  Change in disbursement accounts

 

 

(15,093

)

 

 

(3,983

)

  Common stock issuance

 

 

7,146

 

 

 

-

 

  Dividends paid

  

 

      (62,820

)

  

 

     (59,846

)

Net cash provided by (used in) financing activities

  

 

     470,209

 

  

 

     (65,016

)

 

  

 

 

 

  

 

 

 

Net (decrease) increase in cash and cash equivalents

  

 

(1,412

)

  

 

11,292

 

Cash and cash equivalents at the beginning of the year

  

 

       12,497

 

  

 

      16,526

 

Cash and cash equivalents at the end of the period

 

$

11,085 =======

 

 

$

27,818 =======

 

Supplemental disclosures of cash flow information:

  

 

 

 

  

 

 

 

Cash paid during the period for:

  

 

 

 

  

 

 

 

  Interest, net of amounts capitalized

  

$

79,259

 

  

$

73,460

 

 

 

 

 

 

 

 

 

 

  Income taxes, net of refunds

  

$

4,995

 

  

$

18,710

 

 

 

 

 

 

 

 

 

 

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

 

Table of Contents

 

**Notes to Condensed Consolidated Financial Statements**(Unaudited)

The accompanying notes should be read in conjunction with Notes to Consolidated Financial Statements included in NSTAR’s 2004 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 electricdistribution customers in 81 communities and approximately 300,000 natural gas distribution customers in 51 communities.  NSTAR’s retail utility subsidiaries are Boston Edison Company (Boston Edison), Commonwealth Electric Company (ComElectric), CambridgeElectric Light Company (Cambridge Electric) (collectively operating as “NSTAR Electric”) and NSTAR Gas Company (NSTAR Gas).  Reference in this report to “NSTAR” shall mean the registrant NSTAR or NSTAR and its subsidiaries as the contextrequires.  NSTAR also has ownership interests in and conducts non-utility, unregulated operations.

2.  Basis of Consolidation and Accounting

The financial information presented as of June 30, 2005 and for the three and six-month periods ended June 30, 2005 and 2004 have been prepared from NSTAR’s books and records without audit by an independent registered publicaccounting 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 Public Company Accounting Oversight Board (United States). Financial information as of December 31, 2004 was derived from the audited consolidated financial statements of NSTAR, but does not include all disclosures required by accounting principles generally accepted in the United States of America (GAAP).  In theopinion 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 theprior year amounts to conform with the current presentation.

The utility subsidiaries are subject to the Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 71, “Accounting for the Effects of Certain Types of Regulation” (SFAS 71). The application of SFAS 71 results in differences in the timing of recognition of certain expenses from those of other businesses and industries.  The distribution and transmission businesses remain subject to rate-regulation and continue to meet the criteriafor 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 contingentassets 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, 2005 and 2004 are not indicative of the results that may be expected for an entire year.  Electric energy sales and revenues are typically higher in thewinter and summer months than in the spring and fall months, as sales tend to vary with weather conditions.  Natural gas energy sales and revenues are typically higher in the winter months than during other periods of the year.

3.  Stock Option Accounting

NSTAR applies the recognition and measurement principles of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations in accounting for its 1997 Share IncentivePlan.  Currently, no stock-based employee compensation expense for option grants is reflected in net income, as all options granted under this plan had an exercise price equal to the market value of the underlying common shares on the date of grant.  Thefollowing table illustrates the effect on net income and earnings per share if NSTAR had applied the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” to stock-based employee compensation.  See Note A.5,"New Accounting Standards," for more information on a revision to SFAS 123.

 

 

Three Months Ended

 

 

 

Six Months Ended

 

 

 

 

June 30,

 

 

 

June 30,

 

(in thousands, except earnings per common share amounts)

 

 

2005

 

 

 

2004

 

 

 

2005

 

 

 

2004

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income, as reported

 

$

    33,151

 

 

$

    37,525

 

 

$

   79,420

 

 

$

    87,241

 

Add: Share grant incentive compensation expense included

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   in reported net income, net of related tax effects

 

 

719

 

 

 

661

 

 

 

1,406

 

 

 

1,219

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deduct: Total share grant and stock option compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   expense determined under fair value method for all

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   awards, net of related tax effects

 

 

        (888

)

 

 

       (869

)

 

 

    (1,767

)

 

 

     (1,606

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pro forma net income

 

$

 32,982 =====

 

 

$

   37,317 =====

 

 

$

  79,059 =====

 

 

$

86,854 =====

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Basic - as reported

 

$

0.31

 

 

$

0.35

 

 

$

0.74

 

 

$

0.82

 

   Basic - pro forma

 

$

0.31

 

 

$

0.35

 

 

$

0.74

 

 

$

0.82

 

   Diluted - as reported

 

$

0.31

 

 

$

0.35

 

 

$

0.74

 

 

$

0.81

 

   Diluted - pro forma

 

$

0.31

 

 

$

0.35

 

 

$

0.74

 

 

$

0.81

 

 

4.  Pension and Other Postretirement Benefits

Pension

NSTAR sponsors a defined benefit retirement plan, the NSTAR Pension Plan (the Plan), that covers substantially all employees.  During the first six months of 2005, NSTAR contributed approximately $31 million to the Plan.  TheCompany anticipates contributing approximately $4 million to the Plan over the remaining six months of 2005.

SFAS No. 132R, “Employers’ Disclosures about Pensions and Other Postretirement Benefits,” requires disclosure of the net periodic pension and postretirement benefits cost.

Components of net periodic pension benefit cost were as follows:

 

 

Three Months Ended

 

 

 

Six Months Ended

 

 

 

 

June 30,

 

 

 

June 30,

 

(in millions)

 

 

2005

 

 

 

2004

 

 

 

2005

 

 

 

2004

 

Service cost

 

$

5.2

 

 

$

4.8

 

 

$

10.3

 

 

$

9.5

 

Interest cost

 

 

14.4

 

 

 

15.0

 

 

 

28.8

 

 

 

30.1

 

Expected return on Plan assets

 

 

(18.6

)

 

 

(17.7

)

 

 

(37.2

)

 

 

(35.4

)

Amortization of transition obligation

 

 

-

 

 

 

0.1

 

 

 

-

 

 

 

0.2

 

Amortization of prior service cost

 

 

-

 

 

 

-

 

 

 

0.1

 

 

 

0.1

 

Recognized actuarial loss

 

 

        6.6

 

 

 

       6.8

 

 

 

       13.1

 

 

 

        13.4

 

   Net periodic pension benefit cost

 

$

7.6 =====

 

 

$

9.0 =====

 

 

$

15.1 =====

 

 

$

17.9 ======

 

 

The net periodic pension costs for the six months ended June 30, 2005 and 2004 have been adjusted based on the actual actuarial study results.  For the three months ended June 30, 2005 and 2004, the net periodic pension benefitcost was (decreased)/increased by approximately ($1.1 million) and $0.6 million, respectively, to reflect the true-up to actual results.

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 forpostretirement benefits.  During the first six months of 2005, NSTAR contributed approximately $6 million toward these benefits.  The Company anticipates contributing an additional $14 million for these benefits over the remaining six months of 2005.

Components of net periodic postretirement benefits cost were as follows:

 

 

Three Months Ended

 

 

 

Six Months Ended

 

 

 

 

June 30,

 

 

 

June 30,

 

(in millions)

 

 

2005

 

 

 

2004

 

 

 

2005

 

 

 

2004

 

Service cost

 

$

1.4

 

 

$

1.5

 

 

$

2.8

 

 

$

2.9

 

Interest cost

 

 

8.3

 

 

 

8.3

 

 

 

16.7

 

 

 

16.7

 

Expected return on Plan assets

 

 

(6.3

)

 

 

(5.9

)

 

 

(12.5

)

 

 

(11.9

)

Amortization of transition obligation

 

 

0.3

 

 

 

0.5

 

 

 

0.6

 

 

 

0.9

 

Amortization of prior service cost

 

 

0.1

 

 

 

0.3

 

 

 

0.1

 

 

 

0.6

 

Recognized actuarial loss

 

 

       2.8

 

 

 

       2.4

 

 

 

      5.6

 

 

 

     4.8

 

   Net periodic postretirement benefit cost

 

$

6.6 =====

 

 

$

7.1 ====

 

 

$

13.3 =====

 

 

$

14.0 ====

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The net periodic postretirement benefit costs for the six months ended June 30, 2005 and 2004 have been adjusted based on the actual actuarial study results.  For the three months ended June 30, 2005 and 2004, the net periodicpostretirement benefit cost was decreased by approximately $0.6 million and $0.5 million, respectively, to reflect the true-up to actual results.

In 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) was signed into law.  The Act provides for drug benefits for retirees over the age of 65 under a new Medicare Part D program.  Foremployers like NSTAR, who currently provide retiree medical programs for eligible former employees over the age of 65, there are subsidies available that are inherent in the Act.  The Act entitles these employers to a direct tax-exempt federal subsidy.

In May 2004, the FASB provided guidance on the accounting for the effects of the Act. The guidance requires that, when an employer initially accounts for the effects of the Act, the impact on the accumulated postretirement benefitsobligation (APBO) should be accounted for as an actuarial gain (assuming, no plan amendments are made).  In accordance with this provision, NSTAR's APBO was reduced by approximately $51 million in 2004.  In addition, since the subsidy affects the employer'sshare of its plan's costs, the subsidy is included in measuring the costs of benefits attributable to current service. Therefore, the subsidy reduces service cost when it is recognized as a component of net periodic postretirement benefits cost. NSTAR's adoption ofthe accounting guidance resulted in a reduction to the net periodic postretirement benefit cost of approximately $7 million in 2004 and is reflected as a component of net periodic postretirement benefits costs above.  As required, the Company restated its netperiodic postretirement benefits cost for the first two quarters of 2004.  However, due to the Company's pension and other postretirement benefits rate reconciliation adjustment mechanism that went into effect on September 1, 2003, this reduction in cost doesnot have a material impact on earnings.

5.  New Accounting Standards

In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment." This Standard addresses the accounting for transactions in which a company receives employee services in exchange for (a) equity instruments of the company or (b)liabilities that are based on the fair value of the company's equity instruments or that may be settled by the issuance of such equity instruments. This Standard eliminates the ability to account for share-based compensation transactions using Accounting PrinciplesBoard Opinion No. 25, "Accounting for Stock Issued to Employees," and requires that such transactions be accounted for using a fair-value-based method. The Standard is effective for NSTAR beginning January 1, 2006.   NSTAR is currently assessing the valuationoptions allowed in this Standard but, preliminarily, expects this Standard to impact annual earnings by approximately $1.5 million pre-tax.

In March 2005, the FASB issued Interpretation No. 47, "Accounting for Conditional Asset Retirement Obligations, an interpretation of FASB Statement No. 143” (FIN 47).  FIN 47 clarifies when an entity would be required torecognize a liability for the fair value of an asset retirement obligation that is conditional on a future event if the liability's fair value can be reasonably estimated.  Uncertainty surrounding the timing and method of settlement that may be conditional onevents occurring in the future would be factored into the measurement of the liability rather than the existence of the liability.  FIN 47 is effective for NSTAR at December 31, 2005.  NSTAR is currently assessing the impact that the interpretation may haveon its consolidated financial position and results of operation.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections” (SFAS 154).  This Standard changes the requirements for the accounting for and reporting of accounting changes and errorcorrections.  The Standard establishes retrospective application as the required method for reporting a change in accounting principle rather than reporting a cumulative effect of change in accounting principle.  Retrospective application requires theapplication of the new accounting principle to prior periods as if that principle had always been used.  SFAS 154 is effective for NSTAR for any accounting changes and corrections of errors made beginning January 1, 2006.

**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 ofJune 30, 2005 and December 31, 2004, the estimated amount of the cost of removal included in regulatory liabilities was approximately $264 million and $259 million, respectively, based on the cost of removalcomponent in currentdepreciation rates.

**Note C.  Derivative Instruments - Power Contracts**

NSTAR accounts for its power contracts in accordance with SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133) and related interpretations.  At June 30, 2005, NSTAR does not have any contractswhich must be classified as derivative instruments.  On March 1, 2005, NSTAR closed on a securitization financing for $674.5 million to finance the buy-out of four contracts that were classified as derivative instruments at December 31, 2004.  The fairvalue of these four contracts at December 31, 2004 was approximately $472 million and was therefore removed as a derivative instrument from Deferred credits - Power contracts, along with the offsetting regulatory asset, on the accompanying Condensed ConsolidatedBalance Sheets.  The securitization debt obligation was recorded along with an offsetting regulatory asset to reflect the future recovery of the debt obligation through its electric distribution companies' transition charge.

**Note D.  Variable Interest Entities**

In 2004, NSTAR created two wholly owned special purpose subsidiaries: BEC Funding II, LLC and CEC Funding, LLC, to undertake the sale of a combined $674.5 million in notes to a special purpose trust.  This trust was created by twoMassachusetts state agencies. See Note I, Securitization, for more information.  As part of NSTAR's assessment of FASB Interpretation No. 46, "Consolidation of Variable Interest Entities," as revised in December 2003 (FIN 46R), NSTAR separately reviewed thesubstance of these entities to determine if it is proper to consolidate these entities. Based on its review, NSTAR has concluded that BEC Funding II, LLC and CEC Funding, LLC are variable interest entities and should be consolidated by NSTAR.

**Note E.  Service Quality Indicators**

Service quality indicators are established performance benchmarks for certain identified measures of service quality relating to customer service and billing performance, customer satisfaction, and reliability and safety performance forall Massachusetts utilities.  NSTAR Electric and NSTAR Gas are required to report annually to the Massachusetts Department of Telecommunications and Energy (MDTE) concerning their performance as to each measure and are subject to maximum penalties of up to twopercent of transmission and distribution revenues should performance fail to meet the applicable benchmarks.

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

On March 1, 2005, NSTAR Electric and NSTAR Gas filed their 2004 Service Quality Reports with the MDTE that demonstrated the Companies achieved sufficient levels of reliability and performance; the reports indicate that no penalty wasassessable for 2004.  The MDTE will review this filing and will likely issue an order later in 2005.

As of June 30, 2005, NSTAR Electric’s and NSTAR Gas’ 2005 performance reflects a slight penalty position for the applicable established benchmarks such that a liability has been accrued for 2005.  However, these resultsmay not be indicative of the results that may be expected for the remainder of the year and management believes that NSTAR Electric’s and NSTAR Gas’ performance by year end will not reflect a penalty position.

Recently, the MDTE initiated a proceeding into potentially modifying the service quality indicators for all Massachusetts utilities.  Until any modification occurs, the current service quality indicators will remain in place. NSTAR currently cannot predict the outcome of this proceeding or its impact.

**Note F.  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 temporarydifferences between the carrying amounts and the tax basis of assets and liabilities.  In accordance with SFAS 71 and SFAS 109, net regulatory assets of $49.8 million and $50.3 million and corresponding net increases in accumulated deferred income taxes wererecorded as of June 30, 2005 and December 31, 2004, respectively.  The regulatory assets represent the additional future revenues to be collected from customers for deferred income taxes.

The following table reconciles the statutory federal income tax rate to the annual estimated effective income tax rate for 2005 and the actual effective income tax rate for the year ended December 31, 2004:

 

 

 

2005

 

 

 

2004

 

Statutory tax rate

 

 

35.0

%

 

 

35.0

%

State income tax, net of federal income tax benefit

 

 

5.0

 

 

 

3.9

 

Investment tax credits

 

 

(0.6

)

 

 

(0.6

)

Other

 

 

      0.2

 

 

 

      0.4

 

  Effective tax rate

 

 

39.6 =====

%

 

 

38.7 =====

%

**Note G.  Capital Stock**

At NSTAR's Annual Meeting on April 28, 2005, NSTAR shareholders approved the authorization of an additional 100 million common shares (to 200 million). Subsequently, the Board of Trustees approved a two-for-one stock split ofNSTAR’s common shares, in the form of a 100% common share dividend, to shareholders of record on May 16, 2005.  The new shares were issued on June 3, 2005.  The Company’s intent in effecting a stock split in the form of a stock dividend was toincrease the number of outstanding common shares, to reduce the per share stock price thereby making it more accessible to investors and to align the stock price with comparable peers in the utility industry.  Common equity, common shares, and stock optionactivity for all periods presented have been restated to give retroactive recognition to the stock split.  In addition, all references in the financial statements and notes to the financial statements, to weighted average number of basic and diluted shares, andper share amounts of the Company’s common shares have been restated to give retroactive recognition to the stock split.

**Note H.  Earnings Per Common Share**

Basic earnings per common share (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 year.  Diluted EPS issimilar 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, adjusted for forfeitures.

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

 

 

Three Months Ended

 

 

 

Six Months Ended

 

 

 

 

June 30,

 

 

 

June 30,

 

(in thousands, except per share amounts)

 

 

2005

 

 

 

2004

 

 

 

2005

 

 

 

2004

 

Net income

 

$

33,151

 

 

$

37,525

 

 

$

79,420

 

 

$

87,241

 

   Basic EPS

 

$

0.31

 

 

$

0.35

 

 

$

0.74

 

 

$

0.82

 

   Diluted EPS

 

$

0.31

 

 

$

0.35

 

 

$

0.74

 

 

$

0.81

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   outstanding for basic EPS

 

 

106,767

 

 

 

106,169

 

 

 

106,702

 

 

 

106,117

 

Effect of diluted shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average dilutive potential common shares

 

 

        800

 

 

 

        996

 

 

 

        779

 

 

 

       950

 

Weighted average common shares outstanding for diluted EPS

 

 

 107,567 =====

 

 

 

 107,165 =====

 

 

 

 107,481 =====

 

 

 

 107,067 =====

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**Note I.  Securitization**

On March 1, 2005, two wholly owned special purpose subsidiaries, BEC Funding II, LLC and CEC Funding LLC, issued $265.5 million and $409 million, respectively, in notes to a special purpose trust created by two Massachusetts stateagencies.  The trust then concurrently issued a total of $674.5 million of rate reduction certificates to the public.  These certificates represent fractional, undivided beneficial interests in the notes issued by BEC Funding II, LLC and CEC Funding, LLCand are secured by a portion of the transition charge assessed on Boston Edison's and ComElectric's retail customers as permitted under the 1997 Massachusetts Electric Industry Restructuring Act and authorized by the MDTE.  These certificates are non-recourse toBoston Edison and ComElectric, respectively.  The assets and revenues of BEC Funding II, LLC and CEC Funding, LLC, including without limitation, the transition property, are owned solely by BEC Funding II, LLC and CEC Funding, LLC, and are not available tocreditors of Boston Edison, ComElectric or NSTAR.  The certificates, and the related BEC Funding II, LLC and CEC Funding, LLC notes were issued at a weighted average yield of 4.15% in four classes with varying final maturity dates between 2008 and 2015. Scheduled semi-annual principal payments begin in September 2005.  The net proceeds from this transaction were used to make liquidation payments required in connection with the termination of certain purchase power agreements, and, in the case of ComElectric, torepay $150 million of outstanding long-term debt.

**Note J.  Segment and Related Information**

For the purpose of providing segment information, NSTAR’s principal operating segments, or its traditional core businesses, are the electric and natural gas utilities that provide energy delivery services in 107 cities and townsin 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 periodsended June 30, 2005 and 2004 include the allocation of costs incurred by NSTAR, which primarily consists of interest charges and are allocated to the subsidiary companies based on NSTAR's investment relating to these various business segments.

Financial data for the operating segments were as follows:

 

 

Utility Operations

 

Unregulated

 

Consolidated

(in thousands)

 

Electric

 

 

Gas

 

Operations

 

Total

Three months ended June 30,

 

 

 

 

 

 

 

 

 

 

 

 

2005

 

 

 

 

 

 

 

 

 

 

 

 

Operating revenues

$

575,018

 

$

84,400

 

$

32,587

 

$

692,005

 

Segment net income (loss)

$

31,912

 

$

(2,065

)

$

3,304

 

$

33,151

 

2004

 

 

 

 

 

 

 

 

 

 

 

 

Operating revenues

$

558,777

 

$

70,496

 

$

20,514

 

$

649,787

 

Segment net income (loss)

$

36,542

 

$

(1,288

)

$

2,271

 

$

37,525

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended June 30,

 

 

 

 

 

 

 

 

 

 

 

 

2005

 

 

 

 

 

 

 

 

 

 

 

 

Operating revenues

$

1,206,915

 

$

298,085

 

$

67,050

 

$

1,572,050

 

Segment net income

$

58,194

 

$

17,368

 

$

3,858

 

$

79,420

 

2004

 

 

 

 

 

 

 

 

 

 

 

 

Operating revenues

$

1,119,999

 

$

282,197

 

$

57,499

 

$

1,459,695

 

Segment net income

$

63,704

 

$

18,957

 

$

4,580

 

$

87,241

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2005

$

6,529,525

 

$

619,687

 

$

205,227

 

$

7,354,439

 

December 31, 2004

$

6,259,216

 

$

656,554

 

$

201,459

 

$

7,117,229

 

 

**Note K.  Commitments and Contingencies**

1.  Environmental Matters

As of June 30, 2005, NSTAR’s subsidiaries are involved in three state-regulated properties (“Massachusetts Contingency Plan, or “MCP” sites”) where oil or other hazardous materials were previously spilledor released.  The NSTAR subsidiaries are required to clean up or otherwise remediate these properties in accordance with specific state regulations.  There are sometimes uncertainties associated with total remediation costs due to the final selection of thespecific cleanup technology and the particular characteristics of the different sites.  Estimates of approximately $0.5 million are included as liabilities in the accompanying Condensed Consolidated Balance Sheets at both June 30, 2005 and December 31,2004.

In addition to the MCP sites, NSTAR subsidiaries also face possible liability as a result of involvement in 14 multi-party disposal sites or third party claims associated with contamination remediation.  NSTAR generally expects tohave only a small percentage of the total potential liability for these sites.

During the second quarter of 2005,the Massachusetts Supreme Judicial Court (SJC) issued its decision in one of the environmental contamination matters.  In 2004, a Superior Court had issued adecision favorable to Boston Edison that put the burden of proof on the plaintiffs to determine Boston Edison’s liability for contamination.  The SJC’s opinion reversed the Superior Court’s 2004 ruling and held that the plaintiffs in thismatter are allowed to seek joint and several liability against the defendants, including Boston Edison.  The case was remanded back to the Superior Court for trial.  The burden of proof is now on Boston Edison to prove what portion of the environmentalcosts for which it is not responsible.  Boston Edison believes that it has meritorious defenses to offset a portion of the costs.  As a result,Boston Edison will vigorously attempt torecover all amounts from the other responsible third parties, including recovery from its insurance carrier.  Currently, Boston Edison has received a settlement offer from the plaintiffs and is currently assessing all of its options and rights. Based on a review of the current facts and circumstances with outside counsel, management has provided for what it believes to be a reasonable estimate of the potential loss exposure for this matter.

Asof June 30, 2005 and December 31, 2004, NSTAR had reserves of $10.4 million and $3.4 million, respectively, for all potential environmental sites, including this specific site.   Thisestimated recorded liability is based on an evaluation of all currently available facts with respect to all of its sites. In addition, based on a legal opinion from the Company’s environmental counsel, it is probable that Boston Edison will recover, at aminimum, approximately $2 million from other parties.   Boston Edison recorded an asset in the second quarter that will ultimately offset the Company’s obligation.  Management believes that the ultimate disposition of this matter will not have amaterial adverse impact on NSTAR’s results of operation, cash flows or its financial position.

NSTAR Gas is participating in the assessment or remediation of five former manufactured gas plant (MGP) sites and alleged MGP waste disposal locations to determine if and to what extent such sites have been contaminated and whetherNSTAR Gas may be responsible for remedial action.  The MDTE has approved recovery of costs associated with MGP sites over a 7-year period, without carrying costs.  As of June 30, 2005 and December 31, 2004, NSTAR recorded a liability of approximately $4.9million and $3.8 million, respectively, as estimates for site cleanup costs for several MGP sites for which NSTAR Gas was previously cited as a potentially responsible party.  A corresponding regulatory asset was recorded that reflects the future rate recoveryfor 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 suchsites 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 andregulatory 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.  Capital Spending Commitments

In the second quarter of 2005, NSTAR began construction of a substation in Stoughton, Massachusetts and a 345kV transmission line that would connect the substation to South Boston.  This transmission line is expected to ensurecontinued reliability of electric service and improve power import capability in the Northeast Massachusetts area.  This project is expected to be placed in service during the summer of 2006.  A substantial portion of this project will be shared by all ofNew England based on ISO-NE's approval and will be recovered by NSTAR through wholesale and retail transmission rates.  As of June 30, 2005, NSTAR has contractual commitments of approximately $34 million related to this project.

3.  Regulatory and Legal Matters

a.  Regulatory matters

In December 2004, NSTAR Electric filed proposed transition rate adjustments for 2005, including a preliminary reconciliation of transition, transmission, standard offer and default service costs and revenues through 2004.  The MDTEsubsequently approved tariffs for each retail electric subsidiary effective January 1, 2005.  The filings were updated in February 2005 to reflect final 2004 costs and revenues.  The filings are subject to annual review and reconciliation.

On December 1, 2003, NSTAR Electric and NSTAR Gas filed their annual reconciliation report on their pension and PBOP rate adjustment mechanism.  Hearings were held during 2004.  On June 29, 2005, the MDTE issued their orderapproving the reconciliation report.  In December 2004, the companies filed their annual reconciliations consistent with the rate adjustment mechanism.

On February 1, 2005, the Independent System Operator – New England began operating as a Regional Transmission Organization (RTO).  As a result, NSTAR has given notice to the RTO and other interested parties of its intent tofile for proposed changes to its Open Access Transmission Tariff (OATT).  Cambridge Electric and ComElectric filed proposed changes to their OATT Tariff on March 30, 2005.  This change is expected to provide for consistent application of the OATT among allNSTAR Electric companies.  If approved, the new tariffs will become effective later in 2005.  The 2004 OATT and the related revenues have been based on the existing tariff.

As previously disclosed, a joint return on equity (ROE) filing was made by participating New England Transmission Owners, including NSTAR Electric, with the Federal Energy Regulatory Commission (FERC).  Among other things, thefiling requested an increase in the base ROE component of regional and local transmission rates to a single ROE of 12.8% for all regional and local transmission rates, a 50 basis point adder to reward RTO participation, and a 100 basis point increase in regionalrates as an incentive to build new transmission facilities.  FERC accepted the 50 basis point adder, and set for hearing the base ROE and the 100 basis point incentive adder for new transmission.  Settlement negotiations before an administrative law judgewere unsuccessful and hearings were held in 2005.  As a result of these hearings, on May 27, 2005, an initial decision was reached.  The judge found that the base ROE should be 10.72% and that the 100 basis point adder for new transmission facilities shouldonly apply to projects where innovative and less expensive technology is used.   Appeal briefs by all parties, including the Transmission Owners, were filed on June 27, 2005.  FERC still needs to review the judge’s findings and recommendations andmake a final determination.

b.  Locational Installed Capacity (LICAP)

On March 23, 2005, the FERC unanimously approved an ISO-New England plan to implement LICAP, a new market rule designed to compensate wholesale generators for their capacity with an implementation date of January 1, 2006.  The newLICAP rules require electric load serving entities (LSE), like NSTAR Electric, to procure capacity within the zones where load is served.  The current market structure allows capacity, located anywhere in New England, to count towards a LSE's obligation,regardless of load zone.  NSTAR Electric's service territory covers two of the five capacity zones in New England: Northeastern Massachusetts (NEMA) and Rest of Pool (ROP).  NEMA is import-constrained and could potentially see higher capacity prices thanthe ROP.  The majority of NSTAR's customers are in the NEMA load zone.  At this point, it appears likely that NSTAR's new 345kV transmission project will reduce transmission constraints causing capacity prices between NEMA and ROP to converge, which couldultimately render this locational aspect of LICAP a non-factor for NSTAR customers.  However, since the new market rules require that a certain amount of capacity be procured in the NEMA zone, these requirements could impact pricing for capacity in the NEMAzone.  Additionally, much of the capacity in the NEMA zone has issued notice of their intent to file with the FERC for cost of service type agreements called Reliability Must Run agreements for the recovery of their costs prior to the implementation ofLICAP.  The new LICAP rules are likely to increase overall capacity pricing levels in New England.  Since the New England market as a whole is currently in a surplus position, currently capacity trades at a relatively low price.  One of the goals ofLICAP is to provide a higher level of compensation to generators than what is currently being earned in this surplus market.  NSTAR is opposed to LICAP as this will likely increase the price of power to NSTAR's customers.  As a result, NSTAR (and otherparties) have appealed the FERC's LICAP decision in federal court.  Additionally, while LICAP has been approved by FERC, the specific parameters of the capacity pricing mechanism are still part of a contested hearing at FERC.  A final decision on thesematters is expected in the fall of 2005.  NSTAR cannot predict the actual impact these changes will have on NSTAR Electric and its customers, but expects all costs incurred to be fully reconcilable.

c.  Legal Matters

In the normal course of its business, NSTAR and its subsidiaries are involved in certain legal matters, including civil litigations.  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, except for the item disclosed in Note K, Part 1, “Environmental Matters.”  Based on theinformation 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 resultfrom changes in circumstances could have a material impact on its results of operations, cash flows and financial condition for a reporting period.

Table of Contents

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

The accompanying MD&A focuses on factors that had a material effect on the financial condition, results of operations and cash flows of NSTAR during the periods presented and should be read in conjunction with the accompanyingcondensed consolidated financial statements and related notes and with the MD&A in NSTAR’s 2004 Annual Report on Form 10-K.

**Executive Overview**

NSTAR (or the Company) is a holding company engaged in the energy delivery business serving approximately 1.4 million customers in Massachusetts, including approximately 1.1 million electric distribution customers in 81 communities andapproximately 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 consistent energy delivery to our customers. NSTAR’s strategy is to invest in transmission and distribution assets that will align with its core competencies.

**Electric utility operations.**  NSTAR derives 77% of its operating revenues from the transmission and distribution of electric energy through NSTAR Electric.  NSTAR Electric is comprisedof Boston Edison Company (Boston Edison), Commonwealth Electric Company (ComElectric), and Cambridge Electric Light Company (Cambridge Electric).

**Gas operations. **NSTAR derives 19% of its operating revenues from the distribution of natural gas through NSTAR Gas Company (NSTAR Gas), NSTAR’s retail gas subsidiary.

**Unregulated operations.**  NSTAR derives 4% of its operating revenues from several operating subsidiaries in the telecommunications and district energy delivery operations.

**Earnings.**  NSTAR’s earnings are impacted by fluctuations in unit sales of electric kWh and gas MMbtu, which directly determine the level of distribution and transmission revenuesrecognized.  In accordance with the regulatory rate structure in which NSTAR operates, its recovery of energy 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 quarter and six-month periods endedJune 30, 2005amounted to $33.2 million and $79.4 million, or $0.31 and $0.74 per diluted earnings per share ascompared to $37.5 million and $87.2 million, or $0.35 and $0.81 per diluted earnings per share for the same periods in 2004.

**Cautionary Statement**

The MD&A, as well as other portions of this report, contain statements that are considered forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934.  Theseforward-looking statements may also be contained in other filings with the Securities and Exchange Commission (SEC), in press releases and oral statements.  You can identify these statements by the fact that they do not relate strictly to historical or currentfacts.  They use words such as “anticipate,”  “estimate,” “expect,” “project,” “intend,” “plan,” “believe” and other words and terms of similar meaning in connection withany 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 maynot 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:

   -   

impact of continued cost control procedures on operating results

   -   

weather conditions that directly influence the demand for electricity and natural gas and major storms

   -   

changes in tax laws, regulations and rates

   -   

financial market conditions including, but not limited to, changes in interest rates and the availability and cost of capital

 

   -   

prices and availability of operating supplies

   -   

prevailing governmental policies and regulatory actions (including those of the Massachusetts Department of Telecommunications and Energy (MDTE) and Federal Energy Regulatory Commission (FERC) with respect to allowed rates of return,rate structure, continued recovery of regulatory assets, financings, purchased power, 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 lawsand policies

 

   -   

changes in financial accounting and reporting standards

   -   

new governmental regulations or changes to existing regulations that impose additional operating requirements or liabilities

 

   -   

changes in specific hazardous waste site conditions and the specific cleanup technology

   -   

impact of union contract negotiations

   -   

impact of uninsured losses

   -   

changes in available information and circumstances regarding legal issues and the resulting impact on our estimated litigation costs

   -   

future economic conditions in the regional and national markets

   -   

ability to maintain current credit ratings, and

   -   

the impact of terrorist acts

 

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 areadvised, 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 report also describes material contingencies and critical accountingpolicies and estimates in this section and in the accompanying Notes to Condensed Consolidated Financial Statements and NSTAR encourages a review of these Notes.****
****
**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 2004 Form 10-K.  There have been no substantive changes to those policies andestimates.

**Rate Structure**

a.  Retail Electric Rates

Electric distribution companies in Massachusetts are required to obtain and resell power to retail customers who choose not to buy energy from a competitive energy supplier.  Prior to March 2005, this service was provided througheither standard offer or default service.  Standard offer service ended on February 28, 2005 and default service was renamed basic service.  Therefore, all customers who have not chosen to receive service from a competitive supplier are being provided basicservice.  Basic service rates are reset every six months (every three months for large commercial and industrial customers).  The price of basic service is intended to reflect the average competitive market price for power.  As ofJune 30, 2005and December 31, 2004, customers of NSTAR Electric had approximately 36% and 24%, respectively, of their load requirements provided by competitive suppliers.

On December 21, 2004, the FERC issued an order approving Boston Edison's October 2004 request to modify its Open Access Transmission Tariff (OATT).  Effective January 1, 2005, Boston Edison is allowed to include 50 percent ofconstruction work in progress in its rate base for transmission projects by including this amount in its local network service transmission rate formula.  The order requires Boston Edison to file annual reports of its long-term transmission plan.

b.  Natural Gas Rates

NSTAR Gas generates revenues primarily through the sale and/or transportation of natural gas.  Gas sales and transportation services are divided into two categories: firm, whereby NSTAR Gas must supply gas and/or transportationservices to customers on demand; and interruptible, whereby NSTAR Gas may, generally during colder months, temporarily discontinue service to high volume commercial and industrial customers.  Sales and transportation of gas to interruptible customers do notmaterially affect NSTAR Gas’ operating income because substantially the entire margin for such service is returned to its firm customers as rate reductions.

In addition to delivery service rates, NSTAR Gas’ tariffs include a seasonal Cost of Gas Adjustment Clause (CGAC) and a Local Distribution Adjustment Clause (LDAC).  The CGAC provides for the recovery of all gas supply costsfrom 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 MDTE.  The LDAC is filed annually for approval.  Inaddition, 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%.

The 2004-2005 winter season CGAC factor was revised downward from earlier in 2004 to reflect decreases in the cost of gas caused by varying market conditions.  To date, the CGAC factor received MDTE approval of $0.9968 per thermeffective November 1, 2004.  On February 1, 2005, an approved rate of $0.8500 per therm was established until May 1, 2005 when a rate of $0.7501 per therm was set.

On February 28, 2005, the MDTE approved a petition by NSTAR Gas to change its gas procurement practices.  NSTAR Gas proposed to purchase financial contracts in order to lock in prices for approximately one-third of its projectednormal winter gas requirements.  NSTAR Gas will not be taking physical delivery of the gas when the financial contracts are executed.  Management has yet to commence this practice but is currently negotiating financial contracts with major financialinstitutions.  All costs incurred will continue to be included in the CGAC.

c.  Service Quality Indicators

Service quality indicators are established performance benchmarks for certain identified measures of service quality relating to customer service and billing performance, customer satisfaction, and reliability and safety performance forall Massachusetts utilities.  NSTAR Electric and NSTAR Gas are required to report annually to the MDTE concerning their performance as to each measure and are subject to maximum penalties of up to two percent of transmission and distribution revenues shouldperformance fail to meet the applicable benchmarks.

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

On March 1, 2005, NSTAR Electric and NSTAR Gas filed their 2004 Service Quality Reports with the MDTE that demonstrated the Companies achieved sufficient levels of reliability and performance; the reports indicate that no penalty wasassessable for 2004.  The MDTE will review this filing and will likely issue an order later in 2005.

As of June 30, 2005, NSTAR Electric’s and NSTAR Gas’ 2005 performance reflects a slight penalty position for the applicable established benchmarks such that a liability has been accrued for 2005.  However, these resultsmay not be indicative of the results that may be expected for the remainder of the year and management believes that NSTAR Electric’s and NSTAR Gas’ performance by year end will not reflect a penalty position.

Recently, the MDTE initiated a proceeding into potentially modifying the service quality indicators for all Massachusetts utilities.  Until any modification occurs, the current service quality indicators will remain in place. NSTAR currently cannot predict the outcome of this proceeding or its impact.

**Union Contract**

NSTAR’s labor contract with Local 369 of the Utility Workers Union of America, AFL-CIO, expired on May 15, 2005.  After a three week strike, on May 29, 2005, NSTAR management and union officials agreed upon a new four yearcontract through June 1, 2009.  The union members, which represent approximately 1,900 employees, ratified the contract on May 31, 2005.

**Results of Operations**

The following section of MD&A compares the results of operations for each of the three-month periods ended June 30, 2005 and 2004 and should be read in conjunction with the accompanying Condensed Consolidated Financial Statementsand the accompanying Notes to Condensed Consolidated Financial Statements included elsewhere in this report.

**Three Months Ended June 30, 2005 compared to Three Months Ended June 30, 2004**

Overview

Earnings per common share were as follows:

 

 

Three Months ended June 30,  

 

     

  

2005

   

  

2004

   

% Change

Basic

      

$

0.31

   

$

0.35

   

(11.4)

Diluted

      

$

0.31

    

$

0.35

   

(11.4)

Net income was $33.2 million for the quarter ended June 30, 2005 compared to $37.5 million for the same period in 2004.  Factors that contributed to the $4.3 million, or 11.5%, decrease in 2005 earnings include:

  -  

 

Higher operations and maintenance expense due to incremental costs associated with a strike by union employees (approximately $2.3 million) and a net increase of approximately $5 million for environmental costs

  -  

 

Higher depreciation and amortization expense, excluding amortization expense related to securitization of transition property, that also reflects higher distribution and transmission property ($1.5 million) primarily resulting fromhigher capital additions

  -  

 

Increased property tax expense and interest costs due to higher rates

These decreases were partially offset by:

  -  

 

The recognition of additional MDTE-approved mitigation incentive entitlements for NSTAR successfully lowering transition charges and incentives related to NSTAR's demand-side management programs (approximately $0.7 million and $2.0million, respectively)

  -  

 

Increased gas sales due to cooler weather

 

Significant cash flow events during the quarter include the following: NSTAR invested approximately $101.2 million in capital projects to improve reliability, paid approximately $31.4 million in preferred and common share dividends andretired approximately $36.1 million in long-term debt.

Energy sales and weather

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

Retail Electric Sales - MWH

Three Months ended June 30,

 

   

2005

   

2004

   

% Change

 

   

 

   

 

   

 

  Residential

   

1,488,683

   

1,480,173

   

0.6

  Commercial

   

3,075,564

   

3,098,476

   

(0.7)

  Industrial

   

406,522

   

420,671

   

(3.4)

  Other

   

      35,451

   

      35,859

   

(1.1)

    Total retail sales

   

5,006,220 =======

   

5,035,179 =======

   

(0.6) ===

 

Firm Gas Sales - BBTU

Three Months ended June 30,

 

   

2005

   

2004

   

% Change

 

   

 

   

 

   

 

  Residential

   

3,135

   

  2,905

   

     7.9  

  Commercial and other

   

3,037

   

2,801

   

  8.4

  Industrial

   

        1,136

   

        1,185

   

  (4.1)

    Total firm sales

   

  7,308 =======

   

  6,891 =======

   

  6.1 ===

 

The 6.1% increase in firm gas sales in the second quarter of 2005 primarily reflects cooler overall temperatures than in 2004.

In terms of customer sector characteristics, industrial sales are less sensitive to weather than residential and commercial sales, which are influenced by temperature extremes.  The overall cooler spring weather in the secondquarter of 2005, contributed to decreased energy use.  Electric residential and commercial customers represented approximately 29.7% and 61.4%, respectively, of NSTAR’s total retail sales mix for the second quarter of 2005 and provided 40.7% and 52.9% ofdistribution and transmission revenues, respectively.  Refer to the “Electric revenues” section below for a more detailed discussion.  Industrial sales are primarily influenced by national and local economic conditions and sales to thesecustomers reflect a sluggish economic environment and decreased manufacturing production.

 

   

 

    

 

    

Normal

 

   

 

    

 

    

30-Year

 

   

2005

    

2004

    

Average

 

    

 

    

 

    

 

Heating degree-days

    

876

 

788

 

847

  Percentage colder (warmer) than prior year

    

11.2%

 

(23.3)%

 

 

  Percentage colder (warmer) than 30-year average  

    

3.4%

 

(7.0)%

 

 

 

 

 

 

 

 

 

Cooling degree-days

    

  182

 

  131

 

  175

  Percentage warmer than prior year

    

38.9%

 

35.1%

 

 

  Percentage warmer (cooler) than 30-year average  

    

  4.0%

 

(25.6)%

 

 

 

Weather conditions impact electric and, to a greater extent during the winter, gas sales in NSTAR’s service area.  The comparative information above relates to heating degree-days for the second quarter of 2005 and 2004 andthe number of degree-days in a “normal” second quarter as represented by a 30-year average.  A “degree-day” is a unit measuring how much the outdoor mean temperature falls below (heating degree-day) or rises above (cooling degree-day) abase of 65 degrees.  Each degree below or above the base temperature is measured as one degree-day.

Operating revenues

Operating revenues for the second quarter of 2005 increased 6.5% from the same period in 2004 as follows:

(in millions)

Three Months Ended June 30,

 

Increase/(Decrease)

 

 

 

 

2005

 

 

2004

 

Amount

 

Percent

 

Electric revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

  Retail distribution and transmission

 

$

203.9

 

$

208.0

 

$

(4.1

)

 

(2.0

)

  Energy, transition and other

 

 

   368.3

 

 

   346.6

 

 

  21.7

 

 

6.3

 

    Total retail

 

 

572.2

 

 

554.6

 

 

17.6

 

 

3.2

 

  Wholesale

 

 

       2.8

 

 

       4.2

 

 

  (1.4

)

 

(33.3

)

    Total electric revenues

 

 

575.0

 

 

558.8

 

 

16.2

 

 

2.9

 

Gas revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

  Firm and transportation

 

 

25.2

 

 

23.0

 

 

2.2

 

 

9.6

 

  Energy supply and other

 

 

     59.2

 

 

    47.5

 

 

 11.7

 

 

24.6

 

    Total gas revenues

 

 

84.4

 

 

  70.5

 

 

13.9

 

 

19.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unregulated operations revenues

 

 

     32.6

 

 

    20.5

 

 

 12.1

 

 

59.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Total operating revenues

 

$

692.0 ====

 

$

649.8 ====

 

$

42.2 ===

 

 

6.5 ====

 

 

  Electric revenues

The decrease in retail distribution and transmission revenues primarily reflects lower retail MWH sales, primarily in commercial and industrial sectors as well as lower demand revenues.

NSTAR’s largest earnings sources are the revenues derived from transmission and distribution rates approved by the MDTE.  The level of distribution revenues is affected by weather conditions and the economy.  Weatherconditions affect sales to NSTAR’s residential and small commercial customers.  Economic conditions affect NSTAR’s large commercial and industrial customers.

Energy revenues are received from customers for the procurement of energy on their behalf. These revenues are fully reconciled with the cost currently recognized by the Company and, as a result, do not have an effect on theCompany’s earnings.  Other revenues primarily relate to the Company’s ability to effectively reduce stranded costs (mitigation incentive) and rental revenue from electric property.  The $21.7 million increase in energy, transition and otherrevenues is primarily attributable to higher rates for procuring energy for our customers.

The decrease in 2005 wholesale revenues reflects the expiration of a municipal wholesale power supply contract in the fourth quarter of 2004.  After October 31, 2005, NSTAR Electric anticipates it will no longer have contracts forthe supply of wholesale power.  Amounts collected from wholesale customers are credited to retail customers through the transition charge.  Therefore, the expiration of these contracts has no impact on results of operations.

  Gas revenues

The $2.2 million increase in firm and transportation revenues is attributable to cooler weather in April and May that resulted in additional revenue of approximately $2 million.  NSTAR Gas' sales are positively impacted by colderweather because a substantial portion of its customer base uses natural gas for space heating purposes.

The energy supply and other revenue increase of $11.7 million primarily reflects the impact of the higher sales and cost of gas sold due to the higher gas costs from the Company's gas suppliers.  These revenues are fully reconciledwith 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 operations revenues are derived from NSTAR’s unregulated businesses that include district energy operations and telecommunications.  Unregulated revenues were $32.6 million in the second quarter of 2005 comparedto $20.5 million in the same period of 2004, an increase of $12.1 million, or 59%.  The increase in unregulated revenues is primarily the result of higher steam sales volume, combined with electric and chilled water being higher as a result of higher sales andfuel pricing to customers.

Operating expenses

**Purchased power costs**were $303.8 million in the second quarter of 2005 compared to $304.4 million in the same period of 2004, a decrease of $0.6 million, or less than 1%.  The decrease isprimarily the result of decreased electric sales.  NSTAR Electric adjusts its rates to collect the costs related to energy supply from customers on a fully reconciling basis.  This decrease is offset by an increase in fuel costs at our unregulatedcompanies.

**Cost of gas sold**, representing NSTAR Gas’ supply expense, was $53.7 million in the second quarter of 2005 compared to $42.3 million in 2004, an increase of $11.4 million, or 27%.  Theexpense increase reflects the higher costs of gas supply and the higher volume of firm gas sales of 6.1%.  NSTAR Gas maintains a flexible resource portfolio consisting of gas supply contracts, transportation contracts on interstate pipelines, market area storageand peaking services.  NSTAR Gas adjusts its rates to collect costs related to gas supply from customers on a fully reconciling basis.

**Operations and maintenance expense**  was $111.3 million in the second quarter of 2005 compared to $103.2 million in the same period of 2004, an increase of $8.1 million, or 8%.  Thisincrease primarily reflects incremental costs associated with a strike by union employees ($2.3 million), a $5 million net increase related to an environmental reserve and higher employee expenses.

**Depreciation and amortization expense**  was $84.9 million in the second quarter of 2005 compared to $61.1 million in the same period of 2004, an increase of $23.8 million or 39%.  Theincrease primarily reflects amortization costs related to transition property securitization regulatory assets ($22.3 million) and higher depreciable distribution and transmission plant in service that includes an increase to the transmission depreciation rate.

**DSM and renewable energy programs expense**  was $15.7 million in the second quarter of 2005 compared to $15.6 million in the same period of 2004, an increase of $0.1 million, or 1%, whichare consistent with the collection of conservation and renewable energy revenues.  These costs are in accordance with program guidelines established by the MDTE and are collected from customers on a fully reconciling basis plus a small incentive return.

**Property and other taxes**  were $25.4 million in the second quarter of 2005 compared to $25.0 million in the same period of 2004, an increase of $0.4 million, or 2%.  This increase wasprimarily due to higher overall municipal property taxes caused primarily by increased property investments in our transmission and distribution system.

**Income taxes**  attributable to operations were $21.1 million in the second quarter of 2005 compared to $24.8 million in the same period of 2004, a decrease of $3.7 million, or 15%,reflecting lower pre-tax operating income in 2005.

Other income, net

**Other income, net**  was approximately $1 million in the second quarter of 2005 compared to $2.9 million in the same period of 2004, a decrease of $1.9 million.  The decrease isprimarily due to the absence in 2005 of proceeds from an executive life insurance policy of $1.2 million and $1.7 million in employee-related contract fees as a result of the Blackstone Station sale.

Interest charges

**Interest on long-term debt and transition property securitization certificates**  was $42.7 million in the second quarter of 2005 compared to $36.5 million in the same period of 2004, anincrease of $6.2 million, or 17%.  The increase in interest expense primarily reflects:

-   

 

Higher interest costs in 2005 of $0.7 million on Boston Edison's $300 million ten-year fixed rate 4.875% Debentures issued on April 16, 2004

-   

 

Additional interest costs associated with transition property securitization.  Securitization interest represents interest on securitization notes of BEC Funding, BEC Funding II and CEC Funding collateralized by the future incomestream associated primarily with NSTAR's stranded costs associated with certain terminated purchase power agreements.  The future income stream was sold to these companies by Boston Edison and ComElectric.

-   

 

Higher rates on variable rate debt

These increases were partially offset by:

-   

 

The absence in 2005 of interest expense of nearly $0.8 million related to the March 1, 2005 retirement of $150 million variable rate Note, due in May 2006, at ComElectric with a portion of the proceeds from the sale of CEC Funding LLC'ssecuritization notes.

 

**Short-term and other interest expense**  was $1.7 million in the second quarter of 2005 compared to $2.1 million in the same period of 2004, a decrease of $0.4 million, or 19%.  Thedecrease is primarily due to lower interest costs on regulatory deferrals ($1.1 million) offset by higher short-term debt borrowing costs ($0.9 million) primarily reflective of a 199 basis point increase in interest rates.

**Results of Operations**

The following section of MD&A compares the results of operations for each of the six-month periods ended June 30, 2005 and 2004 and should be read in conjunction with the accompanying Condensed Consolidated Financial Statements andthe accompanying Notes to Condensed Consolidated Financial Statements included elsewhere in this report.

**Six Months Ended June 30, 2005 compared to Six Months Ended June 30, 2004**

Overview

Earnings per common share were as follows:

 

 

Six Months ended June 30,

 

     

  

2005

   

  

2004

   

% Change

Basic

      

$

0.74

   

$

0.82

   

(9.8)

Diluted

      

$

0.74

    

$

0.81

   

(8.6)

 

Net income was $79.4 million for the six-month period ended June 30, 2005 compared to $87.2 million for the same period in 2004.  Factors that contributed to the $7.8 million, or 8.9%, decrease in 2005 earnings include:

  -  

 

Higher operations and maintenance expense due to costs associated with:

   

   

  -   

severe winter storms (approximately $5.4 million)

   

   

  -  

costs associated with facilities consolidation (approximately $3.3 million)

   

   

  -  

incremental costs associated with a strike by union employees ($2.3 million)

   

   

  -  

a net increase of approximately $5 million related to an environmental reserve

  -  

 

Lower firm gas revenues due to lower firm gas sales caused by warmer winter weather (heating degree-days declined 1.6%)

  -  

 

Increased property tax expense

  -  

 

Higher interest costs due to more debt outstanding ($9 million)

These decreases were partially offset by:

  -  

 

Recognition of MDTE-approved incentive entitlements for NSTAR successfully lowering transition charges (approximately $15.1 million) and incentives related to NSTAR's demand-side management programs (approximately $2.0million)

  -  

 

Higher electric transmission rates due to regulatory approval of 50% CWIP in rate base and additional transmission plant in service ($4.7 million)

 

In the first half of 2005, NSTAR closed on a securitization financing transaction in which NSTAR received approximately $674.5 million in proceeds.  The net proceeds were used primarily to make liquidation payments required inconnection with the termination of obligations under certain purchase power contracts (approximately $554 million) and to repay $150 million of outstanding debt at ComElectric.

Significant cash flow events during the first half of 2005 include the following: NSTAR invested approximately $169.4 million in capital projects to improve capacity reliability, paid approximately $62.8 million in preferred and commonshare dividends and retired approximately $205 million in long-term debt.

Energy sales and weather

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

Retail Electric Sales - MWH

Six Months ended June 30,

 

   

2005

   

2004

   

% Change

 

   

 

   

 

   

 

  Residential

   

3,212,446

   

3,245,799

   

(1.0)

  Commercial

   

6,291,046

   

6,234,092

   

0.9

  Industrial

   

802,027

   

813,856

   

(1.5)

  Other

   

       80,707

   

       82,923

   

(2.7)

    Total retail sales

   

10,386,226 =======

   

10,376,670 =======

   

0.1 ===

 

Firm Gas Sales - BBTU

Six Months ended June 30,

 

   

2005

   

2004

   

% Change

 

   

 

   

 

   

 

  Residential

   

13,926

   

14,595

   

(4.6)

  Commercial and other

   

11,323

   

11,366

   

(0.3)

  Industrial

   

        3,031

   

        3,013

   

0.6

    Total firm sales

   

28,280 =======

   

28,974 =======

   

(2.4) ===

 

The 0.1% increase in retail MWH sales in the first half of 2005 reflects, by customer sectors, an improvement of 0.9% in commercial sales offset somewhat by the sales decline of 1.0% in the residential sector due to the warmertemperatures in January and February that resulted in lower heating equipment use, partially offset in the month of June when warmer temperatures resulted in greater air conditioning use when compared to the same period in 2004.  The 2.4% decrease in firm gassales in the first half of 2005 primarily reflects warmer overall temperatures than in 2004.

In terms of customer sector characteristics, industrial sales are less sensitive to weather than residential and commercial sales, which are influenced by temperature extremes.  Despite the overall warmer weather in the first halfof 2005, the increase in electric sales is attributable in part to the commercial sector where building and expansions created the additional energy use.  Electric residential and commercial customers represented approximately 31% and 61%, respectively, ofNSTAR’s total retail sales mix for the first half of 2005 and provided 44.2% and 49.9% of distribution and transmission revenues, respectively.  Refer to the “Electric revenues” section below for a more detailed discussion.  Industrialsales are primarily influenced by national and local economic conditions and sales to these customers reflect an improving economic environment and increased manufacturing production.

 

   

 

    

 

    

Normal

 

   

 

    

 

    

30-Year

 

   

2005

    

2004

    

Average

 

    

 

    

 

    

 

Heating degree-days

    

3,868

 

3,929

 

3,822

  Percentage warmer than prior year

    

(1.6)%

 

(7.4)%

 

 

  Percentage colder than 30-year average  

    

1.2%

 

1.8%

 

 

 

 

 

 

 

 

 

Cooling degree-days

    

  182

 

  131

 

  176

  Percentage warmer than prior year

    

38.9%

 

35.1%

 

 

  Percentage warmer (cooler) than 30-year average  

    

  3.4%

 

(25.6)%

 

 

 

Weather conditions impact electric and, to a greater extent during the winter, gas sales in NSTAR’s service area.  The comparative information above relates to heating degree-days for the first half of 2005 and 2004 and thenumber of degree-days in a “normal” first half-year as represented by a 30-year average.  A “degree-day” is a unit measuring how much the outdoor mean temperature falls below (heating degree-day) or rises above (cooling degree-day) a baseof 65 degrees.  Each degree below or above the base temperature is measured as one degree-day.

Operating revenues

Operating revenues for the first half of 2005 increased 7.7% from the same period in 2004 as follows:

(in millions)

Six Months Ended June 30,

 

Increase/(Decrease)

 

 

 

 

2005

 

 

2004

 

Amount

 

Percent

 

Electric revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

  Retail distribution and transmission

 

$

392.8

 

$

400.2

 

$

(7.4

)

 

(1.8

)

  Energy, transition and other

 

 

   808.4

 

 

   710.8

 

 

 97.6

 

 

13.7

 

    Total retail

 

 

1,201.2

 

 

1,111.0

 

 

90.2

 

 

8.1

 

  Wholesale

 

 

       5.7

 

 

       9.0

 

 

  (3.3

)

 

(36.7

)

    Total electric revenues

 

 

1,206.9

 

 

1,120.0

 

 

86.9

 

 

7.8

 

Gas revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

  Firm and transportation

 

 

89.0

 

 

89.0

 

 

-

 

 

-

 

  Energy supply and other

 

 

   209.1

 

 

   193.2

 

 

 15.9

 

 

 8.2

 

    Total gas revenues

 

 

298.1

 

 

282.2

 

 

15.9

 

 

5.6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unregulated operations revenues

 

 

    67.1

 

 

    57.5

 

 

   9.6

 

 

16.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Total operating revenues

 

$

1,572.1 =====

 

$

1,459.7 =====

 

$

112.4 ===

 

 

7.7 ===

 

 

  Electric revenues

The decrease in retail distribution and transmission revenues reflects, despite a 0.1% increase in retail MWH sales substantially all in the commercial sector, a decrease in demand revenues from our commercial customers.

NSTAR’s largest earnings sources are the revenues derived from transmission and distribution rates approved by the MDTE.  The level of distribution revenues is affected by weather conditions and the economy.  Weatherconditions affect sales to NSTAR’s residential and small commercial customers.  Economic conditions affect NSTAR’s large commercial and industrial customers.

Energy revenues are received from customers for the procurement of energy on their behalf. These revenues are fully reconciled with the cost currently recognized by the Company and, as a result, do not have an effect on theCompany’s earnings.  Other revenues primarily relate to the Company’s ability to effectively reduce stranded costs (mitigation incentive) and rental revenue from electric property.  The $97.6 million increase in energy, transition and otherrevenues is primarily attributable to higher rates for procuring energy for our customers and approximately $14.4 million of MDTE-approved incentive revenue entitlements for successfully lowering transition charges resulting from the securitization financing thatclosed on March 1, 2005.

The decrease in 2005 wholesale revenues reflects the expiration of a municipal wholesale power supply contract in the fourth quarter of 2004.  After October 31, 2005, NSTAR Electric anticipates it will no longer have contracts forthe supply of wholesale power.  Amounts collected from wholesale customers are credited to retail customers through the transition charge.  Therefore, the expiration of these contracts have no impact on results of operations.

Gas revenues

Firm and transportation revenues reflect warmer weather, conservation efforts and the decrease in sales volumes of 2.4%, offset by higher transportation.

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

The energy supply and other revenue increase of $15.9 million primarily reflects the impact of the higher cost of gas sold from the Company's suppliers.  These revenues are fully reconciled with the cost currently recognized by theCompany and, as a result, do not have an effect on the Company's earnings.

  Unregulated operations revenues

Unregulated operations revenues are derived from NSTAR’s unregulated businesses that include district energy operations and telecommunications.  Unregulated revenues were $67.1 million in the first half of 2005 compared to$57.5 million in the same period of 2004, an increase of $9.6 million, or 17%.  The increase in unregulated revenues is primarily the result of higher steam sales volume, combined with electric and chilled water being higher as a result of higher sales andpricing to customers.

Operating expenses

**Purchased power costs**  were $687.3 million in the first half of 2005 compared to $637.9 million in the same period of 2004, an increase of $49.4 million, or 8%.  The increase isprimarily the result of the higher costs of procuring energy for our customers from both our regulated and unregulated companies and increased sales.  NSTAR Electric adjusts its rates to collect the costs related to energy supply from customers on a fullyreconciling basis.

**Cost of gas sold**, representing NSTAR Gas’ supply expense, was $192.2 million in the first half of 2005 compared to $179.9 million in 2004, an increase of $12.3 million, or 7%. Despite the lower volume of firm gas sales of 2.4%, the expense increase reflects the higher costs of gas supply.  NSTAR Gas maintains a flexible resource portfolio consisting of gas supply contracts, transportation contracts on interstate pipelines, market areastorage and peaking services.  NSTAR Gas adjusts its rates to collect costs related to gas supply from customers on a fully reconciling basis.

**Operations and maintenance expense**  was $231.4 million in the first half of 2005 compared to $209.7 million in the same period of 2004, an increase of $21.7 million, or 10%.  Thisincrease primarily reflects costs associated with winter storms (approximately $5.4 million), facilities consolidation (approximately $3.3 million), a strike by union employees (approximately $2.3 million), a net increase to an environmental reserve (approximately $5million), higher bad debt expense (approximately $1.0 million) and higher employee expenses.

**Depreciation and amortization expense**  was $159.6 million in the first half of 2005 compared to $126.6 million in the same period of 2004, an increase of $33 million or 26%.  Theincrease primarily reflects amortization costs related to transition property regulatory asset ($29.8 million) and higher depreciable distribution and transmission plant in service and an increase to the transmission depreciation rate.

**DSM and renewable energy programs expense**  was $33.4 million in the first half of 2005 compared to $33.1 million in the same period of 2004, an increase of $0.3 million, or 1%, which areconsistent with the collection of conservation and renewable energy revenues.  These costs are in accordance with program guidelines established by the MDTE and are collected from customers on a fully reconciling basis plus a small incentive return.

**Property and other taxes**  were $55.0 million in the first half of 2005 compared to $53.8 million in the same period of 2004, an increase of $1.2 million, or 2%.  This increase wasprimarily due to higher overall municipal property taxes caused primarily by increased property investments in our transmission and distribution system.

**Income taxes**  attributable to operations were $50.9 million in the first half of 2005 compared to $57.9 million in the same period of 2004, a decrease of $7.0 million, or 12%, reflectinglower pre-tax operating income in 2005.

Other income, net

**Other income, net**  was approximately $1.7 million in the first half of 2005 compared to $3.8 million in the same period of 2004, a decrease of $2.1 million.  The decrease is primarilydue to the absence in 2005 of proceeds from an executive life insurance policy of $1.2 million and $1.7 million in employee-related contract fees as a result of the Blackstone Station sale.

Interest charges

**Interest on long-term debt and transition property securitization certificates**  was $82.1 million in the first half of 2005 compared to $73.0 million in the same period of 2004, an increaseof $9.1 million, or 12%.  The increase in interest expense primarily reflects:

-   

 

Higher interest costs in 2005 of $4.3 million on Boston Edison's $300 million ten-year fixed rate 4.875% Debentures issued on April 16, 2004

-   

 

Additional interest costs associated with transition property securitization.  Securitization interest represents interest on securitization certificates of BEC Funding, BEC Funding II and CEC Funding collateralized by the futureincome stream associated primarily with NSTAR's stranded costs.  The future income stream was sold to these companies by Boston Edison and ComElectric.

-   

 

Higher rates on variable rate debt

These increases were partially offset by:

-   

 

The absence in 2005 of expense of nearly $3 million related to the retirement of Boston Edison's $181 million 7.80% Debentures on March 15, 2004

-   

 

The impact of the March 1, 2005 retirement of $150 million variable rate Note, due in May 2006, at ComElectric with a portion of the proceeds from the sale of CEC Funding LLC's securitization certificates

 

**Short-term and other interest expense**  was $2.9 million in the first half of 2005 compared to $4.0 million in the same period of 2004, a decrease of $1.1 million, or 28%.  The decreaseis primarily due to lower interest costs on regulatory deferrals offset by higher short-term debt borrowing costs primarily reflective of a 182 basis point increase in interest rates.

**Liquidity and Capital Resources**

     Current Cash Flow Activity

NSTAR’s primary uses of cash in the first half of 2005 include capital expenditures, dividend payments, debt reductions, and liquidation payments under certain purchase power contract buy-out agreements.

Operating cash flow activities, including the contract buy-outs in the first half of 2005, required $291.5 million of cash.  The Company used $180.1 million in its investing activities, primarily to fund $169.4 million of plantexpenditures, which included system reliability and infrastructure improvement projects incurred by NSTAR Electric and NSTAR Gas operations.  Additionally, the Company provided $470.2 million (net) from financing activities primarily from the issuance of $674.5million of transition property securitization certificates.

     Operating Activities

The net cash required in the first half of 2005 for operating activities primarily relates to the contract termination payments on certain purchase power contracts in 2005.  Deferred income tax expense and income tax asset bothincreased due to the contract termination payments made on March 1, 2005 on certain purchase power contracts.  The payment of approximately $554 million creates a current tax deduction.  The payment also creates a timing difference since the payment, forbook purposes, will be amortized to expense over approximately eight years, the period of the collection from customers.  Additionally, with the issuance of transition property securitization certificates, NSTAR increased the amount of transition costs that itcan recover in the future and, therefore, increased regulatory assets.

Other changes to NSTAR's working capital primarily reflect the timing of receipts and disbursements.  For the six months ended June 30, 2005 and 2004, NSTAR contributed approximately $37 million and $45 million, respectively, toits benefit plans.  NSTAR currently anticipates that it will contribute approximately $18 million to its benefit plans in the remainder of 2005.

     Investing Activities

The net cash used in investing activities in the first half of 2005 of $180.1 million consists primarily of capital expenditures related to infrastructure investments in transmission and distribution systems.  Capital expendituresincreased almost $50 million from the prior year primarily due to Boston Edison's 345 kV project.  Boston Edison has spent almost $40 million on this project year-to-date.

     Financing Activities

The net cash provided by financing activities in the first half of 2005 of $470.2 million primarily reflects the issuance of $674.5 million of transition property securitization certificates on March 1, 2005.  Offsetting thereceipt of cash from the securitization financing, NSTAR used cash to make long-term debt redemptions and sinking funds payments of $205.0 million and to pay dividends of $62.8 million.

On March 1, 2005, two wholly owned special purpose subsidiaries, BEC Funding II, LLC and CEC Funding LLC, issued $265.5 million and $409 million, respectively, in notes to a special purpose trust created by two Massachusetts stateagencies.  The trust then concurrently issued a total of $674.5 million of rate reduction certificates to the public.  These certificates represent fractional, undivided beneficial interests in the notes issued by BEC Funding II, LLC and CEC Funding, LLCand are secured by a portion of the transition charge assessed on Boston Edison's and ComElectric's retail customers as permitted under the 1997 Massachusetts Electric Industry Restructuring Act and authorized by the MDTE. These certificates are non-recourse toBoston Edison and ComElectric, respectively.  The assets and revenues of BEC Funding II, LLC and CEC Funding, LLC, including without limitation, the transition property, are owned solely by BEC Funding II, LLC and CEC Funding, LLC, and are not available tocreditors of Boston Edison, ComElectric or NSTAR.  The certificates and the related BEC Funding II, LLC and CEC Funding, LLC notes were issued at a weighted average yield of 4.15% in four classes with varying final maturity dates between 2008 and 2015. Scheduled semi-annual principal payments begin in September 2005.  The net proceeds from this transaction were used to make liquidation payments required in connection with the termination of certain purchase power agreements, and, in the case of ComElectric, torepay outstanding debt.

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

In connection with the NSTAR Dividend Reinvestment and Direct Common Shares Purchase Plan, NSTAR has issued approximately 129,000 shares under this registration and received approximately $7.1 million for the six months ended June 30,2005.

**Sources of Additional Capital and Financial Covenant Requirements**

NSTAR and Boston Edison have no financial covenant requirements under their respective long-term debt arrangements. ComElectric, Cambridge Electric and NSTAR Gas have financial covenant requirements under their long-term debtarrangements and were in compliance at June 30, 2005 and December 31, 2004. NSTAR's long-term debt other than the Mortgage Bonds/Notes of NSTAR Gas and Medical Area Total Energy Plant, Inc., a wholly owned indirect subsidiary of NSTAR, is unsecured.

NSTAR has a five-year, $175 million revolving credit agreement that expires in November 2009.  At June 30, 2005 and December 31, 2004, there were no amounts outstanding under the revolving credit agreement. This credit facilityserves as a backup to NSTAR's $175 million commercial paper program that, at June 30, 2005 and December 31, 2004, had $27.5 million and $5 million outstanding, respectively. Under the terms of the credit agreement, NSTAR is required to maintain a maximum totalconsolidated 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 thetotal agreement amount. At June 30, 2005 and December 31, 2004, NSTAR was in full compliance with the aforementioned covenant as the ratios were 57.1% and 58.3% respectively.

Boston Edison has approval from the FERC to issue short-term debt securities from time to time on or before December 31, 2006, with maturity dates no later than December 31, 2007, in amounts such that the aggregate principal does notexceed $450 million at any one time.  Boston Edison has a five-year, $350 million revolving credit agreement that expires in November 2009.  However, unless Boston Edison receives necessary approvals from the MDTE, the credit agreement will expire 364 daysfrom the date of the first draw under the agreement.   At June 30, 2005 and December 31, 2004, there were no amounts outstanding under the revolving credit agreement. This credit facility serves as backup to Boston Edison's $350 million commercial paper programthat had a $142.5 million and $46.5 million balance at June 30, 2005 and December 31, 2004, respectively. Under the terms of the revolving credit agreement, Boston Edison is required to maintain a consolidated maximum total debt to capitalization ratio of not greaterthan 65% at all times, excluding Transition Property Securitization Certificates, and excluding Accumulated other comprehensive income (loss) from common equity.   At June 30, 2005 and December 31, 2004, Boston Edison was in full compliance with its covenants inconnection with its short-term credit facilities as the ratios were 55.4% and 53.1%, respectively.

As of June 30, 2005, ComElectric, Cambridge Electric and NSTAR Gas, collectively, have $145 million available under several lines of credit and had $69.4 million and $109.9 million outstanding under these lines of credit at June 30,2005 and December 31, 2004, respectively.   As of September 28, 2004, ComElectric and Cambridge Electric have FERC authorization to issue short-term debt securities from time-to-time on or before November 30, 2006 and June 27, 2006, with maturity dates no laterthan November 30, 2007 and June 27, 2007, respectively, in amounts such that the aggregate principal does not exceed $125 million and $60 million, respectively, at any one time. NSTAR Gas is not required to seek approval from FERC to issue short-term debt.

In connection with the NSTAR Dividend Reinvestment and Direct Common Shares Purchase Plan, NSTAR has issued approximately 129,000 shares under this registration and received approximately $7.1 million for the six months ended June 30,2005.

At NSTAR's Annual Meeting on April 28, 2005, NSTAR shareholders approved the authorization of an additional 100 million common shares and the Board of Trustees approved a two-for-one stock split of NSTAR common shares, in the form of a100% common share dividend, for shareholders of record on May 16, 2005.  The new shares were issued on June 3, 2005. The Company’s intent in effecting a stock split in the form of a stock dividend was to increasethe number of outstanding common shares, to reduce the per share stock price thereby making it more accessible to investors and to align the stock price with comparable peers in the utility industry. 

During May 2005, Boston Edison issued a $7.5 million standby letter of credit to the general contractor of Boston Edison’s 345kV project.  The amount of the standby letter of credit reduces to $4.5 million on February 1,2006.  The contractor will be able to draw upon the letter of credit if Boston Edison does not comply with the payment terms of the Construction Agreement, signed by both parties.  NSTAR believes that it is remote that the standby letter of credit will beused.

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 suchfinancing 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 aresufficient to meet its current and projected requirements.

Table of Contents

**Item 3.  Quantitative and Qualitative Disclosure about Market Risk**

NSTAR’s exposure to financial market risk results primarily from fluctuations in interest rates.  There have been no material changes to NSTAR’s market risks as disclosed in NSTAR’s Annual Report on Form 10-K forthe year ended December 31, 2004.

Table of Contents

**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 is recorded, processed, summarized andreported within the time periods specified in the rules and forms of the Securities and Exchange Commission.

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 operationof NSTAR’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15 as of the end of the period covered by this report.  Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that NSTAR’sdisclosure 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) toensure that appropriate information is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

During the most recent fiscal quarter, there have been no changes in NSTAR’s internal control over financial reporting that materially affected, or are reasonably likely to materially affect, internal control over financialreporting.

Table of Contents

**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, except for the item disclosed in the Condensed Consolidated Financial Statements, Note K, Part 1,“Environmental Matters”.  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 reasonablypossible 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 2(c).  Unregistered Sales of Equity Securities and Use of Proceeds**

Common shares of NSTAR issued under the NSTAR Dividend Reinvestment and Direct Common Shares Purchase Plan, the 1997 Share Incentive Plan and the NSTAR Savings Plan may consist of newly issued shares from the Company or shares purchasedin the open market by the Company or an independent agent.  During the three-month period ended June 30, 2005, the shares listed below were acquired in the open market primarily in connection with the NSTAR Savings Plan.

 

              

Total Number of Common Shares   Purchased

              

 Average Price   Paid Per Share  

 

    

 

    

 

   April

    

107,400

 

$27.06

   May

    

92,238

 

$27.89

   June

    

18,587

 

$29.83

 

**Item 4.  Submission of Matters to a Vote of Security Holders**

The Annual Meeting of Shareholders of NSTAR was held on April 28, 2005.  Proxies representing 44,177,858 shares, or 82.8%, of the 53,339,657 outstanding shares entitled to vote were present at the Annual Meeting, constituting aquorum.

Proposal 1.    The following four Class III trustees were elected to serve until the 2008 Annual Meeting and until the election and qualification of their respectivesuccessors:

 

 

Votes For

   

Votes Withheld

 

    

 

   

 

Charles K. Gifford

  

43,379,672

   

798,186

Paul A. La Camera

   

43,418,326

   

759,532

Sherry H. Penney

   

43,379,522

   

798,336

William C. Van Faasen

   

43,411,760

   

766,097

 

Proposal 2.    Shareholders approved the ratification of the appointment of PricewaterhouseCoopers LLP as NSTAR’s independent registered public accounting firm for 2005, asfollows:

For

   

Against

   

Abstain

 

 

 

 

 

43,579,005

   

305,441

   

293,412

 

Proposal 3.   Shareholders approved an amendment to the Declaration of Trust to increase the number of authorized NSTAR common shares from 100,000,000 to 200,000,000, as follows:

For

   

Against

   

Abstain

 

 

 

 

 

42,226,127

   

1,546,978

   

404,753

 

 

Table of Contents

**Item 6.  Exhibits**

Exhibit filed herewith:

 

Exhibit   

3i  

 - 

  

Articles of Incorporation

 

 

 

 

 

 

 

 

3.1

 

 

Declaration of Trust of NSTAR (dated as of April 20, 1999, as amended April 28, 2005)

 

 

 

 

 

 

 

Exhibit   

4   

 - 

  

Instruments Defining the Rights of Security Holders, Including Indentures

 

 

 

 

  

 

 

 

 

 - 

 

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

  

  

  

  

  

  

Exhibits filed herewith:

 

Exhibit   

15   

 - 

  

Letter Re Unaudited Interim Financial Information

 

 

 

 

 

 

 

 

15.1

 

 

PricewaterhouseCoopers LLP Awareness Letter

 

 

 

 

 

 

 

Exhibit   

31   

 - 

  

Rule 13a - 15/15d-15(e) Certifications

 

 

 

 

 

 

 

 

31.1

 

 

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

 

 

 

 

 

 

 

 

31.2

 

 

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

 

 

 

 

 

 

 

Exhibit   

32   

 - 

  

Section 1350 Certifications

 

 

 

 

 

 

 

 

32.1  

 

 

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

 

 

 

 

 

 

 

 

32.2

 

 

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

 

 

 

 

 

 

 

Exhibit   

99   

 - 

  

Additional Exhibits

 

 

 

 

 

 

 

 

99.1  

 

 

Report of Independent Registered Public Accounting Firm

Table of Contents

 

 

**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, 2005          

      

By:   /s/ R.J. WEAFER, JR.                               

   

      

Robert J. Weafer, Jr.*Vice President, Controller and Chief Accounting Officer*