**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   **September 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

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

 

[  ]

Yes

 

[X]

No

The number of shares outstanding of the registrant's class of common stock was 106,808,376 Common Shares, par value $1, as of October 28, 2005.

 

**NSTARForm 10-Q - Quarterly Period Ended September 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 - 21

 

 

 

 

 

 

**Item 2.**

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

 

21 - 38

 

 

 

 

 

 

**Item 3.**

Quantitative and Qualitative Disclosures about Market Risk

 

38

 

**** ****

 

 

 

 

**Item 4.**

Controls and Procedures

 

38

 

**** ****

 

 

 

**Part II.  Other Information:**

 

 

 

**** ****

 

 

 

 

**Item 1.**

Legal Proceedings

 

38 - 39

 

**** ****

 

 

 

 

**Item 2.**

Unregistered Sales of Equity Securities and Use of Proceeds

 

39

 

**** ****

 

 

 

 

**Item 6.**

Exhibits

 

40

 

 

 

 

 

Signature

 

41

                                                                                     

 

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's executiveofficers, 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 Department at 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

 

 

 

Nine Months Ended

 

 

 

 

September 30,

 

 

 

September 30,

 

 

 

 

2005

 

 

 

2004

 

 

 

2005

 

 

 

2004

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating revenues

 

$

   858,495

 

 

$

 781,510

 

 

$

2,430,545

 

 

$

  2,241,205

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Purchased power and cost of gas sold

 

 

462,118

 

 

 

  430,735

 

 

 

1,341,648

 

 

 

1,248,526

 

  Operations and maintenance

 

 

104,780

 

 

 

103,182

 

 

 

336,190

 

 

 

312,833

 

  Depreciation and amortization

 

 

85,722

 

 

 

62,052

 

 

 

249,268

 

 

 

192,602

 

  Demand side management and renewable energy programs

 

 

18,768

 

 

 

18,165

 

 

 

52,133

 

 

 

51,233

 

  Property and other taxes

 

 

23,643

 

 

 

24,904

 

 

 

78,630

 

 

 

78,677

 

  Income taxes

 

 

     43,986

 

 

 

   41,204

 

 

 

     90,978

 

 

 

       95,152

 

    Total operating expenses

 

 

   739,017

 

 

 

 680,242

 

 

 

2,148,847

 

 

 

  1,979,023

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

   119,478

 

 

 

101,268

 

 

 

   281,698

 

 

 

     262,182

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (deductions):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Other income, net

 

 

3,099

 

 

 

1,668

 

 

 

5,340

 

 

 

5,842

 

  Other deductions, net

 

 

         (399

)

 

 

             -

 

 

 

         (969

)

 

 

           (417

)

    Total other income, net

 

 

       2,700

 

 

 

     1,668

 

 

 

       4,371

 

 

 

         5,425

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest charges:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Long-term debt

 

 

30,106

 

 

 

30,332

 

 

 

90,794

 

 

 

88,621

 

  Transition property securitization

 

 

12,477

 

 

 

6,845

 

 

 

33,862

 

 

 

21,602

 

  Short-term debt and other

 

 

2,134

 

 

 

2,222

 

 

 

5,073

 

 

 

6,250

 

  Allowance for borrowed funds used during

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    construction (AFUDC)

 

 

      (1,039

)

 

 

       (234

)

 

 

       (2,560

)

 

 

          (858

)

      Total interest charges

 

 

     43,678

 

 

 

   39,165

 

 

 

    127,169

 

 

 

    115,615

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stock dividends of subsidiary

 

 

          490

 

 

 

        490

 

 

 

        1,470

 

 

 

        1,470

 

Net income

 

$

78,010 ======

 

 

$

63,281 =====

 

 

$

157,430 ======

 

 

$

150,522 ======

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Basic

 

 

106,808 ======

 

 

 

106,336 =====

 

 

 

106,738 ======

 

 

 

106,191 ======

 

  Diluted

 

 

107,726 ======

 

 

 

107,396 =====

 

 

 

107,567 ======

 

 

 

107,177 ======

 

Earnings per common share (Note G):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Basic

 

$

0.73 =====

 

 

$

0.60 =====

 

 

$

1.47 =====

 

 

$

1.42 =====

 

  Diluted

 

$

0.72 =====

 

 

$

0.59 =====

 

 

$

1.46 =====

 

 

$

1.40 =====

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.29 =====

 

 

$

0.2775 =====

 

 

$

0.87 =====

 

 

$

0.8325 =====

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**** ****

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

 

 

 

Nine Months Ended

 

 

 

 

September 30,

 

 

 

September 30,

 

 

 

 

2005

 

 

 

2004

 

 

 

2005

 

 

 

2004

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at the beginning of the period

 

$

535,759

 

 

$

477,441

 

 

$

518,252

 

 

$

449,114

 

Add:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Net income

 

 

   78,010

 

 

 

  63,281

 

 

 

157,430

 

 

 

150,522

 

     Subtotal

 

 

613,769

 

 

 

540,722

 

 

 

675,682

 

 

 

599,636

 

Deduct:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Dividends declared:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Common shares

 

 

   30,974

 

 

 

  29,528

 

 

 

   92,887

 

 

 

  88,442

 

Balance at the end of the period

 

$

582,795 =====

 

 

$

511,194 =====

 

 

$

582,795 =====

 

 

$

511,194 =====

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

Table of Contents

 

NSTARCondensed Consolidated Balance Sheets(Unaudited)(in thousands) 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

 

 

December 31,

 

 

 

 

2005

 

 

 

2004

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Utility plant in service, at original cost

 

$

4,545,329

 

  

$

4,412,073

 

  

Less: accumulated depreciation

 

 

    1,123,753

 

  

 

    1,090,924

 

 

 

 

3,421,576

 

 

 

3,321,149

 

Construction work in progress

 

 

       185,502

 

 

 

       103,866

 

  

Net utility plant

 

 

3,607,078

 

 

 

3,425,015

 

 

 

 

 

 

 

 

 

 

Non-utility property, net

 

 

146,079

 

 

 

154,963

 

 

 

 

 

 

 

 

 

 

Equity and other investments

 

 

75,416

 

 

 

72,983

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

  

Cash and cash equivalents

 

 

14,764

 

 

 

12,497

 

  

Restricted cash

 

 

14,979

 

 

 

10,254

 

  

Accounts receivable, net and accrued unbilled revenues

 

 

360,505

 

 

 

355,946

 

  

Regulatory assets

 

 

355,845

 

 

 

300,238

 

  

Inventory, at average cost

 

 

109,086

 

 

 

86,397

 

 

Income taxes

 

 

86,497

 

 

 

21,063

 

  

Other

 

 

        11,900

 

 

 

         11,434

 

  

  

Total current assets

 

 

      953,576

 

 

 

       797,829

 

 

 

 

 

 

 

 

 

 

Deferred debits:

 

 

 

 

 

 

 

 

  

Regulatory assets - power contracts

 

 

707,065

 

 

 

1,269,651

 

 

Regulatory asset - goodwill

 

 

663,578

 

 

 

678,698

 

  

Regulatory assets - retiree benefit costs

 

 

18,145

 

 

 

11,897

 

  

Regulatory assets - other

 

 

954,755

 

 

 

595,140

 

 

Prepaid pension

 

 

313,321

 

 

 

297,746

 

  

Other

 

 

        80,540

 

 

 

         87,434

 

  

    Total deferred debits

 

 

   2,737,404

 

 

 

    2,940,566

 

 

 

 

 

 

 

 

 

 

 

    Total assets

 

$

7,519,553 ========

 

 

$

7,391,356 ========

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

Table of Contents

 

NSTARCondensed Consolidated Balance Sheets(Unaudited)(in thousands)

 

  

 

 

 

   

 

 

 

 

  

 

September 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

  

 

811,861

 

   

 

819,454

 

  Retained earnings

  

 

582,795

 

   

 

518,252

 

  Accumulated other comprehensive loss

  

 

          (3,374

)

   

 

         (3,374

)

    Total common equity

  

 

    1,498,090

 

   

 

   1,440,882

 

 

  

 

 

 

   

 

 

 

Cumulative non-mandatory redeemable preferred

  

 

 

 

   

 

 

 

  stock of subsidiary

  

 

         43,000

 

   

 

        43,000

 

 

 

  

 

 

 

   

 

 

 

 

 

  

 

 

 

   

 

 

 

Long-term debt

  

 

1,636,552

 

   

 

1,792,654

 

Transition property securitization

  

 

       787,966

 

   

 

      308,748

 

  Total long-term debt

  

 

    2,424,518

 

   

 

   2,101,402

 

     Total capitalization

  

 

    3,965,608

 

   

 

   3,585,284

 

 

  

 

 

 

   

 

 

 

Current liabilities:

  

 

 

 

   

 

 

 

  Long-term debt

  

 

108,803

 

   

 

108,197

 

  Transition property securitization

  

 

138,546

 

   

 

41,048

 

  Notes payable

  

 

148,500

 

   

 

161,400

 

  Deferred income taxes

  

 

11,047

 

   

 

8,072

 

  Accounts payable

  

 

277,234

 

   

 

239,613

 

  Power contracts

 

 

176,064

 

 

 

171,312

 

  Accrued expenses

  

 

      253,971

 

   

 

       231,490

 

    Total current liabilities

  

 

   1,114,165

 

   

 

       961,132

 

 

  

 

 

 

   

 

 

 

 

  

 

 

 

   

 

 

 

Deferred credits:

  

 

 

 

   

 

 

 

  Accumulated deferred income taxes and unamortized

  

 

 

 

   

 

 

 

    investment tax credits

  

 

1,265,163

 

   

 

1,114,588

 

  Power contracts

  

 

707,065

 

   

 

1,269,651

 

  Pension liability

  

 

32,657

 

   

 

31,296

 

  Regulatory liability - cost of removal

 

 

266,331

 

 

 

258,722

 

  Other

  

 

      168,564

 

   

 

       170,683

 

      Total deferred credits

  

 

   2,439,780

 

   

 

    2,844,940

 

 

  

 

 

 

   

 

 

 

Commitments and contingencies

  

 

 

 

   

 

 

 

 

  

 

 

 

   

 

 

 

  Total capitalization and liabilities

  

$

7,519,553 ========

 

   

$

    7,391,356 ========

 

 

 

 

 

 

 

 

 

 

 

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)

 

 

 

Nine Months Ended

 

 

 

 

September 30,

 

Operating activities:

  

 

2005

 

  

 

2004

 

  Net income

  

$

157,430

 

  

$

150,522

 

  Adjustments to reconcile net income to net cash

  

 

 

 

  

 

 

 

    (used in) provided by operating activities:

  

 

 

 

  

 

 

 

    Depreciation and amortization

  

 

250,180

 

  

 

193,183

 

    Deferred income taxes

  

 

164,939

 

  

 

31,795

 

    AFUDC

  

 

(2,560

)

  

 

(858

)

    Gain on sale of steam assets

 

 

(2,564

)

 

 

-

 

  Net changes in:

  

 

 

 

  

 

 

 

    Accounts receivable and accrued unbilled revenues

  

 

(4,559

)

  

 

(10,112

)

    Accounts payable

  

 

47,217

 

  

 

(37,640

)

    Other current assets

  

 

(144,171

)

  

 

2,903

 

    Other current liabilities

  

 

27,975

 

  

 

92,322

 

  Effects of purchase power contract buy-outs

 

 

(554,270

)

 

 

-

 

  Net change from other operating activities

  

 

    40,454

 

  

 

 (81,989

)

Net cash (used in) provided by operating activities

  

 

   (19,929

)

  

 

340,126

 

 

  

 

 

 

  

 

 

 

Investing activities:

  

 

 

 

  

 

 

 

  Plant expenditures (excluding AFUDC)

  

 

(280,203

)

  

 

(198,600

)

  Increase in restricted cash

 

 

(4,725

)

 

 

(1,369

)

  Proceeds from sale of property

 

 

5,500

 

 

 

14,252

 

  Investments

  

 

     (2,537

)

  

 

    (3,412

)

Net cash used in investing activities

  

 

 (281,965

)

  

 

(189,129

)

 

 

  

 

 

 

  

 

 

 

Financing activities:

  

 

 

 

  

 

 

 

  Long-term debt redemptions

  

 

(156,408

)

  

 

(187,213

)

  Transition property securitization redemptions

  

 

(97,784

)

  

 

(51,166

)

  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

  

 

(12,900

)

  

 

(118,900

)

  Change in disbursement accounts

 

 

(9,596

)

 

 

(6,464

)

  Common stock issuance

 

 

7,146

 

 

 

3,965

 

  Dividends paid

  

 

   (94,284

)

  

 

  (89,817

)

Net cash provided by (used in) financing activities

  

 

  304,161

 

  

 

(151,446

)

 

  

 

 

 

  

 

 

 

Net increase (decrease) in cash and cash equivalents

  

 

2,267

 

  

 

(449

)

Cash and cash equivalents at the beginning of the year

  

 

    12,497

 

  

 

   16,526

 

Cash and cash equivalents at the end of the period

 

$

14,764

 

 

$

16,077

 

Supplemental disclosures of cash flow information:

  

 

=======

 

  

 

======

 

Cash paid during the period for:

  

 

 

 

  

 

 

 

  Interest, net of amounts capitalized

  

$

122,344

 

  

$

108,361

 

  Income taxes, net of refunds

  

$

5,144

 

  

$

3,680

 

 

 

 

 

 

 

 

 

 

Noncash financing activity:

 

 

 

 

 

 

 

 

  Noncash common stock issuance

 

$

-

 

 

$

4,063

 

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 context requires.  NSTARalso has ownership interests in and conducts non-utility, unregulated operations.

2.  Basis of Consolidation and Accounting

The financial information presented as of September 30, 2005 and for the three and nine-month periods ended September 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.  Effective September 30, 2005, NSTAR has changed itsclassification of goodwill to a regulatory asset on the accompanying Condensed Consolidated Balance Sheets.  For more information, refer to Note L.  Certain other immaterial reclassifications have been made to the prior year amounts to conform with thecurrent 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).   Theapplication 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 criteria forapplication 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 nine-month periods ended September 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 inthe winter 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 Incentive Plan. 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.  The followingtable 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 AccountingStandards," for more information on a revision to SFAS 123.

 

 

Three Months Ended

 

 

 

Nine Months Ended

 

 

 

 

September 30,

 

 

 

September 30,

 

(in thousands, except earnings per common share amounts)

 

 

2005

 

 

 

2004

 

 

 

2005

 

 

 

2004

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income, as reported

 

$

78,010

 

 

$

   63,281

 

 

$

157,430

 

 

$

   150,522

 

Add: Share grant incentive compensation expense included

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   in reported net income, net of related tax effects

 

 

983

 

 

 

696

 

 

 

2,389

 

 

 

1,914

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deduct: Total share grant and stock option compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   expense determined under fair value method for all

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   awards, net of related tax effects

 

 

(1,208

)

 

 

      (917

)

 

 

(2,975

)

 

 

     (2,523

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pro forma net income

 

$

77,785 =====

 

 

$

63,060 =====

 

 

$

156,844 =====

 

 

$

149,913 =====

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Basic - as reported

 

$

0.73

 

 

$

0.60

 

 

$

1.47

 

 

$

1.42

 

   Basic - pro forma

 

$

0.73

 

 

$

0.60

 

 

$

1.47

 

 

$

1.41

 

   Diluted - as reported

 

$

0.72

 

 

$

0.59

 

 

$

1.46

 

 

$

1.40

 

   Diluted - pro forma

 

$

0.72

 

 

$

0.58

 

 

$

1.46

 

 

$

1.40

 

 

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 nine months of 2005, NSTAR contributed approximately $35 million to the Plan.  TheCompany does not currently anticipate contributing additional amounts to the Plan over the remaining three 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

 

 

 

Nine Months Ended

 

 

 

 

September 30,

 

 

 

September 30,

 

(in millions)

 

 

2005

 

 

 

2004

 

 

 

2005

 

 

 

2004

 

Service cost

 

$

5.2

 

 

$

4.8

 

 

$

15.5

 

 

$

14.3

 

Interest cost

 

 

14.4

 

 

 

15.0

 

 

 

43.2

 

 

 

45.1

 

Expected return on Plan assets

 

 

(18.6

)

 

 

(17.7

)

 

 

(55.8

)

 

 

(53.1

)

Amortization of transition obligation

 

 

-

 

 

 

0.1

 

 

 

-

 

 

 

0.3

 

Amortization of prior service cost

 

 

-

 

 

 

-

 

 

 

0.1

 

 

 

0.1

 

Recognized actuarial loss

 

 

        6.6

 

 

 

      6.8

 

 

 

       19.7

 

 

 

      20.2

 

   Net periodic pension benefit cost

 

$

7.6 =====

 

 

$

9.0 ====

 

 

$

22.7 ====

 

 

$

26.9 =====

 

 

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 nine months of 2005, NSTAR contributed approximately $16 million toward these benefits.  The Company anticipates contributing an additional $4 million for these benefits over the remaining three months of2005.

Components of net periodic postretirement benefits cost were as follows:

 

 

Three Months Ended

 

 

 

Nine Months Ended

 

 

 

 

September 30,

 

 

 

September 30,

 

(in millions)

 

 

2005

 

 

 

2004

 

 

 

2005

 

 

 

2004

 

Service cost

 

$

1.4

 

 

$

1.5

 

 

$

4.3

 

 

$

4.4

 

Interest cost

 

 

8.3

 

 

 

8.3

 

 

 

25.0

 

 

 

25.0

 

Expected return on Plan assets

 

 

(6.3

)

 

 

(5.9

)

 

 

(18.8

)

 

 

(17.8

)

Amortization of transition obligation

 

 

2.9

 

 

 

0.5

 

 

 

8.3

 

 

 

1.3

 

Amortization of prior service cost

 

 

0.1

 

 

 

0.3

 

 

 

0.2

 

 

 

1.0

 

Recognized actuarial loss

 

 

       0.3

 

 

 

       2.3

 

 

 

      1.0

 

 

 

     7.2

 

   Net periodic postretirement benefit cost

 

$

6.7 ====

 

 

$

7.0 ====

 

 

$

20.0 =====

 

 

$

21.1 ====

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 contained 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 an 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 to recognizea 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 on eventsoccurring 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 have on itsconsolidated financial position and results of operation.

In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections" (SFAS 154).  This Standard is effective January 1, 2006 and it changes the requirements for the accounting for and reporting of accountingchanges and error corrections.  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 applicationrequires the application of the new accounting principle to prior periods as if that principle had always been used.  NSTAR will adopt this Standard.

**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 ofSeptember 30, 2005 and December 31, 2004, the estimated amount of the cost of removal included in regulatory liabilities was approximately $266 million and $259 million, respectively, based on the cost of removalcomponent incurrent historic depreciation 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 September 30, 2005, NSTAR does not have anycontracts which 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. These four contracts had a fair value of approximately $472 million at December 31, 2004 and were therefore removed as a derivative instrument from Deferred credits - Power contracts, along with the offsetting regulatory asset, on the accompanying CondensedConsolidated Balance 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 concluded that BEC Funding II, LLC and CEC Funding, LLC are variable interest entities and therefore have been consolidated in the accompanyingconsolidated financial statements.

**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 is reviewing this filing and will likely issue an order prior to December 31, 2005.

As of September 30, 2005, NSTAR anticipates that for 2005, two of its electric subsidiaries' are likely to be in a combined penalty position ranging from $0.3 million to $0.4 million relating to their applicable performancebenchmarks.   This penalty position is primarily caused by the severe winter storms experienced earlier in the year. As a result, NSTAR has recorded a liability of this potential obligation.  Since 2001, NSTAR Electric and NSTAR Gas have not been in apenalty position and therefore, the current performance is not indicative of prior years' results.

Recently, the MDTE initiated a proceeding to potentially modify 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 temporary differencesbetween the carrying amounts and the tax basis of assets and liabilities.  In accordance with SFAS 71 and SFAS 109, net regulatory assets of $49.6 million and $50.3 million and corresponding net increases in accumulated deferred income taxes were recorded as ofSeptember 30, 2005 and December 31, 2004, respectively.  The regulatory assets represent the additional future revenues to be collected from customers for deferred income taxes.

On October 20, 2005, NSTAR received its final Internal Revenue Service Agent's Reports for 2001 and 2002.  As a result of these Reports, as of September 30, 2005, NSTAR recognized a reduction of $4.2 million in accumulated deferredincome tax liability on the accompanying Condensed Consolidated Balance Sheets and a corresponding reduction to income tax expense.

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

 

 

4.8

 

 

 

3.9

 

Investment tax credits

 

 

(0.5

)

 

 

(0.6

)

ESOP dividend deduction

 

 

(0.9

)

 

 

(0.7

)

Other

 

 

     (1.1

)

 

 

      1.1

 

  Effective tax rate

 

 

37.3 =====

%

 

 

38.7 =====

%

**Note G.  Capital Stock**

At NSTAR's Annual Meeting of Shareholders held on April 28, 2005, shareholders approved an increase in the number of the Company's authorized shares from 100 million to 200 million.   Subsequently, the Board of Trustees approved atwo-for-one stock split of NSTAR'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 stockdividend was to increase the number of outstanding common shares and to reduce the per share stock price thereby making it more accessible to investors.  Common equity, common shares, and stock option activity for all periods presented have been restated to giveretroactive 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, and per share amounts of the Company's common shares have beenrestated 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

 

 

 

Nine Months Ended

 

 

 

 

September 30,

 

 

 

September 30,

 

(in thousands, except per share amounts)

 

 

2005

 

 

 

2004

 

 

 

2005

 

 

 

2004

 

Net income

 

$

78,010

 

 

$

63,281

 

 

$

157,430

 

 

$

150,522

 

   Basic EPS

 

$

0.73

 

 

$

0.60

 

 

$

1.47

 

 

$

1.42

 

   Diluted EPS

 

$

0.72

 

 

$

0.59

 

 

$

1.46

 

 

$

1.40

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   outstanding for basic EPS

 

 

106,808

 

 

 

106,336

 

 

 

106,738

 

 

 

106,191

 

Effect of diluted shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average dilutive potential common shares

 

 

        918

 

 

 

      1,060

 

 

 

        829

 

 

 

       986

 

Weighted average common shares outstanding for diluted EPS

 

 

 107,726 =====

 

 

 

 107,396 =====

 

 

 

 107,567 =====

 

 

 

 107,177 =====

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**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 began 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 towns inMassachusetts.  The unregulated operating segment engages in business activities that include district energy operations, telecommunications and a liquefied natural gas service.  Amounts shown on the following table for the three and nine-month periodsended September 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 September 30,

 

 

 

 

 

 

 

 

 

 

 

 

2005

 

 

 

 

 

 

 

 

 

 

 

 

Operating revenues

$

758,736

 

$

64,132

 

$

35,627

 

$

858,495

 

Segment net income (loss)

$

78,576

 

$

(3,480

)

$

2,914

 

$

78,010

 

2004

 

 

 

 

 

 

 

 

 

 

 

 

Operating revenues

$

698,072

 

$

57,753

 

$

25,685

 

$

781,510

 

Segment net income (loss)

$

65,888

 

$

(3,769

)

$

1,162

 

$

63,281

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30,

 

 

 

 

 

 

 

 

 

 

 

 

2005

 

 

 

 

 

 

 

 

 

 

 

 

Operating revenues

$

1,965,651

 

$

362,217

 

$

102,677

 

$

2,430,545

 

Segment net income

$

136,770

 

$

13,888

 

$

6,772

 

$

157,430

 

2004

 

 

 

 

 

 

 

 

 

 

 

 

Operating revenues

$

1,818,071

 

$

339,950

 

$

83,184

 

$

2,241,205

 

Segment net income

$

129,592

 

$

15,188

 

$

5,742

 

$

150,522

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2005

$

6,639,750

 

$

682,349

 

$

197,454

 

$

7,519,553

 

December 31, 2004

$

6,493,187

 

$

696,710

 

$

201,459

 

$

7,391,356

 

 

**Note K.  Electric Equity Investment**

NSTAR Electric collectively has an equity ownership interest of 4% in Maine Yankee Atomic Power Company (MY).  On October 3, 2005, MY was notified by the U.S. Nuclear Regulatory Commission (NRC) that its former plant site has beendecommissioned in accordance with NRC procedures.  The NRC has amended MY's license, reducing the land under the license from approximately 179 acres to the 12 acre Independent Spent Fuel Storage Installation (ISFSI) that includes a dry cask storage facility,and marks the first time a commercial nuclear power plant in the United States has been fully decommissioned with all plant buildings removed.  MY's amended license will continue to apply to the ISFSI where spent nuclear fuel from the plant's 23 years ofoperation is stored.  MY remains responsible for the security and protection of the ISFSI and is required to maintain a radiation monitoring program at the site.

During the course of carrying out the decommissioning work, the Yankee Atomic Electric Company (YA) has identified increases in the scope of soil and other remediation required to meet environmental standards, beyond the levels assumedin the 2003 Estimate.  YA is continuing to evaluate the impact of the additional requirements on its decommissioning plan.  While that evaluation is not complete, as of October 27, 2005, YA has determined that the schedule for the completion of physicalwork will need to extend until mid-2006 and the costs of completing decommissioning will be approximately $63 million greater than the estimate that formed the basis of the 2003 FERC settlement.  Based on this allocation increase, NSTAR Electric is obligated topay $8.8 million to the decommissioning of YA.  Most of the cost increase relates to decommissioning expenditures that will be made during 2006.  In order to fund these additional costs, YA is preparing an application to FERC for increased decommissioningcharges to go into effect in early 2006, subject to FERC approval.  The timing and amount of the FERC application and the ultimate increase in decommissioning costs are under development, but YA expects that it will seek rate recovery of a significant componentof this increase in expenditures during 2006.
****
**Note L.  Change in Classification of Goodwill**

In the third quarter of 2005, NSTAR changed its classification of the amount included as Goodwill in the December 31, 2004 Consolidated Balance Sheet of $415.5 million to a Deferred debit - Regulatory asset -- goodwill.  As aresult of this change in classification to a regulatory asset and in accordance with the requirements of SFAS 109, "Accounting for Income Taxes," the Company recognized $268.2 million of accumulated deferred income taxes along with an offsetting regulatory asset asof September 30, 2005.  The new classification of goodwill was adopted to better align with the Company's recovery of goodwill amortization from customers.   For comparative purposes, NSTAR has adopted the new classification retrospectively to the financialstatements of prior periods.  The regulatory asset, representing the accumulated deferred income taxes, will be amortized over the remaining life of the regulatory asset -- goodwill in accordance with the Company's merger rate order allowing recovery of goodwillamortization and amounts to approximately $7.9 million annually.  This additional amortization expense is entirely offset by a corresponding deferred income tax - benefit.

The Company's goodwill arose from the merger that created NSTAR in 1999.  As a result of a rate order from the MDTE approving the merger, the Company is recovering goodwill from its customers and, therefore, NSTAR has determinedthat this rate structure allows for amortization of goodwill over the collection period.

This classification change had no effect on prior year earnings and, therefore, there has been no change to previously reported retained earnings.

A summary of the impact of the classification change as of and for the three and six month periods ended March 31, 2005 and June 30, 2005, respectively, is as follows: (in thousands)

 

Three Month Period Ended March 31, 2005

 

 

 

 

 

 

 

 

 

 

 

 

   

 

Previously Reported

   

 

As   Adjusted

   

 

Effect of Change

 

Condensed Consolidated Income Statement

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

$

74,743

 

$

76,720

 

$

1,977

 

Income taxes

 

 

29,799

 

 

27,822

 

 

(1,977

)

 

 

 

 

 

 

 

 

 

 

 

 

   

 

Previously Reported

   

 

As   Adjusted

   

 

Effect of Change

 

Condensed Consolidated Statement of Cash Flows

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

$

75,047

 

$

77,024

 

$

1,977

 

Deferred income taxes

 

 

214,807

 

 

212,830

 

 

(1,977

)

 

 

 

March 31, 2005

 

   

 

Previously Reported

   

 

As   Adjusted

   

 

Effect of Change

 

Condensed Consolidated Balance Sheet

 

 

 

 

 

 

 

 

 

 

Goodwill

 

$

423,807

 

$

-

 

$

(423,807

)

Current regulatory asset

 

 

405,144

 

 

425,304

 

 

20,160

 

Deferred debit regulatory asset - goodwill

 

 

-

 

 

673,658

 

 

673,658

 

Accumulated deferred income taxes

 

 

1,056,197

 

 

1,328,347

 

 

272,150

 

 

 

 

Three Month Period Ended June 30, 2005

 

 

 

 

 

 

 

 

 

 

 

 

   

 

Previously Reported

   

 

As   Adjusted

   

 

Effect of Change

 

Condensed Consolidated Income Statement

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

$

84,849

 

$

86,826

 

$

1,977

 

Income taxes

 

 

21,147

 

 

19,170

 

 

(1,977

)

 

 

 

Six Month Period Ended June 30, 2005

 

 

 

 

 

 

 

 

 

 

 

 

   

 

Previously Reported

   

 

As   Adjusted

   

 

Effect of Change

 

Condensed Consolidated Income Statement

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

$

159,592

 

$

163,546

 

$

3,954

 

Income taxes

 

 

50,946

 

 

46,992

 

 

(3,954

)

 

 

 

 

 

 

 

 

 

 

 

 

   

 

Previously Reported

   

 

As   Adjusted

   

 

Effect of Change

 

Condensed Consolidated Statement of Cash Flows

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

$

160,200

 

$

164,154

 

$

3,954

 

Deferred income taxes

 

 

198,497

 

 

194,543

 

 

(3,954

)

 

 

 

June 30, 2005

 

   

 

Previously Reported

   

 

As   Adjusted

   

 

Effect of Change

 

Condensed Consolidated Balance Sheet

 

 

 

 

 

 

 

 

 

 

Goodwill

 

$

420,744

 

$

-

 

$

(420,744

)

Current regulatory asset

 

 

366,945

 

 

387,105

 

 

20,160

 

Deferred debit regulatory asset - goodwill

 

 

-

 

 

668,618

 

 

668,618

 

Accumulated deferred income taxes

 

 

1,036,516

 

 

1,306,689

 

 

270,173

 

 

A summary of the impact of the classification change as of and for the three and six month periods ended March 31, 2004 and June 30, 2004, respectively, is as follows: (in thousands)

 

Three Month Period Ended March 31, 2004

 

 

 

 

 

 

 

 

 

 

 

 

   

 

Previously Reported

   

 

As   Adjusted

   

 

Effect of Change

 

Condensed Consolidated Income Statement

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

$

65,539

 

$

67,516

 

$

1,977

 

Income taxes

 

 

33,070

 

 

31,093

 

 

(1,977

)

 

 

 

 

 

 

 

 

 

 

 

 

   

 

Previously Reported

   

 

As   Adjusted

   

 

Effect of Change

 

Condensed Consolidated Statement of Cash Flows

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

$

65,724

 

$

67,701

 

$

1,977

 

Deferred income taxes

 

 

37,282

 

 

35,305

 

 

(1,977

)

 

 

 

March 31, 2004

 

   

 

Previously Reported

   

 

As   Adjusted

   

 

Effect of Change

 

Condensed Consolidated Balance Sheet

 

 

 

 

 

 

 

 

 

 

Goodwill

 

$

436,059

 

$

-

 

$

(436,059

)

Deferred debit regulatory asset - goodwill

 

 

-

 

 

693,818

 

 

693,818

 

Accumulated deferred income taxes

 

 

778,313

 

 

1,058,371

 

 

280,058

 

 

 

 

Three Month Period Ended June 30, 2004

 

 

 

 

 

 

 

 

 

 

 

 

   

 

Previously Reported

   

 

As   Adjusted

   

 

Effect of Change

 

Condensed Consolidated Income Statement

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

$

61,057

 

$

63,034

 

$

1,977

 

Income taxes

 

 

24,832

 

 

22,855

 

 

(1,977

)

 

 

 

Six Month Period Ended June 30, 2004

 

 

 

 

 

 

 

 

 

 

 

 

   

 

Previously Reported

   

 

As   Adjusted

   

 

Effect of Change

 

Condensed Consolidated Income Statement

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

$

126,596

 

$

130,550

 

$

3,954

 

Income taxes

 

 

57,902

 

 

53,948

 

 

(3,954

)

 

 

 

 

 

 

 

 

 

 

 

 

   

 

Previously Reported

   

 

As   Adjusted

   

 

Effect of Change

 

Condensed Consolidated Statement of Cash Flows

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

$

126,983

 

$

130,937

 

$

3,954

 

Deferred income taxes

 

 

51,829

 

 

47,875

 

 

(3,954

)

 

 

 

June 30, 2004

 

   

 

Previously Reported

   

 

As   Adjusted

   

 

Effect of Change

 

Condensed Consolidated Balance Sheet

 

 

 

 

 

 

 

 

 

 

Goodwill

 

$

432,996

 

$

-

 

$

(432,996

)

Deferred debit regulatory asset - goodwill

 

 

-

 

 

688,778

 

 

688,778

 

Accumulated deferred income taxes

 

 

785,187

 

 

1,063,268

 

 

278,081

 

 

A summary of the impact of the classification change as of and for the three and nine month periods ended September 30, 2004 and for the years ended December 31, 2004, 2003 and 2002 is as follows: (in thousands)

 

 

Three Month Period Ended September 30, 2004

 

 

 

 

 

 

 

 

 

 

 

 

   

 

Previously Reported

   

 

As   Adjusted

   

 

Effect of Change

 

Condensed Consolidated Income Statement

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

$

60,075

 

$

62,052

 

$

1,977

 

Income taxes

 

 

43,181

 

 

41,204

 

 

(1,977

)

 

 

 

Nine Month Period Ended September 30, 2004

 

 

 

 

 

 

 

 

 

 

 

 

   

 

Previously Reported

   

 

As   Adjusted

   

 

Effect of Change

 

Condensed Consolidated Income Statement

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

$

186,671

 

$

192,602

 

$

5,931

 

Income taxes

 

 

101,083

 

 

95,152

 

 

(5,931

)

 

 

 

Nine Month Period Ended September 30, 2004

 

 

 

 

 

 

 

 

 

 

 

 

   

 

Previously Reported

   

 

As   Adjusted

   

 

Effect of Change

 

Condensed Consolidated Statement of Cash Flows

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

$

187,252

 

$

193,183

 

$

5,931

 

Deferred income taxes

 

 

37,726

 

 

31,795

 

 

(5,931

)

 

 

 

September 30, 2004

 

   

 

Previously Reported

   

 

As   Adjusted

   

 

Effect of Change

 

Condensed Consolidated Balance Sheet

 

 

 

 

 

 

 

 

 

 

Goodwill

 

$

429,933

 

$

-

 

$

(429,933

)

Deferred debit regulatory asset - goodwill

 

 

-

 

 

683,738

 

 

683,738

 

Accumulated deferred income taxes

 

 

801,409

 

 

1,077,513

 

 

276,104

 

 

 

 

Year Ended December 31, 2004

 

 

 

 

 

 

 

 

 

 

 

 

   

 

Previously Reported

   

 

As   Adjusted

   

 

Effect of Change

 

Consolidated Income Statement

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

$

246,944

 

$

254,852

 

$

7,908

 

Income taxes

 

 

116,238

 

 

108,330

 

 

(7,908

)

 

 

 

 

 

 

 

 

 

 

 

 

   

 

Previously Reported

   

 

As   Adjusted

   

 

Effect of Change

 

Consolidated Statement of Cash Flows

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

$

246,363

 

$

254,271

 

$

7,908

 

Deferred Income taxes

 

 

79,570

 

 

71,662

 

 

(7,908

)

 

 

 

December 31, 2004

 

   

 

Previously Reported

   

 

As   Adjusted

   

 

Effect of Change

 

Consolidated Balance Sheet

 

 

 

 

 

 

 

 

 

 

Goodwill

 

$

426,870

 

$

-

 

$

(426,870

)

Current regulatory asset

 

 

280,078

 

 

300,238

 

 

20,160

 

Deferred debit regulatory asset - goodwill

 

 

-

 

 

678,698

 

 

678,698

 

Accumulated deferred income taxes

 

 

840,461

 

 

1,114,588

 

 

274,127

 

 

 

 

Year Ended December 31, 2003

 

 

 

 

 

 

 

 

 

 

 

 

   

 

Previously Reported

   

 

As   Adjusted

   

 

Effect of Change

 

Consolidated Income Statement

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

$

235,516

 

$

243,424

 

$

7,908

 

Income taxes

 

 

121,409

 

 

113,501

 

 

(7,908

)

 

 

 

 

 

 

 

 

 

 

 

 

   

 

Previously Reported

   

 

As   Adjusted

   

 

Effect of Change

 

Consolidated Statement of Cash Flows

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

$

236,336

 

$

244,244

 

$

7,908

 

Deferred income taxes

 

 

128,379

 

 

120,471

 

 

(7,908

)

 

 

 

December 31, 2003

 

   

 

Previously Reported

   

 

As   Adjusted

   

 

Effect of Change

 

Consolidated Balance Sheet

 

 

 

 

 

 

 

 

 

 

Goodwill

 

$

439,122

 

$

-

 

$

(439,122

)

Current regulatory asset

 

 

142,182

 

 

162,342

 

 

20,160

 

Deferred debit regulatory asset - goodwill

 

 

-

 

 

698,858

 

 

698,858

 

Accumulated deferred income taxes

 

 

765,507

 

 

1,047,542

 

 

282,035

 

 

 

 

Year Ended December 31, 2002

 

 

 

 

 

 

 

 

 

 

 

 

   

 

Previously Reported

   

 

As   Adjusted

   

 

Effect of Change

 

Consolidated Income Statement

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

$

239,233

 

$

247,141

 

$

7,908

 

Income taxes

 

 

107,113

 

 

99,205

 

 

(7,908

)

 

 

 

 

 

 

 

 

 

 

 

 

   

 

Previously Reported

   

 

As   Adjusted

   

 

Effect of Change

 

Consolidated Statement of Cash Flows

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

$

239,800

 

$

247,708

 

$

7,908

 

Deferred income taxes

 

 

(13,311

)

 

(21,219

)

 

(7,908

)

 

 

December 31, 2002

 

   

 

Previously Reported

   

 

As   Adjusted

   

 

Effect of Change

 

Consolidated Balance Sheet

 

 

 

 

 

 

 

 

 

 

Goodwill

 

$

451,374

 

$

-

 

$

(451,374

)

Deferred debit regulatory asset - goodwill

 

 

-

 

 

739,016

 

 

739,016

 

Accumulated deferred income taxes

 

 

675,881

 

 

965,823

 

 

289,942

 

 

**Note M.  Commitments and Contingencies**

1.  Environmental Matters

NSTAR subsidiaries face possible liabilities as a result of involvement in several multi-party disposal sites, state-regulated sites or third party claims associated with contamination remediation.  NSTAR generally expects to haveonly a small percentage of the total potential liability for the majority of 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 a decision favorable to Boston Edisonthat put the burden of proof on the plaintiffs to determine Boston Edison's liability for contamination.  The SJC's decision reversed the Superior Court's 2004 ruling and held that the plaintiffs in this matter are allowed to seek joint and several liabilityagainst the defendants, including Boston Edison.  The case was remanded back to the Superior Court for trial.  On October 6, 2005, Boston Edison   reached a tentative settlement in principle with the plaintiffs in this matter.  It is anticipatedthat the appropriate settlement documents will be filed with the Superior Court for approval during the fourth quarter of 2005.  The Boston Edison settlement payment is within the amount previously reserved for this matter.  Boston Edison will vigorouslyattempt to recover monies from the other responsible third parties, including recovery from its insurance carrier.

Asof September 30, 2005 and December 31, 2004, NSTAR had reserves of $10.9 million and $3.9 million, respectively, for all potential environmental sites, including the site specified in the paragraphabove.   This estimated 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 willrecover, at a minimum, approximately $2 million from other parties.   As a result, Boston Edison recorded an asset in the second quarter that will ultimately offset the Company's obligation.  Management believes that the ultimate disposition of thismatter will not have a material adverse impact on NSTAR's results of operation, cash flows or its financial position.

NSTAR Gas is participating in the assessment or remediation of certain 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 September 30, 2005 and December 31, 2004, NSTAR recorded a liability of approximately$4.9 million 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 raterecovery for these costs.

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

2.  Capital Spending Commitments

In the second quarter of 2005, NSTAR began construction of a substation in Stoughton, Massachusetts and a 345kV transmission line that will connect the substation to South Boston.  As of September 30, 2005, construction that ispart of this project is also in progress on two other substations.  To date, this project is approximately 40% complete.  This transmission line is expected to ensure continued reliability of electric service and improve power import capability in theNortheast Massachusetts area.  This project is expected to be placed in service during the summer of 2006.  A substantial portion of the cost of this project will be shared by other utilities in New England based on ISO-New England's approval and will berecovered by NSTAR through wholesale and retail transmission rates.  As of September 30, 2005, NSTAR has contractual construction cost commitments of approximately $35 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 October19, 2005, the MDTE approved a settlement agreement between Cambridge Electric, ComElectric and the Attorney General of the Commonwealth of Massachusetts to resolve issues relating to the reconciliation of transition, standard offer and default service costs for 2003and 2004.  This settlement agreement had no material effect on NSTAR's consolidated results of operations, cash flows and financial condition for a reporting period.  The reconciliation of transmission costs and revenues was not resolved by settlement andwill be decided by the MDTE after a hearing.

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 for 2004 consistent with the rate adjustment mechanism.

Cambridge Electric and ComElectric filed proposed changes to their Open Access Transmission Tariff (OATT) with the Federal Energy Regulatory Commission (FERC) on March 30, 2005 to provide for consistent application of the OATT among allNSTAR Electric companies.  The new tariffs became effective on June 1, 2005; however, the FERC set issues raised in the proceeding for hearing.  Settlement discussions with an intervener and the Attorney General of the Commonwealth of Massachusetts areongoing.

As previously disclosed, a joint return on equity (ROE) filing was made by participating New England Transmission Owners, including NSTAR Electric, with the FERC.   Among other things, the filing requested an increase in the baseROE 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 regional rates as an incentive to build newtransmission facilities.  FERC accepted the 50 basis point adder for regional rates, and set for hearing the base ROE and the 100 basis point incentive adder for new transmission.  Settlement negotiations before an administrative law judge were unsuccessfuland hearings were held in early 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 should only applyto 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 is reviewing the judge's findings and recommendations and is expected to make a finaldetermination later in November 2005.

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.  FERCsubsequently revised this date to no earlier than October 2006.  The new LICAP 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 capacitylocated 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 isimport-constrained and could potentially see higher capacity prices than the 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 transmissionconstraints causing capacity prices between NEMA and ROP to converge, which could ultimately render this locational aspect of LICAP a minimal factor for NSTAR customers.  However, since the new market rules require that a certain amount of capacity be procuredin the NEMA zone, these requirements could impact pricing for capacity in the NEMA zone.  Additionally, many of the generators in the NEMA zone have filed with the FERC for cost of service-type agreements called Reliability Must Run agreements for the recoveryof their costs prior to the implementation of LICAP.  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 arelatively low price.  One of the goals of LICAP 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'scustomers without any assurance that new capacity will be built.  As a result, NSTAR (and other parties) have appealed the FERC's LICAP decision in federal court.  Additionally, while LICAP has been approved by FERC, the specific parameters of the capacitypricing mechanism are still part of a contested hearing at FERC.  A final decision on these matters is expected sometime in 2006.  On October 21, 2005, FERC issued an Interim Order Regarding Settlement Procedures and Directing Compliance Filing.  Inthis Order, the FERC gives the parties in this proceeding a further opportunity to pursue settlement on an alternative to the LICAP mechanism.  FERC further directed that a settlement judge be appointed to manage the process.   NSTAR cannot predict theactual impact these changes will have on NSTAR Electric and its customers, but expects all costs incurred to be fully recoverable.

c.  Legal Matters

In the normal course of its business, NSTAR and its subsidiaries are involved in certain legal matters, including civil litigation.  Management is unable to fully determine a range of reasonably possible court-ordered damages,settlement amounts, and related litigation costs ("legal liabilities") that would be in excess of amounts accrued and amounts covered by insurance, except for the item disclosed in Note M, Part 1, "Environmental Matters."  Based on the information currentlyavailable, NSTAR does not believe that it is probable that any such legal liabilities will have a material impact on its consolidated financial position.  However, it is reasonably possible that additional legal liabilities that may result from changes incircumstances 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 isto invest in transmission and distribution assets that will align with its core competencies.

**Recent Events**

**Impact from Hurricanes**.  Hurricanes Katrina and Rita have impacted natural gas production, processing and transportation assets in the Gulf of Mexico (GOM).  None of these facilitiesare owned by NSTAR; however, NSTAR depends on resources in the GOM for supply of natural gas in addition to storage supplies which were not affected by the storms.  One of the facilities impacted is the Tennessee Gas Pipeline (TGP) 500 Line, which is currentlyout of service.  TGP's initial assessment is that this pipeline will be out of service for three to six months.  NSTAR has approximately 6% of its peak design winter need supplied by the 500 Line.  NSTAR is in the process of contracting to replace thissupply with Canadian supplies.  NSTAR is actively involved with other utilities, pipelines, suppliers and regulators in assessing the GOM supplies and will continue to respond as necessary.

In addition, it is possible that the recent unprecedented rise in energy prices, resulting from these hurricanes, may have a negative impact on NSTAR's future electric and gas sales.  NSTAR can not predict the overall impactresulting from these events on its financial positions, results of operations or cash flows.

**Regulated rates**.   On September 15, 2005, NSTAR notified the Massachusetts Department of Telecommunications and Energy (MDTE) of its intention to file new rate schedules that willconstitute general changes in rate schedules in the near future for its Boston Edison, Cambridge Electric, Commonwealth Electric and NSTAR Gas subsidiary companies.  This required procedural step taken by NSTAR has put the MDTE on notice of a futurefiling.

**Operating Results**

**Electric utility operations.**  NSTAR derives 81% 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 utility operations. **NSTAR derives 15% 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 nine-month periods endedSeptember 30, 2005amounted to $78.0 million and $157.4 million, or $0.72 and $1.46 per diluted earnings pershare as compared to $63.3 million and $150.5 million, or $0.59 and $1.40 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 with any discussion of future operating or financial performance.  These statementsare based on the current expectations, estimates or projections of management and are not guarantees of future performance.  Some or all of these forward-looking statements may not turn out to be what NSTAR expected.  Actual results could differ materiallyfrom 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 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 laws and 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 are advised, however, to consultall 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 accounting policies and estimates in thissection 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 and estimates.

**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 providedbasic service.  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 ofSeptember 30, 2005and December 31, 2004, customers of NSTAR Electric had approximately 39% 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.  Effective January 1, 2005, Boston Edison is allowed to include 50 percent of constructionwork 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.

On October 19, 2005, the MDTE approved a settlement agreement between Cambridge Electric/ComElectric and the Attorney General of the Commonwealth of Massachusetts to resolve issues relating to the reconciliation of transition, standardoffer and default service costs for 2003 and 2004 for Cambridge Electric and ComElectric.  This settlement agreement had no material effect on NSTAR's consolidated results of operations, cash flows and financial condition for a reporting period.  Thereconciliation of transmission costs and revenues was not resolved by settlement and will be decided by the MDTE after a hearing.

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 costs fromfirm 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.  In addition,NSTAR Gas is required to file interim changes to its CGAC factor when the actual costs of gas supply vary from projections by more than 5%.

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 approved.  On September 1, 2005 and on November 1, 2005, due to rapid increases in natural gasprices, the MDTE approved CGAC factors of $1.2232 per therm and $1.4570 per therm, respectively.

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 is reviewing this filing and will likely issue an order prior to December 31, 2005.

As of September 30, 2005, NSTAR anticipates that for 2005, two of its electric subsidiaries' are likely to be in a combined penalty position ranging from $0.3 million to $0.4 million relating to their applicable performancebenchmarks.   This penalty position is primarily caused by the severe winter storms experienced earlier in the year. As a result, NSTAR has recorded a liability of this potential obligation.  Since 2001, NSTAR Electric and NSTAR Gas have not been in apenalty position and therefore, the current performance is not indicative of prior years' results.

Recently, the MDTE initiated a proceeding to potentially modify 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.

**Decommissioning**

During the course of carrying out the decommissioning work, the Yankee Atomic Electric Company (YA) has identified increases in the scope of soil remediation and certain other remediation required to meet environmental standards, beyondthe levels assumed in the 2003 Estimate.  YA is continuing to evaluate the impact of the additional requirements on its decommissioning plan.  While that evaluation is not complete, as of October 27, 2005, YA has determined that the schedule for thecompletion of physical work will need to extend until mid-2006 and the costs of completing decommissioning will be approximately $63 million greater than the estimate that formed the basis of the 2003 FERC settlement.  Based on this allocation increase, NSTARElectric is obligated to pay $8.8 million to the decommissioning of YA.  Most of the cost increase relates to decommissioning expenditures that will be made during 2006.  In order to fund these additional costs, YA is preparing an application to FERC forincreased decommissioning charges to go into effect in early 2006, subject to FERC approval.  The timing and amount of the FERC application and the ultimate increase in decommissioning costs are under development, but YA expects that it will seek rate recoveryof a significant component of this increase in expenditures during 2006.

**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 year contractexpiring 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 September 30, 2005 and 2004 and should be read in conjunction with the accompanying Condensed Consolidated FinancialStatements and the accompanying Notes to Condensed Consolidated Financial Statements included elsewhere in this report.

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

Overview

Earnings per common share were as follows:

 

 

Three Months ended September 30,  

 

     

  

2005

   

  

2004

   

% Change

Basic

      

$

0.73

   

$

0.60

   

21.7

Diluted

      

$

0.72

    

$

0.59

   

22.0

Net income was $78 million for the quarter ended September 30, 2005 compared to $63.3 million for the same period in 2004.  Factors that contributed to the $14.7 million, or 23.2%, increase in 2005 earnings include:

  -  

 

Increased electric sales of 8.7% which was driven by warmer than normal summer temperatures

  -  

 

Increased transmission revenues due to higher plant investment balances

  -  

 

Decreased income tax expense of approximately $4.2 million as a result of   successful resolution of uncertain tax positions

These increases were partially offset by:

  -  

 

Higher depreciation and amortization expense, excluding amortization expense related to securitization of transition property, that also reflects higher distribution and transmission property ($1.2 million) primarily resulting fromhigher capital additions

Significant cash flow events during the quarter include the following: NSTAR invested approximately $111 million in capital projects to improve reliability (including $35.7 million for the 345 kv project), paid approximately $31.5 million in preferred and commonshare dividends and retired approximately $49.2 million in long-term debt.

Energy sales

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

Retail Electric Sales - MWH

Three Months ended September 30,

 

   

2005

   

2004

   

% Change

 

   

 

   

 

   

 

  Residential

   

1,948,254

   

1,715,035

   

13.6 

  Commercial

   

3,687,611

   

3,428,032

   

7.6

  Industrial

   

435,650

   

441,705

   

(1.4)

  Other

   

     36,809

   

     37,073

   

(0.7)

    Total retail sales

   

6,108,324 =======

   

5,621,845 =======

   

8.7 ===

 

Firm Gas Sales - BBTU

Three Months ended September 30,

 

   

2005

   

2004

   

% Change

 

   

 

   

 

   

 

  Residential

   

1,427

 

1,462

 

  (2.4)

  Commercial and other

   

1,721

 

1,667

 

3.2

  Industrial

   

          859

 

          965

 

(11.0)

    Total firm sales

   

  4,007 =======

   

  4,094 =======

   

  (2.1) ===

 

The 2.1% decrease in firm gas sales in the third quarter of 2005 primarily reflects warmer overall temperatures than in 2004.

Weather Conditions

In terms of customer sector characteristics, industrial sales are less sensitive to weather than residential and commercial sales, which are influenced by temperature extremes.  The warmer weather in the third quarter of 2005 (by26.2% over 2004) had the most favorable impact on the electric residential sector.  Commercial sales were strong also due to the warmer weather primarily due to higher air conditioning use.  For each of the three months in the quarter, NSTAR's electricdemand peak exceeded the prior year's demand for the same periods.  NSTAR's electric system experienced new all-time demand peaks on two occasions in July 2005, exceeding the previous peak that occurred in 2002 by nearly 6%.  Significant investments NSTARhas made in recent years to maintain reliability and upgrade the distribution infrastructure are crucial to maintaining system demands.  Electric residential and commercial customers represented approximately 31.9% and 60.4%, respectively, of NSTAR's totalretail sales mix for the third quarter of 2005 and provided 36.4% and 56.7% of distribution and transmission revenues, respectively.  Refer to the "Electric revenues" section below for a more detailed discussion.  Industrial sales are primarily influencedby national and local economic conditions and sales to these customers reflect a sluggish economic environment and decreased manufacturing production.

 

   

 

    

 

    

Normal

 

   

 

    

 

    

30-Year

 

   

2005

    

2004

    

Average

 

    

 

    

 

    

 

Heating degree-days

    

93

 

126

 

126

  Percentage colder (warmer) than prior year

    

(26.2)%

 

38.5%

 

 

  Percentage colder (warmer) than 30-year average  

    

(26.2)%

 

-

 

 

 

 

 

 

 

 

 

Cooling degree-days

    

698

 

501

 

593

  Percentage warmer (cooler) than prior year

    

39.3%

 

(23.5)%

 

 

  Percentage warmer (cooler) than 30-year average  

    

17.7%

 

(15.5)%

 

 

 

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 degree-days for the third quarter of 2005 and 2004 and the number ofdegree-days in a "normal" third 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) a base of 65 degrees.  Each degreebelow or above the base temperature is measured as one degree-day.

Operating revenues

Operating revenues for the third quarter of 2005 increased 9.9% from the same period in 2004 as follows:

(in millions)

 Three Months Ended September 30,

 

 Increase/(Decrease)

 

 

 

 

2005

 

 

2004

 

Amount

 

Percent

 

Electric revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

  Retail distribution and transmission

 

$

284.5

 

$

266.3

 

$

18.2

 

 

6.8

 

  Energy, transition and other

 

 

   471.3

 

 

    427.2

 

 

 44.1

 

 

10.3

 

    Total retail

 

 

755.8

 

 

693.5

 

 

62.3

 

 

9.0

 

  Wholesale

 

 

       3.0

 

 

        4.6

 

 

  (1.6

)

 

(34.8

)

    Total electric revenues

 

 

758.8

 

 

698.1

 

 

60.7

 

 

8.7

 

Gas revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

  Firm gas and transportation

 

 

16.0

 

 

15.8

 

 

0.2

 

 

1.3

 

  Energy supply and other

 

 

     48.1

 

 

      41.9

 

 

   6.2

 

 

14.8

 

    Total gas revenues

 

 

64.1

 

 

57.7

 

 

6.4

 

 

11.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unregulated operations revenues

 

 

     35.6

 

 

      25.7

 

 

  9.9

 

 

38.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Total operating revenues

 

$

858.5 ====

 

$

781.5 =====

 

$

77.0 ===

 

 

9.9 ====

 

  Electric revenues

The increase in retail distribution and transmission revenues primarily reflects higher retail mWh sales, primarily in residential and commercial sectors as well as higher 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 and economic conditions.  Weather conditionsaffect 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 the Company'searnings.  Other revenues primarily relate to the Company's ability to effectively reduce stranded costs (mitigation incentive) and rental revenue from electric property.  The $44.1 million increase in energy, transition and other revenues is primarilyattributable to higher rates for procuring energy for our customers as a result of the increased cost of energy.

The decrease in 2005 wholesale revenues reflects the expiration of a municipal wholesale power supply contract in the fourth quarter of 2004 that was not renewed.  On September 1, 2005, NSTAR executed a new Wholesale andDistribution Service Agreement with a regional airport, to take effect upon the expiration of the current agreement between the parties, which expires October 31, 2005.  Amounts collected from wholesale customers are credited to retail customers through thetransition charge.  Therefore, the expiration of the municipal wholesale supply contract has no impact on results of operations or cash flows.

  Gas revenues

The $0.2 million increase in firm gas and transportation revenues is attributable to the improved economy and a new large customer.

The energy supply and other revenue increase of $6.2 million primarily reflects the impact of the higher cost of gas sold due to the higher gas costs from the Company's gas suppliers.  These revenues are fully reconciled with thecost currently recognized by the Company and, as a result, do not have an effect on the Company's earnings.

  Unregulated operating revenues

Unregulated operating revenues are derived from NSTAR's unregulated businesses that include district energy operations and telecommunications.  Unregulated revenues were $35.6 million in the third quarter of 2005 compared to $25.7million in the same period of 2004, an increase of $9.9 million, or 39%.  The increase in unregulated revenues is primarily the result of higher steam sales volume, combined with electric and chilled water having higher revenues as a result of increased salesand fuel that increased pricing to customers.

Operating expenses

**Purchased power costs**were $420.7 million in the third quarter of 2005 compared to $396.1 million in the same period of 2004, an increase of $24.6 million, or 6%.  The increase is primarilythe result of increased electric sales, and to a lesser extent, the higher costs of fuels at our unregulated companies.  NSTAR Electric adjusts its rates to collect the costs related to energy supply from customers on a fully reconciling basis. 

**Cost of gas sold**, representing NSTAR Gas' supply expense, was $41.4 million in the third quarter of 2005 compared to $34.6 million in 2004, an increase of $6.8 million, or 20%.  The expenseincrease reflects the higher costs of gas supply, offset by the lower volume of firm gas sales of 2.1%.  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 $104.8 million in the third quarter of 2005 compared to $103.2 million in the same period of 2004, an increase of $1.6 million, or 2%.  Thisincrease primarily reflects an increase of $2 million relating to potential litigation matters.

**Depreciation and amortization expense**  was $85.7 million in the third quarter of 2005 compared to $62.1 million in the same period of 2004, an increase of $23.6 million or 38%.  Theincrease primarily reflects amortization costs related to transition property securitization regulatory assets ($22.3 million) and higher depreciable distribution and transmission plant in service.

**DSM and renewable energy programs expense**  was $18.8 million in the third quarter of 2005 compared to $18.2 million in the same period of 2004, an increase of $0.6 million, or 3%, 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 $23.6 million in the third quarter of 2005 compared to $24.9 million in the same period of 2004, a decrease of $1.3 million, or 5%.  This decrease wasprimarily due to a reconciliation of property tax accrued expenses based on actual bills.

**Income taxes**  attributable to operations were $44 million in the third quarter of 2005 compared to $41.2 million in the same period of 2004, an increase of $2.8 million, or 7%.  Higher pre-tax operating income in 2005 increased tax expense by approximately $7 million.  This increase was offset by the favorable resolution of uncertain tax positions that decreased tax expense by $4.2 million.

Other income, net

**Other income, net**  was approximately $2.7 million in the third quarter of 2005 compared to $1.7 million in the same period of 2004, an increase of $1.0 million.  The increase isprimarily due to the sale of a portion of NSTAR's district energy steam assets that resulted in an after tax gain of $1.6 million.

Interest charges

**Interest on long-term debt and transition property securitization certificates**  was $42.6 million in the third quarter of 2005 compared to $37.2 million in the same period of 2004, anincrease of $5.4 million, or 15%.  The increase in interest expense primarily reflects:

-   

 

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 $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 $2.1 million in the third quarter of 2005 compared to $2.2 million in the same period of 2004, a decrease of $0.1 million, or 4.5%.  Thedecrease is primarily due to interest income on regulatory deferrals ($1.3 million) offset by higher short-term debt borrowing costs ($1.2 million) primarily reflective of a 198 basis point increase in the weighted average borrowing rates during the third quarter2005 compared to the same period in 2004.

**Results of Operations**

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

**Nine Months Ended September 30, 2005 compared to Nine Months Ended September 30, 2004**

Overview

Earnings per common share were as follows:

 

 

Nine Months ended September 30,

 

     

  

2005

   

  

2004

   

% Change

Basic

      

$

1.47

   

$

1.42

   

3.5

Diluted

      

$

1.46

    

$

1.40

   

4.3

 

Net income was $157.4 million for the nine-month period ended September 30, 2005 compared to $150.5 million for the same period in 2004.  Factors that contributed to the $6.9 million, or 4.6%, increase in 2005 earningsinclude:

  -  

 

Recognition of MDTE-approved incentive entitlements for NSTAR successfully lowering transition charges (approximately $13.8 million) and incentives related to NSTAR's demand-side management programs (approximately $0.9million)

  -  

 

Higher electric transmission rates due to FERC approval of the inclusion of 50% CWIP in rate base and additional transmission plant in service ($10.6 million)

  -  

 

Decreased income tax expense of approximately $4.2 million derived from successful resolution of uncertain tax positions.

These increases were partially offset by:

  -  

 

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 weather through September (heating degree-days declined 2.3%)

  -  

 

Higher interest costs due to more debt outstanding ($14 million)

 

In the first nine-months 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 requiredin connection 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 nine-months of 2005 include the following: NSTAR invested approximately $280 million in capital projects to improve capacity reliability, paid approximately $94.3 million in preferred andcommon share dividends and retired approximately $254.2 million in long-term debt.

Energy sales

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

Retail Electric Sales - MWH

Nine Months ended September 30,

 

   

2005

   

2004

   

% Change

 

   

 

   

 

   

 

  Residential

   

5,160,700

 

4,960,834

   

4.0

  Commercial

   

9,978,657

 

9,662,124

   

3.3

  Industrial

   

1,237,677

 

1,255,561

   

(1.4)

  Other

   

    117,516

 

    119,996

   

(2.1)

    Total retail sales

   

16,494,550 =======

   

15,998,515 =======

   

3.1 ===

 

 

Firm Gas Sales - BBTU

Nine Months ended September 30,

 

   

2005

   

2004

   

% Change

 

   

 

   

 

   

 

  Residential

   

15,353

 

16,057

   

(4.4)

  Commercial and other

   

13,044

 

13,033

   

-  

  Industrial

   

       3,890

 

       3,978

   

(2.2)

    Total firm sales

   

32,287 =======

   

33,068 =======

   

(2.4) ===

 

The 3.1% increase in retail mWh sales in the first nine-months of 2005 reflects, by customer sectors, an improvement of 4% and 3.3% residential and commercial sales offset somewhat by the sales decline in January and February due to thewarmer temperatures that resulted in lower heating equipment use, partially offset in the month of June and the entire third quarter of 2005 when warmer temperatures resulted in greater air conditioning use when compared to the same periods in 2004.  The 2.4%decrease in firm gas sales in the first nine-months of 2005 primarily reflects warmer overall temperatures than in 2004.

Weather conditions

In terms of customer sector characteristics, industrial sales are less sensitive to weather than residential and commercial sales, which are influenced by temperature extremes.  The overall warmer weather in the first nine-monthsof 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 nine months of 2005 and provided 41.5% and 52.6% of distribution and transmission revenues, respectively.  Refer to the "Electric revenues" section below for a more detailed discussion.  Industrial sales areprimarily 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

    

3,961

 

4,055

 

3,948

  Percentage warmer than prior year

    

(2.3)%

 

(6.5)%

 

 

  Percentage colder than 30-year average  

    

0.3%

 

1.8%

 

 

 

 

 

 

 

 

 

Cooling degree-days

    

880

 

632

 

769

  Percentage warmer (cooler) than prior year

    

39.2%

 

(16.0)%

 

 

  Percentage warmer (cooler) than 30-year average  

    

14.4%

 

(17.8)%

 

 

 

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 nine-months of 2005 and 2004 and thenumber of degree-days in a "normal" first nine-month period 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 base of 65degrees.  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 8.5% from the same period in 2004 as follows:

(in millions)

Nine Months Ended September 30,

 

Increase/(Decrease)

 

 

 

 

2005

 

 

2004

 

Amount

 

Percent

 

Electric revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

  Retail distribution and transmission

 

$

677.3

 

$

666.5

 

$

10.8

 

 

1.6

 

  Energy, transition and other

 

 

 1,279.8

 

 

  1,138.0

 

 

141.8

 

 

12.5

 

    Total retail

 

 

1,957.1

 

 

1,804.5

 

 

152.6

 

 

8.5

 

  Wholesale

 

 

       8.6

 

 

       13.6

 

 

  (5.0

)

 

(36.8

)

    Total electric revenues

 

 

1,965.7

 

 

1,818.1

 

 

147.6

 

 

8.1

 

Gas revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

  Firm gas and transportation

 

 

105.0

 

 

104.8

 

 

0.2

 

 

0.2

 

  Energy supply and other

 

 

  257.2

 

 

   235.2

 

 

  22.0

 

 

9.4

 

    Total gas revenues

 

 

362.2

 

 

340.0

 

 

22.2

 

 

6.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unregulated operations revenues

 

 

    102.7

 

 

    83.1

 

 

  19.6

 

 

23.6

 

    Total operating revenues

 

$

2,430.6 =====

 

$

2,241.2 =====

 

$

189.4 ===

 

 

8.5 ===

 

  Electric revenues

The increase in retail distribution and transmission revenues reflects   a 3.1% increase in retail mWh sales substantially all in the residential and commercial sector and includes an increase in demand revenues from our commercialcustomers.

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 and economical conditions.  Weather conditionsaffect 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 the Company'searnings.  Other revenues primarily relate to the Company's ability to effectively reduce stranded costs (mitigation incentive) and rental revenue from electric property.  The $141.8 million increase in energy, transition and other revenues is primarilyattributable to higher rates for procuring energy for our customers and approximately $13.8 million of MDTE-approved incentive revenue entitlements for successfully lowering transition charges resulting from the securitization financing that closed 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 that was not renewed.  On September 1, 2005, NSTAR executed a new Wholesale andDistribution Service Agreement with a regional airport, to take effect upon the expiration of the current agreement between the parties, which expires October 31, 2005.  Amounts collected from wholesale customers are credited to retail customers through thetransition charge.  Therefore, the expiration of the municipal wholesale supply contract has no impact on results of operations or cash flows.

  Gas revenues

Despite the impact of warmer weather conditions, conservation efforts and the decrease in sales volumes of 2.4% during the first nine months of 2005, firm gas and transportation revenues increased primarily due to the recovery ofpension and other postretirement expense through a reconciling rate mechanism.

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 $22 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 operating revenues

Unregulated operating revenues are derived from NSTAR's unregulated businesses that include district energy operations and telecommunications.  Unregulated revenues were $102.7 million in the first nine months of 2005 compared to$83.1 million in the same period of 2004, an increase of $19.6 million, or 24%.  The increase in unregulated revenues is primarily the result of higher steam sales volume, combined with electric and chilled water revenues being higher as a result of higher salesand pricing to customers.

Operating expenses

**Purchased power costs**  were $1,108.1 million in the first nine months of 2005 compared to $1,034.0 million in the same period of 2004, an increase of $74.1 million, or 7%.  Theincrease is primarily 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 afully reconciling basis.

**Cost of gas sold**, representing NSTAR Gas' supply expense, was $233.6 million in the first nine months of 2005 compared to $214.5 million in 2004, an increase of $19.1 million, or 9%. 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 $336.2 million in the first nine months of 2005 compared to $312.8 million in the same period of 2004, an increase of $23.4 million, or 7%. This increase primarily reflects costs associated with winter storms (approximately $5.4 million), facilities consolidation (approximately $3.3 million), incremental costs associated with a strike by union employees (approximately $2.3 million), a net increase to anenvironmental reserve and other litigation reserves (approximately $5 million and $2 million, respectively), higher bad debt expense (approximately $2.3 million) and higher employee expenses.

**Depreciation and amortization expense**  was $249.3 million in the first nine months of 2005 compared to $192.6 million in the same period of 2004, an increase of $56.7 million or 29%. The increase primarily reflects amortization costs related to transition property regulatory asset ($52.2 million) and higher depreciable distribution and transmission plant in service.

**DSM and renewable energy programs expense**  was $52.1 million in the first nine months of 2005 compared to $51.2 million in the same period of 2004, an increase of $0.9 million, or 2%, 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 $78.6 million in the first nine months of 2005 compared to $78.7 million in the same period of 2004, a decrease of $0.1 million, or less than 1%.  Thisslight decrease is primarily due to a true-up of property tax accrued based on estimates to the actual payments made.

**Income taxes**  attributable to operations were $91 million in the first nine months of 2005 compared to $95.2 million in the same period of 2004,  a decrease of $4.2 million, or 4%,reflecting the favorable resolution of uncertain tax positions which decreased tax expense by $4.2 million.

Other income, net

**Other income, net**  was approximately $4.4 million in the first nine months of 2005 compared to $5.4 million in the same period of 2004, a decrease of $1.0 million.  The decrease isprimarily due to the absence in 2005 of proceeds from an executive life insurance policy of $1.2 million and $1 million in employee-related contract fees as a result of the Blackstone Station sale, offset by a $1.6 million gain recognized in 2005 from the sale of aportion of NSTAR's district energy steam assets.

Interest charges

**Interest on long-term debt and transition property securitization certificates**  was $124.7 million in the first nine months of 2005 compared to $110.2 million in the same period of 2004, anincrease of $14.5 million, or 13%.  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 $5.1 million in the first nine months of 2005 compared to $6.3 million in the same period of 2004, a decrease of $1.2 million, or 19%.  The decrease is primarily due to lower interest costs on regulatorydeferrals offset by higher short-term debt borrowing costs primarily reflective of a 196 basis point increase in the year to date weighted average borrowing rates as compared to the same period during 2004.

**Liquidity and Capital Resources**

     Current Cash Flow Activity

NSTAR's primary uses of cash in the first nine months 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 nine months of 2005, required $17.8 million of cash.  The Company used $282 million in its investing activities, primarily to fund $280.2 million of plantexpenditures, which included system reliability and infrastructure improvement projects incurred by NSTAR Electric and NSTAR Gas operations.  Additionally, the Company provided $304.2 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 nine months 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 assetboth increased due to the contract termination payments made on March 1, 2005 on certain purchase power contracts.  The payments of approximately $554 million create a current tax deduction.  The payments also create a timing difference since the payment,for book purposes, will be amortized to expense over approximately eight years, the period of the collection from customers.

Other changes to NSTAR's working capital primarily reflect the timing of ordinary receipts and disbursements.  For the nine months ended September 30, 2005 and 2004, NSTAR contributed approximately $51 million and $52 million,respectively, to its benefit plans.  NSTAR currently anticipates that it will contribute approximately $4 million to its benefit plans in the remainder of 2005.

     Investing Activities

The net cash used in investing activities in the first nine months of 2005 of $282 million consists primarily of capital expenditures related to infrastructure investments in transmission and distribution systems.  Capitalexpenditures increased $81.6 million from the prior year primarily due to Boston Edison's 345 kV project.  Boston Edison has spent nearly $75 million on this project in 2005.

     Financing Activities

The net cash provided by financing activities in the first nine months of 2005 of $304.2 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 $254.2 million, paid down its short-term debt by $12.9 million and to pay dividends of $94.3 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 began 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 in the balancesof 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 nine months ended September30, 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 September 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 executed a five-year, $175 million revolving credit agreement that expires in November 2009.  At September 30, 2005 and December 31, 2004, there were no amounts outstanding under the revolving credit agreement. Thiscredit facility serves as a backup to NSTAR's $175 million commercial paper program that, at September 30, 2005 and December 31, 2004, had $39 million and $5 million outstanding, respectively. Under the terms of the credit agreement, NSTAR is required to maintain amaximum total consolidated debt to total capitalization ratio of not greater than 65% at all times, excluding Transition Property Securitization Certificates, and excluding Accumulated other comprehensive income (loss) from common equity.  Commitment fees mustbe paid on the total agreement amount. At September 30, 2005 and December 31, 2004, NSTAR was in full compliance with the aforementioned covenant as the ratios were 55.4% 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 September 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 paperprogram that had a $18 million and $46.5 million balance at September 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 ofnot greater than 65% at all times, excluding Transition Property Securitization Certificates, and excluding Accumulated other comprehensive income (loss) from common equity.   At September 30, 2005 and December 31, 2004, Boston Edison was in full compliance withits covenants in connection with its short-term credit facilities as the ratios were 44% and 53.1%, respectively.

As of September 30, 2005, ComElectric, Cambridge Electric and NSTAR Gas, collectively, have $145 million available under several lines of credit and had $91.5 million and $109.9 million outstanding under these lines of credit atSeptember 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 maturitydates no later than 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-termdebt.

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 nine months ended September30, 2005.

At NSTAR's Annual Meeting of Shareholders held on April 28, 2005, shareholders approved an increase in the number of the Company's authorized shares from 100 million to 200 million common shares.  The Board of Trustees subsequentlyapproved a two-for-one stock split of NSTAR common shares, in the form of a 100% common share dividend, for shareholders of record on May 16, 2005.  The new shares were issued on June 3, 2005. The Company's intent ineffecting a stock split in the form of a stock dividend was to increase the number of outstanding common shares, to reduce the per share stock price thereby making it more accessible to investors. 

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 respective executed construction agreement, signed by both parties.  NSTAR believes that it is very unlikely that a draw willbe made on the standby letter of credit.

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.

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

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

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**Item 4.  Controls and Procedures**

NSTAR's disclosure controls and procedures are designed to ensure that information required to be disclosed in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reportedwithin 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 operation of NSTAR'sdisclosure 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's disclosure controls andprocedures were effective (1) to timely alert them to material information relating to NSTAR's information required to be disclosed by NSTAR in the reports that it files or submits under the Securities Exchange Act of 1934 and (2) to ensure that appropriateinformation 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.

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**Part II.  Other Information**

**Item 1.  Legal Proceedings**

In the normal course of its business, NSTAR and its subsidiaries are involved in certain legal matters, including civil litigation.  Management is unable to fully determine a range of reasonably possible court-ordered damages,settlement amounts, and related litigation costs ("legal liabilities") that would be in excess of amounts accrued and amounts covered by insurance, except for the item disclosed in the Condensed Consolidated Financial Statements, Note M, Part 1, "EnvironmentalMatters".  Based on the information currently available, NSTAR does not believe that it is probable that any such legal liability will have a material impact on its consolidated financial position.  However, it is reasonably possible that additional legalliabilities 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 September 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  

 

    

 

    

 

   July

    

114,196

 

$30.56

   August

    

610,399

 

$29.98

   September

    

5,815

 

$29.57

 

 

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**Item 6.  Exhibits**

Exhibit filed herewith:

 

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

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**SIGNATURE**

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

 

 

 

    

       

 

    

       

 

   

 

               NSTAR               

   

       

(Registrant)

   

   

   

   

    

Date: November 7, 2005          

      

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

   

      

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