##### Table of Contents







UNITED STATES SECURITIES AND

EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-K



|x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------------



For the fiscal year ended December 31, 2007



or



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------



For the transition period
from                    
to



Commission file number 1-14768



NSTAR

(Exact name of registrant
as specified in its charter)



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



617-424-2000

(Registrants telephone number, including area code)



Securities registered pursuant to Section 12(b) of the Act:



|                                      |  |                                          
|------------------------------------- |  | -----------------------------------------
|Title of each class                   |  | Name of each exchange on which registered
|Common Shares, par value $1 per share |  | New York Stock Exchange                  



Indicate by check
mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.



x  Yes     ̈  No



Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d)
of the Act.



 ̈  Yes    x  No



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



x  Yes     ̈  No



Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   ̈



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



|                           |  |                      |  |                          |  |                             
|-------------------------- |  | -------------------- |  | ------------------------ |  | ----------------------------
|Large accelerated filer  x |  | Accelerated filer   ̈ |  | Non-accelerated filer   ̈ |  | Smaller reporting company   ̈



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



 ̈  Yes    x  No



The aggregate market value of the 106,808,376 shares of voting stock of the registrant held by non-affiliates of the registrant, computed as the
average of the high and low market prices of the common shares as reported on the New York Stock Exchange consolidated transaction reporting system for NSTAR Common Shares as of the last business day of the registrants most recently completed
second fiscal quarter: $3,465,931,801.



Indicate the number of
shares outstanding of each of the registrants classes of common stock, as of the latest practicable date:



|                                      |  |                                
|------------------------------------- |  | -------------------------------
|Class                                 |  | Outstanding at February 8, 2008
|Common Shares, par value $1 per share |  | 106,808,376 shares             



Documents
Incorporated by Reference



Sections of NSTARs
Definitive Proxy Statement for the 2008 Annual Meeting of Shareholders to be held on May 1, 2008 are incorporated by reference into Parts I and III of this Form 10-K.









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##### Table of Contents

NSTAR



Index to Annual Report on Form
10-K

Year Ended December 31, 2007



|                                                           |  |                                                                                                              |  |     
|---------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------ |  | ----
|                                                           |  |                                                                                                              |  | Page
|Glossary of Terms                                          |  | 2                                                                                                           
|                                                           | 
|Cautionary Statement Regarding Forward-Looking Information |  | 4                                                                                                           
|                                                           |  |                                                                                                             
|                                                           |  | Part I                                                                                                       |  |     
|                                                           |  |                                                                                                             
|Item 1.                                                    |  | Business                                                                                                     |  | 5   
|Item 1A.                                                   |  | Risk Factors                                                                                                 |  | 13  
|Item 1B.                                                   |  | Unresolved Staff Comments                                                                                    |  | 15  
|Item 2.                                                    |  | Properties                                                                                                   |  | 15  
|Item 3.                                                    |  | Legal Proceedings                                                                                            |  | 16  
|Item 4.                                                    |  | Submission of Matters to a Vote of Security Holders                                                          |  | 16  
|Item 4A.                                                   |  | Executive Officers of the Registrant                                                                         |  | 16  
|                                                           |  |                                                                                                             
|                                                           |  | Part II                                                                                                      |  |     
|                                                           |  |                                                                                                             
|Item 5.                                                    |  | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 17  
|Item 6.                                                    |  | Selected Consolidated Financial Data                                                                         |  | 20  
|Item 7.                                                    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                        |  | 21  
|Item 7A.                                                   |  | Quantitative and Qualitative Disclosures About Market Risk                                                   |  | 53  
|Item 8.                                                    |  | Financial Statements and Supplementary Data                                                                  |  | 54  
|Item 9.                                                    |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                         |  | 96  
|Item 9A.                                                   |  | Controls and Procedures                                                                                      |  | 96  
|Item 9B.                                                   |  | Other Information                                                                                            |  | 96  
|                                                           |  |                                                                                                             
|                                                           |  | Part III                                                                                                     |  |     
|                                                           |  |                                                                                                             
|Item 10.                                                   |  | Trustees, Executive Officers and Corporate Governance                                                        |  | 97  
|Item 11.                                                   |  | Executive Compensation                                                                                       |  | 97  
|Item 12.                                                   |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               |  | 97  
|Item 13.                                                   |  | Certain Relationships and Related Transactions, and Trustee Independence                                     |  | 97  
|Item 14.                                                   |  | Principal Accountant Fees and Services                                                                       |  | 97  
|                                                           |  |                                                                                                             
|                                                           |  | Part IV                                                                                                      |  |     
|                                                           |  |                                                                                                             
|Item 15.                                                   |  | Exhibits and Financial Statement Schedules                                                                   |  | 98  
|                                                           | 
|Signatures                                                 |  | 107                                                                                                         
|                                                           |  |                                                                                                             
|Exhibit 31.1                                               |  | Section 302 CEO Certification                                                                                |  |     
|                                                           |  |                                                                                                             
|Exhibit 31.2                                               |  | Section 302 CFO Certification                                                                                |  |     
|                                                           |  |                                                                                                             
|Exhibit 32.1                                               |  | Section 906 CEO Certification                                                                                |  |     
|                                                           |  |                                                                                                             
|Exhibit 32.2                                               |  | Section 906 CFO Certification                                                                                |  |     



1



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##### Table of Contents

Glossary of Terms



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



|                                 |  |                                                                                                                                                                                                                 
|-------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NSTAR Companies                  |  |                                                                                                                                                                                                                 
|NSTAR                            |  | NSTAR (Parent company), Company or NSTAR and its subsidiaries (as the context requires)                                                                                                                         
|NSTAR Electric                   |  | NSTAR Electric Company                                                                                                                                                                                          
|NSTAR Gas                        |  | NSTAR Gas Company                                                                                                                                                                                               
|NSTAR Electric & Gas             |  | NSTAR Electric & Gas Corporation                                                                                                                                                                                
|Boston Edison                    |  | The former Boston Edison Company                                                                                                                                                                                
|ComElectric                      |  | The former Commonwealth Electric Company                                                                                                                                                                        
|Cambridge Electric               |  | The former Cambridge Electric Light Company                                                                                                                                                                     
|Canal                            |  | The former Canal Electric Company                                                                                                                                                                               
|MATEP                            |  | Medical Area Total Energy Plant, Inc.                                                                                                                                                                           
|AES                              |  | Advanced Energy Systems, Inc. (Parent company of MATEP)                                                                                                                                                         
|NSTAR Com                        |  | NSTAR Communications, Inc.                                                                                                                                                                                      
|Hopkinton                        |  | Hopkinton LNG Corp.                                                                                                                                                                                             
|HEEC                             |  | Harbor Electric Energy Company                                                                                                                                                                                  
|                                 | 
|Regulatory and Other Authorities |  |                                                                                                                                                                                                                 
|AG                               |  | Attorney General of the Commonwealth of Massachusetts                                                                                                                                                           
|CUC                              |  | Commonwealth Utilities Commission                                                                                                                                                                               
|DPU                              |  | Massachusetts Department of Public Utilities (Prior to April 11, 2007, the DPU was known as the MDTE. The Company uses the acronym DPU interchangeably throughout this report to refer to both the
DPU and MDTE)
|DOE                              |  | U.S. Department of Energy                                                                                                                                                                                       
|FASB                             |  | Financial Accounting Standards Board                                                                                                                                                                            
|FERC                             |  | Federal Energy Regulatory Commission (the Commission)                                                                                                                                                           
|IRS                              |  | U.S. Internal Revenue Service                                                                                                                                                                                   
|ISO-NE                           |  | ISO (Independent System Operator) - New England Inc.                                                                                                                                                            
|MDTE                             |  | Massachusetts Department of Telecommunications and Energy (now known as DPU)                                                                                                                                    
|Moodys                          |  | Moodys Investors Service                                                                                                                                                                                       
|NRC                              |  | U.S. Nuclear Regulatory Commission                                                                                                                                                                              
|NYMEX                            |  | New York Mercantile Exchange                                                                                                                                                                                    
|SEC                              |  | U.S. Securities and Exchange Commission                                                                                                                                                                         
|S&P                              |  | Standard & Poors                                                                                                                                                                                               
|                                 | 
|Other                            |  |                                                                                                                                                                                                                 
|AFUDC                            |  | Allowance for Funds Used During Construction                                                                                                                                                                    
|AOCI                             |  | Accumulated Other Comprehensive Income                                                                                                                                                                          
|APB                              |  | Accounting Principles Board                                                                                                                                                                                     
|ARO                              |  | Asset Retirement Obligation                                                                                                                                                                                     
|BBtu                             |  | Billions of British thermal units                                                                                                                                                                               
|Bcf                              |  | Billion cubic feet                                                                                                                                                                                              
|CGAC                             |  | Cost of Gas Adjustment Clause                                                                                                                                                                                   
|CPSL                             |  | Capital Projects Scheduling List                                                                                                                                                                                
|CY                               |  | Connecticut Yankee Atomic Power Company                                                                                                                                                                         
|DSM                              |  | Demand-Side Management                                                                                                                                                                                          
|EPS                              |  | Earnings Per Common Share                                                                                                                                                                                       



2



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##### Table of Contents

|      |  |                                                                                      
|----- |  | -------------------------------------------------------------------------------------
|FCA   |  | Forward Capacity Auctions                                                            
|FCM   |  | Forward Capacity Market                                                              
|FIN   |  | FASB Interpretation Number                                                           
|GAAP  |  | Accounting principles generally accepted in the United
States of America             
|ISFSI |  | Independent Spent Fuel Storage Installation                                          
|LDAC  |  | Local Distribution Adjustment Clause                                                 
|LNG   |  | Liquefied Natural Gas                                                                
|MD&A  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations
|MGP   |  | Manufactured Gas Plant                                                               
|MMbtu |  | Millions of British thermal units                                                    
|MW    |  | Megawatts                                                                            
|MWh   |  | Megawatthour (equal to one million watthours)                                        
|MY    |  | Maine Yankee Atomic Power Company                                                    
|NEH   |  | New England Hydro-Transmission Electric Company, Inc.                                
|NHH   |  | New England Hydro-Transmission Corporation                                           
|OATT  |  | Open Access Transmission Tariff                                                      
|PBOP  |  | Postretirement Benefit Obligation other than Pensions                                
|ROE   |  | Return on Equity                                                                     
|RMR   |  | Reliability Must Run                                                                 
|RTO   |  | Regional Transmission Organization                                                   
|SFAS  |  | Statement of Financial Accounting Standards                                          
|SIP   |  | Simplified Incentive Plan                                                            
|SQI   |  | Service Quality Indicators                                                           
|SSCM  |  | Simplified Service Cost Method                                                       
|YA    |  | Yankee Atomic Electric Company                                                       



3



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Cautionary Statement Regarding Forward-Looking Information



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



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



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



| |  |  | weather conditions that directly influence the demand for electricity and natural gas
| | - |  | -------------------------------------------------------------------------------------



| |  |  | future economic conditions in the regional and national markets
| | - |  | ---------------------------------------------------------------



| |  |  | changes to prevailing local, state and federal governmental policies and regulatory actions (including those of the DPU and FERC) with respect to allowed rates of
return, rate structure, continued recovery of regulatory assets and energy costs, financings, municipalization acquisition and disposition of assets, operation and construction of facilities, changes in tax laws and policies and changes in, and
compliance with, environmental and safety laws and policies
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



| |  |  | impact of continued cost control procedures on operating results
| | - |  | ----------------------------------------------------------------



| |  |  | ability to maintain current credit ratings
| | - |  | ------------------------------------------



| |  |  | impact of uninsured losses
| | - |  | --------------------------



| |  |  | impact of union contract negotiations
| | - |  | -------------------------------------



| |  |  | damage from major storms
| | - |  | ------------------------



| |  |  | impact of conservation measures and self-generation by our customers
| | - |  | --------------------------------------------------------------------



| |  |  | changes in financial accounting and reporting standards
| | - |  | -------------------------------------------------------



| |  |  | changes in specific hazardous waste site conditions and the specific cleanup technology
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | prices and availability of operating supplies
| | - |  | ---------------------------------------------



| |  |  | the impact of terrorist acts, and
| | - |  | ---------------------------------



| |  |  | impact of performance service quality measures
| | - |  | ----------------------------------------------



Any forward-looking statement speaks only as of the date of this filing and NSTAR undertakes no obligation to publicly update forward-looking statements, whether as a
result of new information, future events, or otherwise. You are advised, however, to consult all further disclosures NSTAR makes in its filings to the SEC. Other factors in addition to those listed here could also adversely affect NSTAR. This Annual
Report also describes material contingencies and critical accounting policies and estimates in the accompanying Item 1A, Risk Factors, Item 7, MD&A and in the accompanying Notes to Consolidated
Financial Statements and NSTAR encourages a review of these items.



4



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Part I



|Item 1. | Business
|------- | --------



(a) General Development of Business



NSTAR (or the Company) is a holding company engaged through its subsidiaries in the energy delivery business serving approximately 1.4 million customers in Massachusetts, including approximately 1.1 million electric distribution
customers in 81 communities and approximately 300,000 natural gas distribution customers in 51 communities. Utility operations accounted for approximately 96% of consolidated operating revenues in 2007, 2006 and 2005. The remainder is generated from
its unregulated operations.



NSTARs utility operations derive their
revenues primarily from the sale of energy, distribution and transmission services to customers. NSTARs earnings are impacted by fluctuations in unit sales of electric kWh and natural gas MMbtu, which directly determine the level of
distribution and transmission revenues recognized. In accordance with the regulatory rate structure in which NSTAR operates, its recovery of energy and certain energy related costs are fully reconciled with the level of energy revenues currently
recorded and, therefore, do not have an impact on earnings. As a result of this rate structure, any variability in the cost of energy supply purchased will impact purchased power and cost of gas sold expense and corresponding revenues but will not
affect the Companys earnings.



(b) Financial Information about
Industry Segments



NSTARs principal operating segments are the
electric and natural gas utility operations that provide energy delivery services in 107 cities and towns in Massachusetts and its unregulated operations. Refer to Note L, Segment and Related Information of the accompanying Notes
to Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data for specific financial information related to NSTARs electric utility, natural gas utility and unregulated operations segments.



(c) Narrative Description of Business



Principal Products and Services



NSTAR Electric



NSTAR Electric supplies electricity at retail to an area of 1,702 square miles. The territory served is located in Massachusetts and
includes the City of Boston and 80 surrounding cities and towns, including Cambridge, New Bedford, and Plymouth and the geographic area comprising Cape Cod and Marthas Vineyard. The population of this area is approximately 2.3 million.



NSTAR Electrics operating revenues and energy sales percentages by
customer class for the years 2007, 2006 and 2005 consisted of the following:



|                             |  |              |   |  |                    |   |  |      |   |  |      |   |  |      |   |  |      |  
|---------------------------- |  | ------------ | - |  | ------------------ | - |  | ---- | - |  | ---- | - |  | ---- | - |  | ---- | -
|                             |  | Revenues ($) |   |  | Energy Sales (mWh) |  
|                             |  | 2007         |   |  | 2006               |   |  | 2005 |   |  | 2007 |   |  | 2006 |   |  | 2005 |  
|Retail:                      |  |              |   |  |                    |   |  |      |   |  |      |   |  |      |   |  |      |  
|Commercial                   |  | 52           | % |  | 52                 | % |  | 54   | % |  | 62   | % |  | 62   | % |  | 60   | %
|Residential                  |  | 43           | % |  | 43                 | % |  | 39   | % |  | 30   | % |  | 30   | % |  | 31   | %
|Industrial and other         |  | 5            | % |  | 5                  | % |  | 6    | % |  | 8    | % |  | 8    | % |  | 8    | %
|Wholesale and contract sales |  |             |   |  |                   |   |  | 1    | % |  |     |   |  |     |   |  | 1    | %



5



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Electric Rates



Retail electric delivery rates are established by the DPU and are comprised of:



| |  |  | distribution charges, which include a fixed customer charge, energy and demand charges (to collect the costs of building and expanding the infrastructure to
deliver power to its destination, as well as ongoing operating costs), a reconciling rate adjustment mechanism for recovery of costs associated with NSTARs obligation to provide its employees qualified pension and other postretirement benefits
and a reconciling rate adjustment mechanism for recovery of certain DPU-approved safety and reliability program costs,
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a transition charge represents the collection of costs primarily from previously held investments in generating plants and costs related to above market
power contracts,
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a transmission charge represents the collection of costs of moving the electricity over high voltage lines from generating plants to substations located
within NSTARs service area including costs allocated to NSTAR Electric by ISO-NE to maintain the wholesale electric market,
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | an energy conservation chargerepresents a legislatively-mandated charge to collect costs for demand-side management programs and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------



| |  |  | a renewable energy charge represents a legislatively-mandated charge to collect the cost to support the development and promotion of renewable energy
projects.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



Electric distribution companies in Massachusetts
are required to obtain and resell power to retail customers through basic service for those customers who choose not to buy energy from a competitive energy supplier. Basic service rates are reset every six months (every three months for large
commercial and industrial customers). The price of basic service is intended to reflect the average competitive market price for power. NSTAR Electric fully recovers its energy costs, including costs related to charge-offs of uncollected energy
costs, through DPU-approved rate mechanisms.



Rate Settlement Agreement



On December 30, 2005, the DPU
approved a seven-year Rate Settlement Agreement (Rate Settlement Agreement) between NSTAR, the AG, and several interveners. Effective January 1, 2006 and continuing through 2012, the Rate Settlement Agreement establishes, among
other things, an annual inflation-adjusted distribution rate increases that are offset by an equal and corresponding reduction in transition rates. Refer to the Rate Settlement Agreement and Other Regulatory Matterssection of the
accompanying Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations, for more details.



Massachusetts Regulatory Environment



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



In January 2007, a new Governor and
Attorney General took office. The Governor has a very significant influence on energy regulatory policy in Massachusetts. The Governor has identified energy policy as a key initiative of his administration, and has functionally reorganized key
energy offices. His reorganization plan, which took effect on April 11, 2007, created a new cabinet positionthe Secretary of Energy and Environmental Affairs. The Secretary now oversees a newly formed CUC, consisting of three
commissioners. The CUC leads the DPU, a newly formed agency that has jurisdiction over electric, natural gas, water and transportation matters. The agency previously responsible for such functions, the MDTE, was eliminated.



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



6



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During late 2007 and January 2008, the Massachusetts House of Representatives and Senate drafted and approved two
separate energy policy reform bills. These bills address energy procurement, renewable and alternative energy generation and other green power initiatives and utility regulation. Both bills are currently under review by a joint House and Senate
Conference Committee. This Committee is expected to combine the two bills into one comprehensive energy policy reform bill for ultimate approval. It is anticipated that the resulting bill will be enacted into law during 2008. NSTAR cannot anticipate
or predict what terms the final bill will include, and therefore, cannot predict the timing, ultimate approval, or potential impact of this legislation.



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



Proposed Rate Decoupling



On June 22,
2007, the DPU opened a generic investigation into rate structures and revenue recovery mechanisms in order to promote efficient deployment of demand resources in Massachusetts. Demand resources are installed equipment, measures or programs that
reduce end-use demand for electricity or natural gas. This investigation will include, in part, a review of whether and how existing rate mechanisms may be changed to better align a companys financial interests with the needs to provide
greater energy efficiencies and foster the advancement of price-responsive demand in regional wholesale energy markets. Historically, Massachusetts retail electric and natural gas distribution companies have sponsored customer-funded energy
efficiency and load reduction programs with an incentive to mitigate a companys lost retail distribution revenues. However, there is an inherent disconnect between the sponsorship of such programs and the continued maintenance of revenue and
sales growth levels. The DPU has opened a proceeding to determine whether it should implement a base revenue adjustment mechanism that decouples a utilitys retail distribution revenues (the recovery of fixed infrastructure costs,
including a return component and the recovery of other operating costs) and its sales volumes.



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



Sources and Availability of Electric Power
Supply



For basic service power supply, NSTAR Electric makes periodic market
solicitations consistent with DPU requirements. During 2007, NSTAR Electric entered into short-term power purchase agreements to meet its entire basic service supply obligation, ranging in term from three to twelve-months. Though some of these
contracts include a portion of NSTAR Electrics supply for 2008, it is anticipated that it will continue to execute similar contracts for its remaining basic service requirements. NSTAR Electric fully recovers its payments to suppliers through
DPU-approved rates billed to customers.



During late 2004 and early 2005, NSTAR
Electric completed several transactions to buy-out or restructure certain of its long-term power purchase contracts. These transactions resulted in significant savings to its customers over the remaining terms of these contracts.



Wholesale Market and Transmission Rule Changes



FERC Transmission ROE



On October 31, 2006, the FERC authorized, for the participating New England
Transmission Owners, including NSTAR Electric, an ROE on regional transmission facilities of 10.2% plus a 50 basis point adder for joining a RTO from February 1, 2005 (the RTO effective date) through October 31, 2006, and an ROE of 11.4%



7



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##### Table of Contents

thereafter. In addition, FERC granted a 100 basis point incentive adder to ROE for qualified investments made in new regional transmission facilities, that
when combined with FERCs approved ROEs, provide 11.7% and 12.4% returns for the respective time frames. RTO-NE ratepayers will benefit as a result of this order because it responds to the need to enhance the New England transmission grid to
alleviate congestion costs and reliability issues. Transmission projects that are completed and in progress including NSTAR Electrics 345kV project, have significantly minimized these congestion costs and enhance reliability in the region.



Forward Capacity Market



Transition payments applicable to all capacity began December 1, 2006 at a rate of
$3.05/KWMonth and escalate to $4.10/KWMonth until May 2010 when FCM will begin on June 1, 2010. FCAs are auctions designed to procure capacity three or more years into the future with a one-year to five-year commitment period. FCM includes a
locational price mechanism to establish separate zones for capacity when transmission constraints are found to exist. FCM allows load-serving entities such as NSTAR to self-supply through contracted resources to meet its capacity obligations without
participating in the FCAs. The impact to rates for NSTAR customers during the transition period will be approximately 0.8 to 1.1 cents per kilowatt hour and is billed to NSTAR Electric by its energy suppliers. NSTAR Electric cannot anticipate the
precise changes resulting from the FCAs due to their competitive nature, but expects all costs incurred to be fully recoverable.



NSTAR Gas



NSTAR Gas distributes natural gas to approximately 300,000 customers in 51 communities in central and eastern Massachusetts covering 1,067 square miles and having an aggregate population of 1.2 million. Twenty-five of
these communities are also served with electricity by NSTAR Electric. Some of the larger communities served by NSTAR Gas include Cambridge, Somerville, New Bedford, Plymouth, Worcester, Framingham, Dedham and the Hyde Park area of Boston.



NSTAR Gas operating revenues and energy sales percentages by customer
class for the years 2007, 2006 and 2005, consisted of the following:



|                              |  |              |   |  |                       |   |  |      |   |  |      |   |  |      |   |  |      |  
|----------------------------- |  | ------------ | - |  | --------------------- | - |  | ---- | - |  | ---- | - |  | ---- | - |  | ---- | -
|                              |  | Revenues ($) |   |  | Energy Sales (therms) |  
|                              |  | 2007         |   |  | 2006                  |   |  | 2005 |   |  | 2007 |   |  | 2006 |   |  | 2005 |  
|Gas Sales and Transportation: |  |              |   |  |                       |   |  |      |   |  |      |   |  |      |   |  |      |  
|Residential                   |  | 60           | % |  | 59                    | % |  | 64   | % |  | 44   | % |  | 44   | % |  | 46   | %
|Commercial                    |  | 25           | % |  | 27                    | % |  | 23   | % |  | 33   | % |  | 33   | % |  | 32   | %
|Industrial and other          |  | 7            | % |  | 9                     | % |  | 8    | % |  | 16   | % |  | 17   | % |  | 17   | %
|Off-System and Contract sales |  | 8            | % |  | 5                     | % |  | 5    | % |  | 7    | % |  | 6    | % |  | 5    | %



Gas
Rates



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



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



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On August 30, 2006, the DPU approved a fixed-price option pilot program that offers NSTAR Gas residential and
small commercial customers the opportunity to lock-in their gas costs prior to the winter heating season, thus providing a more stable, predictable gas price. The program is open to the first customers who apply up to twenty-five percent
of those eligible. As of the end of the enrollment period in November 2007 and 2006, approximately 35,000 and 13,600 gas customers, respectively, signed up to take part in the fixed rate. Under the plan, the non-participants impact are
minimized from the risk of changing prices during the winter heating season by having the plan participant pay a $0.02/therm premium charge above NSTAR Gas otherwise applicable gas adjustment factor. If the market results in higher or lower
gas costs and NSTAR Gas increases or decreases its CGAC for other customers, customers participating in the fixed-price option program will not be affected. NSTAR Gas remains revenue neutral under the plan and gas costs included in revenues are
fully reconciled to allow full recovery of all NSTAR gas costs as allowed by the DPU. The program was developed as a result of the Rate Settlement Agreement between NSTAR and the AG as approved on December 30, 2005.



NSTAR Gas purchases financial contracts based upon NYMEX natural gas futures in order to
reduce cash flow variability associated with the purchase price for approximately one-third of its natural gas purchases. The objective of this practice is to minimize fluctuations in prices to NSTAR firm gas sales customers. These financial
contracts do not procure gas supply and therefore NSTAR Gas does not take physical delivery of gas. The fair value of these instruments is recognized on the accompanying Consolidated Balance Sheets as an asset or liability representing amounts due
from or payable to the counter parties of NSTAR Gas, as if such contracts were settled currently. All actual costs and benefits incurred are included in the firm sales CGAC and are fully recoverable from customers. As a result, NSTAR Gas records an
offsetting regulatory asset or liability for the market price changes, in lieu of recording the adjustment to Other Comprehensive Income.



Gas Supply, Transportation and Storage



NSTAR Gas maintains a flexible resource portfolio consisting of gas supply contracts, transportation contracts on interstate pipelines, market area storage and peaking
services.



NSTAR Gas purchases transportation, storage and balancing services
from Tennessee Gas Pipeline Company and Algonquin Gas Transmission Company, as well as other upstream pipelines that bring gas from major producing regions in the U.S., Gulf of Mexico and Canada to the final delivery points in the NSTAR Gas service
area. NSTAR Gas purchases all of its gas supply from third-party vendors. Most of the supplies are purchased under a firm portfolio management contract with a term of one year. NSTAR Gas has one multiple year contract, which is used for the purchase
of its Canadian supplies. Based on its firm pipeline transportation capacity entitlements, NSTAR Gas contracts for up to 139,326 MMbtu per day of domestic production. In addition, NSTAR Gas has an agreement for up to 4,500 MMbtu per day of Canadian
supplies.



In addition to the firm transportation and gas supplies mentioned
above, NSTAR Gas utilizes contracts for underground storage and LNG facilities to meet its winter peaking demands. The LNG facilities, described below, are located within NSTAR Gas distribution system and are used to liquefy and store pipeline
gas during the warmer months for use during the heating season. During the summer injection season, excess pipeline capacity is used to deliver and store gas in market area storage facilities, located in the New York and Pennsylvania region. Stored
gas is withdrawn during the winter season to supplement pipeline supplies in order to meet firm heating demand. NSTAR Gas has firm storage contracts and total storage capacity entitlements of approximately 8.3 Bcf.



A portion of the storage of gas supply for NSTAR Gas during the winter heating season is
provided by Hopkinton, a wholly-owned subsidiary of NSTAR. The facilities consist of a liquefaction and vaporization plant and three above-ground cryogenic storage tanks having an aggregate capacity of 3.5 Bcf of natural gas.



Based upon information currently available regarding projected growth in demand and estimates
of availability of future supplies of pipeline gas, NSTAR Gas believes that its present sources of gas supply are adequate to meet existing load and allow for future growth in sales.



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Franchises



Through their charters, which are unlimited in time, NSTAR Electric and NSTAR Gas have the right to engage in the business of delivering and selling electricity and
natural gas and have powers incidental thereto and are entitled to all the rights and privileges of and subject to the duties imposed upon electric and natural gas companies under Massachusetts laws. The locations in public ways for electric
transmission and distribution lines and gas distribution pipelines are obtained from municipal and other state authorities who, in granting these locations, act as agents for the state. In some cases the actions of these authorities are subject to
appeal to the DPU. The rights to these locations are not limited in time and are subject to the action of these authorities and the legislature. Under Massachusetts law, no other entity may provide electric or gas delivery service to retail
customers within NSTARs territory without the written consent of NSTAR Electric and/or NSTAR Gas. This consent must be filed with the DPU and the municipality so affected.



Unregulated Operations



NSTARs unregulated operations segment engages in businesses that include district energy operations, telecommunications and liquefied natural gas service. District
energy operations are provided through its AES subsidiary that sells chilled water, steam and electricity to hospitals, teaching and research facilities located in Bostons Longwood Medical Area. Telecommunications services are provided through
NSTAR Com, which installs, owns, operates and maintains a wholesale transport network for other telecommunications service providers in the metropolitan Boston area to deliver voice, video, data and internet services to customers. A former NSTAR
subsidiary, NSTAR Steam Corporation, sold its assets to a non-affiliated entity in September 2005. Revenues earned from NSTARs unregulated operations accounted for approximately 4% of consolidated operating revenues in 2007, 2006 and 2005.



RCN Joint Venture, Investment Conversion and Abandonment



NSTAR Com participated in a telecommunications venture with RCN Telecom
Services of Massachusetts, a subsidiary of RCN Corporation (RCN). As part of a Joint Venture Agreement, NSTAR Com had the option to exchange portions of its joint venture interest for common shares of RCN at specified periods. NSTAR Com exercised
this option and exchanged its entire joint venture interest for common shares of RCN over several years through 2002. As of December 31, 2002, NSTAR Com no longer participated in the joint venture but held approximately 11.6 million common
shares of RCN. On December 24, 2003, NSTAR abandoned its common shares of RCN.



Regulation



The Energy Policy Act of 2005 repealed the Public
Utility Holding Company Act of 1935 (PUHCA), which established a regulatory regime overseen by the SEC, and replaced it with a new statute focused on increased access to holding company books and records to assist the FERC and state utility
regulators in protecting customers of regulated utilities. On December 8, 2005, the FERC finalized rules to implement the Congressionally mandated repeal of the PUHCA of 1935 and enactment of the PUHCA of 2005. FERC issued its final rules
effective February 8, 2006. NSTAR has been granted an exemption and waiver from certain provisions of PUHCA 2005 revisions by operation of law.



NSTAR Gas and NSTAR Electric and its wholly-owned regulated subsidiary, Harbor Electric Energy Company, operate primarily under the authority of the DPU, whose
jurisdiction includes supervision over retail rates for distribution of electricity, natural gas and financing and investing activities. In addition, the FERC has jurisdiction over various phases of NSTAR Electric and NSTAR Gas utility businesses,
conditions under which natural gas is sold at wholesale, facilities used for the transmission or sale of that energy, certain issuances of short-term debt and regulation of accounting. These companies are also subject to various other state and
municipal regulations with respect to environmental, employment, and general operating matters.



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Plant Expenditures and Financings



The most recent estimates of plant expenditures and long-term debt maturities for the years 2008 and 2009-2012 are as follows:



|                   |  |      |         |           |   |          
|------------------ |  | ---- | ------- | --------- | - | ---------
|(in thousands)     |  | 2008 |         | 2009-2012
|Plant expenditures |  | $    | 440,000 |           | $ | 1,300,000
|Long-term debt     |  | $    | 98,531  |           | $ | 1,493,271



In the five-year period 2008 through
2012, plant expenditures are forecasted to be used for system reliability and performance improvements, customer service enhancements and capacity expansion to meet expected customer demand growth in the NSTAR service territory. Capital expenditures
decreased $66 million from $426 million in 2006 to $360 million in 2007 primarily due to the completion and placement in service of phase one of NSTAR Electrics 345kV transmission project. Phase one of this project involved the construction of
two 345kV transmission lines from a switching station in Stoughton, Massachusetts to substations in the Hyde Park section of Boston and to South Boston. The first line of this project was placed in service in October 2006. The second 345kV line of
phase one was placed in service in April 2007. Phase two of the 345kV project, which will add a third and final 345kV line to the project, is expected to be in service in 2009. Expenditures on phase two of the project are expected to be
approximately $95 million, of which $75 million is expected to be spent in 2008 and 2009 and is included in the amounts reported above. These transmission lines ensure continued reliability of electric service and improvement of power import
capability in the Northeast Massachusetts area. A substantial portion of the cost of this project will be shared by other utilities in New England based on ISO-NEs approval and will be recovered by NSTAR through wholesale and retail
transmission rates.



Management continuously reviews its capital expenditure
and financing programs. These programs and, therefore, the estimates included in this Form 10-K are subject to revision due to changes in regulatory requirements, operating requirements, environmental standards, availability and cost of capital,
interest rates and other assumptions. Refer to the accompanying Cautionary Statement Regarding Forward-Looking Informationpreceding Item 1, Businessand the Liquidity, Commitments and Capital
Resourcessection of Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations.



Seasonal Nature of Business



NSTAR Electrics kilowatt-hour sales and revenues are typically higher in the winter and summer than in the spring and fall as sales tend to vary with weather
conditions. NSTAR Gas sales are positively impacted by colder weather because a substantial portion of its customer base uses natural gas for space heating purposes. Refer to the accompanying Selected Quarterly Consolidated Financial
Datasection in Item 6, Selected Consolidated Financial Data for specific financial information by quarter for 2007 and 2006.



Competitive Conditions



As a rate regulated distribution and transmission utility company, NSTAR is not subject to a significantly competitive business environment. Through its franchise
charters, NSTAR Electric and NSTAR Gas have the exclusive right and privilege to engage in the business of delivering energy services within their granted territory. Under Massachusetts law, no other entity may provide electric or natural gas
delivery service to retail customers within NSTARs service territory without the written consent of NSTAR Electric and/or NSTAR Gas. Refer to the accompanying Franchises section of this Item 1 and to Item 1A,
Risk Factors for a further discussion of NSTARs rights and competitive pressures within its service territory.



Environmental Matters



NSTARs subsidiaries are subject to numerous federal, state and local standards with respect to the management of wastes and other environmental considerations. NSTAR subsidiaries face possible liabilities as a
result of



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involvement in several multi-party disposal sites, state-regulated sites or third party claims associated with contamination remediation. NSTAR generally
expects to have only a small percentage of the total potential liability for the majority of these sites. Noncompliance with certain standards can, in some cases, also result in the imposition of monetary civil penalties. Refer to the accompanying
ContingenciesEnvironmental Matters section in Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operationsand to Notes to Consolidated Financial Statements, Note
N, Commitments and Contingencies, for more information.



Management believes that its facilities are in substantial compliance with currently applicable statutory and regulatory environmental requirements.



Number of Employees



As of December 31, 2007, NSTAR had approximately 3,150 employees, including approximately 2,250, or 71%, who are represented by three unions covered by separate collective bargaining contracts.



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



|                                                                      |  |                                          |  |                    |  |                        
|--------------------------------------------------------------------- |  | ---------------------------------------- |  | ------------------ |  | -----------------------
|Union                                                                 |  | Percent of Union to TotalNSTAR Employees |  | Supports           |  | Contract ExpirationDate
|Local 369 of the Utility Workers of America (AFL-CIO)                 |  | 61%                                      |  | Utility Operations |  | June 1, 2009           
|                                                                      |  |                                          | 
|Local 12004 of the United Steelworkers of America                     |  | 8%                                       |  | Utility Operations |  | March 31, 2010         
|                                                                      |  |                                          | 
|Local 877 of the International Union of Operating Engineers (AFL-CIO) |  | 2%                                       |  | MATEP              |  | September 30, 2009     



Management believes it has satisfactory relations with its employees.



(d) Financial Information about Geographic Areas



NSTAR
is a holding company engaged through its subsidiaries in the energy delivery business in Massachusetts. None of NSTARs subsidiaries have any foreign operations or export sales.



(e) Available Information



NSTAR files its Forms 10-K, 10-Q and 8-K reports, proxy statements and other information with the SEC. You may access materials NSTAR has filed with the SEC on the
SECs website at www.sec.gov. In addition, NSTARs Board of Trustees has various committees, including an Audit, Finance and Risk Management Committee, an Executive Personnel Committee and a Board Governance and Nominating
Committee. The Board also has a standing Executive Committee. The Board has adopted the NSTAR Board of Trustees Corporate Guidelines on Significant Corporate Governance Issues, a Code of Ethics for the Principal Executive Officer, General Counsel,
and Senior Financial Officers pursuant to Section 406 of the Sarbanes-Oxley Act of 2002, and a Code of Ethics and Business Conduct for Directors, Officers and Employees (Code of Ethics). NSTAR intends to disclose any amendment to,
and any waiver from, a provision of the Code of Ethics that applies to the Chief Executive Office or Chief Financial Officer or any other executive officer and that relates to any element of the Code of Ethics definition enumerated in
Item 406(b) of Regulation S-K, on Form 8-K, within five business days following the date of such amendment or waiver. NSTARs SEC filings and Corporate Governance documents, including charters, guidelines and codes, and any amendments to
such charters, guidelines and codes



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that are applicable to NSTARs executive officers, senior financial officers or trustees can be accessed free of charge on NSTARs website at:
www.nstar.com: Select Investor Relations Company Information. Copies of NSTARs SEC filings may also be obtained free of charge by writing to NSTARs Investor Relations Department at the address on the cover
of this Form 10-K or by calling 781-441-8338.



The certifications of
NSTARs Chief Executive Officer and Chief Financial Officer pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 are attached to this Annual Report on Form 10-K as Exhibits 31.1, 31.2, 32.1 and 32.2. NSTAR also filed the required
Annual CEO Certification of its Chief Executive Officer pursuant to Section 303A of the NYSE Listing Manual in 2007, certifying that he is not aware of any violation of the NYSE corporate governance listing standards.



|Item 1A. | Risk Factors
|-------- | ------------



Our future performance is subject to a variety of risks, including those described below. If any of the following risks actually occur, our business could be harmed and the trading price of our common shares could
decline. In addition to the other information in this Annual Report on Form 10-K, shareholders or prospective investors should carefully consider the following risk factors.



Our electric and gas operations are highly regulated, and any adverse regulatory changes could have a significant impact on the
Companys results of operations and its financial position.



NSTARs electric and gas operations, including the rates charged, are regulated by the FERC and the DPU. In addition, NSTARs accounting policies are prescribed by GAAP, the FERC and the DPU. Adverse regulatory changes could have
a significant impact on results of operations and financial condition.



Potential municipalization or technological developments may adversely affect our regulated electricity and gas businesses.



Under Massachusetts law, no other entity may provide electric or gas delivery service to retail customers within NSTARs service territory without the written
consent of NSTAR Electric and/or NSTAR Gas. Although not a trend, NSTARs operating utility companies could be exposed to municipalization risk, whereby a municipality could acquire the electric or gas delivery assets located in that city or
town and take over the customer delivery service, thereby reducing NSTARs revenues. Any such action would require numerous legal and regulatory consents and approvals. NSTAR expects that any municipalization would require that NSTAR be
compensated for its assets assumed. In addition, there is also the risk that technological developments could lead to distributed generation among NSTARs customer base.



Changes in environmental laws and regulations affecting our business could increase our costs or curtail our activities.



NSTAR and its subsidiaries are subject to a number of environmental
laws and regulations that are currently in effect, including those related to the handling, disposal, and treatment of hazardous materials. Changes in compliance requirements or the interpretation by governmental authorities of existing requirements
may impose additional costs, all of which could have an adverse impact on NSTARs results of operations.



The Company may be required to conduct environmental remediation activities for power generating sites and other potentially unidentified sites.



NSTAR is subject to actual or potential claims and lawsuits involving environmental
remediation activities for power generating sites previously owned and other potentially unidentified sites. NSTAR divested all of its regulated generating assets over the past 10 years under terms that generally require the buyer to assume all
responsibility for past and present environmental harm. Based on NSTARs current assessment of its environmental responsibilities, existing legal requirements and regulatory policies, NSTAR does not believe that its known environmental
remediation responsibilities will have a material adverse effect on NSTARs results of



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operations, cash flows or financial position. However, discovery of currently unknown conditions at existing sites, identification of additional waste sites
or changes in environmental regulation, could have a material adverse impact on NSTARs results of operations, cash flows or financial position.



NSTAR is subject to operational risk that could cause us to incur substantial costs and liabilities.



Our business, which involves the transmission and distribution of natural gas and
electricity that is used as an energy source by our customers, is subject to various operational risks, including incidents that expose the Company to potential claims for property damages or personal injuries beyond the scope of NSTARs
insurance coverage, and equipment failures that could result in performance below assumed levels. For example, operational performance below established target benchmark levels could cause NSTAR to incur penalties imposed by the DPU, up to a maximum
of two percent of transmission and distribution revenues, under applicable Service Quality Indicators.



Increases in interest rates due to financial market conditions or changes in our credit ratings, could have an adverse impact on our access to capital markets at favorable rates, or at all, and could otherwise
increase our costs of doing business.



NSTAR frequently accesses the
capital markets to finance its working capital requirements, capital expenditures and to meet its long-term debt maturity obligations. Increased interest rates, or adverse changes in our credit ratings, would increase our cost of borrowing and other
costs that could have an adverse impact on our results of operations and cash flows and ultimately have an adverse impact on the market price of our common shares. In addition, an adverse change in our credit ratings could increase borrowing costs,
trigger requirements that we obtain additional security for performance, such as a letter of credit, related to our energy procurement agreements. Refer to the accompanying Item 7A, Quantitative and Qualitative Disclosures About Market
Risk,for a further discussion.



Our electric and gas
businesses are sensitive to variations in weather and have seasonal variations. In addition, severe storm-related disasters could adversely affect the Company.



Sales of electricity and natural gas to residential and commercial customers are influenced by temperature fluctuations. Significant fluctuations in
heating or cooling degree days could have a material impact on energy sales for any given period. In addition, extremely severe storms, such as hurricanes and ice storms, could cause damage to our facilities that may require additional costs to
repair and have a material adverse impact on the Companys results of operations, cash flows or financial position. To the extent possible, NSTARs rate regulated subsidiaries would seek recovery of these costs through the regulatory
process.



Economic downturn, and increased costs of energy supply, could
adversely affect energy consumption and could adversely affect our results of operations.



Energy consumption is significantly impacted by the general level of economic activity and cost of energy supply. Economic downturns or periods of high energy supply costs typically lead to reductions in energy
consumption and increased conservation measures. These conditions could adversely impact the level of energy sales and result in less demand for energy delivery. A recession or a prolonged lag of a subsequent recovery could have an adverse effect on
NSTARs results of operations, cash flows or financial position.



The ability of NSTAR to maintain future cash dividends at the level currently paid to shareholders is dependent upon the ability of its subsidiaries to pay dividends to NSTAR.



As a holding company, NSTAR does not have any operating activity and therefore is
substantially dependent on dividends from its subsidiaries and from external borrowings at variable rates of interest to provide the cash necessary for debt obligations, to pay administrative costs, to meet contractual obligations that may not be
met by our subsidiaries and to pay common share dividends to NSTARs shareholders. Regulatory and other legal restrictions may limit our ability to transfer funds freely, either to or from our subsidiaries. These laws and



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regulations may hinder our ability to access funds that we may need to make payments on our obligations. As the holding companys sources of cash are
limited to dividends from its subsidiaries and external borrowings, the ability to maintain future cash dividends at the level currently paid to shareholders will be dependent upon earnings of NSTARs subsidiaries.



Our electric and gas operations may be impacted if generation supply or its
transportation or transmission availability is limited or unreliable.



Our electric and natural gas delivery businesses are reliant on transportation and transmission facilities that we do not own or control. Our ability to provide energy delivery services depends on the operations and facilities of third
parties, including the independent system operator, electric generators that supply our customers energy requirements and natural gas pipeline operators from which we receive delivery of our natural gas supply. Should our ability to receive
electric or natural gas supply be disrupted due either to operational issues or to inadequacy of transmission capacity, it could impact our ability to serve our customers. It could also force us to secure alternative supply at significantly higher
costs.



|Item 1B. | Unresolved Staff Comments
|-------- | -------------------------



None



|Item 2. | Properties
|------- | ----------



NSTAR Electric properties include an integrated system of transmission and distribution lines and substations, a jointly owned administration office building and other structures such as garages and service centers
that are located primarily in eastern Massachusetts.



NSTAR Electrics
principal electric properties consist of substations, transmission and distribution lines and meters necessary to maintain reliable service to customers. In addition, it owns several service centers. NSTARs high-voltage transmission lines are
generally located on land either owned or subject to perpetual and exclusive easements in its favor. Its low-voltage distribution lines are located principally on public property under permits granted by municipal and other state authorities. In
October 2006, NSTAR Electric completed and placed in service the first line of a 345 kV transmission project that added approximately 18 miles of transmission lines. The second line of this project was placed in service in April 2007. A third and
final line is expected to be in service in 2009.



At December 31, 2007,
NSTAR Electrics primary and secondary transmission and distribution system consisted of approximately 21,600 circuit miles of overhead lines, approximately 12,830 circuit miles of underground lines, 257 substation facilities and approximately
1,158,500 active customer meters.



NSTAR Gas principal natural gas
properties consist of distribution mains, services and meters necessary to maintain reliable service to customers. In addition, it owns a jointly owned administration office and service building, three district office buildings and several natural
gas receiving and take stations. At December 31, 2007, the gas system included approximately 3,080 miles of gas distribution lines, approximately 186,100 services and approximately 286,700 customer meters together with the necessary measuring
and regulating equipment. In addition, Hopkinton owns a liquefaction and vaporization plant, a satellite vaporization plant and above ground cryogenic storage tanks having an aggregate storage capacity equivalent to 3.5 Bcf of natural gas.



District energy operations consist of AES cogeneration facility located
in the Longwood Medical Area of Boston. MATEP provides steam, chilled water and electricity to over 9 million square feet of medical and teaching facilities.



NSTAR Coms telecommunications service owns approximately 200 miles of fiber optic network which represents approximately 79,000 fiber
miles of network.



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|Item 3. | Legal Proceedings
|------- | -----------------



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



|Item 4. | Submission of Matters to a Vote of Security Holders
|------- | ---------------------------------------------------



There were no matters submitted to a vote of security holders during the fourth quarter of 2007.



|Item 4A. | Executive Officers of Registrant
|-------- | --------------------------------



Identification of Executive Officers



|                      |  |                                                                                 |  |                        
|--------------------- |  | ------------------------------------------------------------------------------- |  | -----------------------
|Name of Officer       |  | Position and Business Experience                                                |  | Age atDecember 31, 2007
|Thomas J. May         |  | Chairman, President and Chief Executive Officer and a Trustee                   |  | 60                     
|                      |  |                                                                                
|Douglas S. Horan      |  | Senior Vice President - Strategy, Law and Policy, Secretary and General Counsel |  | 58                     
|                      |  |                                                                                
|James J. Judge        |  | Senior Vice President, Treasurer and Chief Financial Officer                    |  | 51                     
|                      |  |                                                                                
|Timothy R. Manning    |  | Senior Vice President - Human Resources                                         |  | 56                     
|                      |  |                                                                                
|Joseph R. Nolan, Jr.  |  | Senior Vice President - Customer & Corporate Relations                          |  | 44                     
|                      |  |                                                                                
|Werner J. Schweiger   |  | Senior Vice President - Operations                                              |  | 48                     
|                      |  |                                                                                
|Eugene J. Zimon       |  | Senior Vice President - Information Technology                                  |  | 59                     
|                      |  |                                                                                
|Robert J. Weafer, Jr. |  | Vice President, Controller and Chief Accounting Officer                         |  | 60                     



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PART II



|Item 5. | Market for the Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
|------- | ----------------------------------------------------------------------------------------------------------------



(a) Market Information and (c) Dividends



The NSTAR Common Shares, $1 par value, are listed on the New York Stock
Exchange under the symbol NST. NSTARs Common Shares closing market price at December 31, 2007 was $36.22 per share.



The NSTAR Common Shares high and low sales prices as reported by the New York Stock Exchange composite transaction reporting system and dividends declared per share for
each of the quarters in 2007 and 2006 were as follows:



|               |  |              |       |                   |   |              |      |                   |       |  |   |       |  |   |       |  |   |       
|-------------- |  | ------------ | ----- | ----------------- | - | ------------ | ---- | ----------------- | ----- |  | - | ----- |  | - | ----- |  | - | ------
|               |  | 2007         |       | 2006             
|               |  | Sales Prices |       | DividendsDeclared |   | Sales Prices |      | DividendsDeclared
|               |  | High         |       | Low               |   |              | High |                   | Low   | 
|First quarter  |  | $            | 35.37 |                   | $ | 32.68        |      | $                 | 0.325 |  | $ | 30.16 |  | $ | 28.00 |  | $ | 0.3025
|Second quarter |  | $            | 37.37 |                   | $ | 31.70        |      | $                 | 0.325 |  | $ | 28.83 |  | $ | 26.50 |  | $ | 0.3025
|Third quarter  |  | $            | 35.05 |                   | $ | 30.75        |      | $                 | 0.325 |  | $ | 34.07 |  | $ | 28.10 |  | $ | 0.3025
|Fourth quarter |  | $            | 37.00 |                   | $ | 33.45        |      | $                 | 0.350 |  | $ | 35.90 |  | $ | 33.26 |  | $ | 0.3250



NSTAR paid common share dividends to
shareholders totaling $138.9 million and $129.2 million in 2007 and 2006, respectively.



(b) Holders



As of December 31, 2007, there were 21,344 registered holders of NSTAR Common Shares.



(d) Securities authorized for issuance under equity
compensation plans



The following table
provides information about NSTARs equity compensation plans as of December 31, 2007.



|                                                       |  |                                                                     |  |                                                     |       |                                                                                         |          
|------------------------------------------------------ |  | ------------------------------------------------------------------- |  | --------------------------------------------------- | ----- | --------------------------------------------------------------------------------------- | ---------
|Plan Category                                          |  | Number of securitiesto be issued uponexercise ofoutstanding options |  | Weighted averageexercise price ofoutstandingoptions |       | Number ofsecurities remainingavailable forfuture
issuanceunder equitycompensation plans
|Equity compensation plans approved byshareholders      |  | 2,234,202                                                           |  | $                                                   | 28.06 |                                                                                         | 2,908,900
|Equity compensation plans not approved by shareholders |  |                                                                    |  |                                                     | N/A   |                                                                                         | N/A      
|                                                       |  |                                                                     |  |                                                     |       |                                                                                         |          
|Total                                                  |  | 2,234,202                                                           |  | $                                                   | 28.06 |                                                                                         | 2,908,900
|                                                       |  |                                                                     |  |                                                     |       |                                                                                         |          



The NSTAR 1997 Share Incentive Plan
(the 1997 Plan) permitted a variety of stock and stock-based awards, including stock options and deferred stock awards granted to key employees. The 1997 Plan, which expired as to further grants on January 23, 2007, limited the terms of awards
to ten years. Subject to adjustment for stock-splits and similar events, the aggregate number of common shares that were available for award under the 1997 Plan was 4 million. All options were granted at the full market price of the common shares on
the date of the grant when approved by the NSTAR Board of Trustees Executive Personnel Committee. In general, stock options and deferred stock awards vest ratably over a three-year period from date of grants, and options may be exercised
during the ten-year period from grant date.



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On May 3, 2007, NSTAR shareholders approved the NSTAR 2007 Long Term Incentive Plan (the 2007 Plan). The 2007 Plan
replaced the 1997 Plan, which expired by its terms in January 2007. The 2007 Plan is similar in design to the 1997 Plan. The 2007 Plan limits the terms of awards to ten years and prohibits the granting of awards beyond ten years after its effective
date. The aggregate number of common shares available for award under the 2007 Plan as approved was 3.5 million with 2,908,900 unissued shares available as of December 31, 2007.



(e) Purchases of equity securities



Common Shares of NSTAR issued under the NSTAR Dividend Reinvestment and Direct Common Shares Purchase Plan, the 1997 Share Incentive Plan, the 2007 Long Term Incentive
Plan and the NSTAR Savings Plan may consist of newly issued shares from the Company or shares purchased in the open market by the Company or an independent agent. During the three-month period ended December 31, 2007, the shares listed below
were acquired in the open market.



|                     |  |                                       |  |                             |      
|-------------------- |  | ------------------------------------- |  | --------------------------- | -----
|                     |  | Total Number ofCommon SharesPurchased |  | Average PricePaid Per Share
|October              |  | 83,829                                |  | $                           | 34.64
|November             |  | 119,035                               |  | $                           | 34.47
|December             |  | 2,975                                 |  | $                           | 36.21
|                     |  |                                       |  |                             |      
|Total Fourth Quarter |  | 205,839                               |  | $                           | 34.56
|                     |  |                                       |  |                             |      



(f) Stock Performance Graphs



The following Stock Performance
Graphs and related information shall not be deemed soliciting material or to be filed with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or Securities
Exchange Act of 1934, each as amended, except to the extent that the Company specifically incorporates it by reference into such filing.



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The stock performance graph presentations set forth below compare cumulative five-year and ten-year shareholder returns
with the Standard & Poors 500 Index (S&P 500) and the Edison Electric Industry Index (EEI Index), a recognized industry index of 61 investor-owned utility companies. Pursuant to the SECs regulations, the graphs below depict
the investment of $100 at the commencement of the measurement periods, with dividends reinvested.



Five-Year Performance Graph



LOGO



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Ten-Year Performance Graph



LOGO



|Item 6. | Selected Consolidated Financial Data
|------- | ------------------------------------



The following table summarizes five years of selected consolidated financial data.



|                                       |  |      |           |      |   |           |  |      |           |      |   |           |  |   |          
|-------------------------------------- |  | ---- | --------- | ---- | - | --------- |  | ---- | --------- | ---- | - | --------- |  | - | ---------
|(in thousands, except per share data)  |  | 2007 |           | 2006 |   | 2005      |  | 2004 |           | 2003
|Operating revenues                     |  | $    | 3,261,784 |      | $ | 3,577,702 |  | $    | 3,243,120 |      | $ | 2,954,332 |  | $ | 2,911,711
|Net income                             |  | $    | 221,515   |      | $ | 206,774   |  | $    | 196,135   |      | $ | 188,481   |  | $ | 181,574  
|Per common share:                      |  |      |           |      |   |           |  |      |           |      |   |           |  |   |          
|Basic earnings                         |  | $    | 2.07      |      | $ | 1.94      |  | $    | 1.84      |      | $ | 1.77      |  | $ | 1.71     
|Diluted earnings                       |  | $    | 2.07      |      | $ | 1.93      |  | $    | 1.83      |      | $ | 1.76      |  | $ | 1.70     
|Cash dividends declared (b)            |  | $    | 1.325     |      | $ | 1.535     |  | $    | 0.87      |      | $ | 1.1225    |  | $ | 1.0875   
|Total assets                           |  | $    | 7,759,545 |      | $ | 7,769,091 |  | $    | 7,638,332 |      | $ | 7,391,356 |  | $ | 6,614,186
|Long-term debt (a)                     |  | $    | 2,017,439 |      | $ | 1,723,558 |  | $    | 1,614,411 |      | $ | 1,792,654 |  | $ | 1,602,402
|Transition property securitization (a) |  | $    | 483,961   |      | $ | 637,217   |  | $    | 787,966   |      | $ | 308,748   |  | $ | 377,150  
|Preferred stock of subsidiary          |  | $    | 43,000    |      | $ | 43,000    |  | $    | 43,000    |      | $ | 43,000    |  | $ | 43,000   



|(a) | Excludes the current portion.
|--- | -----------------------------



|(b) | As a result of a change in NSTARs Board of Trustees meetings schedule in 2005, the fourth quarter dividend that typically would have been declared in December 2005, was
approved on January 26, 2006 at $0.3025 per share, and therefore dividends declared during 2006 include the fourth quarter of 2005. The dividend payment schedule remained unchanged.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Selected Quarterly Consolidated Financial Data (Unaudited)



|                                          |  |                   |           |                 |       |           |         |                        |        |  |   |      |  |   |     
|----------------------------------------- |  | ----------------- | --------- | --------------- | ----- | --------- | ------- | ---------------------- | ------ |  | - | ---- |  | - | ----
|                                          |  | OperatingRevenues |           | OperatingIncome |       | NetIncome |         | Earnings Per Share (a)
|(in thousands, except earnings per share) |  |                   |           |                 | Basic |           | Diluted
|2007                                      |  |                   |           |                 |       |           |         |                        |        |  |   |      |  |   |     
|First quarter                             |  | $                 | 984,378   |                 | $     | 89,187    |         | $                      | 47,820 |  | $ | 0.45 |  | $ | 0.45
|Second quarter                            |  | $                 | 725,135   |                 | $     | 92,720    |         | $                      | 50,100 |  | $ | 0.47 |  | $ | 0.47
|Third quarter                             |  | $                 | 804,919   |                 | $     | 121,061   |         | $                      | 84,198 |  | $ | 0.79 |  | $ | 0.79
|Fourth quarter                            |  | $                 | 747,352   |                 | $     | 80,869    |         | $                      | 39,397 |  | $ | 0.37 |  | $ | 0.37
|                                          |  |                   |           |                 |      
|2006                                      |  |                   |           |                 |       |           |         |                        |        |  |   |      |  |   |     
|First quarter                             |  | $                 | 1,034,770 |                 | $     | 87,478    |         | $                      | 44,047 |  | $ | 0.41 |  | $ | 0.41
|Second quarter                            |  | $                 | 784,586   |                 | $     | 87,661    |         | $                      | 45,666 |  | $ | 0.43 |  | $ | 0.43
|Third quarter                             |  | $                 | 956,279   |                 | $     | 121,307   |         | $                      | 76,705 |  | $ | 0.72 |  | $ | 0.72
|Fourth quarter                            |  | $                 | 802,067   |                 | $     | 78,069    |         | $                      | 40,356 |  | $ | 0.38 |  | $ | 0.38



|(a) | The sum of the quarters may not equal basic and diluted annual earnings per share due to rounding.
|--- | --------------------------------------------------------------------------------------------------



|Item 7. | Managements Discussion and Analysis of Financial Condition and Results of Operations (MD&A)
|------- | --------------------------------------------------------------------------------------------



Overview



NSTAR (or the Company) is a holding company engaged through its subsidiaries in the energy delivery business serving approximately
1.4 million customers in Massachusetts, including approximately 1.1 million electric distribution customers in 81 communities and approximately 300,000 natural gas distribution customers in 51 communities. Prior to January 1, 2007,
NSTARs retail electric utility subsidiaries were Boston Edison, ComElectric and Cambridge Electric. Its wholesale electric subsidiary was Canal. NSTARs three retail electric companies collectively have operated under the trade name
NSTAR Electric. NSTARs retail natural gas distribution utility subsidiary is NSTAR Gas. NSTARs nonutility, unregulated operations include district energy operations primarily through its AES subsidiary, telecommunications
operations (NSTAR Com) and a liquefied natural gas service company (Hopkinton). Harbor Electric Energy Company, a wholly-owned subsidiary of NSTAR Electric, provides distribution service and ongoing support to its only customer, the Massachusetts
Water Resources Authority. Utility operations accounted for approximately 96% of consolidated operating revenues in 2007, 2006 and 2005.



NSTARs Rate Settlement Agreement anticipated the transfer of the net assets, structured as a merger of NSTARs electric subsidiary companies Cambridge
Electric, ComElectric and Canal, to Boston Edison. NSTAR requested and received final approval of this merger from the DPU and FERC during the fourth quarter of 2006. As part of this merger, on December 1, 2006, NSTAR filed blended basic
service rates with the DPU, effective January 1, 2007. The individual Boston Edison, ComElectric and Cambridge Electric basic service rates were blended into rates applicable to the entire NSTAR Electric service territory pursuant to the
DPUs approval of the NSTAR Electric merger. The merger was effective as of January 1, 2007 and Boston Edison was renamed NSTAR Electric Company.



NSTAR consolidates three-wholly owned special purpose subsidiaries, BEC Funding LLC, established in 1999, BEC Funding II, LLC and CEC Funding, LLC, both established in
2004. These entities were created to complete the sale of $725 million, $265.5 million and $409 million, respectively, in notes to a special purpose trust created by two Massachusetts state agencies. NSTAR has no variable interest entities.



NSTAR derives its revenues primarily from the sale of energy, distribution and
transmission services to customers and from its unregulated businesses. NSTARs earnings are impacted by fluctuations in unit sales of electric kWh and natural gas MMbtu, which directly determine the level of distribution and transmission



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revenues recognized. 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. As a result of this rate structure, any variability in the cost of energy supply purchased will impact purchased power and cost of gas sold expense and
corresponding revenues but will not affect the Companys earnings.



Critical Accounting Policies and Estimates



NSTARs
discussion and analysis of its financial condition, results of operations and cash flows are based upon the accompanying Consolidated Financial Statements, which have been prepared in accordance with GAAP. The preparation of these Consolidated
Financial Statements required management to make estimates and judgments that affect the reported amount of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of the Consolidated
Financial Statements. Actual results may differ from these estimates under different assumptions or conditions.



Critical accounting policies and estimates are defined as those that require significant judgment and uncertainties, and potentially may result in materially different
outcomes under different assumptions and conditions. NSTAR believes that its accounting policies and estimates that are most critical to the reported results of operations, cash flows and financial position are described below.



a. Revenue Recognition



Utility revenues are based on authorized rates approved by the DPU and FERC. Revenues
related to the sale, transmission and distribution of delivery service are generally recorded when service is rendered or energy is delivered to customers. However, the determination of the energy sales to individual customers is based on systematic
meter readings throughout the month. Meters that are not read during a given month are estimated and trued-up in a future period. At the end of each month, amounts of energy delivered to customers since the date of the last billing date are
estimated and the corresponding unbilled revenue is recorded. Unbilled electric revenue is estimated each month based on daily generation volumes (territory load), estimated line losses and applicable customer rates. Unbilled natural gas revenues
are estimated based on estimated purchased gas volumes, estimated gas losses and tariffed rates in effect. Accrued unbilled revenues totaled $60 million and $59 million in the accompanying Consolidated Balance Sheets as of December 31, 2007 and
2006, respectively.



The level of revenues is subject to seasonal weather
conditions. Electric sales volumes are typically higher in the winter and summer than in the spring or fall. Gas sales volumes are impacted by colder weather since a substantial portion of NSTARs customer base uses natural gas for heating
purposes. As a result, NSTAR records a higher level of unbilled revenue during the seasonal periods mentioned above.



NSTARs nonutility revenues are recognized when services are rendered or when the energy is delivered. Revenues are based, for the most part, on long-term
contractual rates.



b. Regulatory Accounting



NSTAR follows accounting policies prescribed by GAAP, the FERC and the DPU. As a
rate-regulated company, NSTARs utility subsidiaries are subject to SFAS No. 71, Accounting for the Effects of Certain Types of Regulation(SFAS 71). The application of SFAS 71 results in differences in the timing of
recognition of certain revenues and expenses from those of other businesses and industries. NSTARs energy delivery businesses remain subject to rate-regulation and continue to meet the criteria for application of SFAS 71. This ratemaking
process results in the recording of regulatory assets based on the probability of current and future cash inflows. Regulatory assets represent incurred or accrued costs that have been deferred because they are probable of future recovery from
customers. As of December 31, 2007 and 2006, NSTAR has recorded regulatory assets of $2.6 billion and $2.9 billion, respectively. NSTAR continuously reviews these assets to assess their ultimate



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recoverability within the approved regulatory guidelines. NSTAR expects to fully recover these regulatory assets in its rates. If future recovery of costs
ceases to be probable, NSTAR would be required to charge these assets to current earnings. Impairment risk associated with these assets relates to potentially adverse legislative, judicial or regulatory actions in the future.



c. Pension and Other Postretirement Benefits



NSTARs annual pension and other postretirement benefits costs are dependent upon
several factors and assumptions, such as but not limited to, employee demographics, plan design, the level of cash contributions made to the plans, the discount rate, the expected long-term rate of return on the plans assets and health care
cost trends.



In accordance with SFAS No. 87, Employers
Accounting for Pensions (SFAS 87) and SFAS No. 106, Employers Accounting for Postretirement Benefits Other than Pensions(SFAS 106), changes in pension and PBOP liabilities associated with these factors are
not immediately recognized as pension and PBOP costs in the statements of income, but generally are recognized in future years over the remaining average service period of the plans participants. As a result of the requirements of SFAS
No. 158, Employers Accounting for Deferred Benefit Pension and Other Postretirement Plansan amendment of FASB Statements Nos. 87, 88, 106, and 132(R) (SFAS 158), these factors could have a significant impact on
pension and postretirement assets or liabilities recognized.



There were no
significant changes to NSTARs pension benefits in 2007, 2006 and 2005 that had a material impact on recorded pension costs. As further described in Note G, Pension and Other Postretirement Benefits,to the accompanying
Consolidated Financial Statements, NSTARs discount rates at December 31, 2007 and 2006 were 6.25% and 6%, respectively, and align with market conditions and the characteristics of NSTARs pension obligation. The expected long-term
rate of return on its pension plan assets for 2007 remained at 8.4% (net of plan expenses), the same as 2006. These assumptions will have an impact on reported pension costs in future years in accordance with the cost recognition approach of SFAS
87. This impact, however, is mitigated through NSTARs regulatory rate treatment of qualified pension and PBOP costs. (Refer to a further discussion of regulatory accounting treatment below.) In determining pension obligation and cost amounts,
these assumptions may change from period to period, and such changes could result in material changes to recorded pension and PBOP costs and funding requirements.



NSTARs Pension Plan (the Plan) assets, which partially consist of equity investments, are affected by fluctuations in the financial
markets. These fluctuations in market returns will have an impact on pension costs in future periods. In addition, fluctuation in the market value of these assets will have an impact on the recorded funded status of these benefit plans, in
accordance with the requirements of SFAS 158.



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The following chart reflects the projected benefit obligation and cost sensitivities associated with a change in certain
actuarial assumptions by the indicated percentage. Each sensitivity below reflects an evaluation of the change based solely on a change in that assumption.



|                                                             |  |                     |  |                                                         |         |   |                                        |   |        |  
|------------------------------------------------------------ |  | ------------------- |  | ------------------------------------------------------- | ------- | - | -------------------------------------- | - | ------ | -
|(in thousands)                                               |  | Changein Assumption |  | Impact onProjected BenefitObligationIncrease/(Decrease) |         |   | Impact on 2007 CostIncrease/(Decrease) |  
|                                                             |  |                    
|                                                             |  |                     | 
|Actuarial Assumption                                         |  |                     | 
|Pension:                                                     |  |                     |  |                                                         |         |   |                                        |   |        |  
|Increase in discount rate                                    |  | 50 basis points     |  | $                                                       | (56,744 | ) |                                        | $ | (5,288 | )
|Decrease in discount rate                                    |  | 50 basis points     |  | $                                                       | 56,162  |   |                                        | $ | 4,256  |  
|Increase in expected long-term rate of return on plan assets |  | 50 basis points     |  |                                                         | N/A     |   |                                        | $ | (4,985 | )
|Decrease in expected long-term rate of return on plan assets |  | 50 basis points     |  |                                                         | N/A     |   |                                        | $ | 4,985  |  
|                                                             |  |                     | 
|Other Postretirement Benefits:                               |  |                     |  |                                                         |         |   |                                        |   |        |  
|Increase in discount rate                                    |  | 50 basis points     |  | $                                                       | (43,441 | ) |                                        | $ | (2,472 | )
|Decrease in discount rate                                    |  | 50 basis points     |  | $                                                       | 48,899  |   |                                        | $ | 3,357  |  
|Increase in expected long-term rate of return on plan assets |  | 50 basis points     |  |                                                         | N/A     |   |                                        | $ | (1,634 | )
|Decrease in expected long-term rate of return on plan assets |  | 50 basis points     |  |                                                         | N/A     |   |                                        | $ | 1,634  |  
|N/A - not applicable                                         |  |                     |  |                                                         |         |   |                                        |   |        |  



Management evaluates the
appropriateness of the discount rate through the modeling of a bond portfolio that approximates the Plan liabilities. Management further considers rates of high quality corporate bonds of appropriate maturities as published by nationally recognized
rating agencies consistent with the duration of the Companys plans.



In
determining the expected long-term rate of return on plan assets, NSTAR considers past performance and economic forecasts for the types of investments held by the Plan as well as the target allocation for the investments over a 20-year time period.
In 2007, NSTAR kept the expected long-term rate of return on plan assets at 8.4% as a result of the prevailing outlook for investment returns. This rate is presented net of both administrative and investment expenses, which have averaged
approximately 0.6% for 2007, 2006 and 2005.



The expected long-term rate of
return on Plan assets could vary from actual returns as well as the target allocation for investments over time. As such, these fluctuations could impact NSTARs capital resources to meet its plan contributions.



As a result of the DPU-approved Pension and PBOP cost reconciliation rate adjustment
mechanism tariff (PAM), NSTAR is authorized to recover its pension and PBOP expense through this reconciling rate mechanism. This PAM removes the volatility in earnings that could result from fluctuations in market conditions and plan assumptions.



On August 17, 2006, the Pension Protection Act of 2006 (the Act) was
enacted into law. The Act requires employers with defined-benefit pension plans to make contributions to meet a certain funding target and eliminate funding shortfalls. The Company is in compliance with this Act. Based on its current funding level
and the provisions of the Act, NSTAR does not anticipate making contributions to the Plan in 2008.



d. Uncertain Tax Positions



Effective January 1, 2007, NSTAR adopted the provisions of FASB Interpretation No. 48 (FIN 48) Accounting for Uncertainty in Income Taxes, an Interpretation of SFAS No. 109, Accounting for Income Taxes
relating to



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uncertain tax positions. FIN 48 requires management to use judgment in assessing the potential exposure from tax positions taken that may be challenged by
taxing authorities. Management is required to assess the possibility of alternative outcomes based upon all facts available at the reporting date, including in some cases the opinion of independent tax consultants. These estimates could differ
significantly from the ultimate outcome. For additional information on uncertain tax positions and estimates used therein, refer to Income Tax Matters included in this section of this MD&A.



Investments in Yankee Companies



NSTAR Electric collectively has an equity ownership of 14% in CY, 14% in YA, and 4% in MY,
(collectively, the Yankee Companies).



CY was notified on
November 26, 2007 by the NRC that its former generating plant site was decommissioned in accordance with NRC procedures. Also, YA and MY plant sites have been decommissioned in accordance with NRC procedures. Amended licenses continue to apply
to the ISFSIs where spent nuclear fuel is stored at these sites. CY, YA and MY remain responsible for the security and protection of the ISFSI and are required to maintain radiation monitoring programs at the sites.



On December 21, 2006, the shareholders of CY approved a resolution to repurchase 276,575
of its outstanding shares from all equity holders at a price of $108.4681 per share and declared those shares payable at the close of business on that date. The total value of this buy-back transaction was $30 million. NSTAR Electrics
reduction of its equity ownership resulting from the CY buy-back of 38,721 shares was approximately $4.2 million.



Yankee Companies Spent Fuel Litigation



On October 4, 2006, the U.S. Court of Federal Claims issued a judgment in a spent nuclear fuel litigation, in the amounts of $34.2 million, $32.9 million and $75.8
million for CY, YA and MY, respectively. This judgment in favor of these Yankee companies relating to the alleged failure of the DOE to provide for a permanent facility to store spent nuclear fuel for years prior to 2001 for CY and YA, and prior to
2002 for MY. NSTAR Electrics portion of the judgment amounts to $4.8 million, $4.6 million and $3 million, respectively. On December 4, 2006, the DOE filed its notice of appeal of the trial courts decision. As a result, the Yankee
Companies have not recognized the damage awards on their books, and therefore, NSTAR Electric has not recognized its portion. On December 14, 2007, the Yankee companies filed complaints against the DOE seeking damages from 2001 for CY and YA,
and from 2002 for MY, through a future trial date. NSTAR cannot predict the ultimate outcome of this decision on appeal or the subsequent complaints.



The accounting for decommissioning costs of nuclear power plants involves significant estimates related to costs to be incurred many years in the future. Changes in these
estimates will not affect NSTARs results of operations or cash flows because these costs will be collected from customers through NSTAR Electrics transition charge filings with the DPU.



Derivative Instruments



Energy Contracts



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



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Hedging Agreements



NSTAR Gas purchases financial contracts based upon NYMEX natural gas futures in order to reduce cash flow variability associated with the
purchase price for approximately one-third of its natural gas purchases. The objective of this practice is to minimize fluctuations in prices to NSTAR firm gas sales customers. These financial contracts do not procure gas supply and therefore NSTAR
Gas does not take physical delivery of gas. These contracts qualify as derivative financial instruments, specifically cash flow hedges. Accordingly, the fair value of these instruments is recognized on the accompanying Consolidated Balance Sheets as
an asset or liability representing amounts due from or payable to the counter parties of NSTAR Gas, as if such contracts were settled currently. All actual costs and benefits incurred are included in the firm sales CGAC and are fully recoverable
from customers. As a result, NSTAR Gas records an offsetting regulatory asset or liability for the market price changes, in lieu of recording the adjustment to Other Comprehensive Income. Currently, these derivative contracts extend through April
2009. At December 31, 2007 and 2006, NSTAR has recorded a liability and a corresponding regulatory asset of $10.5 million and $32.7 million, respectively, reflecting the fair value of these contracts. During 2007, approximately $30.4 million of
these financial contracts were settled resulting in payments by NSTAR to the counterparties to the contracts.



Asset Retirement Obligations



The FASB
Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations, an interpretation of SFAS No. 143(FIN 47), Accounting for Asset Retirement Obligations (SFAS 143), requires entities to
record the fair value of a liability for an ARO in the period in which it is incurred. When the liability is initially recorded, the entity capitalizes the cost by increasing the carrying amount of the related long-lived asset. Over time, the
liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a
gain or loss upon settlement.



The recognition of an ARO within its regulated
utility businesses has no impact on NSTARs earnings. In accordance with SFAS 71, for its rate-regulated utilities, NSTAR establishes a regulatory asset to recognize future recoveries through depreciation rates for the recorded ARO. NSTAR has
certain plant assets in which this condition exists and is related to both plant assets containing asbestos materials and legal requirements to undertake remediation efforts upon retirement.



For NSTARs regulated utility businesses, the ultimate cost to remove utility plant from
service (cost of removal) is recognized as a component of depreciation expense in accordance with approved regulatory treatment. As of December 31, 2007 and 2006, the estimated amount of the cost of removal included in regulatory liabilities
was approximately $259 million and $260 million, respectively, based on the estimated cost of removal component in current depreciation rates. At December 31, 2007, NSTAR has an asset retirement cost in utility plant of $3 million, an asset
retirement liability of $23 million and a regulatory asset of $18 million.



New Accounting Standards



SFAS No. 157



In September 2006, the FASB issued SFAS
No. 157, Fair Value Measurements(SFAS 157), which provides enhanced guidance for using fair value measurements in financial reporting. While the standard does not expand the use of fair value in any new circumstance, it has
applicability to several current accounting standards that require or permit entities to measure assets and liabilities at fair value. SFAS 157 defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures
about fair value measurements. NSTAR adopted this standard on January 1, 2008 with no impact to its results of operations, financial position or cash flows.



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SFAS No. 159



In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities(SFAS 159). This statement provides companies with an option to report selected financial assets and liabilities at fair value. NSTAR adopted this standard on January 1, 2008. NSTAR did not elect the fair value option, and therefore,
SFAS 159 had no impact on its results of operations, financial position or cash flows.



Rate and Regulatory Proceedings



a. Service Quality
Indicators



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



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



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



The Rate Settlement Agreement approved by the DPU on December 30, 2005 established
additional performance measures applicable to NSTARs rate regulated subsidiaries. The Rate Settlement Agreement establishes, for NSTAR Electric, a performance benchmark relating to its poor performing circuits, with a maximum penalty or
incentive of up to $0.5 million. For 2006 and 2007, NSTAR Electric determined that its performance related to these applicable circuits exceeded the established benchmarks and therefore, accrued its incentive entitlement of $0.5 million for each of
those years, subject to final DPU approval.



b. Rate Structures



Retail Electric Rates



Electric distribution companies in Massachusetts are required to obtain and resell power to
retail customers through basic service for those customers who choose not to buy energy from a competitive energy supplier. Basic service rates are reset every six months (every three months for large commercial and industrial customers). The price
of basic service is intended to reflect the average competitive market price for power. As of December 31, 2007, 2006 and 2005, customers of NSTAR Electric had approximately 47%, 49%, and 68%, respectively, of their load requirements provided
through basic service. For 2007 and 2006, the residential, commercial and industrial customer classes load requirements provided through basic service were 56%, 31% and 13%, respectively, and 52%, 31% and 17%, respectively. NSTAR Electric
fully recovers its energy costs, including costs related to charge-offs of uncollected energy costs, through DPU-approved rate mechanisms. Though energy delivery charges vary slightly by region, the basic service price for all residential customers
decreased an average of 8% from $0.1186 to $0.1084 per kilowatt-hour effective July 1, 2007. Medium and large commercial customers decreased an average of 17% from $0.1142 cents to $0.0947 cents per kilowatt-hour effective October 1, 2007.
The basic service price for all residential customers increased an average of 3%, from $0.1084 to $0.1117 per kilowatt-hour effective January 1, 2008. Medium and large commercial customers increased an average of 17% from $0.0949 cents to
$0.1106 cents per kilowatt-hour effective January 1, 2008.



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Changes in Massachusetts Regulatory Environment



In January 2007, a new Governor and Attorney General took office. The Governor has a very
significant influence on energy regulatory policy in Massachusetts. The Governor has identified energy policy as a key initiative of his administration, and has functionally reorganized key energy offices. His reorganization plan, which took effect
on April 11, 2007, created a new cabinet positionthe Secretary of Energy and Environmental Affairs. The Secretary now oversees a newly formed CUC, consisting of three commissioners. The CUC leads the DPU, a newly formed agency that has
jurisdiction over electric, natural gas, water and transportation matters. The agency previously responsible for such functions, the MDTE, was eliminated.



During late 2007 and January 2008, the Massachusetts House of Representatives and Senate drafted and approved two separate energy policy reform bills. These bills address
energy procurement, renewable and alternative energy generation and other green power initiatives and utility regulation. Both bills are currently under review by a joint House and Senate Conference Committee. This Committee is expected to combine
the two bills into one comprehensive energy policy reform bill for ultimate approval. It is anticipated that the resulting bill will be enacted into law during 2008. NSTAR cannot anticipate or predict what terms the final bill will include, and
therefore, cannot predict the timing, ultimate approval, or potential impact of this legislation.



Proposed Rate Decoupling



On June 22, 2007, the DPU opened a generic investigation into rate structures and revenue recovery mechanisms in order to promote efficient deployment of demand
resources in Massachusetts. Demand resources are installed equipment, measures or programs that reduce end-use demand for electricity or natural gas. This investigation will include, in part, a review of whether and how existing rate mechanisms may
be changed to better align a companys financial interests with the needs to provide greater energy efficiencies and foster the advancement of price-responsive demand in regional wholesale energy markets. Historically, Massachusetts retail
electric and natural gas distribution companies have sponsored customer-funded energy efficiency and load reduction programs with an incentive to mitigate a companys lost retail distribution revenues. However, there is an inherent disconnect
between the sponsorship of such programs and the continued maintenance of revenue and sales growth levels. The DPU has opened a proceeding to determine whether it should implement a base revenue adjustment mechanism that decouples a
utilitys retail distribution revenues (the recovery of fixed infrastructure costs, including a return component and the recovery of other operating costs) and its sales volumes.



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



Rate Settlement Agreement and Other Regulatory Matters



On December 30, 2005, the DPU approved a seven-year Rate Settlement Agreement (Rate Settlement Agreement) between NSTAR, the AG, and several interveners. For 2006, the Rate Settlement Agreement
required NSTAR Electric to lower its transition rates by $20 million, effective January 1, 2006, and by an additional $30 million, effective May 1, 2006, from what would otherwise have been billed in 2006. Effective May 1, 2006, NSTAR
Electric increased its distribution rates by $30 million. Uncollected transition charges as a result of the reductions in transition rates are deferred and collected through future rates with a carrying charge at a rate of 10.88%. Beginning
January 1, 2007 and continuing through 2012, the Rate Settlement Agreement establishes annual inflation-adjusted distribution rate increases that are offset by an equal and corresponding reduction in transition rates.



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Wholesale Power Cost Savings Initiatives



The Rate Settlement Agreement provides for NSTAR Electric to continue its efforts to advocate on behalf of customers at the FERC to mitigate
wholesale electricity cost inefficiencies that would be borne by regional customers. If NSTAR Electrics efforts to reduce customers costs are successful, the Company is allowed to retain a portion of those savings, as well as related
litigation costs, as an incentive. Under the terms of the Rate Settlement Agreement, NSTAR Electric is to share in 25% of the savings applicable to its customers. The recovery of NSTAR Electrics share of benefits is to be collected over three
years, and the aggregate annual recovery is capped at 2% of the annual distribution and transmission service revenues. As a result of NSTARs role in two RMR cases, NSTAR Electric had sought to collect $9.8 million annually for three years and
began recognizing and collecting these incentive revenues from its customers effective January 1, 2007, subject to final DPU approval. Public hearings were held by the DPU in early 2007 to investigate the basis and support for the incentive
payments. After these hearings NSTAR Electric began discussions with the staff of the newly elected AG and a revised Settlement Agreement was executed on July 23, 2007. This revised Settlement Agreement allows NSTAR Electric to collect $6.3
million of the savings annually for three years effective January 1, 2007. In addition, it stipulates that NSTAR Electric will share 12.5% of the savings applicable to its customers in its future efforts related to new wholesale energy cost
savings cases. Approval of this Settlement Agreement and of the incentives is required by the DPU. The DPU has extended the deadline to issue a decision on this Agreement until February 29, 2008.



NSTAR is unable to predict the ultimate outcome of this proceeding. In the event an adverse
decision is reached it should not have a material impact on the Companys reported results of operations for 2007. However, such a decision could have an impact on future results of operations and cash flows.



Regulatory ProceedingsDPU



NSTAR Electric made its 2006 Distribution Rate Adjustment/Reconciliation Filing on
September 29, 2006. The filing implements the provisions of the Rate Settlement Agreement that supports the establishment of new distribution and transition rates that became effective January 1, 2007. Also effective on this date, NSTAR
Electrics distribution rates include elements of a SIP and a CPSL program that require an offsetting adjustment to its transition rate. The performance-based SIP is based on the gross domestic product price index minus a productivity offset
and rate adjustment factor that resulted in a 2.64% increase in distribution rates. The CPSL program relates to incremental spending for double pole removal, pole replacements and underground electric safety programs, which include stray-voltage
remediation and manhole inspections, repairs and upgrades. For 2006, the CPSL cost recovery was estimated to be $13.3 million and that amount was included in retail distribution rates for 2007. The final reconciliation of 2006 CPSL costs and
revenues is currently under review by the DPU. On October 1, 2007, NSTAR Electric filed for the establishment of new distribution (SIP of 2.68%), transition and transmission rates that became effective on January 1, 2008. This filing
included recovery of estimated CPSL costs of $24 million to be collected during 2008. This balance includes the under-collection of 2006 CPSL amounts. Recovery of transition and CPSL costs is subject to DPU review and reconciliation to actual costs.
NSTAR cannot predict the timing or the ultimate outcome of these pending filings.



Basic Service Bad Debt Adder



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



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



NSTAR Electric has not implemented the components of the June 28, 2007
DPU order. Implementation of this order would require NSTAR Electric to write-off a previously recorded regulatory asset related to its basic service bad debt costs. NSTAR Electric filed a Motion for Reconsideration of the DPUs order on
July 18, 2007. On December 14, 2007, the Motion for Reconsideration was granted and the DPU reopened the case to hear additional evidence. NSTAR Electric believes its position is appropriate and that it is probable that it will ultimately
prevail. However, in the event that it does not, NSTAR Electric intends to pursue all legal options. As of December 31, 2007, the potential impact to earnings of eliminating the bad debt adder was approximately $14 million, pre-tax. NSTAR
cannot predict the timing or the ultimate outcome of this proceeding.



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



In December 2005, NSTAR Electric filed proposed transition rate adjustments for 2006,
including a preliminary reconciliation of transition, transmission, basic service and default service costs and revenues through 2005. The DPU subsequently approved tariffs for each retail electric subsidiary effective January 1, 2006. Updated
reconciliations to reflect final 2005 costs and revenues were filed during the second quarter of 2006 for Boston Edison, ComElectric and Cambridge Electric. A settlement agreement between the AG and NSTAR Electric on the reconciliation of the Boston
Edison costs and revenue for 2004 and 2005 was filed with the DPU on May 29, 2007, and approved by the DPU on July 23, 2007. Evidentiary hearings were conducted on the reconciliation of the ComElectric and Cambridge Electric costs and
revenue for 2005. The case is pending a decision at the DPU and NSTAR cannot predict the timing or the ultimate outcome of this filing.



c. Wholesale Market and Transmission Changes



Regulatory ProceedingsFERC



On July 9, 2007, FERC issued an Order that approved NSTAR Electrics 2007 proposed consolidated transmission rates as filed on February 14, 2007, subject
to refund, pending the conclusion of subsequent proceedings. As a result of these proceedings, NSTAR reached an agreement in principle with the FERC staff and the AG. A final settlement is expected to be executed during the first quarter of 2008.
This settlement will be subject to FERC approval. The implementation of this settlement is not expected to have a material impact on the Companys results of operations, financial position or cash flows.



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



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FERC Transmission ROE



On October 31, 2006, the FERC authorized, for the participating New England Transmission Owners, including NSTAR Electric, an ROE on
regional transmission facilities of 10.2% plus a 50 basis point adder for joining a RTO from February 1, 2005 (the RTO effective date) through October 31, 2006, and an ROE of 11.4% thereafter. In addition, FERC granted a 100 basis point
incentive adder to ROE for qualified investments made in new regional transmission facilities, that when combined with FERCs approved ROEs, provide 11.7% and 12.4% returns for the respective time frames. RTO-NE ratepayers will benefit as a
result of this order because it responds to the need to enhance the New England transmission grid to alleviate congestion costs and reliability issues. Transmission projects that are completed and in progress including NSTAR Electrics 345kV
project, have significantly minimized these congestion costs and enhance reliability in the region. The New England Transmission Owners accepted all but one of the terms of the October 31, 2006 FERC decision, and on November 30, 2006,
filed for a request for rehearing involving the calculation of the base ROE, for which the FERC did not provide an explanation for its action and which the New England Transmission Owners believe is not supported by the record evidence. The New
England Transmission Owners contend that the base ROE should be 10.5%. The Company is unable to determine the ultimate timing or result of the rehearing process or of the ultimate FERC decision.



d. Gas Rates



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



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



Effective May 1, 2007, the DPU approved a summer period CGAC factor of
$0.8726/therm, a 27% decline in cost from the previous rate level. The DPU approved the CGAC factor effective November 1, 2007 for the 2007-2008 winter heating season of $0.9799/therm that was 18% lower than the rate set in November 2006 of
$1.1949/therm. These rates reflect normal differences between winter and summer prices and the continued volatility of fuel prices on the NYMEX. The 2005-2006 winter season DPU-approved CGAC factor was revised downward to $0.90/therm effective
March 1, 2006 from a factor of $1.3955/therm effective January 1, 2006 to reflect decreases in the cost of gas caused by varying market conditions. Effective May 1, 2006, the DPU approved a summer period CGAC factor of $1.1855/therm
that included higher forecasted gas commodity costs. Changes in the cost of gas supply have no impact on the Companys earnings due to this rate recovery mechanism.



On February 28, 2005, the DPU-approved a petition by NSTAR Gas to change a portion of its gas procurement practices. As approved, NSTAR Gas began
purchasing financial contracts based upon NYMEX natural gas futures in order to reduce cash flow variability associated with the purchase price for approximately one-third of its natural gas purchases. Refer to the accompanying Hedging
Agreements section disclosed above for a further discussion.



Nonmonetary Transactions2006



In the third and fourth
quarters of 2006, NSTARs unregulated subsidiary, AES, recognized the impact of several nonmonetary transactions. As part of an agreement executed with a vendor, AES received new equipment with a



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fair value of $4.1 million, at no cost, to compensate AES for incremental costs incurred resulting from equipment installation problems experienced during
2003 and 2004. This resulting nonmonetary gain, representing the fair value of the new equipment, was primarily recognized as a reduction in purchased power expense on the accompanying Consolidated Statements of Income.



In addition, in separate transactions in 2006, two agreements were executed between AES and
other parties, which required AES to relinquish its rights under existing easements and other assets owned by AES located on development sites. In exchange, AES received title to new steam and chilled water pipelines with greater capacity and
replacement easements. As a result of the new assets, AES anticipates achieving higher future sales. Therefore, the transactions were recorded at the fair value of the assets received and resulted in a $5.5 million nonmonetary gain recorded to other
income on the accompanying Consolidated Statements of Income.



Sale of
Properties



There were no material property sales recognized during 2007.



On November 8, 2006, NSTAR Electric completed the sale of a former office
complex in Wareham, Massachusetts for $7.7 million. The regulatory treatment of the proceeds remains subject to DPU approval. As a result, this transaction had no impact on 2006 earnings.



On April 26, 2006 and September 19, 2006, NSTAR Electric sold two parcels of nonutility land in Boston, Massachusetts and Lincoln,
Massachusetts for $6.2 million, realizing a pre-tax gain on the sale of $4.1 million. This gain is reflected as a component of other income, net on the accompanying Consolidated Statements of Income.



On December 28, 2005, NSTAR Electric sold a former electric generation station site in
New Bedford, Massachusetts for $12 million. NSTAR anticipates that most of the proceeds from the sale will be applied against NSTAR Electrics transition charge. The sale and regulatory treatment of the proceeds remains subject to DPU approval.
As a result, this transaction had no impact on 2005 earnings.



On
September 8, 2005, NSTAR sold the assets of its wholly-owned unregulated subsidiary, NSTAR Steam Corporation to a non-affiliated company for $3.5 million, realizing a pre-tax gain on the sale of $2.5 million. Also in September 2005, NSTAR sold
a parcel of land in Cambridge, Massachusetts for $2 million. No gain was recognized from this land sale, as NSTAR Electric refunded these proceeds to its customers.



General Legal Matters



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



Income Tax Matters



Construction-related Costs



In 2004, NSTAR filed an amended 2002 Federal income tax return to change the method of accounting for certain construction-related overhead costs previously capitalized
to plant to the Simplified Service Cost Method (SSCM). Under SSCM, certain costs which were previously capitalized for tax purposes are deducted in the



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year incurred. NSTAR has claimed additional deductions related to the tax accounting method change in its 2002-2004 returns of $368.9 million. In 2005, NSTAR
received formal notification from the IRS that the claim on its amended income tax return would be denied. NSTAR did not receive the requested refund amount due.



In August 2005, the IRS issued Revenue Ruling 2005-53 and Treasury Regulations under Code Section 263A related to the SSCM to curtail
these levels of construction-related cost deductions by utilities and others. Under this Regulation, the SSCM is not available for the majority of NSTARs constructed property for the years 2005 and forward. As a result, NSTAR was required to
make a cash tax payment to the IRS of $129.1 million in late 2006 representing the disallowed SSCM deductions taken for 2002-2004 even though the tax refund was never received. This payment will be fully refunded with interest to NSTAR, once this
tax position is resolved. As of December 31, 2007 and 2006, this refund has been recorded as a non-current refundable income tax on the accompanying Consolidated Balance Sheets.



RCN Corporation (RCN) Share Abandonment Tax Treatment



On December 24, 2003, NSTAR exited its investment in RCN by formally abandoning its 11.6 million shares of RCN common stock. As a
result of the RCN share abandonment, the Company claimed an ordinary loss on its 2003 tax return for this item. The ordinary loss tax treatment resulted in the Company realizing the benefits represented by the tax asset recorded on its books that
resulted from the previous write-down of this investment for financial reporting purposes.



Prior to the adoption of FIN 48, it was NSTARs tax accounting policy not to recognize tax benefits associated with an uncertain tax position until it is probable that such tax benefit would ultimately be
realized. NSTAR determined that it could not conclude that it was probable that the tax deduction related to the abandonment of its RCN investment would ultimately be sustained. Accordingly, NSTAR accrued a tax reserve so as to not recognize the tax
benefit of this tax position.



As of January 1, 2007, the potential tax
loss contingency was approximately $39.6 million. NSTAR adopted FIN 48 effective January 1, 2007. FIN 48 establishes a tax accounting recognition standard of more-likely-than-not, which is a lower threshold than NSTARs previous tax
recognition policy of probable. Upon the adoption of FIN 48, NSTAR recognized the entire amount as an adjustment to its January 1, 2007 retained earnings balance. NSTAR cannot predict the timing or ultimate resolution of this tax position.



Earnings Outlook



NSTAR is currently projecting to achieve earnings per share for the year ended
December 31, 2008 in the $2.16 - $2.26 range. This guidance reflects the following factors: electric sales are expected to increase 1% to 2%, assuming normal weather conditions; operations and maintenance expense is expected to grow
1% to 2%; and capital expenditures for the year are expected to be approximately $440 million, including approximately $140 million for transmission projects.



Common Share Dividends



On November 15, 2007, NSTARs Board of Trustees declared a quarterly cash dividend of $0.35 per share for shareholders of record on January 10, 2008,
payable February 1, 2008. NSTARs current annualized rate is $1.40 per share, a 7.7% increase over the previous rate of $1.30 per share. NSTAR expects that the growth rate of its common dividend will continue to be in-line with the growth
rate in earnings per share. All future dividend decisions are subject to quarterly dividend declarations based upon the Companys financial position and other relevant considerations at the time.



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Results of Operations



The following section of MD&A compares the results of operations for each of the three fiscal years ended December 31, 2007, 2006 and 2005 and should be read in
conjunction with the accompanying Consolidated Financial Statements and the accompanying Notes to Consolidated Financial Statements included elsewhere in this report.



2007 compared to 2006



Executive Summary



NSTAR achieved several positive performance results in 2007:



| |  |  | EPS increased $0.14 from $1.93 to $2.07. This 7.3% increase reflects the positive impact of the second year of our seven-year Rate Settlement Agreement and higher
electric and gas sales
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Companys common share dividend was increased in 2007 by 7.7%, outperforming the industry average of 5.4%.
| | - |  | --------------------------------------------------------------------------------------------------------------



| |  |  | NSTAR Gas was upgraded to a credit rating of AA- while all other entities maintained credit ratings at A level.
| | - |  | -------------------------------------------------------------------------------------------------------------------



Earnings per common share were as follows:



|        |  |                          |      |      |   |          |  |    
|------- |  | ------------------------ | ---- | ---- | - | -------- |  | ---
|        |  | Years ended December 31,
|        |  | 2007                     |      | 2006 |   | % Change
|Basic   |  | $                        | 2.07 |      | $ | 1.94     |  | 6.7
|Diluted |  | $                        | 2.07 |      | $ | 1.93     |  | 7.3



Net income was $221.5 million for 2007
compared to $206.8 million for 2006. Major factors (after tax) that contributed to the $14.7 million, or 7.1%, increase include:



| |  |  | Higher electric distribution revenues primarily as a result of the Rate Settlement Agreement and increased sales of 1.8% ($30.5 million)
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Higher firm gas revenues due to higher sales of 12.7% primarily caused by colder weather (heating degree-days increased by 11.3%) ($7.7 million)
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Higher transmission revenues primarily as a result of increased investment in the Companys transmission infrastructure, most notably the 345kV project ($9.3
million)
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Interest on certain tax matters ($6.5 million)
| | - |  | ----------------------------------------------



These increases in earnings factors were partially offset by:



| |  |  | Higher operations and maintenance expenses in 2007 most notably related to the absence of a pre-tax adjustment of $6.9 million that reduced bad debt expense
recorded in 2006 to reflect the implementation of a rate recovery mechanism, higher current year bad debt expense (exclusive of the 2006 adjustment) and increased labor costs ($18.6 million)
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Lower earnings from NSTARs unregulated operations primarily due to gains realized in 2006 from non-monetary transactions ($4.7 million)
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Higher depreciation and amortization expense in 2007 related to higher depreciable electric and gas distribution plant in service ($5.9 million)
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Higher short-term interest expense as a result of increased borrowing rates and an increase in the average borrowing levels ($4.4 million)
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------



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Significant cash flow events during 2007 include the following:



| |  |  | Cash flows from operating activities provided $491 million, a decrease of $42 million as compared to 2006. This decrease primarily reflects the timing of the
collection of basic service (energy costs) from customers
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | NSTAR invested approximately $360 million in capital projects to improve capacity and system reliability
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | NSTAR paid approximately $139 million in common share dividends and retired approximately $237 million in long-term and securitized debt
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | On November 19, 2007, NSTAR Electric closed on the sale of $300 million, ten-year, fixed rate (5.625%) Debentures. The proceeds of the sale were used to
repay short-term debt balances. This transaction was completed as part of the Companys approved financing plan as filed with the DPU and its approved shelf registration with the SEC to allow issuance of up to $400 million in debt securities
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Energy Sales



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



|                          |  |                          |  |            |  |          |  
|------------------------- |  | ------------------------ |  | ---------- |  | -------- | -
|                          |  | Years ended December 31, | 
|                          |  | 2007                     |  | 2006       |  | % Change |  
|Retail Electric SalesMWH |  |                          |  |            |  |          |  
|Residential               |  | 6,575,587                |  | 6,481,929  |  | 1.4      |  
|Commercial                |  | 13,445,887               |  | 13,083,032 |  | 2.8      |  
|Industrial                |  | 1,473,589                |  | 1,551,552  |  | (5.0     | )
|Other                     |  | 160,158                  |  | 163,494    |  | (2.0     | )
|                          |  |                          |  |            |  |          |  
|Total retail sales        |  | 21,655,221               |  | 21,280,007 |  | 1.8      |  
|                          |  |                          |  |            |  |          |  
|                          | 
|                          |  | Years ended December 31, | 
|                          |  | 2007                     |  | 2006       |  | % Change |  
|Firm Gas SalesBBtu       |  |                          |  |            |  |          |  
|Residential               |  | 21,792                   |  | 19,283     |  | 13.0     |  
|Commercial                |  | 16,705                   |  | 14,547     |  | 14.8     |  
|Industrial                |  | 5,083                    |  | 4,764      |  | 6.7      |  
|Municipal                 |  | 2,885                    |  | 2,625      |  | 9.9      |  
|                          |  |                          |  |            |  |          |  
|Total firm sales          |  | 46,465                   |  | 41,219     |  | 12.7     |  
|                          |  |                          |  |            |  |          |  



Weather Conditions



NSTAR forecasts its electric and natural gas sales based on normal weather conditions.
Actual results may vary from those projected due to actual weather conditions, energy conservation, and other factors. Refer to the Cautionary Statement Regarding Forward-Looking Information section preceding Item 1.
Business of this Form 10-K.



The demand for electricity and
natural gas is affected by weather conditions. In terms of customer sector characteristics, industrial sales are less sensitive to weather than residential and commercial sales, which are influenced by temperature extremes. Electric residential and
commercial customers represented approximately 30% and 62%, respectively, of NSTARs total electric sales mix in 2007 and provided 40% and 54% of distribution and transmission revenues, respectively. Gas residential and commercial customers
represented approximately 47% and 36%, respectively, of NSTARs total gas sales mix in 2007. Refer to the Electric



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Revenues and Gas Revenues sections below for a more detailed discussions. Industrial sales are primarily influenced by
national and local economic conditions.



|                                           |  |       |    |  |       |    |  |                     
|------------------------------------------ |  | ----- | -- |  | ----- | -- |  | --------------------
|                                           |  | 2007  |    |  | 2006  |    |  | Normal30-YearAverage
|Heating degree-days                        |  | 6,782 |    |  | 6,094 |    |  | 6,815               
|Percentage colder (warmer) than prior year |  | 11.3  | %  |  | (10.0 | )% |  |                     
|Percentage (warmer) than 30-year average   |  | (0.5  | )% |  | (10.6 | )% |  |                     
|                                           |  |       |   
|Cooling degree-days                        |  | 907   |    |  | 803   |    |  | 777                 
|Percentage warmer (cooler) than prior year |  | 13.0  | %  |  | (10.1 | )% |  |                     
|Percentage warmer than 30-year average     |  | 16.7  | %  |  | 3.3   | %  |  |                     



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



The 1.8% or 375,214 MWh energy sales increase in 2007 primarily reflects colder winter
temperatures and warmer weather in late August and September of 2007. NSTAR Electrics retail peak demand for 2007 was 4,554 MW as measured on August 3, 2007. This was 8.2% less than the all-time high peak demand of 4,959 MW reached on
August 2, 2006. Industrial sales continue to lag due to the weak manufacturing segment of the economy. The 12.7% increase in firm gas and transportation sales is due to the colder winter weather during 2007 and the shift of commercial and
industrial customers returning to using natural gas from fuel oil. All gas customer segments showed positive sales growth despite continued customer conservation efforts. However, even with the higher energy usage, revenues and the cost of that
energy (which is also included in revenues) reflects the sustained high levels in global energy costs.



Operating Revenues



Operating revenues
for 2007 decreased 8.8% from 2006 as follows:



|                                     |  |      |         |      |   |                     |  |   |         |   |  |       |  
|------------------------------------ |  | ---- | ------- | ---- | - | ------------------- |  | - | ------- | - |  | ----- | -
|                                     |  |      |         |      |   | Increase/(Decrease) | 
|(in millions)                        |  | 2007 |         | 2006 |   | Amount              |  |   | Percent |  
|Electric revenues                    |  |      |         |      |   |                     |  |   |         |   |  |       |  
|Retail distribution and transmission |  | $    | 957.0   |      | $ | 1,013.2             |  | $ | (56.2   | ) |  | (5.5  | )
|Energy, transition and other         |  |      | 1,605.9 |      |   | 1,898.9             |  |   | (293.0  | ) |  | (15.4 | )
|                                     |  |      |         |      |   |                     |  |   |         |   |  |       |  
|Total electric revenues              |  |      | 2,562.9 |      |   | 2,912.1             |  |   | (349.2  | ) |  | (12.0 | )
|                                     |  |      |         |     
|Gas revenues                         |  |      |         |      |   |                     |  |   |         |   |  |       |  
|Firm and transportation              |  |      | 152.0   |      |   | 139.5               |  |   | 12.5    |   |  | 9.0   |  
|Energy supply and other              |  |      | 408.4   |      |   | 378.4               |  |   | 30.0    |   |  | 7.9   |  
|                                     |  |      |         |      |   |                     |  |   |         |   |  |       |  
|Total gas revenues                   |  |      | 560.4   |      |   | 517.9               |  |   | 42.5    |   |  | 8.2   |  
|                                     |  |      |         |     
|Unregulated operations revenues      |  |      | 138.5   |      |   | 147.7               |  |   | (9.2    | ) |  | (6.2  | )
|                                     |  |      |         |      |   |                     |  |   |         |   |  |       |  
|Total operating revenues             |  | $    | 3,261.8 |      | $ | 3,577.7             |  | $ | (315.9  | ) |  | (8.8  | )
|                                     |  |      |         |      |   |                     |  |   |         |   |  |       |  



Electric Revenues



NSTARs largest earnings sources are the revenues derived from
distribution and transmission rates approved by the DPU and FERC. Electric retail distribution revenues primarily represent charges to customers for recovery of



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the Companys capital investment, including a return component, and operation and maintenance costs related to its electric distribution infrastructure.
The transmission revenue component represents charges to customers for the recovery of costs to move the electricity over high voltage lines from the generator to the Companys substations.



The decrease in retail distribution and transmission revenues reflects:



| |  |  | Lower transmission revenues related to decreased regional RMR costs of $141 million reflecting a refund from the ISO-NE of previously billed RMR costs. NSTAR
Electric lowered its retail transmission rates effective on March 1, 2007 in order to refund amounts previously over-collected from customers and to match the amount to be paid to generators. These RMR costs are fully reconciled and therefore
there is no earnings impact.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | Increased NSTAR Electric distribution rates by an annual rate of $30 million effective May 1, 2006 and by an annual inflation-adjusted rate increase effective
January 1, 2007, with a corresponding reduction in transition charges. This rate increase reflects the impact of the 2005 Rate Settlement Agreement. These factors and an 1.8% increase in energy sales resulted in increased distribution revenues
of $51.2 million for 2007 as compared to 2006. In addition, higher transmission revenues as a result of increased investment in the Companys transmission infrastructure, most notably the 345kV project, also offset the overall decrease.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Energy, transition and other revenues primarily represent
charges to customers for the recovery of costs incurred by the Company in order to acquire the energy supply on behalf of its customers and a transition charge for recovery of the Companys prior investments in generating plants and the costs
related to long-term purchase power contracts. Energy revenues are fully reconciled to the costs incurred and have no impact on the Companys consolidated net income. Energy, transition and other revenues also reflect revenues related to the
Companys ability to effectively reduce stranded costs, rental revenue from electric property and annual cost reconciliation true-up adjustments. The $293 million decrease in energy, transition and other revenues is primarily attributable to a
$264 million decrease in energy supply costs and to a reduction in transition rates in accordance with the 2005 Rate Settlement Agreement. These amounts were partially offset by an increase in non-retail related regional transmission revenues of
$22.5 million that are used to support NSTAR Electrics transmission assets. Uncollected transition charges as a result of the reductions in transition rates are being deferred and collected through future rates with a carrying charge at a rate
of 10.88%.



Gas Revenues



Firm and transportation gas revenues primarily represent charges to customers for NSTAR
Gas recovery of costs of its capital investment in its gas infrastructure, including a return component, and for the recovery of costs for the ongoing operation and maintenance of that infrastructure. The transportation revenue component
represents charges to customers for the recovery of costs to move the natural gas over pipelines from gas suppliers to take stations located within NSTAR Gas service area. The $12.5 million increase in firm and transportation revenues is
primarily attributable to colder winter weather conditions during 2007 and customers switching back to natural gas from alternate fuel sources as a result of higher energy price concerns. These factors resulted in the increase in sales volumes of
12.7% through December 31, 2007.



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



Energy supply and other gas revenues primarily represent charges to customers for the recovery of costs to the Company in order to acquire the natural gas in the
marketplace and a charge for recovery of the Companys gas supplier service costs. The energy supply and other revenue increase of $30.0 million primarily reflects the



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impact of the 12.7% increase in energy sales offset by a 9% decline in the cost of gas per therm purchased from these suppliers. These revenues are fully
reconciled with the cost currently recognized by the Company and, as a result, do not have an effect on the Companys earnings.



Unregulated Operations Revenues



Unregulated operating revenues are derived from NSTARs district energy and telecommunications operations. Unregulated revenues were $138.5 million through
December 31, 2007 compared to $147.7 million in 2006, a decrease of $9.2 million, or 6.2%. The decrease is primarily the result of lower electricity, steam and chilled water revenues.



Operating Expenses



Purchased power and transmission costs were $1,390.6 million in 2007 compared to $1,783.9 million in 2006, a decrease of $393.3
million, or 22%. Despite higher energy sales of 1.8%, the decrease in expense reflects lower basic service energy supply costs of $264 million for both NSTARs regulated and unregulated companies. In addition, transmission costs declined $107.1
million as a result of a $141 million decline in transmission-related congestion costs partially offset by higher regional network support costs of $37 million. NSTAR Electric adjusts its rates to collect the costs related to energy supply and
transmission from customers on a fully reconciling basis. Due to these rate adjustment mechanisms, changes in the amount of energy supply and transmission expense have no impact on earnings.



Cost of gas sold, representing NSTAR Gas supply expense, was $375.8 million in
2007 compared to $344.6 million in 2006, an increase of $31.2 million, or 9%. The increase in cost reflects the 12.7% increase in firm gas sales and an increase in the settlement of cash flow hedging contracts during 2007 of $20.9 million offset by
a lower cost of gas supply per therm. NSTAR Gas adjusts its rates to collect costs related to gas supply from customers on a fully reconciling basis and therefore changes in the amount of energy supply expense have no impact on earnings.



Operations and maintenance expense was $446.8 million in 2007 compared to $431.4
million in 2006, an increase of $15.4 million, or 3.6%. This increase primarily relates to higher bad debt expense due to the absence of a $6.9 million reduction in bad debt expense recorded in 2006 to reflect the implementation of a recovery rate
mechanism and to higher bad debt expenses. In addition, higher material costs and higher labor costs related to ongoing electric and gas system operations contributed to this increase.



Depreciation and amortization expense was $369.6 million in 2007 compared to $362.2 million in 2006, an increase of $7.4 million or
2%. The increase primarily reflects higher depreciable distribution and transmission plant in service.



DSM and renewable energy programs expense was $70.9 million in 2007 compared to $67.9 million in 2006, an increase of $3 million, or 4.4%, which are consistent with the collection of conservation and renewable
energy revenues. These costs are in accordance with program guidelines established by the DPU and are collected from customers on a fully reconciling basis plus a small incentive return.



Property and other taxes were $93.7 million in 2007 compared to $93.9 million in 2006, a decrease of $0.2 million, or 0.2%
reflecting slightly lower overall property tax rates.



Income tax
expense attributable to operations was $130.4 million in 2007 compared to $119.3 million in 2006, an increase of $11.1 million, or 9.3%, primarily reflecting the higher pre-tax operating income in 2007.



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Other income, net



Other income, net was approximately $10.1 million in 2007 compared to $13.6 million in 2006, a decrease of $3.5 million. The decrease primarily reflects the
absence in 2007 of after-tax gains realized on nonutility nonmonetary transactions of $3.6 million.



Other deductions, net



Other
deductions, netwere approximately $3.0 million in 2007 compared to $1.5 million in 2006. The $1.5 million increase primarily reflects a higher level of charitable contributions in 2007.



Interest charges



Interest on long-term debt and transition property securitization certificates was $155 million in 2007 compared to $167.3 million in
2006, a decrease of $12.3 million, or 7.3%. The decrease in interest expense reflects:



| |  |  | Lower interest cost of $8.4 million as a result of the redemption of all debt of the former Commonwealth Electric and Cambridge Electric subsidiaries
long-term debt on January 2, 2007 and the fourth quarter of 2006, respectively
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Lower interest costs on transition property securitization debt of $8.4 million due to current maturities. Securitization interest represents interest on
securitization certificates of BEC Funding, BEC Funding II and CEC Funding that are collateralized by the future income stream associated primarily with NSTARs stranded costs
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



These decreases were partially offset by:



| |  |  | Interest expense of $4.4 million associated with NSTAR Electrics $200 million and $300 million Debentures issued in March 2006 and November 2007, respectively
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



Short-term and other interest expense was $16.3
million in 2007 compared to $17.5 million in 2006, a decrease of $1.2 million, or 6.9%. The decrease is due to lower net interest expense on income tax deficiencies of $10.7 million primarily as a result of recognizing, in the current year, interest
income of $4.7 million on uncertain tax positions. Also contributing to this decrease was higher interest income on the regulatory deferrals. Significantly offsetting these decreases was a higher average level of borrowed funds as compared to 2006.
Interest rates on short-term borrowings in 2007 were nearly level with the rates in 2006. The weighted average short-term interest rates including fees were 5.33% and 5.32% in 2007 and 2006, respectively. The higher average borrowing during 2007
reflects the impact of NSTAR Electric financing the redemption of $77.7 million in long-term debt in January 2007 with short-term debt.



2006 compared to 2005



Executive Summary



NSTAR achieved
several positive performance results in 2006:



| |  |  | Several important regulatory outcomes were achieved in 2006, including full implementation of a comprehensive state rate settlement, the merger of the
Companys four electric utility subsidiaries into a single corporation and a federal rate order relating to transmission return on equity.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Companys common share dividend was increased in November, 2006 by 7.4%, outperforming the industry average of 5.9%.
| | - |  | ------------------------------------------------------------------------------------------------------------------------



| |  |  | The Companys pension plan achieved an overall return of 14.4%, exceeding the established absolute return and relative performance targets.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Companys credit rating was upgraded by Standard & Poors to A+, while NSTAR utility subsidiary credit ratings maintained their
A level ratings, above the utility average of BBB.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Earnings per common share were as follows:



|        |  |                          |      |      |   |          |  |    
|------- |  | ------------------------ | ---- | ---- | - | -------- |  | ---
|        |  | Years ended December 31,
|        |  | 2006                     |      | 2005 |   | % Change
|Basic   |  | $                        | 1.94 |      | $ | 1.84     |  | 5.4
|Diluted |  | $                        | 1.93 |      | $ | 1.83     |  | 5.5



Net income was $206.8 million for 2006
compared to $196.1 million for 2005. Factors (after tax) that contributed to the $10.7 million, or 5.5%, increase in 2006 earnings include:



| |  |  | Higher electric transmission revenues primarily as a result of investment in the Companys transmission infrastructure, specifically, NSTARs 345kV
project ($11.6 million)
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Higher distribution revenues as a result of the Rate Settlement Agreement ($11.9 million),
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | Lower operations and maintenance expenses in 2006 due to service restoration costs incurred in 2005 associated with storms (approximately $10.3 million), lower
facilities consolidation charges in 2006 (approximately $2.2 million), lower bad debt expense in 2006 ($5.1 million) and a charge in 2005 related to an environmental settlement claim in 2006 ($4.6 million). The reduction in bad debt expense includes
the effect of the implementation of a new DPU-approved recovery rate mechanism, effective January 1, 2006, that allows NSTAR Electric to segregate recovery of bad debt charge-offs related to its basic service (energy component) on a fully
reconciling basis
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Improved earnings resulting from NSTARs unregulated district energy business (excluding nonmonetary gains), offset by the sale of steam assets in 2005 ($4.2
million)
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Nonmonetary gains of $6.3 million in connection with the asset exchanges related to NSTARs unregulated operations.
| | - |  | -------------------------------------------------------------------------------------------------------------------



These increases in earnings factors were partially offset by:



| |  |  | A reduction in 2006 of DPU-approved incentive entitlements for successfully lowering transition charges ($10.1 million) in 2005
| | - |  | -------------------------------------------------------------------------------------------------------------------------------



| |  |  | Distribution revenues offset by the impact of the 1.9% reduction in kWh sales ($5.6 million)
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | Adjustments lowering income tax expense in 2005 reflecting the positive outcome of a tax audit ($4.2 million)
| | - |  | -------------------------------------------------------------------------------------------------------------



| |  |  | Lower firm gas revenues due to lower energy sales primarily caused by warmer weather (heating degree-days declined by 10%) ($5.2 million)
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Adjustments lowering income tax expense in 2005 related to the successful completion of a tax audit and tax benefits related to capital gain transactions in 2006
($8.8 million)
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Higher depreciation and amortization expense in 2006 related to higher depreciable distribution and transmission plant in service ($5.3 million)
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Higher interest expense as a result of both increased rates and higher levels of borrowings ($6.2 million)
| | - |  | ----------------------------------------------------------------------------------------------------------



Significant cash flow events during 2006 included the following: NSTAR invested approximately
$426 million in capital projects to improve capacity and reliability, issued, net of discount, $198 million in new long-term debt to pay-down its short-term debt balances, paid approximately $129 million in common share dividends and retired
approximately $188 million in securitized and other long-term debt.



In
September 2006, NSTAR filed its 2005 Federal Income Tax return. It reflected a net operating loss and resulted in a tax refund of approximately $88 million. NSTARs 2005 net operating loss for income tax purposes was primarily the result of the
deduction of the purchase power contract termination payments made on March 1, 2005. This refund was reduced by the $65 million payment required in connection with the SSCM. The remaining $23 million was received in November 2006. Refer to the
accompanying Notes to Consolidated



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Financial Statements, Note F, Income Taxesand the Liquidity, Commitments and Capital Resources section of this
MD&A, for further details.



On March 16, 2006, NSTAR Electric closed
on the sale of $200 million, 30-year, fixed rate (5.75%) Debentures. The proceeds of the sale were used to repay short-term debt balances. In the first quarter of 2005, NSTAR closed on a $674.5 million securitization financing transaction. The
net proceeds were used primarily to make liquidation payments required in connection with the termination of obligations under certain purchase power contracts (approximately $554 million) and to repay $150 million of outstanding debt.



Energy Sales



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



|                            |  |                          |  |            |  |          |  
|--------------------------- |  | ------------------------ |  | ---------- |  | -------- | -
|                            |  | Years ended December 31, | 
|                            |  | 2006                     |  | 2005       |  | % Change |  
|Retail Electric Sales - MWH |  |                          |  |            |  |          |  
|Residential                 |  | 6,481,929                |  | 6,773,925  |  | (4.3     | )
|Commercial                  |  | 13,083,032               |  | 13,117,869 |  | (0.3     | )
|Industrial                  |  | 1,551,552                |  | 1,624,422  |  | (4.5     | )
|Other                       |  | 163,494                  |  | 165,158    |  | (1.0     | )
|                            |  |                          |  |            |  |          |  
|Total retail sales          |  | 21,280,007               |  | 21,681,374 |  | (1.9     | )
|                            |  |                          |  |            |  |          |  



NSTAR Electrics peak load for
2006 reached an all-time high demand of 4,959 MW on August 2, 2006. It was 7.3% more than the previous level of 4,621 MW established in 2005 and 16.6% more than the 2004 peak demand of 4,254 MW. The summer peak load in 2004 was impacted by
cooler weather.



|                      |  |                          |  |        |  |          |  
|--------------------- |  | ------------------------ |  | ------ |  | -------- | -
|                      |  | Years ended December 31, | 
|                      |  | 2006                     |  | 2005   |  | % Change |  
|Firm Gas Sales - BBtu |  |                          |  |        |  |          |  
|Residential           |  | 19,283                   |  | 21,932 |  | (12.1    | )
|Commercial            |  | 14,547                   |  | 15,416 |  | (5.6     | )
|Industrial            |  | 4,764                    |  | 5,342  |  | (10.8    | )
|Municipal             |  | 2,625                    |  | 2,815  |  | (6.7     | )
|                      |  |                          |  |        |  |          |  
|Total firm sales      |  | 41,219                   |  | 45,505 |  | (9.4     | )
|                      |  |                          |  |        |  |          |  



Weather Conditions



The demand for electricity and natural gas is affected by weather conditions. In terms of
customer sector characteristics, industrial sales are less sensitive to weather than residential and commercial sales, which are influenced by temperature extremes. Electric residential and commercial customers represented approximately 30% and 61%,
respectively, of NSTARs total sales mix for 2006 and provided 41% and 53% of distribution and transmission revenues, respectively. Refer to the Electric Revenues section below for a more detailed discussion. Industrial sales
are primarily influenced by national and local economic conditions.



|                                           |  |       |    |  |       |    |  |                     
|------------------------------------------ |  | ----- | -- |  | ----- | -- |  | --------------------
|                                           |  | 2006  |    |  | 2005  |    |  | Normal30-YearAverage
|Heating degree-days                        |  | 6,094 |    |  | 6,768 |    |  | 6,815               
|Percentage (warmer) than prior year        |  | (10.0 | )% |  | (1.3  | )% |  |                     
|Percentage (warmer) than 30-year average   |  | (10.6 | )% |  | (0.7  | )% |  |                     
|                                           |  |       |   
|Cooling degree-days                        |  | 803   |    |  | 894   |    |  | 777                 
|Percentage (cooler) warmer than prior year |  | (10.1 | )% |  | 41.9  | %  |  |                     
|Percentage warmer than 30-year average     |  | 3.3   | %  |  | 15.1  | %  |  |                     



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Heating and Cooling Degree-Days measure changes in daily temperature levels in explaining demand for electricity and
natural gas, based on weather conditions. The 1.9% decrease in retail MWh sales in 2006 reflects the warmer temperatures in January, March and May than in 2005, a cooler summer, and the warmest combined November and December in Bostons weather
history. However, even with the lower energy usage, revenues and the cost of that energy (which is also included in revenues) increased dramatically due to the rise in global energy costs. The warmer temperatures in the heating season not only
resulted in fewer natural gas energy units sold, but also resulted in lower demand from electrically-powered heating equipment. Similarly, during the cooler summer months, the demand for air conditioning was reduced. The 9.4% decrease in firm gas
sales in 2006 primarily reflects warmer winter temperatures in the first half of the year and fourth quarter as compared to the same periods in 2005. Additionally, conservation measures implemented by NSTARs electric and gas customers have
contributed to these declines in sales.



Operating Revenues



Operating revenues for 2006 increased 10.3% from 2005 as
follows:



|                                     |  |      |         |      |   |                     |  |   |         |   |  |        |  
|------------------------------------ |  | ---- | ------- | ---- | - | ------------------- |  | - | ------- | - |  | ------ | -
|                                     |  |      |         |      |   | Increase/(Decrease) | 
|(in millions)                        |  | 2006 |         | 2005 |   | Amount              |  |   | Percent |  
|Electric revenues                    |  |      |         |      |   |                     |  |   |         |   |  |        |  
|Retail distribution and transmission |  | $    | 1,013.2 |      | $ | 867.1               |  | $ | 146.1   |   |  | 16.8   |  
|Energy, transition and other         |  |      | 1,898.9 |      |   | 1,666.7             |  |   | 232.2   |   |  | 13.9   |  
|                                     |  |      |         |      |   |                     |  |   |         |   |  |        |  
|Total retail                         |  |      | 2,912.1 |      |   | 2,533.8             |  |   | 378.3   |   |  | 14.9   |  
|Wholesale                            |  |      |        |      |   | 9.7                 |  |   | (9.7    | ) |  | (100.0 | )
|                                     |  |      |         |      |   |                     |  |   |         |   |  |        |  
|Total electric revenues              |  |      | 2,912.1 |      |   | 2,543.5             |  |   | 368.6   |   |  | 14.5   |  
|                                     |  |      |         |     
|Gas revenues                         |  |      |         |      |   |                     |  |   |         |   |  |        |  
|Firm and transportation              |  |      | 139.5   |      |   | 145.6               |  |   | (6.1    | ) |  | (4.2   | )
|Energy supply and other              |  |      | 378.4   |      |   | 425.6               |  |   | (47.2   | ) |  | (11.1  | )
|                                     |  |      |         |      |   |                     |  |   |         |   |  |        |  
|Total gas revenues                   |  |      | 517.9   |      |   | 571.2               |  |   | (53.3   | ) |  | (9.3   | )
|                                     |  |      |         |     
|Unregulated operations revenues      |  |      | 147.7   |      |   | 128.4               |  |   | 19.3    |   |  | 15.0   |  
|                                     |  |      |         |      |   |                     |  |   |         |   |  |        |  
|Total operating revenues             |  | $    | 3,577.7 |      | $ | 3,243.1             |  | $ | 334.6   |   |  | 10.3   |  
|                                     |  |      |         |      |   |                     |  |   |         |   |  |        |  



Electric Revenues



Electric retail distribution revenues primarily represent charges to
customers for recovery of the Companys capital investment, including a return component, and operation and maintenance related to its electric distribution infrastructure. The transmission revenue component represents charges to customers for
the recovery of costs to move the electricity over high voltage lines from the generator to the Companys substations. The increase in retail distribution and transmission revenues includes higher transmission rates reflecting primarily NSTAR
Electrics increased investment in transmission infrastructure and higher transmission congestion costs.



NSTARs largest earnings sources are the revenues derived from transmission and distribution rates approved by the DPU and FERC. Despite a 1.9% decrease in MWh sales, substantially in the residential sector, the
$135.3 million increase in retail distribution and transmission revenues is primarily due to higher transmission-related rates that increased transmission revenues by approximately $112.6 million and a distribution rate increase effective
May 1, 2006, as approved in NSTAR Electrics Rate Settlement Agreement. Weather, conservation measures and economic conditions affect sales to NSTARs residential and small commercial customers. Economic conditions and conservation
measures affect NSTARs large commercial and industrial customers.



Energy, transition and other revenues primarily represent charges to customers for the recovery of costs incurred by the Company in order to acquire the energy supply on behalf of its customers and a transition charge for



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recovery of the Companys prior investments in generating plants and the costs related to long-term purchase power contracts. Energy revenues are fully
reconciled to the costs incurred and have no impact on NSTARs consolidated net income. Energy, transition and other revenues also reflect revenues related to the Companys ability to effectively reduce stranded costs, rental revenue from
electric property and annual cost reconciliation true-up adjustments. The $243 million increase in energy, transition and other revenues is primarily attributable to the $348.3 million increase in energy supply costs, partially offset by a reduction
of $61.7 million in transition-related revenues resulting from the Rate Settlement Agreement and the absence in 2006 of approximately $16.6 million of DPU-approved incentive revenue entitlements realized in 2005 for successfully lowering transition
charges resulting from the securitization financing that closed on March 1, 2005. NSTAR Electric earns a carrying charge on transition deferral balances.



Wholesale revenues relate to electric sales to municipal utilities and certain other governmental authorities. The absence in 2006 of wholesale revenues reflects the
expiration of a wholesale power supply contract with a regional airport that expired on October 31, 2005. As of November 1, 2005, NSTAR no longer has wholesale electric supply contracts. Amounts collected from wholesale customers were
credited to retail customers through the transition charge. Therefore, the expiration of these wholesale supply contracts had no material impact on results of operations or cash flows.



Gas Revenues



Firm and transportation gas revenues primarily represent charges to customers for NSTAR Gas recovery of costs of its capital investment in its gas infrastructure,
including a return component, and for the recovery of costs for the ongoing operation and maintenance of that infrastructure. The transportation revenue component represents charges to customers for the recovery of costs to move the natural gas over
pipelines from gas suppliers to take stations located within NSTAR Gas service area. The $6.1 million decrease in firm and transportation revenues is primarily attributable to warmer winter weather conditions, energy efficiency and customer
conservation efforts and customers switching to alternate fuel sources as a result of higher energy price concerns. These factors contributed to the decrease in sales volumes of 9.4% in 2006.



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



Energy supply
and other gas revenues primarily represent charges to customers for the recovery of costs to the Company in order to acquire the natural gas in the marketplace and a charge for recovery of the Companys gas supplier service costs. The energy
supply and other revenue decrease of $47.2 million primarily reflects the decline in cost of gas purchased from these suppliers combined with an 9.4% decline in energy sales. These revenues are fully reconciled with the cost currently recognized by
the Company and, as a result, do not have an effect on the Companys earnings.



Unregulated Operations Revenues



Unregulated operating revenues are primarily derived from NSTARs unregulated businesses that include district energy and telecommunications operations. Unregulated revenues were $147.7 million in 2006 compared to $128.4 million in
2005, an increase of $19.3 million, or 15%. The increase in unregulated revenues is primarily the result of higher electricity, steam and chilled water prices and higher electricity sales.



Operating Expenses



Purchased power and transmission costs were $1,783.9 million for 2006 compared to $1,437.9 million for 2005, an increase of $346
million, or 24%. The increase includes $83.2 million in higher transmission-related congestion costs and the remaining $265.1 million reflects higher energy procurement costs of both our regulated and unregulated companies, slightly offset by
decreased kWh sales. NSTAR Electric adjusts its rates to collect



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the costs related to energy supply from customers on a fully reconciling basis. Due to this rate adjustment mechanism, changes in the amount of energy supply
expense have no impact on earnings.



Cost of gas sold, representing
NSTAR Gas supply expense, was $344.6 million for 2006 compared to $388.4 million in 2005, a decrease of $43.8 million, or 11%. The decrease in cost reflects the 9.4% decline in firm gas sales, partly offset by higher costs of gas supply per
therm. NSTAR Gas adjusts its rates to collect costs related to gas supply from customers on a fully reconciling basis and therefore changes in the amount of energy supply expense have no impact on earnings.



Operations and maintenance expense was $431.4 million in 2006 compared to $452.6
million in 2005, a decrease of $21.2 million, or 5%. This decrease primarily relates to:



| |  |  | lower costs associated with storms and environmental issues in 2006 than similar costs experienced in 2005 ($17 million),
| | - |  | -------------------------------------------------------------------------------------------------------------------------



| |  |  | charges in 2005 related to settlement in 2006 of an environmental claim of $7.5 million
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | lower facilities consolidation charges in 2006 ($3.6 million)
| | - |  | -------------------------------------------------------------



| |  |  | lower bad debt expense of $8.5 million in 2006. The reduction in bad debt expense includes the effect of the implementation of a new DPU-approved recovery rate
mechanism, effective January 1, 2006. The mechanism allows NSTAR Electric to segregate recovery of bad debt charge-offs related to its basic service (energy component) on a fully reconciling basis.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Partially offsetting these decreases in expense were incremental costs in 2006 associated
with a DPU-approved safety and reliability program of $12.2 million and $1.5 million in stock option expense resulting from NSTARs adoption of SFAS 123R.



Depreciation and amortization expense was $362.2 million in 2006 compared to $336.7 million in 2005, an increase of $25.5 million or 8%. The increase primarily
reflects amortization costs related to transition property regulatory asset ($162.3 million and $145.4 million in 2006 and 2005, respectively) related to securitization transactions completed on March 1, 2005 and higher depreciable distribution
and transmission plant in service.



DSM and renewable energy programs
expense was $67.9 million in 2006 compared to $68.4 million in 2005, a decrease of $0.5 million, or 1%, which are consistent with the collection of conservation and renewable energy revenues. These costs are in accordance with program guidelines
established by the DPU and are collected from customers on a fully reconciling basis plus a small incentive return.



Property and other taxes were $93.9 million in 2006 compared to $92.9 million in 2005, an increase of $1 million, or 1%. This increase reflects higher overall
property tax assessments, partially offset by a lower City of Boston property tax rate.



Income tax expense attributable to operations was $119.3 million in 2006 compared to $110.7 million in 2005, an increase of $8.6 million, or 8%, primarily reflecting the higher pre-tax operating income in 2006 and $4.2 million of tax
benefits recognized in 2005 related to the completion of a tax audit.



Other
income, net



Other income, net was approximately $13.6 million in
2006 compared to $12.1 million in 2005, an increase in other income $1.5 million. The increase is primarily due to after-tax gains realized on nonutility nonmonetary transactions ($3.6 million), the sales of parcels of nonutility land ($2.5
million), and higher interest and rental income ($5.2 million in 2006 as compared to $4 million in 2005). In 2005, NSTAR recognized a $2.5 million gain from the sale of a portion of its district energy steam assets and the recognition of tax
benefits resulting from the realization of capital tax gains from sales of property.



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Other deductions, net



Other deductions, netwas approximately $1.5 million in 2006 compared to $2.0 million in 2005, a decrease in other deductions of $0.5 million. The lower expense in
2006 relates primarily to lower after tax charitable contribution expense of approximately $0.8 million, partially offset by NSTARs equity investment reduction resulting from a settlement agreement among CY and certain regulatory parties
related to decommissioning activities of $0.7 million.



Interest charges



Interest on long-term debt and transition property securitization
certificates was $167.3 million in 2006 compared to $165.7 million in 2005, an increase of $1.6 million, or 1%. The increase in interest expense primarily reflects:



| |  |  | Interest costs of $9.1 million associated with NSTAR Electrics $200 million, 30-year fixed rate (5.75%) Debentures issued on March 16, 2006
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------



The increase in interest
expense was partially offset by:



| |  |  | The absence in 2006 of interest expense of $2.9 million related to NSTAR Electrics $100 million Floating Rate Debentures due to their redemption on
October 17, 2005
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Lower interest costs of $2.8 million associated with transition property securitization. Securitization interest represents interest on securitization certificates
of BEC Funding, BEC Funding II and CEC Funding collateralized by the future income stream associated primarily with NSTARs stranded costs. The future income stream was sold to these companies by NSTAR Electric
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The absence in 2006 of interest expense of nearly $0.8 million on the March 1, 2005 redemption of $150 million variable rate Note, due in May 2006, at NSTAR
Electric
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



Short-term and other interest expense was
$17.5 million in 2006 compared to $5.6 million in 2005, an increase of $11.9 million, or 213%. The increase is due to higher short-term debt borrowing costs of $8.2 million reflecting a 151 basis point increase in the 2006 weighted average borrowing
rates and a higher average level of funds borrowed. The weighted average short-term interest rates including fees were 5.32% and 3.81% in 2006 and 2005, respectively. The higher average borrowing during 2006 reflects the impact of NSTAR Electric
financing its $100 million long-term debt redemptions on October 17, 2005 with short-term debt. NSTAR Electric used the proceeds of its $200 million Debenture that was issued on March 16, 2006 to pay down its short-term debt balances.



AFUDCincreased $3.2 million in 2006 primarily due to the higher
short-term borrowing rate, as noted above, and the timing of construction activity and higher average construction work in progress balances.



Liquidity, Commitments and Capital Resources



Cash Requirements for Contractual Obligations



A major factor that affects NSTARs cash requirements is the level of plant expenditures. The current 2008 forecast of plant expenditures is $440 million. These
plant investments relate to system reliability and performance improvements, customer service enhancements and capacity expansion. These costs are recoverable through NSTAR Electric and NSTAR Gas distribution and transmission rates. The
aggregate plant expenditure level over the following four years (2009-2012) is currently forecasted at approximately $1.3 billion.



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In addition to plant expenditures, NSTAR enters into a variety of contractual obligations and other commitments in the
course of ordinary business activities. The following table summarizes NSTARs significant contractual cash obligations as of December 31, 2007:



|                                                          |  |      |     |      |   |      |  |      |       |      |   |                 |  |       |     |  |   |       |  |   |      
|--------------------------------------------------------- |  | ---- | --- | ---- | - | ---- |  | ---- | ----- | ---- | - | --------------- |  | ----- | --- |  | - | ----- |  | - | -----
|(in millions)                                             |  | 2008 |     | 2009 |   | 2010 |  | 2011 |       | 2012 |   | YearsThereafter |  | Total
|Long-term debt maturities                                 |  | $    | 5   |      | $ | 6    |  | $    | 632   |      | $ | 7               |  | $     | 408 |  | $ | 975   |  | $ | 2,033
|Interest obligation on long-term debt                     |  |      | 128 |      |   | 127  |  |      | 102   |      |   | 77              |  |       | 76  |  |   | 483   |  |   | 993  
|Securitization obligation                                 |  |      | 94  |      |   | 153  |  |      | 119   |      |   | 84              |  |       | 84  |  |   | 43    |  |   | 577  
|Interest obligation on transition property securitization |  |      | 29  |      |   | 21   |  |      | 13    |      |   | 8               |  |       | 5   |  |   | 1     |  |   | 77   
|Leases                                                    |  |      | 17  |      |   | 16   |  |      | 14    |      |   | 11              |  |       | 10  |  |   | 27    |  |   | 95   
|Postretirement benefit obligation (c)                     |  |      | 15  |      |   | 15   |  |      | 15    |      |   | 15              |  |       | 15  |  |   |      |  |   | 75   
|Electric capacity obligations                             |  |      | 2   |      |   | 2    |  |      | 2     |      |   | 2               |  |       | 3   |  |   | 17    |  |   | 28   
|Decommissioning of nuclear generating units               |  |      | 9   |      |   | 8    |  |      | 9     |      |   | 8               |  |       | 8   |  |   | 23    |  |   | 65   
|Gas contractual obligations                               |  |      | 52  |      |   | 52   |  |      | 50    |      |   | 46              |  |       | 30  |  |   | 35    |  |   | 265  
|Purchase power buy-out obligations                        |  |      | 162 |      |   | 142  |  |      | 140   |      |   | 75              |  |       | 32  |  |   | 99    |  |   | 650  
|                                                          |  |      |     |      |   |      |  |      |       |      |   |                 |  |       |     |  |   |       |  |   |      
|Total obligation (a)(b)                                   |  | $    | 513 |      | $ | 542  |  | $    | 1,096 |      | $ | 333             |  | $     | 671 |  | $ | 1,703 |  | $ | 4,858
|                                                          |  |      |     |      |   |      |  |      |       |      |   |                 |  |       |     |  |   |       |  |   |      



|(a) | Management does not anticipate making pension contributions during 2008. Management cannot estimate projected pension contributions beyond 2008. Refer to Note G, Pension
and Other Postretirement Benefits, in the accompanying Notes to the Consolidated Financial Statements.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(b) | Management has not included its FIN 48 liability related to construction-related costs as the timing of a payment, if any, cannot be reasonably estimated. As of December 31, 2007,
$15 million has been recorded as a FIN 48 liability. Refer to Note F, Income Taxes, in the accompanying Notes to the Consolidated Financial Statements.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(c) | Postretirement benefit contributions during the 2008-2012 period are managements best estimate based on projected medical costs, current funding levels and government
regulations. Management cannot estimate projected contributions beyond 2012. Refer to Note G, Pension and Other Postretirement Benefits,in the accompanying Notes to the Consolidated Financial Statements.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Transition property securitization payments reflect securities issued in 1999 by BEC
Funding LLC, a subsidiary of NSTAR Electric and on March 1, 2005, additional transition property securitization bonds issued through BEC Funding II, LLC and CEC Funding, LLC. These funding entities recover the principal and interest obligations
for their transition property securitization bonds from customers of NSTAR Electric, through a component of NSTAR Electrics transition charges and, as a result, these payment obligations do not affect NSTARs overall cash flow.



Electric capacity and gas contractual obligations reflect obligations for
purchased power and the cost of gas. NSTAR Electric fully recovers capacity and buy-out/restructuring obligations from customers through a component of its transition charges and, as a result, this payment obligation does not affect NSTARs
results of operations. NSTAR Gas fully recovers its contractual obligations from customers through its seasonal CGAC and, as a result, these payment obligations do not affect NSTARs results of operations.



Obligations related to the decommissioning of nuclear generating units are based on estimates
from the Yankee Companies management and reflect the total remaining approximate cost for decommissioning and/or security or protection of the three units in which NSTAR has equity investments.



Current Cash Flow Activity



NSTARs primary uses of cash in 2007 included capital expenditures, dividend payments,
long-term and securitized debt redemptions and purchase power contract buyouts. NSTARs primary sources of cash in 2007 included cash from electric and gas operations and the issuance of $300 million ten-year fixed rate Debentures.



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Operating Activities



The net cash generated by operating activities in 2007, as compared to 2006, decreased by approximately $42 million primarily due to the
timing of the collection of basic service (energy costs) from customers.



In
2005, NSTAR contributed $117.6 million to its qualified retirement benefit plans. Due to this high level of contribution and funding levels, no contributions were made in 2006 or 2007. NSTAR does not anticipate making pension plan contributions
during 2008. For 2008, NSTAR anticipates making a $15 million contribution to its qualified other postretirement benefit plan.



In addition, during 2005 NSTAR Electric made $554 million in one-time payments for the buy-out certain purchase power contracts.



Investing Activities



The net cash used in investing activities in 2007 was $358 million. The majority of these
expenditures were for system reliability and performance improvements, customer service enhancements and capacity expansion to meet expected growth in the NSTAR service territory. Capital expenditures decreased in 2007 when compared to 2006 by
approximately $66 million primarily due to greater spending in 2006 on the NSTAR Electric 345kV transmission project.



Financing Activities



The net cash used in financing activities in 2007 of $115 million primarily reflects long-term and securitized debt redemptions of $237 million and dividend payments of
$139 million. These items were offset by proceeds from NSTAR Electrics issuance of $300 million in ten-year fixed-rate (5.625%) Debentures on November 19, 2007 which were used to pay down short-term debt as further discussed below.



Long-Term Financing Activities



On November 19, 2007, NSTAR Electric sold $300 million of ten-year fixed rate
(5.625%) Debentures. The net proceeds were used to repay outstanding short-term debt balances. This transaction was completed as part of the Companys approved financing plan as filed with the DPU and its approved shelf registration with
the SEC to allow issuance of up to $400 million in debt securities.



On
January 2, 2007, NSTAR Electric retired $77.7 million of long-term debt. The redemption included a make-whole premium and accrued interest payment of $17.6 million and $1.5 million, respectively.



On March 16, 2006, NSTAR Electric sold $200 million of thirty-year fixed rate
(5.75%) Debentures. The net proceeds were primarily used to repay outstanding short-term debt balances.



On September 1, 2006, NSTAR Electric redeemed the entire $5 million aggregate principal amount of its 8.7%, Series H Notes, due March 1, 2007, at a price of 101.439% of the principal amount plus accrued
interest.



On November 1, 2006, NSTAR Electric redeemed the entire
outstanding balance of $20 million aggregate principal balance of its 7.62% seven-year Notes.



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 state agencies. 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, LLC and are secured by a portion of the transition charge assessed



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on NSTAR Electrics retail customers as permitted under the 1997 Massachusetts Electric Industry Restructuring Act and authorized by the DPU. These
certificates are non-recourse to NSTAR Electric. 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 to creditors of NSTAR Electric 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 to repay
outstanding debt.



During 2005, NSTAR Electric executed several agreements to
buy-out or restructure certain of its purchase power agreements. These agreements constituted purchased power commitments and reduced the amount of above-market energy costs that NSTAR Electric will incur and collect from its customers through its
transition charges.



The total amount recognized as of December 31, 2007
and 2006 for obligations relating to these agreements is approximately $541 million and $658 million, respectively, of which approximately $128 million and $160 million are reflected as a component of current liabilities - energy contracts and
approximately $413 million and $498 million, respectively, as a component of Deferred credits - energy contracts on the accompanying Consolidated Balance Sheets. NSTAR Electric has recorded a corresponding regulatory asset to reflect the full future
recovery of these payments through its transition charge. This recognition represents a non-cash increase to assets and liabilities.



Short-Term Financing Activities



NSTARs short-term debt decreased by $33 million to $403.4 million at December 31, 2007 compared to $436.4 million at December 31, 2006. The decrease
resulted primarily were from the issuance of NSTAR Electrics $300 million in ten-year fixed-rate (5.625%) Debentures in November 2007, the net proceeds of which were used to pay down short-term 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 balances of the disbursement accounts are reflected in financing activities in the accompanying Consolidated
Statements of Cash Flows.



Income Tax Payments



In 2004, NSTAR filed an amended federal income tax return for 2002 to
change the method of accounting for certain construction-related overhead costs previously capitalized to plant using SSCM. This resulted in accelerated deductions. NSTAR claimed additional deductions related to the tax accounting method change in
its 2002-2004 returns of $368.9 million. In 2005, NSTAR received formal notification from the IRS that the claim on its amended income tax return would be denied and NSTAR would not receive the requested refund amount due.



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



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refund of approximately $88 million before this item, NSTAR applied the initial $64.5 million payment (50% of the $129.1 million) as a reduction to its 2005
refund due. This tax payment, along with any potential deduction ultimately sustained, is not anticipated to have a material impact on NSTARs results of operations, financial position or cash flows.



The remaining 50% of the cash tax payment for this item of $64.6 million was made in December
2006. In addition to this payment, NSTAR made a $130.9 million estimated federal tax payment relating to its 2006 tax liability. Also, in the fourth quarter of 2006, NSTAR received the remaining refund due of $23 million from the IRS related to its
2005 net operating loss.



During 2007 NSTAR made $151.6 million of income tax
payments.



Sources of Additional Capital and Financial Covenant Requirements



With the exception of bond indemnity agreements, NSTAR has no financial
guarantees, commitments, debt or lease agreements that would require a change in terms and conditions, such as acceleration of payment obligations, as a result of a change in its credit rating. However, NSTARs subsidiaries could be required to
provide additional security for power supply contract performance, such as a letter of credit for their pro-rata share of the remaining value of such contracts.



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



NSTAR currently has a $175 million revolving credit agreement that expires December 31,
2012. At December 31, 2007 and 2006, there were no amounts outstanding under the revolving credit agreement. This credit facility serves as a backup to NSTARs $175 million commercial paper program that, at December 31, 2007 and 2006,
had $4 million and $53.5 million outstanding, respectively. Under the terms of the credit agreement, NSTAR is required to maintain a maximum total consolidated debt to total capitalization ratio of not greater than 65% at all times, excluding
Transition Property Securitization Certificates, and excluding accumulated other comprehensive income (loss) from common equity. Commitment fees must be paid on the total agreement amount. At December 31, 2007 and 2006, NSTAR was in full
compliance with the aforementioned covenant as the ratios were 58.2% and 58.3%, respectively.



On May 18, 2007, NSTAR Electric filed with the DPU for approval to issue up to $400 million of long-term debt securities from time to time through December 31, 2008. On May 18, 2007, in connection with
this filing, NSTAR Electric filed a registration statement on Form S-3 with the SEC to issue up to $400 million in debt securities. This registration statement became effective on June 1, 2007. NSTAR Electric will use the proceeds of the
issuance of these securities to finance capital expenditures, repay short-term debt, and/or general working capital purposes. The DPU approved this financing plan on August 9, 2007. On November 19, 2007, NSTAR Electric sold $300 million of
ten-year fixed-rate (5.625%) Debentures.



NSTAR Electric has approval from
the FERC to issue short-term debt securities from time to time on or before October 23, 2008, with maturity dates no later than October 23, 2009, in amounts such that the aggregate principal does not exceed $655 million at any one time.
NSTAR Electric has a five-year, $450 million revolving credit agreement that expires December 31, 2012. However, unless NSTAR Electric receives necessary approvals from the DPU, the credit agreement will expire 364 days from the date of the
first draw under the agreement. At December 31, 2007 and 2006, there were no amounts outstanding under the revolving credit agreement. This credit facility serves as backup to NSTAR Electrics $450 million commercial paper program that had
$257 million and $200 million outstanding balances at December 31, 2007 and 2006, respectively. On January 2, 2007, with the effect of the NSTAR Electric merger, the commercial paper program had an



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outstanding balance of $326 million. Under the terms of the revolving credit agreement, NSTAR Electric is required to maintain a consolidated maximum total
debt to capitalization ratio of not greater than 65% at all times, excluding Transition Property Securitization Certificates, and excluding accumulated other comprehensive income (loss) from common equity. As of December 31, 2007, NSTAR
Electric could declare and pay dividends of approximately $1 billion of its total common equity (approximately $1.8 billion) to NSTAR and remain in compliance with this ratio. At December 31, 2007 and 2006, NSTAR Electric was in full compliance
with its covenants in connection with its short-term credit facilities, as the ratios were 46.2% and 49.0%, respectively.



As of December 31, 2007, NSTAR Gas had a $200 million line of credit. This line of credit was reduced to $100 million on January 4, 2008 and is due to expire on
November 20, 2008. As of December 31, 2007 and 2006, NSTAR Gas had $142.4 million and $150.7 million outstanding, respectively.



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



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



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



Commitments and
Contingencies



NSTAR is exposed to uncertain tax positions and regulatory
matters as discussed in this MD&A under the caption Critical Accounting Policies and Estimates.



Performance Assurances from Electricity and Gas Supply Agreements



Electric Agreements



NSTAR Electric continuously enters into power purchase agreements to meet its entire basic service supply obligations. Most of NSTAR Electrics power suppliers are either investment grade companies or are
subsidiaries of larger companies with investment grade or better credit ratings. In accordance with NSTARs Internal Credit Policy, and to minimize NSTAR Electric risk in the event the supplier encounters financial difficulties or otherwise
fails to perform, NSTAR has financial assurances and guarantees that include both parental guarantees and letters of credit in place from the parent company of the supplier. In addition, under these agreements, in the event that the supplier (or its
parent guarantor) fails to maintain an investment grade credit rating, it is required to provide additional security for performance of its obligations. In view of current volatility in the energy supply industry, NSTAR Electric is unable to
determine whether its suppliers (or their parent guarantors) will become subject to financial difficulties, or whether these financial assurances and guarantees are sufficient. In the event the supplier (or its guarantor) does not provide the
required additional security within the required time frames, NSTAR Electric may then terminate the agreement. In such event, NSTAR may be required to secure alternative sources of supply at higher or lower prices than provided under the terminated
agreements. Some of these agreements include a reciprocal provision, where in the event that NSTAR Electric receives a downgrade, it could be required to provide additional security for performance, such as a letter of credit.



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Gas Agreements



NSTAR Gas continually evaluates the financial stability of current and prospective gas suppliers. Firm suppliers are required to have and maintain investment grade credit
ratings or financial assurances and guarantees that include both parental guarantees and letters of credit in place from the parent company of the supplier and the firm gas supply agreements allow either party to require financial assurance, or, if
necessary, contract termination in the event that either party is downgraded below investment grade level and is unable to provide financial assurance acceptable to NSTAR Gas. Additionally, the hedging agreements that NSTAR Gas enters into related
to its gas purchases have a termination clause for either party in the event the credit rating of the other falls below a stipulated level.



Virtually all of NSTAR Gas firm gas supply agreements are short-term (one year or less) and utilize market-based, monthly indexed pricing mechanisms so the
financial risk to the Company would be minimal if a supplier were to fail to perform. However, in the event that a firm supplier does fail to perform under its firm gas supply agreement, the Company would be entitled to any positive difference
between the monthly supply price and the cost of replacement supplies. The cost of gas procured for firm gas sales customers is recovered through a cost of gas adjustment mechanism which is updated semi-annually. Under DPU regulations, interim
adjustments to the cost of gas are required when the actual costs of gas supply vary from projections by more than 5%.



Financial and Performance Guarantees



On a limited basis, NSTAR and certain of its subsidiaries may enter into agreements providing financial assurance to third parties. Such agreements include letters of
credit, surety bonds, and other guarantees.



At December 31, 2007,
outstanding guarantees totaled $30.1 million as follows:



|                 |  |   |       
|---------------- |  | - | ------
|(in thousands)   |  |  
|Letter of Credit |  | $ | 5,560 
|Surety Bonds     |  |   | 17,581
|Other Guarantees |  |   | 6,947 
|                 |  |   |       
|Total Guarantees |  | $ | 30,088
|                 |  |   |       



Letter of Credit



NSTAR has issued a $5.6 million letter of credit for the benefit of a
third party, as trustee in connection with Advanced Energy Systems 6.924% Notes. The letter of credit is available if the subsidiary has insufficient funds to pay the debt service requirements. As of December 31, 2007, there have been no
amounts drawn under its letter of credit.



Surety Bonds



As of December 31, 2007, certain of NSTARs subsidiaries have
purchased a total of $1.4 million of performance surety bonds for the purpose of obtaining licenses, permits and rights-of-way in various municipalities. In addition, NSTAR and certain of its subsidiaries have purchased approximately $16.2 million
in workers compensation self-insurer bonds. These bonds support the guarantee by NSTAR and certain of its subsidiaries to the Commonwealth of Massachusetts, required as part of the Companys workers compensation self-insurance
program. NSTAR and certain of its subsidiaries have indemnity agreements to provide additional financial security to its bond company in the form of a contingent letter of credit to be triggered in the event of a downgrade in the future of
NSTARs Senior Note rating to below BBB by S&P and/or to below Baa1 by Moodys. These Indemnity Agreements cover both the performance surety bonds and workers compensation bonds.



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Other



NSTAR and its subsidiaries have also issued $6.9 million of residual value guarantees related to its equity interest in the Hydro-Quebec transmission companies.



Management believes the likelihood that NSTAR would be required to perform or
otherwise incur any significant losses associated with any of these guarantees is remote.



Contingencies



Environmental Matters



NSTAR subsidiaries face possible
liabilities as a result of involvement in several multi-party disposal sites, state-regulated sites or third-party claims associated with contamination remediation. NSTAR generally expects to have only a small percentage of the total potential
liability for the majority of these sites.



In accordance with a court approved
settlement agreement relating to litigation brought against NSTAR Electric by various governmental entities, NSTAR Electric paid $8.6 million in September, 2006 upon final judgment of the Massachusetts Superior Court. This payment did not have an
earnings impact in 2006, as NSTAR recognized this liability in the second quarter of 2005. In December 2006, NSTAR Electric settled with its insurance carrier for $4.5 million relating to this claim and recognized $2.5 million of this amount in 2006
as a reduction to its operating expenses.



As of December 31, 2007 and
2006, NSTAR had recorded liabilities of $0.8 million and $2.9 million, respectively, for potential multi-party environmental sites. This estimate is based on an evaluation of all currently available facts with respect to all of its sites.



NSTAR Gas is participating in the assessment or remediation of certain former
MGP sites and alleged MGP waste disposal locations to determine if and to what extent such sites have been contaminated and whether NSTAR Gas may be responsible to undertake remedial action. The DPU has approved recovery of costs associated with MGP
sites over a seven-year period, without carrying costs. As of December 31, 2007 and 2006, NSTAR recorded a liability of approximately $10.1 million and $3.2 million, respectively, as an estimate for site cleanup costs for several MGP sites for
which NSTAR Gas was previously cited as a potentially responsible party. A corresponding regulatory asset was recorded that reflects the future rate recovery for these costs.



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



Fair
Value of Financial Instruments



Carrying amounts and fair values of
long-term indebtedness (excluding notes payable, including current maturities) as of December 31, 2007 and 2006 were as follows:



|                                                      |  |                |           |            |   |                |  |            |           |  |   |          
|----------------------------------------------------- |  | -------------- | --------- | ---------- | - | -------------- |  | ---------- | --------- |  | - | ---------
|                                                      |  | 2007           |           | 2006      
|(in thousands)                                        |  | CarryingAmount |           | Fair Value |   | CarryingAmount |  | Fair Value
|Long-term indebtedness (including current maturities) |  | $              | 2,599,931 |            | $ | 2,680,240      |  | $          | 2,536,857 |  | $ | 2,623,100



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As discussed in the following section, NSTARs exposure to financial market risk results primarily from fluctuations
in interest rates.



|Item 7A. | Quantitative and Qualitative Disclosures About Market Risk
|-------- | ----------------------------------------------------------



Although NSTAR has material commodity purchase contracts, these instruments are not subject to market risk. NSTARs electric and gas distribution subsidiaries have
rate-making mechanisms that allow for the recovery of energy supply costs from customers, who make commodity purchases from NSTARs electric and gas subsidiaries, rather than from the competitive market. All energy supply costs incurred by
NSTARs electric and gas subsidiaries to provide electricity for retail customers purchasing basic service or retail gas customers are recovered on a fully reconciling basis.



However, NSTARs exposure to financial market risk results primarily from fluctuations in interest rates. NSTAR is exposed to changes
in interest rates primarily based on levels of short-term debt outstanding. The weighted average interest rates including fees for short-term indebtedness were 5.33% and 5.32% in 2007 and 2006, respectively. The weighted average interest rates for
long-term indebtedness, including current maturities were 5.97% and 6.04% in 2007 and 2006, respectively.



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Item 8. Financial Statements and Supplementary Data



NSTAR

Consolidated Statements of Income



|                                                     |  |                                          |           |   |      |   |           |      |  |   |           |  
|---------------------------------------------------- |  | ---------------------------------------- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | -
|                                                     |  | Years ended December 31,                 |          
|                                                     |  | 2007                                     |           |   | 2006 |   |           | 2005 | 
|                                                     |  | (in thousands, except per share amounts) |          
|Operating revenues                                   |  | $                                        | 3,261,784 |   |      | $ | 3,577,702 |      |  | $ | 3,243,120 |  
|                                                     |  |                                          |           |   |      |   |           |      |  |   |           |  
|Operating expenses:                                  |  |                                          |           |   |      |   |           |      |  |   |           |  
|Purchased power and transmission                     |  |                                          | 1,390,610 |   |      |   | 1,783,860 |      |  |   | 1,437,943 |  
|Cost of gas sold                                     |  |                                          | 375,839   |   |      |   | 344,573   |      |  |   | 388,377   |  
|Operations and maintenance                           |  |                                          | 446,807   |   |      |   | 431,375   |      |  |   | 452,558   |  
|Depreciation and amortization                        |  |                                          | 369,642   |   |      |   | 362,222   |      |  |   | 336,670   |  
|Demand side management and renewable energy programs |  |                                          | 70,877    |   |      |   | 67,890    |      |  |   | 68,441    |  
|Property and other taxes                             |  |                                          | 93,748    |   |      |   | 93,925    |      |  |   | 92,871    |  
|Income taxes                                         |  |                                          | 130,424   |   |      |   | 119,342   |      |  |   | 110,690   |  
|                                                     |  |                                          |           |   |      |   |           |      |  |   |           |  
|Total operating expenses                             |  |                                          | 2,877,947 |   |      |   | 3,203,187 |      |  |   | 2,887,550 |  
|                                                     |  |                                          |           |   |      |   |           |      |  |   |           |  
|Operating income                                     |  |                                          | 383,837   |   |      |   | 374,515   |      |  |   | 355,570   |  
|                                                     |  |                                          |           |   |      |   |           |      |  |   |           |  
|Other income (deductions):                           |  |                                          |           |   |      |   |           |      |  |   |           |  
|Other income, net                                    |  |                                          | 10,070    |   |      |   | 13,582    |      |  |   | 12,120    |  
|Other deductions, net                                |  |                                          | (3,030    | ) |      |   | (1,506    | )    |  |   | (2,032    | )
|                                                     |  |                                          |           |   |      |   |           |      |  |   |           |  
|Total other income, net                              |  |                                          | 7,040     |   |      |   | 12,076    |      |  |   | 10,088    |  
|                                                     |  |                                          |           |   |      |   |           |      |  |   |           |  
|Interest charges:                                    |  |                                          |           |   |      |   |           |      |  |   |           |  
|Long-term debt                                       |  |                                          | 118,663   |   |      |   | 122,570   |      |  |   | 118,270   |  
|Transition property securitization                   |  |                                          | 36,341    |   |      |   | 44,692    |      |  |   | 47,394    |  
|Short-term debt and other                            |  |                                          | 16,279    |   |      |   | 17,482    |      |  |   | 5,608     |  
|AFUDC                                                |  |                                          | (3,881    | ) |      |   | (6,887    | )    |  |   | (3,709    | )
|                                                     |  |                                          |           |   |      |   |           |      |  |   |           |  
|Total interest charges                               |  |                                          | 167,402   |   |      |   | 177,857   |      |  |   | 167,563   |  
|                                                     |  |                                          |           |   |      |   |           |      |  |   |           |  
|Preferred stock dividends of subsidiary              |  |                                          | 1,960     |   |      |   | 1,960     |      |  |   | 1,960     |  
|                                                     |  |                                          |           |   |      |   |           |      |  |   |           |  
|Net Income                                           |  | $                                        | 221,515   |   |      | $ | 206,774   |      |  | $ | 196,135   |  
|                                                     |  |                                          |           |   |      |   |           |      |  |   |           |  
|Weighted average common shares outstanding:          |  |                                          |           |   |      |   |           |      |  |   |           |  
|Basic                                                |  |                                          | 106,808   |   |      |   | 106,808   |      |  |   | 106,756   |  
|Diluted                                              |  |                                          | 107,122   |   |      |   | 107,125   |      |  |   | 107,100   |  
|                                                     |  |                                          |          
|Earnings per common share:                           |  |                                          |           |   |      |   |           |      |  |   |           |  
|Basic                                                |  | $                                        | 2.07      |   |      | $ | 1.94      |      |  | $ | 1.84      |  
|Diluted                                              |  | $                                        | 2.07      |   |      | $ | 1.93      |      |  | $ | 1.83      |  
|                                                     |  |                                          |          
|Dividends declared per common share                  |  | $                                        | 1.325     |   |      | $ | 1.535     |      |  | $ | 0.87      |  



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



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NSTAR

Consolidated Statements of Comprehensive Income



|                                 |  |                          |         |   |      |   |         |      |  |   |         |  
|-------------------------------- |  | ------------------------ | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                 |  | Years ended December 31, |        
|                                 |  | 2007                     |         |   | 2006 |   |         | 2005 | 
|                                 |  | (in thousands)           |        
|Net income                       |  | $                        | 221,515 |   |      | $ | 206,774 |      |  | $ | 196,135 |  
|Other comprehensive income, net: |  |                          |         |   |      |   |         |      |  |   |         |  
|Pension and postretirement costs |  |                          | (867    | ) |      |   | (725    | )    |  |   | (5,132  | )
|Deferred income taxes benefit    |  |                          | 292     |   |      |   | 284     |      |  |   | 2,113   |  
|                                 |  |                          |         |   |      |   |         |      |  |   |         |  
|Comprehensive income             |  | $                        | 220,940 |   |      | $ | 206,333 |      |  | $ | 193,116 |  
|                                 |  |                          |         |   |      |   |         |      |  |   |         |  



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



NSTAR

Consolidated Statements of Retained Earnings



|                                                             |  |                          |         |      |   |         |  |   |        
|------------------------------------------------------------ |  | ------------------------ | ------- | ---- | - | ------- |  | - | -------
|                                                             |  | Years ended December 31,
|                                                             |  | 2007                     |         | 2006 |   | 2005   
|                                                             |  | (in thousands)          
|Balance at the beginning of the year, as previously reported |  | $                        | 664,323 |      | $ | 621,500 |  | $ | 518,252
|Adoption of FIN 48                                           |  |                          | 46,610  |      |   |        |  |   |       
|                                                             |  |                          |         |      |   |         |  |   |        
|Adjusted balance at the beginning of the year                |  |                          | 710,933 |      |   | 621,500 |  |   | 518,252
|Add:                                                         |  |                          |         |      |   |         |  |   |        
|Net income                                                   |  |                          | 221,515 |      |   | 206,774 |  |   | 196,135
|                                                             |  |                          |         |      |   |         |  |   |        
|Subtotal                                                     |  |                          | 932,448 |      |   | 828,274 |  |   | 714,387
|                                                             |  |                          |         |      |   |         |  |   |        
|Deduct:                                                      |  |                          |         |      |   |         |  |   |        
|Dividends declared:                                          |  |                          |         |      |   |         |  |   |        
|Common shares                                                |  |                          | 141,522 |      |   | 163,951 |  |   | 92,887 
|                                                             |  |                          |         |      |   |         |  |   |        
|Balance at the end of the year                               |  | $                        | 790,926 |      | $ | 664,323 |  | $ | 621,500
|                                                             |  |                          |         |      |   |         |  |   |        



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





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NSTAR

Consolidated Balance Sheets



|                                                                           |  |                |           |      |   |          
|-------------------------------------------------------------------------- |  | -------------- | --------- | ---- | - | ---------
|                                                                           |  | December 31,  
|                                                                           |  | 2007           |           | 2006
|                                                                           |  | (in thousands)
|Assets                                                                     |  |                |           |      |   |          
|                                                                           |  |               
|Utility plant:                                                             |  |                |           |      |   |          
|Electric and gas plant in service, at original cost                        |  | $              | 5,350,795 |      | $ | 5,033,562
|Less: accumulated depreciation                                             |  |                | 1,321,013 |      |   | 1,244,163
|                                                                           |  |                |           |      |   |          
|                                                                           |  |                | 4,029,782 |      |   | 3,789,399
|Construction work in progress                                              |  |                | 112,513   |      |   | 155,862  
|                                                                           |  |                |           |      |   |          
|Net utility plant                                                          |  |                | 4,142,295 |      |   | 3,945,261
|                                                                           |  |               
|Other property and investments:                                            |  |                |           |      |   |          
|Nonutility property, net                                                   |  |                | 143,930   |      |   | 140,866  
|Electric equity investments                                                |  |                | 7,067     |      |   | 8,113    
|Other investments                                                          |  |                | 83,664    |      |   | 74,482   
|                                                                           |  |                |           |      |   |          
|                                                                           |  |                | 234,661   |      |   | 223,461  
|                                                                           |  |               
|Current assets:                                                            |  |                |           |      |   |          
|Cash and cash equivalents                                                  |  |                | 34,121    |      |   | 16,132   
|Restricted cash                                                            |  |                | 3,938     |      |   | 7,010    
|Accounts receivable, net of allowance of $29,426 and $27,240, respectively |  |                | 328,651   |      |   | 317,220  
|Accrued unbilled revenues                                                  |  |                | 59,859    |      |   | 58,976   
|Regulatory assets                                                          |  |                | 527,382   |      |   | 418,724  
|Inventory, at average cost                                                 |  |                | 120,251   |      |   | 124,874  
|Other                                                                      |  |                | 14,369    |      |   | 16,514   
|                                                                           |  |                |           |      |   |          
|                                                                           |  |                | 1,088,571 |      |   | 959,450  
|                                                                           |  |               
|Deferred debits:                                                           |  |                |           |      |   |          
|Regulatory assets                                                          |  |                | 2,041,600 |      |   | 2,434,737
|Other                                                                      |  |                | 123,298   |      |   | 77,062   
|                                                                           |  |                |           |      |   |          
|                                                                           |  |                | 2,164,898 |      |   | 2,511,799
|Refundable income taxes                                                    |  |                | 129,120   |      |   | 129,120  
|                                                                           |  |                |           |      |   |          
|Total assets                                                               |  | $              | 7,759,545 |      | $ | 7,769,091
|                                                                           |  |                |           |      |   |          



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



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NSTAR

Consolidated Balance Sheets



|                                                                                                                                                     |  |                |           |   |      |   |           |  
|---------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | --------- | - | ---- | - | --------- | -
|                                                                                                                                                     |  | December 31,   |          
|                                                                                                                                                     |  | 2007           |           |   | 2006 |  
|                                                                                                                                                     |  | (in thousands) |          
|Capitalization and Liabilities                                                                                                                       |  |                |           |  
|                                                                                                                                                     |  |               
|Common equity:                                                                                                                                       |  |                |           |   |      |   |           |  
|Common shares, par value $1 per share, 200,000,000 shares authorized, 106,808,376 issued and outstanding                                             |  | $              | 106,808   |   |      | $ | 106,808   |  
|Premium on common shares                                                                                                                             |  |                | 818,674   |   |      |   | 823,450   |  
|Retained earnings                                                                                                                                    |  |                | 790,926   |   |      |   | 664,323   |  
|Accumulated other comprehensive loss                                                                                                                 |  |                | (12,593   | ) |      |   | (12,018   | )
|                                                                                                                                                     |  |                |           |   |      |   |           |  
|                                                                                                                                                     |  |                | 1,703,815 |   |      |   | 1,582,563 |  
|                                                                                                                                                     |  |               
|Long-term debt and preferred stock:                                                                                                                  |  |                |           |   |      |   |           |  
|Long-term debt                                                                                                                                       |  |                | 2,017,439 |   |      |   | 1,723,558 |  
|Transition property securitization                                                                                                                   |  |                | 483,961   |   |      |   | 637,217   |  
|Cumulative non-mandatory redeemable preferred stock of subsidiary, par value $100 per share, 2,890,000 shares authorized, 430,000 shares
outstanding |  |                | 43,000    |   |      |   | 43,000    |  
|                                                                                                                                                     |  |                |           |   |      |   |           |  
|                                                                                                                                                     |  |                | 2,544,400 |   |      |   | 2,403,775 |  
|                                                                                                                                                     |  |               
|Current liabilities:                                                                                                                                 |  |                |           |   |      |   |           |  
|Long-term debt                                                                                                                                       |  |                | 5,124     |   |      |   | 83,999    |  
|Transition property securitization                                                                                                                   |  |                | 93,407    |   |      |   | 92,083    |  
|Notes payable                                                                                                                                        |  |                | 403,400   |   |      |   | 436,400   |  
|Income taxes                                                                                                                                         |  |                | 80,144    |   |      |   | 17,485    |  
|Accounts payable                                                                                                                                     |  |                | 310,640   |   |      |   | 302,240   |  
|Energy contracts                                                                                                                                     |  |                | 147,841   |   |      |   | 204,470   |  
|Accrued interest                                                                                                                                     |  |                | 30,956    |   |      |   | 37,742    |  
|Dividends payable                                                                                                                                    |  |                | 37,710    |   |      |   | 35,039    |  
|Accrued expenses                                                                                                                                     |  |                | 16,850    |   |      |   | 15,125    |  
|Other                                                                                                                                                |  |                | 64,240    |   |      |   | 47,721    |  
|                                                                                                                                                     |  |                |           |   |      |   |           |  
|                                                                                                                                                     |  |                | 1,190,312 |   |      |   | 1,272,304 |  
|                                                                                                                                                     |  |               
|Deferred credits:                                                                                                                                    |  |                |           |   |      |   |           |  
|Accumulated deferred income taxes                                                                                                                    |  |                | 1,116,073 |   |      |   | 1,209,734 |  
|Unamortized investment tax credits                                                                                                                   |  |                | 20,100    |   |      |   | 21,785    |  
|Energy contracts                                                                                                                                     |  |                | 467,932   |   |      |   | 563,936   |  
|Pension and other postretirement liability                                                                                                           |  |                | 278,215   |   |      |   | 264,246   |  
|Regulatory liabilitycost of removal                                                                                                                 |  |                | 258,948   |   |      |   | 260,198   |  
|Other                                                                                                                                                |  |                | 179,750   |   |      |   | 190,550   |  
|                                                                                                                                                     |  |                |           |   |      |   |           |  
|                                                                                                                                                     |  |                | 2,321,018 |   |      |   | 2,510,449 |  
|Commitments and contingencies                                                                                                                        |  |                |           |   |      |   |           |  
|                                                                                                                                                     |  |                |           |   |      |   |           |  
|Total capitalization and liabilities                                                                                                                 |  | $              | 7,759,545 |   |      | $ | 7,769,091 |  
|                                                                                                                                                     |  |                |           |   |      |   |           |  



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



57



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NSTAR

Consolidated Statements of Cash Flows



|                                                         |  |                          |          |   |      |   |          |      |  |   |          |  
|-------------------------------------------------------- |  | ------------------------ | -------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                                         |  | Years ended December 31, |         
|                                                         |  | 2007                     |          |   | 2006 |   |          | 2005 | 
|                                                         |  | (in thousands)           |         
|Operating activities:                                    |  |                          |          |   |      |   |          |      |  |   |          |  
|Net income                                               |  | $                        | 221,515  |   |      | $ | 206,774  |      |  | $ | 196,135  |  
|Adjustments to reconcile net income to net               |  |                          |          |   |      |   |          |      |  |   |          |  
|cash provided by (used in) operating activities:         |  |                          |          |   |      |   |          |      |  |   |          |  
|Depreciation and amortization                            |  |                          | 371,510  |   |      |   | 363,480  |      |  |   | 337,887  |  
|Deferred income taxes                                    |  |                          | 7,060    |   |      |   | 2,086    |      |  |   | 158,914  |  
|Gain on sale of nonutility property                      |  |                          |         |   |      |   | (4,144   | )    |  |   | (2,500   | )
|Impact of nonmonetary transactions                       |  |                          |         |   |      |   | (9,630   | )    |  |   |         |  
|Noncash stock-based compensation                         |  |                          | 8,910    |   |      |   | 8,228    |      |  |   | 5,507    |  
|Premium paid on long-term debt redemption                |  |                          | (17,647  | ) |      |   |         |      |  |   |         |  
|Purchase power contract buyouts                          |  |                          | (157,520 | ) |      |   | (140,518 | )    |  |   | (653,210 | )
|Net changes in:                                          |  |                          |          |   |      |   |          |      |  |   |          |  
|Accounts receivable and accrued unbilled revenues        |  |                          | (17,850  | ) |      |   | (5,819   | )    |  |   | (8,895   | )
|Inventory, at average cost                               |  |                          | 4,622    |   |      |   | (3,950   | )    |  |   | (34,527  | )
|Other current assets                                     |  |                          | 2,286    |   |      |   | 50,592   |      |  |   | (41,938  | )
|Accounts payable                                         |  |                          | (3,921   | ) |      |   | 4,239    |      |  |   | 55,523   |  
|Other current liabilities                                |  |                          | 17,488   |   |      |   | (11,016  | )    |  |   | (8,939   | )
|Regulatory assets                                        |  |                          | 103,478  |   |      |   | 5,183    |      |  |   | (39,348  | )
|Net change from other miscellaneous operating activities |  |                          | (48,551  | ) |      |   | 67,956   |      |  |   | 12,214   |  
|                                                         |  |                          |          |   |      |   |          |      |  |   |          |  
|Net cash provided by (used in) operating activities      |  |                          | 491,380  |   |      |   | 533,461  |      |  |   | (23,177  | )
|                                                         |  |                          |          |   |      |   |          |      |  |   |          |  
|Investing activities:                                    |  |                          |          |   |      |   |          |      |  |   |          |  
|Plant expenditures (including AFUDC)                     |  |                          | (360,130 | ) |      |   | (426,146 | )    |  |   | (387,265 | )
|Decrease (increase) in restricted cash                   |  |                          | 3,049    |   |      |   | (238     | )    |  |   | (4,028   | )
|Proceeds from sale of properties                         |  |                          |         |   |      |   | 13,295   |      |  |   | 16,321   |  
|Investments                                              |  |                          | (1,137   | ) |      |   | 1,571    |      |  |   | 728      |  
|                                                         |  |                          |          |   |      |   |          |      |  |   |          |  
|Net cash used in investing activities                    |  |                          | (358,218 | ) |      |   | (411,518 | )    |  |   | (374,244 | )
|                                                         |  |                          |          |   |      |   |          |      |  |   |          |  
|Financing activities:                                    |  |                          |          |   |      |   |          |      |  |   |          |  
|Long-term debt redemptions                               |  |                          | (84,943  | ) |      |   | (34,455  | )    |  |   | (259,200 | )
|Transition property securitization redemptions           |  |                          | (151,932 | ) |      |   | (153,349 | )    |  |   | (141,647 | )
|Issuance of long-term debt, net of discount              |  |                          | 298,694  |   |      |   | 197,886  |      |  |   |         |  
|Debt issue costs                                         |  |                          | (2,301   | ) |      |   | (1,750   | )    |  |   | (6,513   | )
|Issuance of transition property securitization           |  |                          |         |   |      |   |         |      |  |   | 674,500  |  
|Net change in notes payable                              |  |                          | (33,000  | ) |      |   | 18,900   |      |  |   | 256,100  |  
|Change in disbursement accounts                          |  |                          | 6,921    |   |      |   | (7,272   | )    |  |   | (4,103   | )
|Common stock issuance                                    |  |                          |         |   |      |   |         |      |  |   | 7,146    |  
|Dividends paid                                           |  |                          | (138,851 | ) |      |   | (129,239 | )    |  |   | (125,747 | )
|Cash received for exercise of equity options             |  |                          | 10,948   |   |      |   | 17,383   |      |  |   |         |  
|Cash used to settle equity compensation                  |  |                          | (23,247  | ) |      |   | (33,488  | )    |  |   |         |  
|Windfall tax effect of settlement of equity compensation |  |                          | 2,538    |   |      |   | 3,961    |      |  |   |         |  
|                                                         |  |                          |          |   |      |   |          |      |  |   |          |  
|Net cash (used in) provided by financing activities      |  |                          | (115,173 | ) |      |   | (121,423 | )    |  |   | 400,536  |  
|                                                         |  |                          |          |   |      |   |          |      |  |   |          |  
|Net increase in cash and cash equivalents                |  |                          | 17,989   |   |      |   | 520      |      |  |   | 3,115    |  
|Cash and cash equivalents at the beginning of the year   |  |                          | 16,132   |   |      |   | 15,612   |      |  |   | 12,497   |  
|                                                         |  |                          |          |   |      |   |          |      |  |   |          |  
|Cash and cash equivalents at the end of the year         |  | $                        | 34,121   |   |      | $ | 16,132   |      |  | $ | 15,612   |  
|                                                         |  |                          |          |   |      |   |          |      |  |   |          |  
|Supplemental disclosures of cash flow information:       |  |                          |          |   |      |   |          |      |  |   |          |  
|Cash paid (received) during the year for:                |  |                          |          |   |      |   |          |      |  |   |          |  
|Interest, net of amounts capitalized                     |  | $                        | 178,500  |   |      | $ | 167,168  |      |  | $ | 166,853  |  
|Income taxes                                             |  | $                        | 151,619  |   |      | $ | 199,408  |      |  | $ | (4,317   | )
|Non-cash investing activity:                             |  |                          |          |   |      |   |          |      |  |   |          |  
|Plant additions included in ending accounts payable      |  | $                        | 47,369   |   |      | $ | 41,969   |      |  | $ | 57,656   |  



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



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Notes to Consolidated Financial Statements



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. Prior to January 1, 2007, NSTARs retail electric
utility subsidiaries were Boston Edison, ComElectric and Cambridge Electric. Its wholesale electric subsidiary was Canal. NSTARs three retail electric companies collectively have operated under the trade name NSTAR Electric.
NSTARs retail natural gas distribution utility subsidiary is NSTAR Gas. NSTARs nonutility, unregulated operations include district energy operations primarily through its AES subsidiary, telecommunications operations (NSTAR Com) and a
liquefied natural gas service company (Hopkinton). Harbor Electric Energy Company, a wholly-owned subsidiary of NSTAR Electric, provides distribution service and ongoing support to its only customer, the Massachusetts Water Resources Authority.
Utility operations accounted for approximately 96% of consolidated operating revenues in 2007, 2006 and 2005.



NSTAR consolidates three-wholly owned special purpose subsidiaries, BEC Funding LLC, established in 1999, BEC Funding II, LLC and CEC Funding, LLC, each established in 2004. These entities were created to complete the
sale of notes to a special purpose trust created by two Massachusetts state agencies. NSTAR has no variable interest entities.



NSTARs 2005 Rate Settlement Agreement (Rate Settlement Agreement) approved by the DPU anticipated the transfer of the net assets, structured as a merger
of NSTARs electric subsidiary companies Cambridge Electric, ComElectric and Canal, to Boston Edison. NSTAR requested and received final approval of this merger from the DPU and FERC during the fourth quarter of 2006. The merger was effective
as of January 1, 2007 and Boston Edison was renamed NSTAR Electric Company.



2. Basis of Consolidation and Accounting



The accompanying Consolidated Financial Statements reflect the results of operations, comprehensive income, retained earnings, financial position and cash flows of
NSTAR and its subsidiaries. All significant intercompany transactions have been eliminated in consolidation. Certain immaterial reclassifications have been made to prior year amounts to conform to the current years presentation.



NSTARs utility subsidiaries follow accounting policies prescribed by the FERC and the
DPU. In addition, NSTAR and its subsidiaries are subject to the accounting and reporting requirements of the SEC. The accompanying Consolidated Financial Statements conform to accounting principles in conformity with GAAP. The utility subsidiaries
are subject to SFAS No. 71, Accounting for the Effects of Certain Types of Regulation(SFAS 71). The application of SFAS 71 results in differences in the timing of recognition of certain revenues and expenses from those of
other businesses and industries. The distribution and transmission businesses are subject to rate-regulation and meet the criteria for application of SFAS 71. Refer to Note D, Regulatory Assets, for more information.



3. Use of Estimates



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



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4. Revenues



Utility revenues are based on authorized rates approved by the DPU and FERC. Estimates of distribution and transition revenues for
electricity and natural gas delivered to customers but not yet billed are accrued at the end of each accounting period.



Revenues for NSTARs nonutility subsidiaries are recognized when services are rendered or when the energy is delivered. Revenues are based, for the most part, on
long-term contractual rates.



NSTAR records
sales taxes collected from its customers on a net basis (excluded from operating revenues).



5. Utility Plant



Utility plant is stated at original cost. The cost of replacements of property units is capitalized. Maintenance and repairs and replacements of certain items are
expensed as incurred. The original cost of property retired, net of salvage value, is charged to accumulated depreciation. The incurred related cost of removal is charged against the Regulatory liability - cost of removal. The following is a summary
of utility property and equipment, at cost, at December 31:



|                               |  |      |           |      |   |          
|------------------------------ |  | ---- | --------- | ---- | - | ---------
|(in thousands)                 |  | 2007 |           | 2006
|Electric -                     |  |      |           |      |   |          
|Transmission                   |  | $    | 956,841   |      | $ | 863,479  
|Distribution                   |  |      | 3,482,584 |      |   | 3,299,816
|General                        |  |      | 223,752   |      |   | 222,440  
|                               |  |      |           |      |   |          
|Electric utility plant         |  |      | 4,663,177 |      |   | 4,385,735
|                               |  |     
|Gas -                          |  |      |           |      |   |          
|Transmission and distribution  |  |      | 597,930   |      |   | 563,675  
|General                        |  |      | 89,688    |      |   | 84,152   
|                               |  |      |           |      |   |          
|Gas utility plant              |  |      | 687,618   |      |   | 647,827  
|                               |  |      |           |      |   |          
|Total utility plant in service |  | $    | 5,350,795 |      | $ | 5,033,562
|                               |  |      |           |      |   |          



6. Nonutility Property



Nonutility property is stated at cost or
its net realizable value. The following is a summary of nonutility property, plant and equipment, at cost less accumulated depreciation, at December 31:



|                                        |  |      |         |   |      |   |         |  
|--------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|(in thousands)                          |  | 2007 |         |   | 2006 |  
|Land                                    |  | $    | 11,318  |   |      | $ | 8,629   |  
|Energy production and storage equipment |  |      | 158,174 |   |      |   | 150,529 |  
|Telecommunications equipment            |  |      | 40,662  |   |      |   | 40,198  |  
|Buildings and improvements              |  |      | 3,464   |   |      |   | 3,233   |  
|                                        |  |      |         |   |      |   |         |  
|                                        |  |      | 213,618 |   |      |   | 202,589 |  
|Less: accumulated depreciation          |  |      | (69,688 | ) |      |   | (61,879 | )
|                                        |  |      |         |   |      |   |         |  
|                                        |  |      | 143,930 |   |      |   | 140,710 |  
|Construction work in progress           |  |      |        |   |      |   | 156     |  
|                                        |  |      |         |   |      |   |         |  
|Total nonutility property, net          |  | $    | 143,930 |   |      | $ | 140,866 |  
|                                        |  |      |         |   |      |   |         |  



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7. Depreciation and Amortization



Depreciation of utility plant is computed on a straight-line basis using composite rates
based on the estimated useful lives of the various classes of property. The composite rates are subject to the approval of the DPU and FERC. The overall composite depreciation rates for utility property were 3.03%, 3.02% and 3.03% in 2007, 2006 and
2005, respectively. The rates include a cost of removal component, which is collected from customers. Depreciation and amortization expense on utility plant for 2007, 2006 and 2005 was $159.3 million, $149.9 million and $141.4 million, respectively.



Depreciation and amortization of nonutility property is computed on a
straight-line basis over the estimated life of the asset. The estimated depreciable service lives (in years) of the major components of nonutility property and equipment are as follows:



|                                        |  |                        
|--------------------------------------- |  | -----------------------
|Plant Component                         |  | DepreciableLife (Years)
|Energy production and storage equipment |  | 25-35                  
|Telecommunications equipment            |  | 15                     
|Buildings and improvements              |  | 40                     



Depreciation and amortization expense
on nonutility property and equipment was $11.5 million, $12.8 million and $12.9 million for 2007, 2006 and 2005, respectively.



8. Costs Associated with Issuance and Redemption of Debt and Preferred Stock



Consistent with the recovery in utility rates, discounts, redemption premiums and related
costs associated with the issuance and redemption of long-term debt and preferred stock are deferred and amortized as an addition to interest expense over the life of the original or replacement debt. Costs related to preferred stock issuances and
redemptions are reflected as a direct reduction to retained earnings upon redemption or over the average life of the replacement preferred stock series as applicable.



9. Allowance for Borrowed Funds Used During Construction (AFUDC)



AFUDC represents the estimated costs to finance utility plant construction. In accordance
with regulatory accounting, AFUDC is included as a cost of utility plant and a reduction of current interest charges. Although AFUDC is not a current source of cash income, the costs are recovered from customers over the service life of the related
plant in the form of increased revenues collected as a result of higher depreciation expense. Average AFUDC rates in 2007, 2006 and 2005 were 5.27%, 5.26% and 3.75%, respectively, and represented only the costs of short-term debt. The 2007 and 2006
rate increases are directly related to increases in short-term borrowing rates.



10. Cash, Cash Equivalents and Restricted Cash



Cash, cash equivalents and restricted cash at December 31, 2007 and 2006 are comprised of liquid securities with maturities of 90 days
or less when purchased. Restricted cash primarily represents the funds held by a trustee in connection with Advanced Energy Systems 6.924% Note Agreement.



NSTARs banking arrangements provide for daily cash transfers to its disbursement accounts as vendor checks are presented for payment. The balances of the
disbursement accounts amounted to $21.7 million and $14.8 million at December 31, 2007 and 2006, respectively, and are included in Accounts payable on the accompanying Consolidated Balance Sheets. Changes in the balances of the disbursement
accounts are reflected in financing activities in the accompanying Consolidated Statements of Cash Flows.



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11. Use of Fair Value



The fair value of financial instruments is estimated based upon market trading information,
where available. Absent published market values for an instrument or other assets, management uses observable market data to arrive at its estimates of fair value. For its long-term debt, management estimates are based on quotations from
broker/dealers or interest rate information for similar instruments. The carrying amount of cash and temporary investments, accounts receivable, accounts payable, short-term borrowings and other current liabilities approximates fair value because of
the short maturity and/or frequent repricing of those instruments.



In
addition, the Company applies the fair value recognition provisions of SFAS No. 123(R), Share Based Payment, to estimate the fair value of its stock-based compensation.



12. Income Taxes



Income taxes are accounted for in accordance with SFAS No. 109 (SFAS 109),
Accounting for Income Taxes.Income tax expense includes the current tax obligation or benefit and the change in deferred income tax liability for the period. Deferred income taxes result from temporary differences between
financial and tax bases of certain assets and liabilities. Uncertain tax positions are accounted for in accordance with FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, an interpretation of SFAS
No. 109, Accounting for Income Taxes. Refer to Note F, Income Taxes, for more information.



13. Equity Method of Accounting



NSTAR uses the equity method of accounting for investments in corporate joint ventures in which it does not have a controlling interest. Under this method, it records as
income or loss the proportionate share of the net earnings or losses of the joint ventures with a corresponding increase or decrease in the carrying value of the investment. The investment is reduced as cash dividends are received. NSTAR
participates in several corporate joint ventures in which it has investments, principally its 14.5% equity investment in two companies that own and operate transmission facilities to import electricity from the Hydro-Quebec System in Canada, and its
equity investments ranging from 4% to 14% in three regional nuclear facilities, all of which have been decommissioned in accordance with the federal NRC procedures.



14. Other Income (Deductions), net



Major components of other income, net were as follows:



|                                                                     |  |                          |        |   |      |   |        |      |  |   |        |  
|-------------------------------------------------------------------- |  | ------------------------ | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                     |  | Years ended December 31, |       
|(in thousands)                                                       |  | 2007                     |        |   | 2006 |   |        | 2005 | 
|Equity earnings, dividends and other investment income               |  | $                        | 1,495  |   |      | $ | 644    |      |  | $ | 1,480  |  
|Interest, dividend and rental income                                 |  |                          | 9,226  |   |      |   | 8,492  |      |  |   | 6,509  |  
|Nonmonetary gain                                                     |  |                          |       |   |      |   | 5,494  |      |  |   |       |  
|Sales of nonutility property                                         |  |                          |       |   |      |   | 4,144  |      |  |   | 2,564  |  
|Tax adjustments                                                      |  |                          |       |   |      |   | 158    |      |  |   | 4,735  |  
|Miscellaneous other income, (includes applicable income tax expense) |  |                          | (651   | ) |      |   | (5,350 | )    |  |   | (3,168 | )
|                                                                     |  |                          |        |   |      |   |        |      |  |   |        |  
|                                                                     |  | $                        | 10,070 |   |      | $ | 13,582 |      |  | $ | 12,120 |  
|                                                                     |  |                          |        |   |      |   |        |      |  |   |        |  



Major components of other deductions,
net were as follows:



|                                                                                   |  |                          |        |   |      |   |        |      |  |   |        |  
|---------------------------------------------------------------------------------- |  | ------------------------ | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                                   |  | Years ended December 31, |       
|(in thousands)                                                                     |  | 2007                     |        |   | 2006 |   |        | 2005 | 
|Charitable contributions                                                           |  | $                        | (1,730 | ) |      | $ | (449   | )    |  | $ | (2,486 | )
|Miscellaneous other deductions, (includes applicable income tax benefit (expense)) |  |                          | (1,300 | ) |      |   | (1,057 | )    |  |   | 454    |  
|                                                                                   |  |                          |        |   |      |   |        |      |  |   |        |  
|                                                                                   |  | $                        | (3,030 | ) |      | $ | (1,506 | )    |  | $ | (2,032 | )
|                                                                                   |  |                          |        |   |      |   |        |      |  |   |        |  



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The lower level of charitable contributions in 2006, as compared to 2007 and 2005, reflects the funding of the NSTAR
Foundation to desired levels. This was accomplished by a contribution to the Foundation of $2 million in 2005. NSTAR recorded a contribution to the Foundation of $1 million in 2007.



15. New Accounting Standards



SFAS No. 157



In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements(SFAS 157), which provides enhanced guidance for using fair value
measurements in financial reporting. While the standard does not expand the use of fair value in any new circumstance, it has applicability to several current accounting standards that require or permit entities to measure assets and liabilities at
fair value. SFAS 157 defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements. The Company adopted this standard on January 1, 2008 with no impact to NSTARs results
of operations, financial position or cash flows.



SFAS No. 159



In February 2007, the FASB issued SFAS
No. 159, The Fair Value Option for Financial Assets and Financial Liabilities(SFAS 159). This statement provides companies with an option to report selected financial assets and liabilities at fair value. NSTAR
adopted this standard on January 1, 2008. The Company did not elect the fair value option, and therefore, SFAS 159 had no impact on its results of operations, financial position or cash flows.



16. Purchase and Sales Transactions with ISO-NE



During 2007 and 2006, as part of its normal business operations, NSTAR
Electric transacted with ISO-NE to sell energy entitlements from all of its remaining long-term energy supply resources. NSTAR Electric records the net effect of transactions with the ISO-NE as an adjustment to Purchased power and transmission
expense.



Note B. Earnings Per Common Share



Basic EPS is calculated by dividing net income by the weighted average common shares
outstanding during the year. SFAS No. 128, Earnings per Share, requires the disclosure of diluted EPS. Diluted EPS is similar to the computation of basic EPS except that the weighted average common shares are increased to
include the number of potential dilutive common shares. Diluted EPS reflects the impact on shares outstanding of the deferred (non-vested) shares and stock options granted under the NSTAR 1997 Share Incentive Plan and the NSTAR 2007 Long Term
Incentive Plan.



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



|                                                                                                                                                     |  |      |         |      |   |         |  |   |        
|---------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | ---- | - | ------- |  | - | -------
|(in thousands, except per share amounts)                                                                                                             |  | 2007 |         | 2006 |   | 2005   
|Net income                                                                                                                                           |  | $    | 221,515 |      | $ | 206,774 |  | $ | 196,135
|Basic EPS                                                                                                                                            |  | $    | 2.07    |      | $ | 1.94    |  | $ | 1.84   
|Diluted EPS                                                                                                                                          |  | $    | 2.07    |      | $ | 1.93    |  | $ | 1.83   
|Weighted average common shares outstanding for basic EPS                                                                                             |  |      | 106,808 |      |   | 106,808 |  |   | 106,756
|Effect of dilutive shares:                                                                                                                           |  |      |         |      |   |         |  |   |        
|Weighted average dilutive potential common shares                                                                                                    |  |      | 314     |      |   | 317     |  |   | 344    
|                                                                                                                                                     |  |      |         |      |   |         |  |   |        
|Weighted average common shares outstanding for diluted EPS                                                                                           |  |      | 107,122 |      |   | 107,125 |  |   | 107,100
|                                                                                                                                                     |  |      |         |      |   |         |  |   |        
|The following table summarizes potential common shares that
are excluded from the calculation of diluted EPS as their effect would be anti-dilutive:
|                                                                                                                                                     |  | 2007 |         | 2006 |   | 2005   
|Deferred shares                                                                                                                                      |  |      | 150,756 |      |   |        |  |   | 338,930
|Stock options                                                                                                                                        |  |      | 305,760 |      |   | 906,851 |  |   | 329,123



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Note C. Asset Retirement Obligations



The FASB Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations, an interpretation of SFAS
No. 143(FIN 47), Accounting for Asset Retirement Obligations (SFAS 143), requires entities to record the fair value of a liability for an ARO in the period in which it is incurred. When the liability is initially
recorded, the entity capitalizes the cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the
related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement.



The recognition of an ARO within its regulated utility businesses has no impact on NSTARs earnings. In accordance with SFAS 71, for its rate-regulated utilities,
NSTAR establishes a regulatory asset to recognize future recoveries through depreciation rates for the recorded ARO. NSTAR has several plant assets in which this condition exists and is related to both plant assets containing asbestos materials and
legal requirements to undertake remediation efforts upon retirement.



For
NSTARs regulated utility businesses, the ultimate cost to remove utility plant from service (cost of removal) is recognized as a component of depreciation expense in accordance with approved regulatory treatment. As of December 31, 2007
and 2006, the estimated amount of the cost of removal included in regulatory liabilities was approximately $259 million and $260 million, respectively, based on the estimated cost of removal component in current depreciation rates. At
December 31, 2007, NSTAR has an asset retirement cost in utility plant of $3 million, an asset retirement liability of $23 million and a regulatory asset of $18 million.



Note D. Regulatory Assets



Regulatory assets represent costs incurred that are expected to be collected from customers through future rates in accordance with agreements with regulators. These
costs are expensed when the corresponding revenues are received in order to appropriately match revenues and expenses.



Regulatory assets consisted of the following:



|                                               |  |              |           |      |   |           |  
|---------------------------------------------- |  | ------------ | --------- | ---- | - | --------- | -
|                                               |  | December 31, |          
|(in thousands)                                 |  | 2007         |           | 2006 |  
|Energy contracts (including Yankee units)      |  | $            | 615,773   |      | $ | 768,406   |  
|Goodwill                                       |  |              | 638,379   |      |   | 658,539   |  
|Securitized energy-related costs               |  |              | 731,485   |      |   | 815,321   |  
|Retiree benefit costs                          |  |              | 406,815   |      |   | 482,693   |  
|Merger costs to achieve                        |  |              | 27,385    |      |   | 43,817    |  
|Income taxes, net                              |  |              | 30,249    |      |   | 30,857    |  
|Purchased energy costs under/(over) collection |  |              | 14,250    |      |   | (39,659   | )
|Redemption premiums                            |  |              | 28,233    |      |   | 13,080    |  
|Other                                          |  |              | 76,413    |      |   | 80,407    |  
|                                               |  |              |           |      |   |           |  
|Total current and long-term regulatory assets  |  | $            | 2,568,982 |      | $ | 2,853,461 |  
|                                               |  |              |           |      |   |           |  



Under the traditional revenue
requirements model, electric and gas rates are based on the cost of providing energy delivery service. Under this model, NSTAR Electric and NSTAR Gas are subject to certain accounting standards that are not applicable to other businesses and
industries in general. The application of SFAS 71 requires companies to defer the recognition of certain costs when incurred if future rate recovery of these costs is expected. This is applicable to NSTARs electric and gas distribution and
transmission operations.



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Amortization expense recorded in the Depreciation and amortization caption on the accompanying Consolidated Statements of
Income on certain regulatory assets for 2007, 2006 and 2005 was $198.8 million, $199.5 million and $182.4 million, respectively. The amortization of other regulatory assets is recorded in the Purchased power and transmission expense caption.



Energy contracts



At December 31, 2007, $540.8 million represents the recognition of eight purchase power
contract buy-out agreements that NSTAR Electric executed in 2004 and their future recovery through NSTAR Electrics transition charges. Refer to Note M, Contracts for the Purchase of Energy, for further details. Since no cash
outlay has been incurred by NSTAR to create the regulatory asset, NSTAR does not earn a return on this regulatory asset. NSTAR recognized this regulatory asset as a result of recognizing the contract termination liability in accordance with SFAS
146, Accounting for Costs Associated with Exit or Disposal Activities. The contracts termination payments will occur over time and will be collected from customers through NSTARs transition charge over the same time
period. The cost recovery of these terminated contracts is through September 2016.



In addition, the unamortized balance of the costs to decommission the CY, YA and MY nuclear power plants was $64.5 million at December 31, 2007. All three nuclear units have been notified by the NRC that their respective former plant
sites were decommissioned in accordance with NRC procedures and regulations. NSTARs liability for CY decommissioning and its recovery ends at the earliest in 2015, for YA in 2014 and for MY in 2010. However, should the actual costs exceed
current estimates, NSTAR could have an obligation beyond these periods that would be fully recoverable. These costs are recovered through NSTAR Electrics transition charge. NSTAR does not earn a return on decommissioning costs, but a return is
included in rates charged to NSTAR by these plants. Refer to Note N, Commitments and Contingencies, for further discussion.



The remaining balance at December 31, 2007 of $10.5 million represents the recognition of the future recoverability of a derivative liability recorded related to
contracts structured to hedge the cash flow variability associated with a portion of NSTAR Gas future supply purchases which does not earn a return. Refer to Note E, Derivative Instruments, for further details.



Goodwill



The Companys goodwill originated from the merger that created NSTAR in 1999. As a result of a rate order from the DPU approving the
merger, the Company is recovering goodwill from its customers and, therefore, NSTAR has determined that this rate structure allows for amortization of goodwill over the collection period. Goodwill along with related deferred income taxes is being
amortized over 40 years, through 2039, without a carrying charge.



Securitized energy-related costs



Costs related to purchase power
contract buy-outs and the divestiture of NSTAR Electrics generation business are recovered with a return through the transition charge. This recovery occurs through 2013 for NSTAR Electric and is subject to adjustment by the DPU.



On March 1, 2005, NSTAR closed on a securitization financing for $674.5 million to,
in part, finance the buy-out of four energy contracts. The remaining balance at December 31, 2007 of $435.6 million represents their future recovery through NSTAR Electrics transition charge.



As of December 31, 2007, $586.9 million of these energy-related regulatory assets are
collateralized with the Transition Property Securitization Certificates held by NSTAR Electrics subsidiaries, BEC Funding LLC, BEC Funding II, LLC and CEC Funding, LLC. The certificates are non-recourse to NSTAR Electric.



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Retiree benefit costs



The retiree benefit regulatory asset at December 31, 2007 of $406.8 million is comprised primarily of $414.8 million related to the
application of SFAS No. 158, Employers Accounting for Deferred Benefit Pension and Other Postretirement Plansan amendment of FASB Statements Nos. 87, 88, 106, and 132(R)(SFAS 158). (Refer to Note G,
Pension and Other Postretirement Benefits, for further details.) Of this amount, $279 million is earning a carrying charge under the PAM regulatory mechanism. The remaining balance reflects the recognition of the retirement
plans funded status. Deferred pension and PBOP costs and over-recoveries of costs, in accordance with PAM, are amortized and collected from or returned to customers over three years. At December 31, 2007, a deferred over-recovery of costs
amounted to $8.0 million. NSTAR recovers its qualified pension and PBOP expenses through this reconciling rate mechanism, thereby removing the volatility in earnings that may have resulted from requirements of existing accounting standards and
provides for an annual filing and rate adjustment with the DPU.



Merger costs to achieve



An integral part of the merger that created
NSTAR was the DPU-approved rate plan of the retail utility subsidiaries of NSTAR. These costs are collected from all NSTAR Electric and NSTAR Gas distribution customers and exclude a return component. The costs to achieve amortization expense was
$16.4 million in 2007, 2006 and 2005 and the original ten-year amortization period ends in 2009.



Income taxes, net



The principal holder of this regulatory asset is NSTAR Electric. Approximately $38 million of this regulatory asset balance reflects deferred tax reserve deficiencies
that are currently being recovered from customers and excludes a return component. Offsetting these amounts is approximately $8 million of a regulatory liability associated with unamortized investment tax credits relating to NSTAR Electric and NSTAR
Gas.



Purchased energy costs



The purchased energy costs at December 31, 2007 relate to deferred electric basic
service and gas supply costs. Basic service is the electricity that is supplied by the local distribution company when a customer has chosen not to receive service from a competitive supplier. The market price for basic service and gas costs may
fluctuate based on the average market price for energy. Amounts incurred for basic service and cost of gas supply are recovered on a fully reconciling basis without a return.



Redemption premiums



These amounts reflect the unamortized balance of redemption premiums on NSTAR Electric Debentures that are amortized and recovered over the life of the respective
debentures pursuant to DPU approval. The increase reflects the redemption premium paid on the early retirement of ComElectrics entire balance of long-term debt. There is no return recognized on this balance.



Other



These amounts primarily consist of deferred transmission costs that will be recovered over a subsequent twelve-month period with carrying
charges. The deferred costs represent the difference between the level of billed transmission revenues and the current period costs incurred to provide transmission-related services. Additionally in this category are the costs associated with a
DPU-approved safety and reliability program and clean up costs related to former gas manufacturing sites which are recovered over a seven-year period without a return.



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Note E. Derivative Instruments



Energy Contracts



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



Hedging Agreements



NSTAR Gas purchases financial contracts based upon NYMEX natural gas futures in order to reduce cash flow variability associated with the purchase price for approximately
one-third of its natural gas purchases. The objective of this practice is to minimize fluctuations in prices to NSTAR firm gas sales customers. These financial contracts do not procure gas supply and therefore NSTAR Gas does not take physical
delivery of gas. These contracts qualify as derivative financial instruments, specifically cash flow hedges. Accordingly, the fair value of these instruments is recognized on the accompanying Consolidated Balance Sheets as an asset or liability
representing amounts due from or payable to the counter parties of NSTAR Gas, as if such contracts were settled currently. All actual costs and benefits incurred are included in the firm sales CGAC and are fully recoverable from customers. As a
result, NSTAR Gas records an offsetting regulatory asset or liability for the market price changes, in lieu of recording the adjustment to Other Comprehensive Income. Currently, these derivative contracts extend through April 2009. At
December 31, 2007 and 2006, NSTAR has recorded a liability and a corresponding regulatory asset of $10.5 million and $32.7 million, respectively, reflecting the fair value of these contracts. During 2007, approximately $30.4 million of these
financial contracts were settled resulting in payments by NSTAR to the counterparties to the contracts.



Note F. Income Taxes



Income taxes
are accounted for in accordance with SFAS No. 109, Accounting for Income Taxes (SFAS 109) and FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, an Interpretation of SFAS
109. SFAS 109 requires the recognition of deferred tax assets and liabilities for the future tax effects of temporary differences between the carrying amounts and the tax basis of assets and liabilities. In accordance with SFAS 71 and SFAS
109, net regulatory assets of $30.2 million and $30.9 million and corresponding net increases in accumulated deferred income taxes were recorded as of December 31, 2007 and 2006, respectively. The regulatory assets represent the additional
future revenues to be collected from customers for deferred income taxes.



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Accumulated deferred income taxes and unamortized investment tax credits consisted of the following:



|                                               |  |              |           |      |   |          
|---------------------------------------------- |  | ------------ | --------- | ---- | - | ---------
|                                               |  | December 31,
|(in thousands)                                 |  | 2007         |           | 2006
|Deferred tax liabilities:                      |  |              |           |      |   |          
|Plant-related                                  |  | $            | 668,771   |      | $ | 643,521  
|Goodwill                                       |  |              | 250,404   |      |   | 258,312  
|Power contracts                                |  |              | 183,049   |      |   | 218,478  
|Transition costs                               |  |              | 60,376    |      |   | 88,242   
|Other                                          |  |              | 194,608   |      |   | 171,262  
|                                               |  |              |           |      |   |          
|                                               |  |              | 1,357,208 |      |   | 1,379,815
|                                               |  |              |           |      |   |          
|Deferred tax assets:                           |  |              |           |      |   |          
|Plant-related                                  |  |              | 36,326    |      |   | 41,016   
|Investment tax credits                         |  |              | 12,872    |      |   | 13,942   
|Other                                          |  |              | 103,181   |      |   | 100,282  
|                                               |  |              |           |      |   |          
|                                               |  |              | 152,379   |      |   | 155,240  
|                                               |  |              |           |      |   |          
|Net accumulated deferred income taxes          |  |              | 1,204,829 |      |   | 1,224,575
|Accumulated unamortized investment tax credits |  |              | 20,100    |      |   | 21,785   
|                                               |  |              |           |      |   |          
|                                               |  | $            | 1,224,929 |      | $ | 1,246,360
|                                               |  |              |           |      |   |          



Previously deferred investment tax
credits are amortized over the estimated remaining lives of the property that generated the credits.



Components of income tax expense were as follows:



|                                                  |  |      |         |   |      |   |         |      |  |   |         |  
|------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|(in thousands)                                    |  | 2007 |         |   | 2006 |   |         | 2005 | 
|Current income tax expense (benefit)              |  | $    | 138,108 |   |      | $ | 119,827 |      |  | $ | (52,959 | )
|Deferred income tax (benefit) expense             |  |      | (5,999  | ) |      |   | 1,207   |      |  |   | 165,364 |  
|Investment tax credit amortization                |  |      | (1,685  | ) |      |   | (1,692  | )    |  |   | (1,715  | )
|                                                  |  |      |         |   |      |   |         |      |  |   |         |  
|Income taxes charged to operations                |  |      | 130,424 |   |      |   | 119,342 |      |  |   | 110,690 |  
|                                                  |  |      |         |   |      |   |         |      |  |   |         |  
|Tax expense (benefit) on other income net:        |  |      |         |   |      |   |         |      |  |   |         |  
|Current income tax expense                        |  |      | 2,348   |   |      |   | 4,964   |      |  |   | 3,703   |  
|Deferred income tax expense (benefit)             |  |      | 624     |   |      |   | 2,571   |      |  |   | (4,735  | )
|                                                  |  |      |         |   |      |   |         |      |  |   |         |  
|Income tax expense (benefit) on other income, net |  |      | 2,972   |   |      |   | 7,535   |      |  |   | (1,032  | )
|                                                  |  |      |         |   |      |   |         |      |  |   |         |  
|Total income tax expense                          |  | $    | 133,396 |   |      | $ | 126,877 |      |  | $ | 109,658 |  
|                                                  |  |      |         |   |      |   |         |      |  |   |         |  



The effective income tax rates
reflected in the accompanying consolidated financial statements and the reasons for their differences from the statutory federal income tax rate were as follows:



|                                                    |  |      |   |  |      |   |  |      |  
|--------------------------------------------------- |  | ---- | - |  | ---- | - |  | ---- | -
|                                                    |  | 2007 |   |  | 2006 |   |  | 2005 |  
|Statutory tax rate                                  |  | 35.0 | % |  | 35.0 | % |  | 35.0 | %
|State income tax, net of federal income tax benefit |  | 4.5  |   |  | 4.5  |   |  | 4.6  |  
|Investment tax credits                              |  | (0.5 | ) |  | (0.5 | ) |  | (0.6 | )
|Capital gain adjustment                             |  |     |   |  |     |   |  | (1.5 | )
|Other                                               |  | (1.4 | ) |  | (1.0 | ) |  | (1.6 | )
|                                                    |  |      |   |  |      |   |  |      |  
|Effective tax rate                                  |  | 37.6 | % |  | 38.0 | % |  | 35.9 | %
|                                                    |  |      |   |  |      |   |  |      |  



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During 2005, the Company recognized approximately $4.7 million in tax benefits relating to capital tax gain transactions.
As a result, the Company reduced its tax loss contingency by a corresponding amount. This impact is reflected in the above schedule as a tax adjustment.



Uncertain Tax Positions



In July 2006, the FASB issued Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, an Interpretation of SFAS No. 109, Accounting for Income Taxes. FIN 48
establishes criteria for the recognition of income tax benefits. FIN 48 requires the financial statement recognition of an income tax benefit when the company determines that it is more-likely-than-not that the tax position will be ultimately
sustained.



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



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



The following unrecognized tax benefits have been recognized as FIN 48 liabilities on the accompanying Consolidated Balance Sheets included in Deferred
CreditsOther.



|                                         |  |               |   
|---------------------------------------- |  | ------------- | --
|                                         |  | (in millions)
|Balance at January 1, 2007               |  | $             | 12
|Additions for current year tax positions |  |               | 3 
|                                         |  |               |   
|Balance at December 31, 2007             |  | $             | 15
|                                         |  |               |   



As of January 1, 2007, the date
of adoption, and December 31, 2007, there were no unrecognized tax benefits of a permanent tax nature that if recognized would have an impact on the Companys effective tax rate.



As of December 31, 2007, the 2001 through 2006 federal and state tax years remain open.
Years 2001 and 2002 are currently at the IRS Office of Appeals and years 2003 and 2004 are under examination by the IRS.



RCN Share Abandonment Tax Treatment



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



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



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Deduction of Construction-Related Costs



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



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



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



Interest on Tax Positions



NSTAR recognizes interest accrued related to uncertain tax positions in Interest
charges: Short-term debt and other and related penalties, if applicable, in Other deductions, net on the accompanying Consolidated Statements of Income. This accounting policy is consistent with the recognition of these items prior
to the adoption of FIN 48. For the twelve months ended December 31, 2007, the amount of interest income, net, recognized on the accompanying Consolidated Statements of Income was $9.1 million and the total amount of accrued interest receivable
on the accompanying Consolidated Balance Sheets was $13.2 million. No penalties were recognized during 2007.



In addition to its FIN 48 tax liability, NSTAR has unrecognized benefits associated with interest on construction-related uncertain tax positions. These unrecognized benefits were $9 million and $14 million as of
December 31, 2007 and January 1, 2007, respectively. The decrease of $5 million during 2007 reflects interest income on tax positions taken during prior periods recognized during 2007. The amount recognized reflects a change in
managements estimate of its tax position resulting from additional information which became available during the third quarter of 2007. It is possible that the amount of unrecognized tax benefits relating to the deduction for
construction-related costs in the form of interest income could significantly change within twelve months from December 31, 2007. This would occur if NSTAR were to reach a final resolution with the IRS Office of Appeals on this issue. The
estimated range of the unrecognized potential change is zero to approximately $9 million as of December 31, 2007.



Note G. Pension and Other Postretirement Benefits



NSTAR adopted the funded status recognition provision of SFAS 158 effective December 31, 2006. This standard amended SFAS Nos. 87, 88, 106 and 132(R). SFAS 158
requires an employer with a defined benefit plan or other postretirement plan to recognize an asset or liability on its balance sheet for the over funded or under funded status of the plan as defined by SFAS 158. The pension asset or liability is
the difference between the fair value of the pension plans assets and the projected benefit obligation as of year-end. For other postretirement benefit plans, the asset or liability is the difference between the fair value of the plans
assets and the accumulated postretirement benefit obligation as of year-end. As a result of NSTARs approved regulatory rate mechanism for recovery of pension and postretirement costs, NSTAR has recognized a regulatory asset for the majority of
its pension and postretirement costs in lieu of taking a charge to AOCI.



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A charge of approximately $5.2 million, net of taxes, was taken to AOCI related to NSTARs unregulated operations
and its nonqualified pension plan at December 31, 2006 upon the application of SFAS 158. The following table illustrates the effect on AOCI of applying this standard relating to pension and postretirement benefit costs.



The change in Accumulated Other Comprehensive Income due to the application of SFAS 158 was
as follows:



|                                                                               |  |                  |         |  
|------------------------------------------------------------------------------ |  | ---------------- | ------- | -
|(in thousands)                                                                 |  | December 31,2006 |        
|                                                                              
|Accumulated other comprehensive loss (before application of SFAS 158)          |  | $                | (6,833  | )
|Increase in accumulated other comprehensive loss due to application ofSFAS 158 |  |                  | (5,185  | )
|                                                                               |  |                  |         |  
|Accumulated other comprehensive loss (after application of SFAS 158)           |  | $                | (12,018 | )
|                                                                               |  |                  |         |  



1. Pension



NSTAR sponsors a defined benefit retirement plan,
the NSTAR Pension Plan (the Plan), that covers substantially all employees. Retirement benefits are based on various final average pay formulae. NSTAR also maintains nonqualified retirement plans for certain management employees.



The Plans use December 31stfor the measurement date to determine their projected benefit obligation and fair value of plan assets for the purposes of determining the Plans funded
status and the net periodic benefit costs for the following year.



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The following tables for NSTARs Pension benefit plans present the change in benefit obligation, change in the
Plans assets, the funded status, the components of net periodic benefit cost and key assumptions used:



|                                                          |  |              |           |   |      |   |           |  
|--------------------------------------------------------- |  | ------------ | --------- | - | ---- | - | --------- | -
|                                                          |  | December 31, |          
|(in thousands)                                            |  | 2007         |           |   | 2006 |  
|Change in benefit obligation:                             |  |              |           |   |      |   |           |  
|Benefit obligation, beginning of the year                 |  | $            | 1,075,001 |   |      | $ | 1,035,558 |  
|Service cost                                              |  |              | 21,530    |   |      |   | 20,865    |  
|Interest cost                                             |  |              | 62,154    |   |      |   | 59,507    |  
|Plan participants contributions                          |  |              | 32        |   |      |   | 36        |  
|Plan amendments                                           |  |              |          |   |      |   | 699       |  
|Actuarial (gain) loss                                     |  |              | (25,397   | ) |      |   | 22,966    |  
|Settlement payments                                       |  |              | (21,471   | ) |      |   | (10,953   | )
|Benefits paid                                             |  |              | (54,443   | ) |      |   | (53,677   | )
|                                                          |  |              |           |   |      |   |           |  
|Projected benefit obligation, end of the year             |  | $            | 1,057,406 |   |      | $ | 1,075,001 |  
|                                                          |  |              |           |   |      |   |           |  
|                                                          |  |             
|Change in Plan assets:                                    |  |              |           |   |      |   |           |  
|Fair value of Plan assets, beginning of the year          |  | $            | 1,029,059 |   |      | $ | 964,613   |  
|Actual gain on Plan assets, net                           |  |              | 93,906    |   |      |   | 126,210   |  
|Employer contribution                                     |  |              | 2,295     |   |      |   | 2,830     |  
|Plan participants contributions                          |  |              | 32        |   |      |   | 36        |  
|Settlement payments                                       |  |              | (21,471   | ) |      |   | (10,953   | )
|Benefits paid                                             |  |              | (54,443   | ) |      |   | (53,677   | )
|                                                          |  |              |           |   |      |   |           |  
|Fair value of Plan assets at end of the year              |  | $            | 1,049,378 |   |      | $ | 1,029,059 |  
|                                                          |  |              |           |   |      |   |           |  
|                                                          |  |             
|Funded status at end of year - (under funded)             |  | $            | (8,028    | ) |      | $ | (45,942   | )
|                                                          |  |              |           |   |      |   |           |  
|                                                         
|Source of change in other comprehensive income:           | 
|                                                          |  |             
|                                                          |  | 2007         |           |   |      |  
|Net loss arising during period                            |  | $            | (2,553    | ) |      |   |           |  
|Amortization:                                             |  |              |           |   |      |   |           |  
|Prior service cost                                        |  |              | 1,186     |   |      |   |           |  
|Loss                                                      |  |              | 905       |   |      |   |           |  
|                                                          |  |              |           |   |      |   |           |  
|Total other comprehensive loss recognized during the year |  | $            | (462      | ) |      |   |           |  
|                                                          |  |              |           |   |      |   |           |  



The market-related value of
NSTARs pension plans assets is determined based on the actual fair value as of the balance sheet date for all classes of assets. Therefore, the entire difference between the actual and expected return on Plan assets is reflected as a
component of unrecognized actuarial net gain or loss.



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Amounts recognized in the accompanying Consolidated Balance Sheets consisted of:



|                                                                                                                                    |  |              |          |   |      |   |          |  
|----------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | -------- | - | ---- | - | -------- | -
|                                                                                                                                    |  | December 31, |         
|(in thousands)                                                                                                                      |  | 2007         |          |   | 2006 |  
|Deferred debits - other                                                                                                             |  | $            | 37,144   |   |      | $ |         |  
|Current liabilities - other                                                                                                         |  |              | (2,825   | ) |      |   | (3,000   | )
|Deferred credits - pension and other postretirement liabilities                                                                     |  |              | (42,347  | ) |      |   | (42,942  | )
|                                                                                                                                    |  |              |          |   |      |   |          |  
|                                                                                                                                    |  | $            | (8,028   | ) |      | $ | (45,942  | )
|                                                                                                                                    |  |              |          |   |      |   |          |  
|Amounts not yet reflected in net periodic benefit cost and included in accumulated other comprehensive income and regulatory
asset: |  |              |          |   |      |   |          |  
|Prior service credit                                                                                                                |  | $            | 2,678    |   |      | $ | 2,658    |  
|Accumulated actuarial loss                                                                                                          |  |              | (287,479 | ) |      |   | (344,481 | )
|Cumulative employer contributions in excess of net periodic benefit cost                                                            |  |              | 276,773  |   |      |   | 295,881  |  
|                                                                                                                                    |  |              |          |   |      |   |          |  
|Net unrecognized periodic pension benefit cost reflected on the accompanying Consolidated Balance Sheets                            |  | $            | (8,028   | ) |      | $ | (45,942  | )
|                                                                                                                                    |  |              |          |   |      |   |          |  



The estimated prior service cost and
net actuarial loss that will be amortized from AOCI and regulatory assets into net periodic benefit cost in 2008 are $20,000 and $21,133,000, respectively.



The accumulated benefit obligation for the qualified pension plan as of December 31, 2007 and 2006 were $962.9 million and $905.1 million, respectively.



The projected benefit obligation, accumulated benefit obligation and fair value of plan
assets for the nonqualified retirement plan were $45.2 million, $41.7 million and $0, respectively, as of December 31, 2007 and were $41.3 million, $39.2 million and $0, respectively, as of December 31, 2006.



Weighted average assumptions were as follows:



|                                                              |  |      |   |  |      |   |  |      |  
|------------------------------------------------------------- |  | ---- | - |  | ---- | - |  | ---- | -
|                                                              |  | 2007 |   |  | 2006 |   |  | 2005 |  
|Discount rate at the end of the year                          |  | 6.25 | % |  | 6.0  | % |  | 5.75 | %
|Expected return on Plan assets for the year (net of expenses) |  | 8.4  | % |  | 8.4  | % |  | 8.4  | %
|Rate of compensation increase at the end of the year          |  | 4.0  | % |  | 4.0  | % |  | 4.0  | %



The Plans discount rates are
based on a rate modeling of a bond portfolio that approximates the Plan liabilities. In addition, management considers rates of high quality corporate bonds of appropriate maturities as published by nationally recognized rating agencies consistent
with the duration of the Companys plans and through periodic bond portfolio matching. The Plans long-term rates of return are based on past performance and economic forecasts for the types of investments held in the Plans as well as the
target allocation of the investments over a 20-year time period. This rate is presented net of both administrative expenses and investment expenses, which have averaged approximately 0.6% for 2007 and 2006.



Components of net periodic benefit cost were as follows:



|                                      |  |                          |         |   |      |   |         |      |  |   |         |  
|------------------------------------- |  | ------------------------ | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                      |  | Years ended December 31, |        
|(in thousands)                        |  | 2007                     |         |   | 2006 |   |         | 2005 | 
|Service cost                          |  | $                        | 21,530  |   |      | $ | 20,865  |      |  | $ | 20,689  |  
|Interest cost                         |  |                          | 62,154  |   |      |   | 59,507  |      |  |   | 57,634  |  
|Expected return on Plan assets        |  |                          | (83,434 | ) |      |   | (78,013 | )    |  |   | (74,390 | )
|Amortization of prior service cost    |  |                          | 20      |   |      |   | 129     |      |  |   | 133     |  
|Amortization of transition obligation |  |                          |        |   |      |   |        |      |  |   |        |  
|Recognized actuarial loss             |  |                          | 21,133  |   |      |   | 27,437  |      |  |   | 26,202  |  
|                                      |  |                          |         |   |      |   |         |      |  |   |         |  
|Net periodic benefit cost             |  | $                        | 21,403  |   |      | $ | 29,925  |      |  | $ | 30,268  |  
|                                      |  |                          |         |   |      |   |         |      |  |   |         |  



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The following reflects the weighted average asset allocation
percentage of the fair value of the total Plans assets for each major type of the Plans assets as of December 31stas well as the
Plans target percentages and the targeted ranges:



|                  |  |             |   |  |         |   |  |                 |   |           |           |  |                    
|----------------- |  | ----------- | - |  | ------- | - |  | --------------- | - | --------- | --------- |  | -------------------
|                  |  | Plan Assets |   |  | Target% |   |  | Targeted Ranges |   | Benchmark
|                  |  | 2007        |   |  | 2006    |   |  |                 |  
|Asset Category    |  |             |   |  |         |   |  |                 |   |           |           |  |                    
|Equity securities |  | 43          | % |  | 51      | % |  | 45              | % |           | 40% - 50% |  | CITI BMI World     
|Debt securities   |  | 14          |   |  | 17      |   |  | 14              |   |           | 12% - 22% |  | Lehman Aggregate   
|Real Estate       |  | 18          |   |  | 12      |   |  | 17              |   |           | 10% - 20% |  | NCREIF Property    
|Alternative       |  | 25          |   |  | 20      |   |  | 24              |   |           | 20% - 30% |  | 90-Day T-Bills + 3%
|                  |  |             |   |  |         |   |  |                 |   |           |           |  |                    
|Total             |  | 100         | % |  | 100     | % |  | 100             | % |           |           |  |                    
|                  |  |             |   |  |         |   |  |                 |   |           |           |  |                    



Alternative asset category consists of hedge funds and common/collective trusts.



The primary investment goal of the Plans is to achieve a total annualized return of 9% (before expenses) over the long-term and to minimize unsystematic risk so that no single security or class of securities will have
a disproportionate impact on the Plans. Risk is regularly evaluated, compared and benchmarked to plans with a similar investment strategy. NSTAR currently uses 22 asset managers to manage its plans assets. Assets are diversified by several
asset classes (i.e., equities, bonds) and within these classes (i.e., economic sector, industry), such that, for each asset manager:



| |  |  | No more than 6% of an asset managers equity portfolio market value may be invested in one company
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | Each equity portfolio should be invested in at least 20 different companies in different industries
| | - |  | ---------------------------------------------------------------------------------------------------



| |  |  | No more than 50% of each equity portfolios market value may be invested in one industry sector, and
| | - |  | ----------------------------------------------------------------------------------------------------



| |  |  | No more than 5% of a fixed income managers portfolio may be invested in the security of an issuer, except the U.S. Government and its agencies.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------



Employer contributions in 2007 represent benefit payments
under its non-qualified plan. NSTAR does not anticipate making any contributions to its qualified Plan in 2008.



The estimated benefit payments for the next 10 years are as follows:



|               |  |   |        
|-------------- |  | - | -------
|(in thousands) |  |  
|2008           |  | $ | 68,117 
|2009           |  |   | 70,427 
|2010           |  |   | 71,713 
|2011           |  |   | 73,762 
|2012           |  |   | 76,790 
|2013 - 2017    |  |   | 409,087
|               |  |   |        
|Total          |  | $ | 769,896
|               |  |   |        



2. Other Postretirement Benefits



NSTAR also provides health
care and other benefits to retired employees who meet certain age and years of service eligibility requirements. These benefits include health and life insurance coverage. Under certain circumstances, eligible retirees are required to contribute to
the cost of postretirement benefits.



NSTARs other postretirement
benefits are not vested and the Company has the right to modify any benefit provision, including contribution requirements, with respect to any current or former employee, dependent or beneficiary, subject to applicable laws at that time.



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##### Table of Contents

The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) was reflected as of January 1,
2004 by NSTAR assuming continuation of prescription drug benefits to retirees that are at least actuarially equivalent to the benefits provided under Medicare Part D. The Act provides for drug benefits for participants age 65 and over under a new
Medicare Part D program. For employers like NSTAR, who continue to provide prescription drug programs for eligible former employees age 65 and over, there are subsidies available that are contained in the Act in the form of direct tax-exempt cash
payments.



Since the subsidy affects the employers share 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. The impact
of this subsidy reduced NSTARs net periodic postretirement benefit cost by approximately $12.1 million and $11.5 million in 2007 and 2006, respectively, and is reflected as a component of net periodic postretirement benefits costs. However, as
a result of the Companys pension and other postretirement benefits rate adjustment mechanism, these reductions do not have a material impact on reported earnings.



NSTARs other postretirement plans use December 31stfor the measurement date to determine its benefit obligation and fair value of plan assets for the purposes of determining the plans funded status and the net periodic benefit
costs for the following year.



The following tables for NSTARs
postretirement plans present the change in benefit obligation, change in the plans assets, the funded status, the components of net periodic benefit cost and key assumptions used:



|                                                       |  |              |         |   |      |   |         |  
|------------------------------------------------------ |  | ------------ | ------- | - | ---- | - | ------- | -
|                                                       |  | December 31, |        
|(in thousands)                                         |  | 2007         |         |   | 2006 |  
|Change in benefit obligation:                          |  |              |         |   |      |   |         |  
|Benefit obligation, beginning of the year              |  | $            | 574,800 |   |      | $ | 595,672 |  
|Service cost                                           |  |              | 5,812   |   |      |   | 5,490   |  
|Interest cost                                          |  |              | 35,611  |   |      |   | 32,890  |  
|Plan participants contributions                       |  |              | 2,625   |   |      |   | 2,428   |  
|Plan amendments                                        |  |              | 222     |   |      |   | (12,695 | )
|Actuarial loss (gain)                                  |  |              | 6,498   |   |      |   | (18,874 | )
|Benefits paid                                          |  |              | (31,653 | ) |      |   | (31,902 | )
|Federal subsidy                                        |  |              | 1,878   |   |      |   | 1,791   |  
|                                                       |  |              |         |   |      |   |         |  
|Benefit obligation, end of the year                    |  | $            | 595,793 |   |      | $ | 574,800 |  
|                                                       |  |              |         |   |      |   |         |  
|Change in the plans assets:                           |  |              |         |   |      |   |         |  
|Fair value of the plans assets, beginning of the year |  | $            | 353,434 |   |      | $ | 335,338 |  
|Actual gain on plans assets                           |  |              | 20,729  |   |      |   | 47,521  |  
|Employer contribution                                  |  |              | 15,053  |   |      |   | 49      |  
|Plan participants contributions                       |  |              | 2,625   |   |      |   | 2,428   |  
|Benefits paid                                          |  |              | (31,653 | ) |      |   | (31,902 | )
|                                                       |  |              |         |   |      |   |         |  
|Fair value of the plans assets, end of the year       |  | $            | 360,188 |   |      | $ | 353,434 |  
|                                                       |  |              |         |   |      |   |         |  



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The plans funded status was as follows:



|                                                                                                                                     |  |              |          |   |      |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------ |  | ------------ | -------- | - | ---- | - | -------- | -
|                                                                                                                                     |  | December 31, |         
|(in thousands)                                                                                                                       |  | 2007         |          |   | 2006 |  
|Funded status at end of year - (under funded)                                                                                        |  | $            | (235,605 | ) |      | $ | (221,366 | )
|                                                                                                                                     |  |              |          |   |      |   |          |  
|Amounts recognized in the accompanying Consolidated Balance Sheet:                                                                   |  |              |          |   |      |   |          |  
|Current liabilities - other                                                                                                          |  | $            | (29,444  | ) |      | $ | (62      | )
|Deferred credits - pension and other postretirement liabilities                                                                      |  |              | (206,161 | ) |      |   | (221,304 | )
|                                                                                                                                     |  |              |          |   |      |   |          |  
|                                                                                                                                     |  | $            | (235,605 | ) |      | $ | (221,366 | )
|                                                                                                                                     |  |              |          |   |      |   |          |  
|Amounts not yet reflected in net periodic benefit cost and included in accumulated other comprehensive income and regulatory
assets: |  |              |          |   |      |   |          |  
|Transition obligation                                                                                                                |  | $            | (4,065   | ) |      | $ | (4,877   | )
|Prior service credit                                                                                                                 |  |              | 11,810   |   |      |   | 13,504   |  
|Accumulated actuarial loss                                                                                                           |  |              | (158,424 | ) |      |   | (155,499 | )
|Cumulative net periodic benefit costs in excess of employee contributions                                                            |  |              | (84,926  | ) |      |   | (74,494  | )
|                                                                                                                                     |  |              |          |   |      |   |          |  
|Net amount recognized in statement of financial position                                                                             |  | $            | (235,605 | ) |      | $ | (221,366 | )
|                                                                                                                                     |  |              |          |   |      |   |          |  



Source of change in other comprehensive income:



|                                                          |  |      |      |  
|--------------------------------------------------------- |  | ---- | ---- | -
|                                                          |  | 2007 |     
|Net loss arising during period                            |  | $    | (553 | )
|Amortization:                                             |  |      |      |  
|Transition obligation                                     |  |      | 5    |  
|Prior service credit                                      |  |      | (10  | )
|Gain                                                      |  |      | 153  |  
|                                                          |  |      |      |  
|Total other comprehensive loss recognized during the year |  | $    | (405 | )
|                                                          |  |      |      |  



The estimated transition obligation,
prior service credit and net actuarial loss that will be amortized from AOCI and regulatory assets into net periodic benefit costs in 2008 are $812,000, $1,456,000 and $7,983,000, respectively.



Weighted average assumptions were as follows:



|                                                  |  |      |   |  |      |   |  |      |  
|------------------------------------------------- |  | ---- | - |  | ---- | - |  | ---- | -
|                                                  |  | 2007 |   |  | 2006 |   |  | 2005 |  
|Discount rate at the end of the year              |  | 6.25 | % |  | 6.0  | % |  | 5.75 | %
|Expected return on the plans assets for the year |  | 9.0  | % |  | 9.0  | % |  | 9.0  | %



For measurement purposes, a 9.5%
weighted annual rate increase in per capita cost of covered medical claims was assumed for 2007. This rate is assumed to decrease gradually to 5% in 2015 and remain at that level thereafter. Dental claims are assumed to increase at a weighted annual
rate of 4%.



A 1% change in the assumed health care cost trend rate would have
the following effects:



|                                                              |  |                      |        |          |   |         |  
|------------------------------------------------------------- |  | -------------------- | ------ | -------- | - | ------- | -
|                                                              |  | One-Percentage-Point |       
|(in thousands)                                                |  | Increase             |        | Decrease |  
|Effect on total service and interest cost components for 2007 |  | $                    | 6,869  |          | $ | (5,467  | )
|Effect on December 31, 2007 postretirement benefit obligation |  | $                    | 93,644 |          | $ | (75,239 | )



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Components of net periodic benefit cost were as follows:



|                                      |  |                          |         |   |      |   |         |      |  |   |         |  
|------------------------------------- |  | ------------------------ | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                      |  | Years ended December 31, |        
|(in thousands)                        |  | 2007                     |         |   | 2006 |   |         | 2005 | 
|Service cost                          |  | $                        | 5,813   |   |      | $ | 5,490   |      |  | $ | 5,733   |  
|Interest cost                         |  |                          | 35,611  |   |      |   | 32,890  |      |  |   | 33,342  |  
|Expected return on plans assets      |  |                          | (28,186 | ) |      |   | (27,015 | )    |  |   | (25,027 | )
|Amortization of prior service cost    |  |                          | (1,472  | ) |      |   | 13      |      |  |   | 222     |  
|Amortization of transition obligation |  |                          | 812     |   |      |   | 812     |      |  |   | 1,241   |  
|Recognized actuarial loss             |  |                          | 11,028  |   |      |   | 10,691  |      |  |   | 11,216  |  
|                                      |  |                          |         |   |      |   |         |      |  |   |         |  
|Net periodic benefit cost             |  | $                        | 23,606  |   |      | $ | 22,881  |      |  | $ | 26,727  |  
|                                      |  |                          |         |   |      |   |         |      |  |   |         |  



NSTAR anticipates making an estimated
contribution of approximately $15 million to its other postretirement benefit plans in 2008.



The estimated future cash flows for the years after 2007 are as follows:



|               |  |                                 |         |                                                     |   |       
|-------------- |  | ------------------------------- | ------- | --------------------------------------------------- | - | ------
|               |  | Gross estimatedbenefit payments |         | Estimated expectedcash inflows fromMedicare subsidy
|(in thousands) |  |                                 |         |                                                    
|2008           |  | $                               | 29,444  |                                                     | $ | 2,595 
|2009           |  |                                 | 31,438  |                                                     |   | 2,870 
|2010           |  |                                 | 33,322  |                                                     |   | 3,149 
|2011           |  |                                 | 35,374  |                                                     |   | 3,414 
|2012           |  |                                 | 36,901  |                                                     |   | 3,951 
|2013 - 2017    |  |                                 | 208,122 |                                                     |   | 25,418
|               |  |                                 |         |                                                     |   |       
|Total          |  | $                               | 374,601 |                                                     | $ | 41,397
|               |  |                                 |         |                                                     |   |       



The following reflects the weighted average asset allocation percentages of the fair value of the total Plans assets for each major type of the Plans assets as of December 31stas well as the Plans target percentages and the targeted range:



|                  |  |             |   |  |         |   |  |                |   |           |          |  |                      
|----------------- |  | ----------- | - |  | ------- | - |  | -------------- | - | --------- | -------- |  | ---------------------
|                  |  | Plan Assets |   |  | Target% |   |  | TargetedRanges |   | Benchmark
|Asset Category    |  | 2007        |   |  | 2006    |   |  |                |  
|Equity securities |  | 47          | % |  | 49      | % |  | 50             | % |           | 45% -55% |  | Russell 3000 Index   
|Debt securities   |  | 27          |   |  | 30      |   |  | 30             |   |           | 25% -35% |  | Lehman Aggregate     
|Real Estate       |  | 12          |   |  | 11      |   |  | 10             |   |           | 5% - 15% |  | Wilshire NAREIT Index
|Alternative       |  | 14          |   |  | 10      |   |  | 10             |   |           | 5% - 15% |  | 90-Day T-Bills       
|                  |  |             |   |  |         |   |  |                |   |           |          |  |                      
|Total             |  | 100         | % |  | 100     | % |  | 100            | % |           |          |  |                      
|                  |  |             |   |  |         |   |  |                |   |           |          |  |                      



Alternative asset category consists of hedge funds.



The assets of
NSTARs PBOP Plan are held in voluntary employees beneficiary association trusts and in the Pension Plan 401(h) account which is a subset of the Pension Plan assets and are not reflected as a component of the Pension Plan assets.



The Plans primary investment goal is to outperform the return of the
composite benchmark. The portfolio also seeks a level of volatility, which approximates that of the composite benchmark returns.



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3. Savings Plan



NSTAR also provides a defined contribution 401(k) plan for substantially all employees. Matching contributions (which are equal to 50% of
the employees deferral up to 8% of eligible base and cash incentive compensation subject to statutory limits) included in the accompanying Consolidated Statements of Income amounted to $9 million in 2007, 2006 and 2005. The plan was amended to
allow for increased maximum annual pre-tax contributions and additional catch-up pre-tax contributions for participants age 50 or older, acceptance of other types of roll-over pre-tax funds from other plans and the option of
reinvesting dividends paid on the NSTAR Common Share Fund or receiving such dividends in cash. The election to reinvest dividends paid on the NSTAR Common Share Fund or receive the dividends in cash is subject to a freeze period beginning seven days
prior to the date any dividend is paid. During this period, participants cannot change their election. NSTAR dividends are paid to this plan four times a year in February, May, August and November.



Note H. Stock-Based Compensation



The Plans



The NSTAR 1997 Share Incentive Plan (the 1997 Plan) permitted a variety of stock and
stock-based awards, including stock options and deferred stock awards granted to key employees. The 1997 Plan, which expired as to further grants on January 23, 2007, limited the terms of awards to ten years. Subject to adjustment for
stock-splits and similar events, the aggregate number of common shares that were available for award under the 1997 Plan was four million. All options were granted at the full market price of the common shares on the date of the grant when approved
by the NSTAR Board of Trustees Executive Personnel Committee. In general, stock options and deferred stock awards vest ratably over a three-year period from date of grants, and options may be exercised during the ten-year period from grant
date.



On May 3, 2007, NSTAR shareholders approved the NSTAR 2007 Long
Term Incentive Plan (the 2007 Plan). The 2007 Plan replaced the 1997 Plan, which expired by its terms in January 2007. The 2007 Plan is similar in design to the 1997 Plan. The 2007 Plan limits the terms of awards to ten years and prohibits the
granting of awards beyond ten years after its effective date. The aggregate number of common shares available for award under the 2007 Plan as approved was 3.5 million with 2,908,900 unissued shares available as of December 31, 2007. Also,
on May 3, 2007, awards totaling 173,100 deferred shares and 422,000 stock options were granted to executives and senior managers.



Stock-based compensation activities of the Plans were as follows:



Deferred Shares:



|                                         |  |              |   |  |                                         |      
|---------------------------------------- |  | ------------ | - |  | --------------------------------------- | -----
|                                         |  | 2007Activity |   |  | WeightedAverageGrantDate FairValuePrice
|Nonvested deferred shares at January 1   |  | 585,519      |   |  | $                                       | 28.28
|Deferred shares granted                  |  | 173,100      |   |  | $                                       | 36.89
|Deferred shares vested                   |  | (205,356     | ) |  | $                                       | 27.14
|Deferred shares forfeited                |  | (9,200       | ) |  | $                                       | 32.01
|                                         |  |              |   |  |                                         |      
|Nonvested deferred shares at December 31 |  | 544,063      |   |  | $                                       | 31.39
|                                         |  |              |   |  |                                         |      



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The fair value of deferred shares vested during 2007 was $7.2 million.



Stock Options:



|                                   |  |              |   |  |                              |      
|---------------------------------- |  | ------------ | - |  | ---------------------------- | -----
|                                   |  | 2007Activity |   |  | WeightedAverageExercisePrice
|Options outstanding at January 1   |  | 2,265,333    |   |  | $                            | 25.66
|Options granted                    |  | 422,000      |   |  | $                            | 36.89
|Options exercised                  |  | (453,131     | ) |  | $                            | 24.29
|Options forfeited                  |  |             |   |  | $                            |     
|                                   |  |              |   |  |                              |      
|Options outstanding at December 31 |  | 2,234,202    |   |  | $                            | 28.06
|                                   |  |              |   |  |                              |      



Summarized information regarding stock options outstanding at December 31, 2007:



|                         |  |                     |  |                                                 |  |                              |       |                                |   |                   |  |                                                 |  |                              |  |                                |       |  |   |       
|------------------------ |  | ------------------- |  | ----------------------------------------------- |  | ---------------------------- | ----- | ------------------------------ | - | ----------------- |  | ----------------------------------------------- |  | ---------------------------- |  | ------------------------------ | ----- |  | - | ------
|                         |  | Options Outstanding |  | Options Exercisable (Vested)                   
|Range of Exercise Prices |  | NumberOutstanding   |  | WeightedAverageRemainingContractualLife (Years) |  | WeightedAverageExercisePrice |       | AggregateIntrinsicValue(000s) |   | NumberExercisable |  | WeightedAverageRemainingContractualLife (Years) |  | WeightedAverageExercisePrice |  | AggregateIntrinsicValue(000s)
|$19.88                   |  | 8,200               |  | 0.26                                            |  | $                            | 19.88 |                                | $ | 134               |  | 8,200                                           |  | 0.26                         |  | $                              | 19.88 |  | $ | 134   
|$22.19                   |  | 33,000              |  | 2.40                                            |  | $                            | 22.19 |                                | $ | 463               |  | 33,000                                          |  | 2.40                         |  | $                              | 22.19 |  | $ | 463   
|$19.85                   |  | 10,000              |  | 3.40                                            |  | $                            | 19.85 |                                | $ | 164               |  | 10,000                                          |  | 3.40                         |  | $                              | 19.85 |  | $ | 164   
|$22.06-$22.67            |  | 92,000              |  | 4.30                                            |  | $                            | 22.40 |                                | $ | 1,271             |  | 92,000                                          |  | 4.30                         |  | $                              | 22.40 |  | $ | 1,271 
|$21.60                   |  | 282,000             |  | 5.33                                            |  | $                            | 21.60 |                                | $ | 4,123             |  | 282,000                                         |  | 5.33                         |  | $                              | 21.60 |  | $ | 4,123 
|$24.21                   |  | 430,000             |  | 6.33                                            |  | $                            | 24.21 |                                | $ | 5,166             |  | 430,000                                         |  | 6.33                         |  | $                              | 24.21 |  | $ | 5,166 
|$29.60                   |  | 497,334             |  | 7.44                                            |  | $                            | 29.60 |                                | $ | 3,292             |  | 309,234                                         |  | 7.44                         |  | $                              | 29.60 |  | $ | 2,047 
|$27.73                   |  | 459,668             |  | 8.32                                            |  | $                            | 27.73 |                                | $ | 3,903             |  | 122,658                                         |  | 8.32                         |  | $                              | 27.73 |  | $ | 1,041 
|$36.89                   |  | 422,000             |  | 9.34                                            |  | $                            | 36.89 |                                |   |                  |  |                                                |  |                             |  |                                |      |  |   |      
|                         |  |                     |  |                                                 |  |                              |       |                                |   |                   |  |                                                 |  |                              |  |                                |       |  |   |       
|                         |  | 2,234,202           |  | 7.25                                            |  | $                            | 28.06 |                                | $ | 18,516            |  | 1,287,092                                       |  | 6.26                         |  | $                              | 22.38 |  | $ | 14,409
|                         |  |                     |  |                                                 |  |                              |       |                                |   |                   |  |                                                 |  |                              |  |                                |       |  |   |       



There were 1,287,092, 1,175,393 and
1,420,465 stock options exercisable as of December 31, 2007, 2006 and 2005, respectively. As of December 31, 2007, 2006 and 2005, the associated weighted average exercise price of these exercisable options is $22.38, $23.75 and $22.09,
respectively. The total intrinsic value (the market price of the common shares on the date exercised, less the option exercise prices) of options exercised during the years ended December 31, 2007, 2006 and 2005 was $5.3 million, $9.7 million
and $8.3 million, respectively.



The stock options granted in 2007, 2006 and
2005 have a weighted average grant date fair value of $4.79, $3.86 and $2.74, respectively. The fair value was estimated using the Black-Scholes option-pricing model that uses the assumptions in the table below. The expected option lives are based
on the average historical time frame that options are expected to remain unexercised. Expected volatilities are based on the historical performance of NSTARs stock price. The risk-free interest rate is based on the U.S. Treasury Strip in
effect on grant date. The fair values were computed using the following range of assumptions for NSTARs stock options for the years ended December 31:



|                        |  |      |   |  |      |   |  |      |  
|----------------------- |  | ---- | - |  | ---- | - |  | ---- | -
|                        |  | 2007 |   |  | 2006 |   |  | 2005 |  
|Expected life (years)   |  | 6.0  |   |  | 6.0  |   |  | 6.0  |  
|Risk-free interest rate |  | 4.56 | % |  | 4.91 | % |  | 3.76 | %
|Volatility              |  | 14.6 | % |  | 16.0 | % |  | 15.0 | %
|Dividends               |  | 3.85 | % |  | 4.06 | % |  | 4.69 | %



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NSTAR used the modified prospective application transition method without restatement of periods prior to 2006. Prior to
the adoption of SFAS 123(R), NSTAR applied the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees and related interpretations in accounting for its 1997 Share Incentive
Plan. Accordingly, no stock-based employee compensation expense for option grants was recognized 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 following table illustrates the effect on net income and earnings per share, for 2005, the periods prior to the adoption of SFAS 123(R), if NSTAR had applied the fair value recognition provisions of SFAS No. 123, Accounting
for Stock-Based Compensation, to stock-based employee compensation:



|                                                                                                                                              |  |                  |         |  
|--------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | ------- | -
|(in thousands, except earnings per common share amounts)                                                                                      |  | December 31,2005 |        
|Net income                                                                                                                                    |  | $                | 196,135 |  
|Add: Share grant incentive compensation expense included in reported net income, net of related tax effects                                   |  |                  | 3,347   |  
|Deduct: Total share grant and stock option compensation expense determined under fair value method for all awards, net of related tax effects |  |                  | (4,110  | )
|                                                                                                                                              |  |                  |         |  
|Pro forma net income                                                                                                                          |  | $                | 195,372 |  
|                                                                                                                                              |  |                  |         |  
|Earnings per common share:                                                                                                                    |  |                  |         |  
|Basic - as reported                                                                                                                           |  | $                | 1.84    |  
|Basic - pro forma                                                                                                                             |  | $                | 1.83    |  
|Diluted - as reported                                                                                                                         |  | $                | 1.83    |  
|Diluted - pro forma                                                                                                                           |  | $                | 1.82    |  



Stock-Based Compensation



As of December 31, 2007, the total stock-based compensation cost
related to nonvested stock options and deferred share awards not yet recognized was $12.5 million. The remaining weighted average period over which total stock-based compensation will be recognized is 1.76 years.



Total stock-based compensation cost recognized in the accompanying Consolidated Statements of
Income in 2007, 2006 and 2005 was $8.9 million, $8.2 million and $5.5 million, respectively. Approximately $1.7 million and $1.5 million of costs related to stock options are included in the 2007 and 2006 stock-based compensation, respectively.



2008 Awards



On January 24, 2008, the Company granted awards under the terms of the 2007 Plan of
329,000 stock options, 125,250 deferred shares and 70,350 performance based share units to executives and senior managers.



Restrictions on performance based share unit awards lapse after a three-year period contingent on achievement of certain earnings growth performance measures. These
awards grant the right to receive, at the end of the performance period, a variable number of shares based on the level of NSTARs earnings growth and a total shareholder return that is compared to peer companies. This variable range extends
from 0% to 170% of the granted awards. The grant date fair value of these performance awards was estimated to be $32.70 for the targeted performance level using a binomial option-pricing model.



Deferred shares and stock options granted on January 24, 2008 have a grant date fair
value of $32.45 and $3.76, respectively. The grant date fair value of deferred shares and the exercise price of stock options are equal to the closing price of the Companys common shares on January 24, 2008.



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Note I. Capital Stock and Accumulated Other Comprehensive Income



NSTARs annual dividend rate per common share was $1.325, $1.2325 and $1.1725 as of
December 31, 2007, 2006 and 2005, respectively. Dividends declared per common share were $1.325, $1.535 and $0.87 in 2007, 2006 and 2005, respectively. As a result of a change in NSTARs Board of Trustees meetings schedule in 2005,
the fourth quarter dividend that typically would have been declared in December 2005, was approved on January 26, 2006 at $0.3025 per share, and therefore dividends declared during 2006 include the fourth quarter of 2005. The dividend payment
schedule remained unchanged.



1. Common
Shares



Common share and accumulated other comprehensive income activity in
2007 and 2006 was as follows:



|                                              |  |                 |  |                |         |                       |   |         |                                     |  |   |         |  
|--------------------------------------------- |  | --------------- |  | -------------- | ------- | --------------------- | - | ------- | ----------------------------------- |  | - | ------- | -
|(in thousands)                                |  | Number ofShares |  | TotalPar Value |         | PremiumonCommonShares |   |         | AccumulatedOtherComprehensiveIncome | 
|Balance at December 31, 2005                  |  | 106,808         |  | $              | 106,808 |                       | $ | 813,099 |                                     |  | $ | (6,392  | )
|Share Incentive Plan                          |  |                |  |                |        |                       |   | 10,351  |                                     |  |   |        |  
|Additional minimum pension liability, net     |  |                |  |                |        |                       |   |        |                                     |  |   | (441    | )
|Adoption of SFAS 158                          |  |                |  |                |        |                       |   |        |                                     |  |   | (5,185  | )
|                                              |  |                 |  |                |         |                       |   |         |                                     |  |   |         |  
|Balance at December 31, 2006                  |  | 106,808         |  | $              | 106,808 |                       | $ | 823,450 |                                     |  | $ | (12,018 | )
|Share Incentive Plan                          |  |                |  |                |        |                       |   | (4,776  | )                                   |  |   |        |  
|Pension and postretirement benefit costs, net |  |                |  |                |        |                       |   |        |                                     |  |   | (575    | )
|                                              |  |                 |  |                |         |                       |   |         |                                     |  |   |         |  
|Balance at December 31, 2007                  |  | 106,808         |  | $              | 106,808 |                       | $ | 818,674 |                                     |  | $ | (12,593 | )
|                                              |  |                 |  |                |         |                       |   |         |                                     |  |   |         |  



2. Cumulative Preferred Stock of Subsidiary



Non-mandatory redeemable series:



Par value
$100 per share, 2,890,000 shares authorized and 430,000 shares issued and outstanding:



|                                         |  |                           |        |                       |         |                   |   |                   |  |   |       
|---------------------------------------- |  | ------------------------- | ------ | --------------------- | ------- | ----------------- | - | ----------------- |  | - | ------
|(in thousands, except per share amounts)
|Series                                   |  | Current SharesOutstanding |        | RedemptionPrice/Share |         | December 31, 2007 |   | December 31, 2006
|4.25%                                    |  | 180,000                   |        | $                     | 103.625 |                   | $ | 18,000            |  | $ | 18,000
|4.78%                                    |  | 250,000                   |        | $                     | 102.80  |                   |   | 25,000            |  |   | 25,000
|                                         |  |                           |        |                       |         |                   |   |                   |  |   |       
|Total non-mandatory redeemable series    |  | $                         | 43,000 |                       | $       | 43,000           
|                                         |  |                           |        |                       |         |                   |   |                   |  |   |       



NSTAR Electric has two outstanding
series of non-mandatory redeemable preferred stock. Both series are part of a class of NSTAR Electrics Cumulative Preferred Stock. Upon any liquidation of NSTAR Electric, holders of the Cumulative Preferred stock are entitled to receive the
liquidation preference for their shares before any distribution to the holder of the common stock. The liquidation preference for each outstanding series of Cumulative Preferred Stock is equal to the par value ($100.00 per share), plus accrued and
unpaid dividends.



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Note J. Indebtedness



1. Long-Term Debt



NSTARs long-term debt consisted of the following:



|                                                                            |  |              |           |   |      |   |           |  
|--------------------------------------------------------------------------- |  | ------------ | --------- | - | ---- | - | --------- | -
|                                                                            |  | December 31, |          
|(in thousands)                                                              |  | 2007         |           |   | 2006 |  
|Mortgage Bonds/Notes, collateralized by property of operating subsidiaries: |  |              |           |   |      |   |           |  
|NSTAR Gas                                                                   |  |              |           |   |      |   |           |  
|6.54%, due September 2007                                                   |  | $            |          |   |      | $ | 1,429     |  
|7.04%, due September 2017                                                   |  |              | 25,000    |   |      |   | 25,000    |  
|9.95%, due December 2020                                                    |  |              | 25,000    |   |      |   | 25,000    |  
|7.11%, due December 2033                                                    |  |              | 35,000    |   |      |   | 35,000    |  
|AES                                                                         |  |              |           |   |      |   |           |  
|6.924%, due June 2021                                                       |  |              | 95,949    |   |      |   | 100,087   |  
|Notes:                                                                      |  |              |           |   |      |   |           |  
|NSTAR                                                                       |  |              |           |   |      |   |           |  
|8.0%, due February 2010                                                     |  |              | 500,000   |   |      |   | 500,000   |  
|NSTAR Electric                                                              |  |              |           |   |      |   |           |  
|9.55%, due December 2007 *                                                  |  |              |          |   |      |   | 1,429     |  
|7.70%, due March 2008 *                                                     |  |              |          |   |      |   | 10,000    |  
|9.37%, due January 2012 *                                                   |  |              |          |   |      |   | 6,316     |  
|7.98%, due March 2013 *                                                     |  |              |          |   |      |   | 25,000    |  
|9.53%, due December 2014 *                                                  |  |              |          |   |      |   | 10,000    |  
|9.60%, due December 2019 *                                                  |  |              |          |   |      |   | 10,000    |  
|8.47%, due March 2023 *                                                     |  |              |          |   |      |   | 15,000    |  
|Debentures:                                                                 |  |              |           |   |      |   |           |  
|7.80%, due May 2010                                                         |  |              | 125,000   |   |      |   | 125,000   |  
|4.875%, due October 2012                                                    |  |              | 400,000   |   |      |   | 400,000   |  
|4.875%, due April 2014                                                      |  |              | 300,000   |   |      |   | 300,000   |  
|5.625%, due November 2017                                                   |  |              | 300,000   |   |      |   |          |  
|5.75%, due March 2036                                                       |  |              | 200,000   |   |      |   | 200,000   |  
|Bonds:                                                                      |  |              |           |   |      |   |           |  
|Massachusetts Industrial Finance Agency (MIFA) bonds                        |  |              |           |   |      |   |           |  
|5.75%, due February 2014                                                    |  |              | 15,000    |   |      |   | 15,000    |  
|HEEC                                                                        |  |              |           |   |      |   |           |  
|Sewage facility revenue bonds, due through 2015                             |  |              | 11,571    |   |      |   | 13,214    |  
|Funding Companies                                                           |  |              |           |   |      |   |           |  
|Transition Property Securitization Certificates:                            |  |              |           |   |      |   |           |  
|6.91%, due September 2007                                                   |  |              |          |   |      |   | 41,430    |  
|3.78%, due September 2008                                                   |  |              | 21,776    |   |      |   | 104,998   |  
|7.03%, due March 2010                                                       |  |              | 144,365   |   |      |   | 171,624   |  
|4.13%, due September 2011                                                   |  |              | 266,477   |   |      |   | 266,477   |  
|4.40%, due September 2013                                                   |  |              | 144,771   |   |      |   | 144,771   |  
|                                                                            |  |              |           |   |      |   |           |  
|                                                                            |  |              | 2,609,909 |   |      |   | 2,546,775 |  
|Unamortized debt discount                                                   |  |              | (9,978    | ) |      |   | (9,918    | )
|Amounts due within one year *                                               |  |              | (98,531   | ) |      |   | (176,082  | )
|                                                                            |  |              |           |   |      |   |           |  
|Total long-term debt                                                        |  | $            | 2,501,400 |   |      | $ | 2,360,775 |  
|                                                                            |  |              |           |   |      |   |           |  



|* | For financial reporting purposes, NSTAR reclassified ComElectrics entire long-term debt principal balance of $77.7 million as due within one year on the accompanying
Consolidated Balance Sheets at December 31, 2006. ComElectrics debt was fully paid off on January 2, 2007. The redemption included a make-whole premium and accrued interest payment of $17.6 million and $1.5 million, respectively.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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On May 18, 2007, NSTAR Electric filed with the DPU for approval to issue up to $400 million of long-term debt
securities from time to time through December 31, 2008. On May 18, 2007, in connection with this filing, NSTAR Electric filed a registration statement on Form S-3 with the SEC to issue up to $400 million in debt securities. This
registration statement became effective on June 1, 2007. NSTAR Electric will use the proceeds of the issuance of these securities for financing of capital expenditures, repayment of short-term debt, and/or general working capital purposes. The
DPU approved this financing plan on August 9, 2007. On November 19, 2007, NSTAR Electric sold $300 million of ten-year fixed rate (5.625%) Debentures.



On September 1, 2006, NSTAR Electric redeemed the entire $5 million aggregate principal amount of its 8.7%, Series H Notes, due
March 1, 2007, for a redemption price of 101.439% of the principal amount plus accrued interest.



On November 1, 2006, NSTAR Electric redeemed the entire outstanding balance of $20 million aggregate principal amount of its 7.62%, seven-year Notes.



Sewage facility revenue bonds are tax-exempt, subject to annual mandatory sinking fund redemption requirements and mature through 2015.
Scheduled redemptions of $1.65 million were made in 2007 and 2006. The interest rate of the bonds was 7.375% for both 2007 and 2006.



The 5.75% tax-exempt unsecured MIFA bonds due 2014 are currently redeemable at par.



The aggregate principal amounts of NSTAR long-term debt (including securitization
certificates and sinking fund requirements) due in the five years subsequent to 2007 are approximately $99 million in 2008, $159 million in 2009, $751 million in 2010, $91 million in 2011, $492 million in 2012 and $1,019 million thereafter.



The Transition Property Securitization Certificates held by NSTAR
Electrics subsidiaries, BEC Funding LLC, BEC Funding II, LLC and CEC Funding, LLC (Funding companies), are each collaterized with separate securitized regulatory assets with combined balances of $586.9 million and $739.6 million as of
December 31, 2007 and 2006, respectively. NSTAR Electric, as servicing agent for the Funding companies, collected $185.1 million and $194.3 million in 2007 and 2006, respectively. Funds collected from the companies respective customers
are transferred to each Funding companies Trust on a daily basis. These Certificates are non-recourse to NSTAR Electric.



On March 16, 2006, NSTAR Electric sold $200 million of thirty-year fixed rate (5.75%) Debentures. The net proceeds were primarily used to repay outstanding
short-term debt balances. This most recent financing activity completes a process that began in December 2003 when NSTAR Electric filed a shelf registration with the SEC to issue up to $500 million in debt securities. The DPU approved the issuance
by NSTAR Electric of up to $500 million of debt securities from time to time on or before December 31, 2005. On December 29, 2005, the DPU approved NSTAR Electrics request to extend the term of its financing plan until June 30,
2006 for the remaining $200 million in securities.



2. Financial Covenant Requirements and Lines of Credit



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



NSTAR currently has a $175 million revolving credit agreement that expires December 31, 2012. At December 31, 2007 and 2006, there were no amounts outstanding under the revolving credit agreement. This
credit facility serves as a backup to NSTARs $175 million commercial paper program that, at December 31, 2007 and 2006, had $4 million and $53.5 million outstanding, respectively. Under the terms of the credit



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agreement, NSTAR is required to maintain a maximum total consolidated debt to total capitalization ratio of not greater than 65% at all times, excluding
Transition Property Securitization Certificates, and excluding accumulated other comprehensive income (loss) from common equity. Commitment fees must be paid on the total agreement amount. At December 31, 2007 and 2006, NSTAR was in full
compliance with the aforementioned covenant as the ratios were 58.2% and 58.3%, respectively.



NSTAR Electric has approval from the FERC to issue short-term debt securities from time to time on or before October 23, 2008, with maturity dates no later than October 23, 2009, in amounts such that the
aggregate principal does not exceed $655 million at any one time. NSTAR Electric has a five-year, $450 million revolving credit agreement that expires December 31, 2012. However, unless NSTAR Electric receives necessary approvals from the DPU,
the credit agreement will expire 364 days from the date of the first draw under the agreement. At December 31, 2007 and 2006, there were no amounts outstanding under the revolving credit agreement. This credit facility serves as backup to NSTAR
Electrics $450 million commercial paper program that had $257 million and $200 million outstanding balances at December 31, 2007 and 2006, respectively. On January 2, 2007, with the effect of the NSTAR Electric merger, the commercial
paper program had an outstanding balance of $326 million. Under the terms of the revolving credit agreement, NSTAR Electric is required to maintain a consolidated maximum total debt to capitalization ratio of not greater than 65% at all times,
excluding Transition Property Securitization Certificates, and excluding accumulated other comprehensive income (loss) from common equity. As of December 31, 2007, NSTAR Electric could declare and pay dividends of approximately $1 billion of
its total common equity (approximately $1.8 billion) to NSTAR and remain in compliance with this ratio. At December 31, 2007 and 2006, NSTAR Electric was in full compliance with its covenants in connection with its short-term credit facilities,
as the ratios were 46.2% and 49.0%, respectively.



As of December 31,
2007, NSTAR Gas had a $200 million line of credit. This line of credit was reduced to $100 million on January 4, 2008 and is due to expire on November 20, 2008. As of December 31, 2007 and 2006, NSTAR Gas had $142.4 million and $150.7
million outstanding, respectively.



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



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



Interest rates on the outstanding short-term borrowings generally are money market rates and averaged 5.24% and 5.11% in 2007 and 2006, respectively. In aggregate,
short-term borrowings totaled $403.4 million and $436.4 million at December 31, 2007 and 2006, respectively.



Note K. Fair Value of Financial Instruments



The following methods and assumptions were used to estimate the fair value of each class of securities for which it is practicable to estimate the value:



1. Cash and Cash Equivalents



The carrying amounts of $34 million and $16 million as of December 31, 2007 and 2006,
respectively, approximate fair value due to the short-term nature of these securities.



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2. Indebtedness (Excluding Notes Payable)



The fair values of long-term indebtedness are based upon the quoted market prices of similar
issues. Carrying amounts and fair values as of December 31, 2007 and 2006 were as follows:



|                                                      |  |                |           |            |   |                |  |            |           |  |   |          
|----------------------------------------------------- |  | -------------- | --------- | ---------- | - | -------------- |  | ---------- | --------- |  | - | ---------
|                                                      |  | 2007           |           | 2006      
|(in thousands)                                        |  | CarryingAmount |           | Fair Value |   | CarryingAmount |  | Fair Value
|Long-term indebtedness (including current maturities) |  | $              | 2,599,931 |            | $ | 2,680,240      |  | $          | 2,536,857 |  | $ | 2,623,100



Note L. 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 in Massachusetts. The unregulated operating segment engages in
business activities that include district energy operations, telecommunications and liquefied natural gas service.



Amounts shown on the following table for 2007, 2006 and 2005 include the allocation of NSTARs (Holding Company) results of operations (primarily interest costs) and
assets, net of inter-company transactions that primarily consist of interest charges and investment assets, respectively, to these business segments. The allocation of parent company charges is based on an indirect allocation of the holding
companys investment relating to these various business segments.



The unregulated segment net income for 2006 reflects non-recurring gains on non-monetary transactions.



|                              |  |      |           |      |   |           |  |   |          
|----------------------------- |  | ---- | --------- | ---- | - | --------- |  | - | ---------
|(in thousands)                |  | 2007 |           | 2006 |   | 2005     
|Operating revenues            |  |      |           |      |   |           |  |   |          
|Electric utility operations   |  | $    | 2,562,850 |      | $ | 2,912,115 |  | $ | 2,543,541
|Gas utility operations        |  |      | 560,478   |      |   | 517,855   |  |   | 571,199  
|Unregulated operations        |  |      | 138,456   |      |   | 147,732   |  |   | 128,380  
|                              |  |      |           |      |   |           |  |   |          
|Consolidated total            |  | $    | 3,261,784 |      | $ | 3,577,702 |  | $ | 3,243,120
|                              |  |      |           |      |   |           |  |   |          
|Depreciation and amortization |  |      |           |      |   |           |  |   |          
|Electric utility operations   |  | $    | 330,325   |      | $ | 323,701   |  | $ | 299,741  
|Gas utility operations        |  |      | 26,144    |      |   | 24,051    |  |   | 22,435   
|Unregulated operations        |  |      | 13,173    |      |   | 14,470    |  |   | 14,494   
|                              |  |      |           |      |   |           |  |   |          
|Consolidated total            |  | $    | 369,642   |      | $ | 362,222   |  | $ | 336,670  
|                              |  |      |           |      |   |           |  |   |          
|Operating income tax expense  |  |      |           |      |   |           |  |   |          
|Electric utility operations   |  | $    | 114,729   |      | $ | 103,634   |  | $ | 92,239   
|Gas utility operations        |  |      | 9,370     |      |   | 6,368     |  |   | 13,589   
|Unregulated operations        |  |      | 6,325     |      |   | 9,340     |  |   | 4,862    
|                              |  |      |           |      |   |           |  |   |          
|Consolidated total            |  | $    | 130,424   |      | $ | 119,342   |  | $ | 110,690  
|                              |  |      |           |      |   |           |  |   |          



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|                                                                                                |  |      |           |      |   |           |  |   |        
|----------------------------------------------------------------------------------------------- |  | ---- | --------- | ---- | - | --------- |  | - | -------
|(in thousands)                                                                                  |  | 2007 |           | 2006 |   | 2005     
|Equity income in investments accounted for by the equity method (a) Electric utility operations |  | $    | 1,495     |      | $ | 644       |  | $ | 1,480  
|                                                                                                |  |      |           |      |   |           |  |   |        
|Interest charges                                                                                |  |      |           |      |   |           |  |   |        
|Electric utility operations                                                                     |  | $    | 137,027   |      | $ | 145,987   |  | $ | 143,044
|Gas utility operations                                                                          |  |      | 22,140    |      |   | 22,932    |  |   | 14,643 
|Unregulated operations                                                                          |  |      | 8,235     |      |   | 8,938     |  |   | 9,876  
|                                                                                                |  |      |           |      |   |           |  |   |        
|Consolidated total                                                                              |  | $    | 167,402   |      | $ | 177,857   |  | $ | 167,563
|                                                                                                |  |      |           |      |   |           |  |   |        
|Segment net income                                                                              |  |      |           |      |   |           |  |   |        
|Electric utility operations                                                                     |  | $    | 189,984   |      | $ | 174,898   |  | $ | 157,235
|Gas utility operations                                                                          |  |      | 18,843    |      |   | 14,184    |  |   | 25,310 
|Unregulated operations                                                                          |  |      | 12,688    |      |   | 17,692    |  |   | 13,590 
|                                                                                                |  |      |           |      |   |           |  |   |        
|Consolidated total                                                                              |  | $    | 221,515   |      | $ | 206,774   |  | $ | 196,135
|                                                                                                |  |      |           |      |   |           |  |   |        
|Expenditures for property                                                                       |  |      |           |      |   |           |  |   |        
|Electric utility operations                                                                     |  | $    | 329,906   |      | $ | 378,709   |  | $ | 340,909
|Gas utility operations                                                                          |  |      | 22,498    |      |   | 38,761    |  |   | 40,680 
|Unregulated operations                                                                          |  |      | 7,726     |      |   | 8,676     |  |   | 5,676  
|                                                                                                |  |      |           |      |   |           |  |   |        
|Consolidated total                                                                              |  | $    | 360,130   |      | $ | 426,146   |  | $ | 387,265
|                                                                                                |  |      |           |      |   |           |  |   |        
|Segment assets                                                                                  |  |      |           |      |   |           |  |   |        
|Electric utility operations                                                                     |  | $    | 6,760,380 |      | $ | 6,764,098 |  |   |        
|Gas utility operations                                                                          |  |      | 799,768   |      |   | 805,635   |  |   |        
|Unregulated operations                                                                          |  |      | 199,397   |      |   | 199,358   |  |   |        
|                                                                                                |  |      |           |      |   |           |  |   |        
|Consolidated total                                                                              |  | $    | 7,759,545 |      | $ | 7,769,091 |  |   |        
|                                                                                                |  |      |           |      |   |           |  |   |        



|(a) | The equity income from equity investments is included in other income, net on the accompanying Consolidated Statements of Income.
|--- | ---------------------------------------------------------------------------------------------------------------------------------



Note M. Contracts for the Purchase of Energy



1. NSTAR Electric Purchase Power Agreements



As a Massachusetts distribution company, NSTAR Electric is required to obtain
and resell power to retail customers through basic service for those who choose not to buy energy from a competitive energy supplier. Basic service rates are reset every six months (every three months for large commercial and industrial customers).
The price of basic service is intended to reflect the average competitive market price for power. For basic service power supply, NSTAR Electric makes periodic market solicitations consistent with DPU regulations. During 2007, NSTAR Electric entered
into short-term power purchase agreements to meet its entire basic service supply obligation, other than to its largest customers, for the period January 1, 2008 through June 30, 2008 and for 50% of its obligation for the second-half of
2008. NSTAR Electric has entered into short-term power purchase agreements to meet its entire basic service supply obligation for large customers through March 2008. Request for proposals will be issued in 2008 for the remainder of the obligation.
For 2007, NSTAR Electric entered into agreements ranging in length from three to twelve-months. NSTAR Electric fully recovers its payments to suppliers through DPU-approved rates billed to customers.



The Rate Settlement Agreement required NSTAR Electric to design a policy for the procurement
of basic service supply for residential customers effective July 1, 2006, permitting NSTAR Electric to execute energy supply contracts for one, two and three-years procuring fifty, twenty-five and twenty-five percent, respectively, of its total
energy load requirements for residential customers. NSTAR Electric, after working with the AG and a low-income support organization, developed a schedule to implement this provision. This proposal included a



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method for further review and modification to potentially include longer-term contracts that would be anticipated to reduce price volatility for small
consumers and solicited long-term contracts as part of its last 2006 solicitation. However, after review of the proposals, NSTAR Electric, after consultation with the AG, determined that it would continue to enter into short-term contract
alternatives. However, in 2007, NSTAR Electric entered into two longer-term renewable energy supply contracts with 10 year terms that are currently pending DPU approval.



2. NSTAR Gas Firm Transportation and Storage Agreements



NSTAR Gas purchases transportation, storage and balancing services from Tennessee Gas
Pipeline Company and Algonquin Gas Transmission Company, as well as other upstream pipelines that bring gas from major producing regions in the U.S., Gulf of Mexico and Canada to the final delivery points in the NSTAR Gas service area. NSTAR Gas
purchases all of its gas supply from third-party vendors. Most of the supplies are purchased under a firm portfolio management contract with a term of one year. NSTAR Gas has one multiple year contract, which is used for the purchase of its Canadian
supplies. Based on its firm pipeline transportation capacity entitlements, NSTAR Gas contracts for up to 139,326 MMbtu per day of domestic production. In addition, NSTAR Gas has an agreement for up to 4,500 MMbtu per day of Canadian supplies.



NSTAR Gas has various contractual agreements covering the transportation of
natural gas and underground natural gas storage facilities, which are recoverable from customers under the DPU-approved CGAC. The contracts expire at various times from 2009 to 2016. NSTAR Gas firm contract demand charges associated with firm
pipeline transportation and storage capacity contracts in 2007, 2006 and 2005 were approximately $51.8 million, $50.6 million and $47.7 million, respectively. Refer to Note N, Commitments and Contingencies, Energy Supplysection for NSTAR Gas firm contract demand charges at current rates under these contracts for the years after 2007.



Note N. Commitments and Contingencies



1. Service Quality Indicators



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



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



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



The Rate Settlement Agreement approved by the DPU on December 30, 2005 established additional performance measures applicable to NSTARs rate regulated
subsidiaries. The Rate Settlement Agreement establishes, for NSTAR Electric, a performance benchmark relating to its poor performing circuits, with a maximum penalty or incentive of up to $0.5 million. For 2006 and 2007, NSTAR Electric determined
that its performance related to these applicable circuits exceeded the established benchmarks and therefore, accrued its incentive entitlement of $0.5 million for those years, subject to final DPU approval.



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2. Contractual Commitments



Leases



NSTAR has leases for facilities and equipment. The estimated minimum rental commitments under non-cancellable capital and operating leases
for the years after 2007 are as follows:



|                 |  |   |       
|---------------- |  | - | ------
|(in thousands)   |  |  
|2008             |  | $ | 17,295
|2009             |  |   | 15,873
|2010             |  |   | 14,072
|2011             |  |   | 11,193
|2012             |  |   | 10,342
|Years thereafter |  |   | 26,748
|                 |  |   |       
|                 |  | $ | 95,523
|                 |  |   |       



The total expense for both leases and
transmission agreements was $24.7 million in 2007, $26.8 million in 2006 and $28.3 million in 2005, net of capitalized expenses of $2.4 million in 2007, $2.3 million in 2006 and $1.8 million in 2005.



Total rent expense for all operating leases, except those with terms of a month or less,
amounted to $13.5 million in 2007, $15.2 million in 2006 and $17.8 million in 2005.



Transmission



As a member of ISO-NE,
NSTAR Electric is subject to the terms and conditions of the ISO-NE tariff through February 2010, as NSTAR Electric is obligated to remain a member through this period. NSTAR Electric is obligated to pay for regional network services through that
period to support the pooled transmission facilities requirements of other New England transmission owners whose facilities are used by NSTAR Electric. These payments amounted to $130.2 million, $89.4 million and $89.6 million in 2007, 2006 and
2005, respectively. This membership also obligates NSTAR Electric, along with other transmission owners and market participants, to fund a proportionate share of the RTOs operating and capital expenditures.



Energy Commitments



NSTAR is currently recovering payments it is making to suppliers from its customers and has
financial and performance assurances and financial guarantees in place with those suppliers to protect NSTAR from risk in the unlikely event any of its suppliers encounter financial difficulties or fail to maintain an investment grade credit rating.
In connection with certain of these agreements, should, in the unlikely event, an individual NSTAR distribution company receive a credit rating below investment grade, that company potentially could be required to obtain certain financial
commitments, including but not limited to, letters of credit. Refer to Note M, Contracts for the Purchase of Energyfor a further discussion.



The following represents NSTARs long-term energy related contractual commitments:



|                                   |  |      |     |      |   |      |  |      |     |      |   |                 |  |       |    |  |   |     |  |   |    
|---------------------------------- |  | ---- | --- | ---- | - | ---- |  | ---- | --- | ---- | - | --------------- |  | ----- | -- |  | - | --- |  | - | ---
|(in millions)                      |  | 2008 |     | 2009 |   | 2010 |  | 2011 |     | 2012 |   | YearsThereafter |  | Total
|Electric capacity obligations      |  | $    | 2   |      | $ | 2    |  | $    | 2   |      | $ | 2               |  | $     | 3  |  | $ | 17  |  | $ | 28 
|Gas contractual obligations        |  |      | 52  |      |   | 52   |  |      | 50  |      |   | 46              |  |       | 30 |  |   | 35  |  |   | 265
|Purchase power buy-out obligations |  |      | 162 |      |   | 142  |  |      | 140 |      |   | 75              |  |       | 32 |  |   | 99  |  |   | 650
|                                   |  |      |     |      |   |      |  |      |     |      |   |                 |  |       |    |  |   |     |  |   |    
|                                   |  | $    | 216 |      | $ | 196  |  | $    | 192 |      | $ | 123             |  | $     | 65 |  | $ | 151 |  | $ | 943
|                                   |  |      |     |      |   |      |  |      |     |      |   |                 |  |       |    |  |   |     |  |   |    



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Electric capacity obligations represent remaining capacity costs of long-term contracts that reflect NSTAR
Electrics proportionate share of capital and fixed operating costs of two generating units. These contracts expire in 2012 and 2019. In 2007 and 2006, these costs were attributed to 47.9 MW of capacity purchased. Energy costs are paid to
generators based on a price per kWh actually received into NSTAR Electrics distribution system and are in addition to the costs above.



Gas contractual obligations represent agreements covering the transportation of natural gas and underground natural gas storage facilities that are recoverable from
customers under the DPU- approved CGAC. These contracts expire at various times from 2008 through 2016.



Purchase power buy-out obligations represent the buy-out/restructuring agreements for contract termination costs that reduce the amount of above-market costs that NSTAR Electric will collect from its customers through
its transition charges. These agreements require NSTAR Electric to make monthly payments through September 2016.



3. Electric Equity Investments and Joint Ownership Interest



NSTAR has an equity investment of approximately 14.5% in two companies that own and operate transmission facilities to import electricity
from the Hydro-Quebec system in Canada. As an equity participant, NSTAR Electric is required to guarantee, in addition to its own share, the obligations of those participants who do not meet certain credit criteria. At December 31, 2007, NSTAR
Electrics portion of these guarantees amounted to $6.9 million. NEH and NHH have agreed to use their best efforts to limit their equity investment to 40% of their total capital during the time NEH and NHH have outstanding debt in their capital
structure. In order to meet their best efforts obligations pursuant to the Equity Funding Agreement dated June 1, 1985, as amended, for NEH and NHH, in 2006, NEH repurchased a total of 140,000 of its outstanding shares from all equity holders
and NHH repurchased a total of 850 outstanding shares from all equity holders. In 2006, NSTAR Electrics reduction of its equity ownership resulting from NEH buy-back of 20,254 shares and NHH buy-back of 123 shares was approximately $0.5
million.



NSTAR Electric collectively has an equity ownership of 14% in CY, 14%
in YA, and 4% in MY, (collectively, the Yankee Companies).



CY was
notified on November 26, 2007 by the NRC that its former generating plant site was decommissioned in accordance with NRC procedures. Also, YA and MY plant sites have been decommissioned in accordance with NRC procedures. Amended licenses
continue to apply to the ISFSIs where spent nuclear fuel is stored at these sites. CY, YA and MY remain responsible for the security and protection of the ISFSI and are required to maintain radiation monitoring programs at the sites.



On December 21, 2006, the shareholders of CY approved a resolution to
repurchase 276,575 of its outstanding shares from all equity holders at a price of $108.4681 per share and declared those shares payable at the close of business on that date. The total value of this buy-back transaction was $30 million. NSTAR
Electrics reduction of its equity ownership resulting from the CY buy-back of 38,721 shares was approximately $4.2 million.



Yankee Companies Spent Fuel Litigation



On October 4, 2006, the U.S. Court of Federal Claims issued a judgment in a spent nuclear fuel litigation, in the amounts of $34.2 million, $32.9 million and $75.8
million for CY, YA and MY, respectively. This judgment in favor of these Yankee companies relating to the alleged failure of the DOE to provide for a permanent facility to store spent nuclear fuel for years prior to 2001 for CY and YA, and prior to
2002 for MY. NSTAR Electrics portion of the judgment amounts to $4.8 million, $4.6 million and $3 million, respectively. On December 4, 2006, the DOE filed its notice of appeal of the trial courts decision. As a result, the Yankee
Companies have not recognized the damage awards on their books, and therefore, NSTAR Electric has not recognized its portion. On



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December 14, 2007, the Yankee companies filed complaints against the DOE seeking damages from 2001 for CY and YA, and from 2002 for MY, through a future
trial date. NSTAR cannot predict the ultimate outcome of this decision on appeal or the subsequent complaints.



The accounting for decommissioning costs of nuclear power plants involves significant estimates related to costs to be incurred many years in the future. Changes in these estimates will not affect NSTARs results
of operations or cash flows because these costs will be collected from customers through NSTAR Electrics transition charge filings with the DPU.



4. Financial and Performance Guarantees



On a limited basis, NSTAR and certain of its subsidiaries may enter into agreements providing financial assurance to third parties. Such agreements include letters of
credit, surety bonds, and other guarantees.



At December 31, 2007,
outstanding guarantees totaled $30.1 million as follows:



|                 |  |   |       
|---------------- |  | - | ------
|(in thousands)   |  |  
|Letter of Credit |  | $ | 5,560 
|Surety Bonds     |  |   | 17,581
|Other Guarantees |  |   | 6,947 
|                 |  |   |       
|Total Guarantees |  | $ | 30,088
|                 |  |   |       



Letter of Credit



NSTAR has issued a $5.6 million letter of credit for the benefit of a third
party, as trustee in connection with Advanced Energy Systems 6.924% Notes. The letter of credit is available if the subsidiary has insufficient funds to pay the debt service requirements. As of December 31, 2007, there have been no
amounts drawn under this letter of credit.



Surety Bonds



As of December 31, 2007, certain of NSTARs subsidiaries have
purchased a total of $1.4 million of performance surety bonds for the purpose of obtaining licenses, permits and rights-of-way in various municipalities. In addition, NSTAR and certain of its subsidiaries have purchased approximately $16.2 million
in workers compensation self-insurer bonds. These bonds support the guarantee by NSTAR and certain of its subsidiaries to the Commonwealth of Massachusetts required as part of the Companys workers compensation self-insurance
program. NSTAR and certain of its subsidiaries have indemnity agreements to provide additional financial security to its bond company in the form of a contingent letter of credit to be triggered in the event of a downgrade in the future of
NSTARs Senior Note rating to below BBB by S&P and/or to below Baa1 by Moodys. These Indemnity Agreements cover both the performance surety bonds and workers compensation bonds.



Other



NSTAR and its subsidiaries have also issued $6.9 million of residual value guarantees related to its equity interest in the Hydro-Quebec
transmission companies.



5. Environmental
Matters



NSTAR subsidiaries face possible liabilities as a result of
involvement in several multi-party disposal sites, state-regulated sites or third-party claims associated with contamination remediation. NSTAR generally expects to have only a small percentage of the total potential liability for the majority of
these sites.



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In accordance with a court approved settlement agreement relating to litigation brought against NSTAR Electric by various
governmental entities, NSTAR Electric paid $8.6 million in September, 2006 upon final judgment of the Massachusetts Superior Court. This payment did not have an earnings impact in 2006, as NSTAR recognized this liability in the second quarter of
2005. In December 2006, NSTAR Electric settled with its insurance carrier for $4.5 million relating to this claim and recognized $2.5 million of this amount in 2006 as a reduction to its operating expenses.



As of December 31, 2007 and 2006, NSTAR had recorded liabilities of $0.8 million and
$2.9 million respectively, for potential multi-party environmental sites. This estimate is based on an evaluation of all currently available facts with respect to all of its sites.



NSTAR Gas is participating in the assessment or remediation of certain former MGP sites and alleged MGP waste disposal locations to
determine if and to what extent such sites have been contaminated and whether NSTAR Gas may be responsible to undertake remedial action. The DPU has approved recovery of costs associated with MGP sites over a seven-year period, without carrying
costs. As of December 31, 2007 and 2006, NSTAR recorded a liability of approximately $10.1 million and $3.2 million, respectively, as an estimate for site cleanup costs for several MGP sites for which NSTAR Gas was previously cited as a
potentially responsible party. A corresponding regulatory asset was recorded that reflects the future rate recovery for these costs.



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



6. Regulatory
and Legal Proceedings



On December 30, 2005, the DPU approved a
seven-year Rate Settlement Agreement (Rate Settlement Agreement) between NSTAR, the AG, and several interveners. For 2006, the Rate Settlement Agreement required NSTAR Electric to lower its transition rates by $20 million, effective
January 1, 2006, and by an additional $30 million, effective May 1, 2006, from what would otherwise have been billed in 2006. Effective May 1, 2006, NSTAR Electric increased its distribution rates by $30 million. Uncollected
transition charges as a result of the reductions in transition rates are deferred and collected through future rates with a carrying charge at a rate of 10.88%. Beginning January 1, 2007 and continuing through 2012, the Rate Settlement
Agreement establishes annual inflation-adjusted distribution rate increases that are offset by an equal and corresponding reduction in transition rates.



Wholesale Power Cost Savings Initiatives



The Rate Settlement Agreement provides for NSTAR Electric to continue its efforts to advocate on behalf of customers at the FERC to mitigate wholesale electricity cost
inefficiencies that would be borne by regional customers. If NSTAR Electrics efforts to reduce customers costs are successful, the Company is allowed to retain a portion of those savings, as well as related litigation costs, as an
incentive. Under the terms of the Rate Settlement Agreement, NSTAR Electric was to share in 25% of the savings applicable to its customers. The recovery of NSTAR Electrics share of benefits is to be collected over three years, and the
aggregate annual recovery is capped at 2% of the annual distribution and transmission service revenues. As a result of NSTARs role in two RMR cases, NSTAR Electric had sought to collect $9.8 million annually for three years and began
recognizing and collecting these incentive revenues from its customers effective January 1, 2007, subject to final DPU approval. Public hearings were held by the DPU in early 2007 to investigate the basis and support for the incentive payments.
After these hearings NSTAR Electric began discussions with the staff of the newly elected AG and a revised Settlement Agreement was executed on July 23, 2007. This revised Settlement Agreement



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allows NSTAR Electric to collect $6.3 million of the savings annually for three years effective January 1, 2007. In addition, it stipulates that NSTAR
Electric will share 12.5% of the savings applicable to its customers in its future efforts related to new wholesale energy cost savings cases. Approval of this Settlement Agreement and of the incentives is required by the DPU. The DPU has extended
the deadline to issue a decision on this Agreement until February 29, 2008.



NSTAR is unable to predict the ultimate outcome of this proceeding. In the event an adverse decision is reached it should not have a material impact on the Companys reported results of operations for 2007. However, such a decision
could have an impact on future results of operations and cash flows.



Regulatory ProceedingsDPU



NSTAR
Electric made its 2006 Distribution Rate Adjustment/Reconciliation Filing on September 29, 2006. The filing implements the provisions of the Rate Settlement Agreement that supports the establishment of new distribution and transition rates that
became effective January 1, 2007. Also effective on this date, NSTAR Electrics distribution rates include elements of a SIP and a CPSL program that require an offsetting adjustment to its transition rate. The performance-based SIP is
based on the gross domestic product price index minus a productivity offset and rate adjustment factor that resulted in a 2.64% increase in distribution rates. The CPSL program relates to incremental spending for double pole removal, pole
replacements and underground electric safety programs, which include stray-voltage remediation and manhole inspections, repairs and upgrades. For 2006, the CPSL cost recovery was estimated to be $13.3 million and that amount was included in retail
distribution rates for 2007. The final reconciliation of 2006 CPSL costs and revenues is currently under review by the DPU. On October 1, 2007, NSTAR Electric filed for the establishment of new distribution (SIP of 2.68%), transition and
transmission rates that became effective on January 1, 2008. This filing included recovery of estimated CPSL costs of $24 million to be collected during 2008. This balance includes the under-collection of 2006 final CPSL amounts. Recovery of
transition and CPSL costs is subject to DPU review and reconciliation to actual costs. NSTAR cannot predict the timing or the ultimate outcome of these pending filings.



Basic Service Bad Debt Adder



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



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



NSTAR Electric has not implemented the components of the June 28, 2007 DPU order. Implementation of this order would require NSTAR Electric to write-off a previously
recorded regulatory asset related to its basic service bad debt costs. NSTAR Electric filed a Motion for Reconsideration of the DPUs order on July 18, 2007. On December 14, 2007, the Motion for Reconsideration was granted and the DPU
reopened the case to hear additional evidence. NSTAR Electric believes its position is appropriate and that it is probable that it will ultimately prevail. However, in the event that it does not, NSTAR Electric intends to pursue all legal options.
As of December 31, 2007, the potential impact to earnings of eliminating the bad debt adder was approximately $14 million, pre-tax. NSTAR cannot predict the timing or the ultimate outcome of this proceeding.



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



On December 1, 2006, NSTAR filed blended basic service and transmission rates with the DPU, effective January 1, 2007. The blended basic service rate was approved on December 19, 2006 and the blended
transmission rate was approved on January 3, 2007. The individual Boston Edison, ComElectric and Cambridge Electric basic service rates were blended into rates applicable to the entire NSTAR Electric service territory pursuant to the DPUs
approval of the NSTAR Electric merger.



In December 2005, NSTAR Electric filed
proposed transition rate adjustments for 2006, including a preliminary reconciliation of transition, transmission, basic service and default service costs and revenues through 2005. The DPU subsequently approved tariffs for each retail electric
subsidiary effective January 1, 2006. Updated reconciliations to reflect final 2005 costs and revenues were filed during the second quarter of 2006 for Boston Edison, ComElectric and Cambridge Electric. A settlement agreement between the AG and
NSTAR Electric on the reconciliation of the Boston Edison costs and revenue for 2004 and 2005 was filed with the DPU on May 29, 2007, and approved by the DPU on July 23, 2007. Evidentiary hearings were conducted on the reconciliation of
the ComElectric and Cambridge Electric costs and revenue for 2005. The case is pending a decision at the DPU and NSTAR cannot predict the timing or the ultimate outcome of this filing.



Wholesale Market and Transmission Changes



Regulatory ProceedingsFERC



On July 9, 2007, FERC issued an Order that approved NSTAR Electrics 2007 proposed consolidated transmission rates as filed on February 14, 2007,
subject to refund, pending the conclusion of subsequent proceedings. As a result of these proceedings, NSTAR reached an agreement in principle with the FERC staff and the AG. A final settlement is expected to be executed during the first quarter of
2008. This settlement will be subject to FERC approval. The implementation of this settlement is not expected to have a material impact to the Companys results of operations, financial position or cash flows.



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



FERC Transmission ROE



On October 31, 2006, the FERC authorized, for the participating New England Transmission Owners, including NSTAR Electric, an ROE on regional transmission facilities
of 10.2% plus a 50 basis point adder for joining a RTO from February 1, 2005 (the RTO effective date) through October 31, 2006, and an ROE of 11.4% thereafter. In addition, FERC granted a 100 basis point incentive adder to ROE for
qualified investments made in new regional transmission facilities, that when combined with FERCs approved ROEs, provide 11.7% and 12.4% returns for the respective time frames. RTO-NE ratepayers will benefit as a result of this order because
it responds to the need to enhance the New England transmission grid to alleviate congestion costs and reliability issues. Transmission projects that are completed and in progress including NSTAR Electrics 345kV project, have significantly
minimized these congestion costs and enhance reliability in the region. The New England



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Transmission Owners accepted all but one of the terms of the October 31, 2006 FERC decision, and on November 30, 2006, filed for a request for
rehearing involving the calculation of the base ROE, for which the FERC did not provide an explanation for its action and which the New England Transmission Owners believe is not supported by the record evidence. The New England Transmission Owners
contend that the base ROE should be 10.5%. The Company is unable to determine the ultimate timing or result of the rehearing process or of the ultimate FERC decision.



b. Legal Matters



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



7. Capital Expenditures and Financings



The most recent estimates of capital expenditures and long-term debt maturities for the years 2008 and 2009-2012 are as follows:



|                     |  |      |         |           |   |          
|-------------------- |  | ---- | ------- | --------- | - | ---------
|(in thousands)       |  | 2008 |         | 2009-2012
|Capital expenditures |  | $    | 440,000 |           | $ | 1,300,000
|Long-term debt       |  | $    | 98,531  |           | $ | 1,493,271



In the five-year period 2008 through
2012, plant expenditures are forecasted to be used for system reliability and performance improvements, customer service enhancements and capacity expansion to meet expected growth in the NSTAR service territory. Capital expenditures decreased $66
million from $426 million in 2006 to $360 million in 2007 primarily due to the completion and placement in service of phase one of NSTAR Electrics 345kV transmission project.



Management continuously reviews its capital expenditure and financing programs. These programs and, therefore, the estimates included in
this Form 10-K are subject to revision due to changes in regulatory requirements, operating requirements, environmental standards, availability and cost of capital, interest rates and other assumptions.



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Report of Independent Registered Public Accounting Firm



To Shareholders and Trustees of NSTAR:



In our opinion, the consolidated financial statements listed in the accompanying index appearing under
Item 15(a)(1) present fairly, in all material respects, the financial position of NSTAR and its subsidiaries (the Company) at December 31, 2007 and December 31, 2006, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2007 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the
accompanying index appearing under Item 15(a)(2) present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company
maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Companys management is responsible for these financial statements and financial statement schedules, for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting, included in Managements Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these
financial statements, on the financial statement schedules, and on the Companys internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over
financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered
necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.



As discussed in Note F to the consolidated financial statements, the Company changed the manner in which it accounts for uncertain tax positions in 2007. As discussed in Note G to the consolidated financial
statements, the Company changed the manner in which it accounts for pension and other postretirement benefits in 2006.



A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (i) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation
of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and
(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.



Because of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies
or procedures may deteriorate.



|                              
|------------------------------
|/s/ PRICEWATERHOUSECOOPERS LLP
|                              
|Boston, Massachusetts         
|February 11, 2008             



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|Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
|------- | ------------------------------------------------------------------------------------



No event that would be described in response to this item 9 has occurred with respect to NSTAR or its subsidiaries.



|Item 9A. | Controls and Procedures
|-------- | -----------------------



Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures



Under the supervision and with the participation of our management, including our principal executive officer and principal financial
officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act). Based on this evaluation, our
principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this annual report.



Managements Annual Report on Internal Control Over Financial Reporting



Management is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined in the Exchange Act Rules 13a-15(f). A system of internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.



Under the supervision and with the participation of management, including the principal executive officer and the principal financial officer, NSTAR management has
evaluated the effectiveness of its internal control over financial reporting as of December 31, 2007 based on the criteria established in a report entitled Internal ControlIntegrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and the Interpretive Guidance issued by the SEC in Release 34-55929. Based on this evaluation, NSTAR management has evaluated and concluded that NSTARs internal control over financial reporting
was effective as of December 31, 2007.



NSTAR is continuously seeking to
improve the efficiency and effectiveness of its operations and of its internal controls. This results in modifications to its processes throughout the Company. However, there has been no change in its internal control over financial reporting that
occurred during the Companys most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.



PricewaterhouseCoopers LLP, the independent registered public accounting firm that audited
the consolidated financial statements included in this Annual Report on Form 10-K, has also audited the effectiveness of our internal control over financial reporting as of December 31, 2007, as stated in their report which appears on
page 95.



|Item 9B. | Other Information
|-------- | -----------------



None



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Part III



The information required by Part III
(Items 10(a), 11, 12, 13, and 14) will be included in NSTARs 2008 Proxy Statement (as specified below) to be filed in connection with the Annual Meeting of Shareholders to be held on May 1, 2008 and is incorporated herein by reference.
NSTARs Proxy Statement will be filed with the Securities and Exchange Commission on or about March 14, 2008.



|Item 10. | Trustees, Executive Officers and Corporate Governance
|-------- | -----------------------------------------------------



The information with respect to Trustees of NSTAR, information with respect to compliance with the reporting obligations under Section 16(a) of the Exchange Act,
information concerning NSTARs code of ethics applicable to senior management, information on NSTARs compliance with corporate governance regulations, and information on NSTARs Board of Trustees audit committee financial
expert, is incorporated herein by reference from disclosures contained in NSTARs Definitive Proxy Statement for the 2008 Annual Meeting of Shareholders to be held on May 1, 2008 under the captions Information about the NSTAR
Board, Nominees and Incumbent Trustees, Section 16(a) Beneficial Ownership Reporting Compliance, and Governance of the Company. Information regarding NSTARs executive officers found in the
section captioned Executive Officers of the Registrant in Item 4A of Part 1 of this Report is also incorporated herein by reference into this Item 10.



|Item 11. | Executive Compensation
|-------- | ----------------------



The information required by this Item is incorporated herein by reference from disclosures contained in NSTARs Definitive Proxy Statement for the 2008 Annual
Meeting of Shareholders under the caption Executive Compensation, including NSTARs Compensation Discussion and Analysis and Executive Personnel Committee Report.



|Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|-------- | ----------------------------------------------------------------------------------------------



Information regarding securities authorized for issuance under equity compensation plans located in Item 5, Section (d) of Part II
hereof is also incorporated by reference into this Item 12. Other information required by this Item is incorporated herein by reference from disclosures contained in NSTARs Definitive Proxy Statement for the 2008 Annual Meeting of
Shareholders under the captions 2007 Trustee Compensation, Common Share Ownership by Trustees and Executive Officers, and Termination/Change in Control Agreements.



|Item 13. | Certain Relationships and Related Transactions, and Trustee Independence
|-------- | ------------------------------------------------------------------------



The information required by this Item is incorporated herein by reference from disclosures contained in NSTARs Definitive Proxy
Statement for the 2008 Annual Meeting of Shareholders under the caption Governance of the CompanyBoard Independence.



|Item 14. | Principal Accountant Fees and Services
|-------- | --------------------------------------



The information required by this Item is incorporated herein by reference from disclosures contained in NSTARs Definitive Proxy Statement for the 2008 Annual
Meeting of Shareholders under the caption Audit and Related Fees.



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Part IV



|Item 15. | Exhibits and Financial Statement Schedules
|-------- | ------------------------------------------



(a) The following documents are filed as part of this Form 10-K:



|1. | Financial Statements:
|-- | ---------------------



|                                                                                                                |  |      
|--------------------------------------------------------------------------------------------------------------- |  | -----
|                                                                                                                |  | Page 
|Consolidated Statements of Income for the years ended December 31, 2007, 2006 and 2005                          |  | 54   
|Consolidated Statements of Comprehensive Income for the years ended December 31, 2007, 2006 and 2005            |  | 55   
|Consolidated Statements of Retained Earnings for the years ended December 31, 2007, 2006 and 2005               |  | 55   
|Consolidated Balance Sheets as of December 31, 2007 and 2006                                                    |  | 56-57
|Consolidated Statements of Cash Flows for the years ended December 31, 2007, 2006 and 2005                      |  | 58   
|Notes to Consolidated Financial Statements                                                                      |  | 59   
|Selected Quarterly Consolidated Financial Data (Unaudited)                                                      |  | 21   
|Report of Independent Registered Public Accounting Firm                                                         |  | 95   
|                                                                                                                | 
|2. Financial Statement Schedules:                                                                               |  |      
|Schedule I - Condensed Parent Company Financial Statements For the years ended December 31, 2007, 2006 and 2005 |  | 103  
|Schedule II - Valuation and Qualifying Accounts For the years ended December 31, 2007, 2006 and 2005            |  | 106  
|                                                                                                                | 
|3. Exhibits:                                                                                                    |  |      
|Refer to the exhibits listing beginning below.                                                                  |  |      



Incorporated herein
by reference unless designated otherwise:



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NSTAR and its subsidiaries



|           |  |                                                                                                                                                                                                                                                                                     
|---------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit 3  |  | Articles of Incorporation and By-Laws                                                                                                                                                                                                                                               
|3.1        |  | Declaration of Trust of NSTAR (dated as of April 20, 1999, as amended April 28, 2005)(NSTAR Form 10-Q for the quarter ended June 30, 2005, File No. 1-14768)                                                                                                                        
|           | 
|3.2        |  | Bylaws of NSTAR (Annex E to the Joint Proxy Statement/Prospectus, which forms part of the Registration Statement on Form S-4 of NSTAR (No. 333-78285))                                                                                                                              
|           | 
|3.3        |  | Boston Edison Restated Articles of Organization (Form 10-Q for the quarter ended June 30, 1994, File No. 1-2301)                                                                                                                                                                    
|           | 
|3.4        |  | Boston Edison Company Bylaws dated April 19, 1977, as amended January 22, 1987, January 28, 1988, May 24, 1988, and November 22, 1989 (Form 10-Q for the quarter ended June 30, 1990, File No.
1-2301)                                                                              
|           | 
|Exhibit 4  |  | Instruments Defining the Rights of Security Holders, Including Indentures                                                                                                                                                                                                           
|4.1        |  | Indenture dated as of January 12, 2000 between NSTAR and Bank One Trust Company N.A. (Exhibit 4.1 to NSTAR Registration Statement on Form S-3, File No. 333-94735)                                                                                                                  
|           | 
|4.2        |  | Votes of the Board of Trustees of NSTAR, dated January 27, 2000, supplementing the Indenture dated as of January 12, 2000 between NSTAR and Bank One Trust Company N. A. (NSTAR Form 10-K for the
year ended December 31, 2002, File No. 1-14768)                                   
|           | 
|4.3        |  | Votes of the Board of Trustees of NSTAR, dated September 28, 2000 supplementing the Indenture dated as of January 12, 2000 between NSTAR and Bank One Trust Company N. A. (NSTAR Form 10-K for the
year ended December 31, 2002, File No. 1-14768)                                  
|           | 
|4.4        |  | Indenture between Boston Edison Company and the Bank of New York (as successor to Bank of Montreal Trust Company)(Form 10-Q for the quarter ended September 30, 1988, File No. 1-2301)                                                                                              
|           | 
|4.5        |  | Votes of the Pricing Committee of the Board of Directors of Boston Edison Company taken May 10, 1995 re 7.80% debentures due May 15, 2010 (Form 10-K for the year ended December 31,
1995, File No. 1-2301)                                                                         
|           | 
|4.6        |  | Votes of the Board of Directors of Boston Edison Company taken October 8, 2002 re $500 million aggregate principal amount of unsecured debentures ($400 million, 4.875% due in 2012 and $100
million, Floating rate due in 2005)(Form 8-K dated October 11, 2002, File No. 1-2301)  
|           | 
|4.7        |  | A Form of 4.875% Debenture Due April 15, 2014 (Boston Edison Company Form 8-K (Exh. 4.3) dated April 15, 2004, File No. 1-2301)                                                                                                                                                     
|           | 
|4.8        |  | A Form of 5.75% Debenture Due March 15, 2036 (Boston Edison Company Form 8-K (Exh. 99.2) dated March 17, 2006, File No. 1-2301)                                                                                                                                                     
|           | 
|4.9        |  | A Form of 5.625% Debenture Due November 15, 2017 (NSTAR Electric Company Form 8-K (Exh. 99.2) dated November 20, 2007, File No. 1-2301)                                                                                                                                             
|           | 
|           |  | Management agrees to furnish to the Securities and Exchange Commission, upon request, a copy of any other agreements or instruments of NSTAR and its subsidiaries defining the rights of holders
of any non-registered debt whose authorization does not exceed 10% of total assets.
|           | 
|Exhibit 10 |  | Material Contracts                                                                                                                                                                                                                                                                  
|           | 
|10.1       |  | NSTAR Excess Benefit Plan, effective August 25, 1999 (NSTAR Form 10-K/A for the year ended December 31, 1999, File No. 1-14768)                                                                                                                                                     
|           | 
|10.2       |  | NSTAR Supplemental Executive Retirement Plan, effective August 25, 1999 (NSTAR Form 10-K/A for the year ended December 31, 1999, File No. 1-14768)                                                                                                                                  



99



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|       |  |                                                                                                                                                                                                                                                                                                                                           
|------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|       | 
|10.3   |  | Special Supplemental Executive Retirement Agreement between Boston Edison Company and Thomas J. May dated March 13, 1999, regarding Key Executive Benefit Plan and Supplemental Executive
Retirement Plan (NSTAR Form 10-K/A for the year ended December 31, 1999, File No. 1-14768)                                                      
|       | 
|10.4   |  | Executive Retirement Plan Agreement between NSTAR and Werner J. Schweiger dated as of February 25, 2002, regarding Supplemental Executive Retirement Plan (NSTAR Form 10-K for the year ended
December 31, 2004, File No. 1-14768)                                                                                                        
|       | 
|10.5   |  | Amended and Restated Change in Control Agreement by and between NSTAR and Thomas J. May dated November 15, 2007 (filed herewith)                                                                                                                                                                                                          
|       | 
|10.6   |  | NSTAR Deferred Compensation Plan (Restated Effective August 25, 1999) (NSTAR Form 10-K/A for the year ended December 31, 1999, File No. 1-14768)                                                                                                                                                                                          
|       | 
|10.7   |  | NSTAR 1997 Share Incentive Plan, as amended June 30, 1999 and assumed by NSTAR effective August 28, 2000 (NSTAR Form 10-K/A for the year ended December 31, 1999, File No.
1-14768)                                                                                                                                                       
|       | 
|10.7.1 |  | NSTAR 1997 Share Incentive Plan, as amended January 24, 2002 (NSTAR Form 10-K for the year ended December 31, 2002, File No. 1-14768)                                                                                                                                                                                                     
|       | 
|10.8   |  | NSTAR 2007 Long Term Incentive Plan, effective May 3, 2007 (NSTAR Form 8-K dated May 3, 2007, File No. 1-14768)                                                                                                                                                                                                                           
|       | 
|10.8.1 |  | Deferred Common Share/Dividend Equivalent Award, Stock Option Grant, Option Certificate and Performance Share Award/Dividend Equivalent Award Agreement Under the NSTAR 2007 Long Term Incentive
Plan, by and between NSTAR and Thomas J. May, dated January 24, 2008 (filed herewith)                                                    
|       | 
|10.8.2 |  | Deferred Common Share/Dividend Equivalent Award, Stock Option Grant, Option Certificate and Performance Share Award/Dividend Equivalent Award Agreement Under the NSTAR 2007 Long Term Incentive
Plan, by and between NSTAR and James J. Judge, dated January 24, 2008 (filed herewith)                                                   
|       | 
|10.8.3 |  | Deferred Common Share/Dividend Equivalent Award, Stock Option Grant, Option Certificate and Performance Share Award/Dividend Equivalent Award Agreement Under the NSTAR 2007 Long Term
Incentive Plan, by and between NSTAR and Douglas S. Horan, dated January 24, 2008 (filed herewith)                                                 
|       | 
|10.8.4 |  | Deferred Common Share/Dividend Equivalent Award, Stock Option Grant, Option Certificate and Performance Share Award/Dividend Equivalent Award Agreement Under the NSTAR 2007 Long Term Incentive
Plan, by and between NSTAR and Joseph R. Nolan, Jr., dated January 24, 2008 (filed herewith)                                             
|       | 
|10.8.5 |  | Deferred Common Share/Dividend Equivalent Award, Stock Option Grant, Option Certificate and Performance Share Award/Dividend Equivalent Award Agreement Under the NSTAR 2007 Long Term Incentive
Plan, by and between NSTAR and Werner J. Schweiger, dated January 24, 2008 (filed herewith)                                              
|       | 
|10.8.6 |  | Deferred Common Share/Dividend Equivalent Award, Stock Option Grant, Option Certificate and Performance Share Award/Dividend Equivalent Award Agreement Under the NSTAR 2007 Long Term Incentive
Plan by and between NSTAR and NSTARs other Senior Vice Presidents and Vice Presidents, dated January 24, 2008 (in form) (filed herewith)
|       | 
|10.9   |  | Amended and Restated Change in Control Agreement by and between James J. Judge and NSTAR, dated November 15, 2007 (filed herewith)                                                                                                                                                                                                        
|       | 
|10.10  |  | NSTAR Trustees Deferred Plan (Restated Effective August 25, 1999), dated October 20, 2000 (NSTAR Form 10-Q for the quarter ended September 30, 2000, File No. 1-14768)                                                                                                                                                                   



100



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|      |  |                                                                                                                                                                                                                                                              
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      | 
|10.11 |  | Master Trust Agreement between NSTAR and State Street Bank and Trust Company (Rabbi Trust), effective August 25, 1999 (NSTAR Form 10-Q for the quarter ended September 30, 2000, File No. 1-14768)                                                           
|      | 
|10.12 |  | Amended and Restated Change in Control Agreement by and between Douglas S. Horan and NSTAR, dated November 15, 2007 (filed herewith)                                                                                                                         
|      | 
|10.13 |  | Amended and Restated Change in Control Agreement by and between Joseph R. Nolan, Jr. and NSTAR, dated November 15, 2007 (filed herewith)                                                                                                                     
|      | 
|10.14 |  | Amended and Restated Change in Control Agreement by and between Werner J. Schweiger and NSTAR, dated November 15, 2007 (filed herewith)                                                                                                                      
|      | 
|10.15 |  | Amended and Restated Change in Control Agreement by and between NSTARs other Senior Vice Presidents and NSTAR (in form), dated November 15, 2007 (filed herewith)                                                                                           
|      | 
|10.16 |  | Amended and Restated Change in Control Agreement between NSTARs Vice Presidents and NSTAR (in form), dated November 15, 2007 (filed herewith)                                                                                                               
|      | 
|10.17 |  | Amended and Restated NSTAR Annual Incentive Plan as of January 1, 2003 (NSTAR Form 10-K for the year ended December 31, 2004, File No. 1-14768)                                                                                                              
|      | 
|10.18 |  | Amended and Restated Power Purchase Agreement (NEA A PPA), dated August 19, 2004, by and between Boston Edison and Northeast Energy Associates L.P. (NSTAR Form 10-K for the year ended December
31, 2005, File No. 1-14768)                                 
|      | 
|10.19 |  | Amended and Restated Power Purchase Agreement (NEA B PPA), dated August 19, 2004, by and between Boston Edison and Northeast Energy Associates L.P. (NSTAR Form 10-K for the year ended December
31, 2005, File No. 1-14768)                                 
|      | 
|10.20 |  | Amended and Restated Power Purchase Agreement (CECO 1 PPA), dated August 19, 2004, by and between ComElectric and Northeast Energy Associates L.P. (NSTAR Form 10-K for the year ended December
31, 2005, File No. 1-14768)                                  
|      | 
|10.21 |  | Amended and Restated Power Purchase Agreement (CECO 2 PPA), dated August 19, 2004, by and between ComElectric and Northeast Energy Associates L.P. (NSTAR Form 10-K for the year ended December
31, 2005, File No. 1-14768)                                  
|      | 
|10.22 |  | The Bellingham Execution Agreement, dated August 19, 2004 between Boston Edison and ComElectric and Northeast Energy Associates L.P. (NSTAR Form 10-K for the year ended December 31, 2005, File
No. 1-14768)                                                
|      | 
|10.23 |  | Purchase and Sale Agreement, dated June 23, 2004, between Boston Edison and Transcanada Energy Ltd. (Ocean State Power Contract) (NSTAR Form 10-K for the year ended December 31, 2005, File No.
1-14768)                                                    
|      | 
|10.24 |  | Termination Agreement, dated June 2, 2004, by and between Cambridge Electric and Pittsfield Generating Company, L. P. (f/k/a Altresco Pittsfield, L.P.) (NSTAR Form 10-K for the year ended
December 31, 2005, File No. 1-14768)                             
|      | 
|10.25 |  | Termination Agreement, dated June 2, 2004, by and between ComElectric and Pittsfield Generating company, L. P. (f/k/a Altresco Pittsfield, L.P.) (NSTAR Form 10-K for the year ended December 31,
2005, File No. 1-14768)                                    
|      | 
|      |  | Transmission Agreements                                                                                                                                                                                                                                      
|      | 
|10.26 |  | Second Restated NEPOOL Agreement among Boston Edison, Cambridge Electric, Canal and ComElectric and various other electric utilities operating in New England, dated August 16, 2004 (NSTAR Form
10-K for the year ended December 31, 2005, File No. 1-14768)



101



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|           |  |                                                                                                                                                                                                                                                                                               
|---------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|           | 
|10.27      |  | Transmission Operating Agreement among Boston Edison, Cambridge Electric, Canal, ComElectric and various other electric transmission providers in New England and ISO New England Inc., dated
February 1, 2005 (NSTAR Form 10-K for the year ended December 31, 2005, File No. 1-14768)       
|           | 
|10.28      |  | Market Participants Service Agreement among Boston Edison, Cambridge Electric, Canal, ComElectric, various other electric utilities operating in New England, NEPOOL and ISO New England Inc.,
dated February 1, 2005 (NSTAR Form 10-K for the year ended December 31, 2005, File No. 1-14768)
|           | 
|10.29      |  | Rate Design and Funds Disbursement Agreement among Boston Edison, Cambridge Electric, Canal, ComElectric and various other electric transmission providers in New England, dated February 1, 2005
(NSTAR Form 10-K for the year ended December 31, 2005, File No. 1-14768)                    
|           | 
|10.30      |  | Participants Agreement among Boston Edison, Cambridge Electric, Canal, ComElectric, various other electric utilities operating in New England, NEPOOL and ISO New England Inc., dated
February 1, 2005 (NSTAR Form 10-K for the year ended December 31, 2006, File No. 1-14768)               
|           | 
|Exhibit 21 |  | Subsidiaries of the Registrant                                                                                                                                                                                                                                                                
|21.1       |  | Incorporated herein by reference (NSTAR Form 10-K for the year ended December 31, 2006, File No 1-14768)                                                                                                                                                                                      
|           | 
|Exhibit 23 |  | Consent of Independent Registered Public Accounting Firm                                                                                                                                                                                                                                      
|23.1       |  | (filed herewith)                                                                                                                                                                                                                                                                              
|           | 
|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 (filed herewith)                                                                                                                                                        
|           | 
|31.2       |  | Certification Statement of Chief Financial Officer of NSTAR pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)                                                                                                                                                        
|           | 
|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 (filed herewith)                                                                                                                                                        
|           | 
|32.2       |  | Certification Statement of Chief Financial Officer of NSTAR pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)                                                                                                                                                        
|           | 
|Exhibit 99 |  | Additional Exhibits                                                                                                                                                                                                                                                                           
|99.1       |  | Annual Reports on Form 11-K for certain employee savings plans for the years ended December 31, 2006, 2005, 2004, 2003 and 2002, as dated June 25, 2007, June 27, 2006, June 28, 2005, June 25,
2004 and June 30, 2003, respectively, (File No. 1-14768)                                      
|           | 
|99.2       |  | MDTE Order approving Settlement Agreement dated December 31, 2005 (NSTAR Form 8-K for the event reported December 30, 2005, dated January 4, 2006, File No. 1-14768)                                                                                                                          



102



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SCHEDULE I



CONDENSED PARENT
COMPANY FINANCIAL STATEMENTS



NSTAR (Holding Company)



Condensed Balance Sheets



|                                        |  |                |           |      |   |          
|--------------------------------------- |  | -------------- | --------- | ---- | - | ---------
|                                        |  | December 31,  
|                                        |  | 2007           |           | 2006
|                                        |  | (in thousands)
|Assets                                  |  |                |           |      |   |          
|                                        |  |               
|Current assets:                         |  |                |           |      |   |          
|Cash and cash equivalents               |  | $              | 825       |      | $ | 632      
|Notes receivable - subsidiary companies |  |                | 1,300     |      |   | 1,900    
|Other                                   |  |                | 4,086     |      |   | 3,886    
|                                        |  |               
|Other assets:                           |  |                |           |      |   |          
|Receivable - subsidiary companies       |  |                | 87,130    |      |   | 89,563   
|Investment in subsidiaries              |  |                | 2,155,512 |      |   | 2,082,909
|Other investments                       |  |                | 25,140    |      |   | 24,079   
|Accumulated deferred income taxes       |  |                | 5,184     |      |   | 9,960    
|Other deferred debits                   |  |                | 1,272     |      |   | 1,618    
|                                        |  |                |           |      |   |          
|Total assets                            |  | $              | 2,280,449 |      | $ | 2,214,547
|                                        |  |                |           |      |   |          
|Capitalization and Liabilities          |  |                |           |      |   |          
|                                        |  |               
|Current liabilities:                    |  |                |           |      |   |          
|Notes payable                           |  | $              | 4,000     |      | $ | 53,500   
|Accrued interest                        |  |                | 15,563    |      |   | 22,572   
|Dividends payable                       |  |                | 37,383    |      |   | 34,713   
|Other                                   |  |                | 46        |      |   | 2,842    
|                                        |  |               
|Other liabilities:                      |  |                |           |      |   |          
|Long-term debt                          |  |                | 499,536   |      |   | 499,318  
|Other deferred credits                  |  |                | 7,513     |      |   | 7,022    
|                                        |  |               
|Common Equity:                          |  |                |           |      |   |          
|Common shares                           |  |                | 106,808   |      |   | 106,808  
|Premium on common shares                |  |                | 818,693   |      |   | 823,468  
|Retained earnings                       |  |                | 790,907   |      |   | 664,304  
|                                        |  |                |           |      |   |          
|Total capitalization and liabilities    |  | $              | 2,280,449 |      | $ | 2,214,547
|                                        |  |                |           |      |   |          



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



103



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NSTAR (Holding Company)



Condensed Statements of Income



|                                          |  |                          |         |   |      |   |         |      |  |   |         |  
|----------------------------------------- |  | ------------------------ | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                          |  | Years ended December 31, |        
|                                          |  | 2007                     |         |   | 2006 |   |         | 2005 | 
|                                          |  | (in thousands)           |        
|Operating expenses                        |  |                          |         |   |      |   |         |      |  |   |         |  
|Administrative, general and other         |  | $                        | 4,242   |   |      | $ | 4,114   |      |  | $ | 3,835   |  
|                                          |  |                          |         |   |      |   |         |      |  |   |         |  
|Operating loss                            |  |                          | (4,242  | ) |      |   | (4,114  | )    |  |   | (3,835  | )
|                                          |  |                          |         |   |      |   |         |      |  |   |         |  
|Other income (deductions), net            |  |                          | 691     |   |      |   | 2,317   |      |  |   | 5,304   |  
|Earnings from investments in subsidiaries |  |                          | 250,750 |   |      |   | 237,197 |      |  |   | 217,629 |  
|Interest expense                          |  |                          | (46,561 | ) |      |   | (49,833 | )    |  |   | (44,032 | )
|                                          |  |                          |         |   |      |   |         |      |  |   |         |  
|Income before income taxes                |  |                          | 200,638 |   |      |   | 185,567 |      |  |   | 175,066 |  
|Income tax benefits                       |  |                          | 20,877  |   |      |   | 21,207  |      |  |   | 21,069  |  
|                                          |  |                          |         |   |      |   |         |      |  |   |         |  
|Net income                                |  | $                        | 221,515 |   |      | $ | 206,774 |      |  | $ | 196,135 |  
|                                          |  |                          |         |   |      |   |         |      |  |   |         |  



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



NSTAR (Holding Company)



Condensed
Statements of Cash Flows



|                                                         |  |                          |          |   |      |   |          |      |  |   |          |  
|-------------------------------------------------------- |  | ------------------------ | -------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                                         |  | Years ended December 31, |         
|                                                         |  | 2007                     |          |   | 2006 |   |          | 2005 | 
|                                                         |  | (in thousands)           |         
|Cash flows from operating activities:                    |  |                          |          |   |      |   |          |      |  |   |          |  
|Net cash provided by operating activities                |  | $                        | 198,174  |   |      | $ | 141,369  |      |  | $ | 68,003   |  
|                                                         |  |                          |          |   |      |   |          |      |  |   |          |  
|Cash flows from investing activities:                    |  |                          |          |   |      |   |          |      |  |   |          |  
|Net change in notes receivable                           |  |                          | 600      |   |      |   | 12,050   |      |  |   | (2,875   | )
|Investments                                              |  |                          | (469     | ) |      |   | 1,017    |      |  |   | (480     | )
|                                                         |  |                          |          |   |      |   |          |      |  |   |          |  
|Net cash provided by (used in) investing activities      |  |                          | 131      |   |      |   | 13,067   |      |  |   | (3,355   | )
|                                                         |  |                          |          |   |      |   |          |      |  |   |          |  
|Cash flows from financing activities:                    |  |                          |          |   |      |   |          |      |  |   |          |  
|Net change in notes payable                              |  |                          | (49,500  | ) |      |   | (12,500  | )    |  |   | 61,000   |  
|Dividends paid                                           |  |                          | (138,851 | ) |      |   | (129,239 | )    |  |   | (125,747 | )
|Cash received for exercise of equity options             |  |                          | 10,948   |   |      |   | 17,383   |      |  |   |         |  
|Cash used to settle equity compensation                  |  |                          | (23,247  | ) |      |   | (33,488  | )    |  |   |         |  
|Windfall tax effect of settlement of equity compensation |  |                          | 2,538    |   |      |   | 3,961    |      |  |   |         |  
|                                                         |  |                          |          |   |      |   |          |      |  |   |          |  
|Net cash used in financing activities                    |  |                          | (198,112 | ) |      |   | (153,883 | )    |  |   | (64,747  | )
|                                                         |  |                          |          |   |      |   |          |      |  |   |          |  
|Net increase (decrease) in cash and cash equivalents     |  |                          | 193      |   |      |   | 553      |      |  |   | (99      | )
|Cash and cash equivalents at the beginning of the year   |  |                          | 632      |   |      |   | 79       |      |  |   | 178      |  
|                                                         |  |                          |          |   |      |   |          |      |  |   |          |  
|Cash and cash equivalents at the end of the year         |  | $                        | 825      |   |      | $ | 632      |      |  | $ | 79       |  
|                                                         |  |                          |          |   |      |   |          |      |  |   |          |  



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



104



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##### Table of Contents

NSTAR (Holding Company)



Notes to Condensed Financial Statements



1. Basis of Presentation



NSTAR on a stand alone basis (Holding Company) has accounted for its wholly-owned subsidiaries using the equity method basis of accounting. These financial statements are
presented on a condensed basis. Additional disclosures relating to the Holding Company financial statements are included under the NSTAR Notes to Consolidated Financial Statements, which information is hereby incorporated by reference.



2. Use of Estimates



The preparation of condensed financial statements in conformity with GAAP requires estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the period. Actual results
could differ from these estimates.



3. Long-Term Debt



NSTAR (Holding Company) had $500 million of
8% Notes outstanding as of December 31, 2007 and 2006. These Notes will mature and are due in February 2010.



Refer to Note J of the NSTAR Consolidated Financial Statements for a description and details of the Holding Company long-term debt.



4. Cash Dividends Received



NSTAR (Holding Company) received $212.2 million, $130.8 million, and $126.9 million of cash
dividends from subsidiaries during 2007, 2006 and 2005, respectively.



5. Commitments, Contingencies and Guarantees



Refer to Note N of the NSTAR Consolidated Financial Statements for a description of any material commitments, contingencies or guarantees of the Holding Company.



105



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##### Table of Contents

SCHEDULE II



VALUATION AND
QUALIFYING ACCOUNTS



FOR THE YEARS ENDED DECEMBER 31,
2007, 2006 and 2005



(In Thousands)



|                                |  |                            |        |                                |   |                              |  |   |                      |  |   |        |  |   |       
|------------------------------- |  | -------------------------- | ------ | ------------------------------ | - | ---------------------------- |  | - | -------------------- |  | - | ------ |  | - | ------
|                                |  |                            |        | Additions                      |   | DeductionsAccountsWrittenOff |  |  
|Description                     |  | Balance atBeginningof Year |        | ProvisionsCharged toOperations |   | Recoveries                   |  |   | BalanceAt Endof Year
|Allowance for Doubtful Accounts |  |                            |        |                                |   |                              |  |   |                      |  |   |        |  |   |       
|Year Ended December 31, 2007    |  | $                          | 27,240 |                                | $ | 36,490                       |  | $ | 4,780                |  | $ | 39,084 |  | $ | 29,426
|Year Ended December 31, 2006    |  | $                          | 24,504 |                                | $ | 31,552                       |  | $ | 7,277                |  | $ | 36,093 |  | $ | 27,240
|Year Ended December 31, 2005    |  | $                          | 21,804 |                                | $ | 28,585                       |  | $ | 8,215                |  | $ | 34,100 |  | $ | 24,504



106



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|          |  |       |  |                  
|--------- |  | ----- |  | -----------------
|FORM 10-K |  | NSTAR |  | DECEMBER 31, 2007



SIGNATURES



Pursuant to the
requirements of Section 13 or 15(d) 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: February 11, 2008 |  |  |  | By: |  | /s/    ROBERT J. WEAFER,
JR.  
|                        |  |  |  |     |  | Robert J. Weafer, Jr.         
|                        |  |  |  |     |  | Vice President, Controller and
|                        |  |  |  |     |  | Chief Accounting Officer      



Pursuant to the
requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated as of the 11th day of February 2008.



|                                                   |  |                                                             
|-------------------------------------------------- |  | ------------------------------------------------------------
|Signature                                          |  | Title                                                       
|                                                   | 
|/s/    THOMAS J.
MAY Thomas J. May                 |  | Chairman, President, Chief Executive Officer and Trustee    
|                                                   | 
|/s/    JAMES J.
JUDGE James J. Judge               |  | Senior Vice President, Treasurer and Chief Financial Officer
|                                                   | 
|/s/    G. L.
COUNTRYMAN Gary L. Countryman         |  | Trustee                                                     
|                                                  
|                                                   | 
|/s/    DANIEL
DENNIS Daniel Dennis                 |  | Trustee                                                     
|                                                  
|                                                   | 
|/s/    THOMAS G. DIGNAN,
JR. Thomas G. Dignan, Jr. |  | Trustee                                                     
|                                                  
|                                                   | 
|/s/    CHARLES K.
GIFFORD Charles K. Gifford       |  | Trustee                                                     
|                                                  
|                                                   | 
|/s/    MATINA
HORNER Matina Horner                 |  | Trustee                                                     
|                                                  
|                                                   | 
|/s/    PAUL A. LA
CAMERA Paul A. La Camera         |  | Trustee                                                     
|                                                  
|                                                   | 
|/s/    SHERRY H.
PENNEY Sherry H. Penney           |  | Trustee                                                     
|                                                  
|                                                   | 
|/s/    WILLIAM C. VAN
FAASEN William C. Van Faasen |  | Trustee                                                     
|                                                  
|                                                   | 
|/s/    G. L.
WILSON Gerald L. Wilson               |  | Trustee                                                     
|                                                  



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