Nstar 10-Q 2005 Q2 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

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

Commission File Number:      1-14768

            NSTAR           

(Exact name of registrant as specified in its charter)

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

(617) 424-2000

(Registrant's telephone number, including area code)

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

[X] Yes [  ] No

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

[X] Yes [  ] No

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

NSTAR
Form 10-Q - Quarterly Period Ended June 30, 2005

Table of Contents

Part I.  Financial Information:				Page No.
	Item 1.	Financial Statements
			Condensed Consolidated Statements of Income	2
			Condensed Consolidated Statements of Retained Earnings	3
			Condensed Consolidated Balance Sheets	4 - 5
			Condensed Consolidated Statements of Cash Flows	6
			Notes to Condensed Consolidated Financial Statements	7 - 15
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		16 – 31
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk		31
	Item 4.	Controls and Procedures		31
Part II.  Other Information:
	Item 1.	Legal Proceedings		31-32
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		32
	Item 4.	Submission of Matters to a Vote of Security Holders		32
	Item 6.	Exhibits		33
Signature				34
Important Shareholder Information
NSTAR files its Forms 10-K, 10-Q and 8-K reports, proxy statements and other information with the Securities and Exchange Commission (SEC).  You may access materials NSTAR has filed with the SEC on the SEC’s website 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, and a Code of Ethics and Business Conduct for Directors, Officers and Employees.  NSTAR’s SEC filings and Corporate Governance documents, including charters, guidelines and codes, and any amendments to such charters, guidelines and codes that are applicable to NSTAR’s executive officers, senior financial officers or trustees can be accessed free of charge on NSTAR’s website at www.nstaronline.com.  Copies of NSTAR’s SEC filings may also be obtained by writing or calling NSTAR’s Investor Relations Department at One NSTAR Way, Westwood, MA 02090 or (781) 441-8100.

Part I.  Financial Information
Item 1.  Financial Statements

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

	Three Months Ended							Six Months Ended
		June 30,						June 30,
		2005			2004			2005			2004
Operating revenues	$	692,005		$	649,787		$	1,572,050		$	1,459,695
Operating expenses:
Purchased power and cost of gas sold		357,531			346,721			879,530			817,791
Operations and maintenance		111,327			103,156			231,410			209,651
Depreciation and amortization		84,849			61,057			159,592			126,596
Demand side management and renewable energy programs		15,696			15,598			33,365			33,068
Property and other taxes		25,367			25,016			54,987			53,773
Income taxes		21,147			24,832			50,946			57,902
Total operating expenses		615,917			576,380			1,409,830			1,298,781
Operating income		76,088			73,407			162,220			160,914
Other income (deductions):
Other income, net		1,332			3,211			2,241			4,174
Other deductions, net		(377	)		(273	)		(570	)		(417	)
Total other income, net		955			2,938			1,671			3,757
Interest charges:
Long-term debt		29,986			29,352			60,688			58,289
Transition property securitization		12,696			7,174			21,385			14,757
Short-term debt and other		1,697			2,100			2,939			4,028
Allowance for borrowed funds used during
construction (AFUDC)		(977	)		(296	)		(1,521	)		(624	)
Total interest charges		43,402			38,330			83,491			76,450
Preferred stock dividends of subsidiary		490			490			980			980
Net income	$	33,151 ======		$	37,525 =====		$	79,420 ======		$	87,241 ======
Weighted average common shares outstanding:
Basic		106,767 ======			106,169 =====			106,702 ======			106,117 ======
Diluted		107,567 ======			107,165 =====			107,481 ======			107,067 ======
Earnings per common share (Note G):
Basic	$	0.31 =====		$	0.35 =====		$	0.74 =====		$	0.82 =====
Diluted	$	0.31 =====		$	0.35 =====		$	0.74 =====		$	0.81 =====
Dividends declared per common share	$	0.29 =====		$	0.2775 =====		$	0.58 =====		$	0.555 =====

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

NSTAR
Condensed Consolidated Statements of Retained Earnings
(Unaudited)
(in thousands)

	Three Months Ended					Six Months Ended
		June 30,				June 30,
		2005		2004		2005		2004
Balance at the beginning of the period	$	533,581	$	469,397	$	518,252	$	449,114
Add:
Net income		33,151		37,525		79,420		87,241
Subtotal		566,732		506,922		597,672		536,355
Deduct:
Dividends declared:
Common shares		30,973		29,481		61,913		58,914
Balance at the end of the period	$	535,759 ======	$	477,441 =====	$	535,759 ======	$	477,441 ======

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

NSTAR
Condensed Consolidated Balance Sheets
(Unaudited)
(in thousands) 

						June 30,			December 31,
						2005			2004
Assets
Utility plant in service, at original cost				$		4,481,312	$		4,412,073
	Less: accumulated depreciation					1,108,322			1,090,924
						3,372,990			3,321,149
Construction work in progress						153,230			103,866
	Net utility plant					3,526,220			3,425,015
Non-utility property, net						149,669			154,963
Goodwill						420,744			426,870
Equity and other investments						75,295			72,983
Current assets:
	Cash and cash equivalents					11,085			12,497
	Restricted cash					18,681			10,254
	Accounts receivable, net and accrued unbilled revenues					380,619			355,946
	Regulatory assets					366,945			280,078
	Inventory, at average cost					74,688			86,397
	Income taxes					169,185			21,063
	Other					12,050			11,434
			Total current assets			1,033,253			777,669
Deferred debits:
		Regulatory assets - power contracts				741,539			1,269,651
		Regulatory assets - retiree benefit costs				3,220			11,897
		Regulatory assets - other				1,006,233			595,140
		Prepaid pension				315,796			297,746
		Other				82,470			85,295
		Total deferred debits				2,149,258			2,259,729
Total assets					$	7,354,439 ========		$	7,117,229 ========

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

NSTAR
Condensed Consolidated Balance Sheets
(Unaudited)
(in thousands)

		June 30,			December 31,
		2005			2004
Capitalization and Liabilities
Common equity:
Common shares, par value $1 per share,
200,000,000 shares authorized; 106,808,376 shares in 2005 and
106,550,282 shares in 2004 issued and outstanding (Note G)	$	106,808		$	106,550
Premium on common shares		815,965			819,454
Retained earnings		535,759			518,252
Accumulated other comprehensive loss		(3,374	)		(3,374	)
Total common equity		1,455,158			1,440,882
Cumulative non-mandatory redeemable preferred
stock of subsidiary		43,000			43,000
Long-term debt		1,638,671			1,792,654
Transition property securitization		864,188			308,748
Total long-term debt		2,502,859			2,101,402
Total capitalization		4,001,017			3,585,284
Current liabilities:
Long-term debt		109,150			108,197
Transition property securitization		108,735			41,048
Notes payable		239,400			161,400
Deferred income taxes		6,707			8,072
Accounts payable		199,273			239,613
Power contracts		174,478			171,312
Accrued expenses		271,820			231,490
Total current liabilities		1,109,563			961,132
Deferred credits:
Accumulated deferred income taxes and unamortized
investment tax credits		1,036,516			840,461
Power contracts		738,179			1,269,651
Pension liability		32,210			31,296
Regulatory liability - cost of removal		263,713			258,722
Other		173,241			170,683
Total deferred credits		2,243,859			2,570,813
Commitments and contingencies
Total capitalization and liabilities	$	7,354,439 =======		$	7,117,229 ========

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

NSTAR
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)

		Six Months Ended
		June 30,
		2005				2004
Operating activities:
Net income	$	79,420			$	87,241
Adjustments to reconcile net income to net cash				��
(used in) provided by operating activities:
Depreciation and amortization		160,200				126,983
Deferred income taxes		198,497				51,829
AFUDC		(1,521	)			(624	)
Effects of purchase power contract buy-outs		(554,270	)			-
Net changes in:
Accounts receivable and accrued unbilled revenues		(24,673	)			(9,217	)
Accounts payable		(25,247	)			(16,734	)
Other current assets		(207,512	)			(11,106	)
Other current liabilities		42,057				69,011
Net change from other operating activities		41,508				(114,644	)
Net cash (used in) provided by operating activities		(291,541	)			182,739
Investing activities:
Plant expenditures (excluding AFUDC)		(169,350	)			(120,304	)
(Increase) decrease in restricted cash		(8,427	)			2,911
Proceeds from sale of property		-				14,252
Investments		(2,303	)			(3,290	)
Net cash used in investing activities		(180,080	)			(106,431	)
Financing activities:
Long-term debt redemptions		(153,636	)			(184,519	)
Transition property securitization redemptions		(51,375	)			(35,317	)
Issuance of transition property securitization		674,500				-
Issuance of long-term debt		-				300,000
Debt issue costs		(6,513	)			(1,851	)
Net change in notes payable		78,000				(79,500	)
Change in disbursement accounts		(15,093	)			(3,983	)
Common stock issuance		7,146				-
Dividends paid		(62,820	)			(59,846	)
Net cash provided by (used in) financing activities		470,209				(65,016	)
Net (decrease) increase in cash and cash equivalents		(1,412	)			11,292
Cash and cash equivalents at the beginning of the year		12,497				16,526
Cash and cash equivalents at the end of the period	$	11,085 =======			$	27,818 =======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest, net of amounts capitalized	$	79,259			$	73,460
Income taxes, net of refunds	$	4,995			$	18,710

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

Notes to Condensed Consolidated Financial Statements
(Unaudited)

The accompanying notes should be read in conjunction with Notes to Consolidated Financial Statements included in NSTAR’s 2004 Annual Report on Form 10-K.

Note A.  Business Organization and Summary of Significant Accounting Policies

1.  About NSTAR

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

2.  Basis of Consolidation and Accounting

The financial information presented as of June 30, 2005 and for the three and six-month periods ended June 30, 2005 and 2004 have been prepared from NSTAR’s books and records without audit by an independent registered public accounting firm.  However, NSTAR’s independent registered public accounting firm has performed a review of these interim financial statements in accordance with standards established by the Public Company Accounting Oversight Board (United States).  Financial information as of December 31, 2004 was derived from the audited consolidated financial statements of NSTAR, but does not include all disclosures required by accounting principles generally accepted in the United States of America (GAAP).  In the opinion of NSTAR’s management, all adjustments (which are of a normal recurring nature) necessary for a fair presentation of the financial information for the periods indicated have been included.  Certain immaterial reclassifications have been made to the prior year amounts to conform with the current presentation.

The utility subsidiaries are subject to the Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 71, “Accounting for the Effects of Certain Types of Regulation” (SFAS 71).  The application of SFAS 71 results in differences in the timing of recognition of certain expenses from those of other businesses and industries.  The distribution and transmission businesses remain subject to rate-regulation and continue to meet the criteria for application of SFAS 71.

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

The results of operations for the three and six-month periods ended June 30, 2005 and 2004 are not indicative of the results that may be expected for an entire year.  Electric energy sales and revenues are typically higher in the winter and summer months than in the spring and fall months, as sales tend to vary with weather conditions.  Natural gas energy sales and revenues are typically higher in the winter months than during other periods of the year.

3.  Stock Option Accounting

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

	Three Months Ended							Six Months Ended
		June 30,						June 30,
(in thousands, except earnings per common share amounts)		2005			2004			2005			2004
Net income, as reported	$	33,151		$	37,525		$	79,420		$	87,241
Add: Share grant incentive compensation expense included
in reported net income, net of related tax effects		719			661			1,406			1,219
Deduct: Total share grant and stock option compensation
expense determined under fair value method for all
awards, net of related tax effects		(888	)		(869	)		(1,767	)		(1,606	)
Pro forma net income	$	32,982 =====		$	37,317 =====		$	79,059 =====		$	86,854 =====
Earnings per common share:
Basic - as reported	$	0.31		$	0.35		$	0.74		$	0.82
Basic - pro forma	$	0.31		$	0.35		$	0.74		$	0.82
Diluted - as reported	$	0.31		$	0.35		$	0.74		$	0.81
Diluted - pro forma	$	0.31		$	0.35		$	0.74		$	0.81

4.  Pension and Other Postretirement Benefits

Pension

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

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

Components of net periodic pension benefit cost were as follows:

	Three Months Ended							Six Months Ended
		June 30,						June 30,
(in millions)		2005			2004			2005			2004
Service cost	$	5.2		$	4.8		$	10.3		$	9.5
Interest cost		14.4			15.0			28.8			30.1
Expected return on Plan assets		(18.6	)		(17.7	)		(37.2	)		(35.4	)
Amortization of transition obligation		-			0.1			-			0.2
Amortization of prior service cost		-			-			0.1			0.1
Recognized actuarial loss		6.6			6.8			13.1			13.4
Net periodic pension benefit cost	$	7.6 =====		$	9.0 =====		$	15.1 =====		$	17.9 ======

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

Other Postretirement Benefits

NSTAR also provides health care and other benefits to retired employees who meet certain age and years of service eligibility requirements.  Under certain circumstances, eligible retirees are required to contribute for postretirement benefits.  During the first six months of 2005, NSTAR contributed approximately $6 million toward these benefits.  The Company anticipates contributing an additional $14 million for these benefits over the remaining six months of 2005.

Components of net periodic postretirement benefits cost were as follows:

	Three Months Ended							Six Months Ended
		June 30,						June 30,
(in millions)		2005			2004			2005			2004
Service cost	$	1.4		$	1.5		$	2.8		$	2.9
Interest cost		8.3			8.3			16.7			16.7
Expected return on Plan assets		(6.3	)		(5.9	)		(12.5	)		(11.9	)
Amortization of transition obligation		0.3			0.5			0.6			0.9
Amortization of prior service cost		0.1			0.3			0.1			0.6
Recognized actuarial loss		2.8			2.4			5.6			4.8
Net periodic postretirement benefit cost	$	6.6 =====		$	7.1 ====		$	13.3 =====		$	14.0 ====

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

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

In May 2004, the FASB provided guidance on the accounting for the effects of the Act. The guidance requires that, when an employer initially accounts for the effects of the Act, the impact on the accumulated postretirement benefits obligation (APBO) should be accounted for as an actuarial gain (assuming, no plan amendments are made).  In accordance with this provision, NSTAR's APBO was reduced by approximately $51 million in 2004.  In addition, since the subsidy affects the employer'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. NSTAR's adoption of the accounting guidance resulted in a reduction to the net periodic postretirement benefit cost of approximately $7 million in 2004 and is reflected as a component of net periodic postretirement benefits costs above.  As required, the Company restated its net periodic postretirement benefits cost for the first two quarters of 2004.  However, due to the Company's pension and other postretirement benefits rate reconciliation adjustment mechanism that went into effect on September 1, 2003, this reduction in cost does not have a material impact on earnings.

5.  New Accounting Standards

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

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

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

Note B.  Cost of Removal

For NSTAR’s regulated utility businesses, the ultimate cost to remove utility plant from service (cost of removal) is recognized as a component of depreciation expense in accordance with approved regulatory treatment.  As of June 30, 2005 and December 31, 2004, the estimated amount of the cost of removal included in regulatory liabilities was approximately $264 million and $259 million, respectively, based on the cost of removal component in current depreciation rates.

Note C.  Derivative Instruments - Power Contracts

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

Note D.  Variable Interest Entities

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

Note E.  Service Quality Indicators

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

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

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

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

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

Note F.  Income Taxes

Income taxes are accounted for in accordance with SFAS No. 109, “Accounting for Income Taxes” (SFAS 109).  SFAS 109 requires the recognition of deferred tax assets and liabilities for the future tax effects of 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 $49.8 million and $50.3 million and corresponding net increases in accumulated deferred income taxes were recorded as of June 30, 2005 and December 31, 2004, respectively.  The regulatory assets represent the additional future revenues to be collected from customers for deferred income taxes.

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

	2005		2004
Statutory tax rate	35.0	%	35.0	%
State income tax, net of federal income tax benefit	5.0		3.9
Investment tax credits	(0.6	)	(0.6	)
Other	0.2		0.4
Effective tax rate	39.6 =====	%	38.7 =====	%

Note G.  Capital Stock

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

Note H.  Earnings Per Common Share

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

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

	Three Months Ended					Six Months Ended
		June 30,				June 30,
(in thousands, except per share amounts)		2005		2004		2005		2004
Net income	$	33,151	$	37,525	$	79,420	$	87,241
Basic EPS	$	0.31	$	0.35	$	0.74	$	0.82
Diluted EPS	$	0.31	$	0.35	$	0.74	$	0.81
Weighted average common shares
outstanding for basic EPS		106,767		106,169		106,702		106,117
Effect of diluted shares:
Weighted average dilutive potential common shares		800		996		779		950
Weighted average common shares outstanding for diluted EPS		107,567 =====		107,165 =====		107,481 =====		107,067 =====

Note I.  Securitization

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

Note J.  Segment and Related Information

For the purpose of providing segment information, NSTAR’s principal operating segments, or its traditional core businesses, are the electric and natural gas utilities that provide energy delivery services in 107 cities and towns in Massachusetts.  The unregulated operating segment engages in business activities that include district energy operations, telecommunications and a liquefied natural gas service.  Amounts shown on the following table for the three and six-month periods ended June 30, 2005 and 2004 include the allocation of costs incurred by NSTAR, which primarily consists of interest charges and are allocated to the subsidiary companies based on NSTAR's investment relating to these various business segments.

Financial data for the operating segments were as follows:

		Utility Operations						Unregulated			Consolidated
(in thousands)		Electric			Gas			Operations			Total
Three months ended June 30,
2005
Operating revenues	$	575,018	$	84,400			$		32,587	$		692,005
Segment net income (loss)	$	31,912	$	(2,065		)	$		3,304	$		33,151
2004
Operating revenues	$	558,777	$	70,496			$		20,514	$		649,787
Segment net income (loss)	$	36,542	$	(1,288		)	$		2,271	$		37,525
Six months ended June 30,
2005
Operating revenues	$	1,206,915	$	298,085			$		67,050	$		1,572,050
Segment net income	$	58,194	$	17,368			$		3,858	$		79,420
2004
Operating revenues	$	1,119,999	$	282,197			$		57,499	$		1,459,695
Segment net income	$	63,704	$	18,957			$		4,580	$		87,241
Total assets
June 30, 2005	$	6,529,525	$	619,687			$		205,227	$		7,354,439
December 31, 2004	$	6,259,216	$	656,554			$		201,459	$		7,117,229

Note K.  Commitments and Contingencies

1.  Environmental Matters

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

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

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

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

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

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

2.  Capital Spending Commitments

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

3.  Regulatory and Legal Matters

a.  Regulatory matters

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

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

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

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

b.  Locational Installed Capacity (LICAP)

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

c.  Legal Matters

In the normal course of its business, NSTAR and its subsidiaries are involved in certain legal matters, including civil litigations.  Management is unable to fully determine a range of reasonably possible court-ordered damages, settlement amounts, and related litigation costs (“legal liabilities”) that would be in excess of amounts accrued and amounts covered by insurance, except for the item disclosed in Note K, Part 1, “Environmental Matters.”  Based on the information currently available, NSTAR does not believe that it is probable that any such legal liabilities will have a material impact on its consolidated financial position.  However, it is reasonably possible that additional legal liabilities that may result from changes in circumstances could have a material impact on its results of operations, cash flows and financial condition for a reporting period.

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

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

Executive Overview

NSTAR (or the Company) is a holding company engaged in the energy delivery business serving approximately 1.4 million customers in Massachusetts, including approximately 1.1 million electric distribution customers in 81 communities and approximately 300,000 natural gas distribution customers in 51 communities.  NSTAR's core business is a traditional “pipes and wires” company with a continuing focus on shareholder value and consistent energy delivery to our customers.  NSTAR’s strategy is to invest in transmission and distribution assets that will align with its core competencies.

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

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

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

Earnings.  NSTAR’s earnings are impacted by fluctuations in unit sales of electric kWh and gas MMbtu, which directly determine the level of distribution and transmission 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.

Net income for the quarter and six-month periods ended June 30, 2005 amounted to $33.2 million and $79.4 million, or $0.31 and $0.74 per diluted earnings per share as compared to $37.5 million and $87.2 million, or $0.35 and $0.81 per diluted earnings per share for the same periods in 2004.

Cautionary Statement

The MD&A, as well as other portions of this report, contain statements that are considered forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934.  These forward-looking statements may also be contained in other filings with the Securities and Exchange Commission (SEC), in press releases and oral statements.  You can identify these statements by the fact that they do not relate strictly to historical or 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:

   -    impact of continued cost control procedures on operating results

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

   -    changes in tax laws, regulations and rates

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

   -    prices and availability of operating supplies

   -    prevailing governmental policies and regulatory actions (including those of the Massachusetts Department of Telecommunications and Energy (MDTE) and Federal Energy Regulatory Commission (FERC) with respect to allowed rates of return, rate structure, continued recovery of regulatory assets, financings, purchased power, acquisition and disposition of assets, operation and construction of facilities, changes in tax laws and policies and changes in, and compliance with, environmental and safety laws and policies  

   -    changes in financial accounting and reporting standards

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

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

   -    impact of union contract negotiations

   -    impact of uninsured losses

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

   -    future economic conditions in the regional and national markets

   -    ability to maintain current credit ratings, and

   -    the impact of terrorist acts

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

Critical Accounting Policies and Estimates

For a complete discussion of critical accounting policies, refer to “Critical Accounting Policies and Estimates” in Item 7 of NSTAR’s 2004 Form 10-K.  There have been no substantive changes to those policies and estimates.

Rate Structure

a.  Retail Electric Rates

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

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

b.  Natural Gas Rates

NSTAR Gas generates revenues primarily through the sale and/or transportation of natural gas.  Gas sales and transportation services are divided into two categories: firm, whereby NSTAR Gas must supply gas and/or 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 Cost of Gas Adjustment Clause (CGAC) and a Local Distribution Adjustment Clause (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 MDTE.  The LDAC is filed annually for approval.  In addition, NSTAR Gas is required to file interim changes to its CGAC factor when the actual costs of gas supply vary from projections by more than 5%.

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

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

c.  Service Quality Indicators

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

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

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

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

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

Union Contract

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

Results of Operations

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

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

Overview

Earnings per common share were as follows:

	Three Months ended June 30,
		2005		2004	% Change
Basic	$	0.31	$	0.35	(11.4)
Diluted	$	0.31	$	0.35	(11.4)

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

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

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

  -   Increased property tax expense and interest costs due to higher rates

These decreases were partially offset by:

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

  -   Increased gas sales due to cooler weather

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

Energy sales and weather

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

Retail Electric Sales - MWH	Three Months ended June 30,
		2005	2004	% Change
Residential		1,488,683	1,480,173	0.6
Commercial		3,075,564	3,098,476	(0.7)
Industrial		406,522	420,671	(3.4)
Other		35,451	35,859	(1.1)
Total retail sales		5,006,220 =======	5,035,179 =======	(0.6) ===

Firm Gas Sales - BBTU	Three Months ended June 30,
		2005	2004	% Change
Residential		3,135	2,905	7.9
Commercial and other		3,037	2,801	8.4
Industrial		1,136	1,185	(4.1)
Total firm sales		7,308 =======	6,891 =======	6.1 ===

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

In terms of customer sector characteristics, industrial sales are less sensitive to weather than residential and commercial sales, which are influenced by temperature extremes.  The overall cooler spring weather in the second quarter of 2005, contributed to decreased energy use.  Electric residential and commercial customers represented approximately 29.7% and 61.4%, respectively, of NSTAR’s total retail sales mix for the second quarter of 2005 and provided 40.7% and 52.9% 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 and sales to these customers reflect a sluggish economic environment and decreased manufacturing production.

			Normal
			30-Year
	2005	2004	Average
Heating degree-days	876	788	847
Percentage colder (warmer) than prior year	11.2%	(23.3)%
Percentage colder (warmer) than 30-year average	3.4%	(7.0)%
Cooling degree-days	182	131	175
Percentage warmer than prior year	38.9%	35.1%
Percentage warmer (cooler) than 30-year average	4.0%	(25.6)%

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

Operating revenues

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

(in millions)	Three Months Ended June 30,						Increase/(Decrease)
			2005		2004	Amount			Percent
Electric revenues
Retail distribution and transmission		$	203.9	$	208.0	$	(4.1	)		(2.0	)
Energy, transition and other			368.3		346.6		21.7			6.3
Total retail			572.2		554.6		17.6			3.2
Wholesale			2.8		4.2		(1.4	)		(33.3	)
Total electric revenues			575.0		558.8		16.2			2.9
Gas revenues
Firm and transportation			25.2		23.0		2.2			9.6
Energy supply and other			59.2		47.5		11.7			24.6
Total gas revenues			84.4		70.5		13.9			19.7
Unregulated operations revenues			32.6		20.5		12.1			59.0
Total operating revenues		$	692.0 ====	$	649.8 ====	$	42.2 ===			6.5 ====

  Electric revenues

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

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

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

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

  Gas revenues

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

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

Operating expenses

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

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

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

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

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

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

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

Other income, net

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

Interest charges

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

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

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

-    Higher rates on variable rate debt

These increases were partially offset by:

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

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

Results of Operations

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

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

Overview

Earnings per common share were as follows:

	Six Months ended June 30,
		2005		2004	% Change
Basic	$	0.74	$	0.82	(9.8)
Diluted	$	0.74	$	0.81	(8.6)

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

  -   Higher operations and maintenance expense due to costs associated with:

  -    severe winter storms (approximately $5.4 million)

  -   costs associated with facilities consolidation (approximately $3.3 million)

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

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

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

  -   Increased property tax expense

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

These decreases were partially offset by:

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

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

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

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

Energy sales and weather

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

Retail Electric Sales - MWH	Six Months ended June 30,
		2005	2004	% Change
Residential		3,212,446	3,245,799	(1.0)
Commercial		6,291,046	6,234,092	0.9
Industrial		802,027	813,856	(1.5)
Other		80,707	82,923	(2.7)
Total retail sales		10,386,226 =======	10,376,670 =======	0.1 ===

Firm Gas Sales - BBTU	Six Months ended June 30,
		2005	2004	% Change
Residential		13,926	14,595	(4.6)
Commercial and other		11,323	11,366	(0.3)
Industrial		3,031	3,013	0.6
Total firm sales		28,280 =======	28,974 =======	(2.4) ===

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

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

			Normal
			30-Year
	2005	2004	Average
Heating degree-days	3,868	3,929	3,822
Percentage warmer than prior year	(1.6)%	(7.4)%
Percentage colder than 30-year average	1.2%	1.8%
Cooling degree-days	182	131	176
Percentage warmer than prior year	38.9%	35.1%
Percentage warmer (cooler) than 30-year average	3.4%	(25.6)%

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

Operating revenues

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

(in millions)	Six Months Ended June 30,						Increase/(Decrease)
			2005		2004	Amount			Percent
Electric revenues
Retail distribution and transmission		$	392.8	$	400.2	$	(7.4	)		(1.8	)
Energy, transition and other			808.4		710.8		97.6			13.7
Total retail			1,201.2		1,111.0		90.2			8.1
Wholesale			5.7		9.0		(3.3	)		(36.7	)
Total electric revenues		��	1,206.9		1,120.0		86.9			7.8
Gas revenues
Firm and transportation			89.0		89.0		-			-
Energy supply and other			209.1		193.2		15.9			8.2
Total gas revenues			298.1		282.2		15.9			5.6
Unregulated operations revenues			67.1		57.5		9.6			16.7
Total operating revenues		$	1,572.1 =====	$	1,459.7 =====	$	112.4 ===			7.7 ===

  Electric revenues

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

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

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

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

Gas revenues

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

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

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

  Unregulated operations revenues

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

Operating expenses

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

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

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

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

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

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

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

Other income, net

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

Interest charges

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

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

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

-    Higher rates on variable rate debt

These increases were partially offset by:

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

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

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

Liquidity and Capital Resources

     Current Cash Flow Activity

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

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

     Operating Activities

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

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

     Investing Activities

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

     Financing Activities

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

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

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

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

Sources of Additional Capital and Financial Covenant Requirements

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

NSTAR has a five-year, $175 million revolving credit agreement that expires in November 2009.  At June 30, 2005 and December 31, 2004, there were no amounts outstanding under the revolving credit agreement. This credit facility serves as a backup to NSTAR's $175 million commercial paper program that, at June 30, 2005 and December 31, 2004, had $27.5 million and $5 million outstanding, respectively. Under the terms of the credit agreement, NSTAR is required to maintain a maximum total consolidated debt to total capitalization ratio of not greater than 65% at all times, excluding Transition Property Securitization Certificates, and excluding Accumulated other comprehensive income (loss) from common equity.  Commitment fees must be paid on the total agreement amount. At June 30, 2005 and December 31, 2004, NSTAR was in full compliance with the aforementioned covenant as the ratios were 57.1% and 58.3% respectively.

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

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

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

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

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

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.

Item 3.  Quantitative and Qualitative Disclosure about Market Risk

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

Item 4.  Controls and Procedures

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

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

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

Part II.  Other Information

Item 1.  Legal Proceedings

In the normal course of its business, NSTAR and its subsidiaries are involved in certain legal matters, including civil litigation.  Management is unable to fully determine a range of reasonably possible court-ordered damages, settlement amounts, and related litigation costs (“legal liabilities”) that would be in excess of amounts accrued and amounts covered by insurance, except for the item disclosed in the Condensed Consolidated Financial Statements, Note K, Part 1, “Environmental Matters”.  Based on the information currently available, NSTAR does not believe that it is probable that any such legal liability will have a material impact on its consolidated financial position.  However, it is reasonably possible that additional legal liabilities that may result from changes in estimates could have a material impact on its results of operations, cash flows and financial condition for a reporting period.

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

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

	Total Number of Common Shares   Purchased	Average Price   Paid Per Share
April	107,400	$27.06
May	92,238	$27.89
June	18,587	$29.83

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

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

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

	Votes For	Votes Withheld
Charles K. Gifford	43,379,672	798,186
Paul A. La Camera	43,418,326	759,532
Sherry H. Penney	43,379,522	798,336
William C. Van Faasen	43,411,760	766,097

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

For	Against	Abstain
43,579,005	305,441	293,412

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

For	Against	Abstain
42,226,127	1,546,978	404,753

Item 6.  Exhibits

Exhibit filed herewith:
Exhibit	3i	-	Articles of Incorporation
	3.1		Declaration of Trust of NSTAR (dated as of April 20, 1999, as amended April 28, 2005)
Exhibit	4	-	Instruments Defining the Rights of Security Holders, Including Indentures
		-	Management agrees to furnish to the Securities and Exchange Commission, upon request, a copy of any agreement or instrument defining the rights of holders of any long-term debt whose authorization does not exceed 10% of total assets.
Exhibits filed herewith:
Exhibit	15	-	Letter Re Unaudited Interim Financial Information
	15.1		PricewaterhouseCoopers LLP Awareness Letter
Exhibit	31	-	Rule 13a - 15/15d-15(e) Certifications
	31.1		Certification Statement of Chief Executive Officer of NSTAR pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	31.2		Certification Statement of Chief Financial Officer of NSTAR pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit	32	-	Section 1350 Certifications
	32.1		Certification Statement of Chief Executive Officer of NSTAR pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
	32.2		Certification Statement of Chief Financial Officer of NSTAR pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit	99	-	Additional Exhibits
	99.1		Report of Independent Registered Public Accounting Firm

SIGNATURE

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

	NSTAR
	(Registrant)
Date: August 1, 2005	By:   /s/ R.J. WEAFER, JR.
	Robert J. Weafer, Jr. Vice President, Controller and Chief Accounting Officer