NSTAR Electric Company PFD 4.25% 10Q 2007 Q3 Quarterly report

NSTAR Electric Company PFD 4.25% (NSARP) 10-Q2007 Q3 Quarterly report

Content analysis

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 September 30, 2007
		or
[ ]		Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
		For the transition period from to


Commission File Number:	1-2301

NSTAR Electric Company

(Exact name of registrant as specified in its charter)



Massachusetts		04-1278810
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

800 Boylston Street, Boston, Massachusetts		02199
(Address of principal executive offices)		(Zip code)

(617) 424-2000

(Registrant's telephone number, including area code)

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


	[X]	Yes		[ ]	No

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


Large accelerated filer	[ ]			Accelerated filer	[ ]		Non-accelerated filer		[ X ]

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


	[ ]	Yes		[ X ]	No

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


Class	Outstanding at November 7, 2007
Common Stock, $1 par value	100 shares

The Company meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q as a wholly-owned subsidiary and is therefore filing this Form 10-Q with the reduced disclosure format.

NSTAR Electric Company

Form 10-Q - Quarterly Period Ended September 30, 2007

Table of Contents


				Page No.
Glossary of Terms				2

Cautionary Statement Regarding Forward-Looking Information				3

Part I. Financial Information:

	Item 1.	Financial Statements

			Condensed Consolidated Statements of Income	4
			Condensed Consolidated Statements of Retained Earnings	5
			Condensed Consolidated Balance Sheets	6 - 7
			Condensed Consolidated Statements of Cash Flows	8
			Notes to Condensed Consolidated Financial Statements	9 - 17

	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations		17 - 31

	Item 4.	Controls and Procedures		31 - 32

Part II. Other Information:

	Item 1.	Legal Proceedings		32

	Item 1A.	Risk Factors		32

	Item 5.	Other Information		32

	Item 6.	Exhibits		33

	Signature			34



Important Shareholder Information

NSTAR Electric files its Forms 10-K, 10-Q and 8-K reports and other information with the Securities and Exchange Commission (SEC). You may access materials NSTAR Electric has filed with the SEC on the SEC's website at www.sec.gov. NSTAR Electric is a wholly owned subsidiary of NSTAR. NSTAR Electric is subject to the NSTAR Board of Trustees Corporate Guidelines on Significant Corporate Governance Issues, a Code of Ethics for the Principal Executive Officer, General Counsel, and Senior Financial Officers pursuant to Section 406 of the Sarbanes-Oxley Act of 2002, and a Code of Ethics and Business Conduct for Directors, Officers and Employees. These codes and amendments to such codes which are applicable to NSTAR Electric's executive officers, senior officers, senior financial officers or directors can be accessed free of charge on NSTAR Electric's website at www.nstar.com. Copies of NSTAR Electric'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) 441-8338. The certifications of NSTAR Electric's Chief Executive Officer and Chief Financial Officer pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 are attached to this Quarterly Report on Form 10-Q as Exhibits 31.1, 31.2, 32.1 and 32.2.

Glossary of Terms

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


NSTAR Companies
NSTAR		NSTAR (Parent company) or NSTAR and its subsidiaries (as the context requires)
NSTAR Electric		NSTAR Electric Company, f.k.a. Boston Edison Company
NSTAR Gas		NSTAR Gas Company
NSTAR Electric & Gas		NSTAR Electric & Gas Corporation

Regulatory and Other Authorities
AG		Attorney General of the Commonwealth of Massachusetts
CUC		Commonwealth Utilities Commission
DPU		Massachusetts Department of Public Utilities (Prior to April 11, 2007, the DPU was known as the MDTE. The Company uses the acronym DPU interchangeably throughout this report to refer to both the current DPU and former MDTE.)
FASB		Financial Accounting Standards Board
FERC		Federal Energy Regulatory Commission
IRS		U.S. Internal Revenue Service
ISO-NE		ISO (Independent System Operator) - New England Inc.
MDTE		Massachusetts Department of Telecommunications and Energy (now known as DPU)
PCAOB		Public Company Accounting Oversight Board (United States)
SEC		Securities and Exchange Commission

Other
AFUDC		Allowance for Funds Used During Construction
CPSL		Capital Projects Scheduling List
DSM		Demand-Side Management
FIN		FASB Interpretation Number
GAAP		Accounting principles generally accepted in the United States of America
MD&A		Management's Discussion and Analysis of Financial Condition and Results of Operations
MWh		Megawatthour (equal to one million watthours)
MW		Megawatts
NEMA		Northeastern Massachusetts
OATT		Open Access Transmission Tariff
PBR		Performance-based distribution rates
RMR		Reliability Must Run
SFAS		Statement of Financial Accounting Standards
SIP		Simplified Incentive Plan
SQI		Service Quality Indicators
SSCM		Simplified Service Cost Method

Cautionary Statement Regarding Forward-Looking Information

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

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


·	financial market conditions including, but not limited to, changes in interest rates and the availability and cost of capital
·	weather conditions that directly influence the demand for electricity and impact from major storms
·	future economic conditions in the regional and national markets
·	changes to prevailing local, state and federal governmental policies and regulatory actions (including those of the DPU and FERC) with respect to allowed rates of return, rate structure, continued recovery of regulatory assets and energy costs, financings, municipalization acquisition and disposition of assets, operation and construction of facilities, changes in tax laws and policies and changes in, and compliance with, environmental and safety laws and policies
·	new governmental regulations or changes to existing regulations that impose additional operating requirements or liabilities
·	changes in available information and circumstances regarding legal issues and the resulting impact on our estimated litigation costs
·	impact of continued cost control procedures on operating results
·	ability to maintain current credit ratings
·	impact of uninsured losses
·	impact of union contract negotiations
·	impact of conservation measures and self-generation by our customers
·	changes in financial accounting and reporting standards
·	changes in specific hazardous waste site conditions and the specific cleanup technology
·	prices and availability of operating supplies
·	the impact of terrorist acts
·	impact of performance service quality measures

Any forward-looking statement speaks only as of the date of this filing and NSTAR Electric 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 Electric makes in its filings to the SEC. Other factors in addition to those listed here could also adversely affect NSTAR Electric. This Quarterly Report also describes material contingencies and critical accounting policies and estimates in the accompanyingMD&A and in the accompanyingNotes to Condensed Consolidated Financial Statements and NSTAR Electric encourages a review of these items.

Table of Contents

Part I. Financial Information

Item 1. Financial Statements

NSTAR Electric Company

Condensed Consolidated Statements of Income

(Unaudited)

(in thousands)


		Three Months Ended						Nine Months Ended
		September 30,						September 30,
		2007			2006			2007			2006

Operating revenues	$	721,113		$	865,619		$	2,013,154		$	2,293,078

Operating expenses:
Purchased power and transmission		346,609			503,101			1,048,250			1,357,464
Operations and maintenance		84,608			81,854			246,827			237,267
Depreciation and amortization		82,529			80,722			247,663			242,165
DSM and renewable energy programs		17,796			17,886			49,624			49,286
Property and other taxes		19,820			20,521			58,714			60,624
Income taxes		57,743			50,858			111,680			101,424

Total operating expenses		609,105			754,942			1,762,758			2,048,230

Operating income		112,008			110,677			250,396			244,848

Other income (deductions):
Other income, net		1,359			1,411			5,710			6,375
Other deductions, net		(67	)		(164	)		(610	)		(454	)
Total other income, net		1,292			1,247			5,100			5,921

Interest expense (income):
Long-term debt		15,358			17,398			46,215			49,846
Transition property securitization		9,037			11,122			28,182			34,552
Short-term debt and other, net		(2,859	)		3,194			2,047			5,061
AFUDC		(1,152	)		(2,064	)		(3,229	)		(5,115	)
Total interest charges		20,384			29,650			73,215			84,344

Net income	$	92,916		$	82,274		$	182,281		$	166,425

Per share data is not relevant because NSTAR Electric Company's common stock is wholly owned by NSTAR.

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

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NSTAR Electric Company

Condensed Consolidated Statements of Retained Earnings

(Unaudited)

(in thousands)


			Three Months Ended						Nine Months Ended
			September 30,						September 30,
			2007			2006			2007			2006

Balance at the beginning of the period, as
previously reported	$	884,061		$	757,119		$	816,399		$	731,948
Adoption of FIN 48 adjustment		-			-			2,277			-
Adjusted balance at the beginning of the period		884,061			757,119			818,676			731,948

Add:
Net income		92,916			82,274			182,281			166,425
Subtotal		976,977			839,393			1,000,957			898,373

Deduct:
Common stock dividends declared to Parent		28,300			27,000			51,300			85,000
Preferred stock dividends declared		490			490			1,470			1,470
Subtotal		28,790			27,490			52,770			86,470
Balance at the end of the period	$	948,187		$	811,903		$	948,187		$	811,903

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

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NSTAR Electric Company

Condensed Consolidated Balance Sheets

(Unaudited)

(in thousands)


			September 30,		December 31,
			2007		2006
Assets

Utility Plant:
	Electric plant in service, at original cost	$		4,599,388		$	4,385,560
	Less: accumulated depreciation and amortization			1,090,103			1,041,293
				3,509,285			3,344,267
	Construction work in progress			102,045			143,033
	Net utility plant			3,611,330			3,487,300

	Investments:
	Equity investments			7,516			8,161
	Restricted cash			6,988			6,988
				14,504			15,149
	Current assets:
	Cash and cash equivalents			9,263			13,436
	Accounts receivable, net of allowance of $19,232 and
	$20,962, respectively			279,756			244,759
	Accrued unbilled revenues			48,847			46,748
	Regulatory assets			460,079			371,456
	Inventory, at average cost			31,278			29,392
	Other			834			5,202
	Total current assets			830,057			710,993

	Deferred debits:
	Regulatory assets			1,908,998			2,186,705
	Other			52,192			41,457
	Total deferred debits			1,961,190			2,228,162

	Refundable income tax			128,340			128,340

	Total assets	$		6,545,421		$	6,569,944

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

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NSTAR Electric Company

Condensed Consolidated Balance Sheets

(Unaudited)

(in thousands)


				September 30,		December 31,
				2007		2006
Capitalization and Liabilities

Common equity:
	Common stock, par value $1 per share
	(100 shares issued and outstanding)			$	-	$	-
	Premium on common stock				992,613		992,613
	Retained earnings				948,187		816,399
	Total common equity				1,940,800		1,809,012

Cumulative non-mandatory redeemable preferred stock					43,000		43,000

Long-term debt:
Long-term debt					1,045,992		1,047,157
Transition property securitization					483,958		637,217
		Total long-term debt			1,529,950		1,684,374

Total capitalization					3,513,750		3,536,386

Current liabilities:
		Transition property securitization			133,989		92,083
		Long-term debt			1,100		78,432
		Notes payable			322,000		232,200
		Power contracts			135,327		171,795
		Accounts payable			187,451		209,849
		Payable to affiliates			37,184		56,958
		Income taxes			144,860		19,642
		Accrued interest			19,808		13,772
		Other			47,082		33,182
		Total current liabilities			1,028,801		907,913


Deferred credits:
		Accumulated deferred income taxes and unamortized
		investment tax credits			1,126,008		1,203,447
		Power contracts			504,056		563,936
		Regulatory liability - cost of removal			216,914		215,085
		Payable to affiliates			60,210		60,210
		Other			95,682		82,967
Total deferred credits					2,002,870		2,125,645

Commitments and contingencies

			Total capitalization and liabilities	$	6,545,421	$	6,569,944

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

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NSTAR Electric Company

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(in thousands)


	Nine Months Ended September 30,
			2007			2006

Operating activities:
Net income		$	182,281		$	166,425
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization			248,112			242,597
Deferred income taxes and investment tax credits			(11,497	)		(99,718	)
Gain on sale of non-utility property			-			(4,101	)
Purchase power contract buy-out payments			(119,250	)		(101,539	)
Premium paid on long-term debt redemption			(17,647	)		-
Net changes in:
Current assets and liabilities			(46,930	)		5,528
Deferred debits and credits, net			148,129			211,474
Net cash provided by operating activities			383,198			420,666

Investing activities:
Plant expenditures (including AFUDC)			(234,740	)		(290,143	)
Proceeds from sale of non-utility property			-			6,033
Other investments			635			419
Net cash used in investing activities			(234,105	)		(283,691	)

Financing activities:
Long-term debt issuance, net of discount			-			197,886
Transition property securitization redemptions			(111,353	)		(118,733	)
Financing costs			-			(1,750	)
Long-term debt redemption			(78,943	)		(7,286	)
Net change in notes payable			89,800			(139,100	)
Contribution from parent company			-			15,000
Dividends paid			(52,770	)		(86,470	)
Net cash used in financing activities			(153,266	)		(140,453	)

Net decrease in cash and cash equivalents			(4,173	)		(3,478	)
Cash and cash equivalents at the beginning of the year			13,436			12,820
Cash and cash equivalents at the end of the period		$	9,263		$	9,342

Cash paid during the period for:

Interest, net of amounts capitalized		$	74,530		$	86,615
Income taxes		$	50,924		$	21,149

Non-cash investing activity:

Plant expenditures included in accounts payable		$	24,044		$	20,078

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

Table of Contents

Notes to Condensed Consolidated Financial Statements
(Unaudited)

The accompanying notes should be read in conjunction with the Notes to Consolidated Financial Statements included in NSTAR Electric's 2006 Annual Report on Form 10-K and its Current Report on Form 8-K filed with the SEC on May 11, 2007.

Note A. Business Organization and Summary of Significant Accounting Policies

1. The Company

NSTAR Electric Company (NSTAR Electric or the Company) is a regulated public utility incorporated in 1886 under Massachusetts law and is a wholly owned subsidiary of NSTAR. NSTAR Electric's wholly owned subsidiaries are Harbor Electric Energy Company, BEC Funding LLC, BEC Funding II LLC and CEC Funding LLC. NSTAR Electric serves approximately 1.1 million electric distribution customers in the City of Boston and 80 surrounding communities. NSTAR is a holding company engaged through its subsidiaries in the energy delivery business and serves approximately 1.4 million customers in Massachusetts, including NSTAR Electric’s distribution customers and approximately 300,000 natural gas distribution customers in 51 communities served by NSTAR's other retail utility distribution subsidiary NSTAR Gas. NSTAR has a services company, NSTAR Electric & Gas, that serves as the employer of substantially all NSTAR employees and that provides management, engin eering, finance and support services to substantially all NSTAR subsidiaries, including NSTAR Electric.

2. Basis of Accounting

The accompanying financial information presented as of September 30, 2007 and for the three and nine-month periods ended September 30, 2007 and 2006 have been prepared from NSTAR Electric's books and records without audit by an independent registered public accounting firm. However, NSTAR Electric's independent registered public accounting firm has performed a review of these interim financial statements in accordance with standards established by the PCAOB. Financial information as of December 31, 2006 was derived from the audited consolidated financial statements of NSTAR Electric, but does not include all disclosures required by GAAP. In the opinion of NSTAR Electric's management, all adjustments (which are of a normal recurring nature) necessary for a fair presentation of the financial information for the periods indicated have been included. Certain immaterial reclassifications have been made to the prior period amounts to conform with the current presentation.

NSTAR Electric follows accounting policies prescribed by the FERC and the DPU. Effective April 11, 2007, the MDTE was restructured as the DPU. In addition, NSTAR Electric is subject to the accounting and reporting requirements of the SEC. NSTAR Electric is subject to SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation" (SFAS 71). The application of SFAS 71 results in differences in the timing of recognition of certain expenses from those of other businesses and industries. The distribution and transmission businesses are subject to rate-regulation and meet the criteria for application of SFAS 71.

The preparation of financial statements in conformity with GAAP requires management of NSTAR Electric 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 nine-month periods ended September 30, 2007 and 2006 are not indicative of the results that may be expected for an entire year. The demand for electricity is primarily affected by weather conditions and the Company's customers' conservation measures caused

by increases in global energy costs. 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.

Transfer of Net Assets Structured as a Merger

Effective January 1, 2007, NSTAR, the parent company of NSTAR Electric Company (f.k.a. Boston Edison Company), completed the transfer of the assets (consisting primarily of the utility distribution facilities, properties and other assets, rights, and franchises) and liabilities, of its wholly-owned electric subsidiaries, Commonwealth Electric Company (ComElectric), Cambridge Electric Light Company (Cambridge Electric) and Canal Electric Company (Canal Electric) to Boston Edison. The transfer of net assets was structured as a merger under common control and ownership of ComElectric, Cambridge Electric and Canal Electric into Boston Edison (together, the "acquired companies"). The transfer of net assets was contemplated by NSTAR's Settlement Agreement of December 30, 2005 as approved by the DPU. The transfer of net assets was approved by the DPU and the FERC. In connection with the transaction, Boston Edison changed its corporate name t o NSTAR Electric Company.

In accordance with the SFAS No. 141"Business Combinations," for business combinations under common control and ownership,information presented in this quarterly report on Form 10-Q represents the results of operations for the three and nine-months ended September 30, 2007 and 2006, cash flows for the nine months ended September 30, 2007 and 2006 and financial position as of September 30, 2007 and December 31, 2006 of NSTAR Electric as though the transfer had occurred at the beginning of the earliest period presented, with comparative periods presented on an "as if" pooling basis. In connection with the merger, NSTAR Electric issued an aggregate of 25 of its Common Shares, par value of $1.00 per share, to NSTAR in exchange for the net assets of the acquired companies. The exchange rate was determined and allocated proportionately based on the common equity of ComElectric, Cambridge Electric and Canal Electric. ;Following the transaction, NSTAR Electric continues as a wholly-owned subsidiary of NSTAR.

3. Pension and Other Postretirement Benefits

Pension

NSTAR Electric applies the funded status recognition provisions of SFAS No. 158,"Employer's Accounting for Deferred Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106, and 132(R)" to record the funded status of the pension benefit plan. The net periodic pension benefit cost for the third quarter was based on the latest available participant census data. An annual actuarial valuation was completed during the second quarter and cost estimates were adjusted based on the actual results.

SFAS No. 132(R),"Employers' Disclosures about Pensions and Other Postretirement Benefits," requires disclosure of the net periodic pension benefit costs.

NSTAR Electric is the sponsor of the NSTAR Pension Plan (the Plan), which is a defined benefit funded retirement plan that covers substantially all employees of NSTAR Electric & Gas. As its sponsor, NSTAR Electric allocates the costs of the Plan to NSTAR Electric & Gas. NSTAR Electric & Gas charges all of its benefit costs to the NSTAR operating companies, including NSTAR Electric, based on the proportion of total direct labor charged to the Company. During the nine months ended September 30, 2007, NSTAR did not contribute to the Plan and does not anticipate making contributions to the Plan for the remainder of 2007 as significant contributions were made to the Plan in previous years. NSTAR also maintains nonqualified retirement plans for certain management employees who provide services to NSTAR Electric.

Components of net periodic pension benefit cost were as follows:


		Three Months Ended					Nine Months Ended
		September 30,					September 30,
(in millions)		2007			2006			2007			2006
Service cost	$	5.2		$	5.1		$	15.6		$	15.2
Interest cost		14.9			14.3			44.7			42.9
Expected return on Plan assets		(20.9	)		(19.5	)		(62.6	)		(58.5	)
Recognized actuarial loss		5.0			6.6			15.0			19.8
Amortization of prior service cost		(0.2	)		(0.2	)		(0.6	)		(0.6	)
Net periodic pension benefits cost	$	4.0		$	6.3		$	12.1		$	18.8

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 make contributions for postretirement benefits.

To fund these postretirement benefits, NSTAR, on behalf of NSTAR Electric and other NSTAR subsidiaries, makes contributions to various VEBA trusts that were established pursuant to section 501(c)(9) of the Internal Revenue Code.

NSTAR Electric participates in the Plan trusts with other NSTAR subsidiaries. Plan assets are available to provide benefits for all Plan participants who are former employees of NSTAR Electric and other subsidiaries of NSTAR. During the nine months ended September 30, 2007, NSTAR contributed $9.3 million toward these benefits.

The net periodic postretirement benefits costs allocated to NSTAR Electric for the three and nine-month period ended September 30, 2007 were $4.7 million and $14.0 million, respectively, as compared to $3.3 million and $9.8 million, respectively, in the three and nine-month periods ended September 30, 2006.

4. Future Accounting Requirement

In February 2007, the FASB issued SFAS No. 159,"The Fair Value Option for Financial Assets and Financial Liabilities"(SFAS 159). This statement provides companies with an option to report selected financial assets and liabilities at fair value. SFAS 159 will apply to fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact SFAS 159 may have, if any, on its financial position.

Note B. Cost of Removal

For NSTAR Electric, 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 September 30, 2007 and December 31, 2006, the estimated amount of the cost of removal included in regulatory liabilities was approximately $216.9 million and $215.1 million, respectively, based on the cost of removal component in current depreciation rates.

Note C. Derivative Instruments

Energy Contracts

NSTAR Electric accounts for its energy contracts in accordance with SFAS No. 133,“Accounting for Derivative Instruments and Hedging Activities” (SFAS 133) and SFAS No. 149,"Amendment of Statement No. 133 on Derivative Instruments and Hedging Activities" (SFAS 149). NSTAR Electric has determined that its electricity supply contracts qualify for, and NSTAR Electric has elected to apply, the normal purchases and sales exception. As a result, these agreements are not reflected as an asset or liability on the accompanying Condensed Consolidated Balance Sheets.

Note D. Service Quality Indicators

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

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

On March 1, 2007, NSTAR Electric filed its 2006 Service Quality Report with the DPU that demonstrated NSTAR Electric achieved sufficient levels of reliability and performance; the report indicates that no penalty was assessable for 2006.

The Rate Settlement Agreement approved by the DPU on December 30, 2005 established additional performance measures applicable to NSTAR Electric. The Rate Settlement Agreement establishes, for NSTAR Electric, a performance benchmark relating to its poor performing circuits, with a maximum penalty or incentive of up to $0.5 million. As part of NSTAR Electric's filing of its 2005 Annual Service Quality performance measures earlier in 2006, it included benchmark information related to this new circuit performance. The DPU issued several sets of discovery questions in this matter. NSTAR Electric has responded to the DPU on a timely basis, including providing updates in September 2006 on detailed electric circuit data. For 2006, NSTAR Electric determined that its performance related to these applicable circuits has exceeded the established benchmarks and therefore, has accrued its incentive entitlement of $0.5 million. For 2007, no circui t performance incentive or penalty has been accrued during the nine months ended September 30, 2007.

Note E. Income Taxes

Income taxes are accounted for in accordance with SFAS No. 109, "Accounting for Income Taxes" (SFAS 109). SFAS 109 requires the recognition of deferred tax assets and liabilities for the future tax effects of temporary differences between the carrying amounts and the tax basis of assets and liabilities. In accordance with SFAS 71 and SFAS 109, net regulatory assets of $32.4 million and $33.6 million and corresponding net increases in accumulated deferred income taxes were recorded as of September 30, 2007 and December 31, 2006, respectively. The regulatory assets represent the additional future revenues to be collected from customers for deferred income tax deficiencies at the adoption of SFAS 109.

NSTAR Electric is part of a consolidated tax group. As such, income tax payments are either due to or from NSTAR.

The following table reconciles the statutory federal income tax rate to the annual estimated effective income tax rate for 2007 and the actual effective income tax rate for the year ended December 31, 2006:

Uncertain Tax Positions

In July 2006, the FASB issued Interpretation No. 48 (FIN 48),“Accounting for Uncertainty in Income Taxes,” an Interpretation of SFAS No. 109,“Accounting for Income Taxes." FIN 48 prescribes guidance to address inconsistencies in the methods used to measure and recognize income tax positions for financial statement purposes. Specifically, FIN 48 establishes criteria for the recognition of income tax benefits. FIN 48 requires the financial statement recognition of an income tax benefit when the company determines that it is more-likely-than-not that the tax position will be ultimately sustained.

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

Upon the adoption, and in accordance with FIN 48, NSTAR Electric recognized the cumulative effect of approximately $2.3 million as an increase to its beginning retained earnings. This adjustment consisted of the after tax interest income accrual on the deduction of construction-related costs.

As of January 1, 2007, the date of adoption, and September 30, 2007, there were no unrecognized tax benefits of a permanent tax nature that if recognized would have an impact on the Company’s effective tax rate. The total amount of unrecognized tax benefits as of September 30, 2007 and January 1, 2007 was $15 million and $12 million, respectively, relating to temporary differences of tax benefits reflected on previous income tax returns. These amounts have been recognized as FIN 48 liabilities on the accompanying Condensed Consolidated Balance Sheets in Deferred Credits - Other.

In addition to its FIN 48 tax liability, NSTAR Electric has unrecognized benefits associated with interest on construction-related uncertain tax positions of approximately $14 million and $9 million at January 1, 2007 and September 30, 2007, respectively. The decrease of $5 million during 2007 reflects interest income on tax positions taken during prior periods recognized during the three months ended September 30, 2007. The amount recognized reflects a change in management's estimate of its tax position resulting from recent settlement discussions with the IRS and additional information available during the third quarter.

It is possible that the amount of unrecognized tax benefits relating to the deduction for construction-related costs in the form of interest income could significantly change within twelve months of this reporting date. This would occur if NSTAR Electric were to reach a final resolution with the IRS Office of Appeals on this issue. The estimated range of unrecognized potential change is zero to approximately $9 million as of September 30, 2007.

NSTAR Electric recognizes interest accrued related to uncertain tax positions in Interest expense: Short-term debt and other on the accompanying Condensed Consolidated Statement of Income. NSTAR Electric also recognizes related penalties, if applicable, in Other deductions, net on the accompanying Condensed Consolidated Statements of Income. This accounting policy is consistent with the recognition of these items prior to the adoption of FIN 48.

For the nine months ended September 30, 2007, the amount of related interest recognized in the accompanying Condensed Consolidated Statements of Income is interest income of $8.3 million and the

total amount of accrued interest recognized in the accompanying Condensed Consolidated Balance Sheets is interest receivable of $12.6 million. No penalties were recognized during the nine months ended September 30, 2007.

As of September 30, 2007, the 2001 through 2006 federal and state tax years remain open. Years 2001 and 2002 are currently at the IRS Office of Appeals and years 2003 and 2004 are under examination by the IRS.

Deduction of Construction-Related Costs

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

In August 2005, the IRS issued Revenue Ruling 2005-53 and Treasury Regulations under Code Section 263A related to the SSCM to curtail these levels of construction-related cost deductions by utilities and others. Under this Regulation, the SSCM is not available for the majority of NSTAR’s constructed property for the years 2005 and forward. As a result, NSTAR Electric was required to make a cash tax payment to the IRS of $128.3 million in 2006 representing the tax benefit related to the disallowed SSCM deductions for 2002-2004 even though the tax refund was not received. This payment will be fully refunded with interest to NSTAR once this tax position is settled. As of September 30, 2007 and December 31, 2006, this refund has been recorded as a non-current Refundable income tax on the accompanying Condensed Consolidated Balance Sheets.

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

Note F. Long-Term Debt Redemption

As a result of the transfer of net assets structured as a merger of NSTAR subsidiaries ComElectric, Cambridge Electric and Canal Electric into NSTAR Electric, the entire long-term debt principal balance of $77.7 million of the former ComElectric, along with a make-whole premium on redemption of $17.6 million, was paid on January 2, 2007. This premium was recorded as a regulatory asset and is amortized over the recovery period through 2036. At December 31, 2006, this debt was classified as due within one year on the accompanying Condensed Consolidated Balance Sheets.

Note G. Commitments and Contingencies

1. Environmental Matters

NSTAR Electric faces possible liabilities as a result of involvement in several multi-party disposal sites, state-regulated sites or third party claims associated with contamination remediation. NSTAR Electric generally expects to have only a small percentage of the total potential liability for the majority of these sites. As of September 30, 2007 and December 31, 2006, NSTAR Electric had a reserve of $0.9 million and $2.9 million, respectively, for these environmental sites. This estimated recorded liability is based on an evaluation of all currently available facts with respect to these sites.

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 Electric's responsibilities for such sites evolve or are resolved. NSTAR Electric's ultimate liability for future environmental remediation costs may vary from these estimates. Based on NSTAR Electric's current

assessment of its environmental responsibilities, existing legal requirements and regulatory policies, NSTAR Electric does not believe that these environmental remediation costs will have a material adverse effect on NSTAR Electric's consolidated financial position, results of operations or cash flows.

2. 345kV Transmission Project

Phase one of this project involved the construction of two 345kV transmission lines from a switching station in Stoughton, Massachusetts to substations in the Hyde Park section of Boston and to South Boston. The first line of this project was placed in service in October 2006. The second 345kV line of phase one was placed in service in April 2007. Phase two of the 345kV project, which will add a third and final 345kV line to the project, is expected to be in service in 2009. Expenditures on phase two of the project are expected to be approximately $30 million in 2007 and $65 million through 2009. These transmission lines ensure continued reliability of electric service and improvement of power import capability in the Northeast Massachusetts area. A substantial portion of the cost of this project will be shared by other utilities in New England based on ISO-NE's approval and will be recovered by NSTAR Electric through wholesale and retail transmission rates.

3. Regulatory and Legal Proceedings

a. Changes in Massachusetts' Regulatory Structure

In February 2007, the Massachusetts Governor amended Massachusetts utility regulation. This bifurcated the Department of Telecommunications and Energy into two distinct components - (1) energy and (2) telecommunications and cable television. The DPU replaces the MDTE and has jurisdiction over electric, natural gas, water and transportation matters. The DPU is headed by the newly established Commonwealth Utilities Commission comprised of three commissioners.

b. Regulatory Proceedings - MDTE/DPU

Proposed Rate Decoupling

On June 22, 2007, the DPU opened a generic investigation into rate structures and revenue recovery mechanisms in order to promote efficient deployment of demand resources in Massachusetts. Demand resources are installed equipment, measures or programs that reduce end-use demand for electricity or natural gas. This investigation will include, in part, a review of whether and how existing rate mechanisms may be changed to better align a company's financial interests with the needs to provide greater energy efficiencies and foster the advancement of price-responsive demand in regional wholesale energy markets. Historically, Massachusetts retail electric and natural gas distribution companies have sponsored customer-funded energy efficiency and load reduction programs. The DPU has proposed to implement a base revenue adjustment mechanism that "decouples" the link between a utility’s revenues and its sales to eliminate a utility’s disi ncentive to sponsor such programs.

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

c. Current Rate Settlement Agreement Matters

transmission service revenues. As a result of NSTAR's role in two RMR cases, NSTAR Electric had sought to collect $9.8 million annually for three years and began recognizing and collecting these incentive revenues from its customers effective January 1, 2007, subject to final DPU approval. Public hearings were held by the DPU in early 2007 to investigate the basis and support for the incentive payments. After these hearings NSTAR Electric began discussions with the staff of the newly elected AG and a revised Settlement Agreement was executed on July 23, 2007. This revised Settlement Agreement allows NSTAR Electric to collect $6.3 million of the savings annually for three years effective January 1, 2007. In addition, the Settlement Agreement stipulates that NSTAR Electric will share 12.5% of the savings applicable to its customers in its future efforts related to new wholesale energy cost savings cases. The revisio n of the Settlement Agreement did not have a material impact on NSTAR Electric’s results of operations, financial position or cash flows. Approval of this Settlement Agreement and of the incentives is required by the DPU. A ruling on this Settlement is expected during the fourth quarter 2007.

NSTAR Electric made its 2006 Distribution Rate Adjustment/Reconciliation Filing on September 29, 2006. The filing implements the provisions of the Rate Settlement Agreement that supports the establishment of new distribution and transition rates that became effective January 1, 2007. Also effective on this date, NSTAR Electric's distribution rates include elements of a SIP and a CPSL program that require an offsetting adjustment to its transition rate. The performance-based SIP is based on the gross domestic product price index minus a productivity offset and rate adjustment factor that resulted in a 2.64% increase in distribution rates. The CPSL program relates to incremental spending for double pole replacements and underground electric safety programs, which include stray-voltage remediation and manhole inspections, repairs and upgrades. For 2006, the CPSL cost recovery was estimated to be $13.3 million and is being collected during 2007. &n bsp;A reconciliation of final 2006 CPSL cost recovery of $14.3 million was filed with the DPU. On October 1, 2007, NSTAR Electric filed for recovery of its estimated 2007 CPSL cost of $24 million to be collected during 2008. This balance includes the under-collection of 2006 final CPSL amounts. Recovery of CPSL costs is subject to DPU review and reconciliation to actual costs. NSTAR Electric cannot predict the timing or the ultimate outcome of these filings.

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

d. Rate Settlement Agreement and Basic Service Bad Debt Adder

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

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

basic service bad debt costs. NSTAR Electric filed a Motion for Reconsideration of the DPU’s order on July 18, 2007. In addition, NSTAR Electric filed a request for extension of the judicial appeal period with the DPU. On July 27, 2007, the extension was granted. NSTAR Electric believes its position is appropriate and that it will ultimately prevail. However, in the event that its Motion for Reconsideration is denied, NSTAR Electric intends to pursue all legal options. As of September 30, 2007, the potential impact to earnings of eliminating the bad debt adder was approximately $12 million, pre-tax. NSTAR Electric cannot predict the timing or the ultimate outcome of this proceeding.

e. Regulatory Proceedings - FERC

On July 9, 2007, FERC issued an Order that in part approved NSTAR Electric's 2007 proposed consolidated transmission rates as filed on February 14, 2007, subject to refund, pending the conclusion of subsequent proceedings. As a result of these proceedings, NSTAR Electric reached an agreement in principle with the FERC staff and the AG. NSTAR Electric anticipates a final Settlement will be executed with the AG during the fourth quarter. The Settlement will be subject to FERC approval. NSTAR Electric does not expect the impact of this Settlement to be material to the Company's financial position, results of operations or cash flows.

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

f. Legal Matters

In the normal course of its business, NSTAR Electric and its subsidiaries are involved in certain legal matters, including civil litigation. Management is unable to fully determine a range of reasonably possible court-ordered damages, settlement amounts, and related litigation costs ("legal liabilities") that would be in excess of amounts accrued and amounts covered by insurance. Based on the information currently available, NSTAR Electric 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 Electric 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 both NSTAR Electric's 2006 Annual Report on Form 10-K and the current report Form 8-K filed May 11, 2007.

Executive Overview

NSTAR Electric Company (NSTAR Electric or the Company) is a regulated public utility incorporated in 1886 under Massachusetts law and is a wholly owned subsidiary of NSTAR. NSTAR Electric's wholly owned subsidiaries are Harbor Electric Energy Company, BEC Funding LLC, BEC Funding II LLC and CEC Funding LLC. NSTAR Electric serves approximately 1.1 million electric distribution customers in the City of Boston and 80 surrounding communities. Harbor Electric Energy Company provides electric distribution service and ongoing support to its only customer, the Massachusetts Water Resources Authority's water treatment facility located on Deer Island in Boston, Massachusetts. BEC Funding LLC, BEC Funding II LLC and CEC Funding LLC are special purpose entities created to facilitate the sale of

electric rate reduction certificates to the public. NSTAR Electric's core business is a traditional electric transmission and distribution company that focuses on consistent energy delivery to its customers. NSTAR Electric's strategy is to invest in transmission and distribution assets that will align with its core competencies.

Transfer of Net Assets Structured as a Merger

Effective January 1, 2007, NSTAR, the parent company of NSTAR Electric Company (f.k.a. Boston Edison), completed the transfer of the assets (consisting primarily of the utility distribution facilities, properties and other assets, rights, and franchises) and liabilities, of its wholly-owned electric subsidiaries, ComElectric, Cambridge Electric and Canal Electric to Boston Edison. The transfer of net assets was structured as a merger under common control and ownership of ComElectric, Cambridge Electric and Canal Electric into Boston Edison (together, the "acquired companies"). The transfer of net assets was contemplated by NSTAR's Settlement Agreement of December 30, 2005 as approved by the DPU. The transfer of net assets was approved by the DPU and the FERC. In connection with the transaction, Boston Edison changed its corporate name to NSTAR Electric Company.

In accordance with the SFAS No. 141"Business Combinations," for business combinations under common control and ownership,information presented on this quarterly report on Form 10-Q represents the results of operations for the three and nine-months ended September 30, 2007 and 2006, cash flows for the nine months ended September 30, 2007 and 2006 and financial position as of September 30, 2007 and December 31, 2006 of NSTAR Electric as though the transfer had occurred at the beginning of the earliest period presented, with comparative periods presented on an "as if" pooling basis. In connection with the merger, NSTAR Electric issued an aggregate of 25 of its Common Shares, par value of $1.00 per share, to NSTAR in exchange for the net assets of the acquired companies. The exchange rate was determined and allocated proportionately based on the common equity of ComElectric, Cambridge Electric and Canal Electric. Follo wing the transaction, NSTAR Electric continues as a wholly-owned subsidiary of NSTAR.

Earnings. NSTAR Electric's earnings are impacted by its customers' requirements for energy in the form of unit sales of electric kWh, which directly determine the level of distribution and transmission revenues recognized. In accordance with the regulatory rate structure in which NSTAR Electric operates, its recovery of energy and energy related costs are fully reconciled with the level of energy revenues currently recorded and, therefore, do not have an impact on earnings.

Net income for the three and nine-month periods ended September 30, 2007 amounted to $92.9 million and $182.3 million, respectively, as compared to $82.3 million and $166.4 million, respectively, for the same periods in 2006, as further explained in this discussion.

Critical Accounting Policies and Estimates

For a complete discussion of critical accounting policies, refer to "Critical Accounting Policies and Estimates" in Item 7 of NSTAR Electric's 2006 Form 10-K. Other than NSTAR's change in its tax accounting policy as a result of the adoption of FASB Interpretation No. 48 (FIN 48),“Accounting for Uncertainty in Income Taxes,” an Interpretation of SFAS No. 109,“Accounting for Income Taxes," there have been no substantive changes to those policies and estimates.

Uncertain Tax Positions

In July 2006, the FASB issued FIN 48 that prescribes guidance to address inconsistencies in the methods used to measure and recognize income tax positions for financial statement purposes. Specifically, FIN 48 establishes criteria for the recognition of income tax benefits. FIN 48 requires the financial statement recognition of an income tax benefit when the company determines that it is more-likely-than-not that the tax position will be ultimately sustained.

Upon the adoption and in accordance with FIN 48, NSTAR Electric recognized the cumulative effect of approximately $2.3 million as an increase to its beginning retained earnings. This adjustment consisted of the after tax interest income accrual on the deduction of construction-related costs.

It is possible that the amount of unrecognized tax benefits relating to the deduction for construction-related costs in the form of interest income could significantly change within twelve months of this reporting date. This would occur if NSTAR Electric were to reach a resolution with the IRS Office of Appeals on this issue. The estimated range of unrecognized potential changes is zero to approximately $9 million as September 30, 2007.

NSTAR Electric recognizes interest accrued related to uncertain tax positions in Interest expense: Short-term debt and other. NSTAR Electric also recognizes related penalties, if applicable, in Other deductions, net on the accompanying Condensed Consolidated Statements of Income. This accounting policy is consistent with the recognition of these items prior to the issuance of FIN 48.

For the nine months ended September 30, 2007, the amount of related interest income, net, recognized on the accompanying Condensed Consolidated Statements of Income was $8.3 million and the total amount of accrued interest receivable on the accompanying Condensed Consolidated Balance Sheets was $12.6 million. No penalties were recognized during the nine months ended September 30, 2007.

Deduction of Construction-Related Costs

In August 2005, the IRS issued Revenue Ruling 2005-53 and Treasury Regulations under Code Section 263A related to the SSCM to curtail these levels of construction-related cost deductions by utilities and others. Under this Regulation, the SSCM is not available for the majority of NSTAR’s constructed property for the years 2005 and forward. As a result, NSTAR Electric was required to make a cash tax payment to the IRS of $128.3 million in 2006 representing the tax benefit related to the disallowed SSCM deductions taken for 2002-2004 even though the tax refund was not received. This payment will be fully refunded with interest to NSTAR once this tax position is settled. As of September

30, 2007 and December 31, 2006, this refund has been recorded as a non-current Refundable income tax on the accompanying Condensed Consolidated Balance Sheets.

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

FIN 48 requires the use of judgment in identifying and determining its uncertain tax positions. Therefore, actual results could differ materially from those estimates.

Future Accounting Requirement

In February 2007, the FASB issued SFAS No. 159,"The Fair Value Option for Financial Assets and Financial Liabilities"(SFAS 159). This statement provides companies with an option to report selected financial assets and liabilities at fair value. SFAS 159 will apply to fiscal years beginning after November 15, 2007. Management is currently evaluating the impact SFAS 159 may have, if any, on its financial position.

Rate Structure

a. Retail Electric Rates

Electric distribution companies in Massachusetts are required to obtain and resell power through basic service for retail customers who choose not to buy energy from a competitive energy supplier. NSTAR Electric solicits bids from available wholesale energy suppliers in order to procure the lowest electricity prices for its customers. 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 September 30, 2007 and December 31, 2006, customers of NSTAR Electric had approximately 56% and 51%, respectively, of their load requirements provided by competitive suppliers. NSTAR Electric fully recovers its energy costs through DPU-approved rate mechanisms. Though energy delivery charges vary slightly by region, the basic service price for all residential customers decreased an avera ge of 8%, from $0.1186 to $0.1084 per kilowatt-hour effective July 1, 2007. Medium and large commercial customers decreased an average of 17% from $0.1142 cents to $0.0947 cents per kilowatt-hour effective October 1, 2007.

Current Rate Settlement Agreement Matters

On December 30, 2005, the DPU approved the seven-year Rate Settlement Agreement (through 2012) between NSTAR Electric, the AG and several interveners. As a component of the Rate Settlement Agreement, NSTAR Electric is entitled to certain incentives related to Wholesale Power Cost Savings Initiatives. Under the terms of the agreement, NSTAR Electric was to share in 25% of the savings applicable to its customers. The recovery of NSTAR Electric's share of benefits is to be collected over three years, and the aggregate annual recovery is capped at 2% of the annual distribution and transmission service revenues. As a result of NSTAR Electric's role in two RMR cases, NSTAR Electric had sought to collect $9.8 million annually for three years and began recognizing and collecting these incentive revenues from its customers effective January 1, 2007, subject to final DPU approval. Public hearings were held by the DPU in early 2007 to investigate the basi s and support for the incentive payments. After these hearings NSTAR Electric began discussions with the staff of the newly elected AG and a revised Settlement Agreement was executed on July 23, 2007. This revised Settlement Agreement allows NSTAR Electric to collect $6.3 million of the savings annually for three years effective January 1, 2007. In addition, the Settlement Agreement stipulates that NSTAR Electric will share 12.5% of the savings applicable to its customers in its future efforts related to new wholesale energy cost savings cases. The revision of the Settlement Agreement did not have a material impact on NSTAR Electric’s results of operations, financial position or cash flows. Approval of this Settlement Agreement and of the incentives is required by the DPU. A ruling on this Settlement is expected during the fourth quarter 2007.

NSTAR Electric made its 2006 Distribution Rate Adjustment/Reconciliation Filing on September 29, 2006. The filing implements the provisions of the Rate Settlement Agreement that supports the establishment of new distribution and transition rates that became effective January 1, 2007. Also effective on this date, NSTAR Electric's distribution rates include elements of a SIP and a CPSL program that require an offsetting adjustment to its transition rate. The performance-based SIP is based on the gross domestic product price index minus a productivity offset and rate adjustment factor that resulted in a 2.64% increase in distribution rates. The CPSL program relates to incremental spending for double pole replacements and underground electric safety programs, which include stray-voltage remediation and manhole inspections, repairs and upgrades. For 2006, the CPSL cost recovery was estimated to be $13.3 million and is being collec ted during 2007. A reconciliation of final 2006 CPSL cost recovery of $14.3 million was filed with the DPU. On October 1, 2007, NSTAR Electric filed for recovery of its estimated 2007 CPSL cost of $24 million to be collected during 2008. This balance includes the under-collection of 2006 final CPSL amounts. Recovery of CPSL costs is subject to DPU review and reconciliation to actual costs. NSTAR Electric cannot predict the timing or the ultimate outcome of these filings.

Rate Settlement Agreement and Basic Bad Debt Adder

NSTAR Electric has not implemented the components of the June 28, 2007 DPU order. Implementation of this order would require NSTAR Electric to write-off a previously recorded regulatory asset related to its basic service bad debt costs. NSTAR Electric filed a Motion for Reconsideration of the DPU’s order on July 18, 2007. In addition, NSTAR Electric filed a request for extension of the judicial appeal period with the DPU. On July 27, 2007, the extension was granted. NSTAR Electric believes its position is appropriate and that it will ultimately prevail. However, in the event that its Motion of Reconsideration is denied, NSTAR Electric intends to pursue all legal options. As of September 30, 2007, the potential impact to earnings of eliminating the bad debt adder was approximately $12 million, pre-tax. NSTAR Electric cannot predict the timing or the ultimate outcome of this proceeding.

b. Massachusetts Policy Environment

In January 2007, a newly elected Governor and Attorney General took office. The Governor and Attorney General have a very significant influence on energy regulatory policy in Massachusetts. While it is

premature to assess how such policies may change, the Governor has taken steps that suggest some degree of change is likely.

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

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

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

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

c. Proposed Rate Decoupling

d. Regulatory Proceedings - FERC

NSTAR's former subsidiaries Cambridge Electric and ComElectric filed proposed changes to their OATT with the FERC on March 30, 2005 to provide for consistent application of the OATT among all NSTAR

Electric companies. These tariffs became effective on June 1, 2005 and expired on December 31, 2006; however, the FERC set certain rate-related issues raised in the proceeding for hearing, but held the hearing in abeyance pending settlement discussions with the AG, the sole intervener. On November 17, 2006, a settlement agreement that resolved all issues in the proceeding was filed at FERC. The settlement was approved by the full Commission on March 1, 2007.

e. Service Quality Indicators

On March 1, 2007, NSTAR Electric filed its 2006 Service Quality Reports with the DPU that demonstrated the Company achieved sufficient levels of reliability and performance and that no penalty was assessable for 2006.

The Rate Settlement Agreement approved by the DPU on December 30, 2005 established additional performance measures applicable to NSTAR Electric. The Rate Settlement Agreement establishes, for NSTAR Electric, a performance benchmark relating to its poor performing circuits, with a maximum penalty or incentive of up to $0.5 million. As part of NSTAR Electric's filing of its 2005 Annual Service Quality performance measures earlier in 2006, it included benchmark information related to this new circuit performance. The DPU issued several sets of discovery questions in this matter. NSTAR Electric has responded to the DPU on a timely basis, including providing updates in September 2006 on detailed electric circuit data. For 2006, NSTAR Electric determined that its performance related to these applicable circuits has exceeded the established benchmarks and therefore, accrued its incentive entitlement of $0.5 million. For 2007, no circuit pe rformance incentive or penalty has been accrued during the nine months ended September 30, 2007.

Employees

NSTAR Electric does not have any direct employees. All labor services are provided by employees of NSTAR Electric & Gas Corporation, an affiliated company. Substantially all management, engineering, finance and support services are provided to the operating subsidiaries of NSTAR (including NSTAR Electric) by employees of NSTAR Electric & Gas. NSTAR subsidiaries have approximately 3,100 employees, including approximately 2,200, or 71%, who are represented by units covered by separate collective bargaining contracts. NSTAR's labor contract with Local 369 of the Utility Workers Union or America, AFL-CIO, which represents approximately 61% of employees, expires on June 1, 2009. Management believes it has satisfactory relations with its employees.

Results of Operations

The following section of MD&A compares the results of operations for each of the three and nine-month periods ended September 30, 2007 and 2006 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 September 30, 2007 compared to Three Months Ended September 30, 2006

Overview

Net income was $92.9 million for the quarter ended September 30, 2007 compared to $82.3 million for the same period in 2006. Major factors (after-tax) that contributed to the $10.6 million, or 12.9%, increase in 2007 earnings include:


·	Higher electric distribution revenues primarily as a result of the Rate Settlement Agreement and an increase in energy sales of 0.7% ($5.4 million)
·	New energy mitigation incentive revenues representing NSTAR Electric's share of customer wholesale energy cost savings ($0.9 million)
·	Higher transmission revenues as a result of increased investment in the Company's transmission infrastructure, most notably the 345kV project ($5.4 million)
·	Recognition of interest income, net of fees, on certain tax benefits ($2.4 million)

These increases in earnings factors were partially offset by:


·	Increase in Operations and Maintenance expenses, including higher labor and labor related costs and bad debt expense ($3.7 million)
·	Higher depreciation and amortization expense in 2007 related to higher depreciable electric distribution plant in service ($0.9 million)

Significant cash flow events during the quarter include the following:


·	Cash flows from operating activities provided $168 million primarily from cash received from electric operations offset by purchase power contract buyout payments
·	NSTAR Electric invested approximately $83.8 million in capital projects to improve capacity and system reliability
·	NSTAR Electric paid approximately $28.3 million in common stock dividends to NSTAR and retired approximately $40.2 million in securitized debt

Energy sales and weather

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


Retail Electric Sales - MWh	Three Months Ended September 30,
		2007	2006	% Change

Residential		1,815,187	1,832,737	(1.0)
Commercial		3,713,513	3,619,550	2.6
Industrial		382,220	418,663	(8.7)
Street Lighting		35,089	35,978	(2.5)
Total retail sales		5,946,009	5,906,928	0.7

The demand for electricity is affected by weather conditions. In terms of customer sector characteristics, industrial sales are less sensitive to weather than residential and commercial sales, which are influenced by temperature extremes. Industrial sales are primarily influenced by economic conditions. Electric residential and commercial customers were approximately 31% and 62%, respectively, of NSTAR Electric's total retail sales mix for the third quarter of 2007 and provided 35% and 59% of distribution and transmission revenues, respectively. Refer to the "Operating revenues" section below for a more detailed discussion.

Weather, conservation measures and economic conditions affect sales to NSTAR Electric's residential and small commercial customers. Economic conditions and conservation measures affect NSTAR Electric's large commercial and industrial customers.


	2007	2006	Normal 30-Year Average
Heating degree-days	62	75	96
Percentage (warmer) colder than prior year	(17.3)%	78.6%
Percentage (warmer) than 30-year average	(35.4)%	(21.9)%

Cooling degree-days	645	621	593
Percentage warmer (cooler) than prior year	3.9%	(11.0)%
Percentage warmer than 30-year average	8.8%	4.7%

Heating and Cooling Degree-Days measure changes in daily temperature levels in explaining demand for electricity based on weather conditions. The comparative information above relates to heating and cooling degree-days for the third quarters of 2007 and 2006 and the number of heating and cooling degree-days in a "normal" third quarter as represented by a 30-year average. A degree-day is a unit measuring how much the outdoor mean temperature falls below or rises above a base of 65 degrees. Each degree below or above the base temperature is measured as one heating or cooling degree-day.

Operating revenues

Operating revenues for the third quarter of 2007 decreased $144.5 million, or 16.7%, from the same period in 2006, and consisted of the following major component changes:


(in millions)		Three Months Ended September 30,				(Decrease)
		2007		2006		Amount		Percent
Electric revenues
Retail distribution and transmission	$	294.5	$	327.8	$	(33.3	)	(10.2	)
Energy, transition and other		426.6		537.8		(111.2	)	(20.7	)
Total retail electric revenues	$	721.1	$	865.6	$	(144.5	)	(16.7	)

NSTAR Electric's largest earnings sources are the revenues derived from distribution and transmission rates approved by the DPU and FERC. Electric retail distribution revenues primarily represent charges to customers for recovery of the Company's capital investment, including a return component, and operation and maintenance related to its electric distribution infrastructure. The transmission revenue component represents charges to customers for the recovery of costs to move the electricity over high voltage lines from the generator to the Company's substations.

The decrease of $33.3 million in retail distribution and transmission revenues primarily reflects:

The impact of NSTAR Electric's efforts in the Wholesale Power Cost Savings Initiative on behalf of its customers that decreased regional RMR costs. As approved by the DPU, decreased regional RMR costs resulted in a decrease in retail transmission billing of approximately $42.4 million for the three months ended September 30, 2007 as compared to the same period in 2006. This reflects the refund from ISO-NE of previously billed RMR costs offset by higher transmission revenues as a result of higher transmission investments. NSTAR Electric lowered its retail transmission rates effective on March 1, 2007, as approved by the DPU, in order to refund amounts previously collected from customers. These RMR costs are collected from customers on a fully reconciling basis. Therefore, there is no earnings impact.

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


·	In accordance with the Rate Settlement Agreement of December 30, 2005, NSTAR Electric increased its distribution rates by an annual rate of $30 million effective May 1, 2006 and by an annual inflation-adjusted rate increase effective January 1, 2007, with corresponding reductions in transition rates. These factors and a 0.7% increase in energy sales, increased distribution revenues by $5.6 million for the three months ended September 30, 2007, as compared to 2006.
·	Higher transmission revenues of $3.9 million as a result of increased investment in the Company's transmission infrastructure, most notably the 345kV project.

Energy, transition and other revenues primarily represent charges to customers for the recovery of costs incurred by the Company in order to acquire the energy supply on behalf of its customers and a transition charge for recovery of the Company's prior investments in generating plants and the costs related to long-term power contracts. The energy revenues relate to providing customers energy supply under basic service. These revenues are fully reconciled to the costs incurred and have no impact on the Company's consolidated net income. Energy, transition and other revenues also reflect revenues related to the Company's ability to effectively reduce stranded costs (incentive entitlements), rental revenue from electric property and annual cost reconciliation true-up adjustments. The $111.2 million decrease in energy, transition and other revenues is primarily attributable to a decrease in energy supply costs and by a reduction of $49.9 million i n transition-related revenues resulting from the December 30, 2005 Rate Settlement Agreement. Uncollected transition charges as a result of the reductions in transition rates are being deferred and collected through future rates with a carrying charge at a rate of 10.88%.

Operating expenses

Purchased power and transmission costs were $346.6 million in the third quarter of 2007 compared to $503.1 million in the same period of 2006, a decrease of $156.5 million, or 31.1%. Despite higher energy sales of 0.7%, the decrease in expense reflects lower basic service supply costs. Slightly offsetting this decrease, transmission costs increased $2.7 million as a result of higher regional network support costs of $5.9 million partially offset by a $3.7 million decline in transmission-related congestion costs. NSTAR Electric adjusts its rates to collect the costs related to energy supply and transmission from customers on a fully reconciling basis. Due to these rate adjustment mechanisms, changes in the amount of energy supply and transmission expense have no impact on earnings.

Operations and maintenance expensewas $84.6 million in the third quarter of 2007 compared to $81.9 million in the same period of 2006, an increase of $2.7 million, or 3.3%. This increase primarily relates to an increase in labor and labor related costs, higher DPU safety and reliability costs and higher claims/litigation expense.

Depreciation and amortization expense was $82.5 million in the third quarter of 2007 compared to $80.7 million in the same period of 2006, an increase of $1.8 million, or 2.2%. The increase reflects higher depreciable distribution and transmission plant in service.

DSM and renewable energy programs expensewas $17.8 million in the third quarter of 2007 compared to $17.9 million in the same period of 2006, a decrease of $0.1 million, or 0.5%, which is consistent with the collection of conservation and renewable energy revenues. These costs are in accordance with program guidelines established by the DPU and are collected from customers on a fully reconciling basis plus a small incentive plan.

Property and other taxes were $19.8 million in the third quarter of 2007 compared to $20.5 million in the same period of 2006, a decrease of $0.7 million, or 3.4%, reflecting lower overall property tax rates.

Income taxesattributable to operations were $57.7 million in the third quarter of 2007 compared to $50.9 million in the same period of 2006, an increase of $6.8 million, or 13.4%, reflecting higher pre-tax operating income in 2007.

Other income, net

Other income, net was $1.3 million in the third quarter of 2007 compared to $1.2 million in the same period of 2006, an increase of $0.1 million. The increase reflects slightly higher non-utility rental income.

Interest charges

Interest on long-term debt and transition property securitization certificates was $24.4 million in the third quarter of 2007 compared to $28.5 million in the same period of 2006, a decrease of $4.1 million, or 14.4%. The decrease in interest expense primarily reflects:


·	Lower interest cost of $2.2 million as a result of the redemption of all debt of the former ComElectric and Cambridge Electric subsidiaries' long-term debt on January 2, 2007 and the fourth quarter of 2006, respectively
·	Lower interest costs on transition property securitization debt of $2.1 million. 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 Electric's stranded costs

Short-term and other interest expense, netwas $2.9 million of net interest income in the third quarter of 2007 compared to $3.2 million of expense in the same period of 2006, a change of $6.1 million, or 191%. The change was due to lower net interest expense on income tax deficiencies of $6.2 million primarily as a result of the recognition, in the current year, of interest income of $4.7 million on uncertain tax positions coupled with slightly lower average bank borrowing rates. Also contributing to the decrease was lower interest on the under recovery of regulatory deferrals. Partially offsetting these decreases was the impact of higher average level of borrowed funds as compared to the same period in 2006. The higher average borrowing during 2007 reflects the impact of NSTAR Electric financing the redemption of $77.7 million of long-term debt in January 2007 with short-term debt.

Nine Months Ended September 30, 2007 compared to Nine Months Ended September 30, 2006

Overview

Net income was $182.3 million for the nine-month period ended September 30, 2007 compared to $166.4 million for the same period in 2006. Major factors (after-tax) that contributed to the $15.9 million, or 9.6%, increase in 2007 earnings include:


·	Higher electric distribution revenues primarily as a result of the Rate Settlement Agreement and increased energy sales of 1.1% ($16.5 million)
·	New energy mitigation incentive revenues representing NSTAR Electric's share of customer wholesale energy cost savings ($2.7 million)
·	Higher transmission revenues primarily as a result of increased investment in the Company's transmission infrastructure, most notably the 345kV project ($9 million)
·	Recognition of interest income, net, on certain tax benefits ($5.9 million)

These increases in earnings factors were partially offset by:


·	Higher operations and maintenance expenses in 2007 primarily related to the absence of a cumulative pre-tax adjustment of $6.9 million reduction in bad debt expense recorded in 2006 to reflect the implementation of a recovery rate mechanism ($9.8 million)
·	Higher depreciation and amortization expense in 2007 related to higher depreciable electric distribution plant in service ($2.8 million)


·	Higher short-term interest expense as a result of increased borrowing rates and an increase in the average borrowing levels ($4.9 million)

Significant cash flow events during the nine months ended September 30, 2007 include the following:


·	Cash flows from operating activities provided $383.2 million primarily from operations offset by purchase power contract buyout payments
·	NSTAR Electric invested approximately $234.7 million in capital projects to improve capacity and reliability
·	NSTAR Electric paid approximately $51.3 million in common stock dividends to NSTAR and retired approximately $111.4 million in securitized long-term debt

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

Energy sales

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


Retail Electric Sales - MWh	Nine Months Ended September 30,
		2007	2006	% Change

Residential		4,957,563	4,935,343	0.5
Commercial		10,215,171	9,987,325	2.3
Industrial		1,123,334	1,199,849	(6.4)
Street Lighting		115,004	116,442	(1.2)
Total retail sales		16,411,072	16,238,959	1.1

Weather Conditions

The demand for electricity is affected by weather conditions. In terms of customer sector characteristics, industrial sales are less sensitive to weather than residential and commercial sales, which are influenced by temperature extremes. Industrial sales are primarily influenced by economic conditions. Electric residential and commercial customers represented approximately 30% and 62%, respectively, of NSTAR Electric's total sales mix for the nine months ended September 30, 2007 and provided approximately 39% and 55% of distribution and transmission revenues, respectively. Refer to the"Electric revenues" section below for a more detailed discussion.


			Normal
			30-Year
	2007	2006	Average

Heating Degree-Days	3,797	3,472	3,750
Percentage colder (warmer) than prior year	9.4%	(12.9)%
Percentage colder (warmer) than 30-year average	1.3%	(7.4)%

Cooling Degree-Days	876	799	769
Percentage warmer (cooler) than prior year	9.6%	(9.2)%
Percentage warmer than 30-year average	13.9%	3.9

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

Operating revenues

Operating revenues for the nine months ended September 30, 2007 decreased $280 million or 12.2%, from the same period in 2006, and consisted of the following major component changes:


(in millions)	Nine Months Ended September 30,						(Decrease)
			2007		2006	Amount			Percent
Electric revenues
Retail distribution and transmission		$	743.7	$	786.3	$	(42.6	)		(5.4	)
Energy, transition and other			1,269.4		1,506.8		(237.4	)		(15.8	)
Total retail electric revenues		$	2,013.1	$	2,293.1	$	(280.0	)		(12.2	)

NSTAR Electric's largest earnings sources are the revenues derived from distribution and transmission rates approved by the DPU and FERC. Electric retail distribution revenues primarily represent charges to customers for recovery of the Company's capital investment, including a return component, and operation and maintenance costs related to its electric distribution infrastructure. The transmission revenue component represents charges to customers for the recovery of costs to move the electricity over high voltage lines from the generator to the Company's substations.

The decrease of $42.6 million in retail distribution and transmission revenues includes:

Lower transmission revenues related to decreased regional RMR costs reflecting the refund from ISO-NE of previously billed RMR costs. This decrease reflects NSTAR's Wholesale Power Costs Savings Initiative. As approved by the DPU, this resulted in a decrease in retail transmission billing of approximately $74.7 million for the nine months ended September 30, 2007 as compared to the same period in 2006. NSTAR Electric lowered its retail transmission rates effective on March 1, 2007 in order to refund amounts previously over collected from customers and match the amount to be paid to generators. These RMR costs are fully reconciled and therefore there is no earnings impact.

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

In accordance with the impact of the Rate Settlement Agreement of December 30, 2005, NSTAR Electric increased its distribution rates by an annual rate of $30 million effective May 1, 2006 and by an annual inflation-adjusted rate increase effective January 1, 2007, with a corresponding reduction in transition charges. These factors and a 1.1% increase in energy sales resulted in increased distribution revenues of $27.2 million for the nine months ended September 30, 2007 as compared to 2006. In addition, higher transmission revenues as a result of increased investment in the Company's transmission infrastructure, most notably the 345kV project, also offset the overall decrease.

Energy, transition and other revenues primarily represent charges to customers for the recovery of costs incurred by the Company in order to acquire the energy supply on behalf of its customers and a transition charge for recovery of the Company's prior investments in generating plants and the costs related to long-term power contracts. The energy revenues relate to providing customers energy supply under basic service. These revenues are fully reconciled to the costs incurred and have no impact on the Company's consolidated net income. Energy, transition and other revenues also reflect revenues related to the Company's ability to effectively reduce stranded costs (incentive entitlements), rental revenue from electric property and annual cost reconciliation true-up adjustments. The $237.4 million decrease in energy, transition and other revenues is primarily attributable to a decrease in energy supply costs and to a reduction of $82.1 million i n transition-related revenues resulting from the December 30, 2005 Rate Settlement Agreement. These amounts were partially offset by an increase in non-retail related regional transmission revenues of $26.1 million that are used to support NSTAR Electric's transmission assets. Uncollected transition charges as a result of the reductions in transition rates are being deferred and collected through future rates with a carrying charge at a rate of 10.88%.

Operating expenses

Purchased power and transmission costs were $1,048.3 million in the nine months ended September 30, 2007 compared to $1,357.5 million in the same period of 2006, a decrease of $309.2 million, or 22.8%. Despite higher energy sales of 1.1%, the decrease in expense reflects lower basic service energy supply costs. In addition, transmission costs declined $67.6 million as a result of a $108.8 million decline in transmission-related congestion costs partially offset by higher regional network support costs of $38.3 million. NSTAR Electric adjusts its rates to collect the costs related to energy supply and transmission from customers on a fully reconciling basis. Due to these rate adjustment mechanisms, changes in the amount of energy supply and transmission expense have no impact on earnings.

Operations and maintenance expense was $246.8 million in the nine months ended September 30, 2007 compared to $237.3 million in the same period of 2006, an increase of $9.5 million, or 4%. This increase primarily relates to higher bad debt expense due to the absence of a cumulative $6.9 million reduction in bad debt expense recorded in 2006 to reflect the implementation of a recovery rate mechanism. In addition, higher DPU Safety and Reliability Program expense, higher material costs and higher labor and labor related costs contributed to the year-to-date increase.

Depreciation and amortization expense was $247.7 million in the nine months ended September 30, 2007 compared to $242.2 million in the same period of 2006, an increase of $5.5 million or 2.3%. The increase primarily reflects higher depreciable distribution and transmission plant in service.

DSM and renewable energy programs expense was $49.6 million in the nine months ended September 30, 2007 compared to $49.3 million in the same period of 2006, an increase of $0.3 million, or 0.6%, which is consistent with the collection of conservation and renewable energy revenues. These costs are in accordance with program guidelines established by the DPU and are collected from customers on a fully reconciling basis plus a small incentive return.

Property and other taxes were $58.7 million in the nine months ended September 30, 2007 compared to $60.6 million in the same period of 2006, a decrease of $1.9 million, or 3.1% reflecting lower overall property tax rates.

Income tax expenseattributable to operations was $111.7 million in the nine months ended September 30, 2007 compared to $101.4 million in the same period of 2006, an increase of $10.3 million, or 10%, reflecting higher pre-tax operating income in 2007.

Other income, net

Other income, net was approximately $5.1 million in the nine months ended September 30, 2007 compared to $5.9 million in the same period of 2006, a decrease of $0.8 million. The decrease primarily reflects the absence in 2007 of the net gain realized in 2006 of $2.2 million on the sale of a parcel of non-utility land. In 2007, other income includes executive life insurance proceeds of $1.9 million and higher equity earnings from investments in the Yankee units and Hydro-Quebec.

Interest charges

Interest on long-term debt and transition property securitization certificates was $74.4 million in the nine months ended September 30, 2007 compared to $84.4 million in the same period of 2006, a decrease of $10.0 million, or 11.8%. The decrease in interest expense reflects:


·	Lower interest cost of $6.5 million as a result of the redemption of all debt of the former Commonwealth Electric and Cambridge Electric subsidiaries' long-term debt on January 2, 2007 and the fourth quarter of 2006, respectively
·	Lower interest costs on transition property securitization debt of $6.4 million due to current maturities. Securitization interest represents interest on securitization certificates of BEC Funding, BEC Funding II and CEC Funding that are collateralized by the future income stream associated primarily with NSTAR Electric's stranded costs

These decreases were partially offset by:


·	Interest expense of $2.4 million associated with NSTAR Electric's $200 million Debentures issued in March 2006

Short-term and other interest expense, net was $2.0 million in the nine months ended September 30, 2007 compared to $5.1 million in the same period of 2006, a decrease of $3.1 million, or 61%. The decrease is due to lower net interest expense on income tax deficiencies of $7.4 million primarily as a result of recognizing, in the current year, interest income of $4.7 million on uncertain tax positions and lower interest on the under recovery of regulatory deferrals. Partially offsetting these decreases was a higher average level of borrowed funds as compared to the same period in 2006. Higher interest rates on short-term borrowings also slightly offset these decreases. The higher average borrowing during 2007 reflects the impact of NSTAR Electric financing the redemption of $77.7 million of long-term debt in January 2007 with short-term debt.

Item 4. Controls and Procedures

NSTAR Electric'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.

As of the end of the period covered by this Quarterly Report on Form 10-Q, NSTAR Electric carried out an evaluation, under the supervision and with the participation of NSTAR Electric's management, including

NSTAR Electric's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of NSTAR Electric's disclosure controls and procedures pursuant to Securities Exchange Act of 1934 Rules 13a-15(e) or 15d-15(e). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that NSTAR Electric's disclosure controls and procedures were effective (1) to timely alert them to material information relating to NSTAR Electric's information required to be disclosed by NSTAR Electric in the reports that it files or submits under the Securities Exchange Act of 1934 and (2) to ensure that appropriate information is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms.

There have been no changes in NSTAR Electric’s internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) of the Securities Exchange Act of 1934) during NSTAR Electric's most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, NSTAR Electric's internal control over financial reporting.

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Part II - Other Information

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

Investors or prospective investors should carefully consider the risk factors that were previously disclosed in NSTAR Electric's Annual Report on Form 10-K for the year ended December 31, 2006 and in other information in this Quarterly Report on Form 10-Q.

Item 5. Other Information

The following is furnished for informational purposes.

Ratio of earnings to fixed charges and ratio of earnings to fixed charges and preferred stock dividend requirements:


Twelve months ended September 30, 2007:
Ratio of earnings to fixed charges		4.09
Ratio of earnings to fixed charges and preferred stock dividend requirements		3.98

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Item 6. Exhibits


a)	Exhibits:
		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	12	-	Statement re Computation of Ratios

			12.1	-	Computation of Ratio of Earnings to Fixed Charges for the Twelve Months Ended September 30, 2007

			12.2	-	Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividend Requirements for the Twelve Months Ended September 30, 2007

		Exhibit	15	-	Letter Re Unaudited Interim Financial Information

			15.1	-	PricewaterhouseCoopers LLP Awareness Letter

		Exhibit	31	-	Rule 13a – 14(a)/15d – 14(a) Certifications

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

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

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

		Exhibit	99	-	Additional Exhibits

			99.1	-	Report of Independent Registered Public Accounting Firm *

				*	Rule 436(c) of the 1933 Act provides that a report on unaudited interim financial information shall not be considered part of a registration statement prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of Section 7 or 11 of the 1933 Act. Therefore, the accountant is not subject to the liability provisions of Section 11 of the 1933 Act.

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SIGNATURE

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




		NSTAR Electric Company
		(Registrant)





Date: November 8, 2007		By: /s/ R. J. WEAFER, JR.
		Robert J. Weafer, Jr.
		Vice President, Controller and
		Chief Accounting Officer

Positive
Negative
Uncertain
Constraining
Legalese
Litigious
Readability	H.S. freshman Avg

Statutory tax rate

State income tax, net of federal income tax benefit

Investment tax credits

Effective tax rate