The accompanying MD&A focuses on factors that had a material effect on the financial condition, results of operations and cash flows of NSTAR during the periods presented and should be read in conjunction with the accompanying consolidated financial statements and related notes and with the MD&A in NSTAR's 2008 Annual Report on Form 10-K.

Business Overview

NSTAR is a holding company engaged through its subsidiaries in the energy delivery business serving approximately 1.4 million customers in Massachusetts, including approximately 1.1 million electric distribution customers in 81 communities and approximately 300,000 natural gas distribution customers in 51 communities. NSTAR's core business is a traditional "pipes and wires" company with a continuing focus on shareholder value and a continued commitment for safe and reliable energy delivery to customers. NSTAR also focuses on providing accurate information and other helpful assistance to its customers, thereby providing a superior customer experience. NSTAR's strategy is to invest in transmission and distribution assets that will align with its core competencies.

Electric utility operations. For the three months ended March 31, 2009, NSTAR derived 71% of its operating revenues from the transmission and distribution of electric energy through NSTAR Electric.

Gas operations. For the three months ended March 31, 2009, NSTAR derived 24% of its operating revenues from the distribution of natural gas through NSTAR Gas.

Unregulated operations. For the three months ended March 31, 2009, NSTAR derived 5% of its operating revenues from non-utility, unregulated operating subsidiaries involved in telecommunications and district energy operations.

Earnings. NSTAR's earnings are impacted by its customers' requirements for energy in the form of unit sales of electricity and natural gas, which directly determine the levels of electric retail distribution and transmission revenues and natural gas firm and transportation revenues recognized. In accordance with the regulatory rate structures in which NSTAR 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 attributable to common shareholders for the quarter ended March 31, 2009 was $61.0 million, or $0.57 diluted earnings per share as compared to $59.2 million, or $0.55 diluted earnings per share for the same period in 2008, 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's 2008 Form 10-K. There have been no substantive changes to those policies and estimates.

Rate Structure

a. Rate Settlement Agreement

The DPU approved a seven-year Rate Settlement Agreement ("Rate Settlement Agreement") between NSTAR, the AG, and several other interveners. Beginning January 1, 2007 and continuing through 2012, the Rate Settlement Agreement establishes for NSTAR Electric, among other things, annual inflation-adjusted distribution rate adjustments that are generally offset by an equal and corresponding reduction in transition rates. Uncollected transition charges as a result of the reductions in transition rates are deferred and collected through future rates with a carrying charge.

b. Electric Rates

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

·         a distribution charge, which includes a fixed customer charge
          and a demand and/or energy charge (to collect the costs of
          building and expanding the infrastructure to deliver power to
          its destination, as well as ongoing operating costs), a Pension
          and PBOP Rate Adjustment Mechanism (PAM) related costs
          adjustment and a reconciling rate adjustment mechanism for
          recovery of certain DPU-approved safety and reliability program
          costs,
·         a basic service charge represents the collection of energy
          costs, including costs related to charge-offs of uncollected
          energy costs, through DPU-approved rate mechanisms.  Electric
          distribution companies in Massachusetts are required to obtain
          and resell power to retail customers through Basic Service for
          those who choose not to buy energy from a competitive energy
          supplier.  Basic Service rates are reset every six months (every
          three months for large commercial and industrial customers).
           The price of Basic Service is intended to reflect the average
          competitive market price for electric power,
·         a transition charge represents the collection of costs primarily
          from previously held investments in generating plants and costs
          related to existing above-market power contracts, and contract
          costs related to long-term power contracts buy-outs,
·         a transmission charge represents the collection of costs of
          moving the electricity over high voltage lines from generating
          plants to substations located within NSTAR's service area
          including costs allocated to NSTAR Electric by ISO-NE to
          maintain the wholesale electric market,
·         an energy conservation charge represents a
          legislatively-mandated charge to collect costs for demand-side
          management programs and energy efficiency programs, and
·         a renewable energy charge represents a legislatively-mandated
          charge to collect the costs to support the development and
          promotion of renewable energy projects.

c. Gas Rates

NSTAR Gas generates revenues primarily through the sale and/or transportation of natural gas. Gas sales and transportation services are divided into two categories: firm, whereby NSTAR Gas must supply gas and/or transportation services to customers on demand; and interruptible, whereby NSTAR Gas may, generally during colder months, temporarily discontinue service to high volume commercial and industrial customers. Sales and transportation of gas to interruptible customers have no impact on NSTAR Gas' operating income because substantially the entire margin for such service is returned to its firm customers as rate reductions.

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

·         a distribution charge consists of a fixed customer charge and a
          demand and/or energy charge that collects the costs of building
          and expanding the gas infrastructure to deliver gas supply to
          its customers' destination.  This also includes collection of
          ongoing operating costs,
·         a seasonal cost of gas adjustment clause (CGAC) represents the
          collection of gas supply costs, pipeline and storage capacity,
          costs related to charge-offs of uncollected energy costs and
          working capital related costs.  The CGAC is reset every six
          months.  In addition, NSTAR Gas is required to file interim
          changes to its CGAC factor when the actual costs of gas supply
          vary from projections by more than 5%,
·         a local distribution adjustment clause (LDAC) primarily
          represents the collection of demand-side management costs,
          environmental costs, PAM related costs, and costs associated
          with the residential assistance adjustment clause.  The LDAC is
          reset annually and provides for the recovery of certain costs
          applicable to both sales and transportation customers.

NSTAR Gas purchases financial contracts based on NYMEX natural gas futures in order to reduce cash flow variability associated with the purchase price for approximately one-third of its natural gas purchases. This practice attempts to minimize the impact of fluctuations in prices to NSTAR's firm gas customers.
These financial contracts do not procure gas supply. All costs incurred or benefits realized when these contracts are settled are included in the CGAC of NSTAR Gas.

d. Regulatory Matters

Regulatory Proceedings - DPU Safety and Reliability Programs (CPSL)

As part of the Rate Settlement Agreement, NSTAR Electric is allowed to recover incremental spending for the double pole inspection, replacement/restoration and transfer program and the underground electric safety program, which includes stray-voltage remediation and manhole inspections, repairs, and upgrades.
Recovery of these Capital Program Scheduling List (CPSL) costs is subject to DPU review and approval. NSTAR Electric incurred incremental costs of $11.1 million and $13.1 million in 2006 and 2007, respectively. This includes incremental operations and maintenance and revenue requirements on capital investments. The final reconciliation of 2006 and 2007 CPSL costs recovery is currently under review by the DPU. The incremental costs for the year 2008 are currently under review by the Company and are estimated to be approximately $15 million. NSTAR anticipates filing with the DPU its final 2008 CPSL cost recovery reconciliation in the third quarter of 2009. NSTAR cannot predict the timing of a DPU order related to these pending filings. Should an adverse decision be issued that would disallow a significant portion of CPSL cost recovery, it could have a material adverse impact to NSTAR's results of operations, financial position, and cash flows.

Wholesale Power Cost Savings Initiatives

The Rate Settlement Agreement includes incentives to encourage NSTAR Electric to continue its efforts to advocate on behalf of customers at the FERC to mitigate wholesale electricity cost inefficiencies that would be borne by regional customers. If NSTAR Electric's efforts to reduce customers' costs are successful, it is allowed to retain a portion of those savings as an incentive, as well as recover related litigation costs. Under the terms of the Rate Settlement Agreement, NSTAR Electric was to share in 25% of the savings applicable to its customers. The recovery of NSTAR Electric's share of benefits is to be collected over three years. As a result of its 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 AG and a revised Settlement Agreement was executed on

July 23, 2007. This revised Settlement Agreement allowed NSTAR Electric to collect $6.3 million of the savings annually for three years effective January 1, 2007 and it stipulated that NSTAR Electric would share 12.5% of the savings applicable to its customers in its future efforts related to new wholesale energy cost savings cases. On February 29, 2008, the DPU issued an order that did not approve the revised Settlement Agreement. The DPU re-established a procedural schedule and final briefs were filed in early May 2008. Through March 31, 2009, $14.2 million has been collected from customers for the Wholesale Power Cost Saving Initiatives.

NSTAR is unable to predict the timing or ultimate outcome of this proceeding.
In the event an adverse decision is issued, it would not have a material impact on the Company's results of operations.

Basic Service Bad Debt Adder

On July 1, 2005, in response to a generic DPU order that required electric utilities in Massachusetts 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 the Rate Settlement Agreement. This recovery mechanism (bad debt adder) allows NSTAR Electric to recover its Basic Service bad debt costs on a fully reconciling basis. These rates were implemented, effective January 1, 2006, as part of NSTAR Electric's Rate Settlement Agreement.

On February 7, 2007, NSTAR Electric filed its 2006 Basic Service reconciliation with the DPU proposing an adjustment related to the increase of its Basic Service bad debt charge-offs. This proposed rate adjustment was anticipated to be implemented effective July 1, 2007. On June 28, 2007, the DPU issued an order approving the implementation of a revised Basic Service rate. However, the DPU required NSTAR Electric to reduce distribution rates by the increase in its Basic Service bad debt charge-offs. Such action would result in a further reduction to distribution rates from the adjustment NSTAR Electric made when it implemented the Settlement Agreement. This adjustment to NSTAR Electric's distribution rates would effectively eliminate the fully reconciling nature of the Basic Service bad debt adder.

NSTAR Electric has not implemented the components of the June 28, 2007 DPU order. Implementation of this order would require NSTAR Electric to write-off a previously recorded regulatory asset related to its Basic Service bad debt costs. NSTAR Electric filed a Motion for Reconsideration of the DPU's order on July 18, 2007. On December 14, 2007, the Motion for Reconsideration was granted and the DPU reopened the case to hear additional evidence. NSTAR Electric filed additional testimony in April 2008, an evidentiary hearing was held, and briefs were filed in mid-2008. NSTAR Electric believes its position is appropriate and that it is probable that it will ultimately prevail. However, in the event that the DPU does not rule in its favor, NSTAR Electric intends to pursue all legal options. As of March 31, 2009, the potential impact to earnings of a disallowance of the bad debt adder would be approximately $18 million, pre-tax.
NSTAR cannot predict the timing of this proceeding.

FERC Transmission ROE

NSTAR earns an 11.14% ROE on local transmission facility investments. The ROE on NSTAR's regional transmission facilities is 11.64%. Additional incentive adders are decided on a case-by-case basis according to FERC's most recent national transmission incentive rules. The FERC may grant a variety of financial incentives, including ROE basis point incentive adders for qualified investments made in new regional transmission facilities, that can bring the ROE for NSTAR up to 12.64%, for certain qualified regional investments. In addition, NSTAR may qualify for other incentives on future transmission projects based upon certain conditions that could bring the ROE to 13.1%.

e. Recent Federal Government Initiatives

The American Recovery and Reinvestment Act of 2009 provides resources for significant increases in spending in several energy-related areas that have relevance to NSTAR, including energy efficiency,

smart grid funding, renewable energy financing and transmission projects. These initiatives are largely directed through federal and state governmental agencies and not-for-profit public agencies. NSTAR is currently evaluating the impact of this legislation on its business initiatives in these areas. Any action will require regulatory approval.

Earnings Outlook

NSTAR reaffirms its 2009 earnings guidance and expects to report earnings for the year in the $2.33 per share to $2.43 per share earnings range.

Results of Operations

The following section of MD&A compares the results of operations for each of the three-month periods ended March 31, 2009 and 2008 and should be read in conjunction with the accompanying Consolidated Financial Statements and the accompanying Notes to Consolidated Financial Statements included elsewhere in this report.

Common Share Dividends

NSTAR's current quarterly cash dividend rate is $0.375 per share or $1.50 per share on an annualized basis. On March 26, 2009, NSTAR's Board of Trustees declared a quarterly cash dividend of $0.375 per share for shareholders of record on April 10, 2009, payable May 1, 2009.

Three Months Ended March 31, 2009 compared to Three Months Ended March 31, 2008

Executive Summary of Quarterly Results

Earnings per common share were as follows:

Three Months ended March 31, 2009 2008 % Change Basic and Diluted $ 0.57 $ 0.55 3.6

Net income attributable to common shareholders was $61.0 million for the quarter ended March 31, 2009 compared to $59.2 million for the same period in 2008.
Major factors (after-tax) that contributed to the $1.8 million, or 3.0%, increase in 2009 earnings include:

· Higher electric distribution revenues attributable to a 2009 SIP adjustment offset by slightly lower sales ($0.7 million)
· Higher gas revenues attributable to a 3% increase in sales that resulted from colder weather than in the prior year
($1.1 million)
· Higher transmission revenues as a result of increased investment base related to the Company's transmission facilities expansion ($2.9 million)
· Lower interest expense primarily due to decreases in short-term interest rates ($1.7 million)
· Lower operations and maintenance expense attributable to lower transportation costs, lower storm related costs and other company-wide cost reduction efforts ($2.4 million)

These increases in earnings factors were partially offset by:

· Higher depreciation and property tax expense in 2009 related to higher municipal tax rates and higher electric and gas plant investment ($2.7 million)

· The absence of income from an environmental settlement that occurred during first quarter 2008 ($2.9 million)
· The absence of a cumulative impact in 2008 of implementing the March 24, 2008 FERC ROE order ($2.4 million)

Significant cash flow events during the quarter include the following:

· Cash flows from operating activities provided approximately $242.7 million, an increase of $40.9 million, as compared to the same period in 2008. The increase primarily reflects the collection of regulatory deferrals related to Basic Service and CGAC
· NSTAR invested approximately $108 million in capital projects to improve capacity and system reliability
· Cash used in financing activities are $34 million higher than 2008. NSTAR paid approximately $40.1 million in common share dividends and paid-down approximately $140.8 million of short-term debt. NSTAR issued, at a premium, $100 million of 5.625% debentures in February 2009

Energy sales

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

Retail Electric Sales - MWh           Three Months ended March 31,
                                         2009         2008    % Change

 Residential                        1,726,094    1,698,493      1.6
 Commercial, Industrial and other   3,579,813    3,726,246     (3.9)
  Total retail sales                5,305,907    5,424,739     (2.2)



Firm Gas Sales and Transportation - BBtu     Three Months ended March 31,
                                                  2009     2008    % Change

 Residential                                    10,334    9,709      6.4
 Commercial and Industrial                       8,844    8,934     (1.0)
 Municipal                                       1,440    1,379      4.4
  Total firm sales                              20,618   20,022      3.0

NSTAR's electric energy sales in the three months ending March 31, 2009 declined 2.2% compared to 2008 despite favorable weather conditions resulting from a colder winter during 2009 as compared to 2008. However, excluding the impact of an additional day due to leap day (February 29) in the first quarter of 2008, electric sales declined only 1%. Electric sales have been impacted by the downturn in the economy that has resulted in lost sales from large industrial customers, commercial office and retail business vacancies, and by the impact of customer and NSTAR-sponsored conservation measures. Industrial sales have been combined with commercial sales because they do not represent a significant share of electric sales or revenues.

Weather conditions positively impacted gas sales. The 3.0% increase in firm gas and transportation sales is due to the colder winter weather that directly impacts residential sales. Excluding the impact of an additional day due to the leap day in the first quarter of 2008, gas sales increased 4.3%. All gas customer segments are impacted by poor economic conditions and continued customer conservation efforts.

Weather, fluctuations in fuel costs, conservation measures, and economic conditions affect sales to NSTAR's residential and small commercial customers.
Economic conditions, fluctuations in fuel costs, and conservation measures affect NSTAR's large commercial and industrial customers. In terms of customer sector characteristics, industrial sales are less sensitive to weather than residential and

commercial sales, which are influenced by temperature variations. Refer to the "Electric Revenues" and "Gas Revenues" sections below for more detailed discussions.

Weather Conditions

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

The demand for electricity and natural gas is affected by weather conditions.
Weather conditions impact electric sales primarily during the summer and, to a greater extent, gas sales during the winter season in NSTAR's service area.
Customer heating or cooling usage may not directly correlate with historical levels or with the level of degree-days that occur (as further discussed below), particularly when weather patterns experienced are consistently colder or warmer. Also, NSTAR's electric and gas businesses are sensitive to variations in daily weather, are highly influenced by New England's seasonal weather variations, and are susceptible to severe storm-related incidents that could adversely affect the Company's ability to provide energy.

Degree-days measure changes in daily mean temperature levels. A degree-day is a unit measuring how much the outdoor daily mean temperature falls below (in the case of heating) or rises above (in the case of cooling) a base of 65 degrees.
The comparative information below relates to heating degree-days for the three months ended March 31, 2009 and 2008 and the number of heating degree-days in a "normal" year using a 30-year average. NSTAR uses the "normal 30-year average" degree-days data to compare current temperature readings to a baseline or "normal" period, that is recalculated every ten years for the preceding 30 years (currently 1971-2000), as collected at the Worcester Massachusetts airport and Boston's Logan Airport for heating degree-day data and cooling degree-day data, respectively. Weather conditions during the three months ended March 31, 2009 measured by heating degree-days were 5.2% higher/colder for 2009 as compared to 2008. Refer to the "Electric Revenues" and "Gas Revenues" sections below for more detailed discussions.

           Heating Degree-Days
           Three months ended March 31, 2009                      3,352
           Three months ended March 31, 2008                      3,186
           Normal 30-Year Average                                 3,304

           Percentage that 2009 was colder than 2008               5.2%
           Percentage that 2009 was colder than 30-year average    1.5%

Operating revenues

Operating revenues for the first quarter of 2009 increased 5.8% from the same period in 2008 as follows:

(in millions)                     Three Months Ended March 31,         Increase/(Decrease)
                                          2009            2008         Amount        Percent
Electric revenues
 Retail distribution and           $     236.5     $     214.5     $     22.0           10.3 %
transmission
 Energy, transition and other            436.0           404.7           31.3            7.7 %
  Total retail electric                  672.5           619.2           53.3            8.6 %
revenues
Gas revenues
 Firm and transportation                  62.1            61.2            0.9            1.5 %
 Energy supply and other                 170.0           173.5           (3.5 )         (2.0 )%
  Total gas revenues                     232.1           234.7           (2.6 )         (1.1 )%
Unregulated operations                    43.2            41.7            1.5            3.6 %
revenues
  Total operating revenues         $     947.8     $     895.6     $     52.2            5.8 %

Electric revenues

NSTAR's largest earnings sources are the revenues derived from distribution and transmission rates approved by the DPU and the 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 similar costs to move the electricity over high voltage lines from the generator to the Company's substations.

The increase of $22 million, or 10.3% in retail distribution and transmission revenues primarily reflects:

· Increase in transmission revenues primarily due to the higher investment base related to the Company's transmission facilities expansion ($21 million)
· Higher distribution revenues due to the impact of the SIP to distribution rates. This annual inflation-adjustment is offset by an equal and corresponding reduction in transition rates ($3.5 million)

These increases were partially offset by:

· Decreased energy sales of 2.2% due primarily to the impact of an additional day in February 2008 caused by the leap year and to a lesser extent the impact of customer conservation measures ($2.3 million)

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 customers being provided energy supply under Basic Service. These revenues are fully reconciled to the costs incurred and have no impact on NSTAR's consolidated net income.
Energy, transition, and other revenues also reflect revenues related to the Company's ability to effectively reduce stranded costs (incentive entitlements), rental revenue from electric property, and annual cost reconciliation true-up adjustments. The $31.3 million increase in energy, transition, and other revenues is primarily attributable to the increased recovery of energy supply costs. Uncollected transition costs as a result of the reductions in transition rates are deferred and collected through future rates with a carrying charge.

Firm and transportation gas revenues primarily represent charges to customers for the Company's recovery of costs of its capital investment in gas infrastructure, including a return component, and for the recovery of costs for the ongoing operation and maintenance of that infrastructure. The transportation revenue component represents charges to customers for the recovery of costs to move the natural gas over pipelines from gas suppliers to take stations located within the Company's service area. The $0.9 million increase in firm and transportation revenues is primarily attributable to colder . . .