NSTAR/MA - 10-K Annual Report

NSTAR

Form 10-K Annual Report - December 31, 2003

	Part I	Page

Item 1.	Business	2
Item 2.	Properties	10
Item 3.	Legal Proceedings	11
Item 4.	Submission of Matters to a Vote of Security Holders	11
Item 4A.	Executive Officers of the Registrant	11

	Part II

Item 5.	Market for the Registrant’s Common Equity and Related Stockholder Matters	13
Item 6.	Selected Consolidated Financial Data	14
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	48
Item 8.	Financial Statements and Supplementary Financial Information	49
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	91
Item 9A.	Controls and Procedures	91

	Part III

Item 10.	Trustees and Executive Officers of the Registrant	91
Item 11.	Executive Compensation	92
Item 12.	Security Ownership of Certain Beneficial Owners and Management	92
Item 13.	Certain Relationships and Related Transactions	92
Item 14.	Principal Accountant Fees and Services	92

	Part IV

Item 15.	Exhibits, Financial Statement Schedules and Reports on Form 8-K	93



Signatures		100



Important Shareholder Information

NSTAR files its Forms 10-K, 10-Q and 8-K reports, proxy statements and other information with the Securities and Exchange Commission (SEC). You may access materials NSTAR has filed with the SEC on the SEC’s website at www.sec.gov. In addition, NSTAR’s Board of Trustees has various committees including an Audit, Finance and Risk Management Committee, an Executive Personnel Committee and a Board Governance and Nominating Committee. In May 2003, the Board amended the charter of each of these committees. The Board also has a standing Executive Committee. In 2003, the Board adopted the NSTAR Board of Trustees Corporate Guidelines on Significant Corporate Governance Issues, a Code of Ethics for the Principal Executive Officer, General Counsel, and Senior Financial Officers, and a Code of Ethics and Business Conduct for Directors, Officers and Employees. NSTAR’s SEC filings and Corporate Governance documents, including charters, guidelines and codes, and any amendments to such codes which are applicable to NSTAR’s executive officers, senior financial officers or trustees can be accessed free of charge on NSTAR’s website at www.nstaronline.com. Copies of NSTAR’s SEC filings may also be obtained by writing or calling NSTAR’s Investor Relations Department at the address or phone number on the cover of this Form 10-K.

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Part I

Item 1. Business

(a) General Development of Business

NSTAR (or the Company) is an energy delivery company engaged primarily in the transmission and distribution of energy. NSTAR serves approximately 1.4 million customers in Massachusetts, including approximately 1.1 million electric customers in 81 communities and 0.3 million gas customers in 51 communities. NSTAR is a public utility holding company generally exempt from the provisions of the Public Utility Holding Company Act of 1935. NSTAR’s retail utility subsidiaries are Boston Edison Company (Boston Edison), Commonwealth Electric Company (ComElectric), Cambridge Electric Light Company (Cambridge Electric) and NSTAR Gas Company (NSTAR Gas). Its wholesale electric subsidiary is Canal Electric Company (Canal). NSTAR’s three retail electric companies operate under the brand name “NSTAR Electric.” Reference in this report to “NSTAR” shall mean the registrant NSTAR or one or more of its subsidiaries as the context requires. Reference in this report to “NSTAR Electric” shall mean each of Boston Edison, ComElectric and Cambridge Electric. NSTAR’s non-utility, unregulated operations include district energy operations (Advanced Energy Systems, Inc. and NSTAR Steam Corporation), telecommunications operations (NSTAR Communications, Inc. (NSTAR Com)) and a liquefied natural gas service company (Hopkinton LNG Corp.). Utility operations accounted for approximately 96% of consolidated operating revenues in 2003, 2002 and 2001.

NSTAR was created in 1999 in connection with the merger of BEC Energy (BEC) and Commonwealth Energy System (COM/Energy). An integral part of the merger involved the rate plan of the NSTAR Electric subsidiaries. Significant elements of the rate plan included a distribution rate freeze through August 2003, recovery of the acquisition premium (goodwill) over 40 years and recovery of transaction and integration costs (costs to achieve) over 10 years. Refer to the “Rate and Regulatory Proceedings” section in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for more information.

In 2002, Canal sold its 3.52% ownership interest in the Seabrook Nuclear Power Station and in April 2003 Cambridge Electric sold Blackstone Station, its lone remaining generating asset. These transactions finalized the divestiture of all of NSTAR’s regulated generating assets. Refer to the “Generating Assets Divestiture” section in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for more information.

(b) Financial Information about Industry Segments

NSTAR’s principal operating segments are the electric and natural gas utility operations that provide energy delivery services in 107 cities and towns in Massachusetts and its unregulated operations. Refer to Note N of the Consolidated Financial Statements in Item 8, “Financial Statements and Supplementary Financial Information” for specific financial information related to NSTAR’s electric utility, gas utility and unregulated operating segments.

(c) Narrative Description of Business

Principal Products and Services

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NSTAR Electric

NSTAR Electric currently supplies electricity at retail to an area of 1,702 square miles. The territory served includes the City of Boston and 80 surrounding cities and towns, including Cambridge, New Bedford, and Plymouth and the geographic area comprising Cape Cod and Martha’s Vineyard. The population of this area is approximately 2.3 million. In 2003, NSTAR Electric served approximately 1.1 million customers.

NSTAR Electric’s operating revenues and energy sales percentages by customer class for the years 2003, 2002 and 2001 consisted of the following:

	Revenues ($)			Energy Sales (MWH)

Retail:	2003	2002	2001	2003	2002	2001
Commercial	54%	52%	51%	59%	56%	55%
Residential	38%	37%	33%	31%	29%	28%
Industrial and other	7%	8%	9%	9%	10%	11%
Wholesale and contract sales	1%	3%	7%	1%	5%	6%

Retail Electric Rates

Unbundled delivery rates are established by the Massachusetts Department of Telecommunications and Energy (MDTE) and are composed of distribution charges including a fixed customer charge and energy and demand charges (to collect the costs of building and expanding the infrastructure to deliver power to its destination, as well as ongoing operating and maintenance costs), a transition charge (to collect costs for previously held investments in generating plants and current costs related to above market power contracts), a transmission charge (to collect the cost of moving the electricity over high voltage lines from a generating plant to substations located within NSTAR’s service area), an energy conservation charge (to collect costs for demand-side management programs) and a renewable energy charge (to collect the cost to support the development and promotion of renewable energy projects). Beginning in 2004, NSTAR’s rate was increased to reflect the carrying charge on the average net prepaid pension and postretirement benefit obligations other than pension (PBOP) balances and to recover a portion of the deferred pension and PBOP balances for 2003. Refer to the Consolidated Financial Statements, Note I, for more detail.

Electric distribution companies in Massachusetts are required to obtain and resell power to retail customers through either standard offer or default service for those who choose not to buy energy from a competitive energy supplier. Currently, standard offer service is scheduled to be available to eligible customers through February 2005 at prices approved by the MDTE. The delivery rates and the standard offer service are set at levels so as to guarantee mandatory overall rate reductions required by the Massachusetts Electric Restructuring Act of 1997 (Restructuring Act). Currently, new retail customers in the NSTAR Electric service territories and other customers who are no longer eligible for standard offer service and have not chosen to receive service from a competitive supplier are provided default service. Default service rates are reset every six months (every three months for large commercial and industrial customers). The price of default service is intended to reflect the average competitive market price for power. NSTAR anticipates that upon the expiration of standard officer service, effective March 1, 2005, all customers will be eligible for default service. However, Massachusetts’ officials are considering new deregulation legislation to be effective after March 1, 2005. NSTAR cannot predict or anticipate the outcome of this process or its impact on NSTAR or its customers. As of December 31, 2003 and 2002, customers of NSTAR Electric had approximately 26% and 27%, respectively, of their load requirements provided by competitive suppliers.

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Sources and Availability of Electric Power Supply

NSTAR Electric expects to continue to make periodic market solicitations for default service and standard offer power supply consistent with provisions of the Restructuring Act and MDTE orders. NSTAR Electric has contracted with third party suppliers to provide 100% of its standard offer supply obligation through December 31, 2004. In connection with this arrangement, NSTAR Electric has assigned its long-term power purchase agreements to one supplier through December 31, 2004. These long-term power purchase agreements are expected to supply approximately 80%-85% of its standard offer service obligations for 2004 and have been assigned to this supplier. NSTAR Electric is fully recovering its payments to suppliers through MDTE approved rates billed to customers. NSTAR Electric’s existing portfolio of long-term power purchase contracts supplied a significant amount of its standard offer (including wholesale) energy requirements in 2003. Also during 2003 and 2002, NSTAR Electric entered into an agreement whereby all of its energy supply resource entitlements were assigned to an independent energy supplier, following which NSTAR Electric repurchased its energy resource needs from this independent energy supplier for NSTAR Electric’s ultimate sale to standard offer customers.

NSTAR Electric has entered into a short-term power purchase agreement to meet its entire default service supply obligation, other than to large customers, for the period January 1, 2004 through June 30, 2004 and for 50% of its obligation, other than to large customers, for the second-half of 2004. NSTAR Electric has entered into a short-term power purchase agreement to meet its entire default service supply obligation for large customers through March 2004. A Request for Proposals will be issued quarterly in 2004 for the remainder of the obligation for large customers and semi-annually for non-large customers in accordance with MDTE regulations. NSTAR Electric entered into agreements ranging in length from six to twelve-months effective January 1, 2003 through December 31, 2003 with suppliers to provide full default service energy and ancillary service requirements at contract rates approved by the MDTE.

NSTAR Electric’s load for 2003 reached a peak demand of 4,299 megawatts (MW) on August 22, which was 2.6% less than the all-time peak demand level of 4,415 MW established in 2002.

Standard Market Design (SMD)

Prior to March 1, 2003, Independent System Operator - New England (ISO-NE) dispatched generating units based on the lowest operating costs of available generation and transmission. Under this structure, generators were required to provide ISO-NE with market prices at which they sell short-term energy supply. For each participant actively involved in the power market, the imbalance in energy provided by a participant and the energy consumed by such participant in each hour is settled at a single real-time clearing hourly price for such power. Pursuant to orders issued by the Federal Energy Regulatory Commission (FERC) in September and December of 2002, these markets were further restructured into SMD, which began on March 1, 2003. SMD provides an additional market in which wholesale power costs can be hedged a day in advance through binding financial commitments. Also, under SMD, wholesale power clearing prices vary by location, called load zones, with prices in load zones with less efficient generation being higher than in load zones with more efficient generation while transmission constraints prevent the lower cost generation from moving from one load zone to another. NSTAR Electric covers two of the eight load zones in New England: Northeastern MA (NEMA) and Southeastern MA (SEMA). NEMA is import constrained and SEMA is export constrained. At times NEMA has higher priced generation than SEMA. As part of SMD, load-serving entities, like NSTAR Electric, were granted proceeds from auction of “financial transmission rights” that is conducted by ISO-NE. NSTAR Electric can either use these proceeds to mitigate costs to customers directly or transfer them to the suppliers of its energy resource needs to reduce the cost to customers.

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Further developments in the movement towards SMD will occur in 2004 with the introduction of a capacity requirement within load zones by load serving entities (LSE), like NSTAR Electric. The current market structure allows capacity, located within all of New England, to count towards a LSE’s obligation. Since the New England market as a whole is currently in a surplus position, capacity trades at a relatively low price. Pursuant to FERC orders, ISO-NE is developing a new structure that will require LSE to provide a portion of their capacity needs within the zone where load is served. This will likely increase the price of power to NSTAR’s customers. These market rules are in development and must be approved by the FERC, currently scheduled for mid-2004. Until these rules are finalized and approved, NSTAR cannot anticipate the impact these changes will have on NSTAR Electric and its customers.

Regional Transmission Organization (RTO)

On October 31, 2003, the ISO-NE, responsible for the day-to-day operations of New England’s bulk generation and transmission systems, together with the utility companies that own transmission facilities in New England, filed a proposal with FERC creating a RTO in compliance with FERC directives and pronouncements. It is anticipated that FERC will act on this proposal by March 2004.

An RTO is intended to be an independent entity, without a financial interest in the region’s marketplace, that would have operating authority over the New England transmission grid and have the responsibility to make impartial decisions on the development and implementation of market rules. Under the ISO’s current proposal, the ISO-NE will be transformed into an RTO through a change of name and governance structure, designed to ensure independence from market participants. The new RTO will enter into a series of contractual arrangements that will define its functions and responsibilities, including a Transmission Operating Agreement, which will govern the relationship between the owners of transmission facilities, such as NSTAR (“Transmission Owners” (TO)) and the RTO, as the operator of the New England transmission grid. Separate agreements will govern the operation of the spot power and related markets, and merchant transmission facilities. Notwithstanding broad agreement between the ISO-NE and TOs on the allocation of their respective rights and responsibilities, there remain certain issues, particularly regarding the authority to make tariff filings and liability and indemnification obligations of the parties, which have not been fully resolved and may require FERC adjudication. While the RTO proposal has the support of the ISO-NE and the TOs, the New England Power Pool declined to support the proposal by a substantial margin. The Chairman of the MDTE has voiced support for the concept of an RTO, while the Massachusetts Attorney General has voiced skepticism about the benefits of the proposed RTO. The FERC effort encouraging the voluntary formation of an RTO is itself under attack nationally from opposition groups, primarily in the South and West. NSTAR generally supports the RTO proposal, which delineates the roles and responsibilities of TOs and the RTO in grid operation and potentially may increase the return earned on its investment in transmission-related assets. Management cannot estimate the impact of this proposal on the Company at this time.

NSTAR Gas

NSTAR Gas’ operating revenues and energy sales percentages by customer class for the years 2003, 2002 and 2001, consisted of the following:

	Revenues ($)			Energy Sales (therms)

Gas Sales and Transportation:	2003	2002	2001	2003	2002	2001
Residential	61%	64%	58%	47%	42%	43%
Commercial	25%	21%	27%	33%	34%	34%
Industrial and other	10%	9%	10%	17%	19%	18%
Off-System and contract sales	4%	6%	5%	3%	5%	5%

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NSTAR Gas distributes natural gas to approximately 0.3 million customers in 51 communities in central and eastern Massachusetts covering 1,067 square miles and having an aggregate population of 1.2 million. Twenty-five of these communities are also served with electricity by NSTAR Electric. Some of the larger communities served by NSTAR Gas include Cambridge, Somerville, New Bedford, Plymouth, Worcester, Framingham, Dedham and the Hyde Park area of Boston.

Natural Gas Industry Restructuring and Rates

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

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

Beginning in 2004, NSTAR’s rate was increased to reflect the carrying charge on the average net prepaid pension and PBOP balances and to recover a portion of the deferred pension and PBOP balances for 2003. Refer to the Consolidated Financial Statements, Note I, for more detail.

Effective November 1, 2000, the MDTE approved regulations that expand the choice of gas supplier to all customers of local gas distribution companies (LDCs) such as NSTAR Gas. The regulations established a five-year transition period and a three-year review of market conditions to determine whether the supply market has become sufficiently competitive to warrant removal or modification of the LDC’s service obligation with respect to planning and procurement. To meet the requirements of the regulations, NSTAR Gas has modified its billing, customer and gas supply systems to accommodate full retail choice. The MDTE previously had approved the compliance process submitted by NSTAR Gas and other LDCs that implement the unbundling of retail gas services to all customers. Among the important provisions are: setting the LDC as the default service provider, certification of competitive suppliers/marketers, extension of the MDTE’s consumer protection rules to residential customers taking competitive service, requirement for LDCs to provide suppliers/marketers with customers usage data, and requirement for suppliers/marketers to disclose service terms to potential customers. The MDTE has also ruled on requiring the mandatory assignment of the LDC’s upstream pipeline and storage capacity and downstream peaking capacity to customers who elect a competitive gas supply. This eliminates potential stranded cost exposure for the LDCs for the five-year transition period. In January 2004, the MDTE opened a new docket to determine whether the upstream capacity market is sufficiently competitive to warrant the voluntary assignment of interstate pipeline capacity to other entities. Such a determination could modify the mandatory approach to capacity assignment established in November 2000. NSTAR cannot predict or anticipate the outcome of this process or its impact on NSTAR or its customers.

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Gas Supply, Transportation and Storage

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

NSTAR Gas purchases transportation, storage and balancing services from Tennessee Gas Pipeline Company and Algonquin Gas Transmission Company, as well as other upstream pipelines that bring gas from major producing regions in the U.S., Gulf of Mexico and Canada to the final delivery points in the NSTAR Gas service area. NSTAR Gas purchases all of its gas supply from third-party vendors, primarily under firm contracts with terms of less than one year. The vendors vary from small independent marketers to major gas and oil producers. Based on its firm pipeline transportation capacity entitlements, NSTAR Gas contracts for up to 140,309 Million British thermal units (MMbtu) per day of domestic production. In addition, NSTAR Gas has an agreement for up to 4,500 MMbtu per day of Canadian supplies.

In addition to the firm transportation and gas supplies mentioned above, NSTAR Gas utilizes contracts for underground storage and liquefied natural gas (LNG) facilities to meet its winter peaking demands. The LNG facilities, described below, are located within NSTAR Gas’ distribution system and are used to liquefy and store pipeline gas during the warmer months for use during the heating season. The underground storage contracts are a combination of existing and new agreements that are the result of FERC Order 636 service unbundling. During the summer injection season, excess pipeline capacity is used to deliver and store gas in market area storage facilities, located in the New York and Pennsylvania region. Stored gas is withdrawn during the winter season to supplement pipeline supplies in order to meet firm heating demand. NSTAR Gas has firm storage capacity entitlements of nearly 8.0 billion cubic feet (Bcf).

A portion of the storage of gas supply for NSTAR Gas during the winter heating season is provided by Hopkinton LNG Corp. (Hopkinton), a wholly owned unregulated subsidiary of NSTAR. The facility in Hopkinton, Massachusetts consists of a liquefaction and vaporization plant and three above ground cryogenic storage tanks having an aggregate capacity of 3 Bcf of natural gas.

In addition, Hopkinton owns a satellite vaporization plant and two above-ground cryogenic storage tanks located in Acushnet, Massachusetts with an aggregate capacity of 0.5 Bcf of natural gas that are filled with LNG trucked from the Hopkinton facility or purchased from third parties.

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

Franchises

Through their charters, which are unlimited in time, NSTAR Electric and NSTAR Gas have the right to engage in the business of delivering and selling electricity and natural gas and have powers incidental thereto and are entitled to all the rights and privileges of and subject to the duties imposed upon electric and natural gas companies under Massachusetts laws. The locations in public ways for electric transmission and distribution lines or gas distribution lines or gas distribution pipelines are obtained from municipal and other state authorities which, in granting these locations, act as agents for the state. In some cases the actions of these authorities are subject to appeal to the MDTE. The rights to these locations are not limited in time and are subject to the action of these authorities and the legislature. Under Massachusetts law, no other entity may provide electric or gas delivery service to retail customers within NSTAR’s

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territory without the written consent of NSTAR Electric and/or NSTAR Gas. This consent must be filed with the MDTE and the municipality so affected.

Unregulated Operations

NSTAR’s unregulated operations segment engages in businesses that include district energy operations, telecommunications and liquefied natural gas service. District energy operations are principally provided through its Advanced Energy Systems, Inc. (AES) subsidiary that generates chilled water, steam and electricity for use by hospitals and teaching facilities located in Boston’s Longwood Medical Area. AES expanded its Medical Area Total Energy Plant (MATEP) facility in 2003 to provide additional capacity. NSTAR Steam also supplies steam to customers in Cambridge and Boston. Telecommunications services are provided through NSTAR Com, which installs, owns, operates and maintains a wholesale transport network for other telecommunications service providers in the metropolitan Boston area to deliver voice, video, data and internet services to customers. Liquefied natural gas service is provided by Hopkinton LNG Corp.

RCN Joint Venture, Investment Conversion and Abandonment

Beginning in 1997, NSTAR Com participated in a telecommunications venture with RCN Telecom Services, Inc. of Massachusetts, a subsidiary of RCN Corporation (RCN). As part of the Joint Venture Agreement, NSTAR Com had the option to exchange portions of its joint venture interest for common shares of RCN at specified periods. NSTAR Com exercised this option and exchanged its entire joint venture interest for common shares of RCN over several years through 2002. As of December 31, 2002, NSTAR Com no longer participated in the joint venture but held approximately 11.6 million common shares of RCN. On December 24, 2003, NSTAR abandoned its common shares of RCN.

Regulation

NSTAR Electric, NSTAR Gas, and Boston Edison’s wholly owned regulated subsidiary, Harbor Electric Energy Company, operate primarily under the authority of the MDTE, whose jurisdiction includes supervision over retail rates for distribution of electricity, natural gas and financing and investing activities. In addition, the FERC has jurisdiction over various phases of NSTAR Electric and NSTAR Gas utility businesses, including rates for electricity and natural gas sold at wholesale, facilities used for the transmission or sale of that energy, certain issuances of short-term debt and regulation of accounting.

NSTAR is a holding company exempt from the provisions of the Public Utility Holding Company Act of 1935, as amended, except Section 9(c)(2) relating to SEC approval of certain acquisitions of securities of public utility or public utility holding companies.

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Capital Expenditures and Financings

The most recent estimates of capital expenditures and long-term debt maturities for the years 2004 through 2008 are as follows:

	2004	2005	2006	2007	2008
(in thousands)
Capital expenditures*	$309,000	$313,000	$325,000	$256,000	$255,000
Long-term debt	$230,033	$177,562	$248,024	$83,218	$85,629


*	Includes expenditures related to NSTAR’s 345kv transmission project. This project is subject to regulatory approvals. Refer to “Liquidity and Capital Resources” section of Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further discussion.

Management continuously reviews its capital expenditure and financing programs. These programs and, therefore, the estimates included in this Form 10-K are subject to revision due to changes in regulatory requirements, operating requirements, environmental standards, availability and cost of capital, interest rates and other assumptions. Refer to the “Cautionary Statement” section of Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Net plant expenditures in 2003 were approximately $308 million and consisted primarily of additions to NSTAR’s distribution and transmission systems. The majority of these expenditures were for system reliability and performance improvements, customer service enhancements and capacity expansion to meet long-range growth in the NSTAR service territory as well as for new combustion turbines of NSTAR’s AES facility.

Refer to the “Liquidity and Capital Resources” section of Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for more information regarding capital resources to fund NSTAR’s construction programs.

Seasonal Nature of Business

NSTAR Electric kilowatt-hour sales and revenues are typically higher in the winter and summer than in the spring and fall as sales tend to vary with weather conditions. NSTAR Gas’ sales are positively impacted by colder weather because a substantial portion of its customer base uses natural gas for space heating purposes. Refer to the “Selected Consolidated Quarterly Financial Data” section in Item 6, “Selected Consolidated Financial Data” for specific financial information by quarter for 2003 and 2002.

Competitive Conditions

The electric and natural gas industries, in general, have continued to change in response to legislative, regulatory and marketplace demands for improved customer service at lower prices. These pressures have resulted in an increasing trend in the industry to seek efficiencies and other benefits through business combinations. NSTAR was created to operate in this marketplace by combining the resources of its utility subsidiaries activities in the transmission and distribution of energy.

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Environmental Matters

NSTAR’s subsidiaries are subject to numerous federal, state and local standards with respect to the management of wastes, air and water quality and other environmental considerations. These standards could require modification of existing facilities or curtailment or termination of operations at these facilities. They could also potentially delay or discontinue construction of new facilities and increase capital and operating costs by substantial amounts. Noncompliance with certain standards can, in some cases, also result in the imposition of monetary civil penalties. Refer to the “Contingencies - Environmental Matters” section in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for more information.

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

Number of Employees

As of December 31, 2003, NSTAR had approximately 3,200 employees, including approximately 2,400, or 75%, who are represented by three units covered by separate collective bargaining contracts.

Local 369 of the Utility Workers Union of America, AFL-CIO, represents approximately 2,000 employees with a contract that expires on May 15, 2005. Approximately 260 employees, represented by Local 12004, United Steelworkers of America, AFL-CIO, have a contract that expires on March 31, 2006. Approximately 70 employees of Advanced Energy Systems’ MATEP subsidiary are represented by Local 877, the International Union of Operating Engineers, AFL-CIO, with a contract that expires on September 30, 2006.

Management believes it has satisfactory relations with its employees.

(d) Financial Information about Foreign and Domestic Operations and Export Sales

None of NSTAR’s subsidiaries have any foreign operations or export sales.

Item 2. Properties

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

At December 31, 2003, the NSTAR Electric primary and secondary transmission and distribution system consisted of approximately 20,300 circuit miles of overhead lines, approximately 9,000 circuit miles of underground lines, 258 substation facilities and approximately 1,127,000 active customer meters.

NSTAR Electric’s high-tension transmission lines are generally located on land either owned or subject to perpetual and exclusive easements in its favor. Its low-tension distribution lines are located principally on public property under permission granted by municipal and other state authorities.

Cambridge Electric completed the sale of Blackstone Station in April 2003. NSTAR, through its Canal subsidiary, sold its 3.52% ownership interest (40.5 MW of capacity) in the Seabrook Nuclear Generating Station on November 1, 2002.

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NSTAR Gas’ principal natural gas properties consist of distribution mains, services and meters necessary to maintain reliable service to customers. At December 31, 2003, the gas system included approximately 2,950 miles of gas distribution lines, approximately 177,500 services and approximately 274,100 customer meters together with the necessary measuring and regulating equipment. In addition, Hopkinton LNG Corp. owns a liquefaction and vaporization plant, a satellite vaporization plant and above ground cryogenic storage tanks having an aggregate storage capacity equivalent to 3.5 Bcf of natural gas. NSTAR Gas owns an office and service building in Southborough, Massachusetts, three district office buildings and several natural gas receiving and take stations.

In 2002, NSTAR’s utility subsidiaries purchased a 370,000 square foot office building (the Summit) sited on 33 acres in the Boston suburb of Westwood, Massachusetts. This site is centrally located in NSTAR’s service area and houses its central administrative offices including customer care, finance, human resources, sales, engineering, and information technology.

District energy operations primarily consist of AES’ MATEP facility located in the Longwood Medical Area of Boston. MATEP provides steam, chilled water and electricity to over 9 million square feet of medical and teaching facilities. NSTAR Steam’s distribution system consists primarily of approximately 3.5 miles of high pressure steam lines to customers in Cambridge and Boston.

Item 3. Legal Proceedings

Other Legal Matters

In the normal course of its business, NSTAR and its subsidiaries are involved in certain legal matters, including civil litigation. Management is unable to fully determine a range of reasonably possible court-ordered damages, settlement amounts, and related litigation costs (“legal liabilities”) that would be in excess of amounts accrued and amounts covered by insurance. Based on the information currently available, NSTAR does not believe that it is probable that any such legal 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 for a reporting period.

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

There were no matters submitted to a vote of security holders during the fourth quarter of 2003.

Item 4A. Executive Officers of Registrant

Identification of Executive Officers

Name of Officer	Position and Business Experience	Age at December 31, 2003

Thomas J. May	Chairman, President (since 2002), Chief Executive Officer and a Trustee (since 1999); formerly Chairman, President and Chief Executive Officer and a Trustee (1998-1999), BEC Energy; Director, FleetBoston Financial; Liberty Mutual Holding Company Inc.; and New England Business Services, Inc.	56

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Name of Officer	Position and Business Experience		Age at December 31, 2003

Douglas S. Horan	Senior Vice President - Strategy, Law and Policy, Secretary and General Counsel (since 2000); formerly Senior Vice President - Strategy, Law and Policy (1999-2000); Senior Vice President - Strategy and Law and General Counsel, BEC Energy (1998-1999).	54

James J. Judge	Senior Vice President, Treasurer and Chief Financial Officer (since 2000); formerly Senior Vice President and Chief Financial Officer (1999-2000); Senior Vice President - Corporate Services and Treasurer, BEC Energy (1998-1999).	47

Timothy R. Manning	Senior Vice President - Human Resources (since 2002); formerly Vice President Human Resources (2001); Director of Employee and Labor Relations (1999-2001), Director of Human Resources, Boston Edison Company (1998-1999).	52

Joseph R. Nolan, Jr.	Senior Vice President - Customer Care and Corporate Relations (since 2002); formerly Senior Vice President - Corporate Relations (2000-2002); Vice President of Government Affairs (1999-2000); Director of Regulatory Relations, BEC Energy (1998-1999).	40

Werner J. Schweiger	Senior Vice President - Operations (since 2002); formerly Vice President, Office of Electric Operations/Transmission and Distribution Management, Keyspan Energy Corporation (1997-2002).	44

Eugene J. Zimon	Senior Vice President - Information Technology (since 2001); formerly Vice President, Business Development for Utilities, Oracle Corporation (2000-2001); Vice President, Information Services, Boston Gas Company (1996-2000).	55

Robert J. Weafer, Jr.	Vice President, Controller and Chief Accounting Officer (since 1999); formerly Vice President, Controller and Chief Accounting Officer, BEC Energy (1998-1999).	56

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PART II

Item 5. Market for the Registrant’s Common Equity and Related Stockholder Matters

(a) Market Information

NSTAR’s common shares are listed on the New York and Boston Stock Exchanges. NSTAR’s closing market price at December 31, 2003 was $48.50 per share.

The high and low market values per common share as reported by the New York Stock Exchange composite transaction reporting system for each of the quarters in 2003 and 2002 were as follows:

	2003		2002
	High	Low	High	Low
First quarter	$46.12	$38.67	$46.00	$42.30
Second quarter	$48.00	$39.78	$48.20	$43.66
Third quarter	$48.34	$43.63	$45.17	$34.00
Fourth quarter	$48.96	$45.08	$44.70	$36.90

(b) Holders

As of December 31, 2003, there were 26,701 holders of NSTAR common shares.

Dividends declared per common share for each quarter of 2003 and 2002 were as follows:

	2003	2002
First quarter	$0.54	$0.53
Second quarter	$0.54	$0.53
Third quarter	$0.54	$0.53
Fourth quarter	$0.555	$0.54

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Item 6. Selected Consolidated Financial Data

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

(in thousands, except per share data)
	2003	2002	2001	2000	1999(c)
Operating revenues	$2,914,131	$2,691,573	$3,184,046	$2,692,762	$1,851,427
Net income (loss)(a)	$ 181,574	$ 161,707	$ (2,426)	$ 175,002	$ 140,503
Earnings (loss) per share of common stock:
Basic (a)	$ 3.42	$ 3.05	$ (0.05)	$ 3.19	$ 2.77
Diluted (a)	$ 3.40	$ 3.03	$ (0.05)	$ 3.18	$ 2.76
Total assets	$6,320,660	$6,338,454	$5,328,191	$5,547,715	$5,466,143
Long-term debt (b)	$1,605,381	$1,645,465	$1,377,899	$1,440,431	$ 986,843
Transition property securitization (b)	$ 377,150	$ 445,890	$ 513,904	$ 584,130	$ 646,559
Preferred stock of subsidiary (b)	$ 43,000	$ 43,000	$ 43,000	$ 43,000	$ 92,279
Cash dividends declared per common share	$ 2.175	$ 2.13	$ 2.075	$ 2.015	$ 1.955

(a)	2002 and 2001 include non-cash, after-tax charges of $17.7 million and $173.9 million, or $0.33 per share and $3.28 per share, respectively, related to NSTAR’s investment in RCN Corporation.

(b)	Excludes the current portion of long-term debt and preferred stock.

(c)	Due to the application of the purchase method of accounting, the results for 1999 reflect eight months of BEC Energy and four months of NSTAR.

Selected Consolidated Quarterly Financial Data (Unaudited)

(in thousands, except earnings per share)

				Earnings
			Net	Per Basic
	Operating	Operating	Income	Common Share
	Revenues	Income	(a)	(a)(b)

2003
First quarter	$ 763,555	$ 85,477	$ 42,338	$ 0.80
Second quarter	$ 647,910	$ 74,136	$ 39,154	$ 0.74
Third quarter	$ 817,791	$ 103,175	$ 63,662	$ 1.20
Fourth quarter	$ 684,875	$ 73,256	$ 36,420	$ 0.69

2002
First quarter	$ 705,228	$ 76,715	$ 34,304	$ 0.65
Second quarter	$ 593,270	$ 69,061	$ 5,200	$ 0.10
Third quarter	$ 743,284	$ 117,141	$ 73,227	$ 1.38
Fourth quarter	$ 649,791	$ 74,680	$ 48,976	$ 0.92

(a)	The fourth quarter of 2003 includes a non-cash after-tax charge of $4.5 million, or $0.08 per basic share, related to NSTAR’s abandonment of its investment in RCN Corporation (RCN) fully offset by the recognition of related tax benefits of $4.5 million.

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	The second quarter of 2002 includes a non-cash, after-tax impairment charge of $27.6 million, or $0.52 per share, related to NSTAR’s investment in RCN common stock.

	The fourth quarter of 2002 includes a net gain of $9.9 million, or $0.19 per share, that reflects the recognition of tax benefits, based on an IRS review of NSTAR’s 1999 and 2000 tax returns, of $19.6 million, or $0.37 per share, related to NSTAR’s investment in RCN offset, in part, by an additional non-cash, after-tax impairment charge of $9.7 million, or $0.18 per share, associated with the RCN investment.

(b)	The sum of the quarters may not equal basic annual earnings per share due to rounding.

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

Overview

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

Cautionary Statement

The MD&A, as well as other portions of this report, contain statements that are considered forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. These forward-looking statements may also be contained in other filings with the Securities and Exchange Commission (SEC), in press releases and oral statements. You can identify these statements by the fact that they do not relate strictly to historical or current facts. They use words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,”

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“believe” and other words and terms of similar meaning in connection with any discussion of future operating or financial performance. These statements are based on the current expectations, estimates or projections of management and are not guarantees of future performance. Some or all of these forward-looking statements may not turn out to be what NSTAR expected. Actual results could differ materially from these statements. Therefore, no assurance can be given that the outcomes stated in such forward-looking statements and estimates will be achieved.

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

-	impact of continued cost control procedures on operating results
-	weather conditions that directly influence the demand for electricity and natural gas
-	changes in tax laws, regulations and rates
-	financial market conditions including, but not limited to, changes in interest rates and the availability and cost of capital
-	prices and availability of operating supplies
-	prevailing governmental policies and regulatory actions (including those of the Massachusetts Department of Telecommunications and Energy (MDTE) and Federal Energy Regulatory Commission (FERC) with respect to allowed rates of return, rate structure, continued recovery of regulatory assets, financings, purchased power, acquisition and disposition of assets, operation and construction of facilities, changes in tax laws and policies and changes in, and compliance with, environmental and safety laws and policies

-	changes in financial reporting standards
-	new governmental regulations or changes to existing regulations that impose additional operating requirements or liabilities
-	changes in specific hazardous waste site conditions and the specific cleanup technology
-	impact of uninsured losses
-	changes in available information and circumstances regarding legal issues and the resulting impact on our estimated litigation costs
-	future economic conditions in the regional and national markets
-	ability to maintain current credit ratings, and
-	the impact of terrorist acts

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Any forward-looking statement speaks only as of the date of this filing and NSTAR undertakes no obligation to publicly update forward-looking statements, whether as a result of new information, future events, or otherwise. You are advised, however, to consult all further disclosures NSTAR makes in its filings to the SEC. Also note that NSTAR provides in the above paragraphs a cautionary discussion of risks and other uncertainties relative to its business. These are factors that could cause its actual results to differ materially from expected and historical performance. Other factors in addition to those listed here could also adversely affect NSTAR. This report also describes material contingencies and critical accounting policies and estimates in this section and in the accompanying Notes to Consolidated Financial Statements, and NSTAR encourages a review of these Notes.

Critical Accounting Policies and Estimates

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

[ X ]	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the fiscal year ended December 31, 2003
	or
[ ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from to


Massachusetts		04-3466300

(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification Number)
800 Boylston Street, Boston, Massachusetts		02199

(Address of principal executive offices)		(Zip code)

Title of each class	Name of each exchange on which registered
Common Shares, Par Value $1 per share	New York Stock Exchange Boston Stock Exchange

Class	Outstanding at March 1, 2004
Common Shares, $1 par value	53,032,546 Shares

Documents Incorporated by Reference
Sections of NSTAR’s Definitive Proxy Statement for the 2004 Annual Meeting of Shareholders to be held on April 29, 2004
incorporated by reference into Parts I and III of this Form 10-K.

Commission file number	1-14768