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Message from Chairman Tye
GOVERNMENT DOCU'VitNTS OfCARTMf*^
JUL 2^ m9
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The Massachusetts State Legislature granted authority to the Boston Water and Sewer Connmis-
sion in 1 977. The Commission's mission is to ensure proper maintenance, operation, and reconstruction of
the more than 100-year-old Boston water and sewer delivery systems, as well as to assure the future finan-
cial stability of the Commission.
We believe the debt management policies which the Commission has undertaken will secure our
ability to accomplish our goals, both now and in the future. Basically the Commission has designed an
innovative debt structure which provides the flexibility to meet the demands, occasioned by changing
interest rates, or extreme changes in the economy.
Our 1 986 achievements, which include the upgrading of our bond ratings and our ninth consecu-
tive unqualified audit, substantiate the Commission's continued dedication to strong and sound fiscal
In the years ahead the Commission looks forward to completing its mission of system rehabilitation
and further establishing its reputation as one of the outstanding suppliers of water and sewer services in
A. Raymond T/e
The Boston Water and Sewer Commission was created in 1 977 to ensure adequate funding for the
City of Boston's water and wastewater systems, and to improve the long-term quality and reliability of water
and sewer services for all users in Boston. With this overall mandate as a driving force, the Commission has
set forth a number of goals, among which is to have rehabilitated all 1 00-year-old pipe, guaranteeing users
a high level of service at a reasonable cost. The quantity of debt financing to achieve these goals is largely
determined by technical and engineering requirements.
Therefore, the Commission has established a debt management policy with a tri-fold objective to
ensure our ability to accomplish our goals as well as maintain superior water and sewer services. Basically
BWSCs debt management involves a strategy which will:
Minimize the cost of debt within an acceptable range of interest rate exposure:
Provide protection against extreme economic events, particularly in an environment of hyper-
inflation or severe deflation:
Ensure sufficient flexibility for the Commission to alter the nature of its debt structure in response
to internal and external developments.
Primarily the Commission's aim has been to achieve a prudent mix of outstanding debt. Currently
the Commission has $206 million in debt outstanding: of which $ 1 5 5 million, or approximately 75% is in
long term fixed rates. However, the exclusive use of long term fixed debt could expose a borrower to possi-
ble financial stress in the event of a rapid decline in the inflation rate or, in the extreme, deflation. The Com-
mission has made a policy decision to include as a portion of its debt structure, short term variable rate
bonds because it would be fiscally unwise to totally forego the advantages of the lower interest rates which
have historically always been tied to shorter maturities. At the same time, as a public agency with a respon-
sibility to protect its ratepayers, the Commission must limit its exposure to the impact of possible extreme
economic events which would cause rapid increases in short term variable interest rates. To this end, the
Commission has established a flexible debt structure which will provide the foundation for funding all
future capital needs.
Combined Capital Improvements to Water & Sewer Property
IMPLEMENTATION OF DEBT MANAGEMENT FOLIC
In late 1 984, the Commission refinanced its outstanding debt, at no financial cost, with the
issuance of the $69,670,000 1 984 Series A General Revenue Bonds. This refunding was carried out to
enable the Commission to replace its existing bond resolution with a more modern and flexible resolution:
one which would allow for the utilization of variable rate debt among other financing alternatives. The 1 984
Bonds were structured as junior lien bonds, subordinate to future debt, in order to provide for future
increased debt capacity.
During March of 1 985 , BWSC took advantage of the flexibility contained in its new General Reve-
nue Bond Resolution through the issuance of $5 1 ,000,000 of variable rate debt. The 1 985 Series A Bonds
carried an initial average coupon of 678% in an environment in which the long term fixed rate alternative
would have been 1 '/i % or higher The proceeds of the 1 98 5 Bonds supplied the capital to continue the
Commission's efforts to rehabilitate and improve Boston's water and wastewater systems.
In the Spring of 1 986, the Commission assessed the implications of the impending Federal TSx
Reform Legislation. Consideration was given to the impacts of future tax reform which would have affected
the Commissions ability to efficiently and cost-effectively access the financial marketplace and achieve the
objectives of its long term debt management policy The results of this examination concluded on August
5 , 1986 with the issuance of $8 5 ,000,000 in General Revenue Bonds. This financing was structured as a
Rolling Cross-Over Refunding and New Money Issue.
The 1 986 Bonds provide the Commission with funds necessary to execute its capital improve-
ments through 1 989. The sale of the 1 986 Bonds also furnished the funds which established the 1 986 Series
A Escrow Account to secure a guaranteed lock in at historically low long term interest rates for the 1985
bonds. Coupled with the 1 98 5 $ 5 1 ,000,000 f lexi-note issue, the 1 986 Bonds alleviate the risks associated
with floating rates while still allowing the Commission to enjoy the low short term interest rates associated
withthe 1985 issue.
As an almost immediate sequel to the closing of the 1 986 financing, in October 1 986, the Commis-
sion successfully completed the remarketing of $2 5 . 5 million of its 1 98 5 Series A Variable Rate Bonds. This
process served to highlight the advantages of the Rolling Cross-Over strategy The remarketed bonds were
sold at a one-year rate of 4. 1 5% maturing on November 1 , 1 987. Including letter of credit and remarketing
fees, the gross cost of the bonds is approximately 4.85% which represents a net savings over the next
twelve months of approximately 2 .90% or $7 50,000 over the equivalent cost of long-term bonds.
DEBT MANAGEMENT RESULTS
The 1 986 Issue solidifies the Commission debt structure as we face a period of intensive capital
pressures: this was acknowledged by both Rating Agencies resulting in an upgrade by Standard & Poors
from A- to A and by Moody s from Baal to Baa.
Based on an audit of 1 986 results, the Commission received its ninth consecutive unqualified
audit opinion. Continual clean audit opinions are evidence not only of good fiscal management, but also
instill a high level of confidence to the holders of Commission debt. Clean audit opinions also positively
affect the Commission's ability to cost-effectively access the bond markets, influence its bond rating and
consequently lessen the interest costs associated with its debt service, thus providing protection for the
A. Raymond lye
David L. Conlon
Francis W. Gens
Michael T. Feeney
DIRECTOR OF MIS,
Boston Water and Sewer Commission:
We have examined the balance sheets of the Boston Water and Sewer Commission as of December
31.1 986 and 1 985 and the related statements of operations, of Commission equity and of changes in finan-
cial position for the years then ended. Our examinations were made in accordance with generally accepted
auditing standards and, accordingly, included such tests of the accounting records and such other auditing
procedures as we considered necessary in the circumstances.
In our opinion, such financial statements present fairly the financial position of the Boston Water
and Sewer Commission at December 31,1 986 and 1 985 and the results of its operations and changes in its
financial position for the years then ended, in conformity with generally accepted accounting principles
applied on a consistent basis.
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March 20, 1987
Balance Sheets, Decembers!, 1986and 1985
Accounts receivable— customers.
less allowances of $8,604,000 in
1986 and $4,389,000 in 1985
Earned revenues in excess of
billings, less allowances of
$397,000 in 1986 and $632,000 in
Federal and state construction
City of Boston— net
Total Current Assets
PROPERTY, PLANT AND EQUIPMENT NET
DEBT ISSUE COSTS, LESS AMORTIZATION
$ 699,389 $ 616,806
1, 3, 8
See notes to financial statements.
LIABILITIES AND COMMISSION EQUITY
Payable from current assets:
Other accrued liabilities
Due to City of Boston— net
Payable from restricted asset funds:
Massachusetts Water Resources
Authority assessment for water
General Revenue Bonds
Total Current Liabilities
Massachusetts Water Resources
Authority assessment for water and
General Revenue Bonds
Total Other Liabilities
Total Commission Equity
Statements of Operations
for the Years Ended December 31, 1986 and 1985
Water and sewer
Tc O, -'rating
PRIOR YEAR RATE
See notes to financial statements.
Statements of Commission Equity
for the Years Ended December 31, 1986 and 1985
Balance, lanuary 1, 1985
Contributions In aid of
Depreciation of related
Balance, Decembers!. 1985
Contributions in aid of
Depreciation of related
Balance. December 31,1 986
See notes to financial statements.
Statements of Changes in Financial Position
for the Years Ended December 31, 1986 and 1985
Depreciation and amortization (no funds
Realized from (used for):
Accounts receivable— net
Earned revenues in excess of billings-
Accounts payable, assessments, accrued
liabilities and otfier
$ -0- S -0-
Contributions in aid of construction-
Debt issue costs
SI ,876,248 51,000,000
(1,548,082 ) (1,294,665 )
INVESTING ACTIVITIES-Purchase of
property plant, and equipment
CASH AND SECURITIES:
Increase (decrease) during year
Balances at beginning of year
Balances at end of year
YEAR-END BALANCES COMPRISED OF:
TOTAL CASH AND SECURITIES
(27.589.812 ) (23.677.152 )
See notes to fimndal statements.
Notes to Financial Statements
ORGANIZATION, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
The Boston Water and Sewer Commission (the "Commission") has the responsibility to provide
water and wastewater services on a fair and equitable basis in the City of Boston (the "City") as required
under the Boston Water and Sewer Reorganization Act of 1977 (the "Enabling Act").
Under the Enabling Act, the Commission is required to maintain and present its financial state-
ments in accordance with generally accepted accounting principles ("GAAP"). Also, the Commission has
adopted a rate setting process which recognizes certain costs in periods other than when the costs are
incurred. This is generally accepted as appropriate regulatory practice.
To accommodate this rate setting process the Commission follows the accounting standards set
forth under the Financial Accounting Standards Board Statement No. 7 1 ("FAS-7 1"), "Accounting for the
Effects of Certain Types of Regulation." FAS-7 1 requires that under regulation a) revenues provided for
future allowable costs are deferred until the costs are actually incurred (deferred revenues): b) allowable
incurred costs are capitalized if future recovery is assured (deferred charges).
The following is a reconciliation outlining the effects of FAS-7 1 on the statement of operations for
the years ended December 31, 1986 and 1985:
Net income prior to deferrals
Revenues and expenses deferred in
accordance with FAS-7 1 :
Excess of revenues raised over
Income from current operations
$ 2,631.615 $ 5,294.324
The Enabling Act requires that any net surplus or deficit, as defined by the rate setting process,
must either be returned to the City or applied to offset water and sewer rates for the following year. The
Commission has applied $8,863,2 51 and $4,914, 236for the years ended December 31, 1986 and 1985,
respectively, to offset rates in the respective subsequent years.
Water and sewerage fees are billed to users of the systems on a quarterly cycle basis. Revenues are
accrued for periods between the termination of billings for the various cycles and the end of the year.
Trusteed and Non-Trusteed Assets
These assets, consisting of direct and unconditionally guaranteed short-term obligations of the
U.S. Government; repurchase agreements and money market units secured by government securities, are
stated at cost plus accrued interest (approximating market).
Property, Plant and Equipment
Property plant and equipment is stated at cost. Depreciation is provided on the straight-line
method based on the estimated useful lives of the various classes of assets. Maintenance and repairs are
charged to expense as incurred. Major renewals or betterments are capitalized and depreciated over their
estimated useful lives.
60 to 100
Contributions received in aid of specific construction projects are considered contributed capital
and are included in Commission equity. Accordingly, depreciation of the related property is charged
directly to Commission equity and is not included in the accompanying statements of operations.
The ranges of estimated useful lives used in computing depreciation are as follows:
Meters and hydrants
The Commission capitalizes interest cost related to construction of assets for its own use. Interest totaling
approximately $734,000 and $722,000 was capitalized in 1986and 1985, respectively.
Bond issue Lost:
Expenses related to the issuance of bonds are amortized on a weighted-average basis over the life
of the bonds.
2. DEFERRED CHARGES AND ^°
The following is a summarization of the major components of deferred charges and revenues as
reflected in the accompanying balance sheet:
Provision for pension settlement (see
Note7| $17,707 $ 8,300
Excess of amounts accrued for water and
sewerage assessments over cash payments
Provision for litigation claims
Provision for adjustments
Total deferred charges $46,801 $27,414
Current deferred charges $17,230 $ 8,826
Noncurrent deferred charges 29,571 18,588
Total $46,801 $27,414
Capital improvement reimbursements $45,803 $34,391
Principal payments on long-term debt 2,899 8,814
Allowance for slow collection 9,682 12,196
Other 16,299 15,373
Total deferred revenues $74,683 $70,774
Current deferred revenue $21,011 $18,974
Noncurrent deferred revenue 53,672 51,800
Total $74,683. $70,774
3. PROPERTY, PLANT AND EQUIPMEr
The cost of water and sewerage plant and equipment in service and related accumulated deprecia-
tion at December 3 1 , 1986 and 1985 are summarized as follows:
Meters and liydrants
Less accumulated depreciation
Construction in progress
C DAVADl C
Outstanding bonds payable including accrued interest, at December 31. 1986 and 1985 were
1 984 Series A, bearing interest rates
ranging from 6.75% to 10.5% with maturity
dates ranging from lanuary 1 . 1 987 to
lanuary 1. 2011
1985 Series A. bearing variable interest
rates (4.1 5% and 7.375% at December 3 1 ,
1 986), maturing in two equal amounts on
November 1, 2014 and 201 5 and requiring
annual sinking fund contributions through
1 986 Series A, bearing interest rates
ranging from 4.75% to 7.875% with maturity
dates ranging from November 1 , 1 987 to
City Bonds, bearing interest rates ranging
from 4 . 2 5 % to 8% with maturity dates
ranging from November 1987 to
Total bonds outstanding
Less current portion due within one year
including accrued interest
Portion due after one year net of
unamortized original issue discount
$ 67.991.521 $ 68.350.481
The Resolution Establishing Issue of Revenue Bonds adopted by the Commission on December 6,
1 984 places certain restrictions on the Commission's operations, it requires that rates, charges and fees
be set at a level sufficient to meet a net revenue test on an annual basis and requires that all revenues, as
defined, be deposited in a Revenue Fund maintained by a fiscal agent. Amounts held in the Revenue Fund
are to be disbursed to and withdrawn from other funds provided for in the Resolution. The Resolution pro-
vides that all excess cash be held in the Revenue Fund until the last business day of the fiscal year. At that
time, if certain covenants are met, the Commission has the option to remove any excess cash from the
Revenue Fund and place such cash in a fund not restricted by the Resolution.
In compliance with the Resolution, the Commission has established both trusteed and non-
trusteed funds with assets, principally short-term securities, which are restricted for payment of specified
liabilities. The Commission has options for early redemption of revenue bonds starting in 1995 at prices
ranging from 103 to 100 percent of face value.
The 1 984 Series A Bonds were issued in order to advance refund a series of 1 980 System Revenue
Bonds. Under the Refunding TVust Agreement, the Commission deposited sufficient funds with the 1 980
Bond TVustee to pay when due, the principal and interest on all 1 980 bonds through lanuary 1 . 200 1 , the
final maturity date thereon. By depositing such funds with the 1 980 Bond TVustee under the Refunding TVust
Agreement, the Commission caused the 1 980 Bonds to be no longer outstanding under the 1 980 Resolu-
tion. The 1 980 Bondholders have no right, title, interest or liens in any other funds, real or personal prop-
erty or assets of the Commission other than the amounts held under the Refunding TYust Agreement and
pledged for their benefit thereunder.
The 1985 Series A Bonds were issued to provide funds for projects under the Commission's
ongoing capital improvement programs and other capital and operating needs.
In August of 1 986, the Commission issued 1 986 Series A General Revenue Bonds (1986 Bonds) .
This issue was structured as a rolling cross-over refunding and new money issue. The 1986 bonds provide
funds for the Commission's ongoing capital improvement program and other capital and operating needs.
In addition, a portion of the proceeds of the 1 986 bonds were deposited to the 1 986 Series A Escrow
Account to provide for the principal payments of the 1 985 Series A Bonds and the interest payments of the
1986 bonds as they come due. Thus, the Commission is allowed to pay the low short-term interest rates
provided under the 1 98 5 bonds and has secured a guaranteed redemption for the 1 98 5 bonds.
At the time of its creation, the Commission assumed general obligation certificates of indebted-
ness of the City (City Bonds) pertaining to the water and sewerage works systems. Payments for principal
and interest are made directly to the City in accordance with the original maturity and interest schedule.
Aggregate bond maturity and sinking fund requirements of the Revenue bonds and City bonds at
December 31, 1986 are as follows:
1987 S 2,850,000
Subtotal 209,03 5,000
Accrued interest 6,446,007
Unamortized debt discount (7,458,706 )
Total bonds payable $208,022,301
5. MASSACHUSETTS WATER "
On January 1, 1985, legislation became effective creating the Massachusetts Water Resources
Authority (the Authority) which transferred possession, control and operations of the Metropolitan District
Commission (MDC) Waterworks and Sewer System to the Authority The Authority commenced operations
onluly 1, 1985.
The Authority (previously MDC) provides all the Commissions water and sewer treatment require-
ments and assesses the Commission for its actual operating and capital expenses. Payments for the prior
calendar year's water and sewer treatment assessments are due semi-annually in November of the current
year and in May of the subsequent year. Interest is not charged on the outstanding balance. Charges and
assessments for 1986 and 1985 are as follows:
Watercharges $15,761,242 $14,141,028
Wastewater assessments 20,723,367 18,101,887
Total $36,484,609 $32,242,915
In 1 986 and 1985, approximately 67% of water purchased from the Authority was billable to cus-
tomers. Since its inception, the Commission has increased the percentage of billable water from 52% in
1 977 to the current level of 67% in 1 986 and is continuing to take steps to improve the amount of water bill-
able, including replacement of old and defective meters and a comprehensive leak detection and repair
6. TRAi^iSACTIONS WITH THE CITY OF BOSTON
The Commission's ongoing program to meter City facilities has resulted in billings to nine City
departments based on actual consumption of $1 ,016,000 and $707,000 in 1 986 and 1985, respectively
The remaining four City departments were billed based on estimated consumption for $ 1 , 1 82,000 and
$988,000 during 1986 and 1985, respectively
The City provides services to the Commission, including paving and facilities rental. Operating
costs billed by the City were $48 1 ,000 and $924,000 during 1 986 and 1 98 5, respectively Capital costs
billed by the City were $264,000 and $684,000 during 1986 and 1985, respectively
7. RETIREMENT BENEFITS
The Commission provides retirement benefits to substantially all of its employees through a pen-
sion trust fund (trust fund) and the State-Boston Retirement System (Boston System). The Commission's
policy is to accrue the normal cost of future benefits using an actuarially determined rate of 1 1 . 1 4% of regu-
lar compensation. Pension expense is generally funded annually and was $1 ,267,.000 and $1,1 79,000 for
1986 and 1985, respectively
The fair market value of trust fund net assets available for benefits was $ 1 0,984,000 and
$9,45 1 ,000 at December 3 1 , 1986 and 1 985, respectively The trust fund reimburses the Boston System for
the Commission's share of all benefit payments made to its retired employees and related administrative
During 1986, a dispute concerning the Commission's past and future obligations to all employees
covered by the Boston System was settled, resulting in a payment of $ 1 9, 1 00,000 to the Boston System.
This payment, funded primarily through proceeds from bonds issued in 1 98 5 and 1 986. was recorded as a
deferred charge to be recovered through future rates.
The Commission exercised its option to renew the lease for office space through April 1 988 at an
annual rental of $ 1 93 ,000 which provides that the Commission pay for utilities, insurance, tax escalation
and maintenance. Total rent expense charged to operations amounted to $7 58.000 and $764,000 in 1 986
and 1985, respectively.
A major capital improvement program is currently in progress. As part of this program, the Com-
mission has entered into a number of contracts for the design and construction of its facilities. Commit-
ments under these contracts aggregate $3,686,000 at December 31, 1986. Capital improvements, primarily
related to water and wastewater system projects with an emphasis on the clean-up of the Boston Harbor
area, are expected to aggregate $89 million for 1987 through 1 991 . Of this amount $47 million represents
extension and improvement projects to be funded by the proceeds of Commission revenue bonds and fed-
eral and state grants for certain wastewater projects, and $42 million represents renewal and replacement
projects to be funded by current revenues of the Commission.
The Commission is involved in ordinary and routine litigation incidental to its operations. Manage-
ment believes that the resolution of these matters will not materially affect the financial position of the
The Commission has received federal and state grants for specific purposes that are subject to
review and audit by the grantor agencies. Such audits could lead to requests for reimbursement to the
grantor agency for expenditures disallowed under terms of the grant. The Commission believes such disal-
lowances, if any, will not be significant.
The Commission is involved as a defendant in litigation regarding the pollution of Boston Harbor.
Management believes that, except for increases in future MWRA assessments incidental to the litigation,
the Commission's extensive capital improvement program (see Note 8) addresses possible actions that the
Commission may be required to undertake in connection with this litigation.
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Boston Water and Sewer Commission
10 Post Office Square
Boston, MA 02 109. '":^'-'U\„. -