Annual report

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GOVERN Rfit^r Q3CUteEWTS DEPARTMENT i
RECEIVED

JAN 4 1999

Ar^sitM i^tpomT

Boston Water and Sewer Commission

Boston Water and
Sewer Commission

425 Summer Street
Boston, MA 02210-1700
61 7-330-9400
Fax 617-330-5167

August 1998

Dear Colleague:

I am pleased to present the Boston Water and Sewer Commission's 1997 Annual Report.
This report highlights the achievements of the Commission in 1997 and our ability to insure,
for an unprecedented fifth consecutive year, no water and sewer rate increase in 1998.

The Commission maintains a strong record of providing high quality drinking water and
wastewater collection services to the City of Boston. Believing that prospective action is the
key to success, we will continue to identify and implement measures to improve the quality
and efficiency of our services to save the ratepayers money.

If you have any questions regarding the information presented in our 1997 Annual Report
please do not hesitate to contact my office at (617) 330-9400.

Sincereby,

enclosure

Digitized by the Internet Archive

in 2010 with funding from

Boston Public Library

http://www.archive.org/details/annualreport1997bostsew

79?7 - \9°^

Executive Director's Message

o

n July 18, 1977, the Boston Water and Sewer
Commission (BWSC) was formed by the State
Legislature to assume ownership and responsibility
for the maintenance and operation of water and
sewer services to Boston residents, businesses and
institutions. The State Legislature directed the
Commission to "avoid the . . . deterioration of the
financial . . . and physical condition of Boston's
water and sewer system, the need to 'protect natural
resources' and insure the availability of . . . services
at fair but sufficient rates." Twenty years later (in
1997), I am proud to announce that the Commis-
sion has exceeded the directive set by the State
Legislature.

When the Commission was formed in 1977, Boston's
water and sewer infrastructure was in a state of
neglect. Water mains and sewer pipes suffered leaks
that were wasting water which in turn wasted money.
The Commission acted, creating rehabilitative and
preventive maintenance programs, such as a yearly
Capital Improvement Program to help bring the
system into order. A major result of the extensive
repair and maintenance programs initiated through
the annual CIP was Boston leading all major cities in
the Northeast in the least number of main breaks per
mile of pipe in 1997. In addition, during the 1980s
and early 1990s water consumption was cut nearly in
half. Utilizing the latest technology, the Commission
has improved productivity, leading to the receipt
of numerous awards for excellence in the environ-
mental, engineering and financial fields.

In the 1980s, the Boston Harbor Project brought an
additional challenge of double-digit rate increases.
The Commission met this challenge by increasing
productivity and lowering costs and has not increased
water and sewer rates from 1993 to 1997. In addition
to maintaining a flat water and sewer rate for four
consecutive years, the Commission received its
highest bond rating ever in 1997.

These past achievements serve as the impetus to
future goals. The Commission continues its mission
of providing the best possible service at the lowest
possible cost. Improvements to the infrastructure and
technological advancements continue, all to increase
the Commission's efficiency and provide better cus-
tomer service.

Muhammad Ali-Salaam, Commissioner; Cathleen Douglas Stone,
Commissioner; Vincent C. Mannering, Executive Director; and Dennis
A. DiMarzio, Chairman, Board of Commissioners.

The Commission is proud of what has been accom-
plished in 20 years. But now is not the time to be
complacent. The Commission is in the midst of
implementing its strategic technology plan and by
January 1, 1999 will be Year 2000 compliant and
ready to serve the ratepayer of Boston in the new
century.

Sincerely,

Vincent G. Mannering /
Executive Director

Ty/7

July 18, 1977

• BWSC is established with a three-member board of
commissioners that oversee operation
of the newly formed organization to
take possession of the City's water
and sewer systems.

1978

• BWSC obtains City's water and
sewer system.

• Leak Detection and Residential
Metering Programs established.

K? -%* *?*\

1981

• Plan for the construction '
of the Boston Main
Interceptor and East Side
Interceptor initiated with a
scheduled completion of
1990.

2-3

Technological
Advancements and
Financial Integrity

Technological Advancements

The Commission is committed to taking advantage of
technological advancements that are designed to
improve overall efficiency of its operations and better
serve its customers. Over the last 20 years, the
Commission has progressed from hand- recording
employee and customer information to the imple-
mentation of state-of-the-art computer networking
system implementations launched in preparation for
the year 2000 and beyond. These included the
Oracle* Relational Database Management System,
Microsoft"' Windows NT, Geographical Information
System (GIS) software, and the PeopleSoft' Human
Resource Management System (HRMS).

The Oracle Relational Database Management System
provides the Commission with a robust database
engine and supports data replication and warehous-
ing. Microsoft Windows NT has become the
Commission's standard personal computer operating
system and is used to run Microsoft8 Exchange for
both internal and external electronic mail (e-mail)
communications. New Geographical Information
System (GIS) software was purchased from ESRI,
Inc. to house digitized base maps of the City of
Boston and digital "overlays" of water and sewer
facilities. The Commission's functionally obsolete
Human Resource Management System (HRMS) was
replaced with a client/server-based PeopleSoft
HRMS. The new HRMS takes full advantage of the
Commission's advanced technical infrastructure and
provides users with immediate access to all employee
and applicant profiles.

Financial Integrity

In January of 1978, the Boston Water and Sewer
Commission obtained the City of Boston's water and
sewer systems with minimal income from customers
and users. Shordy thereafter, a metering program was
initiated. The Commission began collecting revenue
to help fund many projects that needed to be under-
taken, from the construction of the Boston Main
Interceptor to the undertaking of various technologi-
cal initiatives. The Commission has consistently main-
tained an operating surplus since its inception, and in
1997 operated with a $9,622,986.00 surplus. The
operating surplus is applied direcdy to reducing the
rate revenue requirement in the following year. In
addition to maintaining an outstanding surplus, the
Commission did not raise water and sewer rates
for the fourth consecutive year (1993-1997). This
outstanding money management resulted in the
Commission receiving a credit upgrade from A to A+
by Standard and Poor's and from A to A 1 by
Moody's Investor's Service.

The Commission's Finance Division has been contin-
ually awarded for its outstanding money management
practices, including receiving the GFOA Certificate
of Excellence in Financial Reporting for the fifth con-
secutive year, and for the sixth consecutive year, the
GFOA Distinguished Budget Presentation Award.
For the first time ever, the Commission received an
"Outstanding" rating in the GFOA Budget Award
Program.

1982

• Comprehensive study
launched of Boston's
entire sewer system.

• Construction begins on
New East Side and New
Boston Main Interceptors
four-contract project.

im

5WWI

i yi

1984

• Commission refinances
its outstanding deh! with
the issuance of the Sb°.7
million Series ft General
Revenue Bonds.

• Contract 2 of New
Boston Main Interceptor
Project complete.

1986

• Issuance of $85,000,000 in general
revenue bonds.

• Debt Management Policy established.

1987

• Initiation of Valve Upgrading Program
and Hydrant Improvement Program.

■ Renewal and Replacement program
for water system established to ensure
that by the year 2010, all pipes in the
system more than 100 years old
would be rehabilitated.

1988

• New Meter Reading System
introduced.

• Complete restructurization of
budgeting, financial
planning and rate-setting
process.

' BWSC /

4-5

Operating Efficiency

w.

hen the Commission obtained the City of
Boston's water and sewer infrastructures, it was faced
with a neglected system. Water main breaks were
frequent, and leaks plagued the system. In the first
few years of the Commission's existence, enormous
energy was expended on surveying the water and
sewer systems, and creating many preventive mainte-
nance programs that are still utilized to this day.

The Commission's Operations Division was
established to perform the day-to-day maintenance
on the water and sewer systems as well as to answer
customer requests for service and respond to emer-
gencies. The Division was originally structured as two
separate areas: water operations and sewer opera-
tions. In the mid-nineties the division was reorga-
nized and merged into one area: water and sewer
operations. This merger has allowed for more effi-
cient management practices and customer service.

Preventive maintenance is a major component of the
Operations Division activities. In 1997, a water main
flushing program was implemented to improve the
quality of water distributed to customers. In 1997,
254.3 miles were flushed, 3,542 valves surveyed and
2,051 hydrants operated. Due to the professionalism
and experience of the Commission's flushing crews,
customer inconvenience was negligible.

During 1997, Commission crews began a cross-
training program to broaden their working capacity.
Thirty-eight employees were trained through the

1997 OPERATIONS DIVISION ACHIEVEMENTS:

• Downsized 243 meters, allowing for an
additional 15,806.97 cubic feet of consumption
to be accounted for (a $215,890 increase in
revenue) and a $34,405 reduction was realized
in capital cost savings

• 4,356 meters were replaced

• Eliminated 180 streamlined pipes

■ Removed 437 connecting pipes and relocated 37
meters from outside pits

• Installed 126 new Mills and repaired 629

Commission's Cross-Training Program, 97 employees
were Competent Person Trained and 59 employees
were trained on Confined Space Entry.

A Radcom alarm system that monitors the MWRA's
master meters was implemented. The system also
provides graphics and chart tracking for
broken/repaired ARBs and AMRs, main break
chronologies and meter downsizing.

1989

• Leak Detection Program
saves Commission 10.1
million gallons of water
per day.

1990

• Unaccounted-for
Water Task Force
developed.
Unaccounted-for
water now at 27°/o

• Meter Downsizing
Program initiated.

Wu1

TW

1991

• Collection rate for
accounts receivable
increased from 94%
to "8".

• In-house automated
financial management
system implemented.

he extensive efforts
men and women

; Commission a
erable amount
money annually,
a saving that is passed
onto ratepayers in the
form of flat rates
and more efficient
water service.

♦ "

\

1992

• 1992 Distinguished Budget
Presentation Award; 1992 Best
Overall Public Water System
Award; 1992 New England
Environmental Award.

I Zr SS<J

■ Installed Automatic Meter Reading devices
for over 1,500 of BWSC's largest user
accounts. .^^B

■ Executed a refunding bond W|P<I\
issue totaling approx. $101 J; '.\*ffc-
million.

1994

• New St. James
Avenue Interceptor
Project initiated.

• Downspout
Disconnection
Program launched to
reduce infiltration
and inflow.

1997 BVVSC

Engineering Minds

T„

he Engineering Division has undertaken several
dramatic projects through the years, from the New
Boston Main Drainage and East Side Interceptor
projects in the early and mid-eighties to the New St.
James Avenue Interceptor Project in the late nineties.
Achievements in 1997 include the completion of the
Port Norfolk drainage and water improvements,
AUston-Brighton Sewer System Evaluation and the
Stony Brook Sewer System Study. AutoCAD 13 was
successfully implemented to replace manual drafting
and mapping and update the layout of the city's
water and sewer infrastructure. In addition, the
division's Geographical Information System (GIS)
was expanded. A blockage in the Stony Brook Valley
Sewer was located and removed, eliminating 500,000
gpd of dry weather overflow into the Charles River.
A database for tracking sewer use violations was
initiated and developed as well as a computerized
system to monitor and track the Commission's exca-
vation permit process. The New St. James Avenue
Interceptor Project received the ACEC's Grand
Award honor for its state of the art use of new
technologies, including microtunneling, cured in-
place lining, shotcrete lining and pipe bursting.

Leak detection has proved to be a significant factor
in money-saving and system upkeep. When the
Commission was formed, leaks proved to be such a
problem both financially and structurally that a Leak
Detection Program was initiated in 1978. By 1987,
38% of the total system (447 miles) was surveyed for

leaks annually. In 1988, 95% of the system was sur-
veyed and in 1989 the Leak Detection Program saved
the Commission 10.1 mgd. In 1997, 319 leaks were
located for an additional savings of 3.1 mgd.

UNACCOUNTED-FOR WATER FROM 1977 TO 1997

The programs developed by the Commission to combat the
unaccounted-for water problem have reduced the levels by over
50 mad since 1977.

The extensive efforts by the men and women work-
ing in the Leak Detection Program save the
Commission a considerable amount of money
annually, a saving that is passed onto ratepayers in the
form of flat rates and more efficient water service.

;yyj

1995

• Fifty-one illegal connections
correcled, removing 9,100
mgd untreated sewage to
receiving waters.

• Second consecutive year with
no rate increase.

™

1996

• New St. James Avenue
Interceptor Project finished
two years ahead of schedule
and under budget

• St. James Avenue Interceptor
Project named "Project of the
Year" by Trenchless Teclmoloqv
Magazine; 1996 Outstanding Acr
Boston Society of Civil Engineers.

ement \nard trom

\yy

a

m

1997

• BVVSC celebrates its
20-year anniversary.

• Direct expenses at their
lowest level since 1989.

• Fourth consecutive year with no rate increase

• BWSC receives highest bond rating ever.

• Receives CFOA anard for outstanding financial
management.

In Memoriam

q

"n September 1, 1997,
the Boston Water and Sewer
Commission lost of one of its
legacies, John P. "Jake"
Sullivan, former Director of
Operations. Jake worked for
the Boston Transit Department
before joining the City of
Boston Public Works Water
Division on April 22, 1948. He
was a registered professional
engineer and a certified opera-
tor of drinking water systems in the Commonwealth.
During his years in the Water Division, Jake worked
his way up to become the Division Engineer in 1970,
responsible for overseeing the entire operation of the
Water Division. Jake worked on many major projects
during his years at the Water Division, including
overseeing the rebuilding of the water systems at
Government Center and the redevelopment of the
South End and Charlestown. He was also instrumen-
tal in introducing cleaning and cement refining of
water pipe as a cost-effective rehabilitation in Boston,
one that is still used to this day. He implemented the
recommendations of the 1986 Water Distribution
Study, including the construction of two major 36-
inch and 48-inch transmission lines in Charlestown
and Roxbury.

When the Commission was formed in 1977, Jake was
appointed to the position of Director of Operations
for Water and Sewer Services and held the position
until his retirement on June 30, 1988.

In addition to his many
accomplishments in Boston,
Jake was also an honorary
member of the Massachusetts
Water Works Association and
a life member of the New
England Water Works
Association, American Public
Works Association and the
Boston Society of Civil
Engineers. He did not stand
alone in his tenure at the
Commission and Public Works Department. Jake was
the middle generation of Sullivans to work for
Boston. His father, Daniel M. Sullivan, began with
the Water Division of the City's Public Works
Department in August of 1911 and was Division
Engineer for many years. Jake's son, John P. Sullivan,
Jr., began with the Water Division in 1972 and is cur-
rently the Chief Engineer for the Commission and an
acclaimed expert on infrastructure rehabilitation. In
addition to John Jr., Jake's other sons, Daniel and
Richard, also hold management positions at the
Commission in the Operations Division.

Jake is fondly remembered and sorely missed.

mmmmammmmm

Independent Auditors' Report

THE COMMISSIONERS

BOSTON WATER AND SEWER COMMISSION:

We have audited the accompanying balance sheets of the Boston Water and Sewer Commission
(the "Commission") as of December 3 1 , 1997 and 1996, and the related statements of operations,
Commission equity and cash flows for the years then ended. These financial statements are the
responsibility of the Commission's management. Our responsibility is to express an opinion on
these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing standards. Those stan-
dards require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits provide a reason-
able basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the
financial position of the Commission at December 3 1, 1997 and 1996 and the results of its opera-
tions and its cash flows for the years then ended in conformity with generally accepted accounting
principles.

Our audits were made for the purpose of forming an opinion on the basic financial statements taken
as a whole. The accompanying Supplemental Schedule of Revenues and Expenses — Rate Basis is
presented for purposes of additional analysis and is not a required part of the basic financial state-
ments. Such information has been subjected to the auditing procedures applied in our audits of the
basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the
basic financial statements taken as a whole.

During 1997 the Commission adopted the provisions of Governmental Accounting Standards Board
Statement No. 27, Accounting for Pensions by State and Local Governmental Employers, and
Statement No. 32 , Accounting and financial Reporting for Internal Revenue Code Section 457
Deferred Compensation Plans.

1997 BWSC ANNUAL REPORT

April 3, 1998

Balance Sheets

December 31, 1997 and 1996

ASSETS:

Current assets:

Cash and cash equivalents (note 8)
Accounts receivable, net:

Customers, less allowances of $6,472,190 in 1997

and $6,401,080 in 1996 (note 1)
Unbilled revenues, less allowances of $1,702,361 in
1997 and $1,702,361 in 1996 (note 1)
Construction grants receivable
Prepaid expenses
Deferred compensation plan assets (note 13)

$ 4,050,618

$ 4,656,657

20,767,222

23,891,596

8,862,033

8,279,709

1,337,856

1,368,958

269,934

273,603

3,416,353

Total current assets

35,287,663

41,886,876

Restricted investments (notes 4 and 8)
Property, plant and equipment, net (note 3)
Deferred charges (note 2)
Bond issue costs, net

275,956,366

433,277,165

31,025,356

2,672,324

248,610,946

421,049,968

33,035,277

2,966,152

Total assets

$778,218,874

$747,549,219

LIABILITIES AND COMMISSION EQUITY:

Current liabilities:

Payable from current assets:
Accounts payable
Other accrued liabilities
Current portion of revenue bonds (note 4)

5,761,067
8,377,396
7,115,000

9,764,210
7,404,911
6,750,000

Payable from trusteed assets:

Current portion of City of Boston bonds (note 4)

21,253,463

50,000

23,919,121

50,000

Total current liabilities

21,303,463

23,969,121

Long-term debt (note 4)

Long-term notes payable (note 4)

Deferred compensation plan liability (note 13)

Other long-term liabilities

Deferred credits and reserves (note 2)

See accompanying notes to financial statements.

265,080,570
34,267,440

64,731,187
266,185,706

271,778,050

20,531,323

3,416,353

69,316,779

236,555,871

Total liabilities

651,568,366

625,567,497

Commission equity:
Contributed capital

126,650,508

121,981,722

Commitments and contingencies (notes 9, 10, 11 and 12)
Total liabilities and Commission equity

$778,218,874

$747,549,219

7P77.

Statements of Operations

Years Ended December 31, 1997 and 1996

J997BWSC ANNUAL REPORT

OPERATING REVENUES:

Water and sewer usage $183,255,895 $185,883,893

Fire P^ 2,396,537 2,327,205

Qther 6,617,579 3,648,642

Total operating revenues 192,270,011 191,859,740

OPERATING EXPENSES:

Operations 43,654,591 47,968,088

Maintenance 5,445,498 4,096,378

MWRA assessment (note 5) 103,242,409 101,193,571

Depreciation and amortization 13,904,199 12 951 671

Total operating expenses 166,246,697 166,209,708

Excess operating revenues 26,023,314 25,650,032

NONOPERATING REVENUE (EXPENSE):

Bond redemption costs (note 4) (2 469 400)

Interest income 18,740,157 20^006^612

Interest expense - (17,323,597) (20,966,091)

Total nonoperating revenue (expense) 1,416,560 (3,428 879)

Excess revenues before depreciation add-back

and transfer requirements 27,439,874 22 221 153

Add: Depreciation on fixed assets acquired by grants 2,189,961 2,091 148

Excess revenue before transfer requirements 29,629,835 24,312,301
Excess revenues used to fund reserves and other

deferrals (note 2) (29,376,952) (23,700,800)
Accumulated revenues used to offset future rates —

beginning of year 9,370,103 8,758,602

Accumulated revenues used to offset future rates —

end of year $ 9,622,986 $ 9,370,103

See accompanying notes to financial statements.

STATEMENTS OF COMMISSION EQUITY

Years Ended December 31, 1997 and 1996

CONTRIBUTED
CAPITAL

Balance, December 31, 1995 $120,523,303

Contributions in aid of construction 3,549,567

Depreciation of related property (2,091,148)

Balance, December 31, 1996 121,981,722

Contributions in aid of construction 6,858,747

Depreciation of related property (2,189,961)

Balance, December 31, 1997 $126,650,508

See accompanying notes to financial statements.

Statements of Cash Flows

Years Ended December 31, 1997 and 1996

1997 BU'SC ANNUAL REPORT

CASH FLOWS FROM OPERATING ACTIVITIES:

Excess operating revenues

Adjustments to reconcile operating income to net cash:
Excess revenues used to fund reserves and

other deferrals
Depreciation and amortization
Change in assets and liabilities:

Accounts receivable, net

Unbilled revenues

Construction grants receivable

Prepaid expenses

Accounts payable

Other accrued liabilities

Deferred credits and reserves

Other long-term liabilities

Net cash provided by operating activities

Net cash used for capital and related
financing activities

Cash and cash equivalents at end of year

See accompanying notes to financial statements.

$ 26,023,314

$ 25,650,032

(29,629,835)

(24,312,301)

13,904,199

12,951,671

3,124,374

650,274

(582,324)

273,811

31,102

(17,439)

3,669

114,445

(4,003,143)

(806,746)

972,485

(551,739)

29,629,835

24,312,301

(4,585,592)

616,403

34,888,084

CASH FLOWS FROM INVESTING ACTIVITIES:

Sale (purchase) of investments, net (27,345,420)

Interest income 18 740 157

Net cash (used) provided by investing activities (8,605,263)

CASH FLOWS FROM CAPITAL AND
RELATED FINANCING ACTIVITIES:

Additions to property, plant and equipment (23,827,647)

Proceeds from notes payable 13,736,117

Payment on bonds, including current maturities (6,332,480)

Bond redemption costs

Bond issue costs

Contributions in aid of construction 6,858,747

Payment of bond interest (17,323,597)

Net decrease in cash and cash equivalents
Cash and cash equivalents at beginning of year

(26,888,860)

(606,039)
4,656,657

38,880,712

83,349,906
20,006,612

103,356,518

(36,726,695)
2,428,253

(90,560,357)
(2,469,400)
1,716,600
3,549,567

(20,966,091)

(143,028,123)

(790,893)
5,447,550

$ 4,050,618

S 4,656,657

Notes to Financial Statements

December 31, 1997 and 1996

1. ORGANIZATION, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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 subject to regulation with respect to rates, accounting and other matters, where applica-
ble, by the Board of Commissioners (the "Board"). The Board regulates the rates that the Commission can charge its customers for
water and sewer usage. The rates charged to customers are based on the cash required for the Commission's operations, debt service,
and reserve contributions. However, there is no legally adopted budget that the Commission must adhere to. To comply with the
external financial reporting requirements of the Board, the accompanying financial statements are presented on a basis that is
consistent with generally accepted accounting principles ("GAAP") for regulated utilities (i.e., the accrual basis of accounting and
the capital maintenance measurement focus).

To accommodate the rate making process, the Commission follows the accounting standards set forth in Financial Accounting
Standards Board Statement No. 71 ("FAS-71"), "Accounting for the Effects of Certain Types of Regulation." FAS-71 allows certain
(a) revenues provided for future allowable costs to be deferred until the costs are actually incurred (deferred credits) and (b) costs
incurred to be capitalized if future recovery is reasonably assured (deferred charges). Revenues and expenses appearing in the
Supplemental Schedule of Revenues and Expenses — Rate Basis are presented in the same format as utilized in the Commission's
operational budgeting and rate setting process. The revenues and expenses shown on the Statement of Operations are presented on
a GAAP basis. A reconciliation between the revenues and expenses of these two operating statements for the year ended December
31, 1997 is provided below:

AS PRESENTED IN THE STATEMENTS OF OPERATIONS:

Operating revenues/expenses
Other revenues/expenses

$192,270,011
18,740,157

$166,246,697
17,323,597

Total

RECLASSIFICATIONS AND DEFERRALS:

Contributions to reserves

Provision for working capital

Provision for capitalized interest

Revenue adjustments/bad debt expense

Excess depreciation and amortization over bond payments

Interest expense (escrowed funds)

Interest income (escrowed funds)

Capital expenditures

Excess revenue used to offset current rates

Other deferrals

211,010,168

570,428

154,593

(9,458,991)

(2,759,462)
9,370,103

183,570,294
18,970,811

(9,458,991)
(5,061,747)
(1,149,643)

12,235,587

157,542

As presented in the Supplemental Schedule

$208,886,839

$199,263,853

The Enabling Act requires that any net surplus, as defined by the rate setting process, be either turned over to the City or applied to
offset water and sewer rates for the following year. The Commission has applied $9,622,986 and $9,370,103 for the years ended
December 31, 1997 and 1996, respectively, to offset rates in the respective subsequent years.

(a) Revenue Billings

Water and sewerage fees are billed to users of the systems on a monthly cycle basis. Revenues are accrued for periods between the
termination of billings for the various cycles and the end of the year. Various adjustments are made on a postbilling basis that reduce
the amount of total hillings Accordingly, the 1997 and 1996 total customer bills outstanding of $39,259,192 and $42,180,396,
respectively, have been reduced by provisions for billing adjustments and sewer abatements of $9,615,824 and $2,403,956, respec-
tively, in 1997 and $9,510,176 and $2,377,544, respectively, in 1996. These net billing amounts are further reduced by an allowance
for uncollectible accounts of $6,472,190 and $6,401,080 in 1997 and 1996, to arrive at net accounts receivable.

(b) Jnve^tfnents

Investments, consisting of direct and unconditionally guaranteed short-term obligations of the U.S. Government, repurchase agree-
ments and money market funds secured by government securities, are stated at amortized cost plus accrued interest.

(c) Property, Plant and Equipment

Property, plant and equipment is stated at historical cost. Depreciation is provided on the straight-line method based upon 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. The Commission does not have any donated fixed assets.

The Commission capitalizes interest costs during construction of assets for its own use. No interest was capitalized in 1997 or 1996
because the difference between interest expense and interest income on unexpended proceeds was not material.

/977~. 19^1

1997 BVVSC ANNUAL REPORT

Notes to Financial Statements

December 31, 1997 and 1996

(d) Depreciation

Estimated useful lives used in computing depreciation are as follows:

WATER:

. Works
Meters
Hydrants

100
10
40

SEWERAGE:

Works

Pumping station 35

OTHER 4 to 14

(e) Contributed Capital

Contributions received from governmental agencies, individuals and the City in aid of specific construction projects that are not
refundable are recorded as contributed capital. Accordingly, depreciation of the related property is charged directly to contributed
capital and appears as an addition to excess revenues in the accompanying Statements of Operations.

(F) Cash Equivalents

The Commission considers all highly liquid, short-term cash investments with original maturities of three months or less to be cash
equivalents for purposes of the statements of cash flows.

(g) Bond Issue Costs

Expenses related to the issuance of bonds are amortized on a weighted-average basis over the life of the bonds, which approximates
the effective interest method.

(h) Proprietary Activity Accounting and Financial Reporting

Under the Governmental Accounting Standards Board (GASB) Statement No. 20, Accounting and Financial Reporting for
Proprietary Activities, the Commission has elected to apply all Financial Accounting Standards Board (FASB) Statements and
Interpretations issued on or before November 30, 1989, except those that conflict with or contradict GASB pronouncements.

2. DEFERRED CHARGES AND CREDITS

As discussed in note 1, the application of FAS-71 results in certain revenues and expenses being removed from the Statements of
Operations and reflected in the balance sheets as deferred charges or deferred credits. The revenues and expenses that have been
removed from the Statements of Operations and added to the balance sheets as deferred credits appear in the line "Excess revenues
used to fund reserves and other deferrals" on the Statements of Operations. The components of these amounts are as follows:

1997

1996

Contributions to reserves

Provision for working capital

Provision for capitalized interest

Principal payments on long-term debt

Interest paid from escrow funds

Capital expenditures

Depreciation and amortization

Interest income on project and escrow funds

Other

$18,970,811

(570,428)

(154,593)

8,503,196

(1,149,643)

12,235,587

(11,714,237)

2,759,462

496,797

$17,171,033
(570,428)

9,045,230
(5,939,537)
11,500,320

(10,860,523)
5,43 1.559
(2,076,854)

Total

$29,376,952

$23,700,800

The components of deferred charges included in the accompanying balance sheets are as follows:

Accrued pension expense
Debt extinguishment expense

$14,631,411
16,393,945

$14,970,666
18.064,611

Total deferred charges

$31,025,356

$33,035,277

The activity in and components of deferred credits and reserves included in the accompanying balance sheets are as follows:

Debt service

Capital improvements

Working capital

DECEMBER 31,

INCREASE

DECEMBER 51

1996

(DECREASE)

1997

$ 77,424,009

$18,970,811

S 96,394,820

119,570,765

10,976,569

130.547,334

27,950,994

(570,428)

27380.566

2,240,000

—

2,240,000

Self-insurance

2,240,000

—

2,240,000

Subtotal
Reduction of future rates

227,185,768
9,370,103

29,376,952
252,883

256,562,720
9,622,986

Total deferred credits and reserves

$236,555,871

$29,M

$266,185,706

Notes to Financial Statements

December 31, 1997 and 1996

5. PROPERTY, PLANT AND EQUIPMENT

The cost of water and sewerage property, plant and equipment in service and related accumulated depreciation at December 3 1,
1997 and 1996 are as follows:

1997

1996

WATER:

Works

Meters and hydrants

$151,503,838
19,388,133

$145,474,957
18,299,667

Total water

170,891,971

163,774,624

SEWERAGE:

Works
Pumping station

243,396,937
6,818,570

212,599,900
6,818,570

Total sewerage

250,215,507

219,418,470

OTHER

Total property, plant and equipment
Less accumulated depreciation

68,140,883

489,248,361

95,498,323

62,596,938

445,790,032

83,995,823

Net property, plant and equipment
Construction in progress

393,750,038
39,527,127

361,794,209
59,255,759

Total

$433,277,165

$421,049,968

4. LONG-TERM DEBT

At the time of its creation, the Commission assumed general obligation certificates of indebtedness of the City (the "City bonds")
pertaining to the water and sewer systems. Payments of principal and interest are made direcdy to the City in accordance with the
original maturity and interest schedules. The Commission also issues revenue bonds to support various projects.

A summary of the City bonds and revenue bonds outstanding as of December 3 1 , 1997 and 1996 follows (amounts in thousands):

1996

City Bonds, bearing interest at a rate of 6.9% with
maturity dates through December 1999
Less current installments

$ 100
50

$ 150
50

Total City Bonds, net of current installments

$ 50

Less current installments

48,075

276,350
7,115

100

SENIOR DEBT:

1986 Series A, bearing interest at a rate of 6.0%, with a maturity date of November 1, 2015
1989 Series A, bearing interest at a rate of 6.9% with a maturity date of November 1, 1999

1991 Series A, bearing interest at rates ranging from 6.0% to 6.5%, with maturity
dates ranging from November 1, 1998 to 2021

1992 Series A, bearing interest at rates ranging from 5.1% to 6.1%, with maturity
dates ranging from November 1, 1998 to 2013

1993 Series A, bearing interest at rates ranging from 4.0% to 5.4%, with maturity
dates ranging from November 1, 1998 to 2019

1994 Series A, bearing a variable interest rate (3.9% and 4.0% at December 31, 1997
and 1996, respectively), with maturity dates ranging from November 1, 1998 to 2024

SUBORDINATED DEBT:

1988 Series A, bearing interest at rates ranging from 6.0% to 7.4%, with maturity dates
ranging from November 1, 1998 to 2008

$ 13,165

$ 13,165

585

585

14,890

15,710

63,755

66,200

97,480

97,545

38,400

39.000

50,895

283,100
6,750

Total long-term revenue bonds
Less unamortized issue discount

269,235
4,204

276,350
4,672

Net long-term revenue bonds

$265,031

$271,678

'V77 . V99'

1997 BWSC ANNUAL REPORT

Notes to Financial Statements 16'17

December 31, 1997 and 1996

Annual sinking fund requirements and debt principal and interest maturities for all future years are as follows (amounts in thousands):

CITY BONDS REVENUE BONDS TOTALS

PRINCIPAL INTEREST PRINCIPAL INTEREST PRINCIPAL INTEREST

1998
1999
2000
2001
2002
Thereafter

$ 50
50

$ 7
3

$ 7,115

8,815

9,435

9,955

10,535

230,495

$ 16,187
15,737
15,192
14,611
13,993
125,766

$ 7,165
8,865
9,435
9,955
10,535

230,495

$ 16,194
15,740
15,192
14,611
13,993
125,766

Total

$100

$10

$276,350

$201,486

$276,450

$201,496

In August 1986, the Commission issued 1986 Series A Bonds. This issue was structured as a rolling cross-over refunding and new
money issue. The 1986 Bonds provided funds for the Commission's ongoing capital improvement program and other capital and
operating needs. In addition, a portion of the proceeds on the 1986 Bonds were deposited into the 1986 Series A Escrow Account
to provide for the principal payments on the 1985 Series A Bonds and the interest payments on the 1986 Bonds as they come due.
The outstanding portion of this issue, except for the 2015 Term Bonds, was extinguished through early redemption on November 1,
1996 at no gain or loss. A call premium of $752,800 was paid and a charge of $1,154,545 was recognized in the Statement of
Operations for unamortized bond issue costs.

In December 1988, the Commission issued 1988 Series A Bonds to provide for the defeasance of a portion of the 1984 Series A
Bonds (subsequendy paid January 1, 1995), to provide supplemental funding for the Operating Reserve Fund and to pay costs of
issuance.

In December 1989, the Commission issued 1989 Series A Bonds to provide funds for projects undertaken as pan of the
Commission's ongoing capital improvement program.

In June 1991, the Commission issued 1991 Series A Bonds to provide funds for projects, to provide funds for the Senior Debt
Reserve Fund and to pay the cost of issuance of the 1991 Series A Bonds. The Commission maintains an insurance policy with
Financial Guaranty Insurance Company to guarantee payment of principal and interest on the 1991 Series A Bonds maturing
November 1, 1998 through November 1, 2021.

In September 1992, the Commission issued 1992 Series A Bonds to provide funds for the advanced refunding of $23,930,000 of
the Commission's 1986 Series A Bonds and the establishment of an escrow account to provide for future principal and interest pay-
ments on $37,640,000 of the same 1986 Series A bonds as part of a cross-over refunding transaction. Under the 1992 Refunding
Trust Agreement, the Commission deposited sufficient funds with the Bond Trustee to pay when due the principal and interest on
the advanced refunded bonds until the first call date, November 1, 1996. As a result, this transaction qualifies as an in-substance
defeasance and the advanced refunded bonds of $23,930,000 are no longer considered outstanding under the Commission's
Resolution. The bonds refunded through the cross-over transaction were not considered defeased. The outstanding debt of
$37,640,000 was paid from the 1992 cross-over funds on November 1, 1996.

In March 1993, the Commission issued $100,505,000 of General Revenue Bonds, 1993 Series A to advance refund a portion of the
1984 Series A (Subordinated Series), a portion of the 1989 Series A (Senior Series), and a portion of the 1991 Series A (Senior
Series) Bonds. Under the 1993 Refunding Trust Agreement, the Commission deposited sufficient funds with the Bond Trustee to
pay the principal and interest on the advanced refunded bonds when due. As a result, this transaction qualifies as an in-substance
defeasance and the advanced refunded bonds of $88,040,000 are no longer considered outstanding under the Commission's
Resolution. The Commission advance refunded the bonds to reduce its total debt service payments over 26 years by almost
$7,426,000 and to obtain an economic gain of $6,256,720.

In October 1994, the Commission issued $40,000,000 of General Revenue Bonds, 1994 Series A to provide funds for projects
undertaken as part of the Commission's ongoing capital improvement program. The Commission maintains a letter of credit to
guarantee the principal and interest payments on these bonds maturing November 1, 1998 through 2024, in the event that the
Commission is unable to make such payments.

In the aggregate $157,655,000 remains outstanding at December 31, 1997 on the bond issues that were defeased "in-substance."

Notes to Financial Statements

December 31, 1997 and 1996

The "Resolution Establishing Issue of Revenue Bonds" adopted by the Commission on December 6, 1984 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 into 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.

The Commission has options for early redemption of revenue bonds starting in 1998 at a price of 102% of face value. In addition, in
compliance with the Resolution, the Commission has established both trusteed and nontrusteed funds with investments, principally
short-term securities, which are restricted for payment of specified liabilities, capital projects or other costs of operations. The com-
ponents of the trusteed and nontrusteed investments at December 31, 1997 and 1996 are as follows:

1997

1996

TRUSTEED:

U.S. Treasury notes
Other government obligations
Money market and cash investments
Open-ended mutual funds
Commercial paper

$ 82,475,563

38,724,170

9,445,701

8,642,010

74,160,038

84,618,681
24,164,639
36,658,744
40,102,840
9,545,073

213,447,482

195,089,977

NONTRUSTEED:

U.S. Treasury notes

Other government obligations

Money market and cash investments

Open-ended mutual funds

Commercial paper

Repurchase agreements

8,224,593
2,434,866
16,469,137
13,676,278
3,093,300
18,610,710

9,074,296
2,773,736
4,691,726
8,479,095
6,958,882
21,543,234

62,508,884

53,520,969

$275,956,366

$248,610,946

Long-term Notes Payable:

During 1997 and 1996, the Commission executed loan agreements with the Massachusetts Water Pollution Abatement Trust
("MWPAT") to finance and refinance a portion of the Commission's water pollution abatement projects. As of December 31, 1997,
an aggregate amount of $31,545,790 was received by the Commission. The Commission is eligible to receive the remaining $788,910
once the projects are completed. For purposes of offsetting principal and interest payments, an amount aggregating approximately
$23,689,000 consisting of contract assistance payments from the Commonwealth of Massachusetts and other interest subsidies from
MWPAT will be recognized as capital grants in aid of construction over the term of the loan. The long-term portion of the loan
agreements with MWPAT is $28,580,626 at December 31, 1997. The scheduled loan payments for all MWPAT obligations and
related subsidies are shown below (amounts in thousands):

SCHEDULED LOAN REPAYMENTS

LOAN SUBSIDY AMOUNTS

NET LOAN REPAYMENTS

CONTRACT

EQUITY

ASSISTANCE

PRINCIPAL

INTEREST

TOTAL

EARNINGS

PAYMENTS

TOTAL

PRINCIPAL

INTEREST

TOTAL

1998

$ 1,197

$ 1,607

$ 2,804

$ 809

$ 867

$ 1,676

$ 796

$ 332

$ 1,128

1999

1,232

1,553

2,785

777

867

1,644

819

322

1,141

2000

1,277

1,497

2,774

743

867

1,610

852

312

1,164

2001

1,319

1,436

2,755

708

867

1,575

879

301

1,180

2002

1,375

1,371

2,746

672

867

1,539

920

287

1,207

Thereafter

24,167

9,843

34,010

4,751

10,894

15,645

16,366

1,999

18,365

Total

, $30,567

$17,307

$47,874

$8,460

$15,229

$23,689

$20,632

$3,553

$24,185

The Commission entered into various interest-free loan agreements with the Massachusetts Water Resources Authority (the
"Authority") during 1997 and-il996. Under these agreements, the Commission received $528,000 and $1,122,425 in 1997 and 1996,
respectively, to be repaid in five equal annual installments as part of the Authority's Infiltration/Inflow Local Financial Assistance
program. The long-term portion of these loans at December 31, 1997 is $2,237,703. In addition, the Commission received
$4,311,377 in interest-free loans from the Authority as part of the Authority's Local Water Infrastructure Rehabilitation Program.
The long-term portion of these loans at December 31, 1997 is $3,449,111. These programs are designed to assist service area
communities with sewer' system rehabilitation.

r^77 . 1'9**

1997 BVVSC ANNUAL REPORT

Notes to Financial Statements

December 31, 1997 and 1996

5. MASSACHUSETTS WATER RESOURCES AUTHORITY

The Massachusetts Water Resources Authority provides all the Commission's water supply and sewer treatment requirements and
assesses the Commission for a portion of its actual operating and capital expenses. The assessment is based on the Authority's fiscal
year (July 1 to June 30) and payments are due to the Authority in four equal installments in September, November, March and May.
Amounts included in the Statements of Operation for assessments by the Authority for 1997 and 1996 are as follows:

Assessments allocated on:

Water usage $29,523,486 $28,182,821

Wastewater usage 73,718,923 73,010,750

Total $103,242,409 $101,193,571

In 1997 and 1996, over 77% and 78%, respectively, of water provided from the Authority was billable to customers. Since its
inception, the Commission has increased the percentage of billable water from 52% in 1977 to over 77% in 1997 and is continuing
to take steps to improve the amount of billable water, including replacement of old and defective meters and implementation of a
comprehensive leak detection and repair program.

6. TRANSACTIONS 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 con-
sumption of approximately $3,364,000 and $3,738,000 in 1997 and 1996, respectively.

The City provides services to the Commission, including paving and facilities rental. Operating costs billed to the Commission by
the City were approximately $1,275,200 and $1,020,600 during 1997 and 1996, respectively. Capital costs billed by the City were
approximately $2,627,300 and $3,663,900 during 1997 and 1996, respectively.

The Commission has an agreement with the City that allows the Commission's water and sewer bills that have remained unpaid for
more than two years to be added as liens on the City's property tax bills. Under this agreement, the City provides collection services
on these bills for an administrative fee. As of December 31, 1997, receivables totaling approximately $3.5 million of billings had been
included on property tax bills. During 1997, the city collected and remitted to the Commission $960,000.

At the end of 1995, the Commission implemented its own tax lien program. Under this program, accounts which have unpaid
balances over two years old are transferred into the tax lien program for collection. As of December 31, 1997, approximately
$3 million of this amount remains outstanding.

7. RETIREMENT BENEFITS

During 1997, the Commission adopted GASB Statement No. 27, Accounting for Pensions by State and Local Governmental
Employees, which modified the disclosures required for the retirement plan.

The Commission provides retirement benefits to substantially all of its employees which are funded by a pension trust fund (the
"Trust Fund"), and the State-Boston Retirement System (the "SBRS" or "System"), a cost-sharing retirement plan. The Commission
does not provide any other significant postemployment benefits.

A dispute concerning the Commission's past and future obligations to all Commission employees covered by the SBRS was setded
in 1986, resulting in a payment of $19,100,000 to the SBRS. This payment was funded primarily through 1985 and 1986 bond
proceeds and is recorded as a deferred charge that will be recovered through future rates. As pan of the setdement with the SBRS,
the Commission annually reimburses the City for the Commission's share of pension benefits paid to Commission employees. The
Commission's share is based upon the proportion of each employee's total years of creditable service, level of compensation and
group classification. Employees become 100% vested after 10 years of creditable service as defined by Chapter 32 of the
Massachusetts General Laws ("MGL").

Description of the SBRS Plan and the Trust Fund

The SBRS is a cost-sharing multiemployer public employee retirement system established under Chapter 32 of the MGL and is a
member of the Massachusetts Contributory Retirement System. The System provides retirement, disability and death benefits to plan
members and beneficiaries. Chapter 32 of the MGL assigns authority to establish and amend benefit provisions of the plan, and
grant cost-of-living increases to the State legislature. The System issues a publicly available financial report which can be obtained
through the Commonwealth of Massachusetts, Public Employee Retirement Administration ("PERA"). One Ashburton Place,
Boston, Massachusetts 02108.

Notes to Financial Statements

December 31, 1997 and 1996

Funding Policy

Plan members are required to contribute to the SBRS at rates ranging from 5 % to 1 1 % of annual covered compensation. The
Commission is required to pay into the SBRS its share of the remaining systemwide actuarially determined contribution plus admin-
istration costs which are apportioned among the employers based on active covered payroll. The Commonwealth of Massachusetts
reimburses the SBRS for a portion of benefit payments for cost-of-living increases. The contributions of plan members and the
Commission are governed by Chapter 32 of the MGL. The Commission's contributions to the System for the years ending December
31, 1997, 1996 and 1995 were approximately $1,033,000, $787,000 and $780,000, respectively, which equaled its required contribu-
tion each year. Total employee contributions, based on actuarially determined amounts were approximately $1,578,000, $1,473,000
and $1,449,000 or 7.7%, 7.5% and 7.4% of covered payroll in 1997, 1996 and 1995, respectively.

Valuation of Investments

The investment portfolio is regulated by the MGL, Chapter 32, Section 23. The investments are presented in the financial statements
at fair market value. State Street Bank and Trust Company is the custodian of the portfolio, which is managed by independent
investment advisors.

THE COMMISSION'S TRUST FUND

The Trust Fund pays the SBRS plan annually an amount equal to the amount SBRS paid on behalf of the Commission's employees.
As required by the Commission's Enabling Act, employee pension contributions are transferred to the SBRS and are either returned
to employees upon termination or, for vested employees, are used to defray a portion of the total retirement benefit. The Com-
mission's policy is to make additional employer contributions to the Trust Fund based upon the actuarially determined cost of future
benefits, net of employee contributions.

(a) Valuation of Investments

Trust Fund assets at December 31, 1997 and 1996 are as follows:

Assets (at fair market value):

Common stock $28,341,071 $22,761,060

International stock 2,610,975 2,271,713

Mutual funds 191,419 201,700

Fixed income 17,190,657 15,068,892

Total $48,334,122 $40,303,365

The investment portfolio is regulated by the MGL, Chapter 32, Section 23. The investments are managed by independent invest-
ment advisors. Fleet Bank of MA, N.A., is the custodian of the portfolio.

The most recent actuarial valuation of the Commission was prepared by the Segal Company as of January 1, 1997. As of that date,
the total covered employee payroll was approximately $22,111,072.

The unfunded actuarial liability ("UAL") as of January 1, 1997 is as follows:

Active participants $ 25,809,167

Retired members and beneficiaries 7,841,245

Total actuarial liability 33,650,412

Less actuarially determined net assets (34,333,364)

Overfunded actuarial liability $ (682,952)

The significant assumptions used in the calculation of the UAL as of January 1, 1997 include annually compounded rates of return
of 7.5% on present and future assets and projected salary increases (due to inflation) of 5% per year, compounded annually. The
January 1, 1997 actuarial valuation was based on 151 retired and inactive employees and 530 active employees. These assumptions
are the same as those used to determine actuarial contribution requirements.

797T~. 199'

1997 BWSC ANNUAL REPORT

Notes to Financial Statements

20-21

December 31, 1997 and 1996

8. DEPOSITS AND INVESTMENTS

The Commission's General Revenue Bond Resolution, adopted December 6, 1984, as amended, places certain limitations on the
nature of deposits and investments available to the Commission. Demand deposits and term deposits without collateralization can
only be made with financial institutions meeting certain criteria. Certificates of deposit must be fully collateralized and issued by
FDIC insured banks. Investments can also be made in securities issued by or unconditionally guaranteed by the U.S. Government or
its Agencies; public agencies, municipalities or state obligations carrying the highest bond rating; commercial paper rated A-l, P-l;
A-Rated money market funds; fully collateralized investment contracts and certain futures contracts. In addition, the Commission's
Trust Fund has additional investment powers, most notably the ability to invest in stocks, corporate bonds and other instruments.

(a) Deposits

A summary of the Commission's deposits that are (Category 1) fully insured or collateralized with securities held by the Commission
or its agent in the Commission's name (Category 2) those deposits that are collateralized with securities held by the pledging finan-
cial institution's trust department or agent in the Commission's name and (Category 3) those deposits that are not collateralized as of
December 31, 1997 follows:

1

CATEGORY

2

3

BANK
BALANCE

CARRYING
AMOUNT

Cash

Bank money market deposits

$364,781

—

$ 4,841,688
26,705,272

$ 5,206,469
26,705,272

$ 4,050,618
25,914,838

Total

$364,781

-

$31,546,960

$31,911,741

$29,965,456

Deposits in transit and outstanding checks account for the majority of the difference between the bank balance and the carrying
amount.

(b) Investments

The Commission's investments are categorized according to the level of risk assumed by the Commission. Category 1 includes invest-
ments that are insured, registered or held by the Commission's trustee in the Commission's name. Category 2 includes uninsured and
unregistered investments held by the counterparty's trust department or agent in the Commission's name. Category 3 includes unin-
sured or unregistered investments held by the counterparty, its trust department or agent but not in the Commission's name:

5ns
obligations

1

CATEGORY

2

3

CARRYING
AMOUNT

MARKET
VALUE

CATEGORIZED:

U.S. Government obligatii
U.S. Government Agency
Repurchase agreements
Commercial paper

$108,201,840
23,657,352

$

18,610,710
77,253,338

—

$108,201,840
23,657,352
18,610,710
77,253,338

$108,099,796
23,522,598
18,610,710
77,096,916

131,859,192

95,864,048

—

227,723,240

227,330,020

NOT CATEGORIZED:

Open-end mutual funds

22,318,288

22,318,288

Total

$131,859,192

$95,864,048

—

$250,041,528

$249,648,308

9. LEASE COMMITMENTS

On July 2, 1993, the Commission entered into a 30-year operating lease for office space in the same building the Commission had
previously occupied. This lease accounts for over 95% of the Commission's future minimum lease commitments. In addition to
the minimum base rent under this lease, the Commission must pay as additional rent, a percentage of operating costs of the leased
building.

The Commission also leases other office space and equipment under various leases that have also been accounted for as operating
leases. Leases associated with other office space are expected to be renewed as they expire in the normal course of business.

Notes to Financial Statements

December 31, 1997 and 1996

Minimum lease commitments under all operating leases with terms in excess of one year at December 31, 1997 are as follows:

OFFICE OTHER

1998
1999
2000
2001
2002
Thereafter

$ 1,325,717

$ 764,252

1,325,717

38,074

1,325,717

23,908

1,325,717

23,908

1,325,717

23,908

20,764,517

406,445

Total

$27,393,102

$1,280,495

Rent expense under operating leases amounted to $1,828,796 and $1,848,243 in 1997 and 1996, respectively.

10. COMMITMENTS

A major capital improvement program is currendy in progress. As part of this program, the Commission has entered into a number
of contracts for the design and construction of its facilities. Commitments under these contracts aggregate approximately $38 million
as of December 31, 1997. 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 approximately $107.3 million for 1998 and 1999. Of this amount,
approximately $85.9 million represents extension and improvement projects and $21.4 million represents renewal and replacement
projects. The extension and improvement projects are expected to be 26% funded by federal and state grants and Authority grants
and loans. The remaining amounts will be funded from the Commission's bond proceeds, the sale of surplus property and operating
revenues.

Included in the above commitments is funding for the design and construction of a facility to consolidate Commission operations at
one location. A purchase and sales agreement was executed on January 22, 1998. The date of closing was April 2, 1998 at a total pur-
chase price of $11 million. The total three-year spending, for the new facility, including the cost of purchase is $47.1 million, of
which $25.1 million is anticipated to be spent in 1998 with $20 million and $2 million in years 1999 and 2000, respectively.

Pursuant to Chapter 152 of the Acts of 1997, the Massachusetts General Court authorized the taking of real property within certain
boundaries in South Boston for the purpose of constructing a new convention center in the City of Boston. A four-acre parcel
purchased by the Commission in 1993 lies within those boundaries. Chapter 152 provides that land held by public agencies, includ-
ing the Commission, is deemed to be held for governmental purposes and therefore will be taken without consideration to the
applicable agency. The Commission purchased the parcel for $6,000,000, and made improvements therein, costing approximately
$2,000,000. As part of legislative negotiations, the taking agency represented that the Commission will receive compensation in some
form over time from the end user for the acquisition and use of the parcel. In addition, the Commission will not have to make sewer
and drainage improvements that had been planned for the convention center area because these will be made by the developer as
part of the development of the site.

11. RISK MANAGEMENT AND OTHER INSURANCE

The Commission carries self-insured retention limits for claims filed under workers' compensation and general liability and com-
pletely self-insures for all unemployment benefits. The workers' compensation self-insured retention limits are $300,000 per claim,
$1,868,000 aggregate and is supplemented with $5 million in excess coverage purchased through an outside carrier. For general lia-
bility, the Commission's self-insured limits are $1 million per occurrence, $2.5 million aggregate and is subordinate to $5 million of
excess coverage purchased through an outside carrier. Under the sections of the Model Water and Sewer Act, the Commission's tort
liability is capped at $100,000 per claimant.

The Commission maintains other insurance coverage as follows:

POLICY TYPE

COVERAGE

Health

Vehicles

Property

Public Officials

Fiduciary

Crime

v.

Premium Based

Combined single limit of $1 million

Aggregate limit of $20,227,000

Coverage of $3 million; $100,000 self-insurance retention

$2 million coverage

Employee dishonesty coverage of $5 million

7$77~. 1^9'

Notes to Financial Statements

December 31, 1997 and 1996

1997 BWSC ANNUAL REPORT

22-23

The Commission participates in the City's health benefits plans for which the City assesses monthly premiums to the Commission
based on current enrollments. Insurance claims for all policies have not exceeded coverage by a material amount in the past
three years.

Liabilities for self-insured claims are reported if it is probable that a loss has been incurred and the amount can be reasonably esti-
mated. The Commission has established a liability based on historical trends of previous years and attorney's and independent insur-
ance reserve appraiser's estimates of pending matters and lawsuits in which the Commission is involved. Unemployment claims paid
during 1997 were immaterial.

Changes for the years ended December 31, 1997 and 1996 are as follows:

1997

1996

Beginning balance of reserves

Payment of claims attributable to events of both current and prior years:

Workers' compensation

General liability
Incurred claims

Ending balance of reserves

$4,165,390

(631,508)
(396,487)
1,159,412

$4,508,332

(497,064)
(534,474)
688,596

$4,296,807

$4,165,390

Incurred claims represent the total of a provision for events of the current fiscal year and any change in the provision for events of
the prior fiscal years.

12. CONTINGENCIES

The Commission is involved in ordinary and routine litigation and other matters related to its operations and the establishment of
rates. Management believes that the resolution of these matters will not materially affect the financial position of the Commission.

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 disallowances, if any, will not be significant.

The Commission is involved as a defendant in litigation regarding the pollution of Boston Harbor. Management believes that the
Commission's extensive capital improvement program (see note 10) addresses probable actions that the Commission may be
required to undertake in connection with this litigation. Additionally, the Commission is likely to bear either directly or through
future assessments of the Authority a substantial portion of the financial costs involved. As of December 31, 1997, the overall clean-
up costs are estimated to be approximately $450 million. However, the extent of the Commission's liability for these costs cannot be
determined.

13. DEFERRED COMPENSATION

The Commission offers its employees a deferred compensation plan created in accordance with Section 457 of the U.S. Internal
Revenue Code. The plan is administered by Prudential Trust Company. The plan, available to all employees, permits them to defer a
portion of their current salary to future years. The deferred compensation is not available to the participants until termination, retire-
ment, death or unforeseeable emergency.

In accordance with Section 457 of the Internal Revenue Code, all amounts of compensation deferred under the plan, all property
and rights purchased with such amounts and all income attributable to such amounts, property or rights are held in trust for the
exclusive benefit of participants and their beneficiaries. The assets and liabilities of the plan have, therefore, been removed from the
balance sheet as of December 31, 1997.

14. SUBSEQUENT EVENT

In April 1998, the Commission expects to issue bonds. The proceeds are expected to be used to refund outstanding principal
amounts.

Supplemental Schedule of Revenues
and Expenses — Rate Basis

Years Ended Dcember 31, 1997 and 1996

REVENUES:

Water revenue
Sewer revenue

Less:

Adjustments
Discounts
Bad debt

Total

Net billed charges

Prior year surplus

Miscellaneous revenues:
Late charge revenue
Investment income
Fire pipe revenue
Other income

Total]

DIRECT OPERATING EXPENSES:

Salaries and wages

Overtime wages

Fringe benefits

Supplies and materials

Repairs and maintenance

Utilities

Professional services

Space and equipment rentals

Other services

Insurance

Damage claims

Inventory

Capital outlay

Total direct operating expenses

NONOPERATING EXPENSES:

MWRA assessment
Capital improvements
Principal payments
Interest expense
Deposits to reserve funds
SDWA assessment
Miscellaneous

E 66,673,734
116,582,161

183,255,895

7,279,381

741,903

1,437,706

9,458,990

173,796,905
9,370,103

2,939,296
13,041,399
2,396,537
7,342,599

208,886,839

40,535,902

i 67,703,536
118,180,357

185,883,893

11,605,519

764,433

3,221,666

15,591,618

170,292,275
8,758,602

2,923,808
11,651,244
2,327,205

4,219,071

200,172,205

22,230,570

21,532,653

799,512

882,356

3,482,062

3,079,655

1,904,423

1,633,555

5,445,498

4,096,378

519,179

452,513

1,579,685

1,210,055

1,828,796

1,848,243

861,431

704,378

358,501

374,750

480,560

469,474

383,524

307,547

662,161

519,103

37,110,660

103,242,409

101,193,571

11,573,426

10,981,216

8,503,196

9,045,230

16,173,954

15,026,552

18,970,811

17,171,033

264,155

273,144

—

696

Total nonoperating expenses

158,727,951

153,691,442

Total current expenses

199,263,853

190,802,102

Current year rate surplus

$ 9,622,986

$ 9,370,103

This supplemental schedule presents the Commission's revenues and expenses on the basis that is presented in the Commission's
budget and rate-setting documents.

/977 . -\°>°^

■■■■

This report was produced by the Executive Director's Office of the Boston Water and Sewer (

Design and Print Production: Champagne/Lafayette Cornmunicatioi
Photography: Harry R. rtappeny

\9 Parts of ibis annual report were printed on ret

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