Annual report

BOSTON PUBLIC LIBRARY

3 9999 06588 171 4

GOVDOC

N WATER AND SEWER COMMISSION

1998 ANNUAL REPORT

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building Boston front tite grouiBBraowii

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1998 ANNUAL REPORT

A city is only

as strong as tlie

infrastructure

BUILDING THE CITY FROM THE GROUND DOWN is what the Boston Water and
Sewer Commission has been doing since its inception in 1977. By supporting an aggressive
Capital Improvement Program (CIP), the Conunission has significantly reduced I/I
(infiltration and inflow) into its sewers, repaired, replaced and rehned leaking pipes in
the water system, and initiated major sewer separation projects, which have drastically
reduced harmful pollution from entering Boston Harbor. The results have been dramatic.
Boston leads all the Massachusetts Water Resources Authority (MWRA) communities in
its reduction of I/I, and as a major American city, has experienced the fewest water main
breaks per rrule. In addition, its contribution to the renaissance of Boston Harbor has
opened great development opportunities along Boston's waterfront. The Commission is
proud to be a partner in helping to protect and improve the infrastructure, which will
allow Boston to grow into the new millennium.

foundation

supporting it.

Mindfvd of Mayor Thomas M. Menino's directive to provide the citizens of Boston the
highest quahty water and sewer services for the lowest possible price, the 1998 Direct
Expense Budget was once again level-funded; and for the unprecedented, fifth consecutive
year, there was no increase in Boston's water and sewer rates. By increasing productivity,
the Commission has seen its water and sewer rates go from one of the highest in the metro-
pohtan Boston area to one of the lowest. This rate stabUization has not occurred at the
expense of service to our customers. Besides aggressively attacking the infrastructure
problems of the City's water and sewer system, the Commission has also reformed the way
it does business. The Water and Sewer Departments were merged to form one single
Operations Division, eliminating cross functionahty and dupUcation of service.

director's message

Vincent G. Mannering /

Executive Director

The Commission has aggressively embarked on a five-year strategic plan with regards
to information technology; and in the last two years has implemented PeopleSoft® Human
Resource Information System and Financial Management System, bringing all of the
Commission's administrative and financial functions into Y2K comphance.

The future also holds great promise for the Boston Water and Sewer Commission.
In 1998, the Commission purchased a 10-acre parcel in the City of Boston, formerly
occupied by the Stride Rite Corporation. This will enable the Commission to consohdate its
functions into one site. By consohdating its functions into one area, the Commission will be
able to increase its efficiency and productivity and its service to the citizens of Boston.

This Annual Report demonstrates that the Commission has a rock sohd financial
foundation and strong management initiatives that will enable the Commission to get
the job done. A city is only as strong as the infrastructure foundation supporting it.
The Boston Water and Sewer Commission is proud to report that its piece of the
infrastructure foundation is ready for whatever challenges the new century brings us.

Pictured above: Dennis A. DiiVlarzio, Cliairman, Board of Commissioners; Catlileen Douglas Stone, Commissioner;
IVluliammad Ali-Salaam, Commissioner; and Vincent G. iVlannering, Executive Director

strengthening the

For the fifth consecutive

year, the Commission

proudly announced that

there would be no increase

in the water and sewer

rates for its customers.

ADVANCING THE FINANCIAL ASSETS is one of the highest
priorities of the Commission. As a result of exemplary financial
management in 1998, the Commission ended its fiscal year with
several upgraded bond ratings, the largest bond issuance in the
Commission's history and no water and sewer rate increase for
an unprecedented fifth consecutive year.

Bond Rating Upgrades At the beginning of the year the
Commission received two bond rating upgrades: Moody's
Investor Services upgraded the Commission's bond rating from
A2 to Al and Standard and Poor's upgraded the Commission's
rating from A to A+. These ratings are the highest in the
Commission's history and will save our customers millions of
dollars in debt service costs.

Bond Activity The Commission issued
Series A and Series C Refunding bonds
which generated a combined $1.9 milhon
in net present value savings, or 8% of
refunded par. This is the highest percentage
savings ever achieved by the Commission in
a bond refunding issuance. The Series A
and Series C Refunding bonds will also
provide to the Commission $6.3 miUion in
interest savings over the remaining term of
the bonds and an additional $100,000 of
rate rehef payments for our customers m
1999 from the Conrmonwealth Sewer Debt
Rate Rehef Program. In addition to the
issuance of the Series A and Series C
Refunding bonds, $132.5 miUion in revenue
bonds, with a true interest rate of 4.9%,
were issued to fund future capital expendi-
tures. Overall, 81% of the Commission's

1998 ANNUAL REPORT

outstanding Revenue bonds carry interest
rates at or below 5.25%.

Finally, the Commission became the first
government entity in New England to accept
electronic quotes, which were the low bids
for the sale of its 1998 Series D bond.

Rates For the fifth consecutive year,
the Commission proudly announced that
there would be no increase in the water
and sewer rates for its customers. By
incorporating sound financial practices,
such as the sidjmission of a level-funded
direct expense budget, the Commission
has not increased its rates since 1993.
Currently, the Commission charges one of
the lowest rates within the MWRA system.

financial foundatio]

^

'^

AVERAGE COST PER FAMILY

BWSC vs. Other MWRA Customers*

$700

1995 1996 1997 1998

"Charges reflect industry average "typical" household usage of 90,000 gallons or 12,000 cubic feet annually.

■■■■■■I

mi

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^^i^iiiitaiiimg the

The Commission's

Operations and Engineering

Divisions worl< 365 days a

year to assure the water

and wastewater systems

run without interruption.

THE COMMISSION'S OPERATIONS AJNfD ENGINEERING

Divisions work 24 hours a day, 365 days a year, to assure the
water and wastewater systems function without interruption.
All of Boston sits atop the foundation of water and sewer mains
that have been constructed over three centuries. The Commission
continues to build and improve on this foundation through its
annual Capital Improvement Program (CIP) and by performing
daUy preventive maintenance on the system.

Operations Division In 1998, the Commission's Operations
Division continued its Water Main Flushing Program for the
second year, flushing 245 miles of main. The Preventive
Maintenance Catch Basin Cleaning Program was developed and
implemented, resulting in the cleaning of 7,100 catch basins.

1998 ANNUAL REPORT

The installation of a fixed radio base pilot
meter reading system was completed, with
1,470 residential radio transmitters and 17
data collectors installed. Large meter testing
began, using Rad-Com and Flow Search
Equipment. Over 3,900 meters were
replaced, increasing reading percentages
and revenue returns to the Commission.

Engineering Division Throughout

1998, the Engineering Division participated
in the implementation of the MWRA's
Combined Sewer Overflow (CSO) Facihties
Plan. As a result, the first of several con-
tracts for the Dorchester Sewer Separation
Project was issued, with an estimated value
of $13 million. The Dorchester Sewer
Separation Project is a 7-year project that

will involve the separation of combined
sewers throughout Dorchester. Also to
reheve flooding problems, the Commission
has initiated a number of projects through-
out the city. These projects include a
detailed study of the South End, a project
to reheve flooding problems in the Arnold
Arboretum/South Street, Roshndale area,
and the design of a new 72" drain conduit
in the Tobin Road/Centre Street, West
Roxbury area. With respect to day to day
activities, the Commission oversaw con-
struction management of $13 miUion in
projects that included the relaying or
relining of 16,000 linear feet (U) of sewer
and drain, and 87,000 If of water relay or
water rehabiUtation. In addition, 225,000 If
of television inspection was performed.

iiilBiitial floiiv

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^-^

DORCHESTER
SEWER
SEPARATION
PROJECT

the Dorchester Sewer Separation Project involves the separation of
combined sewers throughout Dorchester. The purpose of the project
is to reduce pollution levels in Boston Harbor and Dorchester Bay, and to
lower sewage treatment costs by removing excess flow.

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enhancing the

The Web-Site was

the first project of its l<ind

undertaken by Commission

staff and it was designed

and developed entirely

in-house.

TO PREPARE FOR THE Y2K ISSUES that have become a
standard way of hfe over the past year, the Coimnission has been
preparing all of its mission critical systems for the "main event"
of January 1, 2000. Since the early 1990's, the Commission has
been enhancing its systems to assure readiness for the "Y2K
Bug." Replacements and upgrades of the Commission's technical
infrastructure were initiated in December 1996 and continue
today as new technology and versions of software are released.
By July 1999, the Commission anticipates that all mission critical
system compUancy will be completed and tested.

Applications In 1998, a new year 2000 comphant Human
Resources Management System, developed by PeopleSoft, Inc.,
was implemented. Data conversion and parallel testing for a
replacement, year 2000 compUant Financial Management

1998 ANNUAL REPORT

System, also developed by PeopleSoft, Inc.,
has been successfidly completed with a "go
hve" date of January 1, 1999. The Conunis-
sion's networking infrastructure has been
upgraded and Windows NT deployment
has been expanded to a total of 230 users.
The Commission's ESRI, Inc.-based
Geographical Information System (GIS)
continues to develop with the completion
of an ARCA'iew-based apphcation for easy
access to digitized water and sewer base
maps, Boston Street Index, and Ortho-
photos. The apphcation allows users to
print maps at various scales, complete
with template and Commission logo.

Web-Site Another major accompUshment
in 1998 was the completion of the Commis-
sion's Web-Site. The Conunission initiated
the development of the site in April 1998

and on December 31, 1998, went hve at
www.BWSC.org. The Web-Site was the first
project of its kind undertaken by Conunis-
sion staff and it was designed and developed
entirely in-house. The site was developed to
be used as an additional method of out-
reach to our customers, the general pubhc,
other utUities, businesses and students.

Some of the information available on the
site includes:

- DESCRIPTIONS OF THE WATER AND
WASTEWATER SYSTEMS

- RATE INFORMATION

- EMPLOYMENT OPPORTUNITIES

- NEIGHBORHOOD PROJECT UPDATES

- COMMUNITY SITE VISITS

- REQUESTS FOR PROPOSALS/INVITATIONS
TO BID

-COMMISSION REGULATIONS

- FEEDBACK PAGE

- LINKS TO RELATED AGENCIES

internal systems

TIMELINE

19

96

JANUARY

Internal Code Review
Initiated

JUNE

Strategic Information
Technology Plan Established

DECEMBER

Operating Systems
Replacement Initiated

1998

V^S-.

JANUARY

Human Resource
System Replacement
Completed

FEBRUARY

Compliance Testing
Initiated

AUGUST

PC BIOS Upgrade
Initiated

w^^

19

99

JANUARY

Financial Management System Replaced

FEBRUARY

Server Operating Systems Upgrade
Initiated

MARCH

Telecommunications System
Replacement Completed; Hand-Held
Meter Reading Equipment Replacement
Initiated

JULY

Mission Critical System Compliancy
Completed

AUGUST

Contingency Plans Complete

DECEMBER

Year 2000 Compliance Testing Complete

designing tlie future

The Facility In March 1998, the commission
purchased a 10-acre parcel located in the Roxbury
neighborhood of Boston, where it plans to build a
new facility that will consoUdate all of its opera-
tions, maintenance and administrative activities
into one central location.

The Purpose The consohdation offers the
Commission a centrahzed facihty that provides
suitable space to enhance administrative and
operational efficiencies at a cost considerably less
than a comparable leasing option. The new facihty
will provide space for all of the Commission's needs
such as the machine shops, interior and exterior
materials storage, administrative offices, parking

for both fleet and employee vehicles and a fueling
and washing station for Commission vehicles.

The Location The new facihty is more centrally
located than the present facihties. In addition,
accessibdity via pubhc transportation is increased
at this new location allowing more of our customers
an opportunity to visit the new facihty.

The Move Site preparation and construction
began in October 1998. The move into the new
facihty will consist of two phases: Operations
Divisions in spring 2000 and Administrative
Divisions in fall 2000.

1998 ANNUAL REPORT

independent auditors' report

THE COMMISSIONERS

BOSTON WATER AND SEWER COMMISSION:

We have audited the accompanying balance sheets of the Boston Water and Sewer Conunission (the
"Commission") as of December 31, 1998 and 1997, and the related statements of operations. Commission
equity and cash flows for the years then ended. These financial statements are the responsibUity of the
Commission's management. Our responsibihty 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 standards 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 beUeve that our audits provide a reasonable 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 31, 1998 and 1997 and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting principles.

The year 2000 supplementary information on page 22 is not a required part of the financial statements, but is
supplementary information required by the Governmental Accounting Standards Board, and we did not audit
and do not express an opinion on such information. Further, we were unable to apply to the information
certain procedures prescribed by professional standards because of the nature of the subject matter underlying
the disclosure requirements and because sufficiently specific criteria regarding the matters to be disclosed have
not been estabUshed. In addition, we do not provide assurance that the Commission is or will become year 2000
comphant, that the Commission's year 2000 remediation efforts will be successful in whole or in part, or that
parties with which the Conunission does business are or will become year 2000 comphant.

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 statements. Such information has been
subjected to the auditing procedures apphed 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 1998, the Commission adopted the provisions of Governmental Accounting Standards Board Statement
No. 31, Accounting and Financial Reporting for Certain Investments and for External Investments Pools.

K^t^C^l^eu^ l^if^^ick. LCP

March 30, 1999

balance sheets

December 31 , 1998 and 1997

ASSETS:

Current assets:

Cash and cash equivalents (note 8) $ 5,082,191 $ 4,050,618
Accounts receivable, net:

Customers, less allowances of 16,035,718 in 1998 and

$6,472,190 in 1997 (note 1) 14,526,071 20,767,222
Unbilled revenues, less allowances of $1,703,561 in 1998 and

$1,702,361 in 1997 (note 1) 8,089,906 8,862,033

Construction grants receivable 1,278,612 1,337,856

Bond proceeds receivable (note 4) 130,352,759 —

Prepaid expenses 278,772 269,934

Total current assets 159,608,311 35,287,663

Restricted investments (notes 4 and 8) 241,151,737 275,956,366
Property, plant and equipment, net (note 3) 455,100,689 433,277,165
Deferred charges (note 2) 25,726,726 31,025,356
Bond issue costs, net 3,059,252 2,672,324

Total assets $884,646,715 $778,218,874

LIABILITIES AND COMMISSION EQUITY:

Current UabOities:

Payable from current assets:

Accounts payable $ 7,159,313 $ 5,761,067

Other accrued Uabihties 10,120,896 8,377,396

Current portion of revenue bonds (note 4) 8,440,000 7,115,000

25,720,209 21,253,463

Payable from trusteed assets:

Current portion of City of Boston bonds (note 4) — 50,000

Total current Uabihties 25,720,209 21,303,463

Long-term debt, net (note 4) 345,161,475 265,080,570

Long-term notes payable (note 4) 35,937,958 34,267,440

Other long-term habihties 58,426,830 64,731,187

Deferred credits and reserves (note 2) 288,558,846 266,185,706

Total habihties

753,805,318

651,568,366

Commission equity:
Contributed capital

130,841,397

126,650,508

Commitments and contingencies (notes 9, 10, 11 and 12)
Total habihties and commission equity

$884,646,715

$778,218,874

See accompanying notes to financial statements.

BOSTON WATER AND SEWER COMMISSION

1998 ANNUAL REPORT

statements of operations and commission equity

Years Ended December 31, 1998 and 1997

OPERATING REVENUES:
Water and sewer usage
Fire pipe
Other

Total operating revenues

^84,371, 106
2,412,803
6,305,287

193,089,196

$183,255,895
2,396,537
6,617,579

192,270,011

OPERATING EXPENSES:
Operations
Maintenance

MWRA assessment (note 5)
Depreciation and amortization

45,654,617

5,113,903

105,461,022

13,935,085

43,654,591

5,445,498

103,242,409

13,904,199

Total operating expenses

170,164,627

166,246,697

Excess operating revenues

22,924,569

26,023,314

NONOPERATING REVENUE (EXPENSE):
Bond redemption costs (note 4)
Investment income
Interest expense

(5,558,203)

19,795,336

(17,096,519)

18,740,157

(17,323,597)

Total nonoperating revenue (expense)

(2,859,386)

1,416,560

Excess revenues before depreciation add-back

and transfer requirements
Add: Depreciation on fixed assets acquired by grants

20,065,183
2,307,958

Accumulated revenues used to offset future rates — end of year

$ 8,788,235

27,439,874
2,189,961

Excess revenue before transfer requirements 22,373,141 29,629,835

Excess revenues used to fund reserves and other deferrals (note 2) (23,207,892) (29,376,952)
Accumulated revenues used to offset future rates — beginning

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

$ 9,622,986

Contributed capital, December 31
Contributions in aid of construction
Depreciation of related property

$126,650,508
6,498,847
(2,307,958)

$121,981,722
6,858,747
(2,189,961)

Contributed capital, December 31

$130,841,397

$126,650,508

See accompanying notes to financial statements.

statements of cash floii^s

Years Ended December 31, 1998 and 1997

CASH FLOWS FROM OPERATING ACTIVITIES:

Excess operating revenues $22,924,569 $26,023,314
Adjustments to reconcile operating income to net cash:

Excess revenues used to fund reserves and other deferrals (22,373,141) (29,629,835)

Depreciation and amortization 13,935,085 13,904,199
Change in assets and liabilities:

Accounts receivable, net 6,241,151 3,124,374

Unbilled revenues 772,127 (582,324)

Construction grants receivable 59,244 31,102

Prepaid expenses (8,838) 3,669

Accounts payable 1,398,246 (4,003,143)

Other accrued habilities 1,743,500 972,485

Deferred credits and reserves 22,373,140 29,629,835

Other long-term habilities (6,304,357) (4,585,592)

Net cash provided by operating activities

40,760,726

34,888,084

CASH FLOWS FROM INVESTING ACTIVITIES:

Sale (purchase) of investments, net
Investment income

34,804,629
18,470,233

(27,345,420)
18,740,157

Net cash provided by (used for) investing activities

53,274,862

(8,605,263)

CASH FLOWS FROM CAPITAL AND
RELATED FINANCING ACTIVITIES:

Additions to property, plant and equipment
Proceeds from notes payable
Payment on bonds
Proceeds from bonds
Contributions in aid of construction
Payment of bond interest

(33,624,421)

(23,827,647)

1,670,518

13,736,117

(76,535,000)

(6,332,480)

26,082,560

—

6,498,847

6,858,747

(17,096,519)

(17,323,597)

Net cash used for capital and related financing activities

(93,004,015)

(26,888,860)

Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year

1,031.
4,050.

573
618

(606,039)
4,656,657

Cash and cash equivalents at end of year

% 5,082,191

$ 4,050,618

NONCASH INVESTING AND FINANCING ACTIVITIES:

Proceeds of bonds issued in December 1998 and received in
January 1999

$130,352,759

See accompanying notes to financial statements.

BOSTON WATER AND SEWER COMMISSION

1998 ANNUAL REPORT

notes to financial statements

December 31, 1998 and 1997

(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
appUcable, by the Board of Commissioners (the "Board"). The Board is appointed by the City's Mayor subject to confirma-
tion by the City Council. It 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 consis-
tent with generally accepted accounting principles ("GAAP") for regulated utiUties (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 capitaUzed 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 reconcUiation between the revenues and expenses of these two
operating statements for the year ended December 31, 1998 is provided below:

REVENUES

EXPENSES

AS PRESENTED IN THE STATEMENT OF OPERATIONS:

Operating revenues/expenses
Other revenues/expenses

$193,089,196
19,795,336

$170,164,627
22,654,722

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)

Investment income (escrowed funds)

Capital expenditures

Excess revenue used to offset current rates

Bond redemption costs

Other deferrals

570,428

154,593

(8,813,304)

(3,598,558)
9,622,986

192,819,349

18,562,782

(8,813,305)
(3,211,772)
(1,462,408)

9,913,671

(5,558,203)

(217,674)

As presented in the Supplemental Schedule

$210,820,675

$202,032,440

The Enabling Act requires that any net surplus, as defined by the rate setting process, be either turned over to the City or
appUed to offset water and sewer rates for the following year. The Commission has apphed $8,788,235 and $9,622,986 for the
years ended December 31, 1998 and 1997, 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 post-
biUing basis that reduce the amount of total hillings Accordingly, the 1998 and 1997 total customer bills outstanding of
$32,581,569 and $39,259,192, respectively, have been reduced by provisions for billing adjustments and sewer abatements of
$9,615,824 and $2,403,956, respectively, in 1998 and $9,615,824 and $2,403,956, respectively, in 1997. These net billing
amounts are further reduced by an allowance for uncollectible accounts of $6,035,718 and $6,472,190 in 1998 and 1997, to
arrive at net accounts receivable.

(b) Investments

Investments, consisting of direct and unconditionally guaranteed short-term obhgations of the U.S. Government, repurchase
agreements and money market funds secured by government securities, are stated at fair value.

(c) Property, Plant and Equipment

Property, plant and ecpiipment is stated at historical cost. Depreciation is provided on the straight-line method based upon
the estimated useful Uves 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 hves. 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 1998 or
1997 because the difference between interest expense and interest income on unexpended proceeds was not material.

noteisi to financial sitatements

December 31, 1998 and 1997

(d) Depreciation

Estimated useful lives used in computing depreciation are as follows:

WATER

Works
Meters
Hydrants

YEARS

YEARS

100 Works 75

10 Pumping station 35

40 BUILDINGS 40

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 Uquid, 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 compo-
nents of these amounts are as foUows:

1998

1997

Contributions to reserves

Provision for working capital

Provision for capitahzed interest

Principal payments on long-term debt

Interest paid from escrow fluids

Capital expenditures

Depreciation and amortization

Investment income on project and escrow funds

Bond redemption costs

Other

$18,562,782

(570,428)

(154,593)

10,355,117

(1,462,408)

9,913,671

(11,627,127)

3,598,558

(5,558,203)

150,523

$18,970,811

(570,428)

(154,593)

8,503,196

(1,149,643)

12,235,587

(11,714,237)

2,759,462

496,797

Total

$23,207,892

$29,376,952

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

1998

Accrued pension expense
Debt extinguishment expense

$14,263,215
11,463,511

114,631,411
16,393,945

Total deferred charges

$25,726,726

$31,025,356

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
Self-insurance

DECEMBER 31,
1997

$ 96,394,820

130,547,334

27,380,565

2,240,000

INCREASE
(DECREASE)

$18,562,782
5,215,537

(570,427)

DECEMBER 31,
1998

$114,957,602

135,762,871

26,810,138

2,240,000

Subtotal
Reduction of future rates

256,562,719
9,622,986

23,207,892
(834,751)

279,770,611
8,788,235

Total deferred credits and reserves

$266,185,705

$22,373,141

$288,558,846

BOSTON WATER AND SEWER COMMISSION

1998 ANNUAL REPORT

notes to financial statements

December 31, 1998 and! 997

(3) PROPERTY, PLANT AND EQUIPMENT

The cost of water and sewerage property, plant and equipment in service and related accumulated depreciation at December
31, 1998 and 1997 are as follows:

1998

1997

WATER:

Works

Meters and hydrants

$162,165,940
13,516,756

$151,503,838
19,388,133

Total water

175,682,696

170,891,971

SEWERAGE:
Works
Pumping station

255,512,601
6,818,570

243,396,937
6,818,570

Total sewerage

262,331,171

250,215,507

OTHER

Total property, plant and equipment
Less accumulated depreciation

73,771,148

511,785,015

91,982,675

68,140,883

489,248,361

95,498,323

Net property, plant and equipment
Construction in progress

419,802,340
35,298,349

393,750,038
39,527,127

Total

$455,100,689

$433,277,165

(4) LONG-TERM DEBT

At the time of its creation, the Commission assumed general obUgation certificates of indebtedness of the City (the "City
bonds") pertaining to the water and sewer systems. Payments of principal and interest are made directly 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 31, 1998 and 1997 follows (amounts in
thousands):

1998 1997

City Bonds, bearing interest at a rate of 6.9%, paid off in full in 1998

Less current installments

$ -

100
50

Total City Bonds, net of current installments

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 6.25% to 6.5%,
with maturity dates ranging from November 1, 1999 to 2001

1992 Series A, bearing interest at rates ranging from 5.3% to 5.75%,
with maturity dates ranging from November 1, 1999 to 2013

1993 Series A, bearing interest at rates ranging from 4.25% to 5.25%,
with maturity dates ranging from November 1, 1999 to 2019

1994 Series A, bearing a variable interest rate (3.7% and 3.2% at
December 31, 1999 and 1998, respectively), with maturity dates
ranging from November 1, 1999 to 2024

1998 Series A, bearing interest rates ranging from 5.0% to 5.1%,
with maturity dates ranging from November 1, 2014 to 2015

1998 Series C, bearing interest rates ranging from 4.5% to 5.2%,
with maturity dates ranging from November 1, 1999 to 2021

1998 Series D, bearing interest rates ranging from 4.5% to 5.0%,
with maturity dates ranging from November 1 , 1999 to 2028

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

585

585

2,955

14,890

61,190

63,755

97,410

97,480

37,800

38,400

12,960

-

11,300

-

132,455

—

Less current installments

356,655
8,440

276,350
7,115

Total long-term revenue bonds
Less unamortized issue discount

348,215
3,054

269,235
4,204

Net long-term revenue bonds

$345,161

$265,031

notes to financial statements

December 31, 1998 and 1997

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

REVENUE BONDS
PRINCIPAL INTEREST

1999 $ 8,440 $ 18,767

2000 8,180 18,334

2001 8,550 17,910

2002 8,955 17,464

2003 9,475 17,005
Thereafter 313,055 194,148

$356,655 $283,628

(a) Current Year Activity

In December 1998, the Commission issued $132,455,000 of General Revenue Bonds, 1998 Series D (Senior Series) to provide
funds for the projects undertaken as part of the Commission's ongoing capital improvement program. The majority of these
proceeds were received in January 1999 and are recorded as bond proceeds receivable as of December 31, 1998.

On November 2, 1998 the Commission redeemed the remaining $45,065,000 balance of the General Revenue Bonds, 1988
Series A (Subordinated Series) by utilizing internally available funds on deposit In the Commission's Revenue and Stabili-
zation Funds. This resulted in savings in debt service of approximately $6.4 million per year for the next 10 years. A call
premium of $207,900 was paid and a charge of approximately $4.9 miUion was recognized in the Statement of Operations for
unamortized bond issue costs.

In March 1998, the Commission issued $12,960,000 of General Revenue Bonds, 1998 Series A (Senior Series), which,
together with available funds of the Commission, were used to current refund $13,165,000 of General Revenue Bonds, 1986
Series A (Senior Series). As a result of this current refunding, the Commission reduced its total debt service payments over
17 years by approximately $2.4 million and obtained an economic gain of approximately $1.2 milUon. A charge of approxi-
mately $219,000 was recognized in the Statement of Operations for unamortized bond issue costs.

In March 1998, the Commission issued $11,325,000 of General Revenue Bonds, 1998 Series C (Senior Series), to advance
refund a portion of General Revenue Bonds, 1991 Series A (Senior Series). The proceeds, together with available funds of
the Commission, were used to purchase government securities sufficient 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 $11,065,000 are no longer considered outstanding under the Commission's "Resolution Establishing Issue of
Revenue Bonds" (the "Resolution"). As a result of this advanced refunding, the Commission reduced its total debt service
payments over 23 years by approjcimately $1.9 miUion and obtained an economic gain of approximately $0.8 miUion. A
charge of approximately $448,000 was recognized in the Statement of Operations for unamortized bond issue costs.

(b) Prior Year Activity

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 (subsequently 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 part 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 poUcy
vrith 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 estabhshraent of an escrow account to provide for future principal and
interest payments 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 transac-
tion 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 consid-
ered defeased. The outstanding debt of $37,640,000 was paid from the 1992 cross-over funds on November 1, 1996.

BOSTON WATER AND SEWER COMMISSION

1998 ANNUAL REPORT

notes to financial statements

December 31, 1998 and 1997

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, $158,890,000 remains outstanding at December 31, 1998 on the bond issues that were defeased "in-
substance."

The "Resolution Estabhshing 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 provides 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 compUance with the Resolution, the Commission has estabUshed both trusteed and nontrusteed funds with
investments, principally short-term securities, which are restricted for payment of specified habUities, capital projects or
other costs of operations. The components of the trusteed and nontrusteed investments at December 31, 1998 and 1997 are
as follows:

TRUSTEED:

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

1998

81,329,017

16,997,371

1,470,337

9,930,455

81,131,233

1997

% 82,475,563

38,724,170

9,445,701

8,642,010

74,160,038

190,858,413

213,447,482

NONTRUSTEED:

U.S. Treasury notes

Other government obUgations

Money market and cash investments

Open-ended mutual funds

Commercial paper

Repurchase agreements

1,927,227
13,858,046
14,407,475
20,100,576

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

50,293,324

62,508,884

$241,151,737

$275,956,366

(c) Long-Tenn 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,
1998, an aggregate amount of $31,545,790 was received by the Commission. The Conunission is eUgible to receive the
remaining $788,910 once the projects are completed. For purposes of offsetting principal and interest payments, an amount
aggregating $22,012,639 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 $27,348,647 at December 31, 1998.

notes to financial statements

December 31, 1998 and 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

1999

$ 1,232

$ 1,553

$ 2,785

$ 777

$ 866

$ 1,643

$ 819

$ 323

$ 1,142

2000

1,276

1,497

2,773

743

867

1,610

852

312

1,164

2001

1,319

1,436

2,755

708

867

1,575

879

300

1,179

2002

1,375

1,371

2,746

672

867

1,539

920

287

1,207

2003

1,427

1,302

2,729

635

867

1,502

955

273

1,228

Thereafter

22,740

8,541

31,281

4,117

10,027

14,144

15,411

1,726

17,137

$29,369

$15,700

$45,069

$7,652

$14,361

$22,013

$19,836

$3,221

$23,057

The Commission has entered into various interest-free loan agreements with the Massachusetts Water Resources Authority
(the "Authority"). Under these agreements, the Commission received $2,263,384, $528,000 and $1,122,425 in 1998, 1997
and 1996, respectively, to be repaid in five equal annual installments as part of the Authority's InfUtration/Inflow Local
Financial Assistance program. The long-term portion of these loans at December 31, 1998 is $2,998,582. In addition, the
Commission has received interest-free loans from the Authority as part of the Authority's Local Water Infrastructure
Rehabihtation Program. Under this program the Commission has received $3,754,867 and $4,311,384 in 1998 and 1997,
respectively. The long-term portion of these loans at December 31, 1998 is $5,590,729. These programs are designed to assist
service area communities with sewer system rehabihtation.

(5) MASSACHUSETTS WATER RESOURCES AUTHORITY

The Massachusetts Water Resources Authority provides all the Commission's water supply and sewer treatment require-
ments 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 1998 and
1997 are as follows:

1998

1997

ASSESSMENTS ALLOCATED ON:

Water usage
Wastewater usage

$ 30,951,756
74,509,266

$ 29,523,486
73,718,923

Total

$105,461,022

$103,242,409

In 1998 and 1997, over 79% and 77%, 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 79% in 1998 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 facihties has resxilted in billings to nine City departments based on actual
consumption of approximately $2,951,000 and $3,364,000 in 1998 and 1997, respectively.

The City provides services to the Conunission, including paving and facihties rental. Operating costs billed to the
Commission by the City were approximately $1,213,800 and $1,275,200 during 1998 and 1997, respectively. Capital costs
billed by the City were approximately $2,097,700 and $2,627,300 during 1998 and 1997, 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 hens on the City's property tax bdls. Under this agreement, the City provides
collection services on these bills for an administrative fee. As of December 31, 1998, receivables totaling approximately $2.5
milhon of billings had been included on property tax bills. During 1998, the City collected and remitted to the Commission
$312,860.

At the end of 1995, the Commission implemented its own tax hen program. Under this program, accounts which have unpaid
balances over two years old are transferred into the tax hen program for collection. As of December 31, 1998, approximately
$3.4 milhon of this amount remains outstanding.

(7) RETIREMENT BENEFITS

The Commission provides retirement benefits to substantially aU 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

BOSTON WATER AND SEWER COMMISSION

1998 ANNUAL REPORT

notes to financial statements

December 31, 1998 and 1997

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
settled 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 part of the settle-
ment 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").

(a) Description of the SBRS Plan and the Trust Fund

The SBRS is a cost-sharing multi-employer 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 estabhsh and amend benefit
provisions of the plan. The System issues a pubUcly available financial report which can be obtained through the
Commonwealth of Massachusetts, Public Employee Retirement Administration ("PERA"), One Ashburton Place, Boston,
Massachusetts 02108.

(b) Funding Policy

Plan members are required to contribute to the SBRS at rates ranging from 5% to 11% of annual covered compensation.
The Commission is required to pay into the SBRS its share of the remaining systemwide actuarially determined contribution
plus administration costs which are apportioned among the employers based on active covered payroll. Through fiscal 1998,
the Commonwealth of Massachusetts reimbursed the SBRS for a portion of benefit payments for cost-of-hving increases.
Beginning July 1, 1998, the SBRS is locally funding the cost of living adjustments, as approved by the SBRS' Board of
Retirement, the City's Mayor and City Council. 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, 1998, 1997 and
1996 were approximately $1,131,000, $1,033,000 and $787,000, respectively, which equaled its required contribution each
year. Total employee contributions, based on actuarially determined amounts were approximately $1,633,000, $1,578,000
and $1,473,000 or 7.8%, 7.7% and 7.5% of covered payroU in 1998, 1997 and 1996, respectively.

(c) Valuation of Investments

The investment portfoUo 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 portfoho, which is managed by
independent investment advisors.

(d) 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 retire-
ment benefit. The Commission's poUcy is to make additional employer contributions to the Trust Fund based upon the
actuarially determined cost of future benefits, net of employee contributions.

• Valuation of Investments

Trust Fund assets at December 31, 1998 and 1997 are as follows:

ASSETS (AT FAIR MARKET VALUE):

Common stock
International stock
Mutual funds
Fixed income

$27,770,996

4,323,937

570,852

21,612,227

$28,341,071

2,610,975

191,419

17,190,657

Total

$54,278,012

$48,334,122

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

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 payroU was approximately $22,111,072.

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

Active participants $ 25,809,167

Retired members and beneficiaries 7,841,245

Total actuarial habUity
Less actuarially determined net assets

33,650,412
(34,333,364)

Overfunded actuarial habUity

(682,952)

notefs to financial statements

December 31, 1998 and 1997

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.

(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; pubUc agencies, municipalities or state obUgations carrying the highest
bond rating; commercial paper rated A-1, P-1; 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 sununary of the Commission's deposits that are (Category 1) fully insured or coUaterahzed 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 financial institution's trust department or agent in the Commission's name and (Category 3) those deposits that
are not collateralized as of December 31, 1998 follows:

TOTAL

1998

1

CATEGORY

2

3

BANK
BALANCE

CARRYING
AMOUNT

Cash

Bank money market deposits

$200,000

—

$ 5,307,117
16,098,220

$ 5,507,117
16,098,220

$ 5,082,191
15,328,383

Total

$200,000

—

$21,405,337

$21,605,337

$20,410,574

1997

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
investments that are insured, registered or held by the Commission's trustee in the Conunission'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 uninsured or unregistered investments held by the counterparty, its trust department or agent but not in
the Commission's name.

The Commission adopted Governmental Accounting Standard Board Statement No. 31, Accounting and Financial Reporting
for Certain Investments and for External Investment Pools. Investments are recorded at a fair value beginning in fiscal year
1998. In 1997, investments were recorded at amortized cost which approximated fair value. Fair value is determined based on
quoted market price. This statement was not retroactively adopted since the effect on the prior year was not material. The
difference between the amortized cost and the fair value of investments at December 31, 1998 was approximately $1.3 million.
This amount was recorded as an unrealized gain and included in investment income for the year ended December 31, 1998.

1998

CATEGORY

2

FAIR
VALUE

CATEGORIZED:

U.S. Government obUgations

U.S. Government agency obligations

Repurchase agreements

$ 81,329,017
18,924,598

$ 81,329,017
18,924,598

Commercial paper

—

101,231,809

—

101,231,809

100,253,615

101,231,809

—

201,485,424

NOT CATEGORIZED:

Open-end mutual funds

24,337,930

Total

$100,253,615

$101,231,809

—

$225,823,354

BOSTON WATER AND SEWER COMMISSION

1998 ANNUAL REPORT

notes to financial statements

December 31, 1998 and 1997

ESTIMATED
CATEGORY FAIR

1997 1 2 3 VALUE

CATEGORIZED:

U.S. Government obligations $108,201,840 $ — — $108,201,840

U.S. Government agency obligations 23,657,352 — — 23,657,352

Repurchase agreements
Commercial paper

18,610,710
77,253,338

18,610,710
77,253,338

131,859,192

95,864,048

—

227,723,240

NOT CATEGORIZED:

Open-end mutual funds

_

22,318,288

Total

$131,859,192

$95,864,048

-

$250,041,528

(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 minimimi lease commitments. In addi-
tion 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.

Minimum lease commitments under all operating leases with terms in excess of one year at December 31, 1998 are as follows:

OFFICE OTHER

1999 ""^ $ 1,325,717 $ 749,275

2000 1,325,717 23,908

2001 1,325,717 23,908

2002 1,325,717 23,908

2003 1,325,717 23,908
Thereafter 19,438,800 382,537

Total $26,067,385 $1,227,444

Rent expense under operating leases amounted to $1,783,290 and $1,828,796 in 1998 and 1997, respectively.

(10) COMMITMENTS

A major capital improvement program is currently 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 approxi-
mately $34 miUion as of December 31, 1998. 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 $128.7 milhon
for 1999 and 2000. Of this amount, approximately $101.1 miUion represents extension and improvement projects and $27.6
million represents renewal and replacement projects. The extension and improvement projects are expected to be 17%
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 opera-
tions 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 purchase price of $11 miUion. The total three-year spending for the new faciUty is $43.3 miUion, of which
$25. 3 million will be spent in 1999 with $17.9 and $0.1 milhon in years 2000 and 2001, 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 hes within those boundaries. Chapter 152 provides that land held by
pubhc agencies, including the Commission, is deemed to be held for governmental purposes and therefore wiU be taken
without consideration to the apphcable agency. The Commission purchased the parcel for $6 milhon, and made improve-
ments therein, costing approximately $2 million. 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.

noteis to financial statements

December 31, 1998 and 1997

(11) RISK MANAGEMENT AND OTHER INSURANCE

The Commission carries self insured retention limits for claims filed under workers' compensation and general liability and
completely self insures for all unemployment benefits. The workers' compensation self insured retention limit is $150,000 per
claim and is supplemented with $5 miEion in excess coverage purchased through an outside carrier. For general liability, 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 Premium based

Vehicles Combined single limit of $1 million

Property Aggregate limit of $41 ,203 ,000

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

Fiduciary $2 million coverage

Crime Employee dishonesty coverage of $5 million

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 reason-
ably estimated. The Commission has estabUshed a habUity based on historical trends of previous years and attorney's and
independent insurance reserve appraiser's estimates of pending matters and lawsuits in which the Conunission is involved.
Unemployment claims paid during 1998 were immaterial.

Changes for the years ended December 31, 1998 and 1997 are as follows:

1998 1997

Beginning balance of reserves $4,296,807 $4,165,390

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

Workers' compensation (706,631) (631,508)

General UabiHty (348,932) (396,487)

Incurred claims 2,732,801 1,159,412

Ending balance of reserves $5,974,045 $4,296,807

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 establish-
ment 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 htigation 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 htigation. 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, 1998,
the overall clean up costs are estimated to be approximately $506 milhon. However, the extent of the Commission's Uabdity
for these costs cannot be determined.

BOSTON WATER AND SEWER COMMISSION

22 I 23 1998 ANNUAL REPORT

required supplementary information

December 31, 1998 and 1997

YEAR 2000 — UNAUDITED

The "year 2000 problem" is the result of shortcomings in many electronic data processing systems and other equipment that
may make operations beyond the year 1999 troublesome. For many years, computer programmers eliminated the first two
digits from a year when writing programs. Accordingly, many programs, if not corrected, will not be able to distinguish
between the year 2000 and the year 1900. This may cause the programs to process data inaccurately or stop processing data
entirely.

The Commission is well under way with its efforts to ensure that its computer operations are year 2000 compUant. In
June 1996, immediately after its Strategic Information Technology Plan was finalized, the Commission began preparing
its computing environment for the year 2000. In accordance with the plan, the Commission's technical infrastructure has
been updated to accommodate the use of new technology. The plan identified the Conunission's Human Resource Information
System (HRIS) and Financial Management System (FMS) as two obsolete "mission critical" appUcations that may not
function properly in the year 2000. On January 1, 1998, the HRIS was replaced with a new chent/server based HRIS
developed by Peoplesoft, Inc. The FMS was replaced with a new cUent/server based FMS developed by Peoplesoft, Inc. on
January 1, 1999. With respect to other "mission critical" systems, the action plan called for program code modification to
the Commission's Customer Information/Billing System which has been completed. The plan also called for replacement
meter reading equipment scheduled for completion in June 1999. Additionally, contingency plans have been put in place
should an unexpected error occur in critical technology. To date, the Commission has expended approximately $2 million
to address year 2000 concerns and expects to spend an additional $0.5 miUion during 1999.

In early 1998, the Commission's year 2000 Program Office conducted a full inventory of its computing hardware and soft-
ware. Vendors were soUcited for year 2000 product compUance certification or a plan for remediation should their product
not be comphant. Vendors' responses were examined and a prioritized action plan was developed for non-compUant or
questionable inventory items.

While the Conunission is working dihgently to address the year 2000 problem and, at this time, the Commission does not
anticipate any significant disruption to its operations or financial condition caused by the year 2000 problem, because of
the inherent complexity of the task, the Commission cannot provide complete assurance that the year 2000 problem will not
cause disruptions to its operations or financial activities. Furthermore, although the Commission is monitoring the readiness
activities of its vendors and suppUers, including the MWRA, failures by such entities to resolve their own year 2000 problems
could adversely affect the Commission's operations.

supplemental schedule of revenuefs and expenses
— rate basis

Years Ended December 31, 1998 and 1997

REVENUES:
Water revenue
Sewer revenue

^ 66,828,252
117,542,854

I 66,673,734
116,582,161

184,371,106

183,255,895

Less:

Adjustments
Discounts
Bad debt

6,804,478

720,014

1,288,812

7,279,381

741,903

1,437,706

Total

8,813,304

9,458,990

Net billed charges
Prior year surplus
Miscellaneous revenues:
Late charge revenue
Investment income
Fire pipe revenue
Other income

175,557,802
9,622,986

2,546,050

13,650,728

2,412,803

7,030,306

173,796,905
9,370,103

2,939,296

13,041,399

2,396,537

7,342,599

Total

revenues

210,820,675

208,886,839

DIRECT OPERATING EXPENSES:

Salaries and wages

Overtime wages

Fringe benefits

Supphes and materials

Repairs and maintenance

Utilities

Professional services

Space and equipment rentals

Other services

Insurance

Damage claims

Inventory

Capital outlay

23,476,920

22,230,570

807,205

799,512

3,874,986

3,482,062

2,264,173

1,904,423

5,113,903

5,445,498

532,068

519,179

1,630,676

1,579,685

1,783,290

1,828,796

910,101

861,431

320,368

358,501

1,088,550

480,560

42,167

383,524

424,563

662,161

Total direct operating expenses

42,268,970

40,535,902

NONOPERATING EXPENSES:
MWRA assessment
Capital improvements
Principal payments
Interest expense
Deposits to reserve funds

105,461,022

9,489,108

10,355,117

15,634,111

18,562,782

103,242,409

11,573,426

8,503,196

16,173,954

18,970,811

SDWA assessment

261,330

264,155

Total nonoperating expenses

159,763,470

158,727,951

Total current expenses

202,032,440

199,263,853

Current year rate surplus

$ 8,788,235

1 9,622,986

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.

BOSTON WATER AND SEWER COMMISSION

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