BOSTON PUBLIC LIBRARY 3 9999 06588 174 8 \ms/o\ ^ EcSfisa?sii^s#ft«*iZsaE!j ?^'.--:"^^ .-•-^J^S 2001 Annual Report lesou[ce for Boston Boston Water and Sewer Commission From Nature Every day all of Boston's homes and busi- nesses receive one of nature's greatest resources from the Quabbin Resei-voir Since the mid-1940s, the Quabbin has provided its consumers with some of the highest quality water in the world. Through the joint efforts of the Boston Water and Sewer Commission (BWSC) and the Massachusetts Water Resource Authority (MWRA), water travels from the Quabbin Resei^voir through an intricate system of reservoirs, aqueducts and pipelines until it reaches consumers. The water is treated and tested repeatedly to insure that all consumers are receiving the highest quality product. MWRA has developed a 10-year, $1.7 billion Integrated Water Supply Improvement Program, and through the years, BWSC has contributed to many of these improvement projects. In fact, nearly 60% of all rate revenues generated from BWSC ratepayers are used to fund MWRA projects. During 2001, there was an emphasis placed on three major com- ponents of this program. These projects are the MetroWest Water Supply Tunnel, new covered storage facilities, and the Walnut Hill Treatment Plant. The MetroWest Water Supply Tunnel is a 17.6-mile aqueduct boring through solid bedrock 200 to 500 feet below the ground from Marlborough to Weston. Once com- pleted in 2003, this new tunnel will link the MWRA water facilities to the City tun- nel, thereby increasing the water delivery system's overall capacity by 450 million gallons per day and providing a redundant supply system for Boston consumers. Covered storage tanks are a second major project that BWSC and its ratepay- ers have been contributing to through MWRA's improvement program. Covered storage facilities provide water sources jlV^y^jf, with added protection by reducing the risk of potential contamination. As a result, in 2001 construction continued on new covered tanks in Marlborough and Weston, due to be completed in 2004. These tanks will create water storage capacity available for peak daily con- sumer demands and emergencies. The new Walnut Hill Water Treatment Plant is the third project to which BWSC and its ratepayers made significant contributions in 2001. This new plant will enhance the quality of drinking water supplied to 2.2 million people in the greater Boston area. More than 400 million gallons of water can be treated at this facility on a daily basis through ozonation/chloramination. Ozonation/chloramination, a modern method of water disinfection, dramatically reduces the amount of chlorine used during treatment, thereby improving the ability to meet all anticipated state and federal drinking water standards. The Walnut Hill Plant is expected to go on-line in 2004. Once the water reaches Boston's city limits, it is distributed to homes and businesses through an extensive net- work of water mains, service pipes, valves and hydrants. The Commission's current water distribution system con- sists of approximately 1,021 miles of pipe which range in size from 4 inches to 48 inches, including almost 14 miles of high pressure fire service mains located in downtown Boston, 12,760 hydrants and 16,073 valves. BWSC enhanced its customer service in 2001 with its Geographical Information System (GIS). GIS technology allows for quick access to detailed maps of water distribution lines and infrastructure. A web-based GIS application is networked to all departments of BWSC, enabling the engineering, customer service and opera- tions staff to track the age and condition of pipelines as well as establish its plan for infrastructure upgrades. GIS provides more efficient record accessibility, improv- ing the data search time and providing the ratepayers of Boston with even more reliable service. Utilizing GIS technology BWSC continued in 2001 to replace older water mains and to clean and line structurally sound water \U\ kUUi UfU] t investments in the water and wastewater systems, two yreat natural resourcBS- theQuabbin and Boston Harbor-are protected and preserved for future generations. Shown from left to right: Dennis DiMarzio, Chair, Board of Commissioners; Muhammad Ali- Salaam, Commissioner; Cathleen Douglas Stone, Commissioner; and Vincent G. Mannering, Executive Director. A Messaye from the [xecutive Director Since its creation in 1977, the Boston Water and Sewer Commission has been provid- ing Boston consumers with the most efficient city water and sewer service possible. The year of 2001 was no exception, as the Commission continued to meet the needs of Boston consumers with a quality water supply and reli- able wastewater removal. Throughout 2001, the Commission continued to make improvements in the way it delivers service to its customers. The completed implementation of our Work Order Management System granted access to all work in progress on graphical maps. This system links all customer requests for service to a work order and this work order is graphically presented to the crews that do the work. The Commission's Geographical Information System has enhanced customer service by allowing quick access to detailed maps of the water and sewer distribution system, and to track the age and con- dition of pipelines to allow for infrastructure upgrades. Beyond system upgrades, the Commission continues to make constant strides in its customer service efforts. In October of 2001, the Commission launched its updated website to provide customers with comprehen- sive information regarding Boston's water and sewer systems, environmental data such as rainfall statistics, forms and regulations. Additionally the Commission's customer service access lines are open 24 hours a day, 365 days a year, to provide any caller with assistance regarding their water distribution and sanita- tion services. All of these efforts, combined with strong management initia- tives and a solid financial foun- dation enabled the Commission to get the job done, and get it done well for our ratepayers. The Boston Water and Sewer Commission is proud of the services that have been pro- vided through 2001 and is committed to continue this tra- dition of excellence through- out the coming years. Vincent G. Mannering Executive Director ISIfll WAHR All SfWfR COMMI 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 31, 2001 and 2000, and the related statements of operations and Commission equity, and cash flows for the years then ended. These financial statements are the responsibility of the Commission's manage- ment. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 finan- cial statement presentation. We believe 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 posi- tion of the Commission at December 31, 2001 and 2000, and the results of its operadons and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. As discussed in note 1, the Commission adopted the provisions of GASB Statement No. 33, Accounting and Financial Reporting for Nonexchange Transactions, in 2001. 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 sub- jected 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. iOH csr a"p March 29, 2002 2U\ UNIAL REPOn Balance Sheets December 31, 2001 am Assets: Current assets: Cash and cash equivalents (note 8) Accounts receivable, net: Customers, less allowances of $5,435,458 in 2001 and 2000 (note 1) Unbilled revenues, less allowances of $1,702,361 in 2001 and $1,703,561 in 2000 Constaiction grants receivable Prepaid expenses $ 7,072,158 8,130,567 6,910,585 1,282,682 331,014 $ 10,065,720 10,604,714 8,290,990 1,277,328 360,463 Total current assets 23,727,006 30,599,215 Restricted investments (notes 4 and 8) Property, plant, and equipment, net (note 3) Deferred charges (note 2) Bond issue costs, net JSSBSSBmK. 273,941,597 589,487,908 27,762,709 2,290,345 308,162,056 549,588,174 29,364,185 2,516,855 Total assets $917,209,565 $920,230,485 Liabilities and Commission equity: Current liabilities: Payable from current assets: Accounts payable Other accrued liabilities Current portion of long-term notes (note 4) Current portion of revenue bonds (note 4) 12,188,635 5,907,724 5,076,025 8,955,000 14,887,662 5,989,789 4,693,186 8,550,000 Total current liabilities 32,127,384 34,120,637 Long-term debt, net (note 4) Long-term notes payable (note 4) Other long-term liabilities Deferred credits and reserves (note 2) 320,321,133 33,136,635 27,966,905 340,612,566 329,024,788 32,701,475 35,145,029 335,700,714 Total liabilities 754,164,623 766,692,643 Commission equity: Contributed capital 163,044,942 153,537,842 Commitments and contingencies (notes 9, 10, 11, and 12) Total liabilities and Commission equity $917,209,565 $920,230,485 See accompanying notes to financial statements. BOSIOI WAHR All S[W[II CBMMISSIOI Statements ot Operations and Commission [qoity Yeafs ended December 31,2001 and 2000 Operating revenues: Water and sewer usage Fire pipe Other $173,054,018 2,690,551 10,851,618 $174,766,567 2,595,314 18,035,955 Total operating revenues 186,596,187 195,397,836 Operating expenses: Operations Maintenance MWRA. assessment (note 5) Depreciation and amortization 44,329,620 6,537,991 117,674,466 15,376,188 45,014,062 6,386,469 112,524,614 14,328,173 Total operating expenses 183,918,265 178,253,318 Excess operating revenues 2,677,922 17,144,518 Nonoperating revenue (expense): Investment income Interest expense 17,289,911 (17,793,752) 24,181,337 (18,812,982) Total nonoperating revenue (expense) (503,841) 5,368,355 Excess revenues before capital grants and contributions, depreciation add-back, and transfer requirements Capital grants and contributions 2,174,081 12,244,871 22,512,873 12,316,488 Excess revenues before depreciation add-back and transfer requirements Add: Depreciation on fixed assets acquired by grants 14,418,952 2,737,771 34,829,361 2,582,478 Excess revenues before transfer requirements Excess revenues used to fund reserves, increase contributed capital, and other deferrals (note 2) Accumulated revenues used to offset future rates — beginning of year 17,156,723 (26,609,868) 9,874,570 37,411,839 (34,660,134) 7,122,865 Accumulated revenues used to offset future rates — end of year $ 421,425 $ 9,874,570 See accompanying notes to financial statements. 2111 nun ufu] 5 Statements of Cash Flows Years eoded December 31, 2001 aodZOOD 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 Cash flows from capital and related financing activities: Additions to property, plant, and equipment Proceeds from notes payable Payment on bonds Contributions in aid of construction Payment of bond interest (53,196,589) 817,997 (8,550,000) 12,244,871 (17,793,752) $ 2,677,922 $ 17,144,518 (4,911,852) (25,095,351) 15,376,188 14,328,173 2,474,147 657,971 1,380,405 (1,106,338) (5,354) (15,501) 29,449 (25,754) (2,699,027) 1,094,578 (82,065) 14,402 4,911,852 25,095,351 (7,178,124) (15,037,346) Net cash provided by operating activities 11,973,541 17,054,703 Cash flows from investing activities: Sale of investments, net Investment income 34,220,459 17,289,911 50,749,880 24,181,337 Net cash provided by investing activities 51,510,370 74,931,217 (71,660,305) (2,349,736) (8,180,000) 12,316,488 (18,812,982) Net cash used in capital and related financing activities (66,477,473) (88,686,535) Net (decrease) increase in cash and cash equivalents Cash and cash equivalents, beginning of year (2,993,562) 10,065,720 3,299,385 6,766,335 Cash and cash equivalents, end of year $ 7,072,158 $ 10,065,720 See accompanying notes to financial statements. WAHR HI S[W[I1 CflMMISSIOI Notes to Financial Statements Oecember]], 2001 and 2DD0 (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 tlie City of Boston (the City) as re- quired 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 is appointed by the City's mayor subject to confirmation by the City Council. It regulates the rates that the Commission can charge its customers for water and sewer usage. The rates charged to cus- tomers are based on the cash required for the Commission's opera- tions, 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 accnial basis of accounting and the capital maintenance measurement focus). To accommodate the rate-making process, the Commission follows the accounting standards set forth in Statement of Financial Account- ing Standards (SEAS) No. 71, Accounting for the Effects of Certain Types of Regulation. SEAS No. 71 allows certain (a) revenues pro- vided for future allowable costs to be deferred until the costs are actually incurred (deferred credits) and (b) costs incurred to be capi- talized 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 statements of operations and Commission equity are presented on a GAAP basis. A reconciliation between the revenues and expenses of these two operating statements for the year ended December 31, 2001 is provided at right: Expenses As presented in the statements of operations and Commission equity: Operating revenues/expenses Other revenues/expenses Total Reclassifications and deferrals: Provision for working capital Revenue adjustments/ bad debt expense Excess bond payments over depreciation and amortization Interest expense (escrowed funds) Investment income (escrowed funds) Capital expenditures Excess revenue used to offset current rates Other deferrals $186,596,187 $183,918,265 17,289,911 17,793,752 203,886,098 201,712,017 570,428 — (5,859,720) (5,859,720) — (1,933,297) — (1,085,996) (4,723,977) — — 11,138,500 9,874,570 — 154,593 (490,937) As presented in the supplemental schedule $203,901,992 $203,480,567 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 $421,425 and $9,874,570 for the years ended December 31, 2001 and 2000, 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-billing basis that reduce the amount of total billings. Accordingly, the 2001 and 2000 total cus- tomer bills outstanding of $23,585,805 and $26,059,952, respectively, have been reduced by provisions for billing adjustments and sewer abatements of $10,019,780 in 2001 and 2000. These net billing amounts are further reduced by an allowance for uncollectible accounts of $5,435,458 in 2001 and 2000 to arrive at net accounts receivable. 2111 yyAi UHU ] (b) Investments 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 fair value. Investments are recorded at fair value. Fair value is determined based on quoted market price. (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 incuiTed. Major renewals or betterments are capitalized and depreciated over their estimated use- ful lives. The Commission does not have any donated fixed assets. The Commission capitalizes interest costs during constaiction of assets for its own use. No interest was capitalized in 2001 or 2000 because the difference between interest expense and interest income on unexpended proceeds was not material. (d) Compensated Absences Various employees of the Commission accumulate unused sick time (subject to certain limitations) to be used at a later date or a percent- age paid in cash upon voluntary resignation and/or retirement from the Commission (subject to Commission policies and/or bargaining agreements). The liability for vacation leave is based on the amount earned but not used; for sick leave, it is based on a percentage of the amount accumulated at the balance sheet date. The liability for both amounts is calculated based on the pay or salary rates in effect at the balance sheet date. (e) Depreciation The Commission provides for depreciation using the straight-line method. Estimated useful lives used in computing depreciation are as follows: :er Years Sewerage Years Works 100 Works 75 Meters 10 Pumping station 35 Hydrants 40 Buildings 40 Other 4 to 14 (f) Capital Grants and Contributions The Commission receives capital grants and contributions from governmental agencies, individuals, and the City in aid of specific construction projects. In fiscal 2001, the Commission adopted GASB Statement No. 33, Accounting and Financial RepoiUng for Nonexchange Transactions, which requires capital grants and contri- butions to be reported as revenue rather than contributed capital. The amount recorded as revenue in fiscal 2001 and 2000 was $12,244,871 and $12,316,488, respectively. Depreciation related to the assets funded by these grants is charged to contributed capital over the estimated useful life of the assets. Depreciation of assets begins when the related facilities and equip- ment are put into service. (g) Cash Equivalents The Commission considers all highly liquid, short-term cash invest- ments with original maturities of thi'ee months or less to be cash equivalents for purposes of the statements of cash flows. (h) Bond Issue Costs Expenses related to the issuance of bonds are amortized on a weighted average basis over the life of the bonds, which approxi- mates the effective interest method. (i) 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. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (k) Reclassifications Certain 2000 amounts have been reclassified to conform with the 2001 presentation. I WAIER HI SEWER EOMMISSIOI Notes to Financial Statements December 31, 2001 and 2000 (2) Deferred Charges and Credits As discussed in note 1, the application of SFAS No. 71 results in certain revenues and expenses being removed from the statements of operations and Commission equity 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 Commission equity and added to the balance sheets as deferred credits appear in the line "Excess revenues used to fund reserves, increase contributed capital, and other deferrals" on the statements of operations and Commission equity. The components of these amounts are as follows: Provision for working capital Provision for capitalized interest Principal payments on long-term debt Interest paid from escrow funds Capital expendiaires Depreciation and amortization Investment income on project and escrow funds Other $ (570,428) (154,593) 12,809,815 (1,085,996) 11,138,500 (12,638,416) 4,723,977 142,138 $ (570,428) (154,593) 12,586,564 (1,135,147) 12,431,415 (11,745,692) 8,777,579 2,153,948 Total $ 14,364,997 $ 22,343,646 The activity in and components of deferred credits and reserves included in the accompanying balance sheets are as follows; December 31 2000 Increase (decrease) December 31 2001 Debt service Capital improvements Working capital Self-insurance $124,445,837 173,471,025 25,669,282 2,240,000 t — $124,445,837 14,935,425 188,406,450 (570,428) 25,098,854 — 2,240,000 Reduction of future rates 325,826,144 9,874,570 14,364,997 340,191,141 (9,453,145) 421,425 Total defeiTed credits and reserves $335,700,714 $ 4,911,852 $340,612,566 (3) Property, Plant, and Equipment The cost of water and sewerage property, plant, and equipment in service and related accumulated depreciation at December 31, 2001 and 2000 is as follows: The components of deferred charges included in the accompanying balance sheets are as follows: Deferred loss on land taking Accrued pension expense Debt extinguishment expense Total deferred charges 2001 2000 $ 6,189,868 $ 6,410,932 12,955,715 13,428,725 8,617,126 9,524,528 $ 27,762,709 $ 29,364,185 Works Meters and hydrants $179,594,305 19,937,740 $174,939,408 18,034,512 Total water 199,532,045 192,973,920 Sewerage: Works Pumping stations 280,552,099 6,818,749 274,095,751 6,818,749 Total sewerage 287,370,848 280,914,500 Other: Total property, plant, and equipment Less accumulated depreciation 123,831,724 75,118,472 610,734,617 549,006,892 (122,845,764) (115,411,232) Net property, plant, and equipment Construction in progress 487,888,853 101,599,055 433,595,660 115,992,514 Total $589,487,908 $549,588,174 During 1999, the Boston Redevelopment Authority (BRA) took land owned by the Commission through eminent domain. The book value of the land, at the time of the taking, was $7,598,710. A portion of this loss, $6,632,000, has been included in deferred charges in the accompanying balance sheets as that amount will be recovered through future rates. The Commission was paid no compensation for the land and does not expect to receive any consideration from BRA in the future. During 2000, the Commission completed the construction of its new headquarters and moved in during February 2001. (4) Long-Term Debt The Commission issues revenue bonds to support various projects. A summary of the revenue bonds outstanding as of December 31, 2001 and 2000 follows (amounts in thousands): Senior debt: 1991 Series A, bearing interest at a rate of 6.5%, with maturity date on November 1, 2001 1992 Series A, bearing interest at rates ranging from 5.5% to 5.75%, with maturity dates ranging from November 1, 2002 to 2013 1993 Series A, bearing interest at rates ranging from 4.6% to 5.25%, with maturity dates ranging from November 1, 2002 to 2019 1994 Series A, bearing a variable interest rate, with maturity dates ranging from November 1, 2002 to 2024 1998 Series A, bearing interest rates ranging from 5.0% to 5.125%), 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, 2002 to 2021 1998 Series D, bearing interest rates ranging from 4.5% to 5.0%, with maturity dates ranging from — $ 1,045 52,680 93,650 35,800 12,960 11,270 55,665 95,165 36,500 12,960 11,280 November 1, 2002 to 2028 125,125 127,420 Less current installments 331,485 8,955 340,035 8,550 Total long-term revenue bonds Less unamortized issue discount 322,530 2,209 331,485 2,460 Net long-term revenue bonds $320,321 $329,025 Annual sinking fund requirements and debt principal and interest maturities for all future years are as follows (amounts in thousands): 2002 2003 2004 2005 2006 Thereafter Revenue Bonds Principal Interest $ 8,955 $ 17,464 9,475 17,005 9,910 16,512 10,480 15,989 10,980 15,429 281,685 146,219 $331,485 $228,618 (a) Prior Year Debt Refunding In the aggregate, $150,970,000 remains outstanding at December 31, 2001 on the bond issues that were defeased "in-substance" during prior years. (b) Trusteed and Nontrusteed Cash and Investments 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 components of the tioisteed and non- trusteed investments at December 31, 2001 and 2000 are as follows: Trusteed: U.S. Treasury notes Other government obligations Money market and cash investments Open-ended mutual funds Commercial paper Repurchase agreements $ 34,163,251 90,814,967 1,131,389 6,435,585 51,159,166 8,416,250 $ 52,668,023 71,127,537 10,976,143 12,881,679 42,324,433 8,416,250 $192,120,608 $198,394,065 Nontrusteed: Other government obligations $ 853,408 $ 1,194,875 Money market and cash investments 1,746,361 1,772,549 Open-ended mutual funds 20,827,533 18,021,339 Commercial paper 12,624,774 16,003,434 Repurchase agreements 45,768,913 72,775,794 81,820,989 109,767,991 Less: Taisteed and nontrusteed cash 273,941,597 (2,877,749) 308,162,056 (12,748,692) Trusteed and nontrusteed investments $271,063,848 $295,413,364 IISIIN WAnR yO SfWfll [DMMISSIIN Notes to Financial Statements December 31,2001 and 2000 (c) 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, 2001, an aggregate amount of $32,334,700 was received by the Commission. For purposes of offsetting principal and interest payments, an amount aggregating $16,798,608, 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 constrtiction over the remaining term of the loan. The long-term portion of the loan agreements with MWPAT is $23,466,003 at December 31, 2001. The scheduled loan payments for all present MWRA obligations are shown below: 2002 2003 2004 2005 2006 Thereafter $ 3,731,931 2,764,054 1,560,404 799,115 799,115 3,747,940 $13,402,559 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 2002 $ 1,344 $ 1,329 $ 2,673 $ 656 $ 852 S 1,508 $ 894 5 274 $ 1,168 2003 1,395 1,261 2,656 619 852 1,471 927 260 1,188 2004 1,446 1,191 2,637 581 857 1,439 958 249 1,207 2005 1.510 1,115 2,624 542 859 1,401 1,000 233 1,234 2006 1.573 1,031 2,604 501 862 1,363 1,041 214 1,255 There- after 17,542 4,798 22,340 2,381 7,236 9,617 11,801 918 12,719 S24.810 510,724 535,534 55,281 511,518 516,799 516,622 52,149 518,770 The Commission has entered into various interest-free loan agree- ments with the Massachusetts Water Resources Authority (the Authority). Under these agreements, the Commission is required to repay these loans in five equal annual installments as part of the Authority's Infiltration/Inflow Local Financial Assistance program. No funding was received under this program in 2001 or 2000. The long-term portion of these loans at December 31, 2001 is $1,310,216. In addition, the Commission has received interest-free loans from the Authority as part of the Authority's Local Water Infrastaicture Rehabilitation Program (WIR) and Pipeline Assistance Program (PAP). The Commission received no funding in 2001 and 2000 for WIR but received $5,514,798 and $2,476,351 in 2001 and 2000, respectively, for PAP. The long-term portion of these loans at December 31, 2001 is $1,416,013 and $6,944,399, respectively. These programs are designed to assist service area communities with sewer system rehabilitation. (5) Massachusetts Water Resources Authority The 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 ten equal installments excluding the months of January and July. Amounts included in the statements of opera- tions and Commission equity for assessments by the Authority for 2001 and 2000 are as follows: Assessments allocated on: Water usage Wastewater usage $ 40,035,390 77,639,076 $ 35,997,824 76,526,790 Total $117,674,466 $112,524,614 In 2001 and 2000, over 78% of water provided from the Authority was billable to customers. Since its inception, the Commission has maintained the percentage of billable water at 78% in 2001 and 2000 and is continuing to take steps to improve the amount of billable water, including replacement of old and defective meters and imple- mentation of a comprehensive leak detection and repair program. 2101 yyn I BE Pin H (6) Transactions with the City of Boston The Commission's ongoing program to meter City facilities lias resulted in billings to ten City departments during 2001 and 2000, respectively, based on actual consumption of approximately $3,805,088 and $2,594,741 in 2001 and 2000, respectively. The City provides services to the Commission, including paving and facilities rental. Operating costs billed to the Commission by the City were approximately $1,066,553 and $1,528,122 during 2001 and 2000, respectively. Capital costs billed by the City were approximately $2,336,802 and $2,203,630 during 2001 and 2000, 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, 2001, receivables totaling approximately $1.7 million of billings had been included on propeity tax bills. Under the Commission's own tax lien program, accounts which have unpaid balances over two years old are transfeired into the tax lien program for collection. As of December 31, 2001, approximately $3,270,797 remains outstanding. (7) Retirement Benefits The Commission provides retirement benefits to substantially all of its employees through the State-Boston Retirement System (SBRS or the System), a cost-sharing, multi-employer 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 settled in 1986, resulting in a payment of $19,100,000 to the SBRS. This pay- ment 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 settlement 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 ten years of creditable service as defined by Chapter 32 of the Massachusetts General Laws (MGL). (a) Description of the SBRS Plan The SBRS is a cost-sharing, multi-employer public employee retire- ment 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. The System issues a publicly available financial report which can be obtained tlirough the Commonwealth of Massachusetts, Public Employee Retirement Administration Commission (PERAC), One Ashburton Place, Boston, Massachusetts 02108. (b) Funding Policy Plan members are required to contribute to the SBRS at rates rang- ing from 5% to 11% of annual covered compensation. The Com- mission 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 pay- ments for cost-of-living 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 ended December 31, 2001, 2000, and 1999 were approximately $565,350, $1,244,000, and $1,181,000, respec- tively, which equaled its required contribution each year. Total employee contributions, based on actuarially determined amounts, were approximately $1,929,788 and $1,871,797 and $1,726,145 or 8.2%, 7.9%, and 7.9% of covered payroll in 2001, 2000, and 1999, respectively. (c) 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 cus- todian of the portfolio, which is managed by independent invest- ment advisors. (d) The Commission's Trust Fund On a quarterly basis, the Commission deposits an amount into a Trust Fund, the assets of which are used to reimburse the SBRS for amounts paid on behalf of the Commission. As required by the Commission's Enabling Act, employee pension contributions are transfeiTcd to the SBRS directly and are either returned to employees upon termination or, for vested employees, are used to defray a portion of the total retirement benefit. The Commission's policy is to make employer contributions to the Trust Fund based upon the actuarially determined cost of future benefits, net of employee contributions. 12 UUU WHnR HI S[W[R [IHMISSim Kotes to Financial Statements December 31, 2001 ani Trust Fund assets at December 31, 2001 and 2000 are as follows: Assets (at fair market value): Common stock International stock Mutual funds Fixed income $30,964,785 5,800,928 759,140 25,915,183 $31,905,760 6,734,365 713,502 25,211,460 Total $63,440,036 $64,565,087 The Trust Fund activity is as follows: Assets (at fair market value): January 1, 2000 $61,796,885 Employer contributions 1,244,261 Investment income and gains 3,047,182 Management fees (235,236) Payment to SBRS (1,288,005) Assets (at fair market value): January 1, 2001 $64,565,087 Employer contributions 565,350 Investment income and gains (13,357) Management fees (247,289) Payments to SBRS (1,429,755) Assets (at fair market value): December 31, 2001 $63,440,036 The investment portfolio is regulated by the MGL, Chapter 32, Section 23. The investments are managed by independent invest- ment advisors. Fleet Bank of Massachusetts, N.A. is the custodian of the portfolio. The Trust Fund assets will be used by the Commission to reimburse SBRS in future years for required employer contributions. (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 coUateralization 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 car- rying 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 instrtiments. (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 financial insti- tution's trtist department or agent in the Commission's name, and (Category 3) those deposits that are not collateralized as of December 31, 2001 and 2000 follows: Category Total bank Carrying 2001 1 2 3 balance amount Cash Bank money market deposits $100,000 — $ 7,068,787 — — 2,877,749 $ 7,168,787 $ 7,072,158 2,877,749 2,877,749 Total $100,000 — $ 9,946,536 $10,046,536 $ 9,949,907 Category Total bank Carrying 2000 1 2 3 balance amount Cash Bank money market deposits $100,000 — $10,106,259 — — 12,748,692 $10,206,259 $10,065,720 12,748,692 12,748,692 Total $100,000 — $22,854,951 $22,954,951 $22,814,412 Deposits in transit and outstanding checks account for the majority of the difference between the bank balance and the carrying amount. !yi Aiya un\ (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 Commission's name. Category 2 includes uninsured and unregis- tered investments held by the counterparty's trust department or agent in the Commission's name. Category 3 includes uninsured or um-egistered investments held by the counterparty, its trust depart- ment, or agent but not in the Commission's name. Category Categorized: U.S. Government obligations $ 34,163,252 U.S. Government agency obligations 91,668,376 Repurchase agreements — Commercial paper — 54,185,163 63,783,939 34,163,252 91,668,376 54,185,163 63,783,939 Total $125,831,628 $117,969,102 $243,800,730 Not categorized: Open-end mutual funds 27,263,118 Total $271,063,848 Category 2000 1 2 3 Fair value Categorized: U.S. Government obligations $ 52,668,024 U.S. Government agency obligations 72,322,411 Repurchase agreements — Commercial paper — 81,192,043 58,327,867 52,668,024 72,322,411 81,192,043 58,327,867 Total $124,990,435 $139,519,910 $264,510,345 Not categorized: Open-end mutual funds 30,903,019 (9) Lease Commitments The Commission leases office space and equipment under various leases that have been accounted for as operating leases. The pay- ments received under these leases are not material. Rent expense under operating leases amounted to $464,760 and $1,773,127 in 2001 and 2000, 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. Commit- ments under these contracts aggregate approximately $101.0 million as of December 31, 2001. Capital improvements, primarily related to water and wastewater system projects with an emphasis on the cleanup of the Boston Harbor area, are expected to aggregate approximately $137.5 million for 2002 through 2003. Of this amount, approximately $101.8 million represents extension and improvement projects and $35.7 million represents renewal and replacement proj- ects. The extension and improvement projects are expected to be 25% funded by federal and state grants and Authority grants and loans. The remaining amounts will be funded from the Commission's bond proceeds and operating revenues. (11) Risl< 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' compensa- tion self-insured retention limit is $250,000 per claim and is supple- mented with $5 million 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. Total $295,413,364 WAl :W[R [OMMISSIO Notes to Financial Statements Qecember 31, 2001 and 2000 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 $66.3 million 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 reasonably estimated. The Commission has established a liability 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 Commission is involved. Unemployment claims paid during 2001 and 2000 were immaterial. (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 agen- cies. Such audits could lead to requests for reimbursement to the grantor agency for expendimres 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 assess- ments of the Authority a substantial portion of the financial costs involved. As of December 31, 2001, the overall cleanup costs are estimated to be approximately $570 million. However, the extent of the Commission's liability for these costs cannot be determined. Changes for the years ended December 31, 2001 and 2000 are as follows: Beginning balance of reserves $3,242,384 $5,091,183 Payment of claims attributable to events of both current and prior years: "Workers' compensation (665,123) (745,104) General liability (269,619) (1,877,075) Incurred claims 547,329 773,380 Ending balance of reserves $2,854,971 $3,242,384 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. 1U\ Supplemental Schedule ol Revenues and [xpenses-Rate Easis Years eoded December 31, 2001 and Revenues: Water revenue Sewer revenue $ 63,020,837 110,033,181 $ 63,579,945 111,186,622 Sub total 173,054,018 174,766,567 Less: Adjustments Discounts Bad debt 4,707,667 657,474 494,579 5,116,196 666,928 845,418 Sub total 5,859,720 6,628,542 Net billed charges 167,194,298 168,138,025 Prior year surplus 9,874,570 7,122,865 Miscellaneous revenues: Late charge revenue 1,475,973 1,781,353 Investment income 11,089,964 13,622,403 Fire pipe revenue 2,690,551 2,595,314 Other income 11,576,636 18,760,974 Total revenues 203,901,992 212,020,934 Direct operating expenses: Salaries and wages 24,997,216 24,953,058 Overtime wages 617,803 733,483 Fringe benefits 4,169,896 3,815,591 Supplies and materials 2,354,260 2,205,368 Repairs and maintenance 6,537,991 6,386,469 Utilities 1,354,969 783,556 Professional services 2,501,705 2,311,596 Space and equipment rentals 548,735 1,831,915 Other services 1,234,412 979,459 Insurance 502,664 432,371 Damage claims 48,896 110,584 Inventory 31,546 37,906 Capital outlay 653,751 137,433 Total direct operating expenses 45,553,844 44,718,789 Nonoperating expenses: MWRA assessment 117,674,466 112,524,614 Capital improvements 10,484,749 12,293,982 Principal payments 12,809,815 12,586,564 Interest expense 16,707,756 19,766,774 SDWA assessment 249,937 255,641 Total nonoperating expenses 157,926,723 157,427,575 Total current expenses 203,480,567 202,146,364 Current year rate surplus $ 421,425 $ 9,874,570 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. IB BOSION WUER HI SEWER [IHMiSSIII mains with cement through the Water Main Rehabilitation Program. The primary purpose of this program is to insure the quality and quantity of water provided to all customers by relaying or rehabilitating all water mains in excess of 100 years of age. Older hydrants and valves are also replaced to insure system operability and maintain public safety. By tracking pipeline condition with GIS, BWSC was able to reduce the occurrence of main breaks and decrease water leakage, there- by reducing long-term maintenance costs. Working in conjunction with GIS, the Commission completed its implemen- tation of an integrated Work Order Management System (WOMS) in 2001. This system facilitates the scheduling of work performed on BWSC's water and sewer infrastructure. The new WOMS has dramatically improved the level of service provided to BWSC customers with access to all work in progress graphically dis- played on a map. Customer requests for service are linked to work orders. Work orders are then linked to physical assets such as a pipe, catch basin or hydrant for tracking purposes. Estimated costs associated with these work orders are monitored to better determine trends in BWSC's maintenance investments in labor, inventory and equipment. And Back to Nature During 2001, BWSC worked vigorously to collect, transport and dispose of sanitary waste generated by households, business- es and industry. The City's wastewater was directed to the new $3.5 billion MWRA. Deer Island Treatment Plant, where it was treated in compliance with all federal and state environmental stan- dards and released into the marine envi- ronment. These treatment investments are directly responsible for the cleanup and revitalization of Boston Harbor. The original backbone of BWSC's waste- water system began in 1884 with the com- pletion of the Boston Main Drainage System. This system was designed to carry the City's sanitary flow with an allowance for stormwater in combined sewer lines. In 1988, improvements were made to this system increasing capacity and eliminating dry weather overflows as well as reducing the volume of wet weather overflows. In recent efforts to clean up Boston Harbor, BWSC has made it their primaiy objective to reduce or eliminate com- bined sewer discharges and associated floatables to the Harbor and its tributary waters through the Combined Sewer Overflow (CSO) Project. In 2001, parts of Dorchester and Stony Brook underwent sewer separation in combined sewer areas. Additionally, Dorchester, Mattapan, West Roxbury and Roslindale ratepayers were involved in the disconnection of building downspouts from existing sani- tary and combined sewers. BWSC's CSO Project has a $152 million capital budget for the purpose of separat- ing combined sewers into pipes for sani- tary flow and pipes for storm water. Sanitary flows are then sent directly to the Deer Island Treatment Plant, and storm water is disbursed back into the earth or into Boston Harbor and its tribu- taries. The separation of the storm water from the sanitary system significantly reduces the amount of extraneous flows transported to Deer Island and the cost associated with treating this clean water City wastewater reaches the Deer Island Treatment Plant through underground tunnels where the wastewater is treated and disinfected before being discharged to the receiving waters of the Massa- chusetts Bay. The treated effluent reaches the Bay through a 9.5-mile outfall tunnel burrowed through solid rock more than 250 feet below the ocean floor. Extensive monitoring insures that the environment is properly protected. By making significant investments in the water and wastewater systems, two great natural resources — the Quabbin and Boston Harbor — are protected and pre- served for future generations. In main- taining this complicated water system, BWSC provided customers with the high- quality service for both personal and business usage. lout tie Duabbin The Quabbin's Winsor Dam under construction in 1938. The Winsor Dam is the main dam that creates the Quabbin Reservoir. The town of Enfield prior to construction of the Quabbin Reservoir. Enfield was one of four towns removed from the area in 1939 to allow for creation of the 39-square-mile Quabbin Reservoir. The history of the Quabbin's creation is a fascinating story. To accommo- date the increasing size of Boston, engineers were forced to look toward the western part of the state for larger water sources to meet the drink- ing water, fire protection and sanitary needs of the burgeoning Boston metropolitan area. In 1939, approximately 2,500 people in four towns located 65 miles west of Boston were relocated in order to facilitate the construction and filling of this 39-square-mile reservoir. It took seven years for the reservoir to reach its maximum capacity of 412 billion gal- lons of water. With its 118 miles of shoreline, the Quabbin is presently the largest man-made drinking water reservoir in the United States. Greenwich Village before construction began on the Quabbin Reservoir. Greenwich Village was also one of the four towns that was relocated in 1939 to facilitate construction and filling of the Quabbin. : "t' .■f.l'fc^iit^- n*:.^;i;!*^^ _,.<►* !'#■* •/ ' *■ ^<m% ■■i>'^ >*T ■ -r , ^ , ..^ s' .