Annual report

BOSTON PUBLIC LIBRARY

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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

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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.

0 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.

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