Annual report

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Working in our communities.

Boston Water and Sewer Commission

2002 Annual Report

Digitized by the Internet Archive

in 2010 with funding from

Boston Public Library

http://www.archive.org/details/annualreport2002bost

Executive Director's Letter for 2002 Annual Report

Throughout 2002, the Boston Water and Sewer Commission continued its overall objective to provide Boston's
residents, businesses and visitors v\/ith the highest quality w/ater and sewer services possible. Despite difficult
fiscal times for all of Massachusetts, the Commission achieved numerous accomplishments within the City's water
and sewer systems.

In 2002, the Commission continued its efforts for consistent improvements to the City's water distribution system.
BWSC maintained an extensive network of water mains, valves and hydrants to provide an uninterrupted supply
of high quality, potable water at adequate pressure for consumption and fire protection. Water mains were relayed
and relined and older hydrants were replaced as necessary on all projects. The Commission exceeded its yearly
goal of 17 miles of new or rehabilitated pipe throughout the City of Boston.

The Commission launched SmartRead, its automated meter reading system, in November 2002 beginning with
the Allston and Brighton communities. Over the next three years, every home and business in Boston will be
upgraded with the new SmartRead system. This system will increase water accountability and will greatly improve
the level of service to Commission customers. Daily readings from these new water meters will virtually eliminate
the need for estimated bills and will provide an excellent tracking of our water usage.

The Commission has been working diligently on sewer separations as a part of the Massachusetts Water
Resources Authority's Combined Sewer Overflow (CSO) Reduction Program. The purpose of these projects is to
reduce discharge into our neighboring tributaries by utilizing the existing "combined" sewer system and splitting it
into two separate systems — one for sanitary flow and one for stormwater flow. The Dorchester Sewer Separation
project completed the first two major projects of its eight-contract site. Construction contracts also continued on
the Stony Brook Sewer Separation project. This CSO program is another way over the years, and particularly in
2002, that the Commission has assisted in reducing pollution levels in Dorchester Bay, Muddy River, Chartes
River and Boston Harbor.

By redesigning business processes and using new technologies, the Commission continues to increase its efficiency
enabling it to provide the highest quality water and sewer services possible in the most cost effective manner.

Boston Water and Sewer Commission • 2002 Annual Report ^^ Page 1

Page 2 ^^ Boston Water and Sewer Commission • 2002 Annual Report

Independent Auditors' Report

The Commissioners

Boston Water and Sewer Commission:

We have audited the accompanying statements of net assets of the Boston Water and Sewer Commission (the
Commission) as of December 31, 2002 and 2001, and the related statements of operations and cash flows for
the years then ended. These financial statements are the responsibility of the Commission's management. Our
responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with 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
financial 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
position of the Commission at December 31, 2002 and 2001, and the results of its operations 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 l(k), the Commission adopted the provisions of GASB Statements No. 34, Basic Financial
Statements — and Management's Discussion and Analysis — for State and Local Governments,- No. 37, Basic
Financial Statements — and Management's Discussion and Analysis — for State and Local Governments —
Omnibus; and No. 38, Certain Financial Statements Note Disclosures effective January 1, 2001.

The Management's Discussion and Analysis on pages 4 through 7 is not a required part of the basic financial
statements, but is supplementary information required by accounting principles generally accepted in the United
States of America. We have applied certain limited procedures, which consisted principally of inquiries of man-
agement regarding the methods of measurement and presentation of the required supplementary information.
However, we did not audit the information and express no opinion on it.

Our audits were made for the purpose of forming an opinion on the basic financial statements. The accompany-
ing supplemental schedule of revenues and expenses — rate basis is presented for purposes of additional anal-
ysis and is not a required part of the basic financial statements. Such information has been subjected to the
auditing procedures applied in our audits of the basic financial statements and, in our opinion, is fairly stated
in all material respects in relation to the basic financial statements taken as a whole.

k^M<Sr U-T

March 28, 2003

Boston Water and Sewer Commission • 2002 Annual Report ^^ Page 3

Management's Discussion and Analysis

Required Supplementary Information
December 31, 2002 and 2001

Since its creation in 1977, tine Boston Water and Sewer Commission (tine Commission) assumed the responsibility to
provide water distribution, wastewater collection and storm water drainage services in the City of Boston (the City).

The Commission has realized surplus from its operation in each year since its inception. In accordance with the
Boston Water and Sewer Reorganization Act of 1977, the Commission applies audited surpluses to reduce its rates
in succeeding years.

To accommodate the rate-mal<ing process, the Commission follows the accounting standards set forth in Statement
of Financial Accounting Standards (SFAS) No. 71. SPAS No. 71 allows certain (a) revenues provided for future
allowable costs to be deferred until the costs are actually incurred (deferred credits) and (b) costs incurred to be
capitalized if future recovery is reasonably assured (deferred charges).

Condensed financial information from the statements of net assets and operations is presented in this section of the
report. The statement of net assets provides information on the assets and liabilities of the Commission, with net
assets reported as the difference between assets and liabilities. The statement of operations of the Commission
reflects all revenues earned and all expenses incurred for each of the years ended December 31, 2002 and 2001.

Condensed Financial Information

Current assets
Capital assets, net
Other assets

2002

f 27,527,877
627,393,255
280,074,598

2001

f 23,727,006
589,487,908
303,994,651

Total assets

934,995,730

917,209,565

Current liabilities
Noncurrent liabilities

31,755,677
717,989,162

32,127,384
722,037,239

Total liabilities

749,744,839

754,164,623

Net assets:

Invested in capital assets, net of related debt
Restricted net assets
Unrestricted net assets

210,369,633
136,568,617
(161,687,359)

168,564,280
146,249,913
(151,769,251)

Total net assets

$185,250,891

$163,044,942

In 2002, the Commission's net assets totaled $185.3 million, an increase of $22.2 million, or 13.6% from the previ-
ous year. The Commission recognized surplus of only $0.4 million in both FY02 and FYOl. Total assets in FY02
were $935.0 million, an increase of $17.8 million, or 1.9% from last year's (FYOl) total assets of $917.2 million.
The Commission invested in various capital assets, including capital improvement projects, machinery and equip-
ment, buildings and improvements. These investments totaled $627.4 million, up $37.9 million, or 6.4% over the
previous year's total investment in capital assets.

Page 4

Boston Water and Sewer Commission • 2002 Annual Report

Management's Discussion and Analysis

Required Supplementary Information
December 31, 2002 and 2001

Operating revenues:

Water and sewer usage

Fire pipe

Other

Total operating revenues

Operating expenses:

Operations
Maintenance
MWRA assessment
Depreciation and amortization

Total operating expenses

Excess operating revenues

Nonoperating revenue (expense):

Investment income
Interest expense

$187,074,121

2,922,124

14,393,107

204,389,352

46,135,304

6,974,382

122,737,010

17,001,481

192,848,177

11,541,175

11,709,410
(16,827,500)

$173,054,018

2,690,551

10,851,618

188,596,187

44,329,620

6,537,991

117,674,466

15,376,188

183,918,265

2,677,922

17,289,911 i
(17,793,752)

Total nonoperating expense

(5,118,090)

(503,841)

Excess revenues before capital grants and contributions,

and transfer requirements
Capital grants and contributions

6,423,085
25,169,817

2,174,081
12,244,871

Excess revenues before transfer requirements

Excess revenues used to fund reserves and ottner deferrals
Accumulated revenues used to offset future rates — beginning of year

31,592,902

(31,575,719)
421,425

14,418,952

(23,872,097)
9,874,570

Accumulated revenues used to offset future rates — end of year

$ 438,608

$ 421,425

Water and sev\/er charges in FY02 represented 91.5% of operating revenues. Water and sewer charges totaled
$187.1 million, which was $14.0 million, or 8.1% higher than the same period the prior year, due primarily to a
rate increase of 8.9% in water and sewer charges in 2002. The Commission accrued billing adjustments at 3.0%
and bad debts at 0.5% of accrued water and sewer charges for the year. Additionally discounts were accrued at
1.0% of unbilled water revenue. Total operating revenues in FY02, which include fire pipe and other revenues,
totaled $204.4 million, representing an increase in total operating revenue of $17.8 million, or 9.5% higher than
the same period the prior year.

Direct operating expenses in FY02 totaled $192.8 million, which was $8.9 million, or 4.9% over direct operating
expenses the same pehod the phor year. This unfavorable variance resulted from a substantial increase in the
MWRA assessment. Investment income decreased by $5.6 million in 2002, offset slightly by a favorable vahance
of $1.0 million in interest paid, reflecting the low interest rate environment in FY02.

Boston Water and Sewer Commission • 2002 Annual Report

^f

Page 5

Management's Discussion and Analysis

Required Supplementary Information
December 31, 2002 and 2001

Capital Assets

In fiscal year 2002, major Commission's project additions totaled $22.8 million, of which $8.9 million were financed
with bond proceeds. Major project expenditures (in millions) are as follows:

Relay of water mains • $3.9M

Reline of water mains 3.2IV1

Rehabilitation/replacement of sewers or storm drains 4.9M

Interceptor improvements 3.4M

Separation of combined sewers 2.5M

Infiltration and inflow 0.9M

Meter replacement 4.0M

The Commission's 2003-2005 capital budget includes projected expenditures of $167.7 million for infrastructure
and capital projects. The major projects are for the rehabilitation of water mains and the replacement/rehabilitation
of the sewer system along with the installation of a new radio frequency meter-reading system. Some water projects
are financed on a pay-as-you-go cash basis combined with an interest-free loan for water rehabilitation provided by
the MWRA. The majority of the sewer improvements along with the installation of a new radio frequency meter-
reading system will be financed through bond proceeds.

Debt Plan

The Commission is empowered by the Boston Water and Sewer Reorganization Act of 1977 (the Enabling Act) to
issue bonds and notes payable solely constituted on the general obligation of the Commission. The Commission has
no legal restrictions concerning the amount of debt, which it may have outstanding, subject to the coverage require-
ments described below.

The Commission issues General Revenue Bonds to finance portions of its capital improvement projects. The
Commission's 2003-2005 capital budget, which totals $167.7 million, anticipates that projects totaling $102.5
million, or 61.1% of the Commission's 2003-2005 capital budget, will be funded from bond proceeds. The 2003
budget for debt service is $30.3 million.

The Commission currently has seven senes of General Revenue Bonds outstanding at the end of 2002; totaling
approximately $322.8 million.

$ 30.8 M

$ 91.0 M

$ 35.1 M

$ 13.0 M

$ 11.2 M
$122.7 M

$ 19.0 M

llion 1992 Series A

llion 1993 Series A

llion 1994 Series A

llion 1998 Series A

llion 1998 Series C

llion 1998 Series D

llion 2002 Series A

In 2002, the Commission completed a successful refunding of the callable portion of the 1992 Series A Bonds,
which generated a net present value savings of $1.5 million.

Page 6 ^& Boston Water and Sewer Commission • 2002 Annual Report

Management's Discussion and Analysis

Required Supplementary Information
December 31, 2002 and 2001

Debt Service Coverage Requirements

The Commission's bond covenant requires that rates and charges be at least sufficient to provide revenues (i) to
pay all current expenses of the Commission, (ii) to pay the principal of, premium if any, and interest on all bonds
issued by the Commission as they become due and payable, (ill) to create and maintain such reasonable reserves
as may be reasonably required by any trust agreement or resolution securing bonds, (iv) to provide funds for paying
the cost of all necessary repairs, replacements and renewal of the systems and (v) to pay or provide for any and all
amounts w/hich the Commission may be obligated to pay or provide for by law or contract. The Commission is also
required to establish and maintain rates and charges at levels sufficient so that total net revenues in each year dur-
ing which bonds are outstanding will equal at least 125% of (1) the bond debt service requirement during such
year less (2) the amount, if any, of bond proceeds available to pay interest becoming due in such year on bonds
outstanding as of the first day of such year. The Commission has exceeded the 125% debt service coverage
requirement of the Resolution in each year since its inception in 1977.

Additional Bonds and Refunding Bonds

The Enabling Act permits the issuance of additional bonds for paying the cost of any project, making deposits in
various funds established under the Enabling Act, paying costs of issuance, paying the principal, premium and
interest on any notes issued in anticipation of additional bonds, or any combination of the above.

Refunding bonds may also be issued by the Commission only upon certifying that the aggregate debt service in
each fiscal year in which Refunding Bonds are outstanding will not be increased as a result of the issuance of the
Refunding Bonds; provided that, in lieu of such certification, the Commission may deliver to the Trustee certificates
satisfying the conditions described above for the issuance of additional bonds.

Next Year's Budgets and Rates

The Commission from 1994 to 2001 was able to maintain its water and sewer rates to its customers without an
increase. Additionally the Commission is required by law to be self-sustaining, to set its rates at a level sufficient to
cover expenses and debt service requirements each year. The Commission instituted a combined rate increase of
8.9% in fiscal years 2002 and 2003. The major reasons behind this increase are: (i) the increase in assessment
paid to the Massachusetts Water Resource Authority (MWRA), and (ii) the decline in water sales due to general
water conservation efforts of individuals and businesses throughout the City

Boston Water and Sewer Commission • 2002 Annual Report

^f

statements of Net Assets

December 31, 2002 and 2001

Assets

Current assets:

Cash and cash equivalents (note 9) $ 9,340,446 $ 7,072,158

Accounts receivable, net:

Customers, less allowances of $5,435,458 in 2002 and 2001 (note 1) 7,567,520 8,130,567

Unbilled revenues, less allowances of $1,702,361 in 2002 and 2001 8,873,762 6,910,585

Construction grants receivable 1,325,497 1,282,682

Prepaid expenses 420,652 331,014

See accompanying notes to financial statements.

Total current assets 21, ^21 fill 23,727,006

Noncurrent assets:

Restncted cash and investments (notes 4 and 9) 252,141,542 273,941,597

Capital assets:

Depreciable, net (note 3) 481,188,905 484,328,338

Nondepreciable (note 3) 146,204,350 105,159,570

Deferred charges (note 2) 25,775,674 27,762,709

Bond issue costs, net 2,157,382 2,290,345

Total noncurrent assets 907,467,853 893,482,559

Total assets 934,995,730 917,209,565

Liabilities

Current liabilities:

Payable from current assets:

Accounts payable 11,200,001 12,188,635

Other accrued liabilities 5,568,561 5,907,724

Current portion of long-term notes (note 4) 5,207,115 5,076,025

Current portion of revenue bonds (note 4) 9,780,000 8,955,000

Total current liabilities 31,755,677 32,127,384

Noncurrent liabilities:

Long-term debt, net (note 4) 310,577,189 320,321,133

Long-term notes payable (note 4) 38,527,699 33,136,635

Other long-term liabilities 18,884,754 27,966,905

Deferred credits and resen/es (note 2) 349,999,520 340,612,566

Total noncurrent liabilities 717,989,162 722,037,239

Total liabilities 749,744,839 754,164,623

Net Assets

Net assets:

Invested in capital assets, net of related debt 210,369,633 168,564,280

Restricted for debt service 41,230,234 41,929,867

Restricted for capital assets 57,465,923 67,145,401

Restncted for debt covenants 37,872,460 37,174,645

Unresthcted net assets (161,687,359) (151,769,251)

Commitments and contingencies (notes 10, 11, 12, and 13)

Total net assets $185,250,891 $163,044,942

Page 8 ^S Boston Water and Sewer Commission • 2002 Annual Report

statements of Operations

Years Ended December 31, 2002 and 2001

Operating Revenues:

Water and sewer usage $187,074,121 $173,054,018

Fire pipe 2,922,124 2,590,551

Other 14,393,107 10,851,618

See accompanying notes to financial statements.

Total operating revenues 204,389,352 186,596,187

Operating expenses:

Operations 46,135,304 44,329,620

Maintenance 6,974,382 6,537,991

MWRA assessment (note 6) 122,737,010 117,674,466

Depreciation and amortization 17,001,481 15,376,188

Total operating expenses

192,848,177

183,918,265

Excess operating revenues

11,541,175

2,677,922

Nonoperating revenue (expense):

Investment income

11,709,410

17,289,911

Interest expense (16,827,500) (17,793,752)

Total nonoperating expense (5,118,090) (503,841)

Excess revenues before capital grants and contributions

and transfer requirements 6,423,085 2,174,081

Capital grants and contributions 25,169,817 12,244,871

Excess revenues before transfer requirements 31,592,902 14,418,952

Excess revenues used to fund reserves and other deferrals (note 2) (31,575,719) (23,872,097)

Accumulated revenues used to offset future rates — beginning of year 421,425 9,874,570

Accumulated revenues used to offset future rates — end of year $ 438,608 $ 421 ,425

Boston Water and Sewer Commission • 2002 Annual Report ^^ Page 9

statements of Cash Flows

Years Ended December 31, 2002 and 2001

Cash flows from operating activities:

Receipts from customers
Payments to suppliers
Payments to employers

Net casli provided by operating activities

Casli flows from investing activities:

Sale of investments
Investment income

Net cash provided by investing activities

Cash flows from capital and related financing activities:

Purctiase of property, plant and equipment
Proceeds from debt
Payment of bond principal
Capital contributions
Payment of bond interest

Net cash used in capital and related financing activities

Net increase (decrease) in cash and cash equivalents

Casti and cash equivalents, beginning of year

Cash and cash equivalents, end of year

Reconciliation of operating income to net cash provided by
operating activities:

Excess operating revenues

Adjustment to reconcile operating income to net cash:

Excess revenues used to fund reserves and other deferrals
Depreciation and amortization
Change in assets and liabilities:
Accounts receivable, net
Unbilled revenues
Construction grants receivable
Prepaid expenses
Accounts payable
Other accrued liabilities
Deferred credits and reserves
Other long-term liabilities

Net cash provided by operating activities

See accompanying notes to financial statements.

$193,559,454

(146,365,943)

(31,618,396)

15,575,115

21,800,055
11,709,410

33,509,465

(51,725,764)
24,527,155

(27,960,000)
25,169,817

(16,827,500)

(46,816,292)

2,268,288

7,072,158

9,340,446

11,541,175

(9,386,954)
17,001,481

563,047

(1,963,177)

(42,815)

(89,638)

(988,634)

(339,163)

8,361,943

(9,082,150)

$ 15,575,115

$185,533,532

(143,937,948)

(29,622,043)

1 1 ,973,541

34,220,459
17,289,911

51,510,370

(53,196,589)

817,997

(8,550,000)

12,244,871

(17,793,752)

(66,477,473)

(2,993,562)

10,065,720

7,072,158

2,677,922

(4,911,852)
15,376,188

2,474,147

1,380,405

(5.354)

29,449

(2,699,027)

(82,065)

4,911,852

(7,178,124)

$ 11,973,541

Page 10

Boston Water and Sewer Commission • 2002 Annual Report

Notes to Financial Statements

December 31, 2002 and 2001

(1) Organization, Basis of Presentation, and
Summary of Significant Accounting Policies

The Boston Water and Sewer Commission (the Commission)
has the responsibility to provide water and wastewater services
on a fair and equitable basis in the City of Boston (the City) as
required under the Boston Water and Sewer Reorganization
Act of 1977 (the Enabling Act).

Under the Enabling Act, the Commission is subject to regula-
tion with respect to rates, accounting and other matters, where
applicable, 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 customers are based on the cash required for the
Commission's operations, debt service and reserve contribu-
tions. However, there is no legally adopted budget that the
Commission must adhere to. To comply with the external finan-
cial reporting requirements of the Board, the accompanying
financial statements are presented on a basis that is consistent
with generally accepted accounting principles (GAAP) for
regulated utilities (i.e., the accrual basis of accounting and
the capital maintenance measurement focus).

To accommodate the rate-making process, the Commission
follows the accounting standards set forth in Statement of
Financial Accounting Standards (SFAS) No. 71, Accounting
for the Effects of Certain Types of Reguiation. SFAS No. 71
allows certain (a) revenues provided for future allowable costs
to be deferred until the costs are actually incurred (deferred
credits) and (b) costs incurred to be capitalized if future recov-
ery 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 are presented on a GAAP basis. A
reconciliation between the revenues and expenses of these two
operating statements for the year ended December 31, 2002 is
provided in the next column:

Expenses

As presented in the statements
of operations:

Operating revenues/expenses

$204,389,352

$192,848,177

Other revenues/expenses

11,709,410

16,827,500

Total

216,098,762

209,675,677

Reclassifications and deferrals:

Provision for working capital

570,428

—

Revenue adjustments/bad debt expense (5,603,254)

(5,603,254)

Excess bond payments over

depreciation and amortization

—

(2,859,762)

Interest expense (escrowed funds)

—

(1,030,056)

Investment income (escrowed funds)

(2,533,616)

—

Capital expenditures

—

8,900,324

Excess revenue used to offset

current rates

421,425

—

Other deferrals

154,592

(413,200)

As presented In the supplemental

schedule

$209,108,337

$208,869,729

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 $438,608 and $421,425 for the
years ended December 31, 2002 and 2001, respectively, to
offset rates in the respective subsequent years.

(a) Revenue Biliings

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 2002 and 2001 total customer bills outstand-
ing of $23,022,758 and $23,585,805, respectively, have been
reduced by provisions for billing adjustments and sewer abate-
ments of $10,019,780 in 2002 and 2001, respectively. These
net billing amounts are further reduced by an allowance for
uncollectible accounts of $5,435,458 in 2002 and 2001,
respectively, to arrive at net accounts receivable.

(b) Investments

Investments are stated at fair value. Fair value is determined
based on quoted market price.

Boston Water and Sewer Commission • 2002 Annual Report

Page 11

Notes to Financial Statements

December 31, 2002 and 2001

(c) Capital Assets

Capital assets are stated at tiistorical cost. Depreciation is pro-
vided on tlie straight-line mettiod based upon the estimated
useful lives of the various classes of assets. Maintenance and
repairs are charged to expense as incurred. Major renewals
or betterments are capitalized and depreciated over their
estimated useful lives.

The Commission capitalizes interest costs during construction
of assets for its own use. No interest was capitalized in 2002
or 2001 because the amount calculated 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 percentage paid in cash upon voluntary resignation and/or
retirement from the Commission (subject to Commission poli-
cies and/or bargaining agreements). The liability for vacation
leave is based on the amount earned but not used; for sicl<
leave, it is based on a percentage of the amount accumulated
at the balance sheet date. The liability for both amounts is cal-
culated 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 depreci-
ation are as follows:

Water

Years

Sewerage

Years

Worlds

100

Worlds

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 spe-
cific construction projects. In fiscal 2001, the Commission
adopted GASB Statement No. 33, Accounting and Financial
Reporting for Nonexchange Transactions, which requires capi-
tal grants and contributions to be reported as capital contribu-
tion revenue. The amount recorded as revenue in fiscal 2002
and 2001 was $25,169,817 and $12,244,871, respectively.

(g) Cash Equivalents

The Commission considers all highly liquid, short-term cash in-
vestments with original maturities of three 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
approximates 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
Proprietar/ 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.

Proprietary funds distinguish operating revenues and expenses
from nonoperating items. Operating revenues and expenses
result from providing services in connection with ongoing oper-
ations. All revenues and expenses not meeting this definition
are reported as nonoperating revenues and expenses.

(j) Use of Estimates

The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to mal<e 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) New Reporting Model

The Commission adopted the provisions of Governmental
Accounting Standards Board Statement No. 34, Basic
Financial Statements — Ivlanagement's Discussion and
Analysis — for State and Local Governments; Statement
No. 37, Basic Financial Statements — and Management's
Discussion and Analysis — for State and Local Governments:
Omnibus: and Statement No. 38, Certain Financial Statement
Note Disclosures (Statement 38), effective January 1, 2001.
Statement 34 establishes financial reporting standards for all
state and local governments and related entities. There was no
effect on equity as a result of implementing GASB Statement
No. 34. However, a new presentation of equity, net assets,
resulted from the adoption of this Statement. The other
changes included the presentation of management's discus-
sion and analysis, and the preparation of the statement of
cash flows on the direct method.

Statement No. 38 establishes and modifies certain financial
statement note disclosure requirements to make the financial
statements more useful in the context of the Statement 34
reporting model. Statement No. 38 had an impact on the notes
to the financial statements, but no impact on net assets.

(I) Reclassifications

Certain 2001 amounts have been reclassified to conform with

the 2002 presentation.

Page 12

Boston Water and Sewer Commission • 2002 Annual Report

Notes to Financial Statements

December 31, 2002 and 2001

(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 reflected in the statement of net
assets as deferred charges or deferred credits. The revenues
and expenses that have been removed from the statements
of operations and added to the statements of net assets as
deferred credits appear in the line "Excess revenues used to
fund reserves, increase contributed capital, and other defer-
rals" on the statements of operations. The components of
these amounts are as follows:

The components of deferred charges included in the accom-
panying statement of net assets are as follows:

2002

2001

Deferred loss on land-taking
Accrued pension expense
Debt extinguishment expense

$ 5,968,799
12,394,168
7,412,707

$ 6,189,868
12,955,715
8,617.126

Total deferred charges

$25,775,674

$27,762,709

The activity in and components of deferred credits and
reserves included in the accompanying statement of net assets
is as follows:

Provision for working capital
Provision for capitalized interest

$ (570,428)

(154,593)

13,580,172

(1,030,056)

8,900,324

(14,037,612)

2,533,616
148,348

$ (570,428)

(154,593)

12,809,815

(1,085,996)

11,138,500

(12,638,416)

4,723,977
142,138

December 31,
2001

Increase
(decrease)

December 31,
2002

Principal payments on long-term debt
Interest paid from escrow funds
Capital expenditures
Depreciation and amortization

Debt service
Capital improvements
Working capital
Self-insurance

$124,445,837

188,406,450

25,098,854

2,240,000

$ -
9,940,199
(570,428)

$124,445,837

198,346,649

24,528,426

2,240,000

Investment income on project

and escrow funds
Other

Reduction of future rates

340,191,141
421,425

9,369,771
17,183

349,560,912
438,608

Total deferred credits
and reserves

$340,612,566

$9,386,954

$ 9,369,771

$14,364,997

$349,999,520

(3) Capital Assets

The cost and activity of water and sewerage capital assets in service and related accumulated depreciation at December 31, 2002
and 2001 are as follows:

Balance at

December 31,

2001

Capital assets, not being depreciated:

Land

Construction in progress

I 2,519,243
102,640,327

Total capital assets not being depreciated

105,159,570

Capital assets, being depreciated:

Buildings and improvements
Machinery and equipment
Infrastructure

57,163,359
21,020,097
528,990,646

Total capital assets being depreciated

607,174,102

Less accumulated depreciation ton

Buildings and improvements
Machinery and equipment
Infrastructure

Total accumulated depreciation

122,845,764

Total capital assets being depreciated, net

484,328,338

Capital assets, net

$589,487,908

52,889,919

52,889,919

2,567,169

959,113

8,315,016

11,841,298

846,237

1,551,523

12,501,524

2,295,685

109,498,003

11,133,523

14,980,731

(3,139,433)

$49,750,486

',139

11,845,139

$11,845,139

Balance at

December 31,

2002

I 2,519,243
143,685,107

146,204,350

59,730,528
21,979,210
537,305,662

619,015.400

2,397,760
14,797,209
120.631.526

137,826,495

481,188.905

$627,393,255

Boston Water and Sewer Commission • 2002 Annual Report

Page 13

Notes to Financial Statements

December 31, 2002 and 2001

Balance at

December 31,

2000

Increases

Decreases

Balance at

December 31,

2001

Capital assets, not being depreciated:

Land

Construction in progress

$ 2,519,243
116,837,021

$ -
52,266,498

$ -
66,463,192

$ 2,519,243
102,640,327

^

Total capital assets not being depreciated

119,356,264

52,268,498

66,463,192

105,159,570

Capital assets, being depreciated:

Buildings and improvements
Machinery and equipment
Infrastructure

12,971,948
18,638,578

514,032,617

48,392,169
3,480,269
15,528,846

4,200,758

1,098,750

570,817

57,163,359
21,020,097
528,990,646

Total capital assets being depreciated

545,843,143

87,401,284

5,870,325

607,174,102

Less accumulated depreciation for:

Buildings and improvements
Mactiinery and equipment
Infrastructure

4,697,316
11,424,627
99,289,290

346,680
2,166,079
10,702,272

4,197,759

1,089,182

493,559

846,237

12,501,524
109,498,003

Total accumulated depreciation

115,411,233

13,215,031

5,780,500

122,845,764

Total capital assets being depreciated, net

430,231,910

54,186,253

89,825

484,328,338

Capital assets, net

$549,588,174

$106,452,751

$86,553,017

$589,487,908

During 1999, tine Boston Redevelopment Auttiority (BRA) took land owned by the Commission througti eminent domain.
Tine book value of ttie 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 statements of net assets 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.

Page 14

Boston Water and Sewer Commission • 2002 Annual Report

Notes to Financial Statements

December 31, 2002 and 2001

(4) Long-Term Obligations

The Commission issues revenue bonds to support various projects.

The following is a summary of revenue bond activity for the years ended December 31, 2002 and December 31, 2001 (amounts in
thousands).

Description

Balance at

December 31,

2001

Balance at

Amounts

December 31,

due within

Reductions

2002

one year

Revenue bonds:

1992 Series A, bearing interest
rates ranging from 5.5% to
5.75%, with maturity dates
ranging from November 1,
2002 to 2013

1993 Series A, bearing interest
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 November 1,

2002 to 2028

2002 Series A, bearing interest
rates ranging from 2.0% to
3.0%, with maturity dates
ranging from November 1,

2003 to 2007

$21,870

2,700

2,825

12,960

11,270

125,125

19,005

122,730

19,005

2,505

3,640

Less:

Unamortized loss on refundiqg
Unamortized issue discount

19,005
1,025

2,209

776

322,815

1,025
1,433

9,780

Net revenue bonds

$329,276

$17,980

$26,899

$320,357

$9,780

Boston Water and Sewer Commission • 2002 Annual Report

^f

Page 15

Notes to Financial Statements

December 31, 2002 and 2001

Description

Revenue bonds:

1991 Series A, bearing interest
at a rate of 6.5%, with a
maturity date of
November 1, 2001

1992 Series A, bearing interest
rates ranging from 5.5% to
5.75% with maturity dates
ranging from November 1,
2001 to 2013

1993 Series A, bearing interest
rates ranging from 4.6% to
5.25%, with maturity dates
ranging from November 1,
2001 to 2019

1994 Series A, bearing a variable
interest rate, with maturity
dates ranging from
November 1, 2001 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,
2001 to 2021

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

Balance at

December 31,

2000

Balance at

Amounts

December 31,

due within

Reductions

2001

one year

$ 1,045

55,665

$1,045

2,985

1,515

700

52,680

93,650

3,150

11,280

2001 to 2028

127,420

—

2,295

125,125

2,395

less unamortized issue discount

340,035
2,460

—

8,550
251

331,485
2,209

8,955 .

Net revenue bonds

$337,575

$ -

$8,299

$329,276

$ 8,955

Page 16

Boston Water and Sewer Commission • 2002 Annual Report

Notes to Financial Statements

December 31, 2002 and 2001

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

Revenue bonds
Principal Interest

2003

2004

2005

2006

2007

2008-2012

2013-2017

2018-2022

2023-2027

2028

10,095
10,535
10,910
11,435
80,925
77,810
63,005
40,305
8,015

16,392
16,018
15,624
15,189
14,712
62,004
40,416
21,047
7,593
334

$322,815

$209,329

(a) Prior Year Debt Refunding

In the aggregate, $155,155,000 remains outstanding at
December 31, 2002, on the bond issues that were defeased
"in-substance" during prior years.

(b) Trusteed and Nontrusteed Casli and Investments
The Commission has established both trusteed and non-
trusteed funds with investments, principally short-term securi-
ties, which are restricted for payment of specified liabilities,
capital projects, or other costs of operations. The components
of the trusteed and nontrusteed investments at December 31,
2002 and 2001 are as follows:

Trusteed:

U.S. Treasury notes $ 22,198,506 $ 34,163,251

Other government obligations 96,777,725 90,814.967

Money market and cash investments 6,741,136 1,131,389

Open-ended mutual funds 10,818,223 6,435,585

Commercial paper 34.891,713 51,159,166

Repurchase agreements 8.416,250 8,416,250

$179,843,553 $192,120,608

Nontrusteed:

Other government obligations

$ 617,126

$ 853,408

Money market and cash investments

1,233,368

1,746,361

Open-ended mutual funds

57,450,439

20,827,533

Commercial paper

12,997,05

12,624.774

Repurchase agreements

—

45,768,913

72,297,989

81,820,989

252,141,542

273,941,597

Less trusteed and nontrusteed cash

(7,974,504)

(2,877,749)

Trusteed and nontrusteed

investments

$244,167,038

$271,063,848

(c) Long-Term Notes Payable

During 1997 and 1996, the Commission executed loan agree-
ments with the IVlassachusetts Water Pollution Abatement
Trust (MWPAT) to finance and refinance a portion of the
Commission's water pollution abatement projects. As of
December 31, 2002, an aggregate amount of $32,334,700
was received by the Commission. For purposes of offsetting
principal and interest payments, an amount aggregating
$15,290,956, consisting of contract assistance payments from
the Commonwealth of Massachusetts and other interest subsi-
dies from MWPAT, will be recognized as capital grants over the
remaining term of the loan.

The scheduled loan payments for all MWPAT obligations and related subsidies are shown below (amounts in thousands):

Loan subsidy amounts

Scheduled loan repayments

Principal

Interest

Total

2003

$ 1,395

$1,261

$2,656

2004

1,446

1,191

2,637

2005

1,510

1,115

2,625

2006

1,573

1,031

2,604

2007

1,647

940

2,587

2008-2012

9,493

3,177

12,670

2013-2017

6,520

681

7,201

Equity
earnings

Contract
assistance
payments

Principal

Net loan repayments

Interest

$ 619
581
542
501
458

852

1,438

926
952

$ 259
247

1,199

859

1,401

992

232

1,224

862

1,363

1,029

212

1,241

862

1,320

1,075

192

1,267

4,260

5,828

6,217

625

6.842

2.114

2,470

4,633

98

4.731

$23,584

$9,336

$32,980

$4,625

$10,666

$15,291

$15,824

$1,865 $17,689

Boston Water and Sewer Commission • 2002 Annual Report

Page 17

m

J
Notes to Financial Statements

Decern

ber 31, 2002 and 2001

The Commission lias entered into

various interest-free loa

1 agreements with the Massachusetts Water Resources

Authority

(the Authority). Under these agreements, the Commission

is required to

repay these loans in annual installments

as part of the

Authority's Infiltration/Inflow Local Financial Assistance program (I/I), Local Water Infrastructure Rehabilitation Pre

gram (WIR)

and Pipeline Assistance Program

(PAP). These programs are designed to assist service area communities with sewer system

rehabilitation.

The following is a summary of Ion

g-term note activities for the years ended December 31, 2002

and 2001.

Balance at

Balance at

Amounts

December 31,

December 31,

due within

Description

2001

Additions

Reductions

2002

one year

MWRA I/I Program Phase II, interest

free, due November 15, 2003

$ 549,194

$ -

$ 327,397

$ 221,797

$ 221,797

MWRA I/I Program Phase III, interest

free, due November 15, 2004

1,748,067

—

659,649

1,088,418

659,649

MWRAW.I.R. Program, interest

free due November 15, 2004

3,361,786

—

1,945,771

1,416,015

1,083,494

MWRA PA.P. Program, interest

free due November 15, 2011

7,743,515

10,480,250

799,116

17,424,649

1,847,141

MWPAT Pool 1, subsidized interest.

dueAugust 1,2013

7,837,653

—

483,396

7,354,257

507,298

MWPAT Pool II, subsidized interest.

dueAugust 1,2015

6,876,086

—

340,358

6,535,728

357,378

MWPAT Pool III, subsidized interest.

due February 1,2017

10,096,359

—

402,409

9,693,950

530,358

Total long-term notes

$38,212,660

$10,480,250

$4,958,096

$43,734,814

$5,207,115

Balance at

Balance at

Amounts

December 31,

December 31,

due within

Description

2000

Additions

Reductions

2001

one year

MWRA I/I Program Phase II, mterest

free, due November 15, 2003

$ 1,101,076

$ -

$ 551,882

$ 549,194

$ 327,397

MWRA I/I Program Phase III, interest

free, due November 15, 2004

2,407,716

—

659,649

1,748,067

659,649

MWRAW.I.R. Program, interest free,

dueNovember 15, 2004

5,307,556

—

1,945,770

3,361,786

1,945,771

MWRA PA.P Program, interest free,

due November 15, 2011

2,476,351

5,514,799

247,635

7,743,515

799,116

MWPAT Pool 1, subsidized interest.

dueAugust 1,2013

8,297,443

—

459,790

7,837,653

483,396

MWPAT Pool II, subsidized interest,

due August 1,2015

7,204,158

—

328,072

6,876,086

340,358

MWPAT Pool III, subsidized interest.

due February 1, 2017

10,600,359

—

504,000

10,096,359

520,338

Total long-term notes

$37,394,659

$ 5,514,799

$4,696,798

$38,212,660

$5,076,025

Page 18

Boston Water and Sewer Commission • 2002 Annual Report

Notes to Financial Statements

December 31, 2002 and 2001

(5) Current Refunding

On November 1, 2002, the Commission issued $19,005,000
in Series A General Revenue Refunding Bonds witli an interest
rate range of 2.0% to 3.0% to refund an $18,720,000 portion
of outstanding 1992 Series A General Revenue Bonds witfi an
interest rate range of 5.7% to 6.1%. The new bonds require
five debt service payments with the final payment due on
November 1, 2007. The net proceeds of $19,061,457 were
used to purchase State and Local Government Series Certificate
of Indebtedness and Notes. These securities were deposited
in a current refund trust fund with an escrow agent to provide
for the final debt service payment on the bonds. As a result,
the bonds are considered to be defeased and the liability has
been removed. The defeased debt was retired on the call date
of November 1, 2002. On December 31, 2002, $19,005,000
of bonds were outstanding and considered defeased.

The Commission refunded the 1992 bonds to reduce its total
debt service payments over the next five years by $1,644,390
and to obtain an economic gain (the difference between the
present value of the debt service payments on the old debt and
the new debt) of $1,538,665.

(6) 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 operations for assess-
ments by the Authority for 2002 and 2001 are as follows:

2002

2001

Assessments allocated on:

Water usage
Wastewater usage

$ 43,369,447
79,367,563

$ 40,035,390
77,639,076

Total

$122,737,010

$117,674,466

In 2002 and 2001, 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% and is continuing to take steps to improve the amount
of billable water, including replacement of old and defective
meters and implementation of a comprehensive leak detection
and repair program.

(7) Transactions with the City of Boston

The Commission's ongoing program to meter City facilities has
resulted in billings to 10 City departments during 2002 and 2001,
respectively, based on actual consumption of approximately
$4,386,765 and $3,805,088 in 2002 and 2001, respectively.

The City provides services to the Commission, including paving
and facilities rental. Operating costs billed to the Commission
by the City were approximately $857,710 and $1,066,553
during 2002 and 2001, respectively. Capital costs billed by the
City were approximately $2,097,599 and $2,336,802 during
2002 and 2001, 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, 2002, receivables totaling approximately
$1.6 million of billings had been included on property tax bills.

Under the Commission's own tax lien program, accounts which
have unpaid balances over two years old are transferred into
the tax lien program for collection. As of December 31, 2002
and 2001, approximately $3,191,929 and $3,270,797, respec-
tively, remains outstanding.

(8) 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 obliga-
tions to all Commission employees covered by the SBRS was
settled in 1986, resulting in a payment of $19,100,000 to the
SBRS. This payment was funded primarily through 1985 and
1986 bond proceeds and is recorded as a deferred charge that
will be recovered through future rates. As part of the 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 propor-
tion of each employee's total years of creditable service, level of
compensation, and group classification. Employees become
100% vested after 10 years of creditable service as defined by
Chapter 32 of the Massachusetts General Laws (MGL).

Boston Water and Sewer Commission • 2002 Annual Report

Page 19

Notes to Financial Statements

December 31, 2002 and 2001

(a) Description of the SBRS Plan

The SBRS is a cost-sharing, multi-employer, public employee
retirement system established under Chapter 32 of the MGL
and is a member of the Massachusetts Contributory Retirement
System. The System provides retirement, disability, and death
benefits to plan members and beneficiaries. Chapter 32 of the
MGL assigns authority to establish and amend benefit provi-
sions of the plan. The System issues a publicly available finan-
cial report which can be obtained through 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
ranging from 5% to 11% of annual covered compensation. The
Commission is required to pay into the SBRS its share of the
remaining systemwide actuarially determined contribution plus
administration costs which are apportioned among the employ-
ers based on active covered payroll. Through fiscal 1998,
the Commonwealth of Massachusetts reimbursed the SBRS
for a portion of benefit payments 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 contribu-
tions 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, 2002, 2001
and 2000 were approximately $481,719, $565,350 and
$1,244,000, respectively, which equaled its required contri-
bution each year. Total employee contributions, based on actu-
arially determined amounts, were approximately $2,001,820,
$1,929,788 and $1,871,797, or 8.3%, 8.2% and 7.9% of
covered payroll in 2002, 2001 and 2000, respectively.

(c) 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 transferred 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 emp/oyer contribu-
tions to the Trust Fund based upon the actuarially determined
cost of future benefits, net of employee contributions.

Trust Fund assets at December 31, 2002 and 2001 are
as follows:

Assets (at fair value):

Common stock
International stock
Mutual funds
Fixed income

$23,777,945 $30,964,785

5,394,386 5,800,928

977,983 759,140

25,464,818 25,915,183

Total

$55,615,132 $63,440,036

The Trust Fund activity is as follows:

Assets (at fair 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 value), December 31

2001

63,440,036

Employer contributions

481,719

Investment income and gains

(6,614,536)

Management fees

(224,409)

Payments to SBRS

(1,467,678)

Assets (at fair value), December 31

2002

$55,615,132

The investment portfolio is regulated by the MGL, Chapter 32,
Section 23. The investments are managed by independent
investment 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.

(9) 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
coilateralization can only be made with financial institutions
meeting certain criteria. Certificates of deposit must be fully
collateralized and issued by FDIC-insured banks. Investments
can also be made in securities issued by or unconditionally
guaranteed by the U.S. Government or its agencies; public
agencies, municipalities, or state obligations carrying the highest
bond rating; commercial paper rated A-1, P-1; A-Rated money
market funds; fully collateralized investment contracts and
certain futures contracts. In addition, the Commission's Trust
Fund has additional investment powers, most notably the ability
to invest in stocks, corporate bonds, and other instruments.

Page 20

Boston Water and Sewer Commission • 2002 Annual Report

Notes to Financial Statements

December 31, 2002 and 2001

(a) Deposits

A summary of the Commission's deposits that are (Category 1) fully insured or collateralized with securities held by the Commission
or its agent in the Commission's name, (Category 2) those deposits that are collateralized with securities held by the pledging finan-
cial institution's trust department or agent in the Commission's name, and (Category 3) those deposits that are not collateralized as
of December 31, 2002 and 2001 follows.

Category

Total bank
balance

Carrying

2002

1

2

3

amount

Cash

Bank money market deposits

$100,000

$ -

$10,110,187
7,974,504

$10,210,187
7,974,504

$ 9,340,446
7,974,504

Total

$100,000

$ -

$18,084,691

$18,184,691

$17,314,950

2001

1

Category
2

3

Total bank
balance

Carrying
amount

Cash

Bank money market deposits

$100,000

$ -

$ 7,068,787
2,877,749

$ 7,168,787
2,877,749

$ 7,072,158
2.877,749

Total

$100,000

$ -

$ 9,946,536

$10,046,538

$ 9,949,907

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

(b) Investments

The Commission's investments are categorized according to the level of custodial credit 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 in-
cludes uninsured and unregistered investments held by the counterparty's trust department or agent in the Commission's name.
Category 3 includes uninsured or unregistered investments held by the counterparty, its trust department, or agent but not in the
Commission's name.

2002

Categorized:

U.S. Government obligations
U.S. Government agency obligations
Repurchase agreements
Commercial paper

Total

Category

22,198,506
97,394,851
8,416,250
47,888,769

$175,898,376

$ -

Not categorized:

Open-end mutual funds

Total

Fair value

22,198,506
97,394,851
8,416,250
47,888.769

$175,898,376

68,268,662

$244,167,038

Boston Water and Sewer Commission • 2002 Annual Report

Page 21

bBSBS^

Notes to Financial Statements

December 31, 2002 and 2001

Category

2001

Categorized:

U.S. Government obligations
U.S. Government agency obligations
Repurchase agreements
Commercial paper

34,163,252
91,668,376
54,185,163
63,783,939

34,163,252
91,668,376
54,185,163
63,783,939

Total

$ -

$243,800,730

$ -

$243,800,730

Not categorized:

Open-end mutual funds

27,263,118

Total

$271,063,848

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

(10) Lease Commitments

The Commission leases office space and equipment under vari-
ous leases that have been accounted for as operating leases.
The payments received under these leases are not material.

Rent expense under operating leases amounted to $81,918 and
$464,760 in 2002 and 2001, respectively.

(11) 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 facili-
ties. Commitments under these contracts aggregate approxi-
mately $52.9 million as of December 31, 2002. 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 $127.5 million
for 2003 through 2004. Of this amount, approximately $107.6
million represents extension and improvement projects and
$19.9 million represents renewal and replacement projects.
The extension and improvement projects are expected to be
42% 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.

(12) Risk IVIanagement and Other insurance

The Commission carries self-Insured retention limits for claims
filed under workers' compensation and general liability and
completely self-insures for all unemployment benefits. The
workers' compensation self-insured retention limit is $250,000
per claim and is supplemented with $5 million in excess cover-
age purchased through an outside carrier. For general liability,
the Commission's self-insured limits are $1 million per occur-
rence, $2.5 million aggregate, and is subordinate to $5 million
of excess coverage purchased through an outside carrier.
Under the sections of the Model Water and Sewer Act, the
Commission's tort liability is capped at $100,000 per claimant.

The Commission maintains other insurance coverage as follows:

Policy type

Coverage

Healtti Premiurr 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 Com-
mission based on current enrollments. Insurance claims for all
policies have not exceeded coverage by a material amount in
the past three years.

Page 22

Boston Water and Sewer Commission • 2002 Annual Report

Notes to Financial Statements

December 31, 2002 and 2001

Liabilities for self-insured claims are reported if it is probable
that a loss has been incurred and the amount can be reason-
ably estimated. The Commission has 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 2002 and 2001
were immaterial.

Changes for the years ended December 31, 2002 and 2001
are as follows:

Beginning balance of reserves
Payment of claims attributable
to events of both current
and prior years:
Workers' compensation
General liability
Incurred claims

(333,044) (665,123)

(252,215) (269,619)

1,063,365 547,329

Ending balance of reserves

$3,333,077

$2,854,971

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.

(13) Contingencies

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

The Commission has received federal and state grants for
specific purposes that are subject to review and audit by the
grantor agencies. Such audits could lead to requests for reim-
bursement to the grantor agency for expenditures disallowed
under terms of the grant. The Commission believes such dis-
allowances, if any, will not be significant.

The Commission is involved as a defendant in litigation regard-
ing the pollution of Boston Harbor. Management believes that
the Commission's extensive capital improvement program
(see note 11) addresses probable actions that the Commission
may be required to undertake in connection with this litigation.
Additionally, the Commission is likely to bear either directly or
through future assessments of the Authority a substantial por-
tion of the financial costs involved. As of December 31, 2002,
the overall cleanup costs are estimated to be approximately
$610 million. However, the extent of the Commission's liability
for these costs cannot be determined.

Boston Water and Sewer Commission • 2002 Annual Report

^^

Page 23

Supplemental Schedule of Revenues and Expenses - Rate Basis

Years Ended December 31, 2002 and 2001

Revenues:

Water revenue
Sewer revenue

; 77,877,004
109,197,117

; 63,020,837
110,033,181

Subtotal

187,074,121

173,054,018

Less:

Adjustments
Discounts
Bad debt

4,439,652
777,021
386,581

4,707,667
657,474
494,579

Subtotal

5,603,254

5,859,720

Net billed charges
Prior year surplus

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

181,470,867
421,425

1,241,285
7,934,508

2,922,124
15,118,128

167,194,298
9,874,570

1,475,973
11,089,964

2,690,551
11,576,636

Total revenues

209,108,337

203,901,992

Direct operating expenses:

Salaries and wages

Overtime wages

Fringe benefits

Supplies and materials

Repairs and maintenance

Utilities

Professional services

Space and equipment rentals

Other services

Insurance

Damage claims

Inventory

Capital outlay

25,558,712

521,971

5,364,521

2,103,293

6,974,382

1,121,739

2,790,215

87,598

1,318,834

579,282

11,477

1,673

23,513

24,997,216

617,803

4,169,896

2,354,260

6,537,991

1,354,969

2,501,705

548,735

1,234,412

502,664

48,896

31,546

653,751

Total direct operating expenses

46,457,210

45,553,844

Nonoperating expenses:

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

122,737,010

8,876,812

13,580,172

15,797,444

978,578

117,674,466
10,484,749
12,809,815
16,707,756

SDWA assessment

242,503

249,937

Total nonoperating expenses

162,212,519

157,926,723

Total current expenses

208,669,729

203,480,567

Current year rate surplus

$ 438,608

$ 421,425

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.
See accompanying independent auditors' report.

Page:

Boston Water and Sewer Commission • 2002 Annual Report

Boston Water and Sewer Commission

980 Harrison Avenue

Boston, MA 02119

617-989-7000

www.bwsc.org