Annual report

d Sewer Commission 2003 Annual Report

f SmartRead ... . .
ti Revolutionizing 4^,

*

SmartRead . . . Smarter Business
is a concept that
has become a reality.

to rfght: Vincent G. Mannering, Executive Director,
Dennis DiMarzio, Chair, Board of Commissioners,
Cathleen Douglas Stone, Commissioner,
and Muhammad Ali-Salaam, Commissioner

A Message from the
Executive Director

I

In 2003, the Boston
Water and Sewer Commission
continued its efforts to provide
Boston's consumers with the most
efficient water and sewer services.
With the introduction of
SmartRead, the Commission's
automated water meter reading
system, technological advances
will revolutionize how we do
business in the city and with our
customers. These exciting
opportunities will positively
impact the day-to-day operations
of Boston's water and sewer utility.

Every home and business in
Boston is being upgraded with this
new technology that will vastly
improve water accountability,
reduce field visits and help to
identify unaccounted for water
usage. SmartRead generates
billing based on actual readings,
eliminates "estimated" billing and
allows for a proactive customer
relationship.

Using the latest technologies,
the Commission's workforce has
dramatically improved its
productivity, enabling us to
provide customers the highest
quality service at the lowest
possible price. SmartRead, along
with CASS WORKS, (our work
order management system) and
GIS, (Geographic Information
System) allows the Commission
to maintain its "best in class"
utility status.

During 2003, our Capital
Improvement Program to
rehabilitate our water and sewer
delivery systems remained an
important priority for the
Commission, our customers and
our environment. The Commission
is steadfast in its commitment to
upgrade its infrastructure and
reduce pollution levels in local
water resources. We are committed
to our mandate of providing a
safe, efficient and reliable public
water and sewer system.

Our staff is committed to the
"nuts and bolts" of our business,
recognizing that the way to
achieve our fiscal, public service
and environmental goals is
through strict attention to details
and customer satisfaction.
While technology positively
impacts our operational budget,
providing first class service to our
customers remains our focus.

Much of our success is due to
the strong support of Mayor
Thomas M. Menino whose
leadership allows us to operate a
public utility that Boston's residents
can be proud of. I am confident
we can uphold the Commission's
tradition of excellence today and
in the coming years.

Sincerely,

Vincent G. Mannering
Executive Director

MovingAhead
with Technology

T

Mod;

A SmartRead water meter
is installed along with a meter
transmission unit at the
residence or place of business.
The information is then passed
to the data collection unit by way
of radio frequency transmission.

oday, technology plays
a pivotal role in the water utility
business, setting new standards for
innovation and effective customer
service.

Customer service is our top priority
and through the utilization of
technology, we are moving ahead
by incorporating various elements
of new technology. This will
greatly benefit our
! "bottom line" and
effectuate a process
that allows for a more
proactive approach to
customer service!

The Commission has always been,
and continues to be, dedicated to
advancing its technological
capabilities that will provide the
tools to be a more productive,
effective workforce and to enhance
the convenience factor for
our customers.

SmartRead...
Smarter Business

SmartRead, a citywide automated
water meter reading system, is
being installed into every home
and business in Boston. SmartRead
utilizes radio frequencies to
transmit data from the customers'
water meter back to the
Commission without the use of
vehicles or personnel. The
Commission successfully pilot
tested SmartRead technology in
over 1400 homes throughout
the city in 1998. The result of the
pilot was an actual read rate in
excess of 99%.

SmartRead will lead to the virtual
elimination of estimated bills, the
#1 customer complaint. The new
system allows the Commission
to identify leaks in a more timely
fashion, improve fire protection
and increase water conservation.

The Commission's new automated
water meter reading system is
state-of-the-art technology that
includes a new water meter, a
meter transmission unit (MTU)
and a data collection unit (DCU)
utilizing a dedicated, secure radio
frequency and cellular wireless
technology. Boston Public School
buildings throughout the city
have been equipped with DCU's
since most are situated at the
highest point in their particular
neighborhood. DCU's were also
installed on other buildings where
additional coverage was needed.
SmartRead is an important capital

investment that will allow
the Commission to heighten its
efficiency and effectiveness.

The Commission and its contractor
have been installing this state-of-
the-art technology throughout the
neighborhoods of Boston with
positive results. Thus far, 98% of
our 88,000 accounts have been
upgraded and SmartRead will be
fully deployed by the end of 2004.
The new system offers exciting
opportunities for our customers
and for the everyday business
operations of our water and sewer
utility.

Revolutionizing the
Water Business

SmartRead presents a unique
opportunity for the Commission
to deliver an effective, smarter
and more convenient system for
improving customer service!

Our customers have experienced
an immediate improvement with
SmartRead by receiving bills based
on actual usage every month
instead of alternating estimated
bills. This alone has reduced
customer complaints by 40%.

SmartRead allows the Commission
to increase its efforts to conserve
water and ensure water equity.
The automated recording of water
usage in Boston will enhance the
review and assessment of account
activity relative to unaccounted for
water, reduce the probability of
defective water meters and identify
anomalies that may be apparent
at a particular property. It will
ensure a higher level of service and
equitable water distribution for
every customer of the Boston
Water and Sewer Commission.
Indeed, SmartRead saves money

Smart©Reacf

The data collection units, mounted on
the roofs of schools throughout the city,
transmit data to Boston Water and
Sewer Commission headquarters.

and valuable resources making it
a cost effective asset for the
Commission, its bond holders and
its ratepayers.

Revenue Auditing

SmartRead will save the utility
about $2M in labor costs, recover
lost revenue by identifying
unaccounted for water and allow
the Commission to increase its
efforts to stop theft of service.
Meter work orders, which average
50,000 per year, will be reduced
by 75% as a result of employing a
proactive
approach to
customer

service and system maintenance.
SmartRead positively impacts our
bottom line!

Large users may also have the
capability of accessing their
accounts to view overnight, daily,
negative, average or unusually
high/low water consumption at
various properties at any time.
The possibility also exists for
weekly analysis and water meter
readings being emailed to large
users for their review. The
Commission is committed to
improving its financial outlook
while reducing expenses for the
benefit of our customers and our
business. Opportunities for
additional revenue sources are
available as a result of SmartRead
including the potential for on-line
data analysis, leak monitoring
and processing meter reading data
for other municipalities.

The computer system collects

the information, and directs

data into each account.

In an effort to reduce illegal or
inconsistent water service, the
Commission will strengthen its
efforts to employ a systematic
auditing of accounts to prevent
leaks and theft of service.
SmartRead allows the Commission
to compare consumption for
similar users, identify illogical
consumption trends and
investigate zero consumption.
The combined capabilities of GIS
and SmartRead technologies will
link customer accounts to
determine area consumption
trends in response to questionable
water consumption.

A Commitment to
Capital Improvements

The Commission holds the
responsibility for the operation
and maintenance of the water
distribution, wastewater collection
and storm water drainage
systems in the City of Boston.

Our most

vital

objectives

as a public

water utility continue to be

the adequate delivery of

high quality potable water

for consumption, fire

protection, the efficient and

environmentally sound

collection of wastewater

for transport and delivery

to a treatment facility.

The 2003-2005 Capital
Improvement Program
identifies capital expenditures
totaling $165M. Water Distribution
projects account for $54M, or
32.3%, of the 2003-2005 CIP.
Sewer System projects comprise
$79.8M, or 47.6%, and Support
projects total $33.7M, or 20.1%,
of the expenditures outlined
in the program.

Water Distribution projects include
relaying aged, undersized or
structurally deteriorated pipes and
relining structurally sound pipes
by cleaning out any interior
residue and installing a cement
lining. Sewer System projects
include repair or replacement of
deteriorated or collapsed sanitary
sewers and storm drains along
with television inspection of 15 to

Bills are generated, showing
a detailed account of
water usage for the month.

20 miles of sewer pipe each year.
Also, the CIP continues to fund the
separation of combined sewers and
for the reduction of infiltration
and inflow into the sanitary
system. The Commission, under
agreement with the
Massachusetts Water
Resources Authority, is
actively pursuing to
eliminate and
substantially close
combined sewer
overflows through
sewer separation
projects in Dorchester,
Stony Brook area in
Jamaica Plain and the
Constitution Beach area
in East Boston.

Support projects in the CIP include
on-going facility projects, meter
projects and improvements
to the Commission's computer
infrastructure, including software
and hardware systems. The
Geographic Information System
continues to be a major element
for the 2003-2005 CIP.

Technology at Work

Significant advances in
technology over the past several
years have made a substantial
impact to the Commission's
capabilities relating to information
accessibility. Several new
utility-wide applications have been
implemented including the
Automated Meter Reading
(SmartRead) system and the Work
Order Management System
(CASS WORKS) to track inventory.
Both of these new applications are
tightly integrated with the
Commission's GIS in such a way
that users are able to visualize

and analyze trends in data with
the added dimension of property
location.

CASS WORKS has been
operational since January 2002
allowing the Operations Division
and Field Engineering Department
to create work orders when crews
perform any type of maintenance
to the system's infrastructure.
Work orders are stored in a
centralized database permitting
staff in any department to quickly
and accurately retrieve information
on work performed, completed or
in progress. SmartRead helps the
Commission to integrate its
information technology with each
customer account to analyze
consumption trends, identify
consumption anomalies, detect
possible leaks and property
location analysis through GIS.

The Future is Here!
Improved

Customer Service and
Convenience

The Commission's technological
upgrades and integration allow
for a vast array of new applications
that will certainly enhance the
effectiveness of our water and
sewer operations and improve
the efficiency of delivering
quality customer service. Our new
capabilities create a unique
opportunity to offer ratepayers
services that have been
consistently requested over the
years. The time has arrived to
ensure that our #1 priority of
providing the best possible
customer service becomes a reality!

SmartRead, CASS WORKS and GIS
have enhanced our internal
operations that certainly impact
the "bottom line" and our business
practices; however, it is our

customers who greatly benefit
from our technological advances.

One of the most requested services
by our customers will soon become
a reality. On-line account access
will allow our residential and
commercial customers to review
their water consumption, payment
history and communicate with our
customer service representatives
via e-mail anytime, day or night.

On-line bill payment offers the
convenience of eliminating check
books, stamps, and envelopes.

SmartRead . . .
improves service
for both our
residential
and commercial
customers.

Customer reviews account

activity and has the option of paying

by check or online.

Customers would be able to view
their bills from anywhere with
on-line access. The Commission
will also have the capability to link
accounts that are registered for
on-line billing and payment
to reduce mailing costs positively
impacting the overall financial
outlook of the Commission.

Improved customer convenience
and service is a direct result of our
capital investments
and it is paying huge
dividends for all
concerned. New
technology and new
customer service
initiatives ensure a
more customer-
friendly approach to
providing the best
possible delivery of
water and sewer
services to Boston's
ratepayers.

Getting the job done

is our top priority and
technology offers possibilities
that were not available just
a few years ago.
The Commission is
dedicated to providing the
best possible customer
service while continuing
to improve the water and
sewer infrastructure
throughout the city.
Our commitment in 2003
has produced positive
results for our customers
and for Boston. We will
strive to produce even
more in 2004.

Independent
Auditor's 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, 2003 and 2002, and the related
statements of operations and cash
flow 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, 2003 and 2002,
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.

The Management's Discussion
and Analysis on pages 10 through 13
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
management 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 accompanying supplemental
schedules are 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.

March 31, 2004

Managements
Discussion and Analysis

Required Supplementary Information,
December 31, 2003 and 2002

Since its creation in 1977, The Boston Water and Sewer Commission (the 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 making process, the Commission follows the accounting standards set forth in Statement of Financial
Accounting Standards (SFAS) No. 71. 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 recovery is reasonably assured
(deferred charges).

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, 2003 and 2002.

Condensed financial information for the three most recent years is presented in this section of the report.

2003

2002*

2001*

Current assets
Capital assets, net
Other assets

$27,371,123
686,412,129
230,477,452

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

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

Total assets

944,260,704

934,995,730

917,209,565

Current liabilities
Noncurrent liabilities

37,587,106
695,411,346

31,755,677
717,989,162

32,127,384
722,037,239

Total liabilities

732,998,452

749,744,839

754,164,623

Net assets:

Invested in capital assets, net of related debt 379,695,558 318,390,253 277,724,297

Restricted net assets 75,559,717 83,636,998 92,815,077

Unrestricted net assets (243,993,023) (216,776,360) (207,494,432)

Total net assets $211,262,252 185,250,891 163,044,942

'Certain reclassifications were made to the 2002 and 2001 information to be comparative with the
current year presentation.

In 2003, the Commission's net assets totaled $211.3 million, an -increase of $26.0 million, or 14.0% from FY 02 and in 2002
net assets totaled $185.3 million an increase of $22.2 million, or 13.6%. from FY 01. The Commission recognized statutory
surplus of $0.5 million in FY 03 and $0.4 million in both FY 02 and FY 01. Total assets in FY 03 were $944.3 million, an
increase of $9.3 million, or 1.0% from last year's FY 02 total assets of $935.0 million. In FY 02 total assets were $935.0 million, an
increase of $17.8 million, or 1.9% from FY 01 total assets of $917.2 million. The Commission invested in various capital assets,
including capital improvement projects, machinery and equipment, buildings and improvements. These investments totaled
$686.4 million, up $59.0 million, or 9.4% over FY 02's total investment in capital assets. In FY 02 these investments totaled $627.4
million, up $37.9 million, or 6.4% over FY 01's total investment in capital assets.

10

Water and sewer charges in FY 03 represented 92.4% of operating revenues. Water and sewer charges totaled $205.0 million, which
was $17.9 million, or 9.6% higher than the same period the prior year, due primarily to a rate increase of 12.8% in water and sewer
charges in 2003. In 2003, the Commission implemented two rate increases one for 8.9% in January and 3.9% in April. This was
due to the special assessment from the Massachusetts Water Resources Authority (MWRA) and the elimination of the debt service
assistance program from the Commonwealth of Massachusetts. The Commission accrued billing adjustments at 2.75% and bad
debts at 0.3% of accrued water and sewer charges for the year. Additionally discounts were accrued at 1.0% of unbilled water rev-
enue. Total operating revenues in FY 03, which includes fire pipe and other revenues, totaled $221.9 million, representing an
increase in total operating revenue of $17.5 million, or 8.6% higher than the same period the prior year.

In FY 02 water and sewer charges represented only 91.5% of operating revenues. They totaled $187.1 million, which is $14.0 mil-
lion, or 8.1% higher than water and sewer charges in FY 01, due to a combined 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 FY 02, which includes fire
pipe and other revenues, totaled $204.4 million, representing an increase in revenue of $17.8 million,
or 9.5% higher than FY 01 revenue.

Direct operating expenses in FY 03 totaled $203.9 million, which was $11.1 million or 5.7% over direct operating expenses for the
same period in FY 02. This increase was due primarily to a substantial increase in the MWRA assessment. Investment income
decreased by $7.5 million in 2003, offset slightly by a decrease of $1.3 million in interest paid, reflecting the low
interest rate environment in FY 03. In FY 02 direct expenses totaled $192.8 million, which is $8.9 million, or 4.9% over FY 01.
Investment income decreased by $5.6 million in 2002, offset slightly by a decrease of $1.0 million in interest paid.

2003

2002*

2001*

Operating revenues

Operating expenses

$221,915,418
203,889,999

204,389,352
192,848,177

186,596,187
183,918,265

Excess operating revenues
Nonoperating expenses

18,025,419
(11,327,734)

11,541,175
(5,118,090)

2,677,922
(503,841)

Excess revenues before capital grants and

contributions and transfer requirements 6,697,685 6,423,085 2,174,081

Capital grants and contributions 29,352,147 25,169,818 12,244,871
Excess revenues used to fund reserves and other deferrals (9,949,275) (9,369,771) (14,364,997)
Change in accumulated revenues used to offset future rates (89,196) (17,183) 9,453,145

Change in net assets ' 26,011,361 22,205,949 9,507,100

Net assets, beginning of year 185,250,891 163,044,942 153,537,842

Net assets, end of year $211,262,252 185,250,891 163,044,942~

II

Managements
Discussion and Analysis

Required Supplementary Information,
December 31, 2003 and 2002

Capital Assets

In fiscal year 2003, major Commission's infrastructure project additions totaled $30.2 million, of which $14.0 million were
financed with bond proceeds as follows:

Relay of water mains $7.SM

Reline of water mains $1.5M

Rehabilitation/replacement of sewers or storm drains $6.5M

Interceptor improvements $0.4M

Separation of combined sewers ' $2.5M

Infiltration and inflow $0.8M

Meter replacement $11.0M

The Commission's 2004-2006 capital budget includes projected expenditures of $177.5 million for infrastructure and capital proj-
ects. 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. However there are sewer improvements that are funded through the utilization of the MWRA loan programs.

More detailed information about the Commission's capital assets is presented in note 3 to the financial statements.

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 con-
cerning the amount of debt, which it may have outstanding, subject to the coverage requirements described below.

The Commission issues General Revenue Bonds to finance portions of its capital improvement projects. The Commission's 2004-
2006 capital budget, which totals $177.5 million, anticipates that projects totaling $103.7 million, or 58.4% of the Commission's
2004-2006 capital budget, will be funded from bond proceeds. The 2004 budget for debt service is $30.5 million.

The Commission currently has seven series of General Revenue Bonds outstanding at the end of 2003; totaling approximately
$300.6 million.

$30.8 Million 1992 Series A

$46.7 Million 1993 Series A

$34.3 Million 1994 Series A

$13.0 Million 1998 Series A

$11.3 Million 1998 Series C

$120.2 Million 1998 Series D

$15.4 Million 2002 Series A

$28.9 Million 2003 Series A

More detailed information about the Commission's long-term obligations is presented in note 4 to the financial statements

In 2003, the Commission completed a successful refunding of the callable portion of the 1993 Series A Bonds, which generated a
net present value savings of $16.3 million.

12

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, (iii) 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 renew-
al of the systems and (v) to pay or provide for any and all amounts which 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 during 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 out-
standing 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 requirement each year. The Commission instituted a rate increase of 8.9% in fiscal year 2002. In fiscal year 2003 a rate
increase of 8.9% was implemented on January 1st and another rate increase of 3.9% on April 1st. As a result, the total increase in
water and sewer rates for fiscal year 2003 was 12.8%. The April increase was due to special assessment from MWRA and the elim-
ination of the debt service assistance program from the Commonwealth of Massachusetts. On January 1, 2004 the water and sewer
rate increased by a combined 5.8%. The major reasons behind these increases are: (i) the increase in assessment paid to the MWRA,
and (ii) the decline in water sales due to general water conservation efforts of individuals and businesses throughout the City.

13

Statements of Net Assets

December 31, 2003 and 2002

2003 2002

Assets

Current assets:

Cash and cash equivalents (note 9)

$8,135,734

9,340,446

Accounts receivable, net:

Customers, less allowances of $5,435,458 in 2003 and 2002 (note 1)
Unbilled revenues, less allowances of $1,702,361 in 2003 and 2002

8,128,780
9,334,029

7,567,520
8,873,762

Construction grants receivable

1,279,663

1,325,497

Prepaid expenses

492,917

420,652

Total current assets

27,371,123

27,527,877

Noncurrent assets:

Restricted cash and investments (notes 4 and 9)

207,173,685

252,141,542

Capital assets:

Depreciable, net (note 3)
Nondepreciable (note 3)

511,515,378
174,896,751

481,188,905
146,204,350

Deferred charges (note 2)

21,375,118

25,775,674

Bond issue costs, net

1,928,649

2,157,382

Total noncurrent assets

916,889,581

907,467,853

Total assets

944,260,704

934,995,730

Liabilities

Current liabilities:

Payable from current assets:

Accounts payable 15,830,813 11,200,001

Other accrued liabilities 5,710,434 5,568,561

Current portion of long-term notes (note 4) 5,690,859 5,207,115

Current portion of revenue bonds (note 4) 10,355,000 9,780,000

Total current liabilities 37,587,106 31,755,677

Noncurrent liabilities:

Long-term debt, net (note 4) 283,067,334 310,577,189

Long-term notes payable (note 4) 44,096,735 38,527,699

Other long-term liabilities 10,552,258 18,884,754

Deferred credits and reserves (note 2) 357,695,019 349,999,520

Total noncurrent liabilities 695,411,346 717,989,162

Total liabilities 732,998,452 749,744,839

Net Assets

Net assets:

Invested in capital assets, net of related debt 379,695,558 318,390,253

Restricted for debt service 31,070,812 41,230,234

Restricted for capital assets 3,666,284 4,534,304

Restricted for debt covenants 40,822,621 37,872,460

Unrestricted net assets (243,993,023) (216,776,360)

Commitments and contingencies (notes 10, 11, 12, and 13)
Total net assets $211,262,252 185,250,891

See accompanying notes to financial statements.

74

Statements of Operations

Year ended December 31, 2003 and 2002

2003

2002

Operating revenues:

Water and sewer usage
Fire pipe
Other

$205,000,340
3,108,779
13,806,299

187,074,121
2,922,124
14,393,107

Total operating revenues

221,915,418

204,389,352

Operating expenses:

Operations

Maintenance

MWRA assessment (note 6)

Depreciation and amortization

45,156,684

7,704,164

135,185,604

15,843,547

46,135,304

6,974,382

122,737,010

17,001,481

Total operating expenses

203,889,999

192,848,177

Excess operating revenues

18,025,419

11,541,175

Nonoperating revenue (expense):

Investment income
Interest expense

4,243,091
(15,570,825)

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

Total nonoperating expense

(11,327,734)

(5,118,090)

Excess revenues before capital grants and contributions and transfer requirements
Capital grants and contributions

6,697,685
29,352,147

6,423,085
25,169,818

Excess revenues before transfer requirements

Excess revenues used to fund reserves and other deferrals (note 2)
Change in accumulated revenues used to offset future rates (note 2)

36,049,832

(9,949,275)
(89,196)

31,592,903

(9,369,771)
(17,183)

Change in net assets
Net assets, beginning of year

26,011,361
185,250,891

22,205,949
163,044,942

Net assets, end of year

$211,262,252

185,250,891

See accompanying notes to financial statements.

15

Statements of Cash Flows

Year ended December 31, 2003 and '2002

Cash flows from capital and related financing activities:

Purchase of capital assets
Proceeds from debt
Payment of bond principal
Capital contributions
Payment of bond interest

See accompanying notes to financial statements.

2003 2002

Cash flows from operating activities:

Receipts from customers $206,498,608 193,559,454

Payments to suppliers (157,352,324) (146,365,943)

Payments to employees (27,948,666) (31,618,396)

Net cash provided by operating activities

21,197,618

15,575,115

Cash flows from investing activities:

Investment income

4,243,091

11,709,410

Net cash provided by investing activities

4,243,091

11,709,410

(73,025,336)

(51,725,764)

34,982,780

24,527,155

(47,352,044)

(27,960,000)

29,352,147

25,169,817

(15,570,825)

(16,827,500)

Net cash used in capital and related financing activities (71,613,278) (46,816,292)

~ Net decrease ' (46,172,569) (19,531,767)

Cash, cash equivalents, restricted cash and investments, beginning of year 261,481,988 281,013,755

Cash, cash equivalents, restricted cash and investments, end of year $215,309,419 261,481,988

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 $21,197,618 15,575,115

$18,025,419

11,541,175

(10,038,471)

(9,386,954)

15,843,547

17,001,481

(561,260)

563,047

(460,267)

(1,963,177)

45,834

(42,815)

(72,264)

(89,638)

• 4,630,812

(988,634)

141,873

(339,163)

1,974,891

8,361,943

(8,332,496)

(9,082,150)

16

Notes to

Financial Statements

December 31, 2003 and 2002

(1) Organization, Basis of Presentation,

and Summary of Significant Accounting Policies

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

Under the Enabling Act, the Commission is subject to regulation with respect to rates, accounting and other matters, where
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 cus-
tomers are based on the cash required for the Commission's operations, debt service, and reserve contributions. However, there is no
legally adopted budget that the Commission must adhere to. To comply with the external financial reporting requirements of the
Board, the accompanying financial statements are presented on a basis that is consistent with generally accepted accounting princi-
ples (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 Regulation. 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 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 are presented on a GAAP basis.
A reconciliation between the revenues and expenses of these two operating statements for the year ended December 31, 2003 is pro-
vided below:

Revenues

Expenses

As presented in the statements of operations:

Operating revenues/expenses
Other revenues/expenses

$221,915,418
4,243,091

203,889,999
15,570,825

Total

226,158,509

219,460,824

Reclassifications and deferrals:

Contributions to reserves

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

— 855,201
(7,750,359) (7,750,359)

— (698,201)

— (974,797)
3,602,060

— 10,768,406
438,608 —

— 259,940

As presented in the supplemental schedule

$222,448,818 221,921,014

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 $527,804 and $438,608 for the years ended
December 31, 2003 and 2002, 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 2003 and 2002 total customer bills outstanding
of $23,584,018 and $23,022,758, respectively, have been reduced by provisions for billing adjustments and sewer
abatements of $10,019,780 in 2003 and 2002. These net billing amounts are further reduced by an allowance for
uncollectible accounts of $5,435,458 in 2003 and 2002, to arrive at net accounts receivable.

Notes to

Financial Statements

December 31, 2003 and 2002

(b) Investments

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

(c) Capital Assets

Capital assets are stated at historical cost. Depreciation is provided on the straight-line method based upon the estimated
useful lives of the various classes of assets. Maintenance and repairs are charged to expense as incurred. Major renewals or
betterments over $500 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 2003
or 2002 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
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:

Years

Water:

Works 100

Meters 10

Hydrants 40
Sewerage:

Works 75
Pumping station 35
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
Reporting for Nonexchange Transactions, which requires capital grants and contributions to be reported as capital
contribution revenue. The amount recorded as revenue in fiscal 2003 and 2002 was $29,352,147 and $25,169,818,
respectively.

(g) Cash Equivalents

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

(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.

18

(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.
Proprietary funds distinguish operating revenues and expenses from nonoperating items. Operating revenues and expenses
result from providing services in connection with ongoing operations. 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 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 2002 amounts have been reclassified to conform with the 2003 presentation.

(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 charges or credits appear in the
line "Excess revenues used to fund reserves, and other deferrals" on the statements of operations. The components of these amounts,
which are based on approval of the Board of Commissioners, are as follows:

2003

2002

Contributions to reserves

Provision for working capital

Provision for capitalized interest

Principal payments on long-term debt

Interest paid from escrow funds

Capital expenditures

Depreciation and amortization

Investment income on project and escrow funds

Other

$855,201 '

14,518,527

(974,798)

10,768,406

(12,502,761)

(3,602,058)

886,758

(570,428)

(154,593)

13,580,172

(1,030,056)

8,900,324

(14,037,612)

2,533,616

148,348

$9,949,275

9,369,771

The components of deferred charges included in the accompanying statement of net assets are as follows:

2003

2002

Deferred loss on land taking $5,747,733
Accrued pension expense 11,808,209
Debt extinguishment expense 3,819,176

5,968,799-

12,394,168

7,412,707

Total deferred charges $21,375,118

25,775,674

Notes to

Financial Statements

December 31, 2003 and 2002

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

December 31,
2002

Increase
(decrease)

December 31,
2003

Debt service

Capital improvements

Working capital

$124,445,837

855,201

125,301,038

198,346,649

9,094,073

207,440,722

24,528,426

(2,342,971)

22,185,455

2,240,000

—

2,240,000

Self-insurance

2,240,000

—

2,240,000

Reduction of future rates

349,560,912
438,608

7,606,303
89,196

357,167,215
527,804

Total deferred credits and reserves

$349,999,520

7,695,499

357,695,019

(3) Capital Assets

The cost and activity of water and sewerage capital assets in service and related accumulated depreciation at December 31, 2003
and 2002 is as follows:

Balance at

Balance at

December 31,

December 31,

2002

Increases

Decreases

2003

Capital assets, not being depreciated:

Land

$2,519,243

-

-

2,519,243

Construction in progress

143,685,107

71,395,248

42,702,847

172,377,508

Total capital assets not

being depreciated

146,204,350

71,395,248

42,702,847

174,896,751

Capital assets, being depreciated:

Buildings and improvements

59,730,528

1,120,464

—

60,850,992

Machinery and equipment

21,979,210

795,509

272,355

22,502,364

Infrastructure

537,305,662

42,431,442

—

579,737,104

Total capital assets

being depreciated

$619,015,400

44,347,415

272,355

663,090,460

Less accumulated depreciation for:

Buildings and improvements

$2,397,760

1,617,441

— x

4,015,201

Machinery and equipment

14,797,209

2,076,821

231,494

16,642,536

Infrastructure

120,631,526

10,285,819

—

130,917,345

Total accumulated

depreciation

137,826,495

13,980,081

231,494

151,575,082

Total capital assets being

depreciated, net

481,188,905

30,367,334

40,861

511,515,378

Capital assets, net

$627,393,255

101,762,582

42,743,708

686,412,129

20

Balance at

December 31,

2001

Increases

Decreases

Balance at

December 31,

2002

Capital assets, not being depreciated:

Land

Construction in progress

$2,519,243
102,640,327

52,889,919

11,845,139

2,519,243
143,685,107

Total capital assets not
being depreciated

105,159,570

52,889,919

11,845,139

146,204,350

Capital assets, being depreciated:

Buildings and improvements
Machinery and equipment
Infrastructure

57,163,359

21,020,097

528,990,646

2,567,169

959,113

8,315,016

-

59,730,528

21,979,210

537,305,662

Total capital assets
being depreciated

607,174,102

11,841,298

_

619,015,400

Less accumulated depreciation for:

Buildings and improvements
Machinery and equipment
Infrastructure

846,237

12,501,524

109,498,003

1,551,523

2,295,685

11,133,523

-

2,397,760

14,797,209

120,631,526

Total accumulated
depreciation

122,845,764

14,980,731

137,826,495

Total capital assets being
depreciated, net

484,328,338

(3,139,433)

481,188,905

Capital assets, net

$589,487,908

49,750,486

11,845,139

627,393,255

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 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.

21

Notes to

Financial Statements

December 31, 2003 and 2002

(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, 2003 and December 31, 2002 (amounts in thousands).

Description

Balance at
December 31,

2002 Additions

Reductions

Balance at

December 31,

2003

Revenue bonds:

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

November 1, 2003 to 2013 $30,810

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

November 1, 2003 to 2019 90,950

1994 Series A, bearing a variable interest
rate, with maturity dates ranging

from November 1, 2003 to 2024 35,100

1998 Series A, bearing interest rates

ranging from 5.0% to 5.125%,

with maturity dates ranging from

November 1, 2014 to 2015 12,960

1998 Series C, bearing interest rates

ranging from 4.5% to 5.2%,

with maturity dates ranging from

November 1, 2003 to 2021 11,260

1998 Series D, bearing interest rates

ranging from 4.5% to 5.0%,

with maturity dates ranging from

November 1, 2003 to 2028 122,730

44,215

800

10

2,505

30,810

46,735

34,300

12,960

11,250

120,225

2002 Series A, bearing interest rates
ranging from 2.0% to 3.0%,
with maturity dates ranging from,
November 1, 2003 to 2007

19,005

3,640

15,365

2003 Series A, bearing interest rates
ranging from 2.4% to 4.0%
with maturity dates ranging from
November 1,2004 to 2011

28,930

-

28,930

322,815

28,930

51,170

300,575

Less:

Unamortized loss on refunding

1,025

6,087

366

6,746

Unamortized issue discount

1,433

-

1,026

407

Net revenue bonds

$320,357

22,843

49,778

293,422

Description

Balance at

December 31,

2001

Additions

Reductions

Balance at

December 31,

2002

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 $52,680

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

November 1, 2002 to 2019 93,650

1994 Series A, bearing a variable
interest rate, with maturity
dates ranging from

November 1, 2002 to 2024 35,800

1998 Series A, bearing interest rates

ranging from 5.0% to 5.125%,

with maturity dates ranging from

November 1, 2014 to 2015 12,960

1998 Series C, bearing interest rates

ranging from 4.5% to 5.2%,

with maturity dates ranging from

November 1, 2002 to 2021 - 11,270

1998 Series D, bearing interest rates

ranging from 4.5% to 5.0%,

with maturity dates ranging from

November 1, 2002 to 2028 125,125

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

700

10

2,395

19,005

30,810

90,950

35,100

12,960

11,260

122,730

19,005

Less:

Unamortized loss on refunding
Unamortized issue discount

331,485

2,209

19,005
1,025

27,675

776

322,815

1,025
1,433

Net revenue bonds

$329,276

17,980

26,899

320,357

23

Notes to

Financial Statements

December 31, 2003 and 2002

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

Revenue bonds
Principal Interest

2004

2005

2006

2007

2008

2009-2013

2014-2018

2019-2023

2024-2028

$10,355

14,758

10,835

14,435

11,140

14,075

11,585

13,677

12,275

13,220

70,915

56,280

77,350

36,333

56,780

17,776

39,340

5,501

$300,575

186,055

(a) Prior Year Debt Refunding

In the aggregate, $198,260,000 remains outstanding at December 31, 2003 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
trusteed and nontrusteed investments at December 31, 2003 and 2002 are as follows:

2003

2002

Trusteed:

U.S. Treasury notes

Other government obligations

Money market and cash investments

Open-ended mutual funds

Commercial paper

Repurchase agreements

106,945,246

1,777,909

8,601,319

28,176,876

8,416,250

22,198,506
96,777,725

6,741,136
10,818,223
34,891,713

8,416,250

153,917,600

179,843,553

Nontrusteed:

^ Other government obligations

Money market and cash investments
Open-ended mutual funds
Commercial paper

439,619

1,586,052

38,215,494

13,014,920

617,126

1,233,368

57,450,439

12,997,056

53,256,085

72,297,989

Less trusteed and nontrusteed cash

207,173,685
(3,363,961)

252,141,542
(7,974,504)

Trusteed and nontrusteed investments

$203,809,724

244,167,038

See accompanying notes to financial statements.

(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. For purposes of
offsetting principal and interest payments, an amount aggregating $13,819,948, consisting of contract assistance payments
from the Commonwealth of Massachusetts and other interest subsidies 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):

Scheduled loan repayments

Loan

subsidy amounts

Net loan repayments

Equity
earnings

Contract
assistance
payments Total

Principal

Interest

Total

Principal

Interest

Total

2004

$1,446

1,191

2,637

581

857 1,438

952

247

1,199

2005

1,510

1,115

2,625

542

859 1,401

992

232

1,224

2006

1,573

1,031

2,604

501

862 1,363

1,029

212

1,241

2007

1,647

940

2,587

458

862 1,320

1,075

192

1,267

2008

- 1,728

845

2,573

413

859 1,272

1,137

" 172

1,309

2009-2013

9,942

2,632

12,574

1,308

4,245 5,553

6,499

509

7,008

2014-2018

4,343

381

4,724

203

1,269 1,472

3,180

42

3,222

$22,189

8,135

30,324

4,006

9,813 13,819

14,864

1,606

16,470

25

Notes to

Financial Statements

December 31, 2003 and 2002

The Commission has entered into various interest-free loan 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 Program (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 long-term note activities for the years ended December 31, 2003 and 2002:

Description

Balance at

December 31,

2002

Additions

Reductions

Balance at

December 31,

2003

MWRA I/I Program Phase II, interest

free, due November 15, 2003

$221,797

. —

221,797

—

MWRA I/I Program Phase III, interest

free, due November 15, 2004

1,088,418

1,603,529

659,649

2,032,298

MWRA I/I Program Phase IV, interest

free, due February 15, 2008

—

3,501,589

—

3,501,589

MWRA W.I.R. Program, interest

free, due November 15, 2004

1,416,015

—

1,083,494

332,521

MWRA P.A.P. Program, interest

free, due November 15, 2011

17,424,649

6,154,777

1,847,141

21,732,285

MWPAT Pool I, subsidized

interest, due August 1, 2013

7,354,257

— "

507,298

6,846,959

MWPAT Pool II, subsidized

interest, due August 1, 2015

6,535,728

-

357,378

6,178,350

MWPAT Pool III, subsidized

interest, due February 1, 2017

. 9,693,950

-

530,358

9,163,592

Total long-term notes $43,734,814

11,259,895

Description

Balance at

December 31,

2001

Additions

5,207,115

Reductions

49,787,594

Balance at

December 31,

2002

MWRA I/I Program Phase II, interest

free, due November 15, 2003 . $549,194

MWRA I/I Program Phase III, interest

free, due November 15, 2004 1,748,067

MWRA W.I.R. Program, interest

free, due November 15, 2004 3,361,786

MWRA P.A.P. Program, interest

free, due November 15, 2011 7,743,515

MWPAT Pool I, subsidized

interest, due August 1, 2013 7,837,653

MWPAT Pool II, subsidized

interest, due August 1, 2015 6,876,086

MWPAT Pool III, subsidized

interest, due February 1, 2017 10,096,359

10,480,250

327,397

221,797

659,64?

1,088,418

1,945,771

1,416,015

799,116

17,424,649

483,396

7,354,257

340,358

6,535,728

402,409

9,693,950

Total long-term notes $38,212,660

10,480,250

4,958,096

43,734,814

(S) Current Refunding

On November 1, 2003, the Commission issued $28,930,000 in Series A General Revenue Refunding Bonds with an interest rate range
of 2.4% to 4.0% to refund an $41,390,000 portion of outstanding 1993 Series A General Revenue Bonds with an interest rate range of
5.0% to 5.25%. The new bonds require eight debt service payments with the final payment due on November 1, 2011.
The net proceeds of $29,258,478 plus $12,959,328 and $1,082,564 from the senior debt service reserve and senior debt service funds,
respectively, 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 Commission refunded the 1993 bonds to reduce its total debt service payments over the next eight years by $19,445,297
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 $16,326,787.

(6) Massachusetts Water Resources Authority

The MWRA 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 MWRA'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 state-
ments of operations for assessments by the Authority for 2003 and 2002 are as follows:

2003

2002

Assessments allocated on:

Water usage
Wastewater usage

$46,875,982
88,309,622

43,369,447
79,367,563

Total

$135,185,604

122,737,010

In 2003 and 2002, 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, includ-
ing 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 ten City departments during 2003 and 2002,
respectively, based on actual consumption of $4,652,674 and $4,386,765 in 2003 and 2002, respectively.

The City provides services to the Commission, including paving and facilities rental. Operating costs billed to the Commission by the
City were $1,200,552 and $857,710 during 2003 and 2002, respectively. Capital costs billed by the City were $2,678,231 and
$2,097,599 during 2003 and 2002, 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, 2003, receivables totaling approximately $1.5 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, 2003 and 2002, $2,380,564 and $3,191,929, respectively, 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). 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 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, theCommission annual-
ly 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).

27

Notes to

Financial Statements

December 31, 2003 and 2002

(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 ben
efits 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 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 employers based on active covered payroll. Through fiscal 1998,
the Commonwealth of Massachusetts reimbursed the SBRS for a portion of benefit payments for cost-of-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, 2003, 2002,
and 2001 were approximately $456,264, $481,719, and $565,350, respectively, which equaled its required contribution each
year. Total employee contributions, based on actuarially determined amounts, were approximately $1,946,993, $2,001,820,
and $1,929,788, or 8.5%, 8.3%, and 8.2% of covered payroll in 2003, 2002, and 2001, 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 employer
contributions to the Trust Fund based upon the actuarially determined cost of future benefits, net of employee contributions.

Trust Fund assets at December 31, 2003 and 2002 are as follows: '

2003 2002

Assets (at fair value):

Common stock
International stock
Mutual funds
Fixed income
Total $66,081,093 55,615,132

The Trust Fund activity is as follows:

Assets (at fair value), January 1, 2002 $63,440,036

Employer contributions 481,719

Investment losses (6,614,536)

Management fees (224,409)

Payments to SBRS . (1,467,678)

Assets (at fair value), December 31, 2002 55,615,132

Employer contributions 456,264

Investment income and gains 12,505,237

Management fees (286,072)

Payments to SBRS ' (2,209,468)

Assets (at fair value), December 31, 2003 $66,081,093

$32,005,754

23,777,945

8,192,654

5,394,386

1,012,557

977,983

24,870,128

25,464,818

28

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

(a) Deposits

A summary of the Commission's deposits that are (Category 1) fully insured or collateralized with securities held by the
Commission or its agent in the Commission's name, (Category 2) those deposits that are collateralized with securities held
by the pledging financial institution's trust department or agent in the Commission's name, and (Category 3) those deposits
that are not collateralized as of December 31, 2003 and 2002 follows:

Category

Total bank
balance

Carrying

2003

1

2

3

amount

Cash

Bank money market deposits

$100,000

—

8,595,758
3,363,961

8,695,758
3,363,961

8,135,734
" 3,363,961

Total

$100,000

—

11,959,719

12,059,719

11,499,695

.

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

Deposits in transit and outstanding checks account for the majority of the difference between the bank balance and the carry
ing 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 includes uninsured and unregistered investments held by the counterparty's trust department-or agent in
the Commission's name. Category 3 includes uninsured or unregistered investments held by the counterparty, its trust
department, or agent but not in the Commission's name.

29

Notes to

Financial Statements

December 31, 2003 and 2002

Category

2003 1

2

3

Fair value

Categorized:

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

107,384,865

8,416,250

- 41,191,796

-

107,384,865

8,416,250

41,191,796

Total

$

156,992,911

—

156,992,911

Not categorized:

Open-end mutual funds

46,816,813

Total

$203,809,724

Category

2002

1

2

3

Fair value

Categorized:

U.S. Government obligations $ 22,198,506 22,198,506

U.S. Government agency obligations 97,394,851 97,394,851

Repurchase agreements 8,416,250 — 8,416,250

Commercial paper — 47,888,769 — 47,888,769

Total

$

175,898,376

175,898,376

Not categorized:

Open-end mutual funds

68,268,662

Total

$244,167,038

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
independent investment advisors.

(10) Lease Commitments

The Commission leases office space and equipment under various 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 $95,866 and $81,918 in 2003 and 2002, 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 facilities. Commitments under these contracts aggregate approximately
$71.5 million as of December 31, 2003. 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 $135.7 million for 2003 through 2004.
Of this amount, approximately $116 million represents extension and improvement projects and $19.7 million represents renewal
and replacement projects. The extension and improvement projects are expected to be 51% 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 Management and Other Insurance

The Commission carries self-insured retention limits for claims filed under workers' compensation and general liability and
completely self insures for all unemployment benefits. The workers' compensation self-insured retention limit is $750,000 per claim
and is supplemented 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 are subordinate to $5 million of excess coverage pur-
chased through an outside carrier. Under the sections of the Model Water and Sewer Act, the Commission's tort
liability is capped at $100,000 per claimant.

The Commission maintains other insurance coverage as follows:

Policy type Coverage

Health Premium based

Vehicles Combined single limit of $1 million

Property . Aggregate limit of $65.9 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 2003 and 2002 were immaterial.

Changes for the years ended December 31, 2003 and 2002 are as follows:

2003 2002

Beginning balance of reserves $3,333,077 ~ 2,854,971

Payment of claims attributable to events of both current and prior years:
Workers' compensation
General liability
Incurred claims
Ending balance of reserves $3,188,171 3,333,077

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 establishment of
rates. Management believes that the resolution of these matters will not materially affect the financial position of the Commission.

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

The Commission is involved as a defendant in litigation regarding the pollution of Boston Harbor. Management believes that the
Commission's extensive capital improvement program (see note 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 assess-
ments of the MWRA a substantial portion of the financial costs involved. As of December 31, 2003, the overall cleanup costs are esti-
mated to be approximately $600 million. However, the extent of the Commission's liability for these costs cannot be determined.

(339,895)

(333,044)

(403,689)

(252,215)

598,678

1,063,365

31

Supplemental Schedule of Revenues
and Expenses -Rate Basis

Years ended December 31, 2003 and 2002

2003

2002

Revenues:

Water revenue
Sewer revenue

$85,996,060
119,004,280

77,877,004
109,197,117

Subtotal

205,000,340

187,074,121

Less:

Adjustments
Discounts
Bad debt

6,095,736
867,894
786,729

4,439,652
777,021
386,581

Subtotal

7,750,359

5,603,254

Net billed charges

Prior year surplus

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

197,249,981
438,608

1,309,806

6,535,345

3,108,779

13,806,299

181,470,867
421,425

1,241,285

7,934,508

2,922,124

15,118,128

Total revenues

222,448,818

209,108,337

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

Travel and training

Damage claims

Inventory

Capital outlay

24,101,884

686,946

4,526,164

2,013,603

7,704,164

1,090,693

2,834,941

95,867

1,201,341

701,958

53,754

721,690

7,059

623,996

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

Total direct operating expenses

46,364,060

46,457,210

Nonoperating expenses:

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

135,185,604

10,144,410

14,518,527

14,596,027

855,201

257,185

122,737,010

8,876,812

13,580,172

15,797,444

978,578

242,503

Total nonoperating expenses

175,556,954

162,212,519

Total current expenses

221,921,014

208,669,729

Current year rate surplus

$527,804

438,608

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.

32

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