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Full text of "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 a nd related financing activities (71,613,278) (46,816,292) 

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

Cash, cash e quivalents, 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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