Boston Water and Sewer Commission 2012 Annual Report Preserving Your Environment

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1 Boston Water and Sewer Commission 2012 Annual Report Preserving Your Environment

2 Boston Water and Sewer Commission Board of Commissioners Paul G. Afonso Chairman Cathleen Douglas Stone Commissioner Muhammad Ali-Salaam Commissioner

3 A Message from the Executive Director Henry F. Vitale Executive Director / CFO and Treasurer 2012 was an eventful year at Boston Water and Sewer Commission (the Commission). The Commission concluded negotiations with the Environmental Protection Agency (EPA) over the course of activities which will protect Boston s waterways for years to come. The resultant consent decree (the decree), while presenting the Commission with serious challenges, is replete with opportunities to improve the quality of water in all of Boston s public waterways and protect the significant investment that the Commission and its customers have made in the reclamation of Boston Harbor and Boston s rivers. Over the course of the decree s implementation, the Commission will need to intensify its efforts to enforce regulations by implementing the most advanced methods of managing stormwater and reducing pollutant loads in runoff. Recognizing that environmental improvements cannot stop at any town line, the Commission needs to expand its cooperative relationship with environmental and fellow governmental organizations, in Boston and beyond. The Commission must continue to balance these environmental initiatives with the need to commit ratepayer dollars in only the most judicious ways possible. While many of the tasks that lie ahead are daunting, I have the utmost confidence in the Commission s ultimate success in all its endeavors. This confidence is inspired by my long association with my Commission colleagues and my admiration for their commitment to making Boston a great place to live. The Commission has been incredibly fortunate in this time of change to have the right mix of knowledgeable, veteran employees and new employees equipped with the latest technical training and new perspectives. At this important juncture in the Commission s history, the critical role that Mayor Thomas M. Menino has played in the evolution of the Commission into one of the most effective water and sewer agencies in the country must be acknowledged. That portion of the Mayor s legacy which has consistently demanded first-rate services in an ever improving environment has left a profoundly positive and indelible effect on the Commission and its customers. On behalf of the Commission, I express my sincere thanks to Mayor Menino for his contribution to our success. Sincerely, Henry F. Vitale Executive Director/CFO and Treasurer 2012 Boston Water and Sewer Commission 1

4 Continuity and Renewal Two years of negotiations with the Environmental Protection Agency (EPA), Department of Justice, and Conservation Law Foundation culminated in August 2012 with a consent decree settlement that is enhancing the ongoing efforts of Boston Water and Sewer Commission (the Commission) to clean and revitalize Boston Harbor and its tributaries. Under the terms of the agreement and with the support of Boston Mayor Thomas Menino, the Commission has begun to implement a program of short- and long-term measures that will ensure the Commission s compliance with the Clean Water Act and the requirements of its National Pollutant Discharge Elimination System (NPDES) permit. Long dedicated to environmental protection as well as to the cost-effective, efficient delivery of superior water and sewer services, the Commission is now engaging its resources to meet and surpass the benchmarks outlined in the consent decree. This mission is challenging but calls on strengths for which the Commission has repeatedly been recognized: sound fiscal leadership, exceptional resource management, innovative technological solutions, and an ability to set the standard for the industry. The Commission continues to draw on those strengths and takes this opportunity to reinvest in research, capital projects, technologies, communications, and operational modifications that will support a renewed commitment to the environment and help the Commission work with its customers and partners to further reduce pollution. The end result safer, cleaner waterways will be a legacy that the people of Boston will enjoy for many years to come. Commitment to the Next Generation Boston s harbor and rivers have made a remarkable comeback in recent decades. Today, with an unprecedentedly high level of access to waterways for public use, they are among the nation s most compelling environmental success stories. But there is more to be done. Although free flowing industrial discharges into our urban waterways are a thing of the past, the Commission must continue its mission and mandate to improve our harbor, rivers and streams by improving the quality of discharges from its systems. To do so the Commission will continue to investigate and remove sources of pollutant discharges including illicit connections (sanitary connections, broken laterals, leaking infrastructure), illegal dumping and construction site discharges and work to reduce pollutants from runoff (including roadways and other impervious areas). The consent decree lays out a specific schedule for investigating sources of pollution from illicit connections discharging Boston Water and Sewer Commission

5 Commitment to the Next Generation 2012 Boston Water and Sewer Commission 3

6 to Boston s waterways. Specific milestones set forth in the decree include the completion of investigations of illicit discharges to prevent pollution at Constitution Beach in East Boston and Malibu and Tenean Beaches in Dorchester. Throughout the life of the agreement, the Commission will provide semiannual compliance reports. These reports will track the Commission s progress on consent decree milestones and obligations and ensure the success of its programs. The Commission expects to expand its working relationships with watershed associations, environmental partners, its customers and city residents to help achieve improved water quality and a better environment. The Commission has a dedicated team of in-house professionals working to ensure compliance with the terms of the consent decree and executing the Commission s strategy for fulfilling its ongoing and future requirements. The Commission has expanded its team with experienced and technical staff to address the Commission s new priorities while maintaining its commitment to sound financial management and the implementation of cost-effective solutions. Expanding Public Awareness Improving communication with the public is a central theme to the changes being undertaken at the Commission. To help build long-term public support for measures designed to further reduce water pollution, the Commission is expanding its public outreach programs and updating a variety of materials that provide information on common sources of pollution and how the public can help eliminate pollutants or minimize their impacts to local waterways. The Commission is developing a concerted strategy to make the public aware of the cumulative environmental harm that can result from seemingly innocuous activities such as the disposal of pet waste, home car washing, the use of chemicals and pesticides and the disposal of grease. Through the effective communication of the danger posed by these everyday activities and the provision of information on the better management of them, the Commission is actively trying to elicit direct public participation in improving the environment. Meeting Challenges with New Technologies Reporting and Responding to Sanitary Sewer Overflows (SSOs) One of the major goals of the consent decree is to reduce both public SSOs and private building backups. The consent decree specifically requires the Commission to report all public SSOs or those impacting public health, public ways or waterways within 24 hours to EPA and MassDEP. In response to this requirement, Commission staff developed a new mobile application for field personnel to collect data and report all SSOs and implemented a new emergency response plan Boston Water and Sewer Commission

7 Expanding Public Awareness 2012 Boston Water and Sewer Commission 5

8 Fixing Leaking Sewer Laterals A primary focus of the Commission and another main goal of the consent decree is to reduce the number of illegal connections and illicit discharges to public waterways. One of the Commission s first changes after lodging the decree was to expand its existing Sewer Lateral Financial Assistance Program that helps property owners fix their broken or leaking sewer laterals. Property owners are often surprised to learn that although their sewer pipes appear to be working well, they are in fact leaking sanitary waste that may be leaching into nearby storm drains that discharge to local waterways. Recognizing the financial challenges that property owners face when they need to pay for household plumbing improvements such as a pipe replacement, the Commission increased reimbursement under the program to $4,000 and expanded the program to include repair, relaying, or relining of laterals on public and private property. Addressing Stormwater Runoff and Other Issues In 2012, the Commission also completed the second year of an ambitious, three-year sewer study of 1,516 miles of sanitary sewers, combined sewers, outfalls, and drains. Among the benefits of this study is that it will help the Commission implement a riskbased analysis of its sewer system, identify and eliminate illegal connections, identify areas for improving its operations related to preventative maintenance to reduce SSOs and develop a plan for the future operation and maintenance of the system for the next 25 years. The past year also saw the implementation of a program to develop a stormwater model that will allow the Commission to calculate the system s pollution loads and identify opportunities for implementation of structural best management practices (BMPs) and green infrastructure (GI). One source of stormwater pollution has been runoff from construction sites. Under a new Construction Site Inspection Program, any construction site of more than one acre needs to comply with EPA s construction site NPDES permit requirements. The construction site inspection program will track new and ongoing sites and ensure they are complying with best practices to prevent runoff into the Commission s system and Boston s waterways. Through its Site Plan Requirements, the Commission has been working with developers and home builders to maximize the amount of stormwater that their developments retain on site. Commission Site Plan Requirements specify that sites retain the first inch of rainwater. By applying the Commission s BMP guidelines to encourage the use of GI and low-impact development (LID) techniques such as infiltration basins, new developments or redevelopment sites can capture water on-site and help reduce pollutants from runoff entering into nearby storm drains Boston Water and Sewer Commission

9 Committed to Results 2012 Boston Water and Sewer Commission 7

10 Committed to Results Since its formation in 1977, Boston Water and Sewer Commission has provided water and sewer services that have helped safeguard the quality of Boston s drinking water while improving the health of its ecosystem. In addition to completing many significant projects designed to safeguard the quality of our drinking water, the Commission has implemented a steady, multipronged response to the challenge of improving Boston s waterways. A major component of this effort has been the completion of several large-scale sewer separation projects to address pollution from the city s old combined sewer overflow (CSO) system, which can reach capacity and discharge a contaminated mix of sanitary flow and rain water into local waterways during storm events. The consent decree has accelerated the Commission s efforts to develop and implement solutions to address remaining sources of stormwater pollution. As the City of Boston continues to grow, the goal is not simply to fulfill obligations, but to work to meet these new challenges and achieve the best results. With ongoing research, technical innovation, and a commitment to administrative excellence and improvement in every regard, the Commission will continue to strive to work in the most cost-effective manner and to provide Boston with the highest quality water and sewer services. Thank you, Mayor Menino The Commission is deeply appreciative of all that outgoing Boston Mayor Thomas Menino has done to support the Commission and its mission. Throughout the mayor s historic 20-year tenure, he has inspired us with his vision, leadership, and service to the Commission and the people of Boston Boston Water and Sewer Commission

11 BOSTON WATER AND SEWER COMMISSION Financial Statements, Required Supplementary Information and Other Supplemental Information December 31, 2012 and 2011 (With Independent Auditors' Report Thereon)

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13 Table of Contents December 31, 2012 Page Independent Auditors Report Management s Discussion and Analysis Financial Statements: Statements of Net Position 18 Statements of Revenues, Expenses and Changes in Net Position 19 Statements of Cash Flows 20 Notes to Financial Statements Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards Required Supplementary Information: Schedule of Funding Progress OPEB 46 Supplemental Schedules: Schedule 1 Supplemental Schedule of Revenues and Expenses Rate Basis 47

14 Independent Auditors Report To the Commissioners of Boston Water and Sewer Commission Boston, Massachusetts We have audited the accompanying financial statements of Boston Water and Sewer Commission (the Commission ) as of and for the years ended December 31, 2012 and 2011, and the related notes to the financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express opinions 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 and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making thoses risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit precedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions. Opinions In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the Commission, as of December 31, 2012 and 2011, and the respective changes in net position and, cash flows thereof for the years then ended in accordance with accounting principles generally accepted in the United States of America Boston Water and Sewer Commission

15 Required Supplementary Information The Management s Discussion and Analysis on pages 14 through 17 and the schedule of funding progress on page 46 are not required parts of the financial statements but are supplementary information required by U.S. generally accepted accounting principles. 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. Supplementary Schedules Our audit was conducted for the purpose of forming opinions on the Company s basic financial statements. The supplemental schedules listed in the accompanying table of contents are presented for purposes of additional analysis and are not a required part of the basic financial statements. Such information have not been subjected to the auditing procedures applied in the audits of the basic financial statements, and accordingly, we do not express an opinion or provide any assurance on it. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated April 30, 2013 on our consideration of the Commission s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the Commission s internal control over financial reporting and compliance. Certified Public Accountants Braintree, Massachusetts April 30, Braintree Hill Office.Park Suite 102 Braintree, MA P: F: Church Street Winchester, MA P: F: Member of 2012 Boston Water and Sewer Commission 13

16 Management's Discussion and Analysis Required Supplementary Information December 31, 2012 and 2011 (Unaudited) Overview Upon its creation in 1977, 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 a rate basis surplus from its operation in each year since its inception. In accordance with the Boston Water and Sewer Reorganization Act of 1977 (the Enabling Act), 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 Governmental Accounting Standards Board Statement No. 62 ( GASB 62 ), Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements. GASB 62 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 statements of net position provide information on the assets and liabilities of the Commission, with net position reported as the difference between assets and liabilities. The statements of operations of the Commission reflect all revenues earned and all expenses incurred. Condensed financial information for the most recent fiscal years is presented in this section of the report. Condensed Financial Information (in thousands) Current assets $ 56,979 51,481 49,951 Capital assets, net 1,149,200 1,099,895 1,060,670 Other assets 235, , ,063 Total assets 1,441,243 1,363,045 1,322,684 Current liabilities 58,619 90,165 58,784 Noncurrent liabilities 1,008, , ,661 Total liabilities 1,067,242 1,010, ,445 Net position: Invested in capital assets, net of related debt 729, , ,454 Restricted 95,056 91,300 92,369 Unrestricted net deficit (450,206) (454,992) (399,584) Total net position $ 374, , ,239 During the year, the Commission saw a slight increase in total assets and in total liabilities, resulting in an increase in total net position of $21.7 million, or 6.2%. In 2011, net position totaled $352.3 million, an increase of $4.1 million, or 1.2% from The Commission s 2012 operations resulted in a budgetary surplus of $183,611, compared to $83,871 in 2011 and $57,897 in Since inception, the Commission has invested in various capital assets, including capital improvement projects, machinery and equipment, buildings, and improvements. These investments, net of accumulated depreciation, totaled $1.15 billion at December 2012, which is 4.5% higher than in In 2011, these investments totaled $1.10 billion, an increase of $39.2 million, or 3.7% over the 2010 total investment in capital assets. These increases in capital assets are the result of continuous upgrades of the Commission owned water and sewer infrastructure. Total operating revenues in 2012 were $303.1 million, which is 4.5% greater than in Total operating revenues in 2011 were $289.9 million, which is 1.0% Boston Water and Sewer Commission

17 Management's Discussion and Analysis Required Supplementary Information December 31, 2012 and 2011 (Unaudited) greater than Operating revenues consist of water and sewer revenue, late charge revenue, fire pipe revenue and other income. Water and sewer revenue in 2012, 2011, and 2010 represented 96.8%, 95.1% and 95.9% of total operating revenues, respectively. The increases in 2012 and 2011 operating revenues were primarily driven by a 6.25% and 2.90% average rate increase, respectively. Total operating expenses in 2012 were $265.8 million, which represents an increase of 2.0% from The increase in 2012 operating expenses was primarily due to a combined overspending of 9.6%, or $6.4 million in all three line items (operations, maintenance and Massachusetts Water Resources Authority ( MWRA ) assessment). Total operating expenses in 2011 were $260.7 million, which represents an increase of 1.3% from This increase in 2011 expenses was driven by a combined increase in maintenance and MWRA assessment, offset by an under spending in operations. Operating expenses consist of operations and maintenance, MWRA assessment, depreciation and amortization. The MWRA assessment is the largest expense incurred by the Commission, representing 69.5%, 68.9% and 68.3% in 2012, 2011 and 2010, respectively, of total operating expenses. In 2012 and 2011, over 85% of water provided by the Commission was billable to customers. Since its inception, the Commission has maintained the percentage of billable water at 78% and is continuing to take steps to improve the amount of billable water, including replacement of old and defective meters and implementation of a comprehensive leak detection and repair program. Condensed Financial Information (in thousands) Operating revenues: Water and sewer usage $ 293, , ,094 Other 9,665 14,267 11,801 Operating expenses (265,801) (260,701) (257,358) Excess operating revenues 37,262 29,187 29,537 Investment income 4,011 7,119 9,094 Interest expense (17,677) (17,303) (17,793) Total nonoperating net expense (13,666) (10,184) (8,699) Excess revenues before capital grants, contributions and transfer requirements 23,596 19,003 20,838 Capital grants and contributions 27,683 9,786 14,322 Excess revenues used to fund reserves and other deferrals (29,483) (24,697) (26,479) Change in accumulated revenues used to offset future rates (100) (26) 90 Change in net position 21,696 4,066 8,771 Net position, beginning of year 352, , ,468 Net position, end of year $ 374, , , Boston Water and Sewer Commission 15

18 Management's Discussion and Analysis Required Supplementary Information December 31, 2012 and 2011 (Unaudited) Capital Assets In fiscal year 2012, major Commission project additions totaled $30.0 million, of which $16.0 million was financed with bond proceeds. Major project expenditures (in millions) are as follows: Relay of water mains $ 14.5 Reline of water mains 1.3 Rehabilitation/replacement of sewers or storm drains 6.5 Interceptor improvements 1.5 Separation of combined sewers 5.7 Infiltration and inflow 0.1 Meter replacement 0.4 $ 30.0 The Commission s capital budget includes projected expenditures of $196.4 million for infrastructure and capital projects. The major projects are for the rehabilitation of water mains and the replacement/rehabilitation of the sewer system. Some water projects are financed on a pay-as-you go basis combined with interest free loans 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. Please refer to footnote 3 for more detailed capital asset activity. Debt Plan The Commission is empowered by the Enabling Act to issue bonds and notes payable solely constituted on the general obligation of the Commission. The Commission has no legal restrictions concerning the amount of debt which it may have outstanding, subject to the coverage requirements described below. The Commission issues General Revenue Bonds to finance portions of its capital improvement projects. The Commission s capital budget, which totals $196.4 million, anticipates that projects totaling $121.9 million, or 62.1% of the Commission s capital budget, will be funded from bond proceeds. The 2013 budget for debt service is $46.9 million. Please refer to footnote 4 for more detailed long-term debt information. The Commission currently has seven series of General Revenue Bonds outstanding at the end of 2012, totaling approximately $405.2 million as follows (in millions): 1992 Series A $ Series A Series A Series A Series A Series B Series A Series A $ Debt Service Coverage Requirements The Commission s bond covenants require 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 renewal 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 outstanding as of the first day of such year. The Commission has exceeded the 125% debt service coverage requirement of the Resolution in each year since its inception in 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 Boston Water and Sewer Commission

19 Management's Discussion and Analysis Required Supplementary Information December 31, 2012 and 2011 (Unaudited) 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. Budgets and Rates The Commission is required by law to be selfsustaining to set its rates at a level sufficient to cover expenses and debt service requirements each year. In 2006 the Commission modified its inclining block rate structure. The number of rate blocks was reduced from ten to six, thereby making the structure easier to understand for customers while still promoting water conservation and generating sufficient revenue. In 2012 and 2011, the Commission increased its water and sewer rates by an average of 6.25% and 2.90% respectively. The major reasons behind these increases were: (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. Effective January 1, 2013, the Commission increased its water and sewer rates by average of 3.90%. Credit Ratings The Commission s revenue bonds are rated Aa1 by Moody s Investors Service, AA+ by Standard and Poor s and AA+ by Fitch Ratings. Contacting the Commission s Financial Management This report is designed to provide our bondholders, customers and other interested parties with a general overview of the Commission s finances and to demonstrate the Commission s accountability for the revenue it receives. If you have questions about this report or need additional information, contact Boston Water and Sewer Commission Finance Department in writing at 980 Harrison Avenue, Boston, MA 02119, or by telephone , or on the web at Boston Water and Sewer Commission 17

20 Statements of Net Position December 31, 2012 and 2011 Assets Current assets: Cash and cash equivalents (Note 10) $ 8,935,919 6,486,768 Accounts receivable, net: Customers, less allowances of $2,731,312 in 2012 and 2011 (Note 1) 23,749,182 21,566,847 Unbilled revenues, less allowances of $1,702,361 in 2012 and ,680,848 22,834,439 Prepaid expenses 612, ,195 Total current assets 56,978,929 51,481,249 Noncurrent assets: Restricted cash and investments (Notes 4 and 10) 218,104, ,321,476 Capital assets (Note 3): Depreciable, net 982,732, ,575,536 Nondepreciable 166,467, ,319,380 Bond issuance costs, net 2,246,207 1,802,912 Deferred charges (Note 2) 14,714,470 16,544,465 Total noncurrent assets 1,384,264,635 1,311,563,769 Total assets 1,441,243,564 1,363,045,018 Liabilities Current liabilities: Payable from current assets: Accounts payable 22,197,877 17,287,197 Other accrued liabilities 7,736,814 5,779,593 Commercial paper notes (Note 5) 40,000,000 Current portion of long-term notes (Note 4) 11,204,770 10,468,211 Current portion of revenue bonds (Note 4) 17,480,000 16,630,000 Total current liabilities 58,619,461 90,165,001 Noncurrent liabilities: Long-term debt, net (Note 4) 406,723, ,454,346 Long-term notes payable (Note 4) 38,232,226 32,468,770 Other long-term liabilities (Notes 9 and 13) 26,517,602 25,767,377 Deferred credits and reserves (Note 2) 537,149, ,884,112 Total noncurrent liabilities 1,008,623, ,574,605 Total liabilities 1,067,242,581 1,010,739,606 Commitments and contingencies (Notes 11, 12, and 13) Net Position Net position: Invested in capital assets, net of related debt 729,151, ,997,033 Restricted for debt service 43,969,633 41,540,947 Restricted for capital assets 157, ,327 Restricted for debt covenants 50,927,908 49,641,373 Unrestricted net deficit (450,206,031) (454,992,268) Total net position $ 374,000, ,305,412 See accompanying notes to financial statements Boston Water and Sewer Commission

21 Statements of Revenues, Expenses and Changes in Net Position December 31, 2012 and Operating revenues: Water and sewer usage (Notes 1 and 7) $ 293,398, ,620,813 Fire pipe 4,107,752 3,990,578 Other 5,556,810 10,276,765 Total operating revenues 303,062, ,888,156 Operating expenses: Operations 57,189,385 56,462,155 Maintenance 5,441,001 5,167,230 MWRA assessment (Note 6) 184,878, ,514,194 Depreciation and amortization 18,291,696 19,557,474 Total operating expenses 265,800, ,701,053 Excess operating revenues 37,262,233 29,187,103 Nonoperating revenue (expense): Investment income 4,010,532 7,118,613 Interest expense (17,676,856) (17,303,081) Total nonoperating net expense (13,666,324) (10,184,468) Excess revenues before capital grants and contributions and transfer requirements 23,595,909 19,002,635 Capital grants and contributions: 27,682,938 9,785,856 Excess revenues before transfer requirements 51,278,847 28,788,491 Excess revenues used to fund reserves and other deferrals (Note 2) (29,483,534) (24,696,847) Change in accumulated revenues used to offset future rates (Note 2) (99,742) (25,974) Change in net position 21,695,571 4,065,670 Net position, beginning of year 352,305, ,239,742 Net position, end of year $ 374,000, ,305,412 See accompanying notes to financial statements Boston Water and Sewer Commission 19

22 Statements of Cash Flows December 31, 2012 and Cash flows from operating activities: Receipts from customers $ 300,034, ,843,257 Payments to suppliers (207,022,913) (195,304,902) Payments to employees (38,308,334) (42,388,095) Net cash provided by operating activities 54,702,845 49,150,260 Cash flows from investing activities: Investment income 4,010,532 7,118,613 Sales of investments 218,664, ,338,496 Purchases of investments (227,169,988) (218,664,443) Net cash (used in) provided by investing activities (4,495,013) (2,207,334) Cash flows from capital and related financing activities: Purchase of capital assets (67,523,471) (57,416,183) Proceeds from debt 16,968,226 6,413,230 Proceeds from revenue bonds 71,885,842 Payment of bond principal (27,098,211) (26,301,159) Proceeds from commercial paper 40,000,000 Payment of commercial paper (40,000,000) Capital contributions 27,682,938 9,785,856 Payment of bond interest (18,280,623) (18,258,204) Net cash used in capital and related financing activities (36,365,299) (45,776,460) Net increase 13,842,533 1,166,466 Cash and cash equivalents, beginning of year 58,751,768 57,585,302 Cash and cash equivalents, end of year $ 72,594,301 58,751,768 Reconciliation of operating income to net cash provided by operating activities: Excess operating revenues $ 37,262,233 29,187,103 Adjustment to reconcile operating income to net cash: Depreciation and amortization 18,291,696 19,557,474 Change in assets and liabilities: Accounts receivable, net (2,182,335) (1,407,003) Unbilled revenues (846,409) (1,637,896) Prepaid expenses (19,785) 58,445 Accounts payable (243,185) (1,807,855) Other accrued liabilities 1,690,404 (2,232,600) Other long-term liabilities 750,225 7,432,592 Net cash provided by operating activities $ 54,702,845 49,150,260 Noncash capital and related financing activities: Bond refunding $ 46,250,000 Interest expense $ 17,676,856 17,303,081 Restricted cash and cash equivalents are comprised of the following: Cash and cash equivalents $ 8,935,919 6,486,768 Money market and cash investments in restricted cash and investments 46,558,096 39,180,448 Cash in restricted cash and investments 17,100,286 13,084,552 Total $ 72,594,301 58,751,768 See accompanying notes to financial statements Boston Water and Sewer Commission

23 Notes to Financial Statement December 31, 2012 and 2011 (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 customers are based on the cash requirements to cover the Commission s operations, debt service, and reserve contributions. To comply with the external financial reporting requirements of the Board, the accompanying financial statements are presented on a basis that is consistent with United States of America generally accepted accounting principles (GAAP) for regulated utilities (i.e., the accrual basis of accounting and the capital maintenance measurement focus). To accommodate the rate-making process, the Commission follows the accounting standards set forth in Governmental Accounting Standards Board Statement No. 62 ( GASB 62 ), Codification of Accounting and Financial Reporting Guidance Contained in Pre- November 30, 1989 FASB and AICPA Pronouncements. GASB 62 allows certain board approved (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, 2012 is provided below: Revenues Expenses As presented in the statements of operations Operating revenues/expenses $ 303,062, ,800,605 Investment income/interest expenses 4,010,532 17,676,856 Total 307,073, ,477,461 Reclassifications and deferrals: Contributions to reserves 340,000 GAAP adjustments (8,667,237) (8,667,237) Excess bond payments over depreciation and amortization 9,248,674 Interest expense (escrowed funds) (257,946) Investment income (escrowed funds) 1,135,599 Capital expenditures 16,127,559 Excess revenue used to offset current rates 83,871 Other deferrals (826,521) As presented in the supplemental schedule $ 299,625, ,441, Boston Water and Sewer Commission 21

24 Notes to Financial Statements December 31, 2012 and 2011 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 $183,611 and $83,871 for the years ended December 31, 2012 and 2011, respectively, to offset rates in the respective subsequent years. (a) (b) (c) 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. Some adjustments are made on a post billing basis that reduce the amount of total billings. The total customer bills outstanding as of December 31, 2012 and 2011, respectively, were $26,480,494 and $24,298,159. These net billing amounts are reduced by an allowance for uncollectible accounts of approximately $2.7 million in 2012 and 2011 to arrive at the net accounts receivable. Investments Investments are stated at fair value. Fair value is based on quoted market prices. Capital Assets Capital assets are stated at historical cost. Depreciation is provided on the straightline 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 2012 or 2011 because the amount calculated was not material. (d) (e) (f) Compensated Absences 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 statement of net position dates that would be paid to employees on termination. The liability for each amount is calculated based on the pay or salary rates in effect as of the date of statements of net position. Reclassification Certain amounts in the 2011 financial statements have been reclassified to conform to the 2012 presentation. Business-Type Activity Accounting Business type activity funds distinguish operating revenues and expenses from non-operating 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 non-operating revenues and expenses Boston Water and Sewer Commission

25 Notes to Financial Statement December 31, 2012 and 2011 (g) (h) (i) (j) (k) 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 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. Bond Issue Costs Costs 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. Deferred Inflows and Outflows Deferred inflows and outflows represent the consumption or acquisition of net assets applicable to a future reporting period. These are typically items of an asset or liability nature for which an exchange transaction is not inherent to their realization or liquidation. Use of Estimates The preparation of financial statements in conformity with United States of America 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. (1) Contributions in Aid of Construction (m) Contributions in aid of construction ( CIAC ) are additions and/or upgrades to infrastructure made by customers or developers that have been assigned to the Commission upon completion of the applicable project. The Commission accepts the responsibility for the on-going maintenance of CIAC and includes as property plant and equipment. Historically, CIAC has not been material to the financial statements. New Government Accounting Pronouncements GASB 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements, is required for periods beginning after December 15, The objective of this Statement is to incorporate into the GASB s authoritative literature certain accounting and financial reporting guidance that is included in pronouncements issued on or before November 30, 1989, which does not conflict with or contradict GASB pronouncements. The statement was implemented during 2012 and had no material effect on the financial statements. GASB 63, Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position is required for periods beginning after December 15, Earlier application is encouraged. The requirements of this Statement will improve financial reporting by standardizing the presentation of deferred outflows of resources and deferred inflows of resources and their effects on a 2012 Boston Water and Sewer Commission 23

26 Notes to Financial Statements December 31, 2012 and 2011 government s net position. It alleviates uncertainty about reporting those financial statement elements by providing guidance where none previously existed. The implementation of GASB 63 changed the name of Net Assets to Net Position and created the deferred inflow and deferred outflow categories on the Statement of Net Position. GASB 65, Items Previously Reported as Assets and Liabilities, is required for periods beginning after December 15, Earlier application is encouraged. This Statement establishes accounting and financial reporting standards that reclassify, as deferred outflows of resources or deferred inflows of resources, certain items that were previously reported as assets and liabilities and recognizes, as outflows of resources or inflows of resources, certain items that were previously reported as assets and liabilities. The Commission is determining the effect GASB 65 on their financial statements. GASB 69, Government Combinations and Disposals of Government Operations is required for periods ending after December 15, This Statement establishes accounting and financial reporting standards related to government combinations and disposals of government operations. As used in this Statement, the term government combinations includes a variety of transactions referred to as mergers, acquisitions, and transfers of operations. The Commission does not believe the statement will have a material effect on the financial statements. GASB 70, Accounting and Financial Reporting for Nonexchange Financial Guarantees is required for periods beginning after June 15, This Statement requires a state or local government guarantor that offers a nonexchange financial guarantee to another organization or government to recognize a liability on its financial statements when it is more likely than not that the guarantor will be required to make a payment to the obligation holders under the agreement. The Commission does not believe the statement will have a material effect on the financial statements Boston Water and Sewer Commission

27 Notes to Financial Statement December 31, 2012 and 2011 (2) Deferred Charges and Credits As discussed in Note 1, the application of GASB 62 results in certain revenues and expenses being removed from the statements of operations and reflected in the statements of net position 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 position as deferred credits appear in the line Excess revenues used to fund reserves and other deferrals on the statements of operations. Components of excess revenues use to fund reserves and other deferral for the years ended 2012 and 2011 are as follows: Contributions to reserves $ 340, ,598 Principal payments on long-term debt 26,395,344 25,620,258 Interest paid from escrow funds (257,946) (324,442) Capital expenditures 16,127,559 10,519,915 Depreciation and amortization (12,304,330) (13,837,288) Investment income on project and escrow funds (1,135,599) 1,855,956 Other 318, ,850 $ 29,483,534 24,696,847 The activity in, and components of, deferred charges consists of the following: December 31, Increase December 31, Increase December 31, 2010 (decrease) 2011 (decrease) 2012 Deferred loss on land taking $ 4,200,267 (221,065) 3,979,202 (221,065) 3,758,137 Accrued pension expense 6,024,381 4,807,298 10,831,679 (1,348,231) 9,483,448 Debt extinguishment expense 1,994,283 (260,699) 1,733,584 (260,699) 1,472,885 Total $ 12,218,931 4,325,534 16,544,465 (1,829,995) 14,714,470 Excess revenues have been designated for the purpose of the deferred credits and reserves listed below. The activity in, and the components of, these items is as follows: December 31, Increase December 31, Increase December 31, 2010 (decrease) 2011 (decrease) 2012 Debt service $ 138,821, , ,420, , ,760,210 Capital improvements 343,443,990 24,130, ,574,462 29,175, ,750,217 Working capital 4,134,106 (5,568,537) (1,434,431) (350,000) (1,784,431) Self-insurance 2,240,000 2,240,000 2,240, ,639,708 19,160, ,800,241 29,165, ,965,996 Reduction of future rates 57,897 25,974 83,871 99, ,611 Total $ 488,697,605 19,186, ,884,112 29,265, ,149, Boston Water and Sewer Commission 25

28 Notes to Financial Statements December 31, 2012 and 2011 (3) Capital Assets The cost and activity of water and sewerage capital assets in service and related accumulated depreciation at December 31, 2012 and 2011 is as follows: Balance at Balance at December 31, December 31, 2011 Increases Decreases Reclassification 2012 Capital assets, not being depreciated: Land $ 5,884,243 5,884,243 Construction in progress 122,435,137 66,466,167 (28,318,418) 160,582,886 Total capital assets not being depreciated 128,319,380 66,466,167 (28,318,418) 166,467,129 Capital assets, being depreciated: Buildings and improvements 67,873,512 67,873,512 Machinery and equipment 32,485, ,155 (4,071,758) 1,771,055 31,105,128 Infrastructure 1,143,029, ,149 26,547,363 1,169,713,663 Total capital assets being depreciated 1,243,388,339 1,057,304 (4,071,758) 28,318,418 1,268,692,303 Less: accumulated depreciation for: Buildings and improvements 19,240,297 1,850,393 21,090,690 Machinery and equipment 26,765,292 1,105,885 (4,071,758) 23,799,419 Infrastructure 225,807,214 15,262, ,069,455 Total accumulated depreciation 271,812,803 18,218,519 (4,071,758) 285,959,564 Total capital assets being depreciated, net 971,575,536 (17,161,215) 28,318, ,732,739 Capital assets, net $ 1,099,894,916 49,304,952 1,149,199, Boston Water and Sewer Commission

29 Notes to Financial Statement December 31, 2012 and 2011 December 31, December 31, 2010 Increases Decreases Reclassification 2011 Capital assets, not being depreciated: Land $ 5,884,243 5,884,243 Construction in progress 150,581,941 56,103,981 (84,250,785) 122,435,137 Total capital assets not being depreciated 156,466,184 56,103,981 (84,250,785) 128,319,380 Capital assets, being depreciated: Buildings and improvements 66,770,938 1,102,574 67,873,512 Machinery and equipment 30,930,730 1,067, ,944 32,485,676 Infrastructure 1,060,123, ,200 82,660,267 1,143,029,151 Total capital assets being depreciated 1,157,825,352 1,312,202 84,250,785 1,243,388,339 Less: accumulated depreciation for: Buildings and improvements 17,395,878 1,844,419 19,240,297 Machinery and equipment 25,672,641 1,092,651 26,765,292 Infrastructure 210,552,472 15,254, ,807,214 Total accumulated depreciation 253,620,991 18,191, ,812,803 Total capital assets being depreciated, net 904,204,361 (16,879,610) 84,250, ,575,536 Capital assets, net $ 1,060,670,545 39,224,371 1,099,894,916 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 which is being amortized over 30 years. At December 31, 2012 and 2011, $4,305,936 and $4,559,226 remains unamortized, respectively, and is included in deferred charges and deferred credits as capital improvements in the accompanying statements of net position. Amortization expense for land taking and amortization of bond issuance costs, net of discounts, for the years ended December 31, 2012 and 2011 totaled $73,177 and $1,365,662, respectively Boston Water and Sewer Commission 27

30 Notes to Financial Statements December 31, 2012 and 2011 (4) Long-Term Obligations (a) Revenue Bonds The Commission issues revenue bonds to support various projects. The following is a summary of revenue bond activity for the years ended December 31, 2012 and 2011 (amounts in thousands). Balance at Balance at Amounts December 31, December 31, due within Description 2011 Additions Reductions 2012 one year Revenue bonds: 1992 Series A, bearing an interest rate of 5.75%, issued September 1, 1992, maturing 1993 to 2013 $ 11,440 5,560 5,880 5, Series A, bearing interest rates ranging from 2.2% to 5.25%, issued September 17, 1993, maturing 1993 to ,735 4,200 42,535 4, Series A, bearing a variable interest rate, issued August 20, 1994, maturing 1995 to ,100 1,300 24,800 1, Series A, bearing interest rates ranging from 3.0% to 5.0%, issued August 12, 2004, maturing 2005 to ,255 46,935 1, Series A, bearing interest rates ranging from 3.0% to 5.0%, issued March 26, 2009, maturing 2010 to ,500 1,325 78,175 1, Series B, bearing interest rates ranging from 3.0% to 5.0%, issued March 26, 2009, maturing 2009 to ,600 3,560 53,040 3, Series A, bearing interest rates ranging from 2.5% to 5.0%, issued January 26, 2010, maturing 2010 to ,485 91, Series A, bearing interest rates ranging from 3.0% to 5.0%, issued June 6, 2012, maturing 2015 to , , , ,970 62, ,205 17,480 Less: Unamortized loss on refunding 3,162 4, ,428 Plus: Unamortized issue discount 14,131 15,911 3,615 26,427 Net revenue bonds $ 371, ,309 66, ,204 17,480 Interest rates for the 1994 Series A bonds are calculated daily according to the Municipal Market Data scale Boston Water and Sewer Commission

31 Notes to Financial Statement December 31, 2012 and 2011 Balance at Balance at Amounts December 31, December 31, due within Description 2010 Additions Reductions 2011 one year Revenue bonds: 1992 Series A, bearing an interest rate of 5.75%, issued September 1, 1992, maturing 1993 to 2013 $ 16,695 5,255 11,440 5, Series A, bearing interest rates ranging from 2.2% to 5.25%, issued September 17, 1993, maturing 1993 to ,735 46,735 4, Series A, bearing a variable interest rate, issued August 20, 1994, maturing 1995 to ,400 1,300 26,100 1, Series A, bearing interest rates ranging from 2.4% to 4.0%, issued September 17, 2003, maturing 2004 to ,175 3, Series A, bearing interest rates ranging from 3.0% to 5.0%, issued August 12, 2004, maturing 2005 to ,685 1,430 48, Series A, bearing interest rates ranging from 3.0% to 5.0%, issued March 26, 2009, maturing 2010 to , ,500 1, Series B, bearing interest rates ranging from 3.0% to 5.0%, issued March 26, 2009, maturing 2009 to ,025 3,425 56,600 3, Series A, bearing interest rates ranging from 2.5% to 5.0%, issued January 26, 2010, maturing 2010 to , , ,000 15, ,115 16,630 Less: Unamortized loss on refunding 3, ,162 Plus: Unamortized issue discount 15,839 1,708 14,131 Net revenue bonds $ 387,989 16, ,084 16, Boston Water and Sewer Commission 29

32 Notes to Financial Statements December 31, 2012 and 2011 Debt principal and interest maturities for all future years as of December 31, 2012 are as follows (amounts in thousands): Revenue bonds Principal Interest 2013 $ 17,480 19, ,380 18, ,110 17, ,995 16, ,995 15, ,710 61, ,270 32, ,610 10, ,655 2,463 $ 405, ,102 The Commission is required to maintain a Senior Debt Service Reserve Fund to be maintained in an amount at least equal to the sum of the maximum amount of principal or sinking fund payments and interest to become due in the current or immediately succeeding year on the outstanding senior bonds issued as fixed rate bonds, net of any accrued interest from the sale of any such bonds. As of December 31, 2012, approximately $37.8 million has been deposited into the Senior Debt Service Reserve Account. This account is included with restricted cash and investments on the Statements of Net Position. During 2012, the Commission completed the issuance of $107,970,000 General Revenue and Refunding Bonds, 2012 Series A (the Bonds ), for the purposes (b) of refunding $46,250,000 of the remaining $48,255,000 outstanding of the 2004 Series A bonds (the defeased bonds ), refunding and permanently financing $40 million of outstanding commercial paper, funding $30 million of new capital improvements and paying the costs of issuance associated with the Bonds. The liability for the defeased bonds is not included in the Commission s financial statements. The Bonds have principal payable annually beginning November 1, 2015, through and including November 1, 2034 and the refunding portion of the Bonds used for the defeasance (the Refunding Bonds ) have interest rates between 3 to 5 percent and mature serially from 2015 through 2025 as opposed to the defeased bonds interest rates ranging from 4 to 5 percent. The advance refunding resulted in an economic gain (the premium paid at delivery and the difference between the present value of the old and new debt service payments) of approximately $5.7 million and a budgetary gain (the difference between the old and new debt service payments) of approximately $8 million. Prior Year Debt Refunding (Defeasements) In the aggregate, $226,245,000 remains outstanding at December 31, 2012, on the bond issues that were defeased in-substance during prior years Boston Water and Sewer Commission

33 Notes to Financial Statement December 31, 2012 and 2011 (c) Restricted 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, 2012 and 2011 are as follows: Trusteed: U.S. government obligations $ 27,435,855 29,022,040 U.S. government agency obligations 76,580,108 77,395,559 Money market 46,558,096 39,180,448 Repurchase agreements 8,416,250 11,746, ,990, ,344,297 Nontrusteed: U.S. government obligations 101,313 U.S. government agency obligations 1,506,450 1,541,250 Cash 17,100,286 13,084,552 Money market 6,197,757 6,131,871 Open-ended mutual funds 34,207,975 15,219,506 59,113,781 35,977,179 Restricted cash and investments 218,104, ,321,476 Less trusteed and nontrusteed cash (17,100,286) (13,084,552) Trusteed and nontrusteed investments $ 201,003, ,236,924 (d) Long-Term Notes Payable The Commission has entered into various interest-free loan agreements with Massachusetts Water Resource Authority (the MWRA ). Under these agreements, the Commission is required to repay these loans in annual installments as part of the MWRA s Infiltration/Inflow Local Financial Assistance Program (I/I), Local Water Infrastructure Rehabilitation Program (WIR), Pipeline Assistance Program (PAP) and System Assistance Program (SAP). These programs are designed to assist service area communities with sewer system rehabilitation. During 1996 and 1997, the Commission executed loan agreements with the Massachusetts Water Pollution Abatement Trust (MWPAT) to finance and refinance a portion of the Commission s water pollution abatement projects. As of December 31, 2012, the Commission anticipates that approximately $2.4 million of future MWPAT payments will be recognized as capital grants Boston Water and Sewer Commission 31

34 Notes to Financial Statements December 31, 2012 and 2011 The following is a summary of long-term note activities with MWRA and MWPAT for the years ended December 31, 2012 and Balance at Balance at Amounts December 31, December 31, due within Description 2011 Additions Reductions 2012 one year MWRA I/I Program Phase IV, interest free, due February 15, 2012 $ 607, ,163 MWRA I/I Program Phase V, interest free, due August 15, ,246, , , ,480 MWRA I/I Program Phase VI, interest free, due May 15, ,334,154 2,301,694 1,124,838 5,511,010 1,585,186 MWRA I/I Program Phase VII, interest free, due November 15, ,232,600 6,232,600 1,246,520 MWRA I/I Program Phase VIII, interest free, due November 15, ,500,022 3,500, ,004 MWRA S.A.P. Program, interest free, due November 15, ,014,130 4,933, ,413 8,546, ,804 MWRA P.A.P. Program, interest free, due August 15, ,193,042 5,358,015 18,835,027 4,309,993 MWPAT Pool I, subsidized interest, due August 1, ,626, , , ,993 MWPAT Pool II, subsidized interest, due August 1, ,528, ,654 1,948, ,751 MWPAT Pool III, subsidized interest, due February 1, ,386, ,463 3,707, ,039 Total long-term notes $ 42,936,981 16,968,226 10,468,211 49,436,996 11,204,770 Balance at Balance at Amounts December 31, December 31, due within Description 2010 Additions Reductions 2011 one year MWRA I/I Program Phase IV, interest free, due February 15, 2012 $ 1,577, , , ,161 MWRA I/I Program Phase V, interest free, due August 15, ,166, ,150 1,246, ,150 MWRA I/I Program Phase VI, interest free, due May 15, ,580,072 2,399, ,018 4,334,154 1,124,838 MWRA S.A.P. Program, interest free, due November 15, ,014,130 4,014, ,413 MWRA P.A.P. Program, interest free, due August 15, ,102,540 5,909,498 24,193,042 5,358,018 MWPAT Pool I, subsidized interest, due August 1, ,390, ,428 1,626, ,514 MWPAT Pool II, subsidized interest, due August 1, ,078, ,342 2,528, ,654 MWPAT Pool III, subsidized interest, due February 1, ,043, ,110 4,386, ,463 Total long-term notes $ 46,939,910 6,413,230 10,416,159 42,936,981 10,468, Boston Water and Sewer Commission

35 Notes to Financial Statement December 31, 2012 and 2011 Debt principal for all future years as of December 31, 2012 are as follows (amounts in thousands): (5) Short -Term Obligations 2013 $ 11, , , , , ,513 $ 49,437 The Commission issues commercial paper for the purpose of financing capital expenditures. The following represents the Commissions commercial paper outstanding as of December 31, 2012 and Balance at Balance at December 31, December 31, Description 2011 Additions Reductions 2012 Commercial paper notes, Bank of America program due November 18, 2011 through June 11, 2012 $ 10,000,000 10,000,000 Bank of America program due February 14, 2012 through June 11, ,000,000 30,000,000 Total long-term notes $ 40,000,000 40,000,000 Balance at Balance at December 31, December 31, Description 2010 Additions Reductions 2011 Commercial paper notes, Bank of America program due August 9, 2010 through April 4, 2011 $ 10,000,000 10,000,000 Bank of America program due November 18, 2011 through June 11, ,000,000 10,000,000 Bank of America program due February 14, 2012 through June 11, ,000,000 30,000,000 Total long-term notes $ 10,000,000 40,000,000 10,000,000 40,000, Boston Water and Sewer Commission 33

36 Notes to Financial Statements December 31, 2012 and 2011 (6) Massachusetts Water Resources Authority The Commission obtains water supply and sewer treatment services from MWRA and is assessed a portion of the MWRA s 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 MWRA in ten equal installments excluding the months of January and July. Amounts included in the statements of operations for assessments by MWRA are as follows: Assessments based on: Water usage $ 69,114,613 66,979,588 Wastewater usage 115,763, ,534,606 Total $ 184,878, ,514,194 (7) Transactions with the City of Boston Departments of the City of Boston were billed approximately $6,100,000 and $5,300,000 during 2012 and 2011, respectively, based on actual consumption. The City provides services to the Commission, including paving and facilities rental. Operating costs billed to the Commission by the City were approximately $438,000 and $370,000 during 2012 and 2011, respectively. Capital costs billed by the City were approximately $2,200,000 and $2,000,000 during 2012 and 2011, respectively. Through 1996, in exchange for an administrative fee, the City provided collection services to the Commission by allowing water and sewer bills outstanding for more than two years to be added as liens on property tax bills. Uncollected amounts under this agreement as of December 31, 2012 and 2011 are approximately $65,000 and $71,000 respectively (8) Pension Benefits The Commission provides retirement benefits to all eligible employees. The Commission paid SBRS $19.1 million in 1986 in exchange for a release of all post and future obligations relating to retirement benefits for all Commission employees receiving retirement benefits at that time. The payment was funded primarily through 1985 and 1986 bond proceeds and is recorded as a deferred charge that will be recovered through future rates. As part of the settlement with the SBRS, the Commission annually reimburses the City for the Commission s share of pension benefits paid to Commission employees. The Commission s share is based upon the proportion of each employee s total years of creditable service, level of compensation, and group classification. Employees become 100% vested after ten years of creditable service as defined by Chapter 32 of the Massachusetts General Laws (MGL). (a) Description of the State-Boston Retirement System Plan The State-Boston Retirement System ( SBRS ) is a cost-sharing multiemployer public employee retirement system established under Chapter 32 of the MGL and is a member of the Massachusetts Contributory Retirement System (the System ). The System provides retirement, disability, and death benefits to plan members and beneficiaries. Chapter 32 of the MGL assigns authority to establish and amend benefit provisions of the plan. The System issues a publicly available financial report which can be obtained through the Commonwealth of Massachusetts, Public Employee Retirement Administration Commission (PERAC), 5 Middlesex Avenue, Suite 304, Somerville, Massachusetts Boston Water and Sewer Commission

37 Notes to Financial Statement December 31, 2012 and 2011 (b) Funding Policy (c) The Commission s Trust Fund 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. 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, 2012, 2011 and 2010 were $1,674,197, $1,660,728 and $1,589,170, respectively, which equaled its required contribution each year. Total employee contributions, based on actuarially determined amounts, were $2,249,772, $2,498,326 and $2,509,712, or 9.19% of covered payroll in 2012, 2011 and 2010, respectively. On a quarterly basis, the Commission deposits an amount into a Trust Fund, the assets of which are used to reimburse the City for amounts paid on behalf of the Commission for both pension and other post-employment benefits. 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, 2012 and 2011 are as follows: Assets (at fair value): Common stock $ 23,394,239 23,801,505 International stock 9,119,802 8,259,966 Fixed income 14,610,118 14,241,422 Equity funds 13,905,779 13,641,587 Fixed income funds 13,010,676 11,497,323 Private hedge funds 8,157,611 7,556,624 Total $ 82,198,225 78,998,427 The Trust Fund activity is as follows: Assets (at fair value), December 31, 2010 $ 85,499,196 Employer contributions 3,472,824 Investment income and gains (2,963,900) Management fees (349,272) Payments to SBRS (6,660,421) Assets (at fair value), December 31, ,998,427 Employer contributions 3,555,039 Investment income and gains 10,169,150 Management fees (478,287) Payments to SBRS (10,046,104) Assets (at fair value), December 31, 2012 $ 82,198, Boston Water and Sewer Commission 35

38 Notes to Financial Statements December 31, 2012 and 2011 The investment portfolio is regulated by the MGL, Chapter 32, Section 23. The investments are reviewed by independent investment advisors. Bank of America 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) Post-Employment Benefits other than Pensions GASB Statement No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions, requires governments to account for other postemployment benefits, primarily healthcare, on an accrual basis rather than on a pay-as-you go basis. The effect is the recognition of an actuarially required contribution as an expense when a future retiree earns their postemployment benefits rather than when they use their post-employment benefits. To the extent that an entity does not fund their actuarially required contribution, a post-employment benefit liability is recognized over time. In addition to offering pension benefits to their retirees, the Commission also offers Other Post- Employment Benefits (OPEB) upon retirement. The Commission participates in the City of Boston s health insurance program, which is administered by the City of Boston as an agent multiple-employer defined benefit OPEB plan. The OPEB plan does not issue a stand-alone financial report. Participation in the City s plan was made via an agreement between the City and the Commission and may be amended with the agreement of both parties. Medical and prescription drug benefits are provided to all eligible retirees not enrolled in Medicare through a variety of plans offered by Blue Cross Blue Shield of Massachusetts, Harvard Pilgrim HealthCare, and Neighborhood Health Plan. Medical and prescription drug benefits are provided to retirees enrolled in Medicare through supplemental and Medicare Advantage plans offered by Blue Cross Blue Shield of Massachusetts and Harvard Pilgrim HealthCare. The Commission also pays 50% of the retiree life insurance premium and reimburses retirees 50% of their Medicare Part B premium. Employees with at least 10 years of creditable service are eligible at age 55 or any age with 20 years of creditable service. Retirees on accidental disability retirement are eligible at any age while ordinary disability retirement requires 10 years of creditable service. The surviving spouse is eligible to receive both preand post-retirement death benefits for life, as well as medical and prescription drug coverage. (a) (b) Funding Policy The Commission funds the plan on a payas-you-go basis and shares the cost of health insurance with plan members. As of June 30, 2011, the valuation date, the plan members contribute 10% to 26.25% of the monthly premium cost, depending on the plan in which they are enrolled. Annual OPEB Cost and Change in Estimate of Net OPEB Obligation The Commission s annual OPEB expense is calculated based on the annual required contribution of the employer (ARC), an amount actuarially determined in accordance with the parameters of GASB Statement No. 45. The ARC represents a level of funding that, if paid on an ongoing basis, is projected to cover the normal cost each year and amortize any unfunded actuarial liability over a period of thirty years. The Commission, City of Boston and the State Boston Retirement Board have agreed to a Memorandum of Understanding (the Memoran-dum ), which limits the Commission s OPEB obligations for its retirees to costs incurred from January 1, 2008 forward by the payment of certain amounts during the two years ended December 31, The Commission remains liable for all OPEB obligations related to its current employees. All obligations prior to January 1, 2008 related to the Commission s retirees have been deemed satisfied Boston Water and Sewer Commission

39 Notes to Financial Statement December 31, 2012 and 2011 The following table shows the components of the Commission s annual OPEB cost for the year ending December 31, 2012, the amount actually contributed to the plan, and the change in the Commission s net OPEB obligation based on an actuarial valuation as of June 30, 2011: Annual Required Contribution (ARC) $ 5,452,743 Interest on net OPEB obligation 892,840 Annual OPEB cost 6,345,583 Contributions made 3,191,422 Change in net OPEB obligation 3,154,161 Net OPEB obligation beginning of year 19,840,893 Net OPEB obligation end of year $ 22,995,054 The Commission s annual OPEB cost, the percentage of annual OPEB cost contributed to the plan, and the net OPEB obligation were as follows: Percentage Fiscal Year Annual of OPEB Cost Net OPEB Ended OPEB Cost Contributed Obligation 2012 $ 6,345, % $ 22,995, $ 5,973, % $ 19,840, $ 6,000,606 % $ 12,448,629 (c) Funded Status and Funding Progress The funded status of the plan as of December 31, 2012, based on an actuarial valuation as of June 30, 2011, is as follows: Actuarially Accrued Liability (AAL) $ 88,038,901 Actuarial value of plan assets Unfunded Actuarial Accrued Liability (UAAL) $ 88,038,901 Funded ratio (actuarial value of plan assets/aal) 0.0% Covered payroll (active plan members) $ 24,624,736 UAAL as a percentage of covered payroll 357.5% Actuarial valuations of an ongoing plan involve estimates of the value of reported amounts and assumptions about the probability of occurrence of events far into the future. Examples include assumptions about future employment, mortality, and the healthcare cost trend. Amounts determined regarding the funded status of the plan and the annual required contributions of the Commission are subject to continual revision as actual results are compared with past expectations and new estimates are made about the future. The schedule of funding progress, presented as required supplementary information following the notes to the financial statements, presents multi-year trend information that shows whether the actuarial value of plan assets is increasing or decreasing over time relative to the actuarial accrued liabilities for benefits Boston Water and Sewer Commission 37

40 Notes to Financial Statements December 31, 2012 and 2011 (d) Actuarial Methods and Assumptions Projections of benefits for financial reporting purposes are based on the substantive plan (the plan as understood by the Commission and plan members) and include the types of benefits provided at the time of each valuation and the historical pattern of sharing of benefit costs between the Commission and plan members to that point. The actuarial methods and assumptions used include techniques that are designed to reduce short-term volatility in actuarial accrued liabilities and the actuarial value of assets, consistent with the long-term perspective of the calculations. In the June 30, 2011 actuarial valuation, the projected unit credit cost method was used. The actuarial assumptions included a 4.5% investment rate of return, an inflation rate of 4.5%, and an annual health care cost trend rate of 8.5% initially, reduced by decrements to an ultimate rate of 5% after 5 to 7 years. The health care cost trend rate differs between the master medical, master medical prescription drug, and other healthcare plans. The actuarial value of assets was determined using the market value of investments. The Commission s unfunded actuarial accrued liability is amortized as a level percentage of pay on a closed basis. The remaining amortization period at January 1, 2011 was thirty years. (10) Deposit and Investment Risks The following represents the Commission s essential risk information about deposits and investments for the years ended December 31, 2012 and (a) Custodial Credit Risk Custodial credit risk is the risk that in the event of bank failure, the Commission s deposits may not be returned. The Commission carries deposits that are fully insured by FDIC insurance or (b) collateralized with securities held by the Commission or the Commission s agent in the Commission s name. The Commission also carries deposits that are not collateralized and are uninsured. The Commission does not have a formal policy for managing custodial credit risk of deposits. As of December 31, 2012 and 2011, the bank balances of uninsured and uncollateralized deposits totaled approximately $52,755,853 and $45,312,319, respectively. All of the Commission s investments are held by a third-party in the name of the Commission. Investment Policy Investment of Commission funds is governed by Federal and state laws and is restricted to permitted investments as defined by the Commission s General Revenue Bond Resolution and Supplemental Resolutions. Revenues generated from the investment of Commission funds reduce the amount the Commission must charge to its customers, while any investment losses would negatively affect the Commission s general rates and charges. Consequently, the Commission shall at all times maintain a fully invested, diversified portfolio with the objective of achieving the highest yield that is attainable in conjunction with a very low risk of loss of capital. The basic criteria that will be used in making investment decisions include the evaluation of risk/reward tradeoffs, historical price spreads between different securities, the slope of the yield curve and the anticipated cash flows of the different investment accounts of the Commission. Current permitted Investments under the General Revenue Bond Resolution include: 1. Any bond or other obligation to which principal and interest are Boston Water and Sewer Commission

41 Notes to Financial Statement December 31, 2012 and 2011 unconditionally guaranteed by the United States of America. 2. Any bond or other obligation of any state, agency or local government unit of any state which are: A. Noncallable. B. Fully collateralized by fund consisting of cash, bonds or obligations of one of the above. 3. Public Housing bonds secured by the United States of America, certain notes issued by public agencies or municipalities fully secured by the United States of America or obligations issued by State or public agencies or municipalities carrying the highest bond rating. 4. Obligations of any state to which the full faith and credit of the state is pledged and are within the two highest bond ratings. 5. Prime Commercial Paper rated A 1 or P Shares of a money market fund which is open ended and rated A or better or a money market fund of banks meeting certain criteria. 7. Certificates of Deposits issued by FDIC banks which are fully secured by obligations described in 1 or 2 above. 8. Repurchase Agreements fully collateralized by obligations described in 1 or 2 above. 9. Futures contracts traded on an exchange for investments described in 1, 2, 3, and 4 above. A single investment in commercial securities cannot be more than $15 million and can only be purchased once. Further, all investments of the Commission are held in the Commission s name by a third-party. (c) Interest Rate Risk The following is a listing of the Commission s fixed income investments and related maturity schedule (in years) as of December 31, 2012 and 2011: 2012 Less More Investment type Fair value than than 10 U.S. government obligations $ 27,537,168 19,498,195 8,038,973 U.S. government agencies 78,086,559 7,632,404 17,476,683 52,977,472 Guaranteed investment contract 8,416,250 8,416,250 Money market 52,755,852 52,755,852 Open ended mutual funds 34,207,975 34,207,975 $ 201,003, ,462,022 15,671,377 17,476,683 61,393, Boston Water and Sewer Commission 39

42 Notes to Financial Statements December 31, 2012 and Less More Investment type Fair value than than 10 U.S. government obligations $ 29,022,040 24,719,060 4,302,980 U.S. government agencies 78,936,809 8,475,928 4,512,425 65,948,456 Guaranteed investment contract 11,746,250 11,746,250 Money market 45,312,319 45,312,319 Open ended mutual funds 15,219,506 15,219,506 $ 180,236,924 85,250,885 12,778,908 4,512,425 77,694,706 The Commission s guidelines do not specifically address limits on maturities as a means of managing its exposure to fair value losses arising from increasing interest rates. (d) Credit Risk The Commission follows its investment policy listed above in regards to the credit worthiness of its investments. The Commission s fixed income investments as of December 31, 2012 and 2011 were rated by Standard and Poor s and/or an equivalent national rating organization and the ratings are presented below using the Standard and Poor s rating scale: 2012 Investment type Fair value AAA AA Not rated U.S. government obligations $ 27,537,168 27,537,168 U.S. government agencies 78,086,558 56,026,665 22,059,893 Guaranteed investment contract 8,416,250 8,416,250 Money market 52,755, ,811 52,409,042 Open ended mutual funds 34,207,975 34,207,975 $ 201,003, ,118,619 52,409,042 30,476, Investment type Fair value AAA AA Not rated U.S. government obligations $ 29,022,040 29,022,040 U.S. government agencies 78,936,810 61,860,217 17,076,593 Guaranteed investment contract 11,746,250 11,746,250 Money market 45,312, ,767 44,965,551 Open ended mutual funds 15,219,506 15,219,506 $ 180,236, ,448,530 44,965,551 28,822,843 (e) As of December 31, 2012 and 2011, the Commission had $22,059,893 and $17,076,593, respectively, of unrated investments that are explicitly guaranteed by the U.S. government. Concentration Risk The Commission s investment policy does not offer specific limitations in regards to the concentration of risk, except that a single investment in commercial securities cannot be more that $15 million. The Commission has (11) Commitments individual investments that at fair value exceed 5% of the total investments balance at December 31, 2012 and Individually these investments in money market funds range between $11 million and $22 million. In the aggregate they approximate $78 million and $52 million, respectively. The Commission has committed to capital improvement projects of approximately $158 million, which are primarily related to enhance Boston Water and Sewer Commission

43 Notes to Financial Statement December 31, 2012 and 2011 the operation of the water and sewer system, including reducing pollution to Boston Harbor and neighboring waterways. Of this amount, approximately $130 million represents extension and improvement projects and $28 million represents renewal and replacement projects. The extension and improvement projects will be 31% funded by Federal, State and Massachusetts Water Resources Authority grants and loans. The remaining amounts will be funded from the Commission s operating revenues and borrowings, as needed. (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 selfinsured retention limit is $750,000 per claim and is supplemented with $25 million in excess coverage purchased through an outside carrier. For general liability, the Commission s selfinsured limits are $1 million per occurrence, $2.5 million aggregate, and is supplemented by $10 million of excess coverage purchased through an outside carrier. Under the sections of the Model Water and Sewer Act, the Commission s maximum tort liability is $100,000 per claimant. The Commission maintains other insurance coverage as follows: Policy type Vehicles Property Public officials Fiduciary Crime Coverage Combined single limit of $1 million/accident, Aggregate limit of $151.6 million on Harrison Ave with other sublimits at other BWSC facilities. Coverage of $5 million; $100,000 self-insurance retention $5 million coverage; with $10,000 deductible per claim. Employee dishonesty coverage of $5 million 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 and attorney s and independent insurance reserve appraiser s estimates of pending matters and lawsuits in which the Commission is involved. Changes for the years ended December 31, 2012 and 2011 are as follows: Beginning balance of reserves $ 5,926,484 5,886,156 Payment of claims attributable to events of both current and prior years: Workers compensation General liability (2,495,392) (121,697) Incurred claims 91, ,025 Ending balance of reserves $ 3,522,548 5,926,484 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 Boston Water and Sewer Commission 41

44 Notes to Financial Statements December 31, 2012 and 2011 Other long-term liabilities are comprised of the following: OPEB liability $ 22,995,054 19,840,893 Reserve for self-insured claims 3,522,548 5,926,484 Total $ 26,517,602 25,767,377 (13) Contingencies (a) (b) (c) Legal 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 for reimbursement to the grantor agency for expenditures disallowed under terms of the grant. The Commission believes such disallowances, if any, will not be significant. Pollution Remediation Obligations GASB Statement No. 49, Accounting and Financial Reporting by Employers for Pollution Remediation Obligations, requires governments to reasonably determine potential polluted sites and provide guidance to recognize Pollution Remediation Obligations ( PRO ) components as liability. The Commission evaluated their pollution remediation events and determined that the PRO liability as of December 31, 2012 and 2011, as well as, the PRO payments made during 2012 and 2011 were not material to the Commission s Financial Statements. Boston Harbor The Commission is a party to litigation regarding the clean-up of Boston Harbor. Management believes that (d) the Commission s extensive capital improvement program (See Note 12) addresses probable actions that the Commission may be required to undertake in connection with this litigation. As of December 31, 2012, the overall cleanup costs to control future pollution of the Boston Harbor and its environment are estimated to be approximately $861 million of which MWRA has currently expended approximately $774 million. The Commission is likely to bear either directly, or through future assessments from the MWRA, a substantial portion of the financial costs involved. However, the extent of the Commission s liability for these costs cannot be determined. To the extent Boston Harbor litigation concerns an ongoing capital improvement program which results in a prevention control measure, the Commission is not required to report the litigation matter as an obligating event pursuant to GASB 49. Environmental Protection Agency During 2012, the Commission entered into a consent decree with the Conservation Law Foundation, Inc. ( CLF ) and the United States Environmental Protection Agency in settlement of a suit originally brought by the CLF alleging violations of the Commission s National Pollution Discharge Elimination System Permit. The consent decree required the Commission to pay approximately $374,000 of penalties and reimbursed legal fees and established specific compliance goals the Commission must meet. Failure to meet each of these goals will subject the Commission to penalties calculated on a daily basis until the goal Boston Water and Sewer Commission

45 Notes to Financial Statement December 31, 2012 and 2011 is achieved. The decree also calls for other payments if the Commission does not meet specific expenditure levels. In accordance with GASB 49 the achievement of these goals is considered to be a part of the Commission s ongoing operations and is not accrued as a PRO. (14) Subsequent Event Management has evaluated subsequent events through April 30, 2013, the date for which the financial statements were available for issuance Boston Water and Sewer Commission 43

46 INDEPENDENT AUDITORS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS To the Commissioners of Boston Water and Sewer Commission Boston, Massachusetts We have audited, in accordance with the auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States, the financial statements of Boston Water and Sewer Commission (the Commission ) as of and for the year ended December 31, 2012, and the related notes to the financial statements, which collectively comprise Commission s basic financial statements, and have issued our report thereon dated April 30, Internal Control Over Financial Reporting In planning and performing our audit of the financial statements, we considered the Commission s internal control over financial reporting (internal control) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinions on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the Commission s internal control. Accordingly, we do not express an opinion on the effectiveness of the Commission s internal control. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity s financial statements will not be prevented, or detected and corrected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. Our consideration of internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or, significant deficiencies. Given these limitations, during our audit we did not identify any deficiencies in internal control that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. Compliance and Other Matters As part of obtaining reasonable assurance about whether the Commission s financial statements are free of material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards Boston Water and Sewer Commission

47 Purpose of this Report The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the results from that testing, and not to provide an opinion on the effectiveness of the entity s internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the entity s internal control and compliance. Accordingly, this communication is not suitable for any other purpose. Certified Public Accountants Braintree, Massachusetts April 30, 2013 Member of 2012 Boston Water and Sewer Commission 45

48 BOSTON WATER AND SEWER COMMISSION Required Supplementary Information December 31, 2012 (Unaudited) Schedule of Funding Progress OPEB Actuarial Actuarial Funded Actuarial value of accrued Unfunded ratio Covered valuation date assets (a) liability (b) (b-a) (a/b) payroll (c) ((b-a)/c) 6/30/2007 $ 91,467,537 91,467, % $ 23,691, % 6/30/2009 $ 97,279,704 97,279, % $ 24,805, % 7/1/2011 $ 88,038,901 88,038, % $ 24,624, % See accompanying independent auditors report Boston Water and Sewer Commission

49 Supplemental Schedules of Revenues and Expenses - Rate Basis Years ended December 31, 2012 and Revenues: Water revenue $ 130,192, ,406,596 Sewer revenue 163,206, ,214,217 Subtotal 293,398, ,620,813 Less: Adjustments 7,666,138 6,669,240 Discounts 915, ,903 Bad debt 85,777 72,431 Subtotal 8,667,237 7,632,574 Net billed charges 284,731, ,988,239 Prior year surplus 83,871 57,897 Miscellaneous revenues: Late charge revenue 1,272,253 1,228,499 Investment income 3,873,877 4,034,159 Fire pipe revenue 4,107,752 3,990,578 Other income 5,556,810 10,276,765 Total revenues 299,625, ,576,137 Direct operating expenses: Salaries and wages 32,324,690 31,900,473 Overtime wages 710, ,763 Fringe benefits 7,260,028 7,761,174 Supplies and materials 2,413,099 2,423,659 Repairs and maintenance 5,441,001 5,167,230 Utilities 974,913 1,189,571 Professional services 2,769,362 2,661,520 Space and equipment rentals 37,985 48,066 Other services 1,233,922 1,142,055 Insurance 756, ,796 Travel and training 18,622 19,065 Damage claims 113, ,279 Inventory 22,235 19,935 Capital outlay 70,624 94,158 Total direct operating expenses 54,147,387 54,148,744 Nonoperating expenses: MWRA assessment 184,878, ,514,194 Capital improvements 16,056,935 10,425,758 Principal payments 26,395,344 25,620,258 Interest expense 17,418,910 16,978,639 Deposits to reserve funds 340, ,598 SDWA assessment 204, ,075 Total nonoperating expenses 245,294, ,343,522 Total current expenses 299,441, ,492,266 Current year rate surplus $ 183,611 83,871 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 Note 1 in the notes to the basic financial statements for the differences between this supplemental schedule and GAAP. See accompanying independent auditors report Boston Water and Sewer Commission 47

50

51 Boston Harbor from Piers Park, East Boston