bases. Measurement of the deferred tax assets and liabilities is at enacted tax rates expected to apply to tax- able income in the years in which those temporar differences are expected to be recovered or settled.The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes  the enactment date. It is anticipated that future rate action by the Commissions will reflect revenue requirements for the tax effects of temporary differences r ecognized, which have previously been flowed through to cus- tomers.The Commissions have granted the Compan y customer rate increases to reflect the normalization  of the tax benefits of the federal accelerated methods and available Investment Tax Credits (ITC) for all assets placed in service after 1980. ITC are deferred and amortized over the lives of the related properties for book purposes. Advances for Construction and Contrib utions in Aid of Construction received from developers subsequent to 1986 were taxable for federal income tax purposes and subsequent to 1991 were subject to California income tax. In 1996 the federal tax law, and in 1997 the California tax law, changed and only deposits for new services were taxable. In late 2000, federal regulations were further modified to exclude  fire services from tax. Earnings Per Share Basic earnings per share (EPS) is calculated by dividing income available to common stockholders (net income less preferred stock dividend of $153,000) by the weighted average shares outstanding during the year. Diluted EPS is calculated by dividing income available to common stock- holders by the weighted average shares outstanding including potentially dilutive shares as determined by application of the treasury stock method.The differ ence between basic and diluted weighted average number of common stock outstanding is the effect of dilutiv e common stock options outstanding. Stock-based Compensation The Company has a stockholder-approved Long-Term Incentive Plan that allows granting of nonqualified stock options. The Company has adopted the disclosure require- ments of Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation,” and as permitted by the statement, applies Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” for its plan. All of the Company’s outstanding options have  an exercise price equal to the market price on the da te they were granted. No compensation expense was recorded for the years ended December 31, 2002, 2001 or 2000. The table below illustrates the effect on net income and earnings per share as if the Company had applied the fair value recognition provisions of F ASB Statement No. 123, “Accounting for Stock-Based Compensation,” to stock-based employee compensa tion. In thousands, except per share amounts 2002 2001 2000 Net income, as reported $19,073 $14,965 $19,963 Deduct:Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects 86 57 24 Pro forma net income $18,987 $14,908 $19,939 Earnings per share: Basic – as reported $ 1.25 $ 0.98 $ 1.31 Basic – pro forma $ 1.25 $ 0.98 $ 1.31 Diluted – as reported $ 1.25 $ 0.97 $ 1.31 Diluted – pro forma $ 1.24 $ 0.97 $ 1.30 43 Recent Accounting Pronouncements In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 143, “Accounting for Asset Retirement Obligations,” which applies to legal obliga- tions associated with the retirement of long-lived assets and the associated asset retirement costs.The Statement is effective for the Company in the first quar ter of 2003. The Company does not expect the adop- tion of SFAS No. 143 to have a significant impact on its financial position or results of operations. In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities and supersedes Emerging Issues T ask Force (EITF) Issue No. 94-3, “Liability Recognition CALIFORNIA WA TER SERVICE GROUP