Terrorism Risk. Since the September 11, 2001, terrorist attacks, to safeguard its water supply and facilities, the Company has heightened security at its facilities and taken added precautions for the safety of our employees and the water we deliver to our customers.While the Company does not make public com- ments on its security programs, it has been in contact with federal, state and local law enforcement agencies to coordinate and improve water delivery systems’ security.The Company has also assigned a high priority to completing work necessary to comply with new EPA requirements concerning security of water facilities. This effort encompasses all of the Company’s operations. Interest Rate Risk. The Company does have exposure to market risk that includes changes  in interest rates. Interest rate risk exists because the Company’s financing includes the use of long-term debt obligations with maturity dates up to 30 years from the date of issue. If interest rates increase, the Company’s future long-term financing may be done at higher rates, resulting in a need to recover higher cost in cus- tomers’ future rates. Cal Water’s long-term obligations are first mortgage bonds and senior note obligations that are generally placed with insurance companies at fixed interest rates.Washington Water’s long-term obli- gations are for periods of up to 10 years and are placed with two banks. New Mexico Water’s long-term debt obligations are with a bank with maturities of 16 months. During 2002, the Company issued four series of $20 million senior notes with interest rates ranging from 5.29% to 7.11%.The range of interest rates is an example of changing market conditions.To expand access to capital debt markets, the Company will investi- gate the use of private and public markets for future debt issues. It may also consider financing on a parent company basis, rather than on a subsidiary-by-subsidiary basis. The Company’s short-term financing is provided by bank lines of credit that are discussed under the “Liquidity and Capital Resources” section of this report. Short-term borrowings that are not repaid from operating cash or funded by retained earnings are generally converted to long-term debt issues.The Company plans to continue the financing of its construction program with a combination of debt and equity issues. Financing of acquisitions have been done using Company common stock or through the debt financing vehicles available to the subsidiary companies. Value Risk. Because the Company operates primarily in a regulated industry, its value risk  is somewhat lessened; however, regulated parameters also can be recognized as limitations to operations  and earnings, and the ability to respond to certain business conditions changes. During 2002 and 2001, the Company experienced value risk because of the impact on earnings of CPUC decisions or the lack of decision on earnings. Non-regulated operations are subject to risk of contract constraints and performance by the Company in achieving its objectives.Value risk management is accomplished using various financial models that consider changing business parameters. It is also supplemented by considering various risk control processes that may be available as circumstances warrant. Stock Market Performance Risk. While the Company’s stock price has not been significantly affected by poor performance of the general stock market over the past two years, the Company’s perform- ance could be affected in other areas.The Company provides its employees a defined benefit pension plan  and postretirement medical benefit plan.The Company is responsible for funding both of these plans and a portion of the plans’ assets are invested in stock market equities, other than Company stock. Poor perform- ance of the equity investments could result in a need for additional future funding and cost to make up for a loss of value in the equity investments.The Company expects to recover its costs associated with the benefit plans in customer rates. Equity Risk. The Company does not have equity investments and, therefore, it does not have equity risks. 34 CALIFORNIA WATER SERVICE GROUP