The Company’s total capitalization at December 31, 2001, was $402.7 million and at the end of 2000 was $389.4 million. Capital ratios were: The return on average common equity was 7.6% in 2001 compared to 10.1% in 2000. The decline in 2001 was caused by the lower net income. Other Acquisitions. On January 25, 2001, the CPUC approved the Company’s acquisition of the Nish water systems in Visalia. The four systems serve 1,100 customers and had annual revenue of $1.2 million. The Company issued 36,180 shares of its common stock valued at $0.9 million and assumed debt of $0.3 million to complete the transaction, which was accounted for as a pooling of interests. The effect of pooling was deemed not to be material; therefore, prior year financial statements have not been restated and pro-forma disclosures were not considered significant. The net equity of Nish was recorded as an adjustment to retained earnings as of January 1, 2001. In 2001, Washington Water purchased the assets of seven water companies that serve 681 customers and generate about $0.3 million in annual revenue. The combined purchase price was $0.7 million. In 2000, Washington Water purchased the assets of two water companies that together serve almost 800 customers and produce annual revenue of about $0.3 million. Washington Water also purchased the assets of Robischon Engineers, Inc. in April 2000. This acquisition added in-house engineering capabili- ties to the Washington operation, enabling Washington Water to provide water system design services to other water providers. The Company agreed to acquire the Rio Grande Utility Corporation that serves 2,300 water and 1,600 wastewater customers near Albuquerque in November 2000. The acquisition, which will be made for $2.3 mil- lion in cash and assumed debt of $3.1 million, is pending approval of the New Mexico Public Regulation Commission. Approval is expected in the second quarter 2002. Real Estate Program. The Company’s subsidiaries own more than 900 real estate parcels. Certain parcels are not necessary for or used in water utility operations. Most surplus properties have a low cost basis. A pro- gram has been developed to realize the value of certain surplus properties through sale or lease of those properties. The program will be ongoing for a period of several years. During the next four years, the Company estimates that gross property transactions totaling over $10 million could be completed. In 2001, $3.9 million in pretax sales were completed. No transactions were completed during 2000. During 2002, the Company expects to complete sales in excess of $3 million. Stockholder Rights Plan. As explained in Note 6 to the Consolidated Financial Statements, in January 1998, the Board of Directors adopted a Stockholder Rights Plan (Plan). In connection with the Plan, a dividend distribution of one right for each common share to purchase preferred stock under certain circumstances was also authorized. The Plan is designed to protect stockholders and maximize stockholder value in the event  of an unsolicited takeover proposal by encouraging a prospective acquirer to negotiate with the Board. FINANCIAL RISK MANAGEMENT The Company does not participate in hedge arrangements, such as forward contracts, swap agreements, options or other contractual agreements relative to the impact of market fluctuations on its assets, liabilities, produc- tion or contractual commitments. The Company operates only in the United States, and therefore, is not sub- ject to foreign currency exchange rate risks. 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 and during the outstanding period interest rates are sub- ject to fluctuation. The Company’s long-term obligations are first mortgage bonds and senior note obligations that are generally placed with insurance companies. Washington Water’s long-term obligations are for periods of up to 10 years and are placed with two banks. During 2001, the Company issued a single series of $20 mil- lion, 30-year senior notes at 7.13%. To expand access to capital debt markets, the Company may investigate the use of private and public markets for future debt issues. It may also consider financing on a parent com- pany 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 operat- ing 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 in this manner. Financing of acquisitions has 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 less- ened; however, regulated parameters also can be recognized as limitations to operations and earnings, and the ability to respond to certain business condition changes. Also, changes in regulatory practices can impact the Company’s operations as was experienced during 2001 when the CPUC adopted a new policy for recovery of off- setable expenses. 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. Equity Risk. The Company does not have equity investments; therefore, it does not have equity risks. NEW ACCOUNTING STANDARDS In July 2001, the Financial Accounting Standards Board issued Statement No. 141, “Business Combinations,” and Statement No. 142, “Goodwill and Other Intangible Assets.” Statement No. 141 requires that the pur- chase method of accounting be used for all business combinations initiated after June 30, 2001 as well as for all purchase method business combinations completed after June 30, 2001. Statement No. 141 also specifies conditions that intangible assets acquired in a purchase method business combination must meet to be recog- nized and reported apart from goodwill. Statement No. 142 specifies that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually in accor- dance with the provisions of Statement No. 142. The statement also requires that intangible assets with deter- minable useful lives be amortized over their useful lives to their estimated residual values and reviewed for impairment. Statement No. 142 is effective for the Company on January 1, 2002. Its adoption is not expected  to have a material impact on the Company’s financial position or results of operations. In June 2001, Statement of Financial Accounting Standards No. 143, “Accounting for Asset Retirement Obligations” of long-lived assets was issued. The statement is effective for fiscal years beginning after June 15, 2002. The Company has not yet completed a full review of the impact that adopting the statement will have on its financial position or results of operations, and therefore is unable to state the impact that adopting the statement will have on its financial position or results of operations. In August 2001, Statement No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” was issued. The statement sets forth requirements for measuring impairment of a long-lived asset that is defined as the condition that exists when the carrying amount of a long-lived asset exceeds its fair value. The statement also establishes criteria in which an impairment loss must be recognized. The Company has not yet completed a full assessment of the impact of adopting this statement, and therefore is uncertain as to the impact that adopting the statement will have on its financial position or results of operations. The statement is effective for the Company on January 1, 2002. 25 CALIFORNIA WATER SERVICE GROUP 24 CALIFORNIA WATER SERVICE GROUP 2001 2000 Common equity 48.8% 51.1% Preferred stock  0.9% 0.9% Long-term debt  50.3% 48.0% Management’s Discussion and Analysis (continued)