Management’s Discussion and Analysis (continued) During 2001, revenue from usage by existing customers declined $5.7 million. A cool, wet spring, mild summer and early fall rains throughout the Company’s service territories resulted in a weather pattern that caused water usage by existing customers to decline by 2%. Rainfall was near normal in the northern part of California, but well above normal in the south. The unusually heavy rains in southern California reduced water sales, a trend that continued all year because of the year’s weather pattern. Washington Water experi- enced dry conditions during the winter and spring months; however, summer rains reduced water sales in the normally high usage summer months. Rate increases in 2001 added $5.4 million in new revenue, offsetting the decline in revenue from usage by existing customers. The Company received CPUC decisions in 2001 for General Rate Case (GRC) increases in three districts providing $1.3 million in new revenue. Step rate increases of $2.6 million that had been authorized in prior GRCs and $0.8 million in offset increases to recover higher power costs in four districts were also granted. New water rates for the City of Hawthorne water system added $0.5 million to revenue, and a GRC decision for Washington Water added $0.2 million. During 2000, the first quarter was wetter than in the prior year, causing a reduction in customer usage. Second and third quarter weather was normal; however, rains in the early part of the fourth quarter negatively affected usage and consequently reduced revenue. Effective in August 2000, offset rate increases to recover increases in water production expenses became effective in four Cal Water districts. The rates generated $1.6 million in additional 2000 revenue. Step rate increases that were effective at the start of the year and new water rates in the City of Hawthorne system accounted for the remainder of the new revenue from rate increases. The December 31, 2001 customer count, including the Hawthorne customers, was 450,400, an increase of 1.4% from the 444,300 customers at the end of 2000, which was an increase of 1.1% from the 439,100 customers at the end of 1999. The growth in customers was due to normal growth within existing ser- vice areas and several small system acquisitions. Operating and Interest Expenses. Total operating expenses were $221.7 million in 2001, $211.6 million in 2000, and $201.9 million in 1999. Wells provided 50.6% of water requirements in 2001 and purchased water provided 48.9%, with 0.5% obtained from surface supplies. For 2000, the corresponding percentages were 50.7%, 48.7% and 0.6%, and in 1999 the percentages were 52.4%, 47.2% and 0.4%. As a group, water production costs, which are purchased water, purchased power and pump taxes, comprise the largest segment of total operating costs. Together, water production costs accounted for 45% of total operating costs in 2001, 2000 and 1999. Rates charged for purchased water and pump taxes are set by various public agencies; the electric rates charged by power companies are authorized by the CPUC. As such, these rates are beyond the Company’s control. The table below provides comparative information regarding water production costs during the past three years: Water production expenses vary with wholesale suppliers’ prices, the quantity of water produced to supply customer water usage, and the sources of supply. In 2001 and 2000, seven wholesale water suppliers increased rates from 2% to 7%. In December 2001, wholesale suppliers in the Los Angeles area refunded $1.4 19 CALIFORNIA WATER SERVICE GROUP 18 CALIFORNIA WATER SERVICE GROUP Other Income and Expenses. Other income is derived from management contracts whereby the Company operates private and municipally owned water systems, agreements for operation of two recycled water systems, contracts for meter reading and billing services to various cities, leases of communication antenna sites, sur- plus property sales, other non-utility sources and interest on short-term investments. Other income, net of expenses, was $5.8 million in 2001, $1.4 million in 2000 and $3.1 million in 1999. During 2001, $3.9 million in pre-tax profits were realized from surplus properties sold as part of the Real Estate Program that is described in more detail in the “Liquidity and Capital Resources” section of this report. There were no property sales in 2000 and $1.3 million in 1999. Short-term bank borrowings to meet operating and interim construction funding needs increased other interest expense in 2001 by $0.1 million. The amount borrowed during the year was larger because of reduced cash flow from operations and an increase in capital project expenditures, but lower short-term rates reduced interest cost on the outstanding balances. There was $22.0 million in short-term borrowings at the end of 2001 and $14.6 million at the end of 2000. Interest on long-term debt increased $1.3 million over 2000. The issuance of $20 million of Series D senior notes in September 2001 and $20 million of Series C senior notes in October 2000, net of sinking fund payments on first mortgage bonds, resulted in a larger principal amount of long-term debt outstanding and thus increased interest expense. In 2000, long-term interest cost was unchanged from 1999. The added interest expense due to the Series C senior note issue was offset by lower interest due to sinking fund payments on first mortgage bonds. Capitalized interest was $0.9 million on construction projects in 2001 and $0.7 million in 2000. A larger amount is expected to be capitalized during 2002 because of the increase in the capital project expenditures. Interest coverage of long-term debt before income taxes was 2.9 times in 2001, 3.6 times in 2000 and 3.8 times in 1999. The reduction in interest coverage for 2001 resulted from lower earnings and the new senior note issues outstanding. Income tax expense was $9.7 million in 2001, $11.6 million in 2000 and $13.5 million in 1999. The changes in taxes are generally due to variations in taxable income. There is no state income tax in Washington. During 2000, a curtailment of the Dominguez pension plan was recorded resulting in a non-taxable gain of $1.2 million that was offset against operating expenses. The curtailment occurred because the Dominguez pension plan was frozen at the merger date and its participants became participants in the Company pension plan. Previous amounts expensed by Dominguez but not funded to the plan comprise the  curtailment amount. This amount is included in the $44.5 million reported for payroll and benefits charged  to operations and maintenance expense. Employee payroll and benefits charged to operations and maintenance were $47.8 million for 2001, $44.5 million for 2000 and $43.0 in 1999. The increases in payroll and related benefits are attributable to gen- eral wage increases effective at the start of each year and additional hours worked. At year-end 2001, 2000 and 1999, there were 783, 797 and 790 employees, respectively. Prior to 2001, the Company had not been subjected to significant electric power cost increases. However, as has been widely publicized, California energy costs rose significantly in 2001. In January, the CPUC approved an energy surcharge that increased the Company’s cost of purchased electric power by 10%. A second, more significant 38% increase in electric power costs became effective in May, bringing the total increase to 48%. When the CPUC proposed electric cost increases, the Company believed the higher costs were recoverable from consumers on a pass-through basis under established CPUC procedures. However, as explained in the Rates and Regulation section of this report, the CPUC revised its rules regarding recovery of the higher costs, resulting in delays in recovering the higher costs. No new power rate increases are proposed at this time. Purchased power is required to operate wells and pumps. Its cost increased $6.0 million in 2001 and $0.7 million in 2000. Through much of 2001, the Company paid substantially higher energy costs that were not recovered in customer rates. The CPUC’s authorizations allowing the Company to recover a portion of the higher power costs were not effective until September and November, well after the high usage summer months. The purchased power cost increase in 2000 was due mainly to a 3% increase in water production. million for over collecting on water purchases in prior periods. The refunds were recorded as a reduction of purchased water costs. For 2002, wholesale rate increases are expected in seven districts ranging from 1% to 11%. One supplier plans to reduce rates 9%. Dollars in millions 2001 2000 1999 Purchased water $ 73.2 $73.8 $69.4 Purchased power 21.1 15.1 14.4 Pump taxes 5.9 6.3 6.9 Total water production costs $100.2 $95.2 $90.7 Change from prior year 5% 5% 15% Water production (billion gallons) 127 128 124 Change from prior year (1)% 3% 10%