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Pension Benefits. The Company incurs costs associated with its pension and postretirement health care benefits plans.To measure the expense of these benefits, management must estimate compensation increases, mortality rates, future health cost increases and discount rates used to value related liabilities and to determine appropriate funding. Different estimates used by management could result in significant vari- ances in the cost recognized for pension benefit plans.The estimates used are based on historical experience, current facts, future expectations and recommendations from independent advisors and actuaries.The Company uses an investment advisor to provide expert advice in managing its benefit investments.To diver- sify investment risk, the plan’s goal is to invest 60% of the assets in equity mutual funds and 40% in bond funds. At December 31, 2002, 48% of the assets were invested in equity mutual funds and 52% in bond funds. Based on the market values of the investment funds, for the year ended December 31, 2002, the total return on the pension plan assets was a decline of 3.7%, and for the year ended December 31, 2001, pension plan assets had a positive 2.6% total return. For December 31, 2002, the discount rate used for pension plan obligations or pension plan expense was 6.7%, which was based on high-quality bond rates in December 2002.The long-term rate of return used to determine the Company’s pension obligation was 8%. By compari- son, a 20-year return of assets invested using the same investment diversification as for the Company’s pension plan would have returned 11.8%.The Company anticipates any increase in funding for the pension and postretirement health care benefits plans will be recovered in future customer rates. 

## RESULTS OF OPERATIONS 

Earnings and Dividends. Net income in 2002 was $19,073,000 compared to $14,965,000 in 2001 and $19,963,000 in 2000. Diluted earnings per common share were $1.25 in 2002, $0.97 in 2001 and $1.31 in 2000.The weighted average number of common shares outstanding was 15,185,000 in 2002, 15,186,000 in 2001, and 15,129,000 in 2000. As explained below, the decline in 2001 net income resulted from three primary factors: low water sales to existing customers due to weather conditions, significantly higher purchased power costs and delays in receipt of regulatory rate relief. 

At its January 2002 meeting, the Board of Directors increased the common stock dividend for the 35th consecutive year. 2002 also marked the 58th consecutive year that a dividend had been paid on the Company’s common stock.The annual dividend paid in 2002 was $1.12, a 0.4% increase over the $1.115 paid in 2001, which was an increase of 1.4% over the $1.100 paid in 2000.The dividend increases were based on projections that the higher dividend could be sustained while still providing the Company with adequate financial resources and flexibility. Earnings not paid as dividends are reinvested in the business for the benefit of stockholders.The dividend payout ratio was 90% in 2002, 115% in 2001, and 84% in 2000, an average of 97% during the three-year period. 

Operating Revenue. Operating revenue, including revenue from the City of Hawthorne lease, was $263.2 million, 6.6% more than the $246.8 million recorded in 2001. Revenue in 2000 was $244.8 mil- lion.The sources of changes in operating revenue were: 

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Temperatures and rainfall in the Company’s service territories were relatively normal through- out 2002. In 2001, the weather patterns were cooler and more rainy than normal. From a water sales perspective, 2002’s weather resulted in a 2% increase in customer’s water usage compared to 2001 and a $6.9 million increase in revenue. 

