UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) ___ |_X_| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1998 OR ___ |___|TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 1-13883 CALIFORNIA WATER SERVICE GROUP (Exact name of registrant as specified in its charter) California 77-0448994 (State or other jurisdiction (I.R.S. Employer identification No.) of incorporation or organization) 1720 North First Street, San Jose, CA. 95112 (Address of principal executive offices) (Zip Code) 1-408-367-8200 (Registrant's telephone number, including area code) Not Applicable (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes __X_ No APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes _____ No _____ APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common shares outstanding as of March 31, 1998 - 12,619,140. This Form 10-Q contains a total of 13 pages. PART I - FINANCIAL INFORMATION ITEM 1 FINANCIAL STATEMENTS CALIFORNIA WATER SERVICE GROUP BALANCE SHEET MARCH 31, 1998 DEC 31, 1997 (In Thousands) ASSETS Utility plant $653,673 $647,648 Less depreciation and amortization 191,090 187,241 Net utility plant 462,583 460,407 Current assets: Cash and cash equivalents 902 1,742 Receivables 11,887 14,862 Unbilled revenue 4,492 5,136 Materials and supplies 2,066 2,105 Taxes and other prepaid expenses 3,843 4,423 Total current assets 23,190 28,268 Regulatory assets 38,479 38,345 Other assets 4,230 4,277 $528,482 $531,297 CAPITALIZATION AND LIABILITIES Capitalization Common shareholders' equity: Common stock 44,941 44,941 Retained earnings 117,275 119,124 Total common shareholders' equity 162,216 164,065 Preferred stock 3,475 3,475 Long term debt 139,205 139,205 Total capitalization 304,896 306,745 Current liabilities: Short-term borrowings 12,500 14,500 Accounts payable 15,045 15,499 Accrued expenses and other liabilities 14,202 13,145 Total current liabilities 41,747 43,144 Unamortized investment tax credits 3,006 3,006 Deferred income taxes 25,914 25,761 Advances for construction 96,324 95,878 Contributions in aid of construction 44,103 44,270 Regulatory liabilities 12,492 12,493 $528,482 $531,297 See accompanying notes on page 5 2 CALIFORNIA WATER SERVICE GROUP STATEMENT OF INCOME March 31 1998 1997 FOR THE THREE MONTHS ENDED: In Thousands Operating revenue $35,225 $37,558 Operating expenses: Operation 22,290 23,006 Maintenance 2,121 1,921 Depreciation and amortization 3,626 3,388 Federal income taxes 649 1,347 State income taxes 65 267 Property and other taxes 1,973 1,917 Total operating expenses 30,724 31,846 Net operating income 4,501 5,712 Other income and expenses: Interest and amortization on long term debt 2,836 2,890 Other income and expenses, net 75 (99) 2,911 2,791 Net income 1,590 2,921 Preferred dividends 38 38 Net income available for common stock $1,552 $2,883 Weighted average shares outstanding 12,619 12,619 Earnings per share of common stock $0.12 $0.23 Dividends per share of common stock $0.2675 $0.2638 See accompanying notes on page 5 3 CALIFORNIA WATER SERVICE GROUP STATEMENT OF CASH FLOWS FOR THE THREE MONTHS ENDED In Thousands MARCH 31 1998 1997 Operating activities: Net Income $1,590 $2,921 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortizaion 3,626 3,388 Regulatory assets and liabilities, net (135) (135) Deferred income taxes and investment tax credits, net 153 361 Change in operating assets and liabilities: Receivables 2,975 225 Unbilled revenue 644 (50) Materials and supplies 39 105 Taxes and other prepaid expenses 580 117 Accounts payable (454) 2,574 Accrued expenses and other liabilities 1,057 1,801 Other changes, net 147 440 Net adjustments 8,632 8,826 Net cash provided by operating activities 10,222 11,747 Investing activities: Utility plant expenditures (6,248) (5,471) Financing activities: Net short-term borrowings (2,000) (3,500) Advances for construction 1,319 645 Contributions in aid of construction 167 405 Refunds of advances for construction (861) (857) Dividends paid (3,439) (3,367) Net cash used in financing activities (4,814) (6,674) Change in cash and cash equivalents (840) (398) Cash and cash equivalents at beginning of period 1,742 1,368 Cash and cash equivalents at end of period $902 $970 See accompanying notes on page 5 4 Notes: 1. Due to the seasonal nature of the water business, the results for interim periods are not indicative of the results for a twelve month period. 2. The interim financial information is unaudited. In the opinion of management, the accompanying financial statements reflect all adjustments which are necessary to provide a fair statement of the results for the periods covered. The adjustments consist only of normal recurring adjustments. 3. Earnings per share are calculated on the weighted average number of common shares outstanding during the period and net income available for common stock as shown on the Statement of Income. 4. Refer to 1997 Annual Report on Form 10-K for a summary of significant accounting policies and detailed information regarding the financial statements. 5. During 1997, the Financial Accounting Standards Board issued two accounting statements. Statement No. 130, "Reporting Comprehensive Income," requires comprehensive income items be classified separately and the accumulated balance be reported in the equity section of the financial statements. Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information," establishes disclosure requirements concerning operating business segments, products and services, geographic areas and major customers. The Group adopted these standards effective January 1, 1998. The adoption did not have a material impact on its financial position or operating results. In 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 132, Employer's Disclosures about Pensions and Other Postretirement Benefits. This statement standardizes employers' disclosure requirements for pensions and other postretirement benefits. The Group expects to adopt SFAS 132 by December 31, 1998. The Group does not expect that adoption of this statement will have a material impact on its financial position or operating results. In 1998, the Americal Institute of Certified Public Accountants issued Statement of Position (SOP) 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. This statement provides guidance on accounting for the costs of computer software developed or obtained for internal use. The Group adopted the provisions of SOP 98-1 effective January 1, 1998. 5 PART I FINANCIAL INFORMATION Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF FIRST QUARTER OPERATIONS First quarter net income was $1,590,000, equivalent to $0.12 per common share, an 11 cent decrease from the $0.23 earned in last year's first quarter. 1997's first quarter earnings were the highest first quarter earnings ever recorded by the Group. Operating revenue decreased $2,333,000 from 1997 to $35,225,000. The primary reason for the revenue decline was the inclement El Nino weather pattern which California experienced throughout the quarter. The wet and cool weather caused a decrease in customers' consumption. By comparison, 1997's first quarter weather was drier and warmer than normal, causing water sales to be at near record highs. Consumption levels, as measured by average sales per metered customer, decreased 8% during the quarter. Average revenue per customer decreased $6.90 or 7%. The decrease due to consumption was partially offset by rate increases and sales to new customers. A breakdown of the net decrease in operating revenue is accounted for in the following table: General rate increases $278,000 Step rate increases 290,000 Total rate increases 568,000 Decreased consumption (3,158,000) Usage by 2,885 new customers 257,000 Net revenue increase $(2,333,000) Total operating expenses decreased 4% this year. Water production for the quarter was 14% less than last year's level. Well production provided 44% of the supply with 55% purchased from wholesale suppliers and the other 1% received from a surface water supply. Water production costs, which include purchased water, purchased power and pump taxes, decreased $1,746,000, reflecting the decline in water sales and production. Six districts experienced wholesale suppliers' purchased water rate increases ranging from 1% to 5%. The components of water production expense and the changes from last year are shown in the table below: First Quarter Dollar 1998 Cost Change Purchased water $8,821,000 ($1,282,000 Purchased power 1,322,000 (379,000) Pump taxes 345,000 (85,000) Total $10,488,000 ($1,746,000 Other operations expense increased $894,000, mainly due to the impact of the 3.0% general wage increase which was effective at the start of the year, additional hours worked and increases in related employee benefits. Increases were also experienced in chemical costs, liability insurance and transmission facilities expense. Depreciation and amortization expense increased $238,000 due to increased depreciation expense authorized by the Commission in the rate case decisions and a greater depreciable plant investment. The additional expense is reflected in customer rates. Federal and state income taxes decreased $900,000 because of reduced taxable income. Pretax income from nonregulated operations was $282,000, a $7,000 decline from last year. The income amount was netted against $109,000 of expenses which includes contributions and costs of maintaining nonoperating properties. REGULATORY MATTERS 1997 rate case applications were filed with the California Public Utilities Commission (Commission) in July 1997 for rate increases in four districts representing 7% of total customers. The applications request additional annual revenue of about $650,000. A decision regarding the applications is expected from the full Commission in the second quarter of 1998. An assessment of which districts rate case applications will be filed this year is currently underway. The filings will be made in July. LIQUIDITY Interest expense on long-term debt decreased by $54,000 as a result of the retirement of Series L first mortgage bonds and first mortgage bond sinking fund payments made in the fourth quarter of 1997. Short-term interest expense increased $128,000 due to additional borrowings under the bank line of credit. At March 31, 1998, $12.5 million was borrowed under the credit line at an effective interest rate of 7%. At March 31, 1997, $4 million was outstanding under the credit line. The first quarter common dividend was paid on February 15, 1998, at $0.2675 per share. The $0.2675 represents a $0.00375 or 1.4% increase in the quarterly dividend rate from last year as approved by the Board of Directors at their January meeting. Annualized, the dividend rate is $1.07 per common share compared to $1.055 in 1997. Based on the 12 month earnings per share at March 31, 1998, the dividend payout ratio is 62%. About 11% of the outstanding shares participate in the Group's Dividend Reinvestment and Stock Purchase Plan (Plan). No new common shares were issued under the Plan during the quarter. Shares required for the dividend reinvestment and stock purchase options were purchased on the open market and distributed to Plan participants. Book value per common share was $12.85 at March 31, 1998, compared to $12.19 a year earlier. During the quarter, utility plant expenditures totaled $6,248,000 for additions to and replacements of utility plant. Of that amount, $5,033,000 was funded through the Group's construction budget with the balance consisting of funds received from developers as contributions in aid of construction and refundable advances for construction. The 1998 Group construction budget is $31,000,000. WATER SUPPLY The Group believes that its various sources of water supply are sufficient to meet customer demand for the remainder of the year. Historically, approximately half of the water source is purchased from wholesale suppliers with the other half pumped from wells. Storage in state reservoirs was 114% of historic average as of March 31, 1998, and groundwater levels remain adequate. There is an abundant snowpack which will provide runoff to streams and reservoirs as the snowpack melts during the spring and summer months. PART II OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders (a) The annual meeting of shareholders of California Water Service Group was held April 15, 1998, at the Group's executive office in San Jose, California. (b) At the annual shareholders' meeting, a Board of Directors was elected for the ensuing year. The following directors were elected as nominated: Robert W. Foy Edward D. Harris, Jr., M.D. Robert K. Jaedicke Richard P. Magnuson Linda R. Meier Peter C. Nelson C. H. Stump George A. Vera J. W. Weinhardt (c) Two matters were voted on at the meeting: (1) election of directors for the ensuing year, and (2) ratification of the Board's selection of independent auditors for 1998. (1) Tabulation of votes for the election of directors was: For Withheld Robert W. Foy 12,865,645 96,729 Edward D. Harris, Jr., M.D. 12,861,243 101,131 Robert K. Jaedicke 12,845,366 117,008 Richard P. Magnuson 12,873,285 89,089 Linda R. Meier 12,866,612 95,762 Peter C. Nelson 12,870,341 92,033 C. H. Stump 12,852,974 109,400 George A. Vera 12,845,535 116,839 J. W. Weinhardt 12,844,604 117,771 (2) The directors selection of KPMG Peat Marwick LLP to serve as independent auditors for 1998 was ratified by the shareholders. There were 12,813,166 votes in favor, 56,879 against, 92,329 abstentions on this matter and no non votes. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits required to be filed by Item 601 of Regulation S-K. None. (b) The following reports on Form 8-K were filed during the quarter ended March 31, 1998: (1) Change in control of registrant as a result of the merger on December 31, 1997 among California Water Service Company, California Water Service Group and CWSG Merger Company. The merger resulted in the formation of the holding company. The Form 8-K was filed January 2, 1998. (2) Adoption of a shareholder rights plan for common shareholders . The rights, unless activated, attach to and trade with the common stock. The Form 8-K was filed February 13, 1998. SIGNATURES Pursuant to the requirement of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the authorized undersigned. CALIFORNIA WATER SERVICE GROUP Registrant /s/ Gerald F. Feeney Vice President, Chief Financial Officer and Treasurer April 28, 1998