10-Q: Quarterly report pursuant to Section 13 or 15(d)

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 June 30, 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 August 3, 1998 - 12,619,140.
This Form 10-Q contains a total of 13 pages.

CALIFORNIA WATER SERVICE GROUP
CONSOLIDATED BALANCE SHEET

JUNE 30, 1998 DEC 31, 1997
(In Thousands)

ASSETS
Utility plant $663,560 $647,648
Less depreciation and amortization 195,133 187,241
Net utility plant 468,427 460,407

Current assets:
Cash and cash equivalents 527 1,742
Receivables 14,920 14,862
Unbilled revenue 6,689 5,136
Materials and supplies 2,133 2,105
Taxes and other prepaid expenses 3,258 4,423
Total current assets 27,527 28,268

Regulatory assets 38,613 38,345
Other deferred assets 4,183 4,277
$538,750 $531,297

CAPITALIZATION AND LIABILITIES
Capitalization
Common shareholders' equity:
Common stock $44,941 $44,941
Retained earnings 117,447 119,124
Total common shareholders' equity 162,388 164,065

Preferred stock 3,475 3,475
Long term debt 139,205 139,205
Total capitalization 305,068 306,745

Current liabilities:
Short-term borrowings 19,500 14,500
Accounts payable 18,513 15,499
Accrued expenses and other liabilities 13,494 13,145
Total current liabilities 51,507 43,144

Unamortized investment tax credits 3,006 3,006
Deferred income taxes 26,145 25,761
Advances for construction 96,426 95,878
Contributions in aid of construction 44,106 44,270
Regulatory liabilities 12,492 12,493
$538,750 $531,297


See accompanying notes on page 5 2

CALIFORNIA WATER SERVICE GROUP
CONSOLIDATED STATEMENT OF INCOME

FOR THE THREE MONTHS ENDED: June 30
1998 1997
In Thousands
Operating revenue $44,455 $55,083
Operating expenses:
Operation 28,063 30,027
Maintenance 2,282 2,300
Depreciation and amortization 3,641 3,388
Income Taxes 2,072 5,734
Property and other taxes 1,823 1,846
Total operating expenses 37,881 43,295
Net operating income 6,574 11,788
Other income and expenses, net 166 136
6,740 11,924
Interest and amortization on long term debt 2,836 2,890
Other interest 343 156
3,179 3,046
Net income 3,561 8,878
Preferred dividends 38 38
Net income available for common stock $3,523 $8,840
Weighted average Common shares outstanding 12,619 12,619
Basic Earnings per share of common stock $0.28 $0.70
Dividends per share of common stock $0.2675 $0.2638


FOR THE SIX MONTHS ENDED:
In Thousands
Operating revenue $79,680 $92,641
Operating expenses:
Operation 50,354 53,033
Maintenance 4,403 4,222
Depreciation and amortization 7,281 6,776
Income Taxes 2,786 7,347
Property and other taxes 3,796 3,763
Total operating expenses 68,620 75,141
Net operating income 11,060 17,500
Other income and expenses, net 354 355
11,414 17,855
Interest and amortization on long term debt 5,672 5,779
Other interest 591 276
6,263 6,055
Net income 5,151 11,800
Preferred dividends 76 76
Net income available for common stock $5,075 $11,724
Weighted average Common shares outstanding 12,619 12,619
Basic Earnings per share of common stock $0.40 $0.93
Dividends per share of common stock $0.5350 $0.5275

See accompanying notes on page 5 3

CALIFORNIA WATER SERVICE GROUP
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED

In Thousands
JUNE 30
1998 1997
Operating activities:
Net Income $5,151 $11,800
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 7,281 6,776
Regulatory assets and liabilities, net (269) 202
Deferred income taxes and investment tax
credit 384 266
Change in operating assets and liabilities:
Receivables (58) (3,179)
Unbilled revenue (1,553) (2,352)
Materials and supplies (28) 99
Taxes and other prepaid expenses 1,165 446
Accounts payable 3,014 5,931
Accrued expenses and other liabilities 349 2,517
Other changes, net 386 601
Net adjustments 10,671 11,307
Net cash provided by operating activities 15,822 23,107
Investing activities:
Utility plant expenditures (16,251) (12,517)
Financing activities:
Net short-term borrowings 5,000 (4,000)
Advances for construction 2,371 1,397
Contributions in aid of construction 510 738
Refunds of advances for construction (1,839) (1,773)
Dividends paid (6,828) (6,733)
Net cash used in financing activities (786) (10,371)
Change in cash and cash equivalents (1,215) 219
Cash and cash equivalents at beginning
of period 1,742 1,368
Cash and cash equivalents at end of period $527 $1,587



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. Basic 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 Consolidated Statement of Income.
The Group has no dilutive securities, accordingly, dilutive earnings per
share is not shown.

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. In 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement addresses the
accounting for derivative, including certain derivative instruments
embedded in other contracts, and hedging activities. The Group expects
to adopt SFAS 133 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.



5
PART I FINANCIAL INFORMATION

Item 2

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD LOOKING STATEMENTS
This 10-Q filing contains forward looking statements. Readers are directed
to review the comments regarding forward looking statements contained in the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" section of 1997 Annual Report to shareholders. The 1997 Annual
Report to shareholders was incorporated by reference in the Group's 1997 Form
10-K filing.

RESULTS OF SECOND QUARTER OPERATIONS
Second quarter net income was $3,561,000, equivalent to $0.28 per
common share. This represents a $0.42 decrease from the $0.70 earned in last
year's second quarter in which the Group achieved outstanding financial results
with revenue, net income and earnings per share at record levels.
Operating revenue decreased $10,628,000 to $44,455,000. The primary
reason for the revenue decline was the continuing effects of the inclement "El
Nino" weather pattern, which California experienced during most of the first
half of 1998. The wet and cool weather caused a 29% decrease in average
metered customer's consumption during the quarter. By comparison, 1997's
second quarter weather was predominately drier and warmer than normal,
causing water consumption to be at near record highs. The decline in
customer consumption was accentuated by the high level of sales last year
and the low level this year.
Average revenue per customer decreased $29.20 or 20%. 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 $390,000
Step rate increases 324,000
Total rate increases 714,000
Decreased consumption (11,670,000)
Usage by 3,238 new customers 328,000
Net revenue decrease $(10,628,000)

Total operating expenses decreased 13% this year.
Water production for the quarter was 28% less than last year's level. Well
production provided 52% of the supply with 47% purchased from wholesale
suppliers. The other 1% was derived from a surface water supply, which was
processed through a company treatment plant. Water production costs, which
include purchased water, purchased power and pump taxes, decreased $2,048,000,
reflecting the decline in water sales and production. The decline would have
been greater, except that in 1997 nonrecurring refunds from wholesale water
suppliers reduced water production costs $2,524,000. The refunds were
credited to purchased water expense, decreasing 1997 operating expenses. The
absence of similar refunds this year accounted for $0.12 of the decline in
earnings. Eight districts experienced wholesale suppliers' purchased water
rate increases since last year ranging from 1% to 12%. The components of
water production expense and the changes from last year are shown in the
table below:

Second Quarter
1998 Cost Change
Purchased water $12,419,000 ($585,000)
Purchased power 2,642,000 (995,000)
Pump taxes 1,027,000 (468,000)
Total $16,088,000 ($2,048,000)

Other operations expense increased only $84,000. 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 increased expenses.
However, there were decreases in other expense categories including chemicals,
telephone expense and employee relocations which offset the increased payroll.
Depreciation and amortization expense increased $253,000 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 $3,662,000 because of lower
taxable income.
Other income and expense, reported on a pretax basis, was $166,000, a
$30,000 increase from last year. Other income included $235,000 from
nonregulated operations. Netted against other income was $69,000 of other
expenses, which includes contributions and costs of maintaining nonoperating
properties.

REGULATORY MATTERS
1998 rate case applications were filed with the California Public Utilities
Commission (Commission) on July 31 for rate increases in four districts (Bear
Gulch, East Los Angeles, Hermosa Redondo and Visalia) representing 25% of
total regulated customers. The applications request additional annual
revenue of about $7,000,000 with a return on equity of 11.85%. Based on the
Commission's processing schedule, a decision regarding the applications is
expected from the full Commission in the second quarter of 1999.
An application to increase rates in the Hawthorne district, which is operated
under a long-term lease, will be filed later this year. That application will
be processed by the Hawthorne city council.
Decisions were received in July 1998 from the Commission on the
applications filed in July 1997. These decisions affect four districts
(Marysville, Oroville, Selma and South San Francisco) representing 7% of the
regulated customers. The decisions are expected to provide $299,000 during
1998, $267,000 in 1999 and $121,000 in the year 2000 and 2001. Rate increases
in the Selma and Oroville districts will be tied to future changes in a price
index.

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 $187,000 due to additional borrowings under the bank line of credit.
At June 30, 1998, $19.5 million was borrowed under the credit line at an
effective interest rate of 7.05%. At June 30, 1997, $3.5 million was
outstanding under the credit line.
The Group plans to issue long-term debt during the third or fourth quarter
of 1998 to replace outstanding short-term bank borrowings.
The second quarter common dividend was paid on May 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 June
30, 1998, the dividend payout ratio is 82%.
About 11% of the outstanding shares participate in the reinvestment
program under 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.
Shares are also purchased on the open market to fulfill the requirements of
the Company sponsored Employee Savings Plan (401(k)). Purchases are made on
a biweekly basis.
Book value per common share was $12.87 at June 30, 1998, compared to
$12.62 a year earlier.
During the quarter, utility plant expenditures totaled $10,003,000 for
additions to and replacements of utility plant. Of that amount, $8,934,000 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's 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 129% of historic average as of June 30,
1998, and groundwater levels remain adequate. Because the first part of the
summer was relatively cool with no sustained hot weather until mid-July,
melting of the very large mountain snowpack has been slow. The abundant
snowpack will provide runoff to streams and reservoirs as it melts during the
remaining summer months.

YEAR 2000
Readiness: The Group has assembled a team to address Year 2000
preparedness issues. Generally, computer operations are centralized at a
single location. The information technology (IT) group has inventoried its
various software programs and identified modifications required to make the
programs Year 2000 ready. Most computer applications are currently processed
on a mainframe based system including the customer billing system. The
customer billing system has been converted to handle Year 2000 dates. A
local area network (LAN) computer system which includes Year 2000 ready
servers and personal computers, is being currently implemented. It is
anticipated that most non-customer billing applications will be migrated to
the LAN system prior to 2000. The customer billing system will not be
switched to the LAN system until sometime after 2000. As a result of the
LAN implementation, programs operating on the LAN system are anticipated to
be Year 2000 ready. A new Year 2000 compatible accounting, purchasing and
human resources software program package is being installed on the LAN system.
Installation is planned to be complete by mid-1999. The Group is investigating
retention of an outside consultant who would review and evaluate the Year 2000
readiness, then provide a risk assessment and further recommendations.

Suppliers and vendors with whom the Group has a material business
relationship have been contacted to assess their Year 2000 preparedness. The
intent of these contacts is to determine that suppliers and vendors will not
encounter Year 2000 problems that may disrupt the Group's business processes.
Those contacted include water wholesalers, power supply companies, chemical
vendors, fuel suppliers, banks and stock registrar. A survey of each of the
Group's water operations has also been completed to assess specific needs
within each district.
Costs: The estimated remediation cost for Year 2000 preparedness is
$300,000. Included in the estimate is the cost of an outside consultant and
programming time. The costs of the new LAN system and software package were
not included in the estimate since their implementation and installation date
were not Year 2000 driven. No IT projects have been deferred as a result of
the Year 2000 efforts.
Risks: In a worst case scenario, the Group may be unable to deliver water
to its customers because wholesale suppliers cannot provide water to the Group
or power supplies are not available to operate pumping equipment.
Additionally, it may be impossible to produce customer bills if power sources
are not available or computer billing programs due not function due to Year
2000 failures. The Group is not able to estimate the potential financial
impact of the scenarios described.
Because there is an increased threat of litigation due to potential Year 2000
problems, the Group is evaluating its insurance policies to determine if they
afford coverage of Year 2000 issues.
Contingency Plans: Each district maintains an emergency response plan
that is reviewed and updated on a regular basis. These plans are designed to
provide for alternative water sources in the event the district's primary
source is interrupted.
Fixed site and portable auxiliary power generators are located throughout
the service territories. These generators are designed to supply electric
power to operate wells and pumps in the event the power company experiences an
outage. If a power supplier was unable to deliver electricity, the auxiliary
generators would be used as a substitute source.
Emergency water connections are maintained between the Group's water
systems and those of adjacent purveyors. In the event of loss of a wholesale
water supply or a power outage, the emergency connections could be operated
to provide a water supply.
Each district is in the process of identifying high profile water users, such
as hospitals, and developing contingent plans for continued service in the
event of a Year 2000 disruption.

PART II OTHER INFORMATION

Item 4. Submission of Matters to a Vote of Security Holders
(a) Exhibits required to be filed by Item 601 of Regulation S-K.
None
(b) No reports on Form 8-K have been filed during the quarter ended June 30,
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

August 3, 1998

/s/ Gerald F. Feeney
Gerald F. Feeney
Vice President, Chief Financial Officer and Treasurer