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 September 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 October 30, 1998 - 12,619,140.
This Form 10-Q contains a total of 21 pages.


CALIFORNIA WATER SERVICE GROUP
CONSOLIDATED BALANCE SHEET

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

ASSETS
Utility plant $670,021 $647,648
Less depreciation and amortization 198,838 187,241
Net utility plant 471,183 460,407

Current assets:
Cash and cash equivalents 1,616 1,742
Receivables 18,341 14,862
Unbilled revenue 8,286 5,136
Materials and supplies 2,193 2,105
Taxes and other prepaid expenses 5,986 4,423
Total current assets 36,422 28,268

Regulatory assets 38,748 38,345
Other deferred assets 4,136 4,277
$550,489 $531,297

CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock $44,941 $44,941
Retained earnings 123,174 119,124
Total common shareholders' equity 168,115 164,065

Preferred stock 3,475 3,475
Long term debt 139,205 139,205
Total capitalization 310,795 306,745

Current liabilities:
Short-term borrowings 13,000 14,500
Accounts payable 20,923 15,499
Accrued expenses and other liabilities 23,890 13,145
Total current liabilities 57,813 43,144

Unamortized investment tax credits 3,006 3,006
Deferred income taxes 26,694 25,761
Advances for construction 95,474 95,878
Contributions in aid of construction 44,215 44,270
Regulatory liabilities 12,492 12,493
$550,489 $531,297


See accompanying notes on page 5 2
CALIFORNIA WATER SERVICE GROUP
CONSOLIDATED STATEMENT OF INCOME

FOR THE THREE MONTHS ENDED: Sept 30
1998 1997
In Thousands
Operating revenue $62,263 $59,551
Operating expenses:
Operation 36,610 35,971
Maintenance 2,253 2,560
Depreciation and amortization 3,641 3,435
Income taxes 5,662 5,025
Property and other taxes 2,094 2,020
Total operating expenses 50,260 49,011
Net operating income 12,003 10,540
Other income and expenses, net 279 257
12,282 10,797
Interest on long term debt 2,836 2,889
Other interest 305 48
3,141 2,937
Net income 9,141 7,860
Preferred dividends 38 38
Net income available for common stock $9,103 $7,822
Weighted average common shares outstanding 12,619 12,619
Basic earnings per share of common stock $0.72 $0.62
Dividends per share of common stock $0.2675 $0.2638


FOR THE NINE MONTHS ENDED:
In Thousands
Operating revenue $141,943 $152,192
Operating expenses:
Operation 86,964 89,005
Maintenance 6,655 6,782
Depreciation and amortization 10,922 10,211
Income taxes 8,449 12,372
Property and other taxes 5,890 5,783
Total operating expenses 118,880 124,153
Net operating income 23,063 28,039
Other income and expenses, net 632 613
23,695 28,652
Interest on long term debt 8,508 8,668
Other interest 896 324
9,404 8,992
Net income 14,291 19,660
Preferred dividends 114 114
Net income available for common stock $14,177 $19,546
Weighted average common shares outstanding 12,619 12,619
Basic earnings per share of common stock $1.12 $1.55
Dividends per share of common stock $0.8025 $0.7913

See accompanying notes on page 5 3

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

In Thousands
SEPTEMBER 30
1998 1997
Operating activities:
Net Income $14,291 $19,660
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 10,922 10,211
Regulatory assets and liabilities, net (404) (153)
Deferred income taxes and investment tax credits,
net 933 708
Change in operating assets and liabilities:
Receivables (3,478) (3,471)
Unbilled revenue (3,150) (2,405)
Materials and supplies (43) 233
Taxes and other prepaid expenses (1,562) (1,898)
Accounts payable 5,424 4,309
Accrued expenses and other liabilities 10,743 6,915
Other changes, net 473 714
Net adjustments 19,858 15,163
Net cash provided by operating activities 34,149 34,823
Investing activities:
Utility plant expenditures (23,210) (21,795)
Financing activities:
Net short-term borrowings (1,500) (5,500)
Advances for construction 2,628 3,562
Contributions in aid of construction 948 1,343
Refunds of advances for construction (2,899) (2,767)
Dividends paid (10,242) (10,100)
Net cash used in financing activities (11,065) (13,462)
Change in cash and cash equivalents (126) (434)
Cash and cash equivalents at beginning of period 1,742 1,368
Cash and cash equivalents at end of period $1,616 $934



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

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 of California Water Service Group ("Group") 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 the
1997 Annual Report to shareholders. The 1997 Annual Report to shareholders
was incorporated by reference in Group's 1997 Form 10-K filing.

RESULTS OF THIRD QUARTER OPERATIONS
Third quarter net income was $9,141,000, equivalent to $0.72 per common share.
This represents a $0.10 or 16% increase from the $0.62 earned in last year's
third quarter.
Operating revenue increased $2,712,000 to $62,263,000. The revenue increase
was primarily due to the passage of "El Nino" which had negatively impacted
revenue and constrained earnings during the first half of 1998. The return
of normal weather resulted in an increase in customer water consumption by 2%,
adding $1,753,000 to revenue.
Usage by 3,100 new customers added in the last twelve months added $494,000 and
increased customer rates added $465,000. Average revenue per customer
increased $6.60 or 4%. A breakdown of the net increase in operating revenue
is accounted for in the following table:

General rate increases $51,000
Step rate increases 414,000
Total rate increases 465,000
Increased consumption 1,753,000
Usage by 3,100 new customers 494,000
Net revenue increase $2,712,000

Total operating expenses increased 2% this quarter:
Water production for the quarter was 1% more than last year's level. Well
production provided 54% of the supply with 46% purchased from wholesale
suppliers.
Water production costs, which include purchased water, purchased power and pump
taxes, increased $564,000. The purchased water increase was modest because
wholesale supplier rate increases in eight districts ranged between 1% and 5%,
while three districts experienced a 13% rate decrease. The components of water
production expense and the changes from last year are shown in the table below:

Third Quarter
1998 Cost Change
Purchased water $17,764,000 $573,000
Purchased power 4,794,000 (36,000)
Pump taxes 1,746,000 27,000
Total $24,304,000 $564,000

Other operations expense categories increased $75,000. 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, general corporate and employee relocations, which offset the
increased payroll.
Maintenance expense was lower this year due to reduced expenditures required
for tank maintenance and pump equipment maintenance and repair.
Depreciation and amortization expense increased $206,000 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 increased $637,000 because of greater taxable
income.
Other income and expense, reported on a pretax basis, was $279,000. Other
income included $318,000 from nonregulated operations. Netted against other
income was $39,000 of other expenses, which included contributions and costs
of maintaining nonregulated properties.

RESULTS FOR THE NINE MONTHS
Net income for the nine months ending September 30, 1998 was $14,291,000,
equivalent to $1.12 per common share. This represents a $0.43 or 28% decrease
from the $1.55 earned for the same period last year. Part of the decline in
earnings was attributable to one-time purchased water refunds received in May
1997 from wholesale water suppliers totaling $2,512,000 or $0.12 per share.
Operating revenue declined $10,249,000 to $141,943,000. The revenue decrease
was primarily due to the impact of "El Nino" which negatively impacted revenue
and constrained earnings during the first two 1998 quarters. As reported
above, the return of normal weather resulted in an increase in customer water
consumption during the third quarter. Since January 1, 1998, 2,800 new
customers have been added. Average consumption per metered customer declined
12% from last year and average revenue per customer decreased $30.08 or 7%,
both indications of the negative impact of "El Nino" weather during the first
half of the year. A breakdown of the net decrease in operating revenue is
accounted for in the following table:


General rate increases $502,000
Step rate increases 1,028,000
Offset rate increases 217,000
Total rate increases 1,747,000
Decreased consumption (13,075,000)
Usage by 2,800 new customers 1,079,000
Net revenue decrease $(10,249,000)

Total operating expenses decreased 4%.
Water production was 13% less than last year. Well production provided 51% of
the supply with 48% purchased from wholesale suppliers and 1% produced through
a local watershed. Because of the decline in water production, purchased
water, purchased power and pump taxes each declined. Water production costs,
which include purchased water, purchased power and pump taxes, decreased
$3,231,000. The decline in purchased water cost would have been greater
except that in May 1997 one-time refunds were received from wholesale water
suppliers totaling $2,512,000.
The components of water production expense and the changes from last year are
shown in the table below:

Year to Date
1998 Cost Change
Purchased water $39,004,000 $(1,294,000)
Purchased power 8,759,000 (1,410,000)
Pump taxes 3,118,000 (527,000)
Total $50,881,000 $(3,231,000)

Besides water production costs, other operation expense categories decreased
$2,042,000. 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 operating expenses. However, there were decreases
in other expense categories including chemicals, CPUC reimbursement fee,
telephone expense, general corporate and employee relocations which offset the
increased payroll.
Maintenance expense was lower this year due to reduced expenditures required
for tank maintenance, water treatment equipment maintenance and pump equipment
maintenance and repair.
Depreciation and amortization expense increased $711,000 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.
The largest decrease in operating expense was Federal and state income taxes
which declined due to lower taxable income.
Other income and expense, reported on a pretax basis, was $632,000. Other
income included $856,000 from nonregulated operations. Netted against other
income was $224,000 of other expenses, which included contributions and costs
of operating and maintaining nonregulated 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 was also filed. In accordance with the lease
agreement, this 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 years 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 $53,000 as a result of the
retirement of Series L first mortgage bonds and annual first mortgage bond
sinking fund payments made in the fourth quarter of 1997. Short-term interest
expense increased $257,000 due to additional borrowings under the bank line of
credit. At September 30, 1998, $13 million was borrowed under the credit line
at an effective interest rate of 7.05%. At September 30, 1997, $2 million was
outstanding under the credit line.
The Group plans to issue long-term debt during the fourth quarter of 1998 or
early in 1999 to replace outstanding short-term bank borrowings.
The third quarter common dividend was paid on August 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
September 30, 1998, the dividend payout ratio is 76%.
About 11% of the outstanding shares participate in the reinvestment program
under 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 $13.32 at September 30, 1998, compared to
$12.98 a year earlier.
During the quarter, utility plant expenditures totaled $6,959,000 for additions
to and replacements of utility plant. Of that amount, $6,696,000 was funded
through 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 136% of historic average as of September 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 was slow. The abundant snowpack
provides runoff to streams and reservoirs as it melts during the remaining
summer months.

YEAR 2000 UPDATE
Group continues to modify and implement its Year 2000 readiness program as
described in the 10Q filed for the quarter ended June 30, 1998.
In the second quarter 10Q filing, Group indicated that it was considering using
an outside consultant to review and assess the Year 2000 readiness plan. An
independent consultant was retained and a risk assessment completed on
October 23, 1998. While the consultants report was positive, it did identify
several areas which require additional attention. Attention is being given
to implement the consultant's recommendations.
Installation of the PeopleSoft accounting and human resources software packages
continues on schedule. Both systems are scheduled to be in place before mid
year 1999.
The $300,000 estimated remediation cost for Year 2000 readiness has not
changed. Operating units continue to work with suppliers to assure availability
of necessary products or services. This work will continually be updated
through the remainder of 1998 and throughout 1999. One objective of
continued updating is to learn of any changes in a supplier's ability to
provide necessary products and services. It is also designed to allow time
for alternative plans should circumstances warrant.

ACCOUNTING PRONOUNCEMENTS
There were no accounting pronouncements issued during the period that would
have a significant impact on Group.

BUSINESS OPPORTUNITIES
In the 1997 Annual Report to shareholders, Group indicated that it would be
carefully evaluating the potential risk and return of business opportunities
in Central and South America. That assessment has been completed. Group
concluded that the risks and potential returns do not warrant pursuing
business opportunities in Central or South America. In accordance with its
growth strategy, Group will continue to investigate opportunities in the
western United States.

REAL ESTATE PROGRAM
Group's subsidiary, California Water Service Company ("Company") owns more
than 850 real estate parcels. Certain parcels are not necessary for or used
in water utility operations. A program has been developed to realize the
value of the surplus properties. The program will be ongoing over a period of
several years. Over the next four years, Group estimates that gross property
transactions totaling several million could be completed.

SHAREHOLDER PROPOSALS
The Board of Directors amended Group's bylaws to require that shareholder
proposals for consideration at an annual shareholders' meeting or nomination of
a candidate for director (other than a nomination by the Board's nominating
committee) must be submitted to Group at least 150 days before the anniversary
date of the previous year's annual meeting. The advance notice requirement is
intended to allow management sufficient time to review and consider any
shareholder proposal or nomination. Proposals and nominations will no longer
be accepted from the floor at the annual shareholders' meeting. Because of
the timing of this action, the deadline for the shareholders' meeting scheduled
for April 21, 1999 will be approximately 30 days later or December 14. The
December 14 date will be about 120 days before the anniversary date of the
1998 annual meeting. The 150 day requirement will be effective for the year
2000 annual meeting. Consistent with Securities and Exchange Commission rules,
the deadline for any proposal to be eligible for inclusion in Group's 1999
proxy statement was November 11, 1998, as announced in the 1998 proxy
statement. The full text of the bylaw amendment is included as an exhibit
with this filing.

PART II OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits required to be filed by Item 601 of Regulation S-K.

Sequential
Exhibit Page Numbers
Number Description in this Report
10.18 Amendment to bylaws regarding timing for 11
submission of shareholder proposals for
consideration at annual shareholder meetings
and shareholder nominations of directors

10.19 Certificate of Determination filed with state 14
of California regarding Series D Participating
Preferred Shares. These shares are relative to
Shareholder Rights Plan and would be issued
if the rights plan were triggered. The certificate
was adopted earlier this year as part of the rights
plan and was refiled in a revised form at the
Secretary of State's request.

(b) No reports on Form 8-K have been filed during the quarter ended
September 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

October 27, 1998

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