UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2009

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

CALIFORNIA WATER SERVICE GROUP

(Exact name of registrant as specified in its charter)

Delaware		77-0448994
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer identification No.)
1720 North First Street, San Jose, CA.		95112
(Address of principal executive offices)		(Zip Code)

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 þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act) Yes o No þ

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, 2009 — 20,744,952

 

 

TABLE OF CONTENTS

						Page
PART I				Financial Information			3
				Item 1 Financial Statements			3
				Condensed Consolidated Balance Sheets (unaudited) June 30, 2009 and December 31, 2008			3
				Condensed Consolidated Statements of Income (unaudited) For the Three Months Ended June 30, 2009 and 2008			4
				Condensed Consolidated Statements of Income (unaudited) For the Six Months Ended June 30, 2009 and 2008			5
				Condensed Consolidated Statements of Cash Flows (unaudited) For the Six Months Ended June 30, 2009 and 2008			6
				Notes to Unaudited Condensed Consolidated Financial Statements			7
Item 2				Management’s Discussion and Analysis of Financial Condition and Results of Operations			22
Item 3				Quantitative and Qualitative Disclosure about Market Risk			32
Item 4				Controls and Procedures			32
PART II				Other Information			34
Item 1				Legal Proceedings			34
Item 4				Submission of Matters to a Vote of Security Holders			35
Item 6				Exhibits			36
				Signatures			37
				Index to Exhibits			38
EX-31.1
EX-31.2
EX-32

PART I FINANCIAL INFORMATION

Item 1.

FINANCIAL STATEMENTS

The condensed consolidated financial statements presented in this filing on Form 10-Q have been prepared by management and are unaudited.

CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATED BALANCE SHEETS

Unaudited
(In thousands, except per share data)

		June 30,				December 31,
		2009				2008
ASSETS
Utility plant:
Utility plant		$	1,638,356			$	1,583,079
Less accumulated depreciation and amortization			(492,989	)			(470,712	)
Net utility plant			1,145,367				1,112,367
Current assets:
Cash and cash equivalents			41,498				13,869
Receivables:
Customers			26,613				22,786
Regulatory balancing accounts			12,612				4,629
Other			7,687				7,442
Unbilled revenue			20,273				13,112
Materials and supplies at average cost			5,244				5,070
Taxes, prepaid expenses and other assets			10,565				12,890
Total current assets			124,492				79,798
Other assets:
Regulatory assets			199,194				198,293
Goodwill			3,906				3,906
Other assets			30,281				23,743
Total other assets			233,381				225,942
		$	1,503,240			$	1,418,107
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock, $.01 par value		$	207			$	207
Additional paid-in capital			214,451				213,922
Retained earnings			191,098				188,820
Total common stockholders’ equity			405,756				402,949
Long-term debt, less current maturities			383,500				287,498
Total capitalization			789,256				690,447
Current liabilities:
Current maturities of long-term debt			2,664				2,818
Short-term borrowings			12,000				40,000
Accounts payable:
Trade and other			42,267				39,187
Regulatory balancing accounts			6,077				2,585
Accrued interest			4,013				3,295
Accrued expenses and other liabilities			34,189				35,311
Total current liabilities			101,210				123,196
Unamortized investment tax credits			2,392				2,392
Deferred income taxes, net			76,008				72,344
Pension and postretirement benefits other than pensions			152,468				152,685
Regulatory and other liabilities			83,282				83,312
Advances for construction			179,566				176,163
Contributions in aid of construction			119,058				117,568
Commitments and contingencies			—				—
		$	1,503,240			$	1,418,107

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements

CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATED STATEMENTS OF INCOME

Unaudited
(In thousands, except per share data)

		June 30,				June 30,
For the three months ended		2009				2008
Operating revenue		$	116,667			$	105,581
Operating expenses:
Operations:
Water production costs			41,702				40,349
Administrative and general			19,386				13,835
Other operations			14,330				12,766
Maintenance			4,312				4,947
Depreciation and amortization			10,282				9,276
Income taxes			6,789				6,442
Property and other taxes			3,911				3,484
Total operating expenses			100,712				91,099
Net operating income			15,955				14,482
Other income and expenses:
Non-regulated revenue			3,098				1,696
Non-regulated expenses, net			(721	)			(1,132	)
Gain on sale of non-utility property			72				7
Income taxes expense on other income and expenses			(992	)			(219	)
Net other income and expenses			1,457				352
Interest expense:
Interest expense			5,962				5,157
Less: capitalized interest			(640	)			(439	)
Net interest expense			5,322				4,718
Net income		$	12,090			$	10,116
Earnings per share
Basic		$	0.58			$	0.48
Diluted		$	0.58			$	0.48
Weighted average shares outstanding
Basic			20,745				20,717
Diluted			20,767				20,741
Dividends declared per share of common stock		$	0.2950			$	0.2925

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements

CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATED STATEMENTS OF INCOME

Unaudited
(In thousands, except per share data)

		June 30,				June 30,
For the six months ended		2009				2008
Operating revenue		$	203,280			$	178,502
Operating expenses:
Operations:			8,947				9,060
Water production costs			70,570				65,707
Administrative and general			38,247				27,253
Other operations			26,786				24,831
Maintenance			8,947				9,060
Depreciation and amortization			20,480				18,498
Income taxes			8,021				6,616
Property and other taxes			7,999				7,223
Total operating expenses			181,050				159,188
Net operating income			22,230				19,314
Other income and expenses:
Non-regulated revenue			5,979				4,601
Non-regulated expenses, net			(3,362	)			(4,168	)
Gain on sale of non-utility property			675				7
Income taxes expense on other income and expenses			(1,330	)			(170	)
Net other income and expense			1,962				270
Interest expense:
Interest expense			11,000				10,171
Less: capitalized interest			(1,319	)			(889	)
Net interest expense			9,681				9,282
Net income		$	14,511			$	10,302
Earnings per share
Basic		$	0.70			$	0.49
Diluted		$	0.70			$	0.49
Weighted average shares outstanding
Basic			20,738				20,702
Diluted			20,763				20,726
Dividends declared per share of common stock		$	0.5900			$	0.5850

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements

CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Unaudited
(In thousands)

		June 30,				June 30,
For the six months ended:		2009				2008
Operating activities
Net income		$	14,511			$	10,302
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			21,614				18,498
Gain on sale of non-utility property			(675	)			(7	)
Change in value of life insurance contracts			(1,827	)			—
Other changes in noncurrent assets and liabilities			3,729				(184	)
Changes in operating assets and liabilities:
Receivables			(12,065	)			(1,695	)
Accounts payable			9,916				2,317
Other current assets			(5,018	)			(7,962	)
Other current liabilities			(143	)			9,994
Other changes, net			518				1,488
Net adjustments			16,049				22,449
Net cash provided by operating activities			30,560				32,751
Investing activities:
Utility plant expenditures:
Company funded			(50,655	)			(38,527	)
Developer funded			(2,275	)			(4,823	)
Purchase of life insurance			(1,613	)			(1,367	)
Proceeds on sale of non-utility property			750				—
Net cash used in investing activities			(53,793	)			(44,717	)
Financing activities:
Short-term borrowings			20,000				23,000
Repayment of short-term borrowing			(48,000	)			—
Advances and contributions in aid of construction			2,414				5,166
Refunds of advances for construction			(2,520	)			(3,675	)
Dividends paid			(12,233	)			(12,191	)
Proceeds from long-term debt, net of issuance cost of $3,390			96,610				—
Repayment of long-term debt			(5,439	)			(939	)
Issuance of common stock			30				—
Net cash provided by financing activities			50,862				11,361
Change in cash and cash equivalents			27,629				(605	)
Cash and cash equivalents at beginning of period			13,869				6,734
Cash and cash equivalents at end of period		$	41,498			$	6,129
Supplemental information
Cash paid for interest, net of interest capitalized		$	8,553			$	8,698
Cash paid for income taxes			358				16
Supplemental disclosure of non-cash activities:
Accrued payables for investments in utility plant		$	7,623			$	19,099
Purchase of intangible assets with company common stock			—			$	1,300
Utility plant contribution by developers		$	7,584			$	6,315

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements

CALIFORNIA WATER SERVICE GROUP
Notes to Unaudited Condensed Consolidated Financial Statements
June 30, 2009
(Amounts in thousands, except share and per share amounts)

Note 1. Organization and Operations and Basis of Presentation

California Water Service Group (the Company) is a holding company that provides water utility and other related services in California, Washington, New Mexico and Hawaii through its wholly-owned subsidiaries. California Water Service Company (Cal Water), Washington Water Service Company (Washington Water), New Mexico Water Service Company (New Mexico Water), and Hawaii Water Service Company, Inc. (Hawaii Water) provide regulated utility services under the rules and regulations of their respective state’s regulatory commissions (jointly referred to herein as the Commissions). CWS Utility Services and HWS Utility Services LLC provide non-regulated water utility and utility-related services.

     Basis of Presentation

The unaudited interim financial information has been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X promulgated by the Securities and Exchange Commission (SEC) and therefore do not contain all of the information and footnotes required by GAAP and the SEC for annual financial statements. The condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements for the year ended December 31, 2008, included in its current report on Form 8-K as filed with the SEC on April 7, 2009.

The preparation of the Company’s condensed consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the balance sheet dates and the reported amounts of revenues and expenses for the periods presented. Actual results could differ from these estimates.

In the opinion of management, the accompanying condensed consolidated financial statements reflect all adjustments that are necessary to provide a fair presentation of the results for the periods covered. The results for interim periods are not necessarily indicative of the results for any future period.

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. Revenue and income are generally higher in the warm, dry summer months when water usage and sales are greater. Revenue and income are lower in the winter months when cooler temperatures and rainfall curtail water usage and sales.

The Company operates primarily in one business segment providing water and related utility services.

Note 2. Summary of Significant Accounting Policies

     Revenue

Revenue includes monthly cycle customer billings for regulated water and wastewater services at rates authorized by regulatory commissions and billings to certain non-regulated customers. In addition, effective July 1, 2008 with the adoption of the Water Revenue Adjustment Mechanism (WRAM) and the Modified Cost Balancing Account (MCBA), Cal Water records the difference between what is billed to its regulated customers and that which is authorized by the California Public Utilities Commission (CPUC).

Under the WRAM, Cal Water records the adopted level of volumetric revenues as authorized by the CPUC for metered accounts (adopted volumetric revenues). In addition to volumetric-based revenues, the revenue requirements approved by the CPUC include service charges, flat rate charges, and other items that are not subject to the WRAM. The adopted volumetric revenue considers the seasonality of consumption of water based upon historical averages. The variance between adopted volumetric revenues and actual billed volumetric revenues for metered accounts is recorded as a component of revenue with an offsetting entry to a current asset or liability balancing account (tracked individually for each Cal Water district). The variance amount may be positive or negative and represents amounts that will be billed or refunded to customers in the future.

Under the MCBA, Cal Water tracks adopted expense levels for purchased water, purchased power, and pump taxes, as established by the CPUC. Variances (which include the effects of changes in both rate and volume) between adopted and actual purchased water, purchased power, and pump tax expenses are recorded as a component of revenue, as the amount of such variances will be recovered from or refunded to the Company’s customers at a later date. This is reflected with an offsetting entry to a current asset or liability regulatory balancing account (tracked individually for each Cal Water district).

The balances in the WRAM and MCBA asset and liability accounts fluctuate on a monthly basis depending upon the variance between adopted and actual results. The recovery or refund of the WRAM is netted against the MCBA over- or under-recovery for the corresponding district and is interest bearing at the current 90 day commercial paper rate. When the net amount for any district achieves a pre-determined level at the end of any calendar year (i.e., at least 2.5 percent over- or under-recovery of the approved revenue requirement), Cal Water will file with the CPUC to refund or collect the balance in the accounts. Account balances less than those levels may be refunded or collected in Cal Water’s general rate case proceedings or aggregated with future calendar year balances for comparison with the recovery level. As of June 30, 2009 and December 31, 2008, the net aggregated asset included in accounts receivable was $12,612 and $4,629, respectively, and the aggregate liability included in accounts payable was $6,077 and $2,585, respectively.

     Recent Accounting Pronouncements Adopted

In December 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 141(R), “Business Combinations.” The statement applies prospectively to business combinations for which the acquisition date is on or after years beginning after December 15, 2008. SFAS 141(R) significantly changes current practices regarding business combinations. Among the more significant changes, SFAS 141(R) expands the definition of a business and a business combination; requires the acquirer to recognize the assets acquired, liabilities assumed and noncontrolling interests (including goodwill), measured at fair value at the acquisition date; requires acquisition-related expenses and restructuring costs to be recognized separately from the business combination and requires assets acquired and liabilities assumed from contractual and non-contractual contingencies to be recognized at their acquisition date fair values with subsequent changes recognized in earnings. Statement 141(R) requires that an entity record, generally through income tax expense, adjustments made after the measurement period (and adjustments during the measurement period that relate to facts and circumstances that did not exist as of the acquisition date) to (1) valuation allowances for acquired deferred tax assets and (2) acquired tax uncertainties. The Company adopted SFAS No. 141 (R) effective January 1, 2009.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51.” The statement amends ARB 51 to establish accounting and reporting standards for the noncontrolling interests in a subsidiary and for the deconsolidation of a subsidiary. The statement is effective for years beginning after December 15, 2008. The Company adopted SFAS No. 160 effective January 1, 2009, and it did not have a material impact on the Company’s financial position, results of operation, or cash flows.

In May 2008, the FASB staff revisited Emerging Issues Task Force (“EITF”) issue No. 03-6 and issued FASB Staff Position (“FSP”) No. EITF 03-6-1, “Determining Whether Instruments Granted in Shared-Based Payment Transactions are Participating Securities.” FSP EITF 03-6-1 requires unvested share-based payments that entitle employees to receive nonrefundable dividends to also be considered participating securities, as defined in EITF 03-6. The Company currently grants certain unvested share-based payments awards that include rights to dividends similar to common stockholders. The Company adopted FSP EITF 03-6-1 effective January 1, 2009 and it did not have a material impact to its computation of earnings per share.

In April 2009, the FASB issued FSP SFAS 107-1 and APB No. 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP SFAS 107-1 and APB No. 28-1”). This FSP amends SFAS No. 107 and APB Opinion No. 28. “Interim Financial Reporting” to require disclosures about the fair value of financial instruments for interim reporting periods that were previously only required for annual reporting periods. An entity is required to disclose the fair value of financial assets and liabilities together with the related carrying amount and where the carrying amount is classified in the Condensed Consolidated Balance Sheets. FSP SFAS 107-1 and APB No. 28-1 is effective prospectively for interim reporting periods after June 15, 2009. The Company adopted FSP SFAS 107-1 and APB No. 28-1 for the period ended June 30, 2009. See Note 9.

In May 2009, the FASB issued SFAS No. 165, “Subsequent Events.” SFAS No. 165 does not significantly change the prior accounting practice for subsequent events except for the requirement to disclose the date through which an entity has evaluated subsequent events and the basis for that date. The Company adopted SFAS No. 165 for the period ended June 30, 2009. There were no significant events or transactions that occurred after the balance sheet date and before the issuance of the financial statements on August 6, 2009 that would have significantly changed the June 30, 2009 financial statements.

     Accounting Pronouncements Issued But Not Yet Adopted

In December 2008, the FASB issued FSP FAS 132(R)-1,“Employers’ Disclosures about Postretirement Benefit Plan Assets” (“FSP 132(R)-1”). FSP 132(R)-1 amends and expands the disclosure requirements of SFAS No. 132. An entity is required to provide qualitative disclosures about how investment allocation decisions are made, the inputs and valuation techniques used to measure the fair value of plan assets, and the concentration of risk within plan assets. Additionally, quantitative disclosures are required showing the fair value of each major category of plan assets, the levels in which each asset is classified within the fair value hierarchy, and a reconciliation for the period of plan assets which are measured using significant unobservable inputs. FSP 132(R)-1 is effective prospectively for fiscal years ending after December 15, 2009. The Company will include the expanded disclosure requirement in the consolidated financial statements for future annual periods.

In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles — a replacement of SFAS No. 162.” The Codification is a reorganization and compilation of all existing authoritative U.S. GAAP recognized by the FASB to be applied to nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities law are also sources of authoritative GAAP for SEC registrants. On the effective date of this statement, the Codification will supersede all then-existing non-SEC accounting and reporting standards. This statement is effective for financial statements issued for interim and annual periods ending after September 15, 2009.

Note 3. Stock-based Compensation

     Long-Term Incentive Plan

The Company had a stockholder-approved Long-Term Incentive Plan (which was replaced on April 27, 2005, by a stockholder-approved Equity Incentive Plan) that allowed granting of non-qualified stock options. The Company had accounted for options issued under the Long-Term Incentive Plan using the intrinsic value method under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” All outstanding options (83,250 shares at June 30, 2009) have an exercise price equal to the market price on the date they were granted. The weighted average price of the options is $24.90. All options granted under the Long-Term Incentive Plan are fully vested. No compensation expense was recorded for the six-month periods ended June 30, 2009 and 2008 related to stock options issued under the Long-Term Incentive Plan.

     Equity Incentive Plan

Under the Company’s Equity Incentive Plan, which was approved by shareholders in April 2005, the Company is authorized to issue up to 1,000,000 shares of common stock. In the six months ended June 30, 2009 and 2008, the Company granted Restricted Stock Awards (RSAs) of 21,000 and 16,630 shares, respectively, of common stock both to officers and to directors of the Company. Employee options vest ratably over 48 months, while director options vest at the end of 12 months. The shares were valued at $38.38 and $37.60 per share, respectively, based upon the fair market value of the Company’s common stock on the date of grant.

In addition, in the six months ended June 30, 2009 and 2008, Stock Appreciation Rights (SARs) equivalent to 71,500 and 47,070 shares, respectively, were granted to officers, which vest ratably over 48 months and expire at the end of 10 years. The grant-date fair value for SARs was determined using the Black Scholes model, which arrived at a fair value of $10.50 and $6.03 per share, respectively. Upon exercise of a SAR, the appreciation is payable in common shares of the Company.

The assumptions utilized in calculation of the SAR fair value were:

		2009				2008
Expected dividend yield			3.06	%			3.11	%
Expected volatility			36.97	%			21.96	%
Risk-free interest rate			1.89	%			2.63	%
Expected holding period in years			6.0				5.2

The Company did not apply a forfeiture rate in the expense computation relating to RSAs and SARs issued to officers as they vest monthly and, as a result, the expense is recorded for actual vesting during the period. For outside directors the Company did not apply a forfeiture rate in the expense computation relating to RSAs, as the Company expects 100% to vest at the end of twelve months.

The table below reflects SARs activity under the Equity Incentive Plan for the six months ended June 30, 2009.

						Weighted Average
		Shares				Exercise Price
Stock Appreciation Rights
Outstanding at December 31, 2008			108,710			$	38.16
Granted			71,500				38.38
Exercised			—				—
Cancelled			—				—
Outstanding at June 30, 2009			180,210			$	38.25
Exercisable at June 30, 2009			64,352			$	38.36

The Company has recorded compensation costs for the RSAs and SARs in Operating Expense in the amount of $221 and $186 for the quarters ended June 30, 2009, and June 30, 2008, respectively, and $505 and $277 for the six months ended June 30, 2009 and 2008, respectively.

Note 4. Earnings Per Share Calculations

The computations of basic and diluted earnings per share are noted below. RSAs are included in the weighted stock outstanding as the shares have all the same voting and dividend rights as issued and unrestricted common stock. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock.

The SARs outstanding of 180,210 and 108,710 are anti-dilutive for the second quarter and six months ended June 30, 2009 and 2008. All options are dilutive and the dilutive effect is shown in the table below.

(In thousands, except per share data)

		Three Months Ended June 30
		2009				2008
Net income		$	12,090			$	10,116
Less preferred dividends			—				(38	)
Net income available to common stockholders		$	12,090			$	10,078
Weighted average common shares, basic			20,745				20,717
Dilutive common stock options (treasury method)			22				24
Shares used for dilutive computation			20,767				20,741
Net income per share — basic		$	0.58			$	0.48
Net income per share — diluted		$	0.58			$	0.48

		Six Months Ended June 30
		2009				2008
Net income		$	14,511			$	10,302
Less preferred dividends			—				(76	)
Net income available to common stockholders		$	14,511			$	10,226
Weighted average common shares, basic			20,738				20,702
Dilutive common stock options (treasury method)			25				24
Shares used for dilutive computation			20,763				20,726
Net income per share — basic		$	0.70			$	0.49
Net income per share — diluted		$	0.70			$	0.49

Note 5. Pension Plan and Other Postretirement Benefits

The Company provides a qualified, defined-benefit, non-contributory pension plan for substantially all employees. The Company makes annual contributions to fund the amounts accrued for the qualified pension plan. The Company also maintains an unfunded, non-qualified, supplemental executive retirement plan. The costs of the plans are charged to expense or are capitalized in utility plant as appropriate.

The Company offers medical, dental, vision, and life insurance benefits for retirees and their spouses and dependents. Participants are required to pay a premium, which offsets a portion of the cost.

Cash payments by the Company related to pension plans and other postretirement benefits were $17,892 for the six months ended June 30, 2009. The estimated cash contribution to the pension plans for 2009 is $29,600. The estimated contribution to the other benefits plan for 2009 is $9,600.

The following table lists components of the pension plans and other postretirement benefits. The data listed under “pension plan” includes the qualified pension plan and the non-qualified supplemental executive retirement plan. The data listed under “other benefits” is for all other postretirement benefits.

		Three Months Ended June 30																Six Months Ended June 30
		Pension Plan								Other Benefits								Pension Plan								Other Benefits
		2009				2008				2009				2008				2009				2008				2009				2008
Service cost		$	2,354			$	1,336			$	954			$	361			$	4,560			$	2,671			$	1,458			$	722
Interest cost			3,158				1,628				890				433				6,176				3,256				1,408				865
Expected return on plan assets			(1,871	)			(1,578	)			(208	)			(156	)			(3,578	)			(3,155	)			(393	)			(312	)
Recognized net initial APBO (1)			N/A				N/A				69				69				N/A				N/A				138				138
Amortization of prior service cost			1,533				468				29				29				3,066				936				58				58
Recognized net actuarial loss			505				81				612				75				966				162				811				150
Net periodic benefit cost		$	5,679			$	1,935			$	2,346			$	811			$	11,190			$	3,870			$	3,480			$	1,621

Note 6. Short-term Borrowings

The Company maintained a bank line of credit providing unsecured borrowings of up to $20 million and Cal Water maintained a separate bank line of credit for an additional $55 million. On April 17, 2009, the Company’s and Cal Water’s loan agreements with Bank of America, N.A. were amended so that the interest rate payable on outstanding borrowings is equal to the bank’s prime rate minus 0.75 percentage points or the LIBOR rate plus 1.0 percentage point. Additionally, the Company and Cal Water agreed to a fee of 0.15% based upon any unused commitment. The amendment also changed the expiration date to April 16, 2010. The agreement with the Company requires a debt to capitalization ratio of less than 0.667:1.0 and an interest coverage ratio of at least 2.5:1.0. As of June 30, 2009, the Company and Cal Water were in compliance with the bank covenants in the loan agreements. At June 30, 2009, there were no outstanding borrowings on the Cal Water line of credit and the outstanding borrowings on the Company line of credit was $12 million.

Note 7. Long-Term Debt

On April 17, 2009, Cal Water completed the sale and issuance of $100 million aggregate principal amount of its 5.875% First Mortgage Bonds due 2019, which are fully and unconditionally guaranteed by the Company. Pursuant to the note purchase agreements and supplements thereto under which Cal Water’s outstanding unsecured senior notes had been issued, Cal Water was required to issue a new series of first mortgage bonds in exchange for each outstanding series of unsecured senior notes with a like aggregate principal amount. The offering triggered this exchange provision. Accordingly, upon the closing of the offering, Cal Water was required to issue an additional series of first mortgage bonds under the mortgage indenture with a like aggregate principal amount to the holders of each series of its outstanding unsecured senior notes in exchange for each such series of notes.

In connection with the offering, Cal Water exercised its option to redeem the remaining $3.0 million of 8.86% Series J First Mortgage Bonds due 2023, which Cal Water assumed in connection with its acquisition of Dominguez Water Corporation in 2000. The redemption was effected pursuant to the terms of the indenture and supplemental indentures governing the Series J bonds. The Series J bonds were redeemed at a redemption price equal to 100% of the outstanding principal amount of the Series J bonds plus a make-whole premium of $1.0 million, and accrued and unpaid interest to the date of redemption.

Note 8. Commitments and Contingencies

Commitments

The Company has significant commitments to lease certain office spaces and water systems, and for the purchase of water from water wholesalers. These commitments are described in footnote 15 of the current report on Form 8-K dated April 7, 2009.

Contingencies

Chico Groundwater/Wausau Insurance Matter

In 1995, the State of California’s Department of Toxic Substances Control (DTSC) named us as a potential responsible party for cleanup of toxic contamination plumes, which contain perchloroethylene, also know as tetrachloroethylene (PCE) in the Chico groundwater. In December 2002, we were named along with other defendants in two lawsuits filed by DTSC for the cleanup of the plumes. In 2007, we entered into Court approved consent decrees (Consent Decrees). The Consent Decrees conditioned our performance upon many factors, including, but not limited to, water pumped and treated by us must meet regulatory standards so we may distribute to its customers. Pursuant to the terms of the Consent Decrees, we will incur capital costs of $1.5 million and future operating costs with a present value of approximately $2.6 million. In our 2007 general rate case (GRC) settlement negotiations, Division of Ratepayer Advocates have tentatively agreed to track all costs associated with the Consent Decrees, including legal costs to pursue insurance coverage, for potential future recovery in rates.

In connection with these suits, our insurance carrier, Employers Insurance of Wausau (Wausau) filed a separate lawsuit against us for reimbursement of past defense costs which approximate $1.5 million and a declaratory determination of coverage. On January 23, 2008, the Court heard various parties’ motions and on September 25, 2008 issued its rulings that Wausau had a duty to defend; therefore, the Company will not have to reimburse Wausau for previously incurred defense costs. The Court did not find Wausau’s actions were intended to harm the Company, so punitive damages will not be recoverable by the Company. However, the Court also found that the issue of policy coverage would be determined at trial. Trial commenced on June 1, 2009. During trial, the parties entered into a confidential settlement agreement which did not have a significant impact to the Company’s results of operations. The confidential settlement was fully executed on June 23, 2009, and a dismissal with prejudice of the lawsuit has been submitted to the Court.

Other Groundwater Contamination

The Company has been and is involved in litigation against third parties to recover past and future costs related to ground water contamination in our service areas. The cost of litigation is expensed as incurred and any settlement is first offset against such costs. Any settlement in excess of the cost to litigate is accounted for on a case by case basis based upon the nature of the settlement. It is anticipated that the majority of the settlement will be reflected as a benefit to the rate payers by offsetting future operating or capital costs.

The Company is involved in a lawsuit against major oil refineries regarding the contamination of the ground water as a result of the gas additive MTBE. The Company entered into a partial settlement with the defendants in April of 2008 that represent approximately 70% of the responsible parties (as determined by the Superior Court). On October 22, 2008, the Company received $34.2 million after deducting attorneys’ fees and litigation expenses. The Company is aggressively pursuing legal action against the remaining responsible parties. The Company has filed with the Commission to determine the appropriate regulatory treatment of the proceeds. It anticipates that the proceeds will be used by the Company on infrastructure improvements. The Company has filed with the Internal Revenue Service a request for a private letter ruling regarding the taxability of the proceeds.

The Company believes the proceeds are non-taxable based upon its intent to reinvest them in qualifying assets. When an agreement is reached with the Commission regarding the regulatory treatment, or when the taxability is determined based upon proceedings with the Internal Revenue Service, the Company will adjust the accounting of the settlement accordingly.

As previously reported, Cal Water has filed with the City of Bakersfield, in the Superior Court of California, a lawsuit that names potentially responsible parties, who manufactured and distributed products containing 1,2,3 trichloropropane (TCP) in California. TCP has been detected in the ground water. The lawsuit seeks to recover treatment costs necessary to remove TCP. The Court has now coordinated our action with other water purveyor cases (TCP Cases JCCP 4435) in San Bernardino County. No trial date has yet been set.

The Company has filed in San Mateo County Superior Court a complaint (California Water Service Company v. The Dow Chemical Company, et al. CIV 473093) against potentially responsible parties that manufactured and distributed products, which contained perchloroethylene, also know as tetrachloroethylene (PCE) in California, to recover the past, present, and future treatment costs. No trial date has yet been set.

Other Legal Matters

From time to time, the Company is involved in various disputes and litigation matters that arise in the ordinary course of business. We review the status of each significant matter and assess its potential financial exposure. If the potential loss from any claim or legal proceeding is considered probable and the amount of the range of loss can be estimated, the Company accrues a liability for the estimated loss in accordance with SFAS No 5, “Accounting of Contingencies.” Legal proceedings are subject to uncertainties, and the outcomes are difficult to predict. Because of such uncertainties, accruals are based on the best information available at the time. While the outcome of these disputes and litigation matters cannot be predicted with any certainty, management does not believe that when taking into account existing reserves that the ultimate resolution of these matters will materially affect our financial position, results of operations, or cash flows.

From time to time, the Company has been named as a co-defendant in several asbestos related lawsuits. The Company has been dismissed without prejudice in several of these cases. In other cases our contractors and our insurance policy carriers have settled the cases with no effect on the Company’s financial statements. As such the Company does not currently believe that there is any potential loss which is probable of occurring related to these matters and therefore no accrual or contingency has been recorded.

Note 9. Fair Value of Financial Instruments

For those financial instruments for which it is practicable to estimate a fair value, the following methods and assumptions were used. For cash equivalents, accounts receivable and accounts payable, the carrying amount approximates the fair value because of the short-term maturity of the instruments. The fair value of the Company’s long-term debt is estimated at $399 million and $290 million as of June 30, 2009 and December 31, 2008, respectively, using the published quoted market price, if available, or the discounted cash flow analysis, based on the current rates available to the Company for debt of similar maturities and credit risk. The book value of the long-term debt is $384 million and $287 million as of June 30, 2009 and December 31, 2008, respectively. The fair value of advances for construction contracts is estimated at $67 million as of June 30, 2009, and $66 million as of December 31, 2008, based on data of recent market transactions.

Note 10. Condensed Consolidating Financial Statements

As discussed in Note 7, on April 17, 2009, Cal Water issued $100 million aggregate principal amount of 5.875% First Mortgage bonds due 2019, which are fully and unconditionally guaranteed by California Water Service Group (Parent Company). The following tables present the condensed consolidating statements of income of California Water Service Group (Guarantor and Parent), Cal Water (issuer and wholly-owned consolidated subsidiary of California Water Service Group) and other wholly-owned subsidiaries of the Company for the three-month and six-month periods ended June 30, 2009 and 2008, the condensed consolidating statements of cash flows for the six-months ended June 30, 2009 and 2008, and the condensed consolidating balance sheets as of June 30, 2009, and December 31, 2008. The information is presented utilizing the equity method of accounting for investments in consolidating subsidiaries.

CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATING BALANCE SHEET
As of June 30, 2009

(In thousands)

		Parent								All Other				Consolidating
		Company				Cal Water				Subsidiaries				Adjustments				Consolidated
ASSETS
Utility plant:
Utility plant		$	—			$	1,539,129			$	106,426			$	(7,199	)		$	1,638,356
Less accumulated depreciation and amortization			—				(471,638	)			(22,412	)			1,061				(492,989	)
Net utility plant			—				1,067,491				84,014				(6,138	)			1,145,367
Current assets:
Cash and cash equivalents			1,371				35,970				4,157				—				41,498
Receivables and unbilled revenue			11				62,906				4,268				—				67,185
Receivables from affiliates			11,959				10,690				1,990				(24,639	)			—
Other current assets			84				15,013				712				—				15,809
Total current assets			13,425				124,579				11,127				(24,639	)			124,492
Other assets:
Regulatory assets			—				198,796				398				—				199,194
Investments in affiliates			406,243				—				—				(406,243	)			—
Long-term affiliate notes receivable			11,664				—				—				(11,664	)			—
Other assets			—				25,580				8,812				(205	)			34,187
Total other assets			417,907				224,376				9,210				(418,112	)			233,381
		$	431,332			$	1,416,446			$	104,351			$	(448,889	)		$	1,503,240
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stockholders’ equity		$	405,756			$	375,690			$	36,921			$	(412,611	)		$	405,756
Affiliate long-term debt			—				—				11,664				(11,664	)			—
Long-term debt, less current maturities			—				380,015				3,485				—				383,500
Total capitalization			405,756				755,705				52,070				(424,275	)			789,256
Current liabilities:
Current maturities of long-term debt			—				1,918				746				—				2,664
Short-term borrowings			12,000								—				—				12,000
Payables to affiliates			12,313				1,695				10,631				(24,639	)			—
Accounts payable			—				43,977				4,367				—				48,344
Accrued expenses and other liabilities			1,263				32,143				4,771				25				38,202
Total current liabilities			25,576				79,733				20,515				(24,614	)			101,210
Unamortized investment tax credits			—				2,392				—				—				2,392
Deferred income taxes, net			—				73,667				2,341				—				76,008
Pension and postretirement benefits other than pensions			—				152,468				—				—				152,468
Regulatory and other liabilities			—				75,420				7,862				—				83,282
Advances for construction			—				178,033				1,533				—				179,566
Contributions in aid of construction			—				99,028				20,030				—				119,058
		$	431,332			$	1,416,446			$	104,351			$	(448,889	)		$	1,503,240

CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATING BALANCE SHEET
As of December 31, 2008

(In thousands)

		Parent								All Other				Consolidating
		Company				Cal Water				Subsidiaries				Adjustments				Consolidated
ASSETS
Utility plant:
Utility plant		$	—			$	1,488,227			$	102,051			$	(7,199	)		$	1,583,079
Less accumulated depreciation and amortization			—				(451,350	)			(20,354	)			992				(470,712	)
Net utility plant			—				1,036,877				81,697				(6,207	)			1,112,367
Current assets:
Cash and cash equivalents			427				3,025				10,417				—				13,869
Receivables and unbilled revenue			72				44,049				3,848				—				47,969
Receivables from affiliates			9,295				11,976				372				(21,643	)			—
Other current assets			142				17,877				(59	)			—				17,960
Total current assets			9,936				76,927				14,578				(21,643	)			79,798
Other assets:
Regulatory assets			905				196,990				398				—				198,293
Investments in affiliates			404,064				—				—				(404,064	)			—
Long-term affiliate notes receivable			10,851				—				—				(10,851	)			—
Other assets			—				20,242				7,612				(205	)			27,649
Total other assets			415,820				217,232				8,010				(415,120	)			225,942
		$	425,756			$	1,331,036			$	104,285			$	(442,970	)		$	1,418,107
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stockholders’ equity		$	402,949			$	372,337			$	38,139			$	(410,476	)		$	402,949
Affiliate long-term debt			—				—				10,851				(10,851	)			—
Long-term debt, less current maturities			—				283,820				3,678				—				287,498
Total capitalization			402,949				656,157				52,668				(421,327	)			690,447
Current liabilities:
Current maturities of long-term debt			—				2,121				697				—				2,818
Short-term borrowings			12,000				28,000				—				—				40,000
Payables to affiliates			9,642				201				11,800				(21,643	)			—
Accounts payable			—				38,003				3,769				—				41,772
Accrued expenses and other liabilities			1,165				34,563				2,878				—				38,606
Total current liabilities			22,807				102,888				19,144				(21,643	)			123,196
Unamortized investment tax credits			—				2,392				—				—				2,392
Deferred income taxes, net			—				70,003				2,341				—				72,344
Pension and postretirement benefits other than pensions			—				152,685				—				—				152,685
Regulatory and other liabilities			—				75,362				7,950				—				83,312
Advances for construction			—				174,625				1,538				—				176,163
Contributions in aid of construction			—				96,924				20,644				—				117,568
		$	425,756			$	1,331,036			$	104,285			$	(442,970	)		$	1,418,107

CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATING STATEMENT OF INCOME
For the three months ended June 30, 2009

(In thousands)

		Parent								All Other				Consolidating
		Company				Cal Water				Subsidiaries				Adjustments				Consolidated
Operating revenue		$	—			$	109,797			$	6,870			$	—			$	116,667
Operating expenses:
Operations:
Water production costs			—				39,979				1,723				—				41,702
Administrative and general			—				17,303				2,083				—				19,386
Other operations			—				12,386				2,058				(114	)			14,330
Maintenance			—				4,054				258				—				4,312
Depreciation and amortization			—				9,448				869				(35	)			10,282
Income taxes (benefit)			(40	)			6,953				(242	)			118				6,789
Property and other taxes			—				3,444				467				—				3,911
Total operating expenses			(40	)			93,567				7,216				(31	)			100,712
Net operating income (loss)			40				16,230				(346	)			31				15,955
Other Income and Expenses:
Non-regulated revenue			181				1,987				1,249				(319	)			3,098
Non-regulated expense, net			—				87				(808	)			—				(721	)
Gain on sale on non-utility property			—				77				(5	)			—				72
Income tax benefit (expense) on other income and expense			(74	)			(876	)			(146	)			104				(992	)
Net other income and expense			107				1,275				290				(215	)			1,457
Interest:
Interest expense			98				5,812				257				(205	)			5,962
Less: capitalized interest			—				(505	)			(135	)			—				(640	)
Net interest expense			98				5,307				122				(205	)			5,322
Equity earnings of subsidiaries			12,041				—				—				(12,041	)			—
Net income (loss)		$	12,090			$	12,198			$	(178	)		$	(12,020	)		$	12,090

CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATING STATEMENT OF INCOME
For the six months ended June 30, 2009

(In thousands)

		Parent								All Other				Consolidating
		Company				Cal Water				Subsidiaries				Adjustments				Consolidated
Operating revenue		$	—			$	190,073			$	13,207			$	—			$	203,280
Operating expenses:
Operations:
Water production costs			—				67,059				3,511				—				70,570
Administrative and general			—				34,542				3,705				—				38,247
Other operations			—				23,417				3,597				(228	)			26,786
Maintenance			—				8,574				373				—				8,947
Depreciation and amortization			—				18,883				1,666				(69	)			20,480
Income taxes (benefit)			(65	)			8,132				(359	)			313				8,021
Property and other taxes			—				6,953				1,046				—				7,999
Total operating expenses			(65	)			167,560				13,539				16				181,050
Net operating income (loss)			65				22,513				(332	)			(16	)			22,230
Other Income and Expenses:
Non-regulated revenue			352				3,944				2,296				(613	)			5,979
Non-regulated expense, net			—				(1,655	)			(1,707	)			—				(3,362	)
Gain on sale on non-utility property			—				675				—				—				675
Income tax benefit (expense) on other income and expense			(144	)			(1,207	)			(264	)			285				(1,330	)
Net other income and expense			208				1,757				325				(328	)			1,962
Interest:
Interest expense			159				10,728				498				(385	)			11,000
Less: capitalized interest			—				(1,050	)			(269	)			—				(1,319	)
Net interest expense			159				9,678				229				(385	)			9,681
Equity earnings of subsidiaries			14,397				—				—				(14,397	)			—
Net income (loss)		$	14,511			$	14,592			$	(236	)		$	(14,356	)		$	14,511