Note 6 — Earnings Per Share and Capital Stock

In accordance with the accounting guidance for participating securities and earnings per share (“EPS”), Registrant uses the “two-class” method of computing EPS. The “two-class” method is an earnings allocation formula that determines EPS for each class of common stock and participating security. AWR has participating securities related to stock options and restricted stock units that earn dividend equivalents on an equal basis with AWR’s Common Shares (the “Common Shares”) that have been issued under AWR’s 2000 and 2008 Employee Plans and the 2003 Directors Plan. In applying the “two-class” method, undistributed earnings are allocated to both common shares and participating securities.

The following is a reconciliation of Registrant’s net income and weighted average Common Shares outstanding for calculating basic net income per share:

Basic	For The Years Ended December 31,
(in thousands, except per share amounts)	2012		2011		2010
Net income from continuing operations	$	54,148	$	42,010	$	31,091
Net income from discontinued operations	—		3,849		2,106
Total net income	54,148		45,859		33,197
Less: (a) Distributed earnings to common shareholders	24,129		20,563		19,329
Distributed earnings to participating securities	171		140		102
Undistributed earnings	29,848		25,156		13,766

(b) Undistributed earnings allocated to common shareholders	29,638		24,985		13,694
Undistributed earnings allocated to participating securities	210		171		72
Total income available to common shareholders, basic (a)+(b)	$	53,767	$	45,548	$	33,023

Weighted average Common Shares outstanding, basic	18,999		18,693		18,585
Basic earnings per Common Share:
Income from continuing operations	$	2.83	$	2.24	$	1.67
Income from discontinued operations	—		0.20		0.11
Net income	$	2.83	$	2.44	$	1.78

Diluted EPS is based upon the weighted average number of Common Shares, including both outstanding shares and shares potentially issuable in connection with stock options and restricted stock units granted under AWR’s 2000 and 2008 Employee Plans, and the 2003 Directors Plan, and net income. At December 31, 2012, there were 201,579 stock options outstanding under these Plans. At December 31, 2012, there were also 149,666 restricted stock units outstanding including performance shares awarded in May 2012 to the President and Chief Executive Officer of the Company.

The following is a reconciliation of Registrant’s net income and weighted average Common Shares outstanding for calculating diluted net income per share:

Diluted	For The Years Ended December 31,
(in thousands, except per share amounts)	2012		2011		2010
Common shareholders earnings, basic	$	53,767	$	45,548	$	33,023
Undistributed earnings for dilutive stock options	210		171		72
Total common shareholders earnings, diluted	$	53,977	$	45,719	$	33,095

Weighted average Common Shares outstanding, basic	18,999		18,693		18,585
Stock-based compensation (1)	132		144		151
Weighted average Common Shares outstanding, diluted	19,131		18,837		18,736
Diluted earnings per Common Share
Income from continuing operations	$	2.82	$	2.23	$	1.66
Income from discontinued operations	—		0.20		0.11
Net income	$	2.82	$	2.43	$	1.77

(1) In applying the treasury stock method of reflecting the dilutive effect of outstanding stock-based compensation in the calculation of diluted EPS, 201,579 stock options and 149,666 restricted stock units at December 31, 2012 were deemed to be outstanding in accordance with accounting guidance on earnings per share.

During the years ended December 31, 2012, 2011 and 2010 AWR issued Common Shares totaling 38,519, 69,434 and 68,025, respectively, under AWR’s Common Share Purchase and Dividend Reinvestment Plan (“DRP”), the 2000 and 2008 Employee Plans and the 2003 Directors Plan. As of December 31, 2012, there are 527,974 and 193,650 Common Shares authorized for issuance directly by AWR but unissued under the DRP and the 401(k) Plan, respectively. Shares reserved for the 401(k) Plan are in relation to AWR’s matching contributions and investment by participants. In addition, during the years ended December 31, 2012, 2011 and 2010, AWR issued 409,700, 88,713 and 30,500 Common Shares for approximately $13,295,000, $2,350,000 and $857,000, respectively, as a result of the exercise of stock options. During 2012, 2011 and 2010, no cash proceeds received by AWR as a result of the exercise of stock options were distributed to any subsidiaries of AWR.

During the years ended December 31, 2012, 2011 and 2010, AWR repurchased Common Shares in the open market of 675,967, 441,410 and 143,034, respectively, under AWR’s DRP and 401(k) Plan, which were used to satisfy the requirements of these plans and programs.

In August 2012, AWR filed a Registration Statement with the Securities and Exchange Commission (“SEC”) for the sale from time to time of debt and equity securities. As of December 31, 2012, $115.0 million was available for issuance of additional securities under this registration statement. This Registration Statement expires in August 2015.

GSWC’s outstanding common shares are owned entirely by its parent, AWR. To the extent GSWC does not reimburse AWR for stock-based compensation awarded under various stock compensation plans, such amounts increase the value of GSWC’s common shareholder’s equity.