Note 12 — Stock-Based Compensation Plans

Summary Description of Stock Incentive Plans

AWR currently has three stock incentive plans: the 2000 and 2008 Employee Plans for its employees, and the 2003 Directors Plan for directors, each more fully described below.

2000 and 2008 Employee Plans — AWR adopted the 2000 and 2008 Employee Plans to provide stock-based incentive awards in the form of stock options, restricted stock units and restricted stock to employees as a means of promoting the success of Registrant by attracting, retaining and more fully aligning the interests of employees with those of shareholders generally. The 2008 Employee Plan also provides for the grant of performance awards.

For stock options, Registrant’s Compensation Committee of the Board of Directors (“Compensation Committee”) determines, among other things, the date of grant, the form, term, option exercise price, vesting and exercise terms of each option. Stock options granted by AWR have been in the form of nonqualified stock options, expire ten years from the date of grant, vest over a period of three years and are subject to earlier termination as provided in the form of option agreement approved by the Compensation Committee. The option price per share was determined by the Compensation Committee at the time of grant, but was not to be less than the fair market value of Common Shares on the date of grant.

Each employee who receives a grant of a time-vested restricted stock unit is entitled to dividend equivalent rights in the form of additional restricted stock units until vesting of the time-vested restricted stock units. These restricted stock units vest over a period of three years. Each restricted stock unit is non-voting and entitles the holder of the restricted stock unit to receive one Common Share.

The Compensation Committee also has the authority to determine the size, number, amount or value of performance awards, the duration of the performance period or performance periods applicable to the award and the performance criteria applicable to each performance award for each performance period. The grant and or vesting of the performance awards are contingent, in whole or in part, upon the attainment of specified performance criteria or the occurrence of any event or events involving a change in control event, death or total disability as the Compensation Committee may determine. In its discretion, the Compensation Committee may grant dividend equivalent rights on performance awards upon the terms and conditions set forth in the award agreement.

2003 Directors Plan — The Board of Directors and shareholders approved the 2003 Directors Plan, which provides the non-employee directors with supplemental stock-based compensation and encourages them to increase their stock ownership in AWR.

Commencing in 2009, non-employee directors have received restricted stock units equal to two and a half times the annual retainer. One-third of these restricted stock units are payable to each non-employee director at the earlier of the first, second and third anniversaries of the date of grant and the date of termination of service as a director. Restricted stock units credited to each non-employee director’s restricted stock unit account are at all times fully vested and non-forfeitable.

The stock options granted under the 2003 Directors Plan are nonqualified stock options which must be exercised within ten years after the date of grant. The exercise price of the stock options is equal to the fair market value of Common Shares on the date of grant. Stock options granted under the 2003 Directors Plan are fully vested and exercisable upon the date of grant. Restricted stock units with respect to dividend equivalent rights on stock options credited to the non-employee director are payable in Common Shares on the earlier of the date on which the stock option is exercised and three years from the date of grant of the stock option.

All stock options and restricted stock units have been granted with dividend equivalent rights payable in the form of additional restricted stock units.

Recognition of Compensation Expense

Registrant recognizes compensation expense related to the fair value of stock-based compensation awards. Share-based compensation cost is measured by the Registrant at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the employee’s requisite service period (generally the vesting period of the equity grant).

The following table presents share-based compensation expenses for the years ended December 31, 2012, 2011 and 2010. These expenses resulting from stock options, restricted stock and restricted stock units are included in administrative and general expenses in AWR and GSWC’s statements of income:

	AWR						GSWC
	For The Years Ended December 31,						For The Years Ended December 31,
(in thousands)	2012		2011		2010		2012		2011		2010
Stock-based compensation related to:
Stock options granted to employees and directors	$	150	$	302	$	579	$	147	$	307	$	438
Restricted stock units granted to employees	1,402		927		645		1,141		747		443
Restricted stock units granted to directors	379		291		258		379		291		258
Total stock-based compensation expense	$	1,931	$	1,520	$	1,482	$	1,667	$	1,345	$	1,139

Equity-based compensation cost, capitalized as part of utility plant for the years ended December 31, 2012, 2011 and 2010 was $259,000, $247,000 and $190,000, respectively, for both AWR and GSWC.

Registrant amortizes stock-based compensation over the requisite (vesting) period for the entire award. Options issued pursuant to the 2000 and 2008 Employee Plans vest and are exercisable in installments of 33% the first two years and 34% in the third year, starting one year from the date of the grant and expire 10 years from the date of the grant. Restricted stock units vest and become nonforfeitable in installments of 33% the first two years and 34% in the third year, starting one year from the date of the grant. Performance shares vest and become nonforfeitable in installments of 33% the first two years and 34% in the third year, if the performance criteria set forth in the award agreement are satisfied.

Valuation of Stock Options

Registrant estimated the fair value of stock options granted during the years ended December 31, 2011 and 2010 using the Black-Scholes valuation model. There were no stock options granted during the year ended December 31, 2012. Key input assumptions used to estimate the fair value of stock options include the exercise price of the award, the expected option term, the expected volatility of the Registrant’s stock over the option’s expected term, the risk-free interest rate over the option’s expected term, and the Registrant’s expected annual dividend yield. Registrant believes that the valuation technique and the approach utilized to develop the underlying assumptions are appropriate in calculating the fair values of Registrant’s stock options granted during the years ended December 31, 2011 and 2010. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by persons who receive equity awards. The fair value of stock units and restricted stock was determined based on the closing trading price of Common Shares on the grant date.

The fair value of each option grant during the years ended December 31, 2011 and 2010 was estimated on the grant date using the Black-Scholes option-pricing model with the following assumptions:

	2011			2010
Weighted-average fair value of option granted	$	7.15		$	7.02
Risk-free interest rate	2.48		%	2.48		%
Expected annual dividend yield	3.04		%	3.04		%
Expected volatility factor	28.98		%	28.98		%
Expected option term (in years)	5			5

Summary of key assumptions — The risk-free interest rate for periods equal to the expected term of the share option was based on the U.S. Treasury yield curve in effect at the time of grant. Dividend yield reflects the current dividend rate at the date of grant. The stock volatility for each grant is measured using the weighted average of historical monthly and daily price changes of the Common Shares over the most recent period equal to the expected option life of the grant. Registrant develops expected option terms by reviewing detailed external information about employee exercise behavior. Accounting guidance also requires entities to estimate the number of forfeitures expected to occur and record expense based upon the number of awards expected to vest.

Stock Options— A summary of stock option activity as of December 31, 2012, and changes during the year ended December 31, 2012, are presented below:

	Number of Options		Weighted Average Exercise Price			Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
Options outstanding at January 1, 2012	619,984		$	32.75
Granted	—		—
Exercised	(409,700	)	(32.45		)
Forfeited or expired	(8,705	)	(31.38		)
Options outstanding at December 31, 2012	201,579		$	33.43		0.71	$	2,932,672
Options exercisable at December 31, 2012	184,755		$	33.44		4.47	$	2,687,254

The aggregate intrinsic value in the table above represents the total pretax intrinsic value (i.e., the difference between the closing price of the Common Shares on the last trading day of the 2012 calendar year and the exercise price, times the number of shares) that would have been received by the option holders had all option holders exercised their option on December 31, 2012. This amount changes if the fair market value of the Common Shares changes. The total intrinsic value of options exercised during the years ended December 31, 2012, 2011 and 2010 was approximately $4,125,000, $766,000 and $281,000, respectively.

During the years ended December 31, 2012, 2011 and 2010, Registrant received approximately $13,295,000, $2,350,000 and $857,000, respectively, in cash proceeds from the exercise of its stock options and realized approximately $890,000, $336,000 and $111,000, respectively, of tax benefit for the tax deduction from awards exercised. As of December 31, 2012, approximately $13,000 of total unrecognized compensation cost related to outstanding stock options is expected to be recognized over a remaining period ranging from 0.08 to 1.08 years.

Restricted Stock and Stock Units—A summary of the status of Registrant’s outstanding restricted stock units to employees and directors as of December 31, 2012, and changes during the year ended December 31, 2012, is presented below:

	Number of Restricted Share Units		Weighted Average Grant-Date Value
Restricted share units at January 1, 2012	137,673		$	34.37
Granted	64,943		36.97
Vested	(52,044	)	(32.50		)
Forfeited	(906	)	(35.52		)
Restricted share units at December 31, 2012	149,666		$	34.05

As of December 31, 2012, there was approximately $1,408,000 of total unrecognized compensation cost related to restricted stock units granted under AWR’s employee and director’s stock plans. That cost is expected to be recognized over a remaining period ranging from 0.08 to 2.83 years. The value of restricted stock units are determined by the Compensation Committee at the time of grant, based on the fair market value of Common Shares on the date of grant.

In May 2012, the Compensation Committee also granted 5,818 performance awards to the President and Chief Executive Officer of the Company. Each performance award was issued with dividend equivalent rights and vest over a period of three years provided that the performance criteria described in the performance award agreement has been satisfied.

AWR has no restricted stock outstanding as of December 31, 2012.