Stock-Based Compensation Plans

Summary Description of Stock Incentive Plans

AWR currently has four stock incentive plans: the 2000 and 2008 employee plans for its employees, and the 2003 and 2013 directors plans 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. No additional grants may be made under the 2000 employee plan.

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 is determined by the Compensation Committee at the time of grant, but may not be less than the fair market value of common shares on the date of grant.

For restricted stock unit awards, the Compensation Committee determines the specific terms, conditions and provisions relating to each restricted stock unit. Each employee who has been granted 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. In general, time-vested 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. Each outstanding performance award granted by the Compensation Committee has been in the form of restricted stock units that generally vest over a period of three years as provided in the performance award agreement. Each employee who has been granted a performance award is entitled to dividend equivalent rights in the form of additional restricted stock units until payment of the performance award.

2003 and 2013 Directors Plans — The Board of Directors and shareholders of AWR have approved the 2003 and 2013 directors plans in order to provide the non-employee directors with supplemental stock-based compensation to encourage them to increase their stock ownership in AWR. No more grants may be made under the 2003 directors plan.

Commencing in 2009, non-employee directors have received restricted stock units equal to two times the annual retainer. One-third of the restricted stock units granted in 2009-2012 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. Each non-employee director is entitled to receive restricted stock units granted after 2012 ninety days after the grant date. 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. No stock options have been granted to directors since AWR’s 2006 annual meeting and no stock options may be granted to directors under the 2013 directors plan.

All stock options, restricted stock units and performance awards 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). Immediate vesting does occur if the employee is at least 55 years old and the sum of the employee’s age and years of employment is equal to or greater than 75. Registrant assumes that forfeitures will be minimal, and recognizes forfeitures as they occur, which results in a reduction in compensation expense.

The following table presents share-based compensation expenses for the years ended December 31, 2013, 2012 and 2011. These expenses resulting from stock options, restricted stock units and performance awards 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)	2013		2012		2011		2013		2012		2011
Stock-based compensation related to:
Stock options	$	9	$	150	$	302	$	8	$	147	$	307
Restricted stock units	1,507		1,729		1,218		1,266		1,468		1,038
Performance awards	493		52		—		373		52		—
Total stock-based compensation expense	$	2,009	$	1,931	$	1,520	$	1,647	$	1,667	$	1,345

Equity-based compensation cost, capitalized as part of utility plant for the years ended December 31, 2013, 2012 and 2011 was $334,000, $259,000 and $247,000, 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. Time-vesting 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. Outstanding performance awards vest and become nonforfeitable in installments of 33% the first two years and 34% in the third year, and are distributed at the end of the performance period if the performance criteria set forth in the award agreement are satisfied.

Stock Options — Registrant estimated the fair value of stock options granted during the year ended December 31, 2011 using the Black-Scholes valuation model. There were no stock options granted during the year ended December 31, 2013 or 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. 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 each option grant during the year ended December 31, 2011 was estimated on the grant date using the Black-Scholes option-pricing model with the following assumptions:



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

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.

A summary of stock option activity as of December 31, 2013 and changes during the year ended December 31, 2013, are presented below:



	Number of Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
Options outstanding at January 1, 2013	403,158		$	16.72
Granted	—		—
Exercised	(131,448	)	16.06
Forfeited or expired	(7,114	)	13.13
Options outstanding at December 31, 2013	264,596		$	17.16	3.75	$	3,060,764
Options exercisable at December 31, 2013	264,545		$	17.16	3.75	$	3,060,166

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 2013 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, 2013. 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, 2013, 2012 and 2011 was approximately $1,402,000, $4,125,000 and $766,000, respectively.

During the years ended December 31, 2013, 2012 and 2011, Registrant received approximately $2.1 million, $13.3 million and $2.4 million, respectively, in cash proceeds from the exercise of its stock options and realized approximately $1,026,000, $890,000 and $336,000, respectively, of tax benefit for the tax deduction from awards exercised. As of December 31, 2013, an immaterial amount of total unrecognized compensation cost related to outstanding stock options will be recognized in 2014.

Restricted Stock Units — A restricted stock unit (“RSU”) represents the right to receive a share of AWR’s common shares and are valued based on the fair market value of AWR's common shares on the date of grant. The fair value of RSUs were determined based on the closing trading price of common shares on the grant date. A summary of the status of Registrant’s outstanding RSUs, excluding performance awards, to employees and directors as of December 31, 2013, and changes during the year ended December 31, 2013, is presented below:



	Number of Restricted Share Units		Weighted Average Grant-Date Value
Restricted share units at January 1, 2013	287,510		$	16.97
Granted	61,312		26.14
Vested	(148,522	)	17.93
Forfeited	(3,264	)	20.78
Restricted share units at December 31, 2013	197,036		$	19.04

As of December 31, 2013, there was approximately $825,000 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 2.82 years.

Performance Awards – During the years ended December 31, 2013 and 2012, the Compensation Committee granted performance awards in the form of restricted stock units to officers of the Registrant. A performance award represents the right to receive a share of AWR's common shares if specified performance goals are met over the performance period specified in the grant (generally three years), subject to certain exceptions through the performance period. Each grantee of any outstanding performance award may earn between 0% and 200% of the target amount depending on Registrant's performance against the performance goals, which generally consist of the following metrics: 25% of the performance awards earned are based on AWR's total shareholder return (TSR) compared to the TSR for a specific peer group of eight other investor-owned water companies (a market-based condition), and 75% of the performance awards will either be earned based on GSWC operating expense control criteria for GSWC's officers or ASUS cumulative net earnings for ASUS officers (performance-based conditions). A summary of the status of Registrant’s outstanding performance awards to officers as of December 31, 2013, and changes during the year ended December 31, 2013, is presented below:



	Number of Performance awards		Weighted Average Grant-Date Value
Performance awards at January 1, 2013	11,822		$	18.37
Granted	33,024		27.37
Vested	(3,926	)	18.42
Performance awards at December 31, 2013	40,920		$	25.63

A portion of the fair value of performance awards was estimated at the grant date based on the probability of satisfying the market-based conditions. The portion of the fair value of the performance awards associated with performance-based conditions was based on the fair market value of AWR's stock at the grant date. The fair value of each outstanding performance award grant is amortized into compensation expense in installments of 33% the first two years and 34% in the third year of their respective vesting periods, which is generally over 3 years unless earlier vested pursuant to the terms of the agreement. The accrual of compensation costs is based on the estimate of the final expected value of the award, and is adjusted as required for the portion based on the performance-based condition. As of December 31, 2013, $493,000 of unrecognized compensation costs related to performance awards is expected to be recognized over a weighted average period ranging from 1.1 to 2.2 years.

Restricted Stock - AWR has no restricted stock outstanding as of December 31, 2013.