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 restricted stock units that earn dividend equivalents on an equal basis with AWR’s Common Shares that have been issued under AWR’s 2000, 2008 and 2016 employee plans, and the 2003 and 2013 directors' plans. 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)	2018		2017		2016
Net income	$	63,871	$	69,367	$	59,743
Less: (a) Distributed earnings to common shareholders	38,937		36,417		33,408
Distributed earnings to participating securities	204		197		187
Undistributed earnings	24,730		32,753		26,148

(b) Undistributed earnings allocated to common shareholders	24,601		32,577		26,003
Undistributed earnings allocated to participating securities	129		176		145
Total income available to common shareholders, basic (a)+(b)	$	63,538	$	68,994	$	59,411

Weighted average Common Shares outstanding, basic	36,733		36,638		36,552

Basic earnings per Common Share	$	1.73	$	1.88	$	1.63

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, 2008 and 2016 employee plans, and the 2003 and 2013 directors' plans, and net income. At December 31, 2018, there were 35,560 stock options outstanding under the 2000 and 2008 employee stock option plans. As of January 28, 2018, all stock options remaining outstanding under the 2000 plan were canceled in accordance with the terms of the 2000 plan. At December 31, 2018, there were also 197,896 restricted stock units outstanding including performance shares awarded to officers of the Registrant.

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)	2018		2017		2016
Common shareholders earnings, basic	$	63,538	$	68,994	$	59,411
Undistributed earnings for dilutive stock options and restricted stock units	129		176		145
Total common shareholders earnings, diluted	$	63,667	$	69,170	$	59,556

Weighted average Common Shares outstanding, basic	36,733		36,638		36,552
Stock-based compensation (1)	203		206		198
Weighted average Common Shares outstanding, diluted	36,936		36,844		36,750

Diluted earnings per Common Share	$	1.72	$	1.88	$	1.62

(1) In applying the treasury stock method of reflecting the dilutive effect of outstanding stock-based compensation in the calculation of diluted EPS, 35,560 stock options and 197,896 restricted stock units, including performance awards, at December 31, 2018 were deemed to be outstanding in accordance with accounting guidance on earnings per share.

During the years ended December 31, 2018, 2017 and 2016, AWR issued Common Shares totaling 44,906, 56,498 and 56,900, respectively, under AWR's employee stock incentive plans and the non-employee directors' plans. In addition, during the years ended December 31, 2018, 2017 and 2016, AWR issued 32,142, 52,936 and 12,546 Common Shares for approximately $546,000, $909,000 and $235,000, respectively, as a result of the exercise of stock options. During 2018, 2017 and 2016, no cash proceeds received by AWR as a result of the exercise of stock options were distributed to any of AWR's subsidiaries. AWR has not issued any Common Shares during 2018, 2017 and 2016 under AWR's Common Share Purchase and Dividend Reinvestment Plan ("DRP") and the 401(k) Plan. Shares reserved for the 401(k) Plan are in relation to AWR’s matching contributions and investment by participants. As of December 31, 2018, there were 1,055,948 and 387,300 Common Shares authorized for issuance directly by AWR but unissued under the DRP and the 401(k) Plan, respectively.

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.