11 · Share-based compensation

Under the 2010 Equity and Incentive Plan (EIP) HEI can issue shares of common stock as incentive compensation to selected employees in the form of stock options, stock appreciation rights, restricted shares, restricted stock units, performance shares and other share-based and cash-based awards.

As of December 31, 2013, there were 3.6 million shares remaining available for future issuance under the EIP of which an estimated 2.2 million shares could be issued upon the vesting of outstanding restricted stock units and the achievement of performance goals under long-term incentive plans (based on the assumption that long-term incentive plan (LTIP) awards are achieved at maximum levels).

Under the 1987 Stock Option and Incentive Plan, as amended (SOIP), there are possible future issuances of an estimated 2,000 shares upon exercise of outstanding stock appreciation rights (SARs) and dividend equivalents based on the market price of shares on December 31, 2013. As of May 11, 2010 (when the EIP became effective), no new awards may be granted under the SOIP. After the shares of common stock for the outstanding SOIP grants and awards are issued or such grants and awards expire, the remaining shares registered under the SOIP will be deregistered and delisted.

For the SARs outstanding under the SOIP, the exercise price of each SAR generally equaled the fair market value of HEI’s stock on or near the date of grant. SARs and related dividend equivalents issued in the form of stock awards generally became exercisable in installments of 25% each year for four years, and expire if not exercised ten years from the date of the grant. SARs compensation expense has been recognized in accordance with the fair value-based measurement method of accounting. The estimated fair value of each SAR grant was calculated on the date of grant using a Binomial Option Pricing Model.

The restricted shares that have been issued under the EIP become unrestricted in four equal annual increments on the anniversaries of the grant date and are forfeited to the extent they have not become unrestricted for terminations of employment during the vesting period, except accelerated vesting is provided for terminations by reason of death, disability and termination without cause. Restricted shares compensation expense has been recognized in accordance with the fair-value-based measurement method of accounting. Dividends on restricted shares are paid quarterly in cash.

Restricted stock units awarded under the EIP in 2013, 2012 and 2011 will vest and be issued in unrestricted stock in four equal annual increments on the anniversaries of the grant date and are forfeited to the extent they have not become vested for terminations of employment during the vesting period, except that pro-rata vesting is provided for terminations due to death, disability and retirement. Restricted stock units awarded under the SOIP and EIP in 2010 and prior years generally vest and will be issued as unrestricted stock four years after the date of the grant and are forfeited for terminations of employment during the vesting period, except that pro-rata vesting is provided for terminations due to death, disability and retirement. Restricted stock units expense has been recognized in accordance with the fair-value-based measurement method of accounting. Dividend equivalent rights are accrued quarterly and are paid at the end of the restriction period when the associated restricted stock units vest.

Stock performance awards granted under the 2011-2013, 2012-2014 and 2013-2015 LTIPs entitle the grantee to shares of common stock with dividend equivalent rights once service conditions and performance conditions are satisfied at the end of the three-year performance period. LTIP awards are forfeited for terminations of employment during the performance period, except that pro-rata participation is provided for terminations due to death, disability and retirement based upon completed months of service after a minimum of 12 months of service in the performance period. Compensation expense for the stock performance awards portion of the LTIP has been recognized in accordance with the fair-value-based measurement method of accounting for performance shares.

Under the 2011 Nonemployee Director Stock Plan (2011 Director Plan), HEI can issue shares of common stock as compensation to nonemployee directors of HEI, Hawaiian Electric and ASB. As of December 31, 2013, there were 202,460 shares remaining available for future issuance under the 2011 Director Plan.

The Company’s share-based compensation expense and related income tax benefit were as follows:



(in millions)	2013		2012		2011
Share-based compensation expense ¹	$	7.8	$	6.7	$	4.3
Income tax benefit	2.8		2.4		1.5


¹	The Company has not capitalized any share-based compensation cost.

The Company has revised its prior year disclosure to correct for an error that excluded from the disclosure amounts for stock awards to non-employee directors of HEI, Hawaiian Electric and ASB. The amounts excluded from the disclosure were not considered to be material to previously issued financial statements. The table below illustrates the effects of this revision on the previous disclosure (the revised disclosure had no impact on the Company’s Consolidated Balance Sheets, Consolidated Statements of Income or Consolidated Statements of Cash Flows):



	2012						2011
(in millions)	As previously filed		As revised		Difference		As previously filed		As revised		Difference
Share-based compensation expense	$	5.9	$	6.7	$	0.8	$	3.8	$	4.3	$	0.5
Income tax benefit	2.0		2.4		0.4		1.3		1.5		0.2

Stock awards. HEI granted HEI common stock to nonemployee directors of HEI, Hawaiian Electric and ASB under the 2011 Director Plan as follows:



($ in millions)	2013		2012		2011
Shares granted	33,184		29,448		34,908
Fair value	$	0.8	$	0.8	$	0.8
Income tax benefit	0.3		0.3		0.3

The number of shares issued to each nonemployee director of HEI, Hawaiian Electric and ASB is determined based on the closing price of HEI Common Stock on grant date.

Nonqualified stock options. Information about HEI’s NQSOs was as follows:



	2013				2012				2011
	Shares		(1)		Shares		(1)		Shares		(1)
Outstanding, January 1	14,000		$	20.49	55,500		$	20.92	215,500		$	20.76
Granted	—		—		—		—		—		—
Exercised	(14,000	)	20.49		(41,500	)	21.06		(160,000	)	20.70
Forfeited	—		—		—		—		—		—
Expired	—		—		—		—		—		—
Outstanding, December 31	—		$	—	14,000		$	20.49	55,500		$	20.92
Exercisable, December 31	—		$	—	14,000		$	20.49	55,500		$	20.92


(1)	Weighted-average exercise price

As of December 31, 2013, there were no NQSOs outstanding.

NQSO activity and statistics were as follows:



(dollars in thousands)	2013		2012		2011
Cash received from exercise	$	287	$	874	$	3,312
Intrinsic value of shares exercised ¹	128		354		1,270
Tax benefit realized for the deduction of exercises	50		138		181


¹	Intrinsic value is the amount by which the fair market value of the underlying stock and the related dividend equivalents exceeds the exercise price of the option.

Stock appreciation rights. Information about HEI’s SARs is summarized as follows:



	2013			2012				2011
	Shares	(1)		Shares		(1)		Shares		(1)
Outstanding, January 1	164,000	$	26.12	282,000		$	26.14	450,000		$	26.13
Granted	—	—		—		—		—		—
Exercised	—	—		(114,000	)	26.17		(110,000	)	26.09
Forfeited	—	—		—		—		—		—
Expired	—	—		(4,000	)	26.18		(58,000	)	26.13
Outstanding, December 31	164,000	$	26.12	164,000		$	26.12	282,000		$	26.14
Exercisable, December 31	164,000	$	26.12	164,000		$	26.12	282,000		$	26.14


(1)	Weighted-average exercise price



December 31, 2013		Outstanding & Exercisable (Vested)
Year of Grant	Range of exercise prices	Number of shares underlying SARs	Weighted-average remaining contractual life	Weighted-average exercise price
2004	$26.02	62,000	0.3	$	26.02
2005	26.18	102,000	1.3	26.18
	$26.02 –26.18	164,000	0.9	$	26.12

As of December 31, 2013, all SARs outstanding were exercisable and had an aggregate intrinsic value (including dividend equivalents) of $0.1 million.

SARs activity and statistics were as follows:



(dollars in thousands, except prices)	2013		2012		2011
Intrinsic value of shares exercised ¹	$	—	$	197	$	64
Tax benefit realized for the deduction of exercises	—		77		25


¹	Intrinsic value is the amount by which the fair market value of the underlying stock and the related dividend equivalents exceeds the exercise price of the right.

Restricted shares and restricted stock awards. Information about HEI’s grants of restricted shares and restricted stock awards was as follows:



	2013				2012				2011
	Shares		(1)		Shares		(1)		Shares		(1)
Outstanding, January 1	9,005		$	22.21	46,807		$	24.45	89,709		$	24.64
Granted	—		—		—		—		—		—
Vested	(4,502	)	22.21		(37,802	)	24.99		(40,102	)	24.83
Forfeited	—		—		—		—		(2,800	)	24.93
Outstanding, December 31	4,503		$	22.21	9,005		$	22.21	46,807		$	24.45


(1)	Weighted-average grant-date fair value per share based on the closing or average price of HEI common stock on the date of grant.

For 2013, 2012 and 2011, total restricted stock vested had a grant-date fair value of $0.1 million, $0.9 million and $1.0 million, respectively, and the tax benefits realized for the tax deductions related to restricted stock awards were nil for 2013, $0.2 million for 2012 and $0.2 million for 2011.

As of December 31, 2013, there was $0.1 million of total unrecognized compensation cost related to nonvested restricted shares and restricted stock awards. The cost is expected to be recognized over a weighted-average period of 0.9 years.

Restricted stock units. Information about HEI’s grants of restricted stock units was as follows:



	2013					2012					2011
	Shares			(1)		Shares			(1)		Shares			(1)
Outstanding, January 1	315,094			$	22.82	247,286			$	21.80	146,500			$	19.80
Granted	111,231			26.88		98,446			25.99		101,786			24.68
Vested	(118,885		)	20.48		(25,728		)	24.68		—			—
Forfeited	(19,289		)	25.62		(4,910		)	24.92		(1,000		)	22.60
Outstanding, December 31	288,151			$	25.17	315,094			$	22.82	247,286			$	21.80
Total weighted-average grant-date fair value of shares granted ($ millions)	$	3.0				$	2.6				$	2.5


(1)	Weighted-average grant-date fair value per share based on the average price of HEI common stock on the date of grant.

For 2013 and 2012, total restricted stock units that vested and related dividends had a grant-date fair value of $2.4 million and $0.7 million, respectively, and the related tax benefits were $0.9 million and $0.2 million, respectively.

As of December 31, 2013, there was $3.7 million of total unrecognized compensation cost related to the nonvested restricted stock units. The cost is expected to be recognized over a weighted-average period of 2.5 years.

LTIP payable in stock. The 2011-2013 LTIP, 2012-2014 LTIP and 2013-2015 LTIP provide for performance awards under the EIP of shares of HEI common stock based on the satisfaction of performance goals considered to be a market condition and service conditions. The number of shares of HEI common stock that may be awarded is fixed on the date the grants are made subject to the achievement of specified performance levels. The potential payout varies from 0% to 200% of the number of target shares depending on achievement of the goals. The LTIP performance goals for the LTIP periods include awards with a market goal based on total return to shareholders (TRS) of HEI stock as a percentile to the Edison Electric Institute Index over the applicable three-year period. In addition, the 2011-2013 LTIP, 2012-2014 LTIP and 2013-2015 LTIP have performance goals related to levels of HEI consolidated net income, HEI consolidated return on average common equity (ROACE), Hawaiian Electric consolidated net income, Hawaiian Electric consolidated ROACE, ASB net income and ASB return on assets – all based on the applicable three-year averages.

LTIP linked to TRS. Information about HEI’s LTIP grants linked to TRS was as follows:



	2013					2012					2011
	Shares			(1)		Shares			(1)		Shares			(1)
Outstanding, January 1	239,256			$	29.12	197,385			$	25.94	126,782			$	20.33
Granted	91,038			32.69		81,223			30.71		75,015			35.46
Vested (settled or lapsed)	(87,753		)	22.45		(35,397		)	14.85		—			—
Forfeited	(10,414		)	32.72		(3,955		)	30.82		(4,412		)	29.56
Outstanding, December 31	232,127			$	32.88	239,256			$	29.12	197,385			$	25.94
Total weighted-average grant-date fair value of shares granted ($ millions)	$	3.0				$	2.5				$	2.7


(1)	Weighted-average grant-date fair value per share determined using a Monte Carlo simulation model.

The grant date fair values of the shares were determined using a Monte Carlo simulation model utilizing actual information for the common shares of HEI and its peers for the period from the beginning of the performance period to the grant date and estimated future stock volatility and dividends of HEI and its peers over the remaining three-year performance period. The expected stock volatility assumptions for HEI and its peer group were based on the three-year historic stock volatility, and the annual dividend yield assumptions were based on dividend yields calculated on the basis of daily stock prices over the same three-year historical period.

The following table summarizes the assumptions used to determine the fair value of the LTIP awards linked to TRS and the resulting fair value of LTIP awards granted:



	2013			2012			2011
Risk-free interest rate	0.38		%	0.33		%	1.25		%
Expected life in years	3			3			3
Expected volatility	19.4		%	25.3		%	27.8		%
Range of expected volatility for Peer Group	12.4% to 25.3%			15.5% to 34.5%			21.2% to 82.6%
Grant date fair value (per share)	$	32.69		$	30.71		$	35.46

For 2013 and 2012, total vested LTIP awards linked to TRS and related dividends had a fair value of $2.2 million and $0.6 million, respectively, and the related tax benefits were $0.9 million and $0.2 million, respectively. Of the 87,753 shares vested and granted (at target level based on the satisfaction of TRS performance) for the 2010-2012 LTIP, the HEI Compensation Committee approved settlement of 70,205 shares of HEI common stock in February 2013 (17,548 of the vested shares lapsed).

As of December 31, 2013, there was $2.4 million of total unrecognized compensation cost related to the nonvested performance awards payable in shares linked to TRS. The cost is expected to be recognized over a weighted-average period of 1.5 years.

LTIP awards linked to other performance conditions. Information about HEI’s LTIP awards payable in shares linked to other performance conditions was as follows:



	2013					2012					2011
	Shares			(1)		Shares			(1)		Shares			(1)
Outstanding, January 1	247,175			$	25.04	182,498			$	22.63	161,310			$	18.66
Granted	120,399			26.89		125,157			26.05		113,831			24.96
Vested and settled	(18,280		)	18.95		—			—		—			—
Cancelled	(41,599		)	24.97		(50,786		)	18.95		(81,908		)	18.38
Forfeited	(10,852		)	26.20		(9,694		)	24.44		(10,735		)	20.12
Outstanding, December 31	296,843			$	26.14	247,175			$	25.04	182,498			$	22.63
Total weighted-average grant-date fair value of shares granted (at target performance levels) ($ millions)	$	3.2				$	3.3				$	2.8


(1)	Weighted-average grant-date fair value per share based on the average price of HEI common stock on the date of grant.

For 2013, total vested LTIP awards linked to other performance conditions and related dividends had a fair value of $0.6 million and the related tax benefits were $0.2 million.

As of December 31, 2013, there was $3.1 million of total unrecognized compensation cost related to the nonvested shares linked to performance conditions other than TRS. The cost is expected to be recognized over a weighted-average period of 1.5 years.