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 September 30, 2013, there were 3.6 million shares remaining available for future issuance under the EIP of which an estimated 2.6 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 upon the exercise of outstanding stock appreciation rights (SARs) and dividend equivalents; however, based on the market price of shares on September 30, 2013, the SARS had no intrinsic value. 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.

Under the 2011 Nonemployee Director Stock Plan (2011 Director Plan), HEI can issue shares of common stock as compensation to nonemployee directors. As of September 30, 2013, there were 202,460 shares remaining available for future issuance.

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



	Three months ended September 30				Nine months ended September 30
(in millions)	2013		2012		2013		2012
Share-based compensation expense (1)	$	2.5	$	1.4	$	6.0	$	5.4
Income tax benefit	0.9		0.5		2.2		1.9

___________________________________________


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

Stock awards. On June 28, 2013 and June 29, 2012, HEI granted 33,184 shares and 29,448 shares, respectively, with a fair value of $0.8 million and $0.8 million and related tax benefits of $0.3 million and $0.3 million, respectively, to HEI nonemployee directors under the 2011 Director Plan. The number of shares issued to each HEI nonemployee director is determined based on the closing price of HEI Common Stock on grant date.

Nonqualified stock options. As of December 31, 2012, nonqualified stock options (NQSOs) outstanding totaled 14,000 (representing the same number of underlying shares), with a weighted-average exercise price of $20.49. As of September 30, 2013, there were no NQSOs outstanding.

NQSO activity and statistics were as follows:



	Three months ended September 30				Nine months ended September 30
(dollars in thousands, except prices)	2013		2012		2013		2012
Shares exercised	—		8,000		14,000		41,500
Weighted-average exercise price	$	—	$	20.49	$	20.49	$	21.06
Cash received from exercise	$	—	$	164	$	287	$	874
Intrinsic value of shares exercised (1)	$	—	$	89	$	128	$	354
Tax benefit realized for the deduction of exercises	$	—	$	35	$	50	$	138

___________________________________________

(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 was as follows:



September 30, 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	0.6	$	26.02
2005	26.18	102,000	1.5	26.18
	$26.02-26.18	164,000	1.2	$	26.12

As of December 31, 2012, the shares underlying SARs outstanding totaled 164,000, with a weighted-average exercise price of $26.12. As of September 30, 2013, all SARs outstanding were exercisable and had no aggregate intrinsic value.

SARs activity and statistics were as follows:



	Three months ended September 30			Nine months ended September 30
(dollars in thousands, except prices)	2013	2012		2013	2012
Shares underlying SARS exercised	—	2,000		—	114,000
Weighted-average price of shares exercised	—	$	26.18	—	$	26.17
Intrinsic value of shares exercised (1)	—	$	3	—	$	197
Tax benefit realized for the deduction of exercises	—	$	1	—	$	77

___________________________________________


(1)	Intrinsic value is the amount by which the fair market value of the underlying stock and the related dividend equivalent rights 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:



	Three months ended September 30							Nine months ended September 30
	2013			2012				2013			2012
	Shares	(1)		Shares		(1)		Shares	(1)		Shares		(1)
Outstanding, beginning of period	9,005	$	22.21	14,807		$	22.45	9,005	$	22.21	46,807		$	24.45
Granted	—	—		—		—		—	—		—		—
Vested	—	—		(1,000	)	24.68		—	—		(33,000	)	25.35
Forfeited	—	—		—		—		—	—		—		—
Outstanding, end of period	9,005	$	22.21	13,807		$	22.29	9,005	$	22.21	13,807		$	22.29

___________________________________________


(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.

As of September 30, 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 1.2 years.

For the first nine months of 2012, total restricted stock vested had a grant-date fair value of $0.8 million and the tax benefits realized for tax deductions related to restricted stock awards were $0.2 million.

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



	Three months ended September 30										Nine months ended September 30
	2013					2012					2013					2012
	Shares			(1)		Shares			(1)		Shares			(1)		Shares			(1)
Outstanding, beginning of period	300,313			$	25.15	319,071			$	22.81	315,094			$	22.82	247,286			$	21.80
Granted	4,000			26.48		—			—		111,231			26.88		94,846			26.00
Vested	(2,500		)	22.31		(2,500		)	22.31		(116,544		)	20.39		(23,997		)	24.69
Forfeited	(11,321		)	25.88		(3,346		)	24.63		(19,289		)	25.62		(4,910		)	24.92
Outstanding, end of period	290,492			$	25.16	313,225			$	22.80	290,492			$	25.16	313,225			$	22.80
	$ millions					$ millions					$ millions					$ millions
Total weighted-average grant-date fair value of shares granted	$	0.1				$	—				$	3.0				$	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.

As of September 30, 2013, there was $4.2 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.

For the first nine months of 2013 and 2012, total restricted stock units that vested and related dividends had a grant-date fair value of $3.6 million and $0.7 million, respectively, and the related tax benefits were $1.0 million and $0.2 million, respectively.

LTIP payable in stock. The 2011-2013 LTIP, 2012-2014 LTIP and the 2013-2015 LTIP provide for performance awards under the EIP of shares of HEI common stock based on the satisfaction of performance goals 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, the 2012-2014 LTIP and the 2013-2015 LTIP have performance goals related to levels of HEI consolidated net income, HEI consolidated return on 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:



	Three months ended September 30										Nine months ended September 30
	2013					2012					2013					2012
	Shares			(1)		Shares			(1)		Shares			(1)		Shares			(1)
Outstanding, beginning of period	235,064			$	32.87	239,407			$	29.12	239,256			$	29.12	197,385			$	25.94
Granted	1,505			32.69		1,723			30.71		91,038			32.69		80,647			30.71
Vested (settled or lapsed)	—			—		—			—		(87,753		)	22.45		(35,397		)	14.85
Forfeited	(4,442		)	32.40		(2,450		)	31.09		(10,414		)	32.72		(3,955		)	30.82
Outstanding, end of period	232,127			$	32.88	238,680			$	29.11	232,127			$	32.88	238,680			$	29.11
	$ millions					$ millions					$ millions					$ millions
Total weighted-average grant-date fair value of shares granted	$	—				$	0.1				$	3.0				$	2.5

___________________________________________


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

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

For the nine months ended September 30, 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 September 30, 2013, there was $2.9 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 1.3 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:



	Three months ended September 30										Nine months ended September 30
	2013					2012					2013					2012
	Shares			(1)		Shares			(1)		Shares			(1)		Shares			(1)
Outstanding, beginning of period	304,473			$	26.12	295,184			$	23.95	247,175			$	25.04	182,498			$	22.63
Granted	1,504			27.11		4,148			27.30		120,399			26.89		122,852			26.05
Vested and settled	—			—		—			—		(18,280		)	18.95		—			—
Cancelled	—			—		(17,911		)	18.95		(37,346		)	24.96		(17,911		)	18.95
Forfeited	(4,881		)	26.53		(3,676		)	24.78		(10,852		)	26.20		(9,694		)	24.44
Outstanding, end of period	301,096			$	26.12	277,745			$	24.31	301,096			$	26.12	277,745			$	24.31
	$ millions					$ millions					$ millions					$ millions
Total weighted-average grant-date fair value of shares granted (at target performance levels)	$	—				$	0.1				$	3.2				$	3.2

___________________________________________


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

For the nine months ended September 30, 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 September 30, 2013, there was $3.7 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 1.4 years.