Share-based compensation

6 Months Ended

Jun. 30, 2011

Share-based compensation

Share-based compensation

6 · Share-based compensation

Under the 2010 Equity and Incentive Plan (EIP), HEI can issue an aggregate of 4 million 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.

Through June 30, 2011, grants under the EIP consisted of 18,009 restricted shares (counted against the shares authorized for issuance under EIP as four shares for every share issued, or 72,036 shares), 162,517 restricted stock units (which will be counted against the shares authorized for issuance under EIP as four shares for every share issued when issued or 650,068 shares) and 371,957 shares that may be issued under the 2011-2013 long-term incentive plan (LTIP) at maximum levels.

Under the 1987 Stock Option and Incentive Plan, as amended (SOIP), grants and awards of an estimated 0.8 million shares of common stock (based on various assumptions, including LTIP awards at maximum levels and the use of the June 30, 2011 market price of shares as the price on the exercise/payment dates) were outstanding as of June 30, 2011 to selected employees in the form of nonqualified stock options (NQSOs), stock appreciation rights (SARs), restricted stock units, LTIP performance and other shares and dividend equivalents. As of May 11, 2010, 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.

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

	Three months ended June 30		Six months ended June 30
(dollars in millions)	2011	2010	2011	2010
Share-based compensation expense (1)	0.5	0.8	1.7	1.4
Income tax benefit	0.1	0.2	0.5	0.4

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

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

June 30, 2011

			Outstanding & Exercisable (Vested)
Year of grant	Range of exercise prices		Number of options	Weighted-average remaining contractual life	Weighted-average exercise price
2002	$	21.68	20,000	0.8	$	21.68
2003	20.49		93,500	1.7	20.49
	$	20.49 – 21.68	113,500	1.5	$	20.70

As of December 31, 2010, NQSOs outstanding totaled 215,500 (representing the same number of underlying shares), with a weighted-average exercise price of $20.76. As of June 30, 2011, all NQSOs outstanding were exercisable and had an aggregate intrinsic value (including dividend equivalents) of $0.7 million.

NQSO activity and statistics were as follows:

	Three months ended June 30				Six months ended June 30
(dollars in thousands, except prices)	2011		2010		2011		2010
Shares expired	—		—		—		2,000
Weighted-average price of shares expired	—		—		—		$	20.49
Shares exercised	69,500		17,000		102,000		63,000
Weighted-average exercise price	$	21.07	$	20.34	$	20.82	$	16.25
Cash received from exercise	$	1,465	$	346	$	2,123	$	1,024
Intrinsic value of shares exercised (1)	$	581	$	76	$	840	$	625
Tax benefit realized for the deduction of exercises	$	170	$	29	$	271	$	243

(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:

June 30, 2011

			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	132,000	1.8	$	26.02
2005	26.18		278,000	2.5	26.18
	$	26.02 –26.18	410,000	2.3	$	26.13

As of December 31, 2010, the shares underlying SARs outstanding totaled 450,000, with a weighted-average exercise price of $26.13. As of June 30, 2011, all SARs outstanding were exercisable and had no intrinsic value.

SARs activity and statistics were as follows:

	Three months ended June 30				Six months ended June 30
(dollars in thousands, except prices)	2011		2010		2011		2010
Shares forfeited	—		—		—		—
Weighted-average price of shares forfeited	—		—		—		—
Shares expired	4,000		12,000		40,000		18,000
Weighted-average price of shares expired	$	26.18	$	26.18	$	26.11	$	26.18
Shares exercised	—		—		—		—

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

	Three months ended June 30								Six months ended June 30
	2011				2010				2011				2010
	Shares		(1)		Shares		(1)		Shares		(1)		Shares		(1)
Outstanding, beginning of period	88,709		$	24.63	120,700		$	25.48	89,709		$	24.64	129,000		$	25.50
Granted	—		—		—		—		—		—		—		—
Vested	(29,800	)	26.03		(42,000	)	26.30		(29,800	)	26.03		(43,565	)	26.29
Forfeited	(1,000	)	24.68		—		—		(2,000	)	25.02		(6,735	)	25.75
Outstanding, end of period	57,909		$	23.91	78,700		$	25.04	57,909		$	23.91	78,700		$	25.04

(1) Weighted-average grant-date fair value per share. The grant date fair value of a restricted stock award share was the closing or average price of HEI common stock on the date of grant.

For the second quarters of 2011 and 2010, total restricted stock vested had a fair value of $0.8 million and $1.1 million, respectively. For the six months ended June 30, 2011 and 2010, total restricted stock vested had a fair value of $0.8 million and $1.1 million, respectively. The tax benefits realized for the tax deductions related to restricted stock awards were $0.1 million and $0.3 million for the first six months of 2011 and 2010, respectively.

As of June 30, 2011, there was $0.4 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 2.6 years.

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

	Three months ended June 30								Six months ended June 30
	2011				2010				2011				2010
	Shares		(1)		Shares		(1)		Shares		(1)		Shares		(1)
Outstanding, beginning of period	230,517		$	21.69	69,000		$	16.99	146,500		$	19.80	70,500		$	16.99
Granted	1,000	(2)	26.25		77,500	(4)	22.30		86,017	(3)	24.97		77,500	(4)	22.30
Vested	—		—		—		—		—		—		(250	)	16.99
Forfeited	—		—		—		—		(1,000	)	22.60		(1,250	)	16.99
Outstanding, end of period	231,517		$	21.70	146,500		$	19.80	231,517		$	21.70	146,500		$	19.80

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

(2) Total weighted-average grant date fair value of $26,000.

(3) Total weighted-average grant-date fair value of $2.1 million.

(4) Total weighted-average grant-date fair value of $1.7 million

As of June 30, 2011, there was $3.2 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 3.0 years.

LTIP payable in stock.  The 2011-2013 LTIP provides for performance awards under the EIP and the 2009-2011 LTIP and the 2010-2012 LTIP provide for performance awards under the SOIP of shares of HEI common stock based on the satisfaction of performance goals and service conditions over a three-year performance period. 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 payout varies from 0% to 200% of the number of target shares depending on achievement of the goals. The LTIP performance goals for both 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 2009-2011 LTIP has performance goals based on HEI return on average common equity (ROACE), the 2010-2012 LTIP has performance goals related to levels of HEI consolidated net income, HECO consolidated ROACE, ASB net income and ASB return on assets — all based on two-year averages (2011-2012), and the 2011-2013 LTIP has performance goals related to levels of HEI consolidated net income, HECO consolidated ROACE, HECO 3-year average consolidated net income, ASB return on assets and ASB 3-year average net income.

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

	Three months ended June 30							Six months ended June 30
	2011				2010			2011				2010
	Shares		(1)		Shares	(1)		Shares		(1)		Shares		(1)
Outstanding, beginning of period	200,735		$	25.94	132,588	$	20.42	126,782		$	20.33	36,198		$	14.85
Granted	475		35.46		—	—		75,015	(2)	35.46		97,191	(3)	22.45
Vested	—		—		—	—		—		—		—		—
Forfeited	(1,647	)	22.45		—	—		(2,234	)	22.45		(801	)	14.85
Outstanding, end of period	199,563		$	25.99	132,588	$	20.42	199,563		$	25.99	132,588		$	20.42

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

(2)Total weighted-average grant-date fair value of $2.7 million.

(3)Total weighted-average grant-date fair value of $2.2 million.

On May 12, 2011, LTIP grants (under the 2011-2013 LTIP) were made payable in 475 shares of HEI common stock (based on the grant date price of $26.25 and target TRS performance levels) with a weighted-average grant date fair value of $17,000 based on the weighted-average grant date fair value per share of $35.46.

The assumptions used to determine the fair value of the LTIP linked to TRS and the resulting fair value of LTIP granted were as follows:

	2011	2010
Risk-free interest rate	1.25%	1.30%
Expected life in years	3	3
Expected volatility	27.8%	27.9%
Range of expected volatility for Peer Group	21.2% to 82.6%	22.3% to 52.3%
Grant date fair value (per share)	$35.46	$22.45

As of June 30, 2011, there was $3.1 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 1.7 years.

LTIP 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 June 30							Six months ended June 30
	2011				2010			2011				2010
	Shares		(1)		Shares	(1)		Shares		(1)		Shares		(1)
Outstanding, beginning of period	273,550		$	21.26	184,535	$	18.69	161,310		$	18.66	24,131		$	16.99
Granted	712		26.25		—	—		113,831	(2)	24.96		160,939	(3)	18.95
Vested	—		—		—	—		—		—		—		—
Cancelled	(81,908	)	18.38		—	—		(81,908	)	18.38		—		—
Forfeited	(6,587	)	18.95		—	—		(7,466	)	18.95		(535	)	16.99
Outstanding, end of period	185,767		$	22.63	184,535	$	18.69	185,767		$	22.63	184,535		$	18.69

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

(2)Total weighted-average grant-date fair value of $2.8 million.

(3)Total weighted-average grant-date fair value of $3.0 million.

On May 12, 2011, LTIP grants (under the 2011-2013 LTIP) were made payable in 712 shares of HEI common stock (based on the grant date price of $26.25 and target performance levels relating to performance goals other than TRS), with a weighted-average grant date fair value of $19,000 based on the weighted-average grant date fair value per share of $26.25.

As of June 30, 2011, 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 2.1 years.