Share-based compensation

9 Months Ended

Sep. 30, 2012

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.

As of September 30, 2012, there were 3.8 million shares remaining available for future issuance under the EIP of which an estimated 1.7 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), grants and awards of an estimated 0.5 million shares of common stock (based on various assumptions, including LTIP awards earned at maximum levels and the use of the September 30, 2012 market price of shares as the price on the exercise/payment dates) were outstanding as of September 30, 2012 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 (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.

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)	2012		2011		2012		2011
Share-based compensation expense (1)	$	1.2	$	1.0	$	4.7	$	2.7
Income tax benefit	0.4		0.4		1.6		0.9

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

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

September 30, 2012	Outstanding & Exercisable (Vested)
Year of grant	Range of exercise prices		Number of options	Weighted-average remaining contractual life	Weighted-average exercise price
2003	$	20.49	14,000	0.6	$	20.49

As of December 31, 2011, NQSOs outstanding totaled 55,500 (representing the same number of underlying shares), with a weighted-average exercise price of $20.92. As of September 30, 2012, all NQSOs outstanding were exercisable and had an aggregate intrinsic value (including dividend equivalents) of $0.1 million.

NQSO activity and statistics were as follows:

	Three months ended September 30					Nine months ended September 30
(dollars in thousands, except prices)	2012		2011			2012		2011
Shares exercised	8,000		2,000			41,500		104,000
Weighted-average exercise price	$	20.49	$	20.49		$	21.06	$	20.81
Cash received from exercise	$	164	$	41		$	874	$	2,164
Intrinsic value of shares exercised (1)	$	89	$	6		$	354	$	846
Tax benefit (expense) realized for the deduction of exercises	$	35	$	(85	)	$	138	$	186

(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, 2012			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	1.6	$	26.02
2005	26.18		106,000	2.4	26.18
	$	26.02 —26.18	168,000	2.1	$	26.12

As of December 31, 2011, the shares underlying SARs outstanding totaled 282,000, with a weighted-average exercise price of $26.14. As of September 30, 2012, all SARs outstanding were exercisable and had an aggregate intrinsic value (including dividend equivalent rights) of $0.1 million.

SARs activity and statistics were as follows:

	Three months ended September 30				Nine months ended September 30
(dollars in thousands, except prices)	2012		2011		2012		2011
Shares underlying SARS expired	—		18,000		—		58,000
Weighted-average price of shares expired	—		$	26.18	—		$	26.13
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
	2012				2011				2012				2011
	Shares		(1)		Shares		(1)		Shares		(1)		Shares		(1)
Outstanding, beginning of period	14,807		$	22.45	57,909		$	23.91	46,807		$	24.45	89,709		$	24.64
Granted	—		—		—		—		—		—		—		—
Vested	(1,000	)	24.68		—		—		(33,000	)	25.35		(29,800	)	26.03
Forfeited	—		—		(300	)	24.71		—		—		(2,300	)	24.98
Outstanding, end of period	13,807		$	22.29	57,609		$	23.90	13,807		$	22.29	57,609		$	23.90

(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.

As of September 30, 2012, there was $0.2 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 2.2 years.

For each of the nine months ended September 30, 2012 and 2011, total restricted stock vested had a fair value of $0.8 million. The tax benefits realized for tax deductions related to restricted stock awards were $0.2 million and $0.1 million for the first nine months of 2012 and 2011, respectively.

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
	2012				2011				2012				2011
	Shares		(1)		Shares		(1)		Shares		(1)		Shares		(1)
Outstanding, beginning of period	319,071		$	22.81	231,517		$	21.70	247,286		$	21.80	146,500		$	19.80
Granted	—		—		10,000	(3)	22.31		94,846	(2)	26.00		96,017	(3)	24.69
Vested	(2,500	)	22.31		—		—		(23,997	)	24.69		—		—
Forfeited	(3,346	)	24.63		—		—		(4,910	)	24.92		(1,000	)	22.60
Outstanding, end of period	313,225		$	22.80	241,517		$	21.73	313,225		$	22.80	241,517		$	21.73

(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 $2.5 million.

(3)Total weighted-average grant-date fair value of $0.2 million and $2.4 million for three and nine months ended September 30, 2011, respectively.

As of September 30, 2012, there was $3.9 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 2.7 years.

For the nine months ended September 30, 2012, total restricted stock units that vested and related dividends had a fair value of $0.7 million and the related tax benefits were $0.2 million.

LTIP payable in stock. The 2011-2013 LTIP and the 2012-2014 LTIP provide for performance awards under the EIP and the 2010-2012 LTIP provides for performance awards under the SOIP 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 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 2010-2012 LTIP has performance goals related to levels of HEI consolidated net income, HECO consolidated return on average common equity (ROACE), ASB net income and ASB return on assets — all based on two-year averages (2011-2012), and the 2011-2013 LTIP and the 2012-2014 LTIP have performance goals related to levels of HEI consolidated net income, HECO consolidated net income, HECO 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
	2012				2011				2012				2011
	Shares		(1)		Shares		(1)		Shares		(1)		Shares		(1)
Outstanding, beginning of period	239,407		$	29.12	199,563		$	25.99	197,385		$	25.94	126,782		$	20.33
Granted	1,723		30.71		—		—		80,647	(2)	30.71		75,015	(3)	35.46
Vested	—		—		—		—		(35,397	)	14.85		—		—
Forfeited	(2,450	)	31.09		(1,063	)	30.67		(3,955	)	30.82		(3,297	)	25.10
Outstanding, end of period	238,680		$	29.11	198,500		$	25.97	238,680		$	29.11	198,500		$	25.97

(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 $2.5 million.

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

In the third quarter of 2012, LTIP grants (under the 2012-2014 LTIP) were made payable in 1,723 shares of HEI common stock (based on the grant date prices of $27.35 and $27.22 and target TRS performance levels), with a weighted-average grant date fair value of $0.1 million based on the weighted-average grant date fair value per share of $30.71.

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:

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

For the nine months ended September 30, 2012, total vested LTIP awards linked to TRS and related dividends had a fair value of $0.6 million and the related tax benefits were $0.2 million.

As of September 30, 2012, there was $3.0 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 1.2 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
	2012				2011				2012				2011
	Shares		(1)		Shares		(1)		Shares		(1)		Shares		(1)
Outstanding, beginning of period	295,184		$	23.95	185,767		$	22.63	182,498		$	22.63	161,310		$	18.66
Granted	4,148		27.30		—		—		122,852	(2)	26.05		113,831	(3)	24.96
Vested	—		—		—		—		—		—		—		—
Cancelled	(17,911	)	18.95		—		—		(17,911	)	18.95		(81,908	)	18.38
Forfeited	(3,676	)	24.78		(1,596	)	22.74		(9,694	)	24.44		(9,062	)	19.61
Outstanding, end of period	277,745		$	24.31	184,171		$	22.63	277,745		$	24.31	184,171		$	22.63

(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 $3.2 million.

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

In the third quarter of 2012, LTIP grants (under the 2012-2014 LTIP) were made payable in 4,148 shares of HEI common stock (based on the grant date prices of $27.35 and $27.22 and target performance levels relating to performance goals other than TRS), with a weighted-average grant date fair value of $0.1 million based on the weighted-average grant date fair value per share of $27.35 and $27.22.

As of September 30, 2012, there was $3.5 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.