Share-based compensation

Under the 2010 Equity and Incentive Plan, HEI can issue shares of common stock as incentive compensation to selected employees in the form of stock options, stock appreciation rights (SARs), restricted shares, restricted stock units, performance shares and other share-based and cash-based awards. The 2010 Equity and Incentive Plan was amended and restated (EIP) effective March 1, 2014 and an additional 1.5 million shares was added to the shares available for issuance under these programs.

As of June 30, 2014, approximately 3.6 million shares were available for future issuance under the terms of the EIP, assuming recycling of shares withheld to satisfy minimum statutory tax liabilities relating to EIP awards, including an estimated 1.1 million shares that could be issued upon the vesting of outstanding restricted stock units and the achievement of performance goals for awards outstanding under long-term incentive plans (assuming that such performance goals 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 SARs and dividend equivalents; however, based on the market price of shares on June 30, 2014, the SARS had no intrinsic value. As of May 11, 2010 (when the 2010 Equity and Incentive Plan 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 of HEI, Hawaiian Electric and ASB. As of June 30, 2014, there were 169,290 shares remaining available for future issuance under the 2011 Director Plan.

Share-based compensation expense and the related income tax benefit were as follows:



	Three months ended June 30				Six months ended June 30
(in millions)	2014		2013		2014		2013
HEI consolidated
Share-based compensation expense ¹	$	2.8	$	1.3	$	5.2	$	3.5
Income tax benefit	1.1		0.5		1.9		1.3
Hawaiian Electric consolidated
Share-based compensation expense ¹	$	0.9	$	0.3	1.6		1.1
Income tax benefit	$	0.3	$	0.1	0.6		0.4


¹	$0.03 million and $0.02 million of this share-based compensation expense was capitalized in the second quarter of 2014 and 2013, respectively. $0.07 million and $0.05 million of this share-based compensation expense was capitalized in the six months ended June 30, 2014 and 2013, respectively.

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):



	Three months ended June 30, 2013						Six months ended June 30, 2013
(in millions)	As previously filed		As revised		Difference		As previously filed		As revised		Difference
Share-based compensation expense	$	1.1	$	1.3	$	0.2	$	3.0	$	3.5	$	0.5
Income tax benefit	0.4		0.5		0.1		1.1		1.3		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:



	Six months ended June 30
($ in millions)	2014		2013
Shares granted	33,170		33,184
Fair value	$	0.8	$	0.8
Income tax benefit	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 the grant date.

Nonqualified stock options. Since April 9, 2013, there were no nonqualified stock options (NQSOs) outstanding.

NQSO activity and statistics were as follows:



(dollars in thousands, except prices)	Three months ended June 30, 2013		Six months ended June 30, 2013
Shares exercised	12,000		14,000
Weighted-average exercise price	$	20.49	$	20.49
Cash received from exercise	$	246	$	287
Intrinsic value of shares exercised ¹	$	113	$	128
Tax benefit realized for the deduction of exercises	$	44	$	50

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, 2014	Outstanding & Exercisable (Vested)
Year of grant	Number of shares underlying SARs	Weighted-average remaining contractual life	Weighted-average exercise price
2005	102,000	0.8	$	26.18

As of December 31, 2013, the shares underlying SARs outstanding totaled 164,000, with a weighted-average exercise price of $26.12. As of June 30, 2014, all SARs outstanding were exercisable and had no aggregate intrinsic value. In April 2014, the shares underlying SARs totaling 62,000, with a weighted-average exercise price of $26.02, expired.

Restricted shares. As of June 30, 2014 and December 31, 2013, the outstanding restricted shares totaled 4,503 with a weighted-average exercise price of $22.21. For the first six months of 2014 and 2013, there was no activity relating to restricted shares. As of June 30, 2014, there was $46,000 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 0.4 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
	2014					2013					2014					2013
	Shares			(1)		Shares			(1)		Shares			(1)		Shares			(1)
Outstanding, beginning of period	332,158			$	25.04	301,145			$	25.15	288,151			$	25.17	315,094			$	22.82
Granted	—			—		—			—		115,036			25.19		107,231			26.89
Vested	(67,832		)	22.31		(832		)	26.60		(138,861		)	24.09		(114,044		)	20.34
Forfeited	—			—		—			—		—			—		(7,968		)	25.26
Outstanding, end of period	264,326			$	25.74	300,313			$	25.15	264,326			$	25.74	300,313			$	25.15
Total weighted-average grant-date fair value of shares granted ($ millions)	$	—				$	—				$	2.9				$	2.9


(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 June 30, 2014, there was $5.6 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 2.8 years.

For the first six months of 2014 and 2013, total restricted stock units that vested and related dividends had a grant-date fair value of $4.0 million and $3.5 million, respectively, and the related tax benefits were $1.3 million and $1.0 million, respectively.

LTIP payable in stock. The 2012-2014 LTIP, 2013-2015 LTIP and 2014-2016 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 2012-2014 LTIP, 2013-2015 LTIP and 2014-2016 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:



	Three months ended June 30									Six months ended June 30
	2014					2013				2014					2013
	Shares			(1)		Shares		(1)		Shares			(1)		Shares			(1)
Outstanding, beginning of period	258,243			$	28.46	235,064		$	32.87	232,127			$	32.88	239,256			$	29.12
Granted (target level)	731			22.95		—		—		97,524			22.95		89,533			32.69
Vested (issued or unissued and cancelled)	—			—		—		—		(70,189		)	35.46		(87,753		)	22.45
Forfeited	(1,018		)	26.50		—		—		(1,506		)	28.32		(5,972		)	32.96
Outstanding, end of period	257,956			$	28.45	235,064		$	32.87	257,956			$	28.45	235,064			$	32.87
Total weighted-average grant-date fair value of shares granted ($ millions)	$	—				$	—			$	2.2				$	2.9


(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:



	2014			2013
Risk-free interest rate	0.66		%	0.38		%
Expected life in years	3			3
Expected volatility	17.8		%	19.4		%
Range of expected volatility for Peer Group	12.4% to 23.3%			12.4% to 25.3%
Grant date fair value (per share)	$	22.95		$	32.69

For the six months ended June 30, 2014 and 2013, total vested LTIP awards linked to TRS and related dividends had a fair value of nil and $2.2 million, respectively, and the related tax benefits were nil and $0.9 million, respectively. For the six months ended June 30, 2014, all of the shares vested (which were granted at target level based on the satisfaction of TRS performance) for the 2011-2013 LTIP lapsed.

As of June 30, 2014, there was $3.3 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 1.6 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 June 30										Six months ended June 30
	2014					2013					2014					2013
	Shares			(1)		Shares			(1)		Shares			(1)		Shares			(1)
Outstanding, beginning of period	360,070			$	26.01	341,824			$	26.00	296,843			$	26.14	247,175			$	25.04
Granted (target level)	730			23.34		—			—		129,603			25.18		118,895			26.89
Vested (issued)	—			—		—			—		(65,089		)	24.95		(18,275		)	18.95
Cancelled	—			—		(37,351		)	24.96		—			—		(37,351		)	24.96
Forfeited	(1,018		)	25.81		—			—		(1,575		)	26.07		(5,971		)	25.94
Outstanding, end of period	359,782			$	26.01	304,473			$	26.12	359,782			$	26.01	304,473			$	26.12
Total weighted-average grant-date fair value of shares granted (at target performance levels) ($ millions)	$	—				$	—				$	3.3				$	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 six months ended June 30, 2014 and 2013, total vested LTIP awards linked to other performance conditions and related dividends had a fair value of $1.9 million and $0.6 million and the related tax benefits were $0.8 million and $0.2 million, respectively.

As of June 30, 2014, there was $4.8 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.