11 · Share-based compensation

Under the 2010 Equity and Incentive Plan, as amended, 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 (original EIP) was amended and restated effective March 1, 2014 (EIP) and an additional 1.5 million shares was added to the shares available for issuance under these programs.

As of December 31, 2016, approximately 3.4 million shares remained 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 0.3 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.

As of May 11, 2010 (when the 2010 Equity and Incentive Plan became effective), no new awards could be granted under the 1987 Stock Option and Incentive Plan, as amended (SOIP). Since by March 2015 all of the shares of common stock reserved for the outstanding SOIP grants and awards were issued or such grants and awards had expired, the remaining shares registered under the SOIP were deregistered and delisted.

For the SARs that were 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 expired if not exercised ten years from the date of the grant. SARs compensation expense was 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. There were no outstanding SARs as of December 31, 2016.

The restricted shares that had been issued under the 2010 Equity and Incentive Plan became unrestricted in four equal annual increments on the anniversaries of the grant date and were forfeited to the extent they had not become unrestricted for terminations of employment during the vesting period, except accelerated vesting was provided for terminations by reason of death, disability and termination without cause. Restricted shares compensation expense had been recognized in accordance with the fair-value-based measurement method of accounting. Dividends on restricted shares were paid quarterly in cash. There were no outstanding restricted shares as of December 31, 2016.

Restricted stock units awarded under the 2010 Equity and Incentive Plan in 2016, 2015, 2014, and 2013 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 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 2014-2016 long-term incentive plan (LTIP) 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, 2016, there were 121,198 shares remaining available for future issuance under the 2011 Director Plan.

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



(in millions)	2016		2015		2014
HEI consolidated
Share-based compensation expense¹	$	4.8	$	6.5	$	9.3
Income tax benefit	1.6		2.3		3.4
Hawaiian Electric consolidated
Share-based compensation expense¹	1.4		1.9		3.1
Income tax benefit	0.5		0.7		1.2


¹	For 2016, the Company has not capitalized any share-based compensation. $0.15 million and $0.16 million of this share-based compensation expense was capitalized in 2015 and 2014, respectively.

Stock awards. Nonemployee director awards totaling $0.2 million were paid in cash (in lieu of common stock) in July 2016. HEI granted HEI common stock to nonemployee directors of HEI, Hawaiian Electric and ASB under the 2011 Director Plan as follows:



(dollars in millions)	2016		2015		2014
Shares granted	19,846		28,246		33,170
Fair value	$	0.6	$	0.8	$	0.8
Income tax benefit	0.2		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.

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



	2015				2014
	Shares		(1)		Shares		(1)
Outstanding, January 1	80,000		$	26.18	164,000		$	26.12
Granted	—		—		—		—
Exercised	(80,000	)	26.18		(22,000	)	26.18
Forfeited	—		—		(62,000	)	26.02
Expired	—		—		—		—
Outstanding, December 31	—		$	—	80,000		$	26.18
Exercisable, December 31	—		$	—	80,000		$	26.18


(1)	Weighted-average exercise price

SARs activity and statistics were as follows:



(in thousands)	2015		2014
Intrinsic value of shares exercised ¹	$	502	$	29
Tax benefit realized for the deduction of exercises	82		11


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:



	2014
	Shares		(1)
Outstanding, January 1	4,503		$	22.21
Granted	—		—
Vested	(4,503	)	22.21
Forfeited	—		—
Outstanding, December 31	—		$	—


(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 2014, total restricted stock vested had a grant-date fair value of $0.1 million and the tax benefits realized for the tax deductions related to restricted stock awards was nil.

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



	2016					2015					2014
	Shares			(1)		Shares			(1)		Shares			(1)
Outstanding, January 1	210,634			$	28.82	261,235			$	25.77	288,151			$	25.17
Granted	114,431			29.70		85,772			33.69		117,786			25.17
Vested	(85,003		)	27.84		(102,173		)	25.67		(144,702		)	24.09
Forfeited	(19,379		)	29.82		(34,200		)	27.09		—			—
Outstanding, December 31	220,683			$	29.57	210,634			$	28.82	261,235			$	25.77
Total weighted-average grant-date fair value of shares granted ($ millions)	$	3.4				$	2.9				$	3.0


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

For 2016, 2015 and 2014, total restricted stock units and related dividends that vested had a fair value of $2.8 million, $3.7 million and $4.1 million, respectively, and the related tax benefits were $0.9 million, $1.1 million and $1.2 million, respectively.

As of December 31, 2016, 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 2.4 years.

Long-term incentive plan payable in stock. The 2014-2016 LTIP provides for performance awards under the original 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 period includes 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 three-year period. In addition, the 2014-2016 LTIP has performance goals related to levels of HEI weighted composite return on average common equity (ROACE), Hawaiian Electric consolidated ROACE and ASB net income - all based on the three-year averages, and ASB return on assets relative to performance peers. The 2015-2017 and the 2016-2018 LTIP provide for performance awards payable in cash and, thus, are not included in the tables below.

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



	2016					2015					2014
	Shares			(1)		Shares			(1)		Shares			(1)
Outstanding, January 1	162,500			$	27.66	257,956			$	28.45	232,127			$	32.88
Granted	—			—		—			—		97,524			22.95
Vested (lapsed because goal not met)	(78,553		)	32.69		(75,915		)	30.71		(70,189		)	35.46
Forfeited	(841		)	22.95		(19,541		)	26.25		(1,506		)	28.32
Outstanding, December 31	83,106			$	22.95	162,500			$	27.66	257,956			$	28.45
Total weighted-average grant-date fair value of shares granted ($ millions)	$	—				$	—				$	2.2


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

For 2016, 2015 and 2014, all of the shares vested (which were granted at target level based on the satisfaction of TRS performance) for the 2013-2015 LTIP, 2012-2014 LTIP and 2011-2013 LTIP were treated as lapsed because the TRS performance goal was not met.

As of December 31, 2016, there was no unrecognized compensation cost related to the nonvested performance awards payable in shares linked to TRS.

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



	2016					2015					2014
	Shares			(1)		Shares			(1)		Shares			(1)
Outstanding, January 1	222,647			$	26.02	364,731			$	26.01	296,843			$	26.14
Granted	—			—		—			—		129,603			25.18
Vested and settled	(109,097		)	26.89		(121,249		)	26.05		(65,089		)	24.95
Increase above target (cancelled)	(1,989		)	25.26		3,412			26.89		4,949			26.70
Forfeited	(1,745		)	25.19		(24,247		)	25.82		(1,575		)	26.07
Outstanding, December 31	109,816			$	25.18	222,647			$	26.02	364,731			$	26.01
Total weighted-average grant-date fair value of shares granted (at target performance levels) ($ millions)	$	—				$	—				$	3.3


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

For 2016, 2015 and 2014, total vested LTIP awards linked to other performance conditions and related dividends had a fair value of $3.6 million, $4.7 million and $1.9 million, respectively, and the related tax benefits were $1.4 million, $1.8 million and $0.8 million, respectively.

As of December 31, 2016, there was no unrecognized compensation cost related to the nonvested shares linked to performance conditions other than TRS.