Share-based compensation

12 Months Ended

Dec. 31, 2011

Share-based compensation

Share-based compensation

10 · 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.

From inception through December 31, 2011, grants under the EIP consisted of 18,009 restricted shares (counted against the shares authorized for issuance under the EIP as four shares for every share issued, or 72,036 shares), 178,286 restricted stock units (which will be counted against the shares authorized for issuance under the EIP as four shares for every share issued when issued or 713,144 shares) and 368,323 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 0.6 million shares of common stock (based on various assumptions, including LTIP awards at maximum levels and the use of the December 31, 2011 market price of shares as the price on the exercise/payment dates) were outstanding as of December 31, 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 (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.

For the NQSOs and SARs outstanding under the SOIP, the exercise price of each NQSO or SAR generally equaled the fair market value of HEI’s stock on or near the date of grant. NQSOs, 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 expire if not exercised ten years from the date of the grant. NQSOs and SARs compensation expense has been recognized in accordance with the fair value-based measurement method of accounting. The estimated fair value of each NQSO and SAR grant was calculated on the date of grant using a Binomial Option Pricing Model.

The restricted shares that have been issued under the EIP become unrestricted in four equal annual increments on the anniversaries of the grant date and are forfeited to the extent they have not become unrestricted for terminations of employment during the vesting period, except accelerated vesting is provided for terminations by reason of death, disability and termination without cause. Restricted stock awards under the SOIP generally become unrestricted four years after the date of grant and are forfeited for terminations of employment during the vesting period, except that pro-rata vesting is provided for terminations by reason of death, disability or termination without cause. Restricted shares and restricted stock awards compensation expense has been recognized in accordance with the fair-value-based measurement method of accounting. Dividends on restricted shares and restricted stock awards are paid quarterly in cash.

Restricted stock units awarded under the EIP in 2011 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 awarded under the SOIP and EIP in 2010 and prior years generally vest and will be issued as unrestricted stock four years after the date of the grant and are forfeited 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 in cash at the end of the restriction period when the restricted stock units vest.

Stock performance awards granted under the 2009-2011, 2010-2012 and 2011-2013 LTIPs 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 forterminations 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.

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

(in millions)	2011	2010	2009
Share-based compensation expense 1	$3.8	$2.7	$1.1
Income tax benefit	1.3	0.9	0.3

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

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

	2011			2010			2009
	Shares		(1)	Shares		(1)	Shares		(1)
Outstanding, January 1	215,500		$20.76	374,500		$19.73	375,500		$19.73
Granted	–		–	–		–	–		–
Exercised	(160,000	)	20.70	(157,000	)	18.32	–		–
Forfeited	–		–	–		–	–		–
Expired	–		–	(2,000	)	20.49	(1,000	)	17.61
Outstanding, December 31	55,500		$20.92	215,500		$20.76	374,500		$19.73
Exercisable, December 31	55,500		$20.92	215,500		$20.76	374,500		$19.73

(1)  Weighted-average exercise price

December 31, 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	0.3	$21.68
2003	20.49		35,500	1.0	20.49
	$20.49 – 21.68		55,500	0.7	$20.92

As of December 31, 2011, all NQSOs outstanding were exercisable and had an aggregate intrinsic value (including dividend equivalents) of $0.5 million.

NQSO activity and statistics were as follows:

(dollars in thousands)	2011	2010	2009
Cash received from exercise	$3,312	$2,876	–
Intrinsic value of shares exercised 1	1,270	1,355	–
Tax benefit realized for the deduction of exercises	181	278	–

1Intrinsic 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 is summarized as follows:

	2011			2010			2009
	Shares		(1)	Shares		(1)	Shares		(1)
Outstanding, January 1	450,000		$26.13	480,000		$26.13	791,000		$26.12
Granted	–		–	–		–	–		–
Exercised	(110,000	)	26.09	–		–	–		–
Forfeited	–		–	–		–	(6,000	)	26.18
Expired	(58,000	)	26.13	(30,000	)	26.18	(305,000	)	26.10
Outstanding, December 31	282,000		$26.14	450,000		$26.13	480,000		$26.13
Exercisable, December 31	282,000		$26.14	450,000		$26.13	480,000		$26.13

(1)  Weighted-average exercise price

December 31, 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		72,000	2.3	$26.02
2005	26.18		210,000	2.6	26.18
	$26.02 –26.18		282,000	2.5	$26.14

As of December 31, 2011, all SARs outstanding were exercisable and had an aggregate intrinsic value (including dividend equivalents) of $0.2 million.

SARs activity and statistics were as follows:

(dollars in thousands, except prices)	2011	2010	2009
Shares vested	–	–	228,000
Aggregate fair value of vested shares	–	–	$1,354
Intrinsic value of shares exercised 1	$64	–	–
Tax benefit realized for the deduction of exercises	$25	–	–
Dividend equivalent shares distributed under Section 409A	–	–	3,143
Weighted-average Section 409A distribution price	–	–	$13.64
Intrinsic value of shares distributed under Section 409A	–	–	$43
Tax benefit realized for Section 409A distributions	–	–	$17

1Intrinsic 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 right.

Section 409A.  As a result of the changes enacted in Section 409A of the Internal Revenue Code of 1986, as amended (Section 409A), in 2009, a total of 3,143 dividend equivalent shares, respectively, for NQSO and SAR grants were distributed to SOIP participants. Section 409A, which amended the federal income tax rules governing deferred compensation, required the Company to change the way certain affected dividend equivalents are paid in order to avoid significant adverse tax consequences to the SOIP participants. Generally, dividend equivalents subject to Section 409A will be paid within 2½ months after the end of the calendar year. Upon retirement, an SOIP participant may elect to take distributions of dividend equivalents subject to Section 409A at the time of retirement or at the end of the calendar year. The dividend equivalents associated with the 2005 SAR grants had no intrinsic value at December 31, 2009; thus, no distribution was made in 2010. No further dividend equivalents are intended to be paid in accordance with this Section 409A modified distribution.

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

	2011			2010			2009
	Shares		(1)	Shares		(1)	Shares		(1)
Outstanding, January 1	89,709		$24.64	129,000		$25.50	160,500		$25.51
Granted	–		–	18,009	(2)	22.21	–		–
Vested	(40,102	)	24.83	(43,565	)	26.29	(3,851	)	24.52
Forfeited	(2,800	)	24.93	(13,735	)	24.35	(27,649	)	25.67
Outstanding, December 31	46,807		$24.45	89,709		$24.64	129,000		$25.50

(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.

(2)Total weighted-average grant-date fair value of $0.4 million.

For 2011, 2010 and 2009, total restricted stock vested had a fair value of $1.0 million, $1.1 million and $0.1 million, respectively, and the tax benefits realized for the tax deductions related to restricted stock awards were $0.2 million for 2011, $0.3 million for 2010 and $0.1 million for 2009.

As of December 31, 2011, there was $0.3 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 2.4 years.

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

	2011			2010			2009
	Shares		(1)	Shares		(1)	Shares	(1)
Outstanding, January 1	146,500		$19.80	70,500		$16.99	–	–
Granted	101,786	(2)	24.68	77,500	(3)	22.30	70,500(4)	$16.99
Vested	–		–	(250	)	16.99	–	–
Forfeited	(1,000	)	22.60	(1,250	)	16.99	–	–
Outstanding, December 31	247,286		$21.80	146,500		$19.80	70,500	$16.99

(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 $1.7 million.

(4)Total weighted-average grant-date fair value of $1.2 million.

As of December 31, 2011, there was $2.9 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.

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:

	2011			2010			2009
	Shares		(1)	Shares		(1)	Shares		(1)
Outstanding, January 1	126,782		$20.33	36,198		$14.85	–		–
Granted	75,015	(2)	35.46	97,191	(3)	22.45	36,198	(4)	$14.85
Vested	–		–	–		–	–		–
Forfeited	(4,412	)	29.56	(6,607	)	21.53
Outstanding, December 31	197,385		$25.94	126,782		$20.33	36,198		$14.85

(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.

(4)Total weighted-average grant-date fair value of $0.5 million.

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-yearhistorical period. The following table summarizes the assumptions used to determine the fair value of the LTIP linked to TRS and the resulting fair value of LTIP granted:

	2011	2010	2009
Risk-free interest rate	1.25%	1.30%	1.30%
Expected life in years	3	3	3
Expected volatility	27.8%	27.9%	23.7%
Range of expected volatility for Peer Group	21.2% to 82.6%	22.3% to 52.3%	20.8% to 46.9%
Grant date fair value (per share)	$35.46	$22.45	$14.85

As of December 31, 2011, there was $2.4 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 linked to other performance conditions.  Information about HEI’s LTIP awards payable in shares linked to other performance conditions was as follows:

	2011			2010			2009
	Shares		(1)	Shares		(1)	Shares		(1)
Outstanding, January 1	161,310		$18.66	24,131		$16.99	–		–
Granted	113,831		24.96	160,939	(2)	18.95	24,131	(3)	$16.99
Vested	–		–	–		–	–		–
Cancelled	(81,908	)	18.38	–		–	–		–
Forfeited	(10,735	)	20.12	(23,760	)	18.90	–		–
Outstanding, December 31	182,498		$22.63	161,310		$18.66	24,131		$16.99

(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 $3.0 million.

(3)Total weighted-average grant-date fair value of $0.4 million.

In 2011, LTIP grants (under the 2011-2013 LTIP) were made payable in 113,831 shares of HEI common stock (based on the grant date prices of $24.95 and $26.25 and target performance levels relating to performance goals other than TRS), with a weighted-average grant date fair value of $2.8 million based on the weighted-average grant date fair value per share of $24.96.

As of December 31, 2011, there was $2.3 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 1.6 years.