 Think Tech Hawaii. Civil engagement lives here. Welcome back to Think Tech. Me, Marco and me here on a Monday. And we have Marco Mangelsdorf on the telephone from Hilo. He's with Prohibition Solar. He's a founder there. And he is very akamai about energy. Oh, wow! We have you again, Marco. So glad about that. Every other Monday just simply would not, I'll repeat that for emphasis, would not be the same without talking to you, my friend. The same. La Mem shows, you know? Anyway, Marco is one of the founders of HIEC, the Hawaii Island Energy Co-op Organization that came into being a couple of three years ago. And he follows, you know, the global market with regard to utilities and with regard to all the factors that enter into the health and success of utilities, large and small, including co-ops. And one of the things that we should talk about from time to time is just how healthy our utilities are and why. What are the factors that go into creating a market for their shares? Factors here, factors on the mainland, factors across the country. This is, you know, utilities have been a huge investment vehicle over the years for investors Hither and Jan. They get more exciting, more complex, more interesting with renewable energy. There are more factors these days than there ever were before. And we should examine what those factors are and how those factors are affecting our local utilities as well. Am I right about that, Marco? The game that plays out between utility companies, investor-owned utilities especially, and the investor class, as I call them, the folks typically in New York and beyond. Sure. You know, we're coming up on the two-year anniversary, which was July 15th, 2016, when the Hawaii Public Utilities Commission announced that they would not be approving that deal. So it's, you know, I feel like very much a newbie in all this, but I just find it to be very fascinating because clearly a lot of electric industries, Hiko, Helco, Miko, are providing power to more than 90% of the state and the cost of power is notably high here because of a number of reasons, at least to which we're in the middle of the Pacific. So the price of energy, the availability of energy, where it comes from, from what sources, all that plays a really significant role, not just in the macro sense in terms of the state's economy, but it pays a very significant role to those people on the lower end of the earnings spectrum who have to sometimes decide between paying a utility bill and paying other necessities for themselves and their families. So it's really a pretty big deal. Yeah, well, let's roll it back to before next era, which was 18 months in the process. There were lots of arguments going on. It was a time of controversy. Stakeholders and activists were taking potshots at the Hawaiian Electric on a regular basis in every capacity and forum they could find. And how did that affect, you know, the rating of the stock and the bonds, you know, investment vehicles for Hawaiian Electric? It's a great question. I don't have a quick and easy answer to. If you look at HCI stock price over the past several years, going into the 30-plus range when the deal was announced in December of 2014, the deal between Hawaiian Electric and next era, and it's been pretty much in the 30-plus-dollar range ever since. So much to my toll to go home and take its hundreds of millions of billions of dollars away, much to my surprise Hawaiian Electric stock on the New York Stock Exchange did not go down. So for the past two years, the investor class has seen HCI as being park money to invest in. And it's to the credit of Connie Lau and the board there and that the board doesn't have any control of. But for, you know, the reality is HCI stock and the value of the company stayed quite stable over the past couple, three years at least. Yeah, you know, that's an interesting observation and it's an interesting phenomenon. You know, I would have thought at the end of that process which was really not pleasant or friendly, you know, by the stakeholders and the public and for that matter the press, although I want to go now and tell you that ThinkTech always supported that deal. And at the end of the day, it was a blow to Hawaiian Electric not to be able to conclude that deal. And yet somehow it came out of that result pretty well. And you've got to give them credit for that. They found a way to not only remain stable in the eyes of the community, but also remain stable in the eyes of the investment community. What happened there to make, do you have any idea, Marco? What happened there to achieve that result? What did they do exactly? You probably are aware there are three companies in the United States that are looked to in terms of credit rating, credit-credits rating and worthiness in terms of the paper that these various businesses hold. And it's Moody's and Fitch's three companies, I think. You know, being an amateur in this, it seems to me Moody's is probably first the money equals and then you have S&P and then Fitch, which is a smaller operation from what I understand. So once next year was told to go away, Moody's actually downgraded HEI July 2016 from there to BA2 grade, which is described as lower-medium grade in terms of investment value and investment quality of what's known as non-investment grade or speculative. Also, they've graded HEI, they downgraded them two years ago and they're now two notches above non-investment grade, speculative or chunk. S&P also downgraded a Hawaiian Electric in July 2016 again after next year was told to go away to BBB minus, which is just one step above chunk. As of January 2017, has Hawaiian Electric as triple BBBB, which they described as lower-medium grade, which is two steps, BBB minus. So the investor class in these two or the three rating agencies saw the turn down of next year attempt by HEI as being a negative for Hawaiian Electric and correspondingly downgraded their credit rating worthiness. And if you look at the 10K filings that HEI filed, both 2016 for 2016 and 2016 for Hawaiian Electric's commercial paper ratings were to be downgraded, HEI and Hawaiian Electric might not be able to sell commercial paper and might be required to draw on more expensive bank lines of credit or to defer capital or other expenditures. And that's a direct quote from the 10K filing for 2017. So the long and short of it, I think, is that the raising of capital to many businesses, including Hawaiian Electric, is critical. So where does the money come from? The money comes from people paying their electric bills, which is based on what the base rate is, which Hawaiian Electric recently received base rate approvals, not as high as they wanted, which caused them some grief. That's one source of revenue, clearly, and the other is lending or taking out money, getting access to commercial money on the market or from the market. And the cost of that money, of course, is determined, as we know, by the credit rating of the company. So as Scott Few pointed out at the verge a couple weeks ago in the session I attended, I mean, he made public note of the fact that one of their credit ratings from S&P, BBB minus, is one step above junk. So the folks at Hawaiian Electric are keenly aware of where they're at right now in terms of they need hundreds of millions of dollars for capital expenditures or CAPEX for short. And the question is, where is it going to come from at what cost? And that's a very, very big deal to a company like Hawaiian Electric. Yeah, it seems to me that they've done some positive things in the period between the end of next era and now. They've done a number of affordable tag projects sort of on their own or at least closer to the vest, so to speak. You know, the further away it is somehow, like homeowners' affordable tag doesn't really help them that much. I mean, just logically, if somebody else is creating the energy, the utility not creating the energy, that's not a good thing financially for the utility. So the utility has to find a way to bring that closer and be part of the creation of the renewables. So I think they've done some things, at least on the industrial scale renewables that are good for them and that probably helped their bottom line. On the other hand, what happened in Puna with the eruption and Puna geothermal ventures probably doesn't help them much because now they have to find other ways to generate that power. And then you have the performance-based docket pending right now. That's got to be a factor also in the way the bottom line looks for later. And I wonder how those things are going to play, as well as other factors I'm sure you're going to mention to me. And what I'd like to do right after the break, Marco, is to talk about the factors that are in play today and how they affect what Scott Hughes said at Verge, how they affect the ratings of all these agencies and what it looks like going forward because they're our utility and their health is kind of a reflection of our health and we always have to remember that. If there's always controversy and there's always these kind of punitive controversies that have happened in the past, at the end of the day it hurts everyone. So I wanted to ask you what factors are in play right now on these issues and how are they going to play out? It's not a small question, but right after this break we're going to hear more. That's a tremendous spine, rather a tremendous cliffhanger question for you and it'll be right back and hear your answer. Wow. My name is Stephanie Mock and I'm one of three hosts of Think Tech Hawaii's Hawaii Food and Farmer series. Our other hosts are Matt Johnson and Pamai Weigert. And we talk to those who are in the fields and behind the scenes of our local food system. We talk to farmers, chefs, restaurateurs and more to learn more about what goes into sustainable agriculture here in Hawaii. We are on at Thursdays at 4 p.m. and we hope we'll see you next time. When I was growing up, I was among the one in six American kids who struggled with hunger and hungry mornings make tired days. Grumpy days. Bad kind of days. But with the power of breakfast, the kids in your neighborhood can think big and be more. When we're not hungry for breakfast, we're hungry for more. More ideas. More dreams. More fun. When kids aren't hungry for breakfast, they can be hungry for more. Go to hungryis.org and lend your time or your voice to make breakfast happen for kids in your neighborhood. Okay, we're back to Marco, Marco Manglestorf here on Me to Marco and me talking about energy in Hawaii and today talking about the utility and how all these factors affect stock price, affect their ability to borrow and gee, that's really central and how you go forward on building a better grid because that costs money and they got to find capital for that. So all these factors, what factors are in play, Marco, and how are they affecting the possibilities going forward? I think one of the top factor, Jay, or at least in the top two or three has to be the perception of what the regulatory climate, the regulatory environment is in a given service territory. And here, of course, across the Hawaiian Islands, we have the Hawaii Public Utilities Commission, which now, by the way, has our friend Jenny Potter, who ascended, so to speak, today, in fact, took the oath of her office, Lorraine Akiva, today is Jenny's first day on the job, along with Jay Griffin and Chair Randy Oase. So I said before, great confidence in all three of them to take us where we need to go and find our way through the uncharted waters here. But interestingly, a very big part and just to quote a couple of lines here, the Ratings Agency in New York in their 2017, a January 2017 analysis and report on Hawaiian Electric, they wrote, quote, Fitch views the regulatory construct in Hawaii as generally supportive, generally supportive of HECO's credit profile. HECO's stable earnings and cash flows reflect a revenue decoupling mechanism, as well as a fuel adjustment and power purchase adjustment clause. So the takeaway from that is Fitch happens to view the regulatory environment for Hawaiian Electric as positive. A report that just came out today, in fact, from the folks at Bank of America and Merrill Lynch on Hawaiian Electric noted, quote, we perceive that there is an increase in ship from alignment in the utilities and state's goals to reach 100% renewable by 2045, helping relieve the negative pressures that have plagued the utility for many years. So here in this case you have Fitch and you have Bank of America and Merrill Lynch, who both perceive the regulatory environment is at worst neutral and more like on the favorable side. Yeah, but don't you agree with that? I mean, that's my observation, too. There was a time when it was fairly contentious and the PUC was making remarks about HECO that were not friendly and Wall Street was listening. But now it seems like there's a certain stability, a certain balance, a certain comfortable relationship better than before, where you can't find a lot of controversy there. It's all positive where it seems. Don't you agree? That's my perception. Things I can respond to on that one is the performance-based regulation or performance-based rate making PBR is a very big issue. And I'll just quote here what Merrill Lynch said and Bank of said in this document today. We perceive the metrics workshop determining the structure of PBR. We previously viewed PBR as, quote, downside risk. Clearly taking note, as others are, that how PBR plays out is going to play a very, very big role by the investor class. The other thing I would mention is that in the three recent rate cases for HECO-HELCO-MICO that Hawaiian Electric asked for a rate-based increase of, I believe, somewhere in the 6-plus percent now. We know it's always this kabuki dance where the utility asked for a rate-based increase that they know in all reality they're not going to get. So they hit, you know, 6-plus or something percent or more. And then everybody looks to see what they actually got. Well, if you see what they actually got, and I believe for HECO it was in the 2.3 percent range, caused the normally unperturbable and almost Buddha-like, and I say that in a very positive fashion, Alan Oshima, to quote, to say that he was, quote, extremely disappointed in that rate increase. To what extent that rate increase approval for HECO-HELCO-MICO is seen in a negative light by the investor class and by the big three kind of remains to be seen. But I don't think anybody can make the case that the rate increase they got was anything to jump up and down in the aisles and cheer about. I think I would take a treat Hawaiian Electric. I think they've been in for a pretty rough, rough road from my perception over the past several years and to what extent that's going to change with the new makeup of the commission, of course, remains to be seen. Well, yeah. And of course you mentioned, and you should, PBR, the performance-based regulation. And that could go, you know, as that report suggested, it could be a downside factor and it could be an upside factor. I mean, when it came out, Hawaiian Electric said, we welcome that. We're good with that. We'll work with the PUC on that. There's a positive statement, you know, whether, you know, that it really is a positive experience for them remains to be seen. But my question to you, and none of my questions are easy, Marco, is how's that going to play out? How are they going to play out on the short term and the intermediate term in the long term as against these rating agencies, as against the value of the stock and the cost of capital? Boy, if I had answers to that down pat, I think I'd be making a lot more money than I am now, Jay. So yet again, I don't have a really good answer, but I think a lot more will be known in the next 12 to 18 months as the PBR plays out and just kind of more exactly what Hawaiian Electric's capital needs will be and where is it going to come from at what cost? Just accurate words from the Moody's report that dates back to the 3rd of August, 2016 when it downgraded Hawaiian Electric from BAA1 to BAA2, which is a downgrade, right? They said, quote, what could change the rating cause it to go up? And they note we could take a positive rating action if we believe HECO's challenges of transforming its generation base have fundamentally diminished and if the regulatory environment becomes more credit supportive, and here's the keyword, less political, what could change the rating in the downward direction? We would take a negative action should HECO encounter additional difficulties with regulators and interveners as it executes on its renewable capital spending plan and of its existing supportive regulatory provisions if they're adversely changed your scale back. So I think in a couple of sentences, Moody's nailed it. What's the climate of the regulatory environment? Yeah, and it's an interesting comment about less political. I mean, what jumps to my mind when you say that is, well, next era was to some extent political, wasn't it? And some of the moves that PUC has made, some of the moves, you know, some of these factors are political factors. For example, David Ige bursting out at one of the large conferences that there would be no LNG, that he opposed LNG. You know, that's political, isn't it? Are we going to be able to escape that going forward? Are we going to have more political surprises and more political processes like that? That do affect the ability of the utility to function. I don't see, Jay. I don't see how it could be anything other than political because energy is such an important mix of the economic political regulatory pie out here. I think it would be delusional to believe that it could somehow be politicized. And I think, you know, deciding Ige's opposition to LNG, well, he was also very directly opposed to the merger of HEI and next era, and he, of course, instructed DBED and the state planning office, interveners like HEIC was on that docket, in other words, to challenge the merger. So I think Moody's is exactly right and I think it's impossible to take politics out of energy, whether it's here, whether it's in California, whether it's in the mainland, whether it's across the globe. There's too much at stake. There's too much at stake, too much money involved. It's the lifeblood of our economy and has been for hundreds of years. That's true, but you know, you can have a political on a smaller impact and a political on a larger impact, and that means that things could happen by surprise and that the impact could happen by surprise. So political has to be, honestly, a negative impact going forward and we just don't know how negative it might be, but I agree with you, it will continue. It's hard to stop it. So that's a factor that is negative going forward. What other factors, what other factors are in play that could be negative? Well, something that just happened last week, which I don't think got a whole lot of play, but I really took notice of it and I have the reason to believe that the folks at Hawaii Electric took notice of it as well. And that is, up until recently, the oil, which, you know, a couple years ago was as low as mid-20s. Now it's around the $70 barrel range in the world market. As the oil goes up and down, there's an effect on our utility bills, right? And that is a pass-through. In other words, the increase in oil cost has led to higher electric rates now compared to last year, compared to two years ago. Hawaii Electric doesn't make any money on that. It's just simply a pass-through. As they pay more for oil with a one to two-month lag, they pass it on to ratepayers, okay? It's been 100% pass-through. The big deal from last week is that for the first time ever, as far as I'm aware, the Public Utilities Commission here is allowing, will allow Hawaii Electric to only pass on 98% of the so-called energy cost adjustment charge, or ECAC for short, energy cost adjustment. Oh, well, that doesn't sound like much, right? 2%. But as a precedent, I find it to be a very big deal and an unsettling precedent from Hawaii Electric's perspective. So they are no longer able to 100% pass through the rising cost of petroleum. They are instead having to eat that 2%, and from what I understand and what I read, this is the commission's attempt to continue to nudge, if not push, or come up with a different verb if you wish, push Hawaii Electric harder to get off of fossil fuels. So that cannot be seen as anything other than a negative development from the perspective of analysts in New York, in my opinion. Yeah, aside from the control point that is pushing Hawaiian Electric to get off oil, is there any logical, evidentiary kind of reason for that? I can't figure one myself. I mean, this is not, the 2% that they lose in the process is not their fault. It has nothing to do with what they do or don't do. Why penalize them that way? I mean, aside from this factor you mentioned of trying to force them to go faster on renewables. I don't think it can be seen as anything other than something of a stick, Jay. Certainly not a carrot. Certainly not a carrot. So again, you could say, well, it's only 2%, but it's more than just symbolic. Yes, it's symbolic, but it's also tangible as well. Well, it could be 4%, next time you look, or 6%, or 8%, who knows. And then it gets to be very painful. One thing that you follow, and I see it all the time, is you're following it yourself and you're writing about it, is the condition of the solar installation industry, the condition of homeowner solar around the state in every county. And I wonder, this is a two-part question, really. I wonder what the future of that is, because now it seems to be getting better for reasons I don't know if I fully understand. I mean, for the installers and for the increase in solar and household solar. And what effect does that have, one way or the other, on the ability of the utility to make a buck and have good valuations and cost of capital? Well, let me maybe address the second part of that first. Since decoupling was introduced a number of years ago, decoupling the profitability and return on equity of the Hawaiian Electric Company is decoupling from the generation of kilowatt-hour sales. So when that decoupling took place, essentially, that has meant that Hawaiian Electric is not going to be penalized kilowatt-hours as energy efficiency becomes more robust and as solar and other renewable energies come online. So I think, you know, overall, in terms of from the investor class, they see more solar probably as being not necessarily a bad thing and in fact, you know, being a positive in terms of getting to the Emerald City-like value of 100% renewable in power generation by 2045. You know, in terms of the overall climate for rooftop solar, I mean, we had our worst year last year. The worst year we had in the past 10 years was last year. So from what I can see so far now that we've got six months under our belt, so to speak, from across the service territories, there has been an increase for sure for Oahu and for the Big Island. I'm waiting to get numbers from my friends at the county of Maui Electrical Department to see how Q2 was in terms of PV permits for Maui County, which is Maui, Lanai, and Molokai. So I think there's greater regulatory certainty now that we've had since early this year when we know what kind of interconnect programs we can offer customers that are going to be around for at least the next year or two or longer. So I think there's kind of greater predictability on the regulatory front. And the introduction has said many times we're not just in theory doing it out here or looking at it. I mean, we've been forced to do it based on the changes that have taken place in terms of net energy metering no longer being available as of October 2015. So I'm cautiously optimistic that we bottomed out last year and hopefully the solar coaster will begin picking up, has been picking up momentum this year because I think everybody is in agreement that more rooftop solar is a more better thing. And especially here on this island with the loss of PGV, perhaps indefinitely, Hawaiian Electric and Elko are necessarily needing to look at what are we going to do to make up for this loss of more than 30 megawatts of firm power that we've had for decades. Well, lots to come on this. It seems to me that a few years ago that the issues on the table were relatively few and relatively simple compared to where we are now. They are much more complex now and our aspirations are much more ambitious now and there's much more to talk about, Marco. So in two weeks' time, let's revisit all of this and keep your fingers anyway on the pulse of what's going on. This is a time when we have to pay more attention, not less, to what's going on in energy in Hawaii. As my dear aunt Linda Beach used to say in response to something like that, absolutely. All right, there you got it. Marco Mangos to our Provision Solar and Helo. Thank you so much, Marco. I'll see you in two weeks. Take care.