Research Team, 22 December 2020

In this 5 minute Q&A, we talk with Vince Hawksworth, CEO of Mercury. We discuss becoming CEO as the country went in to lockdown, their key generation assets, and advice he wishes he were given on investing earlier in life.

Questions covered include:

  1. What does Mercury do?
  2. What did you find taking over as CEO during COVID?
  3. How is Mercury placed for a potential exit from Tiwai Point?
  4. How will you utilise the strong balance sheet for earnings growth?
  5. What do you think will happen to electricity's demand profile?
  6. What are some of the sector's risks?
  7. What advice do you wish you were given when you started investing?

MS: Vince, thanks for joining us. Can you start by just telling us a little bit about the Mercury business?

VH: So, Mercury is New Zealand’s second largest generator retailer of electricity and we have a market capitalisation of around eight billion dollars. That business is made up of hydro, geothermal, and soon to have wind assets as we build that. Producing about 6600 gigawatt hours a year. Around two thirds of that is hydro.

MS: And I want to ask you a little bit about COVID, and in particular taking over as CEO as the country was going into lockdown. How did you find that and what were some of the challenges there?

VH: Well I think it’s something that it’s almost impossible to prepare for. My first day in the office was the first day of level four lockdown. So the office in that case, was the one at home. And I spent the first five weeks of the job communicating via Skype and Zoom and trying to meet people. I think the lesson in that is that you have to be really intentional in filling your day with discussions with people, so they can start to get to know you. But my view would be, there is absolutely no replacement for the day you can stand in the office and talk to people face to face and be able to have the pōwhiri welcome that occurred at Mercury.

MS: And I guess the other big challenge that you faced throughout 2020 was probably the prospects or the risks around Tiwai point. Can you just remind us how Mercury is placed for a potential exit from Tiwai?

VH: Yes well there remains uncertainty about the future of Tiwai. And in many ways that’s always been the case in the New Zealand electricity sector. But for Mercury we’re really well placed because our assets are in the North Island. So our hydro, wind and geothermal assets. Which means they’re close to the largest load centres around Auckland, Hamilton and the Bay of Plenty. So we’re well positioned in that sense, as opposed to having to shift our electricity from the bottom of the South Island. That said, that resilience that we have in our business being really important, we’re not taking it for granted that there’s a big transition to come, as New Zealand decarbonises and deindustrialises.

MS: Mercury’s got quite a strong balance sheet at the moment. What are some of the options to utilise that for earnings growth over the next few years?

VH: Well obviously we are great believers in the decarbonisation story. We believe strongly that the electrification of transport and the electrification of process heat, so taking coal boilers out of dairy factories and schools and hospitals, is important. So that will require growth in generation investment. And our Turitea windfarm we’re doing now is a big new investment for us. We have other investments of that nature we can do in New Zealand. We also own 20 percent of Tilt renewables. And that’s important to us because that gives us exposure to the Australian decarbonisation story, where currently their renewables are only around 20 percent and they’ve got a lot of coal to get out of the system in their electricity sectors.

MS: Just touching on your point around decarbonisation. What do you think the demand profile for electricity in New Zealand looks like in the next decade versus the demand we’ve seen over the past decade?

VH: Well demand’s been relatively flat over the last decade to fifteen years really, as electrical efficiency became the byword. If we put aside the Tiwai smelter issue, what we will see with more electric vehicles, with process heat being electrified, I think it’s a steady creep up of demand. But we also see the transition to lower cost renewables coming in, which includes wind, and we’re pretty excited about that.

MS: And electricity obviously is quite an attractive sector at the moment, both for investors and to be involved in like yourself. But what are some of the risks?

VH: I think the biggest risk is the transition that we’re going through now. That we want to take fossil fuels out of the system. And the difficulty with that is that prices can become volatile. And electricity is an essential service and people worry about volatile prices, they worry about wholesale prices being too high and that they potentially flow through to consumers. So, I think the industry, and certainly from Mercury’s point of view, it’s about remembering our social license to operate and doing the right thing by consumers and staff and stakeholders like iwi on the river, because that will deliver for shareholders.

MS: And finally, just wanted to ask you about your own investing experiences. And in particular, is there a piece of advice you wish you’d been given early on when you first started your investing journey?

VH: I think the piece of advice I would have liked to have been given is, it’s not just about the numbers. Clearly, people are always looking for returns and good investment. But it’s about the convictions. Those macro convictions about those businesses that are attuned to the social changes that are occurring. So, if I’d understood more about decarbonisation earlier, if I’d understood more about digitisation, if I’d understood more about social license to operate 25 years ago when I first started investing, I think I would have made some slightly different decisions. And so those sorts of macro trends on where society’s going, I think are really important to keep in mind when you invest.

MS: That’s great advice. Vince, thanks very much for your time today.

VH: Thank you, cheers Mo.