Mercury (ASX:MCY) share price falls after earnings downgrade

Mercury’s new guidance reflects the challenges it’s been facing through 2021.

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Mercury NZ Ltd (ASX: MCY) shares are down late morning after the company downgraded its guidance for the 2021 financial year. At the time of writing, the Mercury share price is 3.94% lower than yesterday’s closing – with shares in the company swapping hands for $6.09.

It’s the second time this year the New Zealand electricity supplier has dropped its earnings guidance. Today, it has been reduced by 11.5%.

The company cited dry weather, an outage at its geothermal power station, elevated wholesale prices, and its acquisition of Tilt Renewables Ltd (ASX: TLT) as reasons for the downgrade.

Let’s take a closer look at the news that might be weighing on the Mercury share price today.

New guidance

Mercury announced this morning that its expected earnings before interest, tax, depreciation, amortisation, and financial instruments (EBITDAF) has fallen.

The company now expects EBITDAF of $420 million for the 2021 financial year – down from its previous guidance of $520 million.

This is the second time this year that Mercury has dropped its guidance. In February, Mercury downgraded its 2021 financial year guidance from $535 million to $520 million.

Why Mercury’s earnings have dropped

According to Mercury, its Kawerau geothermal power station’s unplanned outage is weighing on its earnings.

The power station’s outage is said to have been caused by a mechanical failure on Monday. It is expected to be out of action for months. Mercury says it will update the market on when the Kawerau power station will be back in operation once it knows more.

Additionally, Mercury stated its EBITDAF has been hindered by Tilt Renewables’ higher associated earnings.

Previously, Mercury and AGL Energy Limited‘s (ASX: AGL) subsidiary, PowAR, were set to acquire Tilt for NZ$7.80 per share. Following the acquisition, Mercury was to operate Tilt’s New Zealand-based assets, while PowAR was to take over its Australian-based operations.

In April, following reports a Canadian pension fund had offered Tilt NZ $8.00 per share, Mercury stepped back from the acquisition and PowAR increased its offer to NZ$8.10 per share.

Now, Mercury will buy Tilt’s New Zealand-based assets from PowAR once the acquisition is complete. The workaround increased the cost of Mercury’s purchase by NZ$27 million.  

Further, dry weather in the Taupo catchment has caused Mercury’s full-year hydro generation guidance to fall by 200 gigawatt hours. Mercury now expects to generate 3,600 gigawatt hours of hydro energy this financial year.

Finally, increasing wholesale prices have added to Mercury’s woes. The company stated spot prices for the fourth quarter of the 2021 financial year to date are averaging at around $285 per megawatt hour in Auckland.

Mercury share price snapshot

The Mercury share price has not had a great run in 2021, falling 2.87% since the start of the year. However, it has still gained 35.33% since this time last year.

The electricity supplier has a market capitalisation of nearly $8.3 billion, with approximately 1.36 billion shares outstanding.

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