Market demand, new facilities driving Pinnacle’s Q1 growth

Pinnacle Renewable Energy’s first quarter revenue increased 26.2 per cent to $89.6 million compared to the same period last year, according to the company’s recently posted financial results. The company is moving forward with planned upgrades at its Williams Lake and Meadowbank production facilities that will boost annual production 80,000 tonnes.

Q1 2019 Highlights

• Adjusted EBITD¹ totalled $8.3 million, compared to $12.0 million in Q1 2018;
• Excluding the impact of the implementation of IFRS 162 and the incident at the company’s Entwistle facility, Q1 2019 Adjusted EBITDA was $8.7 million;
• Pinnacle sold approximately 402,000 metric tonnes (MT) of industrial wood pellets, an increase of 22.6 per cent compared to Q1 2018;
• Secured a third long-term, take-or-pay contract with Sumitomo Corporation to supply 200,000 metric tonnes per annum (MTPA) of industrial wood pellets starting in 2022;
• Commenced commercial production at new production facility in Smithers, B.C.; and
• Negotiated rail cost rates for a five-year term for Pinnacle’s operations in Western Canada with Canadian National Railway (CN).

“Our strong first quarter revenue growth reflects early contributions from our new production facilities and the continued market demand,” said Rob McCurdy, CEO of Pinnacle.  “While our profitability in the quarter was negatively impacted by the fire event at Entwistle and higher costs due to record and near record cold temperatures in our northern mill locations, our outlook for the remainder of 2019 is positive. We have restarted operations at Entwistle, our Smithers and Aliceville facilities are moving towards full production as expected, and we are undertaking significant upgrades to our Williams Lake and Meadowbank Facilities that will better position us to adapt to cyclical changes in wood fibre supply in B.C., while also improving production capacity and operating efficiencies.”

Q1 2019 financial results
Revenue for Q1 2019 totalled $89.6 million, an increase of 26.2 per cent compared to $71.0 million for the 13-week period ended March 30, 2018 (Q1 2018). The increase was primarily attributable to higher sales volume as the company produced and sold pellets from its Entwistle and Aliceville production facilities in Q1 2019, while there were no sales from these facilities in Q1 2018.

Adjusted Gross Margin¹ was $10.9 million, or 12.2 per cent of revenue, in Q1 2019, compared to $14.9 million, or 21.0 per cent of revenue, in Q1 2018. The decline in Adjusted Gross Margin¹ was primarily attributable to higher costs resulting from the Entwistle Incident (described below), higher costs from adverse weather conditions, and increased third-party pellet purchases, partially offset by increased revenue from higher sales volumes. Adjusted Gross Margin¹ for Q1 2019 also reflects the Company’s adoption of IFRS 16². Excluding the impact of the implementation of IFRS 16² and the Entwistle Incident, Q1 2019 Adjusted Gross Margin¹ was $11.3 million, or 12.6 per cent of revenue.

The company reported a net loss of $6.3 million in Q1 2019, compared to $12.8 million in Q1 2018. The change in net loss reflects lower selling, general and administrative (SG&A) expenses, and reduced income tax expense, partially offset by lower gross margin, higher amortization costs, reflecting the company’s new production facilities, and increased finance costs, reflecting non-cash mark-to-market adjustments on foreign exchange contracts. Excluding the impact of the implementation of IFRS 162 and the Entwistle incident, net profit in Q1 2019 was $0.2 million. Comprehensive loss for Q1 2019 was $6.8 million.

Adjusted earnings before interest, taxes, depreciation and amortization (Adjusted EBITDA) totalled $8.3 million in Q1 2019, compared to $12.0 million in Q1 2018. Increased revenue was offset by higher production costs, including higher fibre and conversion costs due principally to colder and wetter weather in the quarter, and costs associated with the Entwistle incident, partially offset by the impact of IFRS 16². Excluding the impact from the Entwistle incident and the adoption of IFRS 16², Q1 2019 adjusted EBITDA was $8.7 million.

Production facility upgrades
Subject to completion of consultation and environmental permitting processes, in the second quarter of Fiscal 2019, Pinnacle will commence upgrades at its Williams Lake and Meadowbank production facilities, located within the Cariboo region of B.C., with the installation of new fibre drying and air filtration equipment, and improvements to access infrastructure. The upgrades will allow the two facilities to process a broader array of available fibre sources in the region, and achieve a series of safety and environmental advancements.

Upon completion of the upgrades, the Williams Lake and Meadowbank facilities will have an increase of 80,000 MTPA in combined overall production capacity. This strategic investment will enhance the operating flexibility of the Williams Lake and Meadowbank facilities and better position Pinnacle to adapt to cyclical changes in wood fibre supply within the B.C. interior. Further, the equipment, technology and infrastructure improvements will result in improved facility operating efficiencies, lower emissions, local employment opportunities and greater overall facility safety. The capital cost of the upgrades is expected to be approximately $34 million, resulting in an estimated capital cost to run-rate EBITDA ratio of approximately 5.0x to 5.5x. Pinnacle will fund the upgrades from draws on its credit facilities. Pinnacle expects the facility upgrades to be completed and commence commissioning by the end of the fourth quarter of Fiscal 2019.

Entwistle incident
On February 11, 2019, a fire and explosion occurred in the dryer area of Pinnacle’s Entwistle production facility causing damage to the dryer and surrounding equipment. On March 29, 2019 Pinnacle resumed operations at the Entwistle facility at approximately 25-30 per cent of production capacity with dry fibre. The company plans to restart the dryer in the fourth quarter of Fiscal 2019. Pinnacle expects accelerated recommissioning of the Entwistle facility once the dryer area has restarted.

Capital costs and other expenses required to replace the dryer and restore the Entwistle facility are estimated to be $21.0 million to $25.0 million. Capital costs to replace the dryer area are estimated to be in the range of $13.0 million to $15.0 million, of which $2.2 million was reflected in construction in progress in property, plant and equipment as at March 29, 2019. Pinnacle expects substantially all of the capital replacement and expenses related to the Entwistle incident to be recoverable through insurance.

As of March 29, 2019, Pinnacle has recognized $3.0 million of initial insurance proceeds (net of deductible) in accounts receivable on its balance sheet. Pinnacle is expecting to receive payment of this receivable in May 2019. The net income impact has been partially offset by the initial $3.0 million of insurance proceeds (net of deductibles) recorded in net income and in accounts receivable on the balance sheet as we expect to receive this amount in May 2019, which will positively impact free cash flow in Q2 2019.

Outlook
Pinnacle expects to achieve strong execution in its strategic growth plan in 2019. The company’s Aliceville and Smithers facilities will contribute to 2019 production growth as they ramp up operations.

The financial outlook of the Entwistle facility is difficult to estimate at this time. As further information is obtained regarding the timeline for recommencement of the dryer area, including the amount of insurance recoveries to which Pinnacle is entitled, the company will be in a better position to provide an update on its outlook for 2019.  Although we expect to recommence operation of the dryer in Q4 2019, the Facility is not expected to provide a meaningful contribution in that quarter.  Pinnacle remains confident that Entwistle will generate $19-$21 million in annual EBITDA when it achieves run-rate production.

Excluding all forecast contribution from the Entwistle facility for 2019, as well as any incremental costs or insurance recoveries relating to the Entwistle incident, Pinnacle expects to achieve Adjusted EBITDA of $54 to $58 million for Fiscal 2019 (excluding the impact of the implementation of IFRS 16²).