Pinnacle reports $9.9M net loss in 2019

Pinnacle Renewable Energy has announced its financial results for the 13-week (Q4 2019) and 52-week (Fiscal 2019) periods ended Dec. 27, 2019.

The company reported a net loss of $9.9 million in Fiscal 2019, compared to a net profit of $2.7 million in Fiscal 2018. The change in net profit reflects higher distribution costs, higher amortization costs reflecting the company’s new production facilities, and higher production costs due to higher fibre costs, cash conversion costs and costs incurred for third-party wood pellet purchases, partially offset by reduced selling, general and administrative (SG&A) expenses. Excluding the impact of the Entwistle Incident, net loss in Fiscal 2019 was $12.8 million.

Revenue for Fiscal 2019 totalled $377.8 million, an increase of 8.7 per cent compared to $347.4 million for Fiscal 2018. The increase was primarily attributable to higher sales volumes mostly due to a full year of revenue contribution from the production and sale of pellets from the Smithers and Aliceville facilities, each of which contributed no production volume in Q1 – Q3 2018, offset by lower production volumes at the company’s B.C. facilities due to sawmill curtailments and reductions in sawmill residual deliveries.

Adjusted EBITDA totaled $47.2 million in Fiscal 2019, compared to $55.1 million in Fiscal 2018. Increased revenue was offset by higher distribution costs, higher production costs, including higher cash conversion costs (due primarily to fibre mix constraints which increased repair and maintenance costs), higher fibre costs due to extended sawmill curtailments in the B.C. region, and costs associated with the Entwistle Incident, partially offset by the impact of IFRS 16 and business interruption amounts recoverable.

Q4 2019 financial results

Revenue for Q4 2019 totaled $91.5 million, a decrease of 11.8 per cent compared to $103.7 million for Q4 2018. The decrease was primarily attributable to disruption to reduced production in the B.C. facilities with a greater concentration of harvest residuals and the Burns Lake maintenance capital shut as well as shipping delays due to the CN rail strike in Q4 2019.

The company reported a net loss of $3.2 million in Q4 2019, compared to a net profit $7.4 million in Q4 2018. The change in net profit reflects higher SG&A expenses and amortization costs reflecting the company’s new production facilities, as well as increased finance costs, partially offset by reduced production costs. Excluding the impact of the Entwistle Incident, net loss in Q4 2019 was $5.5 million.

Adjusted EBITDA totaled $11.3 million in Q4 2019, compared to $13.8 million in Q4 2018. The decrease is attributable to lower revenues in Q4 2019 compared to Q4 2018, increased distribution and SG&A costs and an increase in other expenses. Excluding the impact of $3.2 million associated with the Entwistle Incident, as well as $2.0 million related to the adoption of IFRS 16, Q4 2019 Adjusted EBITDA was $6.1 million.

Q1 2020 CN Rail disruptions

CN rail service has impacted the ability to effectively get product to port and has caused production disruption in Q1 2020. The January derailment in B.C. damaged Pinnacle leased railcars and resulted in some lost pellets. Full recovery of costs from CN is expected.

The derailment caused service disruptions which impacted production output for a period of clean up for which Pinnacle will not be compensated.

Ten straight days of cold weather in January caused CN rail disruptions resulting in some facility downtime.

In February CN rail lines and B.C. ports have been disrupted by blockades resulting in downtime at Pinnacle’s northern facilities.

New off-take agreements

During the quarter, Pinnacle entered into a long-term, take-or-pay contract with Mitsui for 100,000 MTPA commencing in 2023.

This is the ninth contract signed with customers in Japan since the beginning of Fiscal 2018 demonstrating the company’s successful advancement of the strategy for sales growth into Japan. New contracts improve the company’s customer diversification across Japan, the U.K., South Korea, and Europe.

Production facility construction and upgrades

Plans to install a chipper and additional pelleter at the Smithers, B.C., facility have been finalized for a total capital cost of approximately $6.0 million. The upgrade will decrease costs and increase production run-rate output by approximately 15,000 MTPA. The project is expected to begin in Q1 2020, with completion expected in Q3 2020.

Construction at the High Level, Alta., facility progressed in Q4 2019 and is now in a planned suspension due to winter weather conditions until spring 2020 when warmer temperatures will allow for efficient construction to continue. An additional capital requirement of $6.0 million is expected, bringing the total capital cost to $60.0 million, with Pinnacle’s 50 per cent share being $30.0 million. Tolko has indicated that additional fibre will be available due to forest fire log processing, providing a strong supply of fibre for commissioning. As a result, management is confident that this will enable the facility to produce at the upper end of the 170,000 MTPA to 200,000 MTPA range. The facility is expected to be completed as planned in the fourth quarter of 2020.

The upgrades at Pinnacle’s Williams Lake, B.C., and Meadowbank, B.C., facilities are progressing on schedule and are expected to be completed and begin commissioning in Q1 2020 and Q3 2020 respectively. The upgrades will allow the two facilities to process a broader array of available fibre sources and achieve a series of safety and environmental advancements. This strategic investment will enhance the operating flexibility of the facilities and 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 an increase of 80,000 MTPA in combined overall production capacity.

Entwistle restart

The Entwistle rebuild has been completed, the furnace and dryer have been restarted, and commissioning of the new equipment is in process.

Restoration of the facility is expected at a total estimated capital cost of approximately $14.0 million. Other costs are estimated to be approximately $9.5 million, of which $9.1 million has been incurred year-to-date. Pinnacle is actively working with customers and partners to mitigate the impacts of the 2019 production shortfall and continues to work with the company’s insurance providers to determine the insurance recoveries available for the Entwistle Incident. Pinnacle expects substantially all costs incurred to be recoverable through insurance, subject to deductibles.

Outlook

Pinnacle expects growth in revenue and profitability over the next several years as a result of contracted price increases in most of our off-take agreements. In addition, as the potential demand for industrial wood pellets continues to grow globally, the company is well positioned to meet this demand growth through a combination of expansion projects at existing production facilities, some of which are currently underway, and new greenfield and brownfield growth projects. Moreover, Pinnacle will continue to evaluate potential acquisitions and joint ventures to grow our production platform, and continue to capture opportunities in the growing Asian marketplace as a result of its longstanding relationships with customers in the region.

The recent restart of the Entwistle Facility and strong initial performance combined with the commissioning of the destoner will add production volume throughout the year, and an expected positive contribution to Adjusted EBITDA in 2020. Additionally, as the Aliceville and Smithers facilities are both operating at full run-rate production, incremental production volume and Adjusted EBITDA contribution is expected for 2020.

The above mentioned derailment and blockade of CN rail service has continued to impact the ability to get production to port, and in some cases has caused production disruption in Q1 2020. Pinnacle incurred additional costs to divert finished goods from our facilities for ship loading to different ports for some shipments. In Q1 2020 thus far the company has lost 20kMT of production because of disruption to rail and port service, and currently anticipates approximately two million dollars of Adjusted EBITDA will be missed in Q1 2020 as a result of the CN and port blockades and the subsequent rail delays.

Production output of Pinnacle’s B.C. sawmill suppliers has continued at consistently lower levels. Although current forecasts are for reduced stumpage costs for B.C. logs in mid-2020 and improved sawmill economics, Pinnacle continues to retain fibre inventories and employ other sourcing strategies to manage unforeseen disruptions.

While Pinnacle remains focused on improving fibre, fibre processing, haulage, and cash conversion costs, production and revenue are expected to continue to be impacted through 2020, as will the Adjusted Gross Margin as Pinnacle’s B.C. facilities continue to process a wider mix of harvest residuals.