Pinnacle reports best quarterly performance thanks to record production volumes

Pinnacle Renewable Energy has reported revenues of $131.7 million in Q3 2020, $39.1 million or 42 per cent higher than Q3 2019 revenues of $92.6 million.

The increase in revenues in Q3 2020 versus the comparable quarter in 2019 results from higher production volumes at a number of the company’s facilities during the quarter.

The company’s Adjusted Gross Margin (AGM) increased by $13.8 million to $31.7 million in Q3 2020 compared to Q3 2019 or 24.1 per cent of revenue in Q3 2020 (19.3 per cent of revenue in Q3 2019). AGM was $20.0 million or 15.1 per cent of revenue in Q2 2020 and $17.9 million or 19.3 per cent of revenue in Q3 2019. Excluding the net insurance benefits relating to the Entwistle incident, AGM in Q3 2020 was $29.1 million or 22.1 per cent of revenue versus $15.8 million or 17.1 per cent of revenue in Q3 2019.

Adjusted EBITDA was $10.0 million higher in Q3 2020, coming in at $26.1 million, versus $16.1 million in Q2 2020 and $13.6 million in Q3 2019, while net income was $7.7 million compared with net income of $0.02 million in Q2 2020 and a net loss of $1.5 million in Q3 2019. Excluding the net insurance benefits of the Entwistle incident, Adjusted EBITDA was $23.4 million or 17.8 per cent of revenue compared with $11.5 million or 12.4 per cent in Q3 2019. Excluding the net insurance benefits related to the Entwistle incident net income would have been $5.0 million in Q3 2020 compared to a net loss of $3.0 million in Q3 2019.

Strategic context

The positive momentum Pinnacle experienced in the second quarter of 2020 continued into Q3 2020 in spite of the many challenges associated with the ongoing COVID-19 pandemic, resulting in the best quarterly performance in the company’s history. Pinnacle’s strategy of investing in both new capacity and production efficiency has delivered strong gains in productivity and cost reductions while setting the stage for the company to grow its revenue base and profitability.

Pinnacle has earned its position in the top tier of the global wood pellet industry through consistent attention to quality, reliability of supply and service to its customers. These priorities, along with the goals of delivering outstanding returns to our shareholders, safe and rewarding careers for its employees, and economic and environmental benefits for the communities in which Pinnacle operates, will continue to guide the company’s business strategy into the future. Pinnacle also gains comfort knowing that its products play a role in addressing the challenges of global climate change.

Factors impacting third quarter, 2020

Warmer weather, lower fibre costs and returns from capital investments

The combination of warmer and drier weather, lower fibre costs and the returns associated with the company’s capital investment activities contributed to record production and profitability in Q3 2020. Pellet production in Q3 2020 was 587 kMT, 69 kMT or 13 per cent above Pinnacle’s previous record of 518 kMT in Q2 2020, and 145 kMT or 33 per cent higher than Q3 2019. Viewed on a per day basis, production in Q3 2020 was 6,449 MT versus 5,694 MT in Q2 2020 and 4,852 MT in Q3 2019.

Strong performance gains were recorded at a number of plants in Q3 2020 led by Williams Lake which benefited from the completion of its dryer upgrade project in the prior quarter, increasing production by more than 47 per cent quarter over quarter. The Entwistle mill continued its ramp up process during the quarter, increasing production by more than six per cent quarter-over-quarter.

Sawmill residuals increased to 84 per cent of the company’s feedstock in Q3 2020 compared with 74 per cent in Q2 2020 as the strong lumber market resulted in higher operating rates in that sector. Overall, Pinnacle’s fibre costs were down two per cent quarter-over-quarter. During the quarter, Pinnacle reduced its fibre inventories by 10 per cent due to its increased confidence regarding the availability of sawmill residuals.

The combination of lower fibre costs, higher mill-level productivity and the benefits of warmer and drier weather contributed to a seven per cent reduction in Pinnacle’s unit production costs quarter-over-quarter. This reduction in production costs contributed to a 46 per cent increase in AGM in Q3 2020, net of the influences of insurance proceeds, versus Q2 2020 and a similar increase in Adjusted EBITDA, the highest recorded by the company.

Logistics issues negatively impact results

The company’s results in Q3 2020 were achieved in spite of service failures at CN Rail and the Fibreco Terminal in North Vancouver that negatively impacted production in Q3 2020 by an estimated 20 kMT and resulted in approximately $0.6 million in additional rail, distribution and demurrage costs during the quarter. Significant time and attention is being directed to the CN service issue with the goal of improving service levels. The issue at Fibreco was caused by a structural failure of a recently constructed grain silo which required Pinnacle to re-route a ship that was originally scheduled to load at Fibreco to the company’s wholly-owned port facility in Prince Rupert. It also required Pinnacle to re-route rail cars from Fibreco to Prince Rupert. Fibreco resumed operations in mid-October.

Progress on growth-related capital projects

Capital expenditures net of non-controlling interests on growth-related projects amounted to $27.0 million in Q3 2020 as the company continued to drive forward with initiatives to build out and diversify its operating platform. These figures compare to spending on growth-related projects of $9.7 million in Q3 2019.

High Level construction advancing; capital for rail infrastructure authorized

Construction of the new 200k MT mill at High Level, Alta., advanced during Q3 2020. The 200k MT per year mill will be 50 per cent owned by Pinnacle and 50% per cent owned by Tolko Industries Inc.
The project remains on schedule for commissioning in the fourth quarter of 2020.
Production readiness processes are well advanced including staff training.
Additional costs incurred to advance the project during periods of significant rain, improve engineering design and enhanced safety will add an additional $6.8 million to the project which will be split evenly between Pinnacle and Tolko. Despite the extra costs incurred in the construction of High Level, management is confident that this project will generate acceptable returns.
The total cost of the project, including associated rail infrastructure, is $70.6 million, with Pinnacle’s 50 per cent share amounting to $35.3 million. Pinnacle contributed $7.9 million to the project in Q3 2020, bringing the Company’s total project expenditures to $23.4 million or approximately 66 per cent of budgeted costs.

Demopolis construction proceeds as planned

Construction also continued during the quarter on the 360 kMT per year mill in Demopolis, Ala. The mill will be owned and operated by Alabama Pellets LLC, in which Pinnacle has a 70 per cent interest.
Good progress was made in the quarter on underground services, foundations and structural steel for the hammermill and pellet buildings, hammermill and dryer area mechanical installations, and the domes for pellet storage. The project is progressing as planned, with commissioning expected in the second quarter of 2021.
The total authorized capital spend for the project is $135.0 million, with Pinnacle’s 70 per cent share amounting to $94.6 million. Pinnacle contributed $13.1 million to the project in Q3 2020, bringing total project expenditures to $39.9 million or approximately 42 per cent of budgeted costs.

Aliceville phase 2 project nearing completion

The company completed the Phase 2 Project at its mill in Aliceville, Ala., in early October. The mill is owned and operated by Alabama Pellets LLC, in which Pinnacle has a 70 per cent interest. This project adds a truck unloading system to the mill’s infrastructure and broadens access to additional supplies of sawmill residuals on a go-forward basis, supporting the company’s goal of boosting production volumes at the mill. Pinnacle contributed $2.0 million on the Aliceville project in Q3 2020, bringing total expenditures to approximately $3.9 million or 78 per cent of budget at quarter-end.

Meadowbank WESP upgrade restarted

The Meadowbank WESP upgrade, which was halted temporarily during the initial stages of the COVID-19 outbreak, was restarted during the quarter. This upgrade will enhance the operating flexibility of the facility and allow Pinnacle to continue to adapt to cyclical changes in wood fibre supply within the B.C. Interior. The upgrade is expected to increase the mill’s production capacity by 30 kMT per annum.
The project is progressing as planned and is on-budget, with commissioning expected in the fourth quarter of 2020.
The total authorized capital spend for the project is $9.5 million. Pinnacle spent $2.4 million on the project in Q3 2020, bringing total project expenditures to-date to $5.6 million or approximately 59 per cent of budgeted costs.

Completion of these projects is expected to increase Pinnacle’s overall production capacity by almost 20 per cent to 2.8 million MT, and increase the production comprised by facilities located in jurisdictions outside of B.C. to approximately 44 per cent.

New CEO appointed

On Oct. 14, 2020 Pinnacle announced the appointment of Duncan Davies as chief executive officer effective Nov. 1, 2020, replacing the current CEO, Rob McCurdy, whose retirement plans were announced earlier this year. From 2000 to 2019, Mr. Davies served as president and CEO of Interfor Corporation, a growth-oriented, publicly-traded forest products company with operations in Canada and the United States. Davies will be based at Pinnacle’s headquarters in Richmond, B.C., and will continue to serve on the company’s Board of Directors, which he joined in April 2020.

Outlook

Customer demand for wood pellets remains strong. In Q4 2020 Pinnacle expects to see positive year-over-year production increases as the Entwistle Facility operates at full capacity, benefits are realized from the upgrades at Williams Lake, Meadowbank, and Aliceville and the facility at High Level is completed and starts commissioning. However, cooler weather in the upcoming months is expected to moderate production and increase fibre drying costs, which is typical during the winter months. In addition, the spillover of the Fibreco incident impacted loading operations at the port in the early part of Q4 2020 which may continue through the balance of the quarter and possibly longer, with additional impacts on rail service and production. Pinnacle expects to increase its fibre inventories in the coming months as a hedge against seasonal factors and other potential disruptions in the supply of traditional feedstock. Pinnacle’s order backlog remains strong at $6.7 billion.

With respect to the COVID-19 pandemic, ongoing uncertainties including reports of higher positive test results in areas in which Pinnacle operates have the potential to impact the company’s operations and the availability and cost of feedstock. Barring a deterioration in the business environment due to COVID-19 or other factors, the construction of the company’s growth-related projects will continue as planned.