Q3 2019 a ‘challenging period’ for Pinnacle due to BC sawmill curtailments

Pinnacle Renewable Energy posted a revenue increase of 5.6 per cent in Q3 2019, but also reported a net loss of $0.7 million due to higher distribution costs, higher amortization costs, and higher production costs due to higher fibre costs.

“The third quarter of 2019 was a challenging period as a number of our B.C. fibre suppliers curtailed operations, resulting in a transition to an increased use of harvest residuals in our production process, driving higher costs,” said Rob McCurdy, CEO of Pinnacle. “Our team continues to actively focus on reducing costs and improving the operating efficiencies of our B.C. facilities, as well as transitioning of our fibre procurement strategy by leveraging more harvest residuals, developing enhanced processing strategies, and working with First Nations and the B.C. government to diversify our fibre suppliers. While we are laser-focused on fibre management and processing in B.C. we are also encouraged by the ongoing development and diversification of the business with the re-start of the Entwistle facility, recently announced contracts in Japan, and the construction of the High Level facility in Alberta.”

In its Q3 2019 report, Pinnacle posted the following:

• Revenue increased 5.6 per cent to $92.6 million, compared to $87.6 million of revenue in Q3 2018;
• Adjusted EBITDA totaled $14.3 million, $0.2 million lower compared to $14.5 million in Q3 2018;
• Excluding the impact of the implementation of IFRS 162 and the incident at the company’s Entwistle facility, Q3 2019 Adjusted EBITDA was $10.3 million;
• Achieved annual run-rate production of 125,000 megatons (MT) of industrial wood pellets at the Smithers facility as expected;
• Secured a new long-term, take-or-pay off-take contract in Japan with Mitsubishi Corporation for 110,000 to 120,000 metric tons per annum (MTPA) of industrial wood pellets beginning in 2021; and
• Entered an agreement with Tolko Industries Ltd. to build a new industrial wood pellet production facility in High Level, Alta., with production capacity of 170,000 to 200,000 MTPA and commenced construction.

Q3 2019 financial results

Revenue for Q3 2019 totaled $92.6 million, an increase of 5.6 per cent compared to $87.6 million for the 13-week period ended Sept. 28, 2018 (Q3 2018). The increase was primarily attributable to higher selling price per MT and a higher proportion of cost, insurance and freight contracts. Higher volumes of pellets from Pinnacle’s Smithers and Aliceville facilities in Q3 2019 compared to Q3 2018 when there were no sales from these facilities was offset by lower production volumes at the B.C. facilities due to the impacts from the ongoing sawmill curtailments.

The company reported a net loss of $0.7 million in Q3 2019, compared to a net profit $1.5 million in Q3 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 implementation of IFRS 162 and the Entwistle Incident, net loss in Q3 2019 was $1.6 million. Comprehensive income for Q3 2019 was $28,000.

Adjusted EBITDA totaled $14.3 million in Q3 2019, $0.2 million lower than the $14.5 million in Q3 2018. Increased revenue was more than offset by higher cash conversion costs (due primarily to fibre mix constraints which increased repair and maintenance costs), distribution costs and other expenses.

Production facility upgrades

The fibre drying and air filtration equipment upgrades at the Williams Lake, B.C., facility are progressing on schedule, and the planning and design work is underway for upgrades at the Meadowbank, B.C., facility. The upgrades will allow the two facilities, both of which are located within the Cariboo region of B.C., to process a broader array of available fibre sources available in the region 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 improved facility operating efficiencies, lower emissions, local employment opportunities and greater overall facility safety.

Upon completion of the upgrades, the Williams Lake and Meadowbank facilities are expected to have an increase of 80,000 MTPA in combined overall production capacity. Commissioning for the upgrades at Williams Lake and Meadowbank are expected to commence in Q1 2020 and Q3 2020, respectively.

At the Aliceville facility, the first phase of the planned capital improvement plan was completed in Q3 2019. The capital investment focused on improvements to fibre flow, processing, and operating efficiency, and resulted in improvements in operating performance starting in September. The second phase of the planned capital improvement plan is expected to commence in Q2 2020 and will focus on further improvements to fibre flow and processing in order to drive cost effective increases in production capacity. Ongoing work with fibre suppliers to optimize fibre mix and production levels have steadily increased through Q3 2019.

Entwistle restart

Pinnacle restarted the Entwistle dryer in early November as previously committed. The company have finished the rebuild, restarted the furnace and dryer, and is in the process of commissioning the new equipment. On March 29, 2019 Pinnacle resumed partial operations at the Entwistle facility at reduced levels with the production of pellets from dry fibre. The Entwistle facility continued partial operations during Q3 2019 at reduced levels with the production of pellets from dry fibre.

Restoration of the facility is expected at a total estimated capital cost of approximately $15.0 million. Other costs are estimated to be approximately $10.0 million, of which $7.6 million has been incurred year-to-date.

Outlook

Pinnacle expects production and revenue growth pressure to continue through the end of 2019 and into 2020, as the facilities in B.C. continue to process a wider mix of harvest residuals due to sawmill curtailments in the province. As a result, as previously communicated, Adjusted EBITDA for Fiscal 2019 is expected to be below the guidance provided for the year.

Pinnacle remains focused on improving its fibre, fibre processing, haulage, and cash conversion costs. Pinnacle’s partner sawmills in B.C. are cooperating to ensure the B.C. facilities have additional visibility and replacement fibre sources where possible. The fibre team is working to source cleaner, lower cost, consistent sources of replacement fibre to fill identified gaps and has ensured that delivered fibre will exceed requirements for the current operating plan for the facilities in Q4 2019 and Q1 2020.

There is a risk that there will be further curtailment announcements; however, the company is now better prepared to manage impacts of the curtailments than in previous quarters. Additionally, with the restart of the Entwistle dryer and production from Aliceville, Pinnacle will have more production occurring outside of the impacted B.C. fibre basket. As Pinnacle completes the Cariboo capital project in Williams Lake and Meadowbank in 2020, the company will be better able to produce with the anticipated fibre mix.