Pinnacle Renewable Energy Reports 2020 Fourth Quarter Results

Pinnacle Renewable Energy (“Pinnacle” or the “Company”) announced its financial results for the 13-week (“Q4 2020”) and 52-week (“Fiscal 2020”) periods ended December 25, 2020.

Summary of Fourth Quarter 2020 Financial Performance:

– Revenue in Q4 2020 was $116.9 million, $25.4 million or 27.8% higher than Q4 2019 revenue of $91.5 million; the net loss was $2.5 million in Q4 2020 versus $3.1 million in Q4 2019.

– The net loss for Q4 2020 includes $0.1 million for expenses related to the proposed acquisition of Pinnacle by Drax Group PLC (LSE:DRX) (“Drax”) and $0.2 million of net insurance benefits compared with $3.0 million in Q4 2019. Excluding these expenses and benefits, the net loss would have been $2.6 million in Q4 2020 compared with $6.1 million in Q4 2019.

– Adjusted Gross Margin(1) (“AGM”) in Q4 2020 was $19.8 million or 17.0% of revenue compared to $16.4 million or 17.9% of revenue in Q4 2019. Adjusted EBITDA(1) was $15.4 million, or 13.2% of revenue compared to $11.3 million or 12.3% of revenue in Q4 2019. Excluding the insurance benefits reported above, AGM in Q4 2020 would have been $19.5 million compared to $13.0 million in Q4 2019 and Adjusted EBITDA would have been $14.9 million and $8.1 million in Q4 2020 and Q4 2019 respectively.

– Capital expenditures net of non-controlling interests totaled $32.1 million in Q4 2020, including $28.1 million on growth-related projects, compared with $12.9 million in the same quarter last year.

– Net debt at the end of the quarter was $411.2 million resulting in available liquidity of $153.3 million. Net debt includes $84.7 million associated with growth-related projects still under construction, as well as $34.7 million associated with the recently completed High Level mill.

Summary of Fiscal 2020 Financial Performance:

– Revenue for Fiscal 2020 totaled $490.5 million; $112.7 million or 29.8% higher than Fiscal 2019 revenue of $377.8 million; the net loss in Fiscal 2020 was $3.9 million compared to a net loss of $10.0 million in Fiscal 2019.

– The net loss for Fiscal 2020 includes $0.2 million for expenses related to the proposed acquisition of Pinnacle by Drax and $4.8 million of net insurance benefits compared with $2.5 million in Fiscal 2019. Excluding these expenses and benefits, the net loss would have been $8.5 million in Fiscal 2020 versus $12.5 in million in Fiscal 2019.

– The Company’s AGM for Fiscal 2020 was $80.5 million or 16.4% of revenue compared to $65.0 million or 17.2% of revenue in Fiscal 2019. Adjusted EBITDA for Fiscal 2020 was $61.6 million versus $47.2 million in Fiscal 2019. Excluding the insurance benefits reported above, AGM would have been $77.1 million in Fiscal 2020 versus $59.3 million in Fiscal 2019 and Adjusted EBITDA would have been $58.6 million in Fiscal 2020 compared with $43.3 million in Fiscal 2019.

– Capital expenditures net of non-controlling interests totaled $109.3 million in Fiscal 2020, including $100.3 million on growth-related projects, compared with $53.8 million in Fiscal 2019.

Factors Impacting Fourth Quarter, 2020

– Production in Q4 2020 was 489,000 MT, 11% higher than the same quarter last year but 17% below Q3 2020. Shipments totaled 526,000 MT, 24% more than Q4 2019 but 12% below the prior quarter. A total of 39,000 MT of third-party pellets were purchased in Q4 2020 compared with 16,000 MT in Q4 2019 and 15,000 MT in Q3 2020.

Houston Incident and Other Issues Impact Production Volumes

– Production at the Houston plant was suspended on November 25th as a result of a fire-related incident in the dryer area of that mill. Production resumed on December 10th on a reduced basis. A plan to repair the dryer and the other equipment damaged in the incident at a cost of $5.5 to $6.0 million has been developed and will be covered by the Company’s insurance policies, subject to standard deductibles. The production impact at Houston during the quarter has been estimated at 16,000 MT.

– Operating and reliability issues at the Company’s Aliceville plant resulted in the loss of 20,000 MT during Q4. There were several unplanned shuts related to mechanical and electrical failures and to the reinforcement of safety standards.

– Operating disruptions at the Lavington and Armstrong plants in the B.C. Interior stemming from congestion at the Fibreco terminal in North Vancouver resulted in the loss of approximately 5,000 MT of production during Q4 2020. The impact on service levels at the terminal as a result of the Fibreco grain silo collapse in October has been more extensive and will take longer to resolve than initially expected. In addition to the impact on production, Pinnacle incurred approximately $0.5 million in additional inland transportation costs and demurrage associated with the Fibreco matter in Q4 2020.

– Approximately 9,000 MT of production was lost in Q4 2020 due to CN service disruptions unrelated to the Fibreco matter.

Lower Production and Inclement Weather Impact Shipments

– The combination of lower production volumes and inclement weather in both B.C. and Alabama, which impacted the pace of ship loading, had a negative impact of shipment volumes and revenues during the quarter.

Reduced Supply of Sawmill Residuals Impacts Fibre Costs

– Sawmill residuals dropped from 84% of the Company’s feedstock in Q3 2020 to 77% in Q4 2020 due to reduced sawmill operating rates in the last two weeks of the quarter and a decision by the Company to utilize a higher level of fibre inventory as feedstock during the quarter. Overall, fibre costs were up 3% quarter-over-quarter.

Commencement of Production at High Level

– A total of 8,000 MT of pellets were produced at the newly commissioned plant at High Level, Alberta in the quarter. While production levels were ahead of the Company’s commissioning plan, the Company’s Adjusted EBITDA was negatively impacted by $0.7 million in Q4 2020 as operating costs at the plant were amortized over a relatively small volume of production.

Progress on Growth-Related Capital Projects

High Level Construction Completed

– As indicated above, construction of the new 200,000 MT mill at High Level, Alberta was completed during Q4 2020. The new mill is 50% owned by Pinnacle and 50% owned by Tolko Industries Inc. (“Tolko”).

– Pinnacle contributed $10.1 million to the project in Q4 2020, bringing the Company’s total expenditures to $33.9 million or approximately 99% of its share of estimated total project costs.

Demopolis Construction Proceeds as Planned

– Construction continued during the quarter on the 360,000 MT per year mill in Demopolis, Alabama, in which Pinnacle has a 70% interest.

– Initial production at Demopolis is expected in the second quarter of 2021.

– Additional costs incurred to advance the electrical scope of the project and the barge loading area will add an additional $4.5 million to the cost of the project, bringing the total capital investment at Demopolis to $133.2 million (Pinnacle’s share $93.2 million).

– Pinnacle contributed $15.7 million to the project in Q4 2020, bringing expenditures to-date to $55.9 million or approximately 60% of budgeted costs.

Other Growth Capital Projects

– The Phase 2 Project at Aliceville, Alabama was completed in early October. This project added a truck unloading system to the mill’s infrastructure, broadening access to sawmill residuals in the region and supporting the Company’s goal of boosting production volumes at the mill.

– The Meadowbank WESP upgrade was completed during the quarter. The upgrade will enhance the operating flexibility of the facility and allow Pinnacle to continue to adapt to structural changes in fibre supply in the B.C. Interior. The upgrade is expected to increase the mill’s production capacity by 40,000 MT per
year.

Arrangement Agreement

– On February 8, 2021, the Company announced that it has entered into an arrangement agreement with Drax to acquire all of the issued and outstanding common shares of Pinnacle. The Company’s shareholders are entitled to receive $11.30 per share in cash with all future dividends suspended starting in the first quarter of 2021. The transaction is anticipated to close in the second or third quarter of 2021 and is subject to approval by two-thirds of the votes cast by holders at a special meeting of the Company’s shareholders, approval by a majority of the votes cast by holders of Drax shares at a meeting of Drax shareholders, and other governmental and regulatory approvals.

Outlook

– The demand for wood pellets remains strong. Year-over-year production increases are expected as the Entwistle plant operates at full capacity, benefits are realized from the upgrades at Williams Lake, Meadowbank, and Aliceville and High Level continues its commissioning process.

– Cold weather is expected to impact production at the Company’s Canadian mills and increase drying costs, which is typical in the winter months. In addition, the Fibreco grain silo incident will continue to impact loading operations at the port throughout Q1 2021 and possibly longer, with additional impacts on rail service and production.

– Pinnacle’s order backlog remains strong at $6.7 billion.

– On-going uncertainties associated with the COVID-19 pandemic including reports of higher positive test results in areas where the Company operates, have the potential to impact operations and the availability and cost of feedstock for the mills. 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.

For the full fourth quarter results, click here.

About Pinnacle

Pinnacle is the second largest producer of industrial wood pellets in the world. The Company’s products are used to displace fossil fuels in the production of baseload electrical power in key markets around the world. The Company operates nine production facilities in Western Canada and one in Alabama, with one additional facility under construction in Alabama and more in development. The Company also owns a port terminal in Prince Rupert, B.C. Pinnacle has entered into long-term, take-or-pay contracts with utilities in the U.K., Europe and Asia that represent an average of 99% of its production capacity through 2026.

Source: Pinnacle Renewable Energy Inc.