Pinnacle Renewable Energy has announced its financial results for the quarter ended June 28, 2019 (“Q2 2019”).
Q2 2019 Highlights
- Revenue increased 22.4 per cent to $104.2 million, compared to Q2 2018;
- Adjusted EBITDA totalled $16.1 million, compared to $14.9 million in Q2 2018;
- Excluding the impact of the implementation of IFRS 162 and the incident at the Company’s Entwistle facility, Q2 2019 Adjusted EBITDA was $13.6 million;
- Pinnacle sold approximately 478,000 metric tons (“MT”) of industrial wood pellets, an increase of 24.2 per cent compared to Q2 2018;
- Expanded Pinnacle’s credit facility from $380 million to $530 million, and extended the maturity date to June 14, 2024; and
- Secured a new long-term, take-or-pay off-take contract in South Korea with GS Global Corporation for 100,000 MTPA of industrial wood pellets beginning in 2022.
Subsequent to Q2 2019 Highlights
Secured a new long-term, take-or-pay off-take contract in Japan with Mitsubishi Corporation for 110,000 to 120,000 MTPA of industrial wood pellets in 2021; and
Entered an agreement with Tolko Industries Ltd. to build a new industrial wood pellet production facility in High Level, Alberta with production capacity of 170,000 to 200,000 MTPA.
“The second quarter of 2019 marked a strong period of production and revenue growth with the ramping up of our new facilities in Smithers and Aliceville. We also continued executing our growth strategy by securing two new Asian contracts, entering into a joint venture with Tolko to build our second pellet mill in Alberta, and progressing on the fourth quarter restart of the full Entwistle facility,” said Rob McCurdy, CEO of Pinnacle. “Our second quarter production growth occurred during a challenging period as many of our B.C. fibre suppliers curtailed operations, resulting in a transition to increased amounts of harvest residuals to replace sawmill residuals. Our team continues to implement procurement strategies in the B.C. market and operating improvements in our mills, and we believe we will successfully manage our operations and costs as the fibre basket transitions.”
Q2 2019 Financial Results
Revenue for Q2 2019 totalled $104.2 million, an increase of 22.4 per cent compared to $85.1 million for the 13-week period ended June 29, 2018 (“Q2 2018”). The increase was primarily attributable to higher sales volume as the Company produced and sold higher volumes of pellets from its Smithers and Aliceville facilities in Q2 2019, while there were no sales from these facilities in Q2 2018.
Adjusted Gross Margin was $21.2 million, or 20.4 per cent of revenue in Q2 2019, compared to $18.1 million, or 21.3 per cent of revenue in Q2 2018. The decline in Adjusted Gross Margin was primarily attributable to higher fixed overhead costs and costs resulting from the Entwistle Incident, partially offset by business interruption insurance related to the Entwistle Facility received during the quarter. Adjusted Gross Margin for Q2 2019 also reflects the Company’s adoption of IFRS 16. Excluding the impact of the implementation of IFRS 16 and the Entwistle Incident, Q2 2019 Adjusted Gross Margin¹ was $17.6 million, or 16.9 per cent of revenue.
The Company reported a net profit of $2.4 million in Q2 2019, compared to $6.5 million in Q2 2018. The change in net profit reflects higher selling, general and administrative (“SG&A”) expenses, higher production costs, higher amortisation costs reflecting the Company’s new production facilities, and increased finance costs, partially offset by reduced income tax expense. Excluding the impact of the implementation of IFRS 162 and the Entwistle Incident, net loss in Q2 2019 was $1.2 million. Comprehensive income for Q2 2019 was $1.6 million.
Adjusted earnings before interest, taxes, depreciation and amortisation (“Adjusted EBITDA”) totalled $16.1 million in Q2 2019, compared to $14.9 million in Q2 2018. Increased revenue was offset by higher production costs including fibre and conversion costs due primarily to fibre mix constraints which increased repair and maintenance costs, business interruption insurance proceeds recognised, and costs associated with the Entwistle incident, partially offset by the impact of IFRS 16. Excluding the impact from the Entwistle Incident and the adoption of IFRS 16, Q2 2019 Adjusted EBITDA was $13.6 million.
Effective June 14, 2019 Pinnacle amended the senior secured debt facility (existing term loan, delayed draw term loan and revolving operating line) (the “Amended Facility”). The Amended Facility provides up to a $280.0 million term loan, a $185.0 million delayed draw term loan, and a $65.0 million revolving operating line maturing on June 14, 2024. The Amended Facility places Pinnacle in a strong position to evaluate and pursue acquisition opportunities or other strategic initiatives in Western Canada or the U.S. Southeast.
New Off-take Agreements
During the quarter, Pinnacle entered into a new long-term, take-or-pay contract with GS Global Corporation of South Korea for 100,000 MTPA commencing in 2022. To date, only three long-term, take-or-pay contracts for industrial wood pellets have been entered into in South Korea, all with Pinnacle.
Subsequent to the end of the second quarter, Pinnacle entered into a long-term, take-or-pay contract with Mitsubishi for up to 120,000 MTPA commencing in 2021. The Mitsubishi contract is Pinnacle’s eighth 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.
These new contracts improve The Company’s customer diversification, with contracts with customers in Japan, the U.K., South Korea, and Europe. Negotiations are on-going with various counterparties to secure long-term take-or-pay contracts in Asia and Europe to meet growing demand.
New Facility in High Level, AB
Following the end of Q2 2019, Pinnacle entered into a limited partnership agreement with Tolko Industries Ltd. (“Tolko”) to build a new industrial wood pellet production facility in High Level, Alberta. The Facility further diversifies the Company’s fibre supply using high-quality wood fibre sourced primarily from Tolko’s existing sawmill in High Level. The Facility is expected to have a run-rate production capacity of 170,000 to 200,000 metric tons per annum. Annual production volumes from the Facility will be sold through Pinnacle’s contracted backlog of long-term, take-or-pay off-take contracts. Under the terms of the Partnership, Pinnacle and Tolko will each own a 50 percent interest in the Facility.
Under the terms of the Partnership, Pinnacle will operate the Facility and manage all aspects of customer relations, marketing, sales, and logistics. Tolko will supply both heat energy and fibre to the Facility under long-term supply agreements. The Facility, which will be built on land owned by Tolko, will begin construction in the third quarter of 2019. Initial wood pellet production at the Facility is expected to commence in the fourth quarter of 2020. The capital cost of the Facility is expected to be approximately $54 million, with 50 percent funded by Pinnacle and 50 percent by Tolko. Pinnacle expects the capital cost to be in line with its capital cost to run-rate EBITDA ratio target range. Pinnacle will fund its portion of the capital costs from draws on its recently expanded credit facilities.
Production Facility Upgrades
In Q2 2019, Pinnacle commenced 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 available in the region and achieve a series of safety and environmental advancements. 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.
This strategic investment will enhance the operating flexibility of the Williams Lake and Meadowbank 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. 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. As of the end of Q2 2019, $1.4 million has been spent on upgrades at Williams Lake. Pinnacle expects the facility upgrades to be completed and commence commissioning by the end of the fourth quarter of Fiscal 2019.
Pinnacle continues to progress on the Entwistle recovery following the previously disclosed incident in the dryer area of the facility (the “Entwistle Incident”). On March 29, 2019 Pinnacle resumed partial operations at the Entwistle Facility at reduced levels with the production of pellets from dry fibre. The Company is currently rebuilding the dryer and restoring the facility at a total estimated capital cost in the range of $13.0 million to $15.0 million and remains on schedule to restart the dryer in the fourth quarter of Fiscal 2019.Other costs are estimated to be in the range of $8.0 million to $10.0 million, of which $5.8 million has been incurred year-to-date. Pinnacle is actively working with customers and partners to mitigate the impacts of the anticipated 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.
In Q2 2019 there were no additional asset impairment charges recorded, $9.4 million was recognised in Q1 2019 for assets impaired in the incident which has reduced property, plant and equipment and lowered net income for the period. The net income impact has been partially offset by property insurance proceeds recorded in net income on the income statement of $5.0 million in Q2 2019 and $3.0 million (net of deductibles) in Q1 2019. The initial payment of $3.0 million recorded in Q1 2019 was received during the quarter, positively impacting cash flow. The second property insurance amount recoverable of $5.0 million recognised in the second quarter has been recorded in net income and in accounts receivable on the balance sheet as we expect to receive this amount in Q3 2019, which will positively impact cash flow. An initial amount for business interruption insurance was approved by the insurers of $4.5 million for some of the business interruption impact prior to June 28, 2019 and it was recognised in net income on the income statement and accounts receivable on the balance sheet in Q2 2019. Pinnacle expects to receive this amount in Q3 2019, positively impacting cash flow.