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Pinnacle Renewable Energy Reports Fiscal 2019 Second Quarter Results

- NOT FOR DISTRIBUTION IN THE UNITED STATES –

VANCOUVER , Aug. 12, 2019 /CNW/ - Pinnacle Renewable Energy ("Pinnacle" or the "Company") (PL.TO) today announced its financial results for the quarter ended June 28, 2019 ("Q2 2019").

Q2 2019 Highlights

  • Revenue increased 22.4% to $104.2 million , compared to Q2 2018;
  • Adjusted EBITDA¹ totaled $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 EBITDA¹ was $13.6 million ; 
  • Pinnacle sold approximately 478,000 metric tons ("MT") of industrial wood pellets, an increase of 24.2% 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 totaled $104.2 million , an increase of 22.4% 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 Margin¹ was $21.2 million , or 20.4% of revenue in Q2 2019, compared to $18.1 million , or 21.3% of revenue in Q2 2018. The decline in Adjusted Gross Margin¹ 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 Margin¹ for Q2 2019 also reflects the Company's adoption of IFRS 16². Excluding the impact of the implementation of IFRS 16² and the Entwistle Incident, Q2 2019 Adjusted Gross Margin¹ was $17.6 million , or 16.9% 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 amortization 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 amortization ("Adjusted EBITDA")¹ totaled $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 recognized, and costs associated with the Entwistle incident, partially offset by the impact of IFRS 16². Excluding the impact from the Entwistle Incident and the adoption of IFRS 16², Q2 2019 Adjusted EBITDA¹ was $13.6 million .

Debt Facility
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.

Entwistle Incident
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 recognized 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.

Outlook
We continue to expect strong execution of our strategic growth plan in 2019 as reflected by the completion of three new customer contracts in Asia since the beginning of the year, commencement of the Williams Lake and Meadowbank expansions, and development of the High Level Facility.  The Aliceville and Smithers Facilities are expected to continue to achieve production levels above the commissioning curve established by the Company.

The Entwistle Facility is expected to continue to produce pellets from dry fibre at 25-30% of full run-rate production capacity while the dryer is being rebuilt. The project remains on schedule and is expected to be completed in Q4 2019 at which time we expect to return the facility to its pre-incident commissioning curve. We continue to make progress working with insurers in obtaining business interruption insurance.

Production and revenue growth are expected to continue through 2019, as will the margin compression experienced in Q2 2019 as we adapt our operations to manage the impact of fibre transition in our B.C. facilities.  Our fibre procurement team has successfully replaced sawmill residual reductions and we now have sufficient fibre for all of our facilities. We are very focused on improving our fibre processing, haulage and cash conversion costs. At this time, we expect to achieve our previously communicated guidance.

Dividend
The Board of Directors today approved the payment of the Company's Q2 2019 dividend of $0.15 per Common Share. Payment will be made on September 5, 2019 to shareholders of record as at August 23, 2019 .

Selected Consolidated Financial Information
The following tables set forth selected financial information for Q2 2019 compared to the prior year period. Such information has been derived from Pinnacle's unaudited interim consolidated financial statements and accompanying notes.



Q2 2019

Q2 2018

YTD 2019

YTD 2018

(In thousands except per share amounts)


13 weeks

13 weeks

26 weeks

26 weeks







Consolidated Statements of Profit (Loss) and

Comprehensive Income (Loss) Data



Revenue


$

104,164

$

85,084

$

193,791

$

156,106

Costs and expenses:






Production


69,921

53,893

136,456

102,413

Distribution


13,005

13,138

25,771

21,168

Selling, general and administration


5,147

4,265

8,940

13,482

Amortization


9,801

5,381

19,384

10,739

Profit before finance costs and other
expenses 


6,290

8,407

3,240

8,304

Finance cost


(7,753)

(41)

(14,162)

(423)

Other income (expense)


4,991

320

5,797

(17,663)

Net income before income taxes 


3,528

8,686

(5,125)

(9,782)

Income tax (expense) recovery






Deferred income taxes


(1,143)

(2,182)

1,241

3,512

Net profit (loss)


$

2,385

$

6,504

$

(3,884)

$

(6,270)

Impact of:






IFRS 16


$

(579)

N/A

$

(771)

N/A

Entwistle Incident


$

4,182

N/A

$

(2,106)

N/A

Net profit (loss) (excluding above
impact)


$

(1,218)

$

6,504

$

(1,007)

$

(6,270)

 

Consolidated Statements of Cash Flows





Cash provided by (used in)





Operating activities before net change in





non-cash working capital

$

15,490

$

14,091

$

32,622

$

23,581

Net change in non‑cash operating working





capital

$

(7,414)

$

(4,557)

$

(14,292)

$

13,342

Financing activities

$

7,138

$

(9,476)

$

(6,466)

$

4,088

Investing activities

$

(13,889)

$

(10,459)

$

(20,150)

$

(37,896)

 



 

Q2 2019

 

Q2 2018

 

YTD 2019

 

YTD 2018

(In thousands except per MT amounts)


13 weeks

13 weeks

26 weeks

26 weeks







Other Financial Data






Adjusted EBITDA(1)


$

16,136

$

14,861

$

24,441

$

26,818

Adjusted EBITDA per MT(1)


$

33.77

$

38.60

$

27.77

$

37.61

Adjusted Gross Margin per MT(1)


$

44.43

$

47.13

$

36.53

$

46.36

Adjusted Gross Margin Percentage(1)



20.4%


21.3%


16.6%


21.2%

Maintenance capital expenditures


$

4,829

$

1,279

$

5,260

$

2,317

Growth capital expenditures


$

5,331

$

9,240

$

11,195

$

35,694

Operating Data






MT of industrial wood pellets sold


478

385

880

713











June 28,

December 28,

(In thousands)


2019

2018





Selected Consolidated Statements of Financial Position Data






Cash and cash equivalents


$

9,827

$

18,028

Property, plant and equipment


$

364,995

$

330,899

Total assets


$

662,728

$

627,294

Total current liabilities


$

135,128

$

76,644

Total non-current liabilities


$

444,299

$

398,281

Total equity


$

218,429

$

229,013

 

Financial Statements
Pinnacle's unaudited consolidated financial statements and Management's Discussion & Analysis for Q2 2019 are available on the Company's website at pinnaclepellet.com or on SEDAR at www.sedar.com.

Conference Call
Robert McCurdy , CEO and Andrea Johnston , CFO, will host a conference call for investors and analysts on Tuesday, August 13, 2019 at 11:00 am (ET) / 8:00 am (PT) . The dial-in numbers for the conference call are (416) 764-8609 or 1-888-390-0605. A live webcast of the call will be accessible via Pinnacle's website at: http://pinnaclepellet.com/investors/presentations-events

To access a replay of the conference call dial (416) 764-8677 or 1-888-390-0541, passcode: 448127#. The replay will be available until August 20 , 2019.  The webcast will be archived following conclusion of the call.

About Pinnacle
Pinnacle is a rapidly growing industrial wood pellet manufacturer and distributor and the third largest producer in the world. The Company produces sustainable fuel for renewable electricity generation in the form of industrial wood pellets. This fuel is used by large-scale thermal power generators as a greener alternative to produce reliable baseload renewable power. Pinnacle is a trusted supplier to its customers, who require reliable, high-quality fuel supply to maximize utilization of their facilities. Pinnacle takes pride in its industry leading safety practices. The Company operates eight industrial wood pellet production facilities in western Canada and one in Alabama , and 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 103% of its production capacity through 2021 and 106% of its production capacity through 2026.

(1) Non-IFRS Financial Measures
This news release makes reference to certain non-IFRS measures. These measures are not recognized measures under IFRS, and do not have a standardized meaning prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by other companies. Rather, these measures are provided as additional information to complement those IFRS measures by providing further understanding of our results of operations from management's perspective. Accordingly, these measures should not be considered in isolation nor as a substitute for analysis of our financial information reported under IFRS. We use non-IFRS measures including "EBITDA", "Adjusted EBITDA", "Adjusted EBITDA per Metric Ton", "Adjusted Gross Margin", "Adjusted Gross Margin per Metric Ton", "Adjusted Gross Margin Percentage" and "Free Cash Flow". These non-IFRS measures are used to provide investors with supplemental measures of our operating performance and thus highlight trends in our core business that may not otherwise be apparent when relying solely on IFRS measures. We also believe that securities analysts, investors and other interested parties frequently use non-IFRS measures in the evaluation of issuers. Our management also uses non-IFRS measures in order to facilitate operating performance comparisons from period to period, to prepare annual operating budgets and forecasts and to determine components of management compensation. As required by Canadian securities laws, we reconcile these non-IFRS measures to the most comparable IFRS measures in our Management Discussion & Analysis for Q2 2019.

(2) IFRS 16 Implementation
Pinnacle adopted IFRS 16 Leases at the beginning of Fiscal 2019. For a description of IFRS 16 please refer to the Company's Management Discussion & Analysis for Q2 2019.  As a result of initially applying IFRS 16, in relation to the leases that were previously classified as operating leases, Pinnacle recognized $36.8 million of right-of-use assets and $36.8 million of lease liabilities as at December 29, 2018 . Further, in relation to those leases under IFRS 16, Pinnacle has recognized depreciation and interest costs, instead of operating lease expense. During Q2 YTD 2019, the Company recognized $3.8 million of depreciation charges and $1.2 million of interest costs from these leases.

As a result of applying IFRS 16, Adjusted Gross Margin and Adjusted EBITDA for Q2 2019 have increased by $1.8 million related to lease payment expenses that were previously classified as operating leases under IAS 17. Also in relation to applying IFRS 16, Free Cash Flow for Q2 2019 has increased by $1.8 million related to lease payment expenses that were previously classified as operating leases under IAS 17, partially offset by a decrease of $0.6 million related to interest costs (increase in net interest and finance costs includes interest payment expense on capital leases under IFRS 16 of $0.6 million ).

Forward-Looking Information
This news release may contain "forward-looking information" within the meaning of applicable securities laws in Canada . Forward-looking information may relate to Pinnacle's future financial outlook and anticipated events or results and may include information regarding its financial position, business strategy, growth strategies, budgets, operations, financial results, taxes, dividend policy, plans and objectives. Particularly, information regarding the Company's expectations of future results, performance, achievements, prospects or opportunities or the markets in which it operates is forward-looking information. In some cases, forward-looking information can be identified by the use of forward-looking terminology such as "plans", "targets", "expects" or "does not expect", "is expected", "an opportunity exists", "budget", "scheduled", "estimates", "outlook", "forecasts", "projection", "prospects", "strategy", "intends", "anticipates", "does not anticipate", "believes", or variations of such words and phrases or state that certain actions, events or results "may", "could", "would", "might", "will", "will be taken", "occur" or "be achieved". In addition, any statements that refer to expectations, intentions, projections or other characterizations of future events or circumstances contain forward-looking information. Statements containing forward-looking information are not historical facts but instead represent management's expectations, estimates and projections regarding future events or circumstances. If any of the opinions, estimates or assumptions underlying the forward-looking information prove incorrect, actual results or future events might vary materially from those expressed in the forward-looking information. The Company has no obligation or undertaking to update or revise any forward-looking information whether as a result of new information, future events or otherwise, except as required under applicable securities laws in Canada . Actual results and the timing of events may differ materially from those anticipated in the forward-looking information as a result of various factors, including those described in "Risk Factors" which are described in the Company's most recent Annual Information Form ("AIF") filed on SEDAR (www.sedar.com).  

We caution that the list of risk factors and uncertainties is not exhaustive and other factors could also adversely affect our results. Readers are urged to consider the risks, uncertainties and assumptions carefully in evaluating the forward-looking information and are cautioned not to place undue reliance on such information. See "Forward -looking Information" and "Risk Factors" in the Company's most recent AIF and its Management's Discussion & Analysis for Q2 2019 available on SEDAR for a discussion of the uncertainties, risks and assumptions associated with these statements.

SOURCE Pinnacle Renewable Energy Inc.


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