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News Release - March 2, 2020Pinnacle Renewable Energy Reports Fiscal 2019 Fourth Quarter and Year-end Results

/NOT FOR DISTRIBUTION IN THE UNITED STATES/

VANCOUVER, March 2, 2020 /CNW/ - Pinnacle Renewable Energy ("Pinnacle" or the "Company") (TSX: PL) today announced its financial results for the 13-week ("Q4 2019") and 52-week ("Fiscal 2019") periods ended December 27, 2019.

Fiscal 2019 Financial Highlights

Q4 2019 Highlights

"While Fiscal 2019 offered up some challenges for Pinnacle, mainly due to the incident at Entwistle and fibre supply issues as a result of B.C. sawmill curtailments, our team worked diligently to remedy both situations and we look forward to realizing on the opportunities 2020 presents," said Rob McCurdy, CEO of Pinnacle. "We continue to strengthen and diversify the Company through growth and expansion of our existing facilities and through the construction of new facilities, and I am confident that the Pinnacle team will continue to successfully execute on the Pinnacle strategy this year and well into the future."

Q4 2019 Financial Results
Revenue for Q4 2019 totaled $91.5 million, a decrease of 11.8% compared to $103.7 million for Q4 2018. The decrease was primarily attributable to disruption to reduced production in the B.C. facilities with a greater concentration of harvest residuals and the Burns Lake maintenance capital shut as well as shipping delays due to the CN rail strike in Q4 2019.

Adjusted Gross Margin1 was $16.4 million, or 17.9% of revenue in Q4 2019, compared to $16.7 million, or 16.1% of revenue in Q4 2018. The increase in Adjusted Gross Margin1 Percentage was primarily attributable to $4.5 million of business interruption insurance receivable net of $1.1 million of costs associated with fixed overhead and incident response costs for the Entwistle Incident booked as a reduction of production costs and high start up costs incurred at Aliceville and repair and maintenance costs incurred at our Entwistle Facility in Q4 2018. B.C. same facility production levels in Q4 2019 were, however, lower compared to the prior year, mainly due to the CN rail strike, scheduled capital shut down at our Burns Lake Facility, as well a greater concentration of harvest residuals used in production in order to replace reduced sawmill residuals output. Adjusted Gross Margin1 for Q4 2019 also reflects the Company's adoption of IFRS 162. Excluding the impact of the implementation of IFRS 162 and the Entwistle Incident, Q4 2019 Adjusted Gross Margin1 was $11.0 million, or 12.1% of revenue.
The Company reported a net loss of $3.2 million in Q4 2019, compared to a net profit $7.4 million in Q4 2018. The change in net profit reflects higher selling, general and administrative ("SG&A") expenses and amortization costs reflecting the Company's new production facilities, as well as increased finance costs, partially offset by reduced production costs. Excluding the impact of the Entwistle Incident, net loss in Q4 2019 was $5.5 million.

Adjusted EBITDA1 totaled $11.3 million in Q4 2019, compared to $13.8 million in Q4 2018. The decrease is attributable to lower revenues in Q4 2019 compared to Q4 2018, increased distribution and sales, general, and administrative ("SG&A") costs and an increase in other expenses. Excluding the impact of $3.2 million associated with the Entwistle Incident, as well as $2.0 million related to the adoption of IFRS 162, Q4 2019 Adjusted EBITDA1 was $6.1 million.

Fiscal 2019 Financial Results
Revenue for Fiscal 2019 totaled $377.8 million, an increase of 8.7% compared to $347.4 million for Fiscal 2018. The increase was primarily attributable to higher sales volumes mostly due to a full year of revenue contribution from the production and sale of pellets from the Smithers and Aliceville facilities, each of which contributed no production volume in Q1 – Q3 2018, offset by lower production volumes at our B.C. facilities due to sawmill curtailments and reductions in sawmill residual deliveries. 

Adjusted Gross Margin1 was $65.0 million, or 17.2% of revenue in Fiscal 2019, compared to $67.6 million, or 19.5% of revenue in Fiscal 2018. The decrease in Adjusted Gross Margin1 Percentage was primarily attributable to an increase in revenues offset by an increase in production and distribution costs. Production costs include $7.3 million of costs associated with fixed overhead and incident response costs for the Entwistle Incident, offset by an amount of $13.0 million for business interruption insurance proceeds. Adjusted Gross Margin1 for Fiscal 2019 also reflects the Company's adoption of IFRS 162. Excluding the impact of the implementation of IFRS 162 and the Entwistle Incident, Fiscal 2019 Adjusted Gross Margin1 was $51.5 million, or 13.6% of revenue.

The Company reported a net loss of $9.9 million in Fiscal 2019, compared to a net profit of $2.7 million in Fiscal 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 Entwistle Incident, net loss in Fiscal 2019 was $12.8 million.

Adjusted EBITDA1 totaled $47.2 million in Fiscal 2019, compared to $55.1 million in Fiscal 2018. Increased revenue was offset by higher distribution costs, higher production costs, including higher cash conversion costs (due primarily to fibre mix constraints which increased repair and maintenance costs), higher fibre costs due to extended sawmill curtailments in the B.C. region, and costs associated with the Entwistle Incident, partially offset by the impact of IFRS 162 and business interruption amounts recoverable. Excluding the impact of $3.9 million associated with the Entwistle Incident, as well as $7.8 million related to the adoption of IFRS 162, Fiscal 2019 Adjusted EBITDA1 was $35.5 million.

As at the end of Fiscal 2019, the Company had available liquidity of $57.1 million from cash balances and debt facilities (excluding the delayed draw facility), compared to $49.1 million at the end of 2018, which Pinnacle expects to be sufficient throughout Fiscal 2020. At the end of Fiscal 2019 the ratio of net debt to last twelve month Adjusted EBITDA1 was 6.3 times. This ratio was elevated due to the investment in the Aliceville Facility in Q4 2018, significant new capacity at the Entwistle and Smithers Facilities, expansion projects at Williams Lake and Meadowbank, and initial construction costs of the High Level Facility that have not yet generated their run-rate Adjusted EBITDA1. As these facilities reach their run-rate capacity, this ratio is expected to decline.

Q1 2020 CN Rail Disruptions

New Off-take Agreements
During the quarter, Pinnacle entered into a long-term, take-or-pay contract with Mitsui for 100,000 MTPA commencing in 2023.

This is the ninth 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. New contracts improve The Company's customer diversification across Japan, the U.K., South Korea, and Europe.

New Facility in Demopolis, Alabama
In Q4 2019, Pinnacle announced the construction of a new industrial wood pellet production facility in the southeast United States, in close proximity to Pinnacle's Aliceville facility. The new facility (the "Demopolis Facility") will be located adjacent to an existing large sawmill in Demopolis, Alabama. The Demopolis Facility and Aliceville Facility will operate under a single partnership with Pinnacle, The Westervelt Company ("TWC") and Two Rivers Lumber Company, LLC ("TRL"), each holding a 70%, 20% and 10% interest, respectively, and is expected to have annual production volume of 360,000 metric tonnes per annum ("MTPA"). Anticipated capital costs to construct the Demopolis Facility are expected to be approximately US$99 million, and Pinnacle will fund its portion of the capital costs from draws on its existing credit facilities. Commissioning the Demopolis Facility with initial industrial wood pellet production is expected in the second quarter of 2021.

With the addition of the Demopolis facility Pinnacle will have over 44% of its run-rate production capacity outside of the B.C. fibre basket.

Production Facility Construction and Upgrades
Plans to install a chipper and additional pelleter at the Smithers facility have been finalized for a total capital cost of approximately $6.0 million (Pinnacle's portion: $4.2 million funded from existing credit facilities). The upgrade will decrease costs and increase production run-rate output by approximately 15,000 MTPA. The project is expected to begin in Q1 2020, with completion expected in Q3 2020.

Construction at the High Level facility progressed in Q4 2019 and is now in a planned suspension due to winter weather conditions until spring 2020 when warmer temperatures will allow for efficient construction to continue. An additional capital requirement of $6.0 million is expected, bringing the total capital cost to $60.0 million, with Pinnacle's 50% share being $30.0 million. Tolko has indicated that additional fibre will be available due to forest fire log processing, providing a strong supply of fibre for commissioning. As a result, Management is confident that this will enable the facility to produce at the upper end of the 170,000 MTPA to 200,000 MTPA range. The Facility is expected to be completed as planned in the fourth quarter of 2020.

The upgrades at our Williams Lake and Meadowbank facilities are progressing on schedule and are expected to be completed and begin commissioning in Q1 2020 and Q3 2020 respectively. The upgrades will allow the two facilities, to process a broader array of available fibre sources 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 an increase of 80,000 MTPA in combined overall production capacity.

At the Aliceville facility, 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 2019.

Entwistle Restart
The Entwistle rebuild has been completed, the furnace and dryer have been restarted, and commissioning of the new equipment is in process.

Restoration of the facility is expected at a total estimated capital cost of approximately $14.0 million. Other costs are estimated to be approximately $9.5 million, of which $9.1 million has been incurred year-to-date. Pinnacle is actively working with customers and partners to mitigate the impacts of the 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 Q4 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 $9.0 million as at the end of Fiscal 2019 (net of deductibles). At the end of Fiscal 2019, a total of $13.0 million for business interruption insurance was recognised in net profit (loss) as a reduction of production costs, $4.5 million was recognised in Q4 2019. As at December 27, 2019 $8.5 million had been received in cash for business interruption insurance and $4.5 million had been included in other receivables.

Outlook
We expect growth in revenue and profitability over the next several years as a result of contracted price increases in most of our off-take agreements. In addition, as the potential demand for industrial wood pellets continues to grow globally, we are well positioned to meet this demand growth through a combination of expansion projects at existing production facilities, some of which are currently underway, and new greenfield and brownfield growth projects. Moreover, we will continue to evaluate potential acquisitions and joint ventures to grow our production platform, and continue to capture opportunities in the growing Asian marketplace as a result of our longstanding relationships with customers in the region.

The recent restart of the Entwistle Facility and strong initial performance combined with the commissioning of the destoner will add production volume throughout the year, and an expected positive contribution to Adjusted EBITDA in 2020. Additionally, as the Aliceville and Smithers facilities are both operating at full run-rate production, incremental production volume and Adjusted EBITDA contribution is expected for 2020.

The above mentioned derailment and blockade of CN rail service has continued to impact the ability to get production to port, and in some cases has caused production disruption in Q1 2020. We incurred additional costs to divert finished goods from our facilities for ship loading to different ports for some shipments. In Q1 2020 thus far we have lost 20kMT of production because of disruption to rail and port service, and we currently anticipate approximately two million dollars of Adjusted EBITDA will be missed in Q1 2020 as a result of the CN and port blockades and the subsequent rail delays.

Production output of Pinnacle's B.C. sawmill suppliers has continued at consistently lower levels. Although current forecasts are for reduced stumpage costs for B.C. logs in mid-2020 and improved sawmill economics, Pinnacle continues to retain fibre inventories and employ other sourcing strategies to manage unforeseen disruptions.

While Pinnacle remains focused on improving fibre, fibre processing, haulage, and cash conversion costs, production and revenue are expected to continue to be impacted through 2020, as will the Adjusted Gross Margin¹ as our B.C. facilities continue to process a wider mix of harvest residuals.

Dividend
The Board of Directors today approved the payment of the Company's Q4 2019 dividend of $0.15 per Common Share. Payment will be made on March 26, 2020 to shareholders of record as at March 12, 2020.

Selected Consolidated Financial Information
The following tables set forth selected financial information for Q4 2019 compared to the prior year period. Such information has been derived from Pinnacle's Fiscal 2019 audited interim consolidated financial statements and accompanying notes.


Q4 2019

Q4 2018

Fiscal 2019

Fiscal 2018

(In thousands $ except per share amounts)

13 weeks

13 weeks

52 weeks

52 weeks






Consolidated Statements of Profit (Loss)





Revenue

91,465

103,728

377,808

347,440

Costs and expenses:





Production

60,334

73,472

258,547

233,107

Distribution

13,793

13,371

54,021

46,899

Selling, general and administration

4,747

3,933

18,495

22,789

Amortization

10,300

7,324

39,997

24,782

Profit before finance income (cost) and other

2,291

5,628

6,748

19,863

income (expense)





Finance income (cost)

(5,203)

1,828

(24,178)

(2,955)

Other income (expense)

(575)

1,626

5,151

(15,638)

Net profit (loss) before income taxes 

(3,487)

9,082

(12,279)

1,270

Income tax (expense) recovery:





Current

-

-

-

-

Deferred income taxes

246

(1,643)

2,305

1,415

Net profit (loss)

(3,241)

7,439

(9,974)

2,685

Impact of:





Entwistle Incident

3,035

 N/A

2,820

 N/A

Net profit (loss) (excluding above impact)

(5,546)

7,439

(12,794)

2,685






Basic and diluted

(0.12)

0.22

(0.33)

0.05

 


Q4 2019

Q4 2018

Fiscal 2019

Fiscal 2018

(In thousands $ except per MT amounts)

13 weeks

13 weeks

52 weeks

52 weeks






Other Financial Data





Adjusted EBITDA(1)

11,282

13,830

47,173

55,102

Adjusted EBITDA per MT(1)

26.93

29.24

27.39

34.61

Adjusted Gross Margin per MT(1)

39.18

35.23

37.74

42.09

Adjusted Gross Margin Percentage(1)

17.9%

16.1%

17.2%

19.5%

Maintenance capital expenditures

4,417

2,610

11,695

8,059

Growth capital expenditures

32,523

20,358

53,800

65,072

Operating Data





MT ('000) of industrial wood pellets sold

419

473

1,722

1,607









December 27,

December 28,

(In thousands $)



2019

2018

Consolidated Statements of Cash Flows





Cash provided by (used in)





Cash flow from operations before net change in



52,974

50,756

non-cash operating working capital





Net change in non‑cash operating working capital



(20,012)

7,017

Financing activities



13,115

59,930

Investing activities



(52,875)

(118,797)









December 27,

December 28,

(In thousands $)



2019

2018






Selected Consolidated Statements of Financial Position Data





Cash & cash equivalents



11,267

18,028

Property, plant and equipment



399,181

337,285

Total assets



629,911

629,286

Total current liabilities



96,567

76,852

Total non-current liabilities



421,194

398,488

Total equity



208,717

230,798

 

Financial Statements
Pinnacle's  audited consolidated financial statements and Management's Discussion & Analysis for Q4 2019 and Fiscal 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,  March 3, 2020 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: 904519#. The replay will be available until March 10, 2020. The webcast will be archived following conclusion of the call.

About Pinnacle
Pinnacle is a 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, with two additional facilities under construction in Alberta and Alabama. 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.

(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 Q4 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 Q4 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 Fiscal 2019, the Company recognized $8.2 million of depreciation charges and $2.4 million of interest costs from these leases.

As a result of applying IFRS 16, Adjusted Gross Margin and Adjusted EBITDA for Q4 2019 have increased by $2.0 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 Q4 2019 has increased by $2.0 million related to lease payment expenses that were previously classified as operating leases under IAS 17.

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 Q4 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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