Mr. Robert McCurdy reports

PINNACLE RENEWABLE ENERGY REPORTS FISCAL 2018 FOURTH QUARTER AND YEAR-END RESULTS AND ANNOUNCES NEW OFF-TAKE CONTRACTS IN JAPAN AND SOUTH KOREA

Pinnacle Renewable Energy Inc. has released its financial results for the 13-week period (Q4 2018) and 52-week period (fiscal 2018) ended Dec. 28, 2018.

Financial summary:

• Q4 2018 revenue increased 42.2 per cent to $103.7-million, compared with $73-million in Q4 2017.
• Fiscal 2018 revenue increased 18.7 per cent to $347.4-million, compared with $292.7 million in fiscal 2017.
• Q4 2018 adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) totalled $13.8-million, compared with $12.8-million in Q4 2017.
• Fiscal 2018 adjusted EBITDA totalled $55.1-million, compared with $56.1-million in fiscal 2017.

Fiscal 2018 operating highlights:

• Sold a record volume of 1.6 million metric tonnes of industrial wood pellets;
• Secured six new long-term contracts with customers in Japan totalling $1.9-billion, including an additional contract in Q4 2018;
• Secured two new long-term contracts with CGN Daesan Power Co. Ltd. in South Korea totalling $1-billion, including an additional contract in Q4 2018;
• Grew contracted backlog to $5.9-billion at the end of fiscal 2018, a 97-per-cent increase compared with the end of fiscal 2017, and extended the weighted average remaining life of Pinnacle's portfolio off-take contracts to nine years;
• Entered into commercial production at its facility in Entwistle, Alta.;
• Commenced initial production at its new 70-per-cent-owned production facility in Smithers, B.C.;
• Acquired a 70-per-cent stake in an industrial wood pellet production facility in Aliceville, Ala., marking its entry into the U.S. Southeast fibre basket and the formation of a new strategic partnership with The Westervelt Company.

"We grew and diversified our customer base with nearly $3-billion in new long-term contracts in Japan and South Korea," said Rob McCurdy, chief executive officer of Pinnacle. "Our same-facility production volume increased 3 per cent in 2018, reflecting record performance at our Burns Lake and Lavington facilities. However, our 2018 financial performance was negatively impacted by challenges commissioning the Entwistle facility and rail service disruptions."

Leroy Reitsma, chief operating officer of Pinnacle, added: "We made strong progress in advancing our growth objectives in 2018, completing the construction of two new production facilities and acquiring the facility in Aliceville, which increases Pinnacle's run-rate production capacity by more than 56 per cent. While the fire event that occurred on Feb. 11, 2019, at our Entwistle facility is of concern to everyone at Pinnacle, we are working diligently to resolve this incident and resume production."

Q4 2018 financial results

Revenue for Q4 2018 totalled $103.7-million, an increase of 42.2 per cent compared with $73-million for the 13-week period ended Dec. 29, 2017 (Q4 2017). The increase was primarily attributable to increased sales volume. Industrial wood pellet sales volumes increased 41.6 per cent to approximately 473,000 metric tonnes in Q4 2018, compared with approximately 334,000 metric tonnes in Q4 2017. Revenue in Q4 2018 was negatively impacted by lower production volumes than expected due to commissioning issues at the Entwistle facility and challenges with the company's rail services provider.

Adjusted gross margin was $16.7-million, or 16.1 per cent of revenue, in Q4 2018, compared with $15.9-million, or 21.8 per cent of revenue, in Q4 2017. The decrease in adjusted gross margin percentage was primarily attributable to higher-than-expected production and cash conversion costs associated with the start-up at the Entwistle facility, partially offset by higher revenue from increased sales volume.

Net profit and comprehensive income were $7.5-million in Q4 2018, compared with $100,000 in Q4 2017. The variance was primarily attributable to a $7.7-million decrease in finance costs, partially offset by a $1.5-million increase in income tax expense.

Adjusted EBITDA was $13.8-million in Q4 2018, an increase of 7.8 per cent compared with $12.8-million in Q4 2017, reflecting increased revenue, partially offset by higher production costs associated with the start-up of the Entwistle facility and increased logistics costs due to challenges with the company's rail services provider. Adjusted EBITDA for Q4 2018 was also impacted by constant heavy precipitation along the Pacific coast of British Columbia, which constrained loading volumes at the company's port terminals.

Fiscal 2018 financial results

Revenue for fiscal 2018 totalled $347.4-million, an increase of 18.7 per cent compared with $292.7-million for the 52-week period ended Dec. 29, 2017 (fiscal 2017). The increase was primarily attributable to increased sales volume and an increase in average sales price per metric tonne. Industrial wood pellet sales volumes totalled approximately 1.6 million metric tonnes, compared with approximately 1.4 million metric tonnes in fiscal 2017.

Adjusted gross margin was $67.6-million, or 19.5 per cent of revenue, in fiscal 2018, compared with $66.9-million, or 22.9 per cent of revenue, in fiscal 2017. The decrease in adjusted gross margin percentage was primarily due to higher production costs associated with start-up at the Entwistle facility, planned higher fibre costs and higher fibre costs for incremental production volume from the company's legacy production facilities as Pinnacle increased production to offset the shortfall at the Entwistle facility, partially offset by higher revenue from an increase in the average sales price per metric tonne.

Adjusted EBITDA was $55.1-million in fiscal 2018, compared with $56.1-million in fiscal 2017. The decrease was attributable to higher production costs associated with start-up at the Entwistle facility and increased logistics costs due to challenges with the company's rail services provider, partially offset by increased revenue.

Recent customer wins

On Dec. 14, 2018, Pinnacle entered into its second long-term take-or-pay contract with CGN Daesan Power Co. Ltd., a subsidiary of CGN New Energy Holdings Co. Ltd., a diversified independent power producer in Asia. Under the terms of the contract, Pinnacle will supply 75,000 metric tonnes per year of industrial wood pellets to Daesan beginning in 2022.

On Dec. 28, 2018, Pinnacle entered into its second long-term take-or-pay contract with Sumitomo Corp., a large, diversified trading company in Japan. Under the terms of the contract, Pinnacle will supply 50,000 metric tonnes per year of industrial wood pellets to Sumitomo starting in the second half of 2020 for a one-year term. Following the initial one-year term, Pinnacle will supply a total of 150,000 metric tonnes per year to Sumitomo for the duration of the contract.

Entwistle update

On Feb. 11, 2019, Pinnacle temporarily suspended operations at its Entwistle facility due to a fire and explosion that occurred at the dryer area of the facility. The company is currently investigating the cause of the incident and developing action plans to restart the facility. Pinnacle's priority is to manage the impacts of the incident on its employees, contractors, customers, suppliers and the neighbouring community. Management, Alberta Labour Occupational Health & Safety (OH&S), local fire authorities, Pinnacle's insurance adjusters and equipment suppliers, as well as third party experts are engaged in an investigation into the accident. OH&S released control of the site back to the company on Feb. 20, 2019.

Pinnacle is now working with its insurers, suppliers and contractors to evaluate the damage and develop a plan to restart the dryer area. The rest of the facility sustained little damage and Pinnacle will resume production of wood pellets in March, 2019, from dry fibre. The company is working with its customers to mitigate the impact of the temporary suspension of operations at the facility.

Prior to the incident, the company was successfully ramping up the facility. The storage silo is now fully operational and unit train delivery service commenced in Q4 2018. Fibre processing was improving and daily production rates were meeting the company's previously established ramp-up curve. Management expects consistent performance improvement once the facility resumes production.

New production facilities

Pinnacle's new Smithers facility commenced production in November, 2018, and is ramping production as anticipated at this stage of commissioning. Commercial production commenced Dec. 29, 2018. The Aliceville facility has been operating consistently since acquisition. The Aliceville and Smithers facilities are positioned to contribute to adjusted EBITDA growth in fiscal 2019.

Outlook

Pinnacle expects to see continued strong execution in the strategic growth plan of the business in 2019. The Aliceville and Smithers facilities added in Q4 2018 will contribute to 2019 growth as they ramp up production.

Pinnacle is executing on its fibre diversification strategy. This has mitigated fibre availability issues resulting from sawmill curtailments that have been announced by some B.C. forest products companies. As a result, Pinnacle will procure a greater proportion of higher-cost harvest residuals (pulp logs and bush grind). The company expects the impact to be mainly limited to some of its fibre sourcing at its Burns Lake and Meadowbank facilities.

The financial impact of the recent temporary suspension of operations at the Entwistle facility is difficult to estimate at this early date. Pinnacle will resume reduced production of wood pellets at the facility in March, 2019, through the use of dry fibre. The company will provide an update when it obtains further information regarding the timeline for recommencement of the dryer area. The company anticipates providing 2019 guidance at that time.

Dividend

The board of directors has approved the payment of the company's Q4 2018 dividend of 15 cents per common share. Payment will be made on March 14, 2019, to shareholders of record as at March 5, 2019.

Selected consolidated financial information

The attached table sets forth selected financial information for Q4 2018 and fiscal 2018 compared with the corresponding prior-year periods. Such information has been derived from Pinnacle's audited consolidated financial statements and accompanying notes.

  
              CONSOLIDATED STATEMENTS OF PROFIT (LOSS) AND COMPREHENSIVE  INCOME (LOSS) DATA  
                                (in thousands except per-share amounts)   

                                              Q4 2018      Q4 2017   Fiscal 2018   Fiscal 2017   Fiscal 2016
                                             13 weeks     13 weeks      52 weeks      52 weeks      53 weeks

Revenue                                      $103,728      $72,958      $347,440      $292,727      $266,338
Costs and expenses 
Production                                     73,472       47,377       233,107       188,414       173,693
Distribution                                   13,371        9,925        46,899        38,421        39,474
Selling, general and administration             3,933        4,347        22,789        15,268        12,331
Amortization of equipment and 
intangible assets                               7,220        5,280        24,678        21,819        21,211
Profit (loss) before finance costs  
and other (income) expense                     $5,732       $6,029       $19,967       $28,805       $19,629
Finance cost                                   (1,740)       6,120         3,042        24,251         1,000
Other (income) expense                         (1,626)        (358)       15,638         8,912         7,796
Net profit (loss) before income taxes          $9,098         $267        $1,287       $(4,358)      $10,833
Income tax expense (recovery)
Current                                             -            -             -             -            (2)
Deferred                                        1,643          163        (1,415)          526        (5,569)
Net profit (loss)                              $7,455         $104        $2,702       $(4,884)       $5,262
Net profit (loss) per share 
attributable to owners
Basic and diluted                               $0.22       $(0.04)        $0.05        $(0.22)        $0.11

Financial statements

Pinnacle's audited consolidated financial statements and management discussion and analysis for fiscal 2018 are available on the company's website or on SEDAR.

Conference call

Robert McCurdy, chief executive officer, Leroy Reitsma, president and chief operating officer, and Andrea Johnston, chief financial officer, will host a conference call for investors and analysts on Friday, Feb. 22, 2019, at 11 a.m. ET/8 a.m. 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 on Pinnacle's website.

To access a replay of the conference call, dial 416-764-8677 or 1-888-390-0541 (passcode: 639760 followed by the number sign). The replay will be available until March 1, 2019. The webcast will be archived following conclusion of the call.

About Pinnacle Renewable Energy Inc.

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. 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 United Kingdom, Europe and Asia that represent 109 per cent of its production capacity through 2021 and 102 per cent of its production capacity through 2026.

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