Drax Purchase Alters Biomass Landscape

Drax Group, the major United Kingdom-based electricity producer, which has converted much of its generation from coal-fired to wood pellet fuel, has entered into an agreement to purchase major Canadian-based industrial wood pellet producer Pinnacle Renewable Energy Inc. The all-cash transaction is valued at $657 million (U.S.) (C$831 million), including the assumption of net debt.

Duncan Davies, Pinnacle CEO, comments, “The combination of Pinnacle and Drax will create a global leader in sustainable biomass with the vision, technical expertise and financial strength to help meet the growing demand for renewable energy products around the world.”

Will Gardiner, CEO of Drax, remarks, “I am excited about this deal which will reinforce Drax’s position as the world’s leading sustainable biomass generation and supply business, delivering against our strategy to increase self-supply, reduce our biomass production cost and create a long-term future for sustainable biomass.”

In addition to Pinnacle and Drax shareholder approvals, the transaction is subject to other closing conditions, including governmental and regulatory approvals as well as the approval of the Supreme Court of British Columbia. The transaction is expected to close in the second or third quarter of 2021.

Pinnacle is the second largest producer of industrial wood pellets in the world. The company operates nine production facilities in Western Canada and one in Aliceville, Ala., with one additional facility nearing startup in Demopolis, Ala. The company also owns a port terminal in Prince Rupert, BC. 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.

Drax notes the transaction more than doubles its biomass production capacity, significantly reduces its cost of biomass production and adds a major biomass supply business underpinned by long-term contracts with high-quality Asian and European counterparties. Specifically it adds 2.9 million tonnes of biomass production capacity. Pinnacle’s existing joint venture minority partnerships carry over to Drax in the transaction.

Through scale, operational efficiency and low-cost fiber sourcing, Pinnacle reportedly currently produces biomass at a lower cost than Drax. This reflects the use of high levels of low-cost sawmill residues. Seven of Pinnacle’s sites are in British Columbia (1.6 million tonne nameplate capacity) and two are in Alberta (0.6 million tonne nameplate capacity). All of these sites have rail lines to ports at either Prince Rupert or Vancouver, both accessing the Pacific Ocean, providing routes to Asian and European markets. Pinnacle also operates a U.S. hub at Aliceville, Ala. (0.3 million tonne nameplate capacity) and is developing a second site in Demopolis, Ala. (0.4 million tonne nameplate capacity), which Pinnacle expects to commission in 2021.

Pinnacle’s U.S. sites are close to Drax’s existing operations in the Southeastern U.S. and will utilize river barges to access the Port of Mobile and barge-to-ship loading, reducing fixed port storage costs.

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