Onex to exit wood pellets producer through IPO

Pinnacle Renewable Energy, a wood pellet producer owned by Canadian private equity firm Onex, intends to list on the Toronto Stock Exchange.

Founded in 1989 and based in British Columbia, Pinnacle produces industrial wood pellets derived from traditional and non-traditional forest product residuals to create electrical power. According to market consultant Hawkins Wright, wood pellet demand has grown from 9.4 million metric tons in 2009 to 12.9 million tons last year as more countries have adopted policies to encourage a cleaner energy mix.

Pinnacle bills itself as the third-largest pellet manufacturer in the world and operates six production facilities and a dedicated export terminal in Western Canada. It produces 1.4 million tons of wood pellets annually and predicts production levels will increase to 1.9 million tons upon completion of two facilities currently under development.

All of its production capacity through 2021, and almost 80 percent of production capacity through 2026, is already assigned to long-term contracts with utilities in the UK, Europe and Asia, the company said.

Long-term contracts

In a prospectus filed alongside the announcement of its intention to list, Pinnacle described its vertically integrated model, stretching from alignment with wood fiber suppliers to its long-term off-take agreements, as key to its approach to a wood pellet industry that has seen significant consolidation in recent years. Pinnacle said it and two other suppliers are expected to supply as much as a third of wood pellet demand, which is projected to grow at an annualized rate of 17.7 percent through 2021.

“Smaller, independent suppliers tend to operate one or two production facilities and generally do not own or control their transportation infrastructure,” Pinnacle wrote in the prospectus. “This is generally viewed less favorably by large utilities seeking the certainty of supply in exchange for long-term contracts, which is enhanced by suppliers that have greater control over their logistics chain, diversity of supply, operational capabilities and financial resources.”

“Smaller, independent suppliers tend to operate one or two production facilities and generally do not own or control their transportation infrastructure”
Pinnacle Renewable Energy, IPO prospectus

Pinnacle’s size in the market will be especially important in years to come as demand threatens to outstrip supply, according to the prospectus. Citing Hawkins Wright analysis, Pinnacle wrote that an additional 18.6 million tons of wood pellet production capacity will be necessary to meet demand by 2026 and it will be difficult for all but the largest producers to finance necessary projects.

The company wrote that it will continue to look for organic growth and acquisition opportunities in the US South-East and Pacific North-West, in addition to Western Canada.

Onex’s $71 million majority investment in Pinnacle came in 2011 and used capital from the firm’s ONCAP II fund, which closed on C$600 million in 2005. The investment came through ONCAP, the firm’s mid-market platform, and was motivated by Pinnacle’s customer base and established position within a market poised for growth, according to a description on the ONCAP website.

It added that Onex’s focus while owning Pinnacle was on continuing to expand its production capabilities, strengthening its supply chain and diversifying its customer base.

Pinnacle and ONCAP did not return messages seeking further detail by press time.