Tag: forestry and forest management and arboriculture

Building fire resilience with forest management in British Columbia

31 March 2023

Opinion

Key takeaways:

  • Across the globe, wildfires are increasing in size and frequency, driven by the effects of climate change.
  • In places like British Columbia, surging wildfires have meant that in recent years, some forests have been emitting more carbon than they have been able to absorb.
  • British Columbia can serve as an example for where wildfire mitigation occurs, to reduce the risk of threats to communities and forest ecosystems.
  • An essential step is reducing potential fuel for fires by removing flammable material on the forest floor and dead standing trees. The market for biomass encourages the removal of excess fibre which could become fuel for dangerous wildfires.
  • Collaboration between government, industry and First Nations in British Columbia ensures that forests are managed and protected to remain useful resources for all.

Forest fires are nothing new. Temperate forests throughout the world have evolved with fire over millions of years, and a certain amount of fire is inevitable and necessary to maintain the overall health of many types of forests.

But as global temperatures have increased in recent decades, so have the size and recurrence of wildfires. After Australia saw record heat in the summer of 2020, a series of fires across the continent burned an unprecedented 58,000 square kilometres (km2), an area larger than Costa Rica. While in 2022, Europe saw 7,850 km2 of forest destroyed in a single scorching summer, more than double the amount burned in an average fire season.

In addition to the effects of climate change, catastrophic wildfires have also prevailed in response to widespread fire suppression, when methods were sought to increase the resiliency of landscapes to fire and change forest stand characteristics. This has in turn led to thicker and denser forests, and increased fuel loading.

Prior to fire suppression, wildfires would have burned vast areas. In some cases, lower-intensity, stand-maintaining wildfires would naturally keep the forest understory clear of fuel loads. Fire suppression has instead led to increasing density in the forest understory, and when fire inevitably returns to those forest stands it creates conditions for high-intensity, stand-replacing fire events.

In Canada, British Columbia has not escaped these trends of larger fires.

About 64% of the province, more than 60,000 km2, is forested. This makes it particularly vulnerable to wildfire. In 2021 more than 1,600 separate fires burned nearly 8,700 km2 of land in the province, displacing thousands of people from their homes and wildlife from their habitats. Wildfires in the region also now average around 59 MtCO2 of emissions per year, 10x times the 1990s average, meaning that in recent years, British Columbia’s forests have been emitting more carbon than they have been able to absorb, becoming a source of CO2 rather than a sink.

In a region where forests are an important part of life, as well as an essential economic resource for rural communities, protecting forests from intense wildfires, and mitigating the effects, is crucial.

Delivering proactive management against wildfire

Managing forests to make them more resilient to wildfires requires careful management and collaboration between government, industry, communities, and First Nations.

The British Columbian government’s 2022 budget included CA$359 million in new funding to protect British Columbia from wildfires, including CA$145 million over three years to help move the BC Wildfire Service from a reactive to a proactive model. This means year-round work on four pillars of emergency management: prevention and mitigation, preparedness, response, and recovery.

The biomass industry has an important role to play in this work, incentivising fire mitigation and forest management which help protect forests for local communities to use and enjoy, as well as harvesting and regenerating fire-damaged land.

How forest management can protect forests against wildfires

For thousands of years, First Nations used small fires to clear forests, improving habitat for hunting and reducing the chance of large, uncontrollable fires.

While fire may be a natural part of the province’s landscape, active human management can help reduce the damage fires cause One key step is to remove the fuels that cause fires to burn and spread.

Fuels that feed wildfires consist of any burnable materials found on forest floors, ranging from grasses, dead leaves, and small trees to logs, stumps, and branches. Another fuel source are juvenile seedlings, sometimes called “ladder fuels” which move the forest fire from the ground into the forest canopy which often leads to fires that are much more severe and harder to suppress. Outbreaks of pests, like mountain pine beetle, also contribute to fuel loads, leaving large areas of dead wood.

Material accumulated on the forest floor over time can eventually become a source of what’s called ladder fuel that enables a relatively small fire to reach the forest canopy, burning higher, faster, and farther. These fuel loads, coupled with hotter temperatures and more frequent drought, make today’s fires more likely to burn larger and more intensely than their historic counterparts.

Removing sources of fuel and thinning the density of forest stands are sustainable management practices that can help mitigate the risk of the most damaging types of fires.

“When there’s less fuel to consume, future fire events will be lower in intensity,” says Mike Thomas, Regional Biomass Purchaser for Drax Canada. “And because they’re at low levels of intensity, the existing trees will live through the fire.”

However, removing fuel sources from forests can be expensive and historically has not been a priority for forestry operations focused on producing lumber and solid wood products. This makes biomass an important market, serving as a fibre purchaser for the low-grade wood removed in fire mitigation operations.

“Forest mitigation projects are very labour intensive and can be very expensive,” says Thomas. “The smaller material that we purchase from operators for pellet plants also helps to complete the projects. Without the biomass market, there would be less incentive to carry out these fire mitigation operations.”

Collaboration is key to lowering the amount of fuel in a forest

The type of sustainable forest management practices that reduce fuel loads require effort, know-how, and even the right market conditions. The key to implementing these practices is collaboration, between industry, government, and First Nations.

One example is the joint venture between the Tŝideldel First Nation (TFN) and the Tl’etinqox First Nation. The resulting company, called Central Chilcotin Rehabilitation (CCR), is involved in forestry projects, including fire rehabilitation, in the two groups’ traditional territories.

Forest area infected with the mountain pine beetle in British Columbia, Canada

The traditional land of Tŝideldel First Nation is largely lodgepole pine forest, which has been hard hit by mountain pine beetles and subject to frequent burning. In response, the Tŝdeldel have spearheaded several projects to remove dead standing trees and low-grade wood to reduce overall fuel load. Such projects aim to make the damaged landscapes productive, valuable resources once again.

Drax’s partnership with the Tŝideldel provides a crucial market for dead and low-grade wood removed from damaged forests, making it possible to finance forest management operations and reduce the chances of devastating wildfires.

A proactive example for the future

British Columbia offers an example of how smart, proactive forest management can play an important role in reducing the risk of catastrophic fires and making them more resilient to the effects of climate change.

Therefore, by working with the wider forestry sector, the biomass industry can help to facilitate important wildfire mitigation projects, ensuring forests and communities are protected, and all those who use them can continue to depend on them as a vital resource.

Ensuring British Columbia’s forests offer a sustainable source of fibre takes collaboration and careful management

21 December 2022

Sustainable bioenergy

Diane Nicholls, Vice President of Sustainability for North America, Drax

Key takeaways: 

  • British Columbia is 94% provincial Crown Land, meaning its 55-60 million hectares of forest cover is publicly owned, rather than privately held.  
  • Government legislation and regulation exists detailing what forestry practises can take place, working alongside First Nations, to ensure forests are used for the benefit of all.
  • Sustainable forest management practises offer a source of fibre for forest industries while also protecting forests from disease and wildfire.  
  • Although the biomass pellet industry is relatively new to the province, it offers a use for forest residues that were previously burned or landfilled, and for sawmill residues.  

As a business operating in the Canadian forest industry, we have a responsibility to work collaboratively with local and national governments, communities, and First Nations to ensure British Columbia’s forests are sustainably managed, protected from disease and fire, and preserved for future generations.  

British Columbia is a vast and diverse landscape. The second largest of Canada’s provinces, it contains 14 different bio geoclimatic zones ranging from coastal forest in the west, to alpine meadows on the eastern Rocky Mountains, with bogs, wetlands, and even arid land in between.   

The landscape of British Colombia is home to a wide range of flora and fauna. With roughly 55-60 million hectares (550,000-600,000 km2) of land covered in forest, it is a vital resource. More than 50,000 British Columbians work directly in the forest industry and even as cities like Vancouver and Victoria grow, it remains a central source of social value to rural economies.  

Sharing forests between government and First Nations

British Columbia has a long history of stewardship and sustainable forest management practices. Forestry began in the region in the 1800s with Sitka spruce, harvested predominantly to support ship building. Since then, forestry has become a major part of the province’s economy and the province is a world leader in sustainable forest management and environmental practises. 

As 94% of British Columbia is provincial Crown Land, the government sets the rules and regulations about what forestry practices, or any other natural resource extractions, can take place. Under legislation, any land where forest harvesting occurs must be reforested and it is illegal for a company to deforest British Columbia or Canada.   

For many years, an increasingly important component of the Canadian forestry industry has been the contribution that First Nations are making. There are 204 First Nations across British Columbia each with traditional territories used for cultural and spiritual purposes, as well as day-to-day needs like hunting, fishing, trapping, and housing.  

Many First Nations have their own land use plans that are utilised in forest management planning in the province. First Nations are also consulted and collaborated with by the province on forest management decisions. This creates partnerships between First Nations, industries working in the province’s forests, and governments at the provincial and federal levels. 

Protecting forests from pests and fire

Forest infected with mountain pine beetle in British Columbia

Managing forests is crucial to their longevity and ensuring they remain healthy and useable for future generations. This includes forestry practices to protect them from pests and the growing threat of forest fires.  

In 2017 and 2019 we saw the largest catastrophic fires we’ve ever had in British Columbia. At times it felt like the whole province was on fire. More recently, 2020 was another terrible year. Factors like climate change and storms are increasing the number of fires we see, but the intensity of fires is also exacerbated by debris left on forest floors from relatively recent mountain pine beetle infestations and other insects or diseases affecting forest health.  

 In the 1990’s several relatively warm winters led to the mountain pine beetle becoming endemic, and over the next 15 years millions of hectares of pine forest were lost to the bug. The government increased the allowable annual cut (harvesting levels) to remove the debris of such infestations which become dangerous fire hazards if not removed. 

To protect from fires, pests, and diseases, it’s important to open up forests through managed removals. This process creates more space and less dense stands of trees. It’s also crucial to reduce what’s left lying on the forest floor after forestry operations, while ensuring that the right wood is left to encourage biodiversity, soil health and habitat needs.  

These sustainable management practises are important to help the resilience of the forest and biomass offers a use for much of the wood removed through these practices that is not able to be manufactured into lumber.  

Biomass and the wood industry

Compared to lumber manufacturing, pellet production is relatively new to British Columbia’s forest industry, but it offers a practical use for materials that are unmerchantable or unsuitable for sawlogs. This includes, but is not limited to, forms of forest residues such as low-grade wood, treetops, and branches that are left behind from harvesting activities.   

Removing forest residues can provide more growing sites for new seedlings and helps to prevent intense forest fires. Slash and other low-grade wood are often simply burned along roadsides, but pellets offer a way to turn this fibre into a source of renewable energy. 

Forest residues from harvests, like slash and low-grade roundwood, accounted for approximately 8% and 10% of the fibre used in our Canadian pellet plants in the first half of 2022. The rest of the fibre we use comes from sawmill residues, such as wood chips, shavings, and sawdust. 

Drax operates eight pellet mills across British Columbia and two in neighbouring Alberta, but doesn’t own forests or carry out harvesting or wood sorting. Instead, we partner with forest companies that operate sawmills. These companies are awarded forest tenures, which allow them to harvest certain forest areas (which are identified by the provincial government) to produce solid wood products, which lock in carbon for years. In return, we obtain their sawmill residues. The economics of the wood pellet industry means the main driver of harvesting is still demand for high-grade timber.    

Through collaboration with our partners across the province, we help ensure British Columbia’s forests offer resources that benefit local communities and are sustainably managed for future generations.  

Making the grade: The careful process of choosing what wood is right for biomass

16 December 2022

Opinion

Key takeaways:

  • British Columbia’s working forests are owned by the province and managed  to preserve the environment while supporting forestry industries and local communities.
  • When forests are harvested, professional, licensed scalers who are independent of logging companies or sawmills, evaluate the size and quality of wood.
  • The processes and assessments made by scalers are extensive and designed to ensure high quality lumber makes its way to commercial markets.
  • The careful process of grading wood ensures that only low-quality wood, unusable by lumber sectors is used to produce sustainable biomass pellets.

Healthy working forests are full of different species of trees that serve as essential commercial resource to rural communities. Within these forests are different qualities of wood and trees.

The lumber industry, which drives the commercial forestry in British Columbia, only uses high-quality sawlogs that can be processed into lumber and other valuable solid wood products. When forest companies and the provincial government identify areas of forest suitable for management, the materials are professionally, independently sorted, and selected by the logging operator according to specifications set by the sawmill and by merchantability specifications set by government.

 

This leaves a range of rejected roundwood trees and other materials that are unsuitable for lumber. Characteristics of rejected material can include undersized logs, rotting in parts, excessive twisting, cracks, large knots, or exposure to damage like fires. But that’s not to say the wood isn’t valuable.

The biomass industry emerged as a way to utilise wood and residues from forestry and sawmill processes. To sort through wood harvests and identify what wood is suitable for lumber, forest companies in British Columbia use a grading system.

The province’s Forest Act outlines that timber harvested from publicly owned Crown must be scaled (measured) and graded. This standardised system means all types of wood are utilised, and the full value of a harvest maximised for lumber and other wood products – ensuring forests remain valuable resources that are replanted and managed for future generations.

Making the grade

The policy of scaling and grading timber has been in action along British Columbia’s coastal forests since as long ago as 1902.  And while log grades have evolved and expanded with changes in wood utilisation and forest practices, today’s grading rules and conventions are very similar to those used more than a century ago. 

Timber scaling and grading can only be carried out by trained, licenced professionals, known as scalers. The processes and assessments they are required to carry out are rigorous and extensive, as outlined in a regularly updated Scaling Manual.

Scalers apply grading rules to determine: the log’s gross dimensions, estimate what portion of the log is available to produce a given product, and consider the quality of the product that could be produced from the log.

It’s the scaler’s job to assess the visible characteristics of each log and determine what can be recovered from the log given its size and quality characteristics. Results in British Columbia are reported in cubic metres, with one cubic metre of timber viewed as a cubic metre of solid wood (known as firmwood), free of any rot, hole, char, or missing wood. It’s then up to the manufacturer to get the best and most valuable product out of the available volume.

Grade rules typically include three components: minimum or maximum dimensions, a requirement that a percentage of the log’s volume must be available to manufacture a given product, a requirement that a percentage of the product manufactured from the log must meet or exceed a given quality.

By developing methods of taking measurements in British Columbia’s coastal and interior regions, meaningful data is generated to understand the health and quality of the province’s diverse forests.

Click to view/download. 

Grade code 1 – Premium sawlogs

The highest-quality and most valuable grade, a grade code 1 log must be 2.5 m or more in length and 10 cm or more in radius. It can also be a slab of wood 2.5 m long and 20 cm wide and 20 cm or more in thickness measured at a right angle to the growth rings.

For species like hemlock, cedar or balsam log or slab, at least 90% of the overall log can be manufactured into lumber, meaning it’s free of rot, chars, or holes, without too many knots or twists.

For other species, at least 75% can be manufactured into lumber. For all species, at least 75% of the lumber will be suitable for sale.

Grade code 2 – Sawlog 

Smaller than premium sawlogs, grade code 2 logs are also 2.5 m or longer but can be only 5 cm wide. Grade code 2 sawlogs can also be made from slabs of wood 2.5 m or more in length and 15 cm wide, with a 15 cm or more thickness measured at a right angle to the growth rings.

In species like hemlock or cedar at least 75% of the wood can be manufactured into lumber, while for a balsam logs, it’s at least 67%. For all other species, at least 50% of overall wood can be manufactured into lumber.

Grade code 4 – Lumber reject

Lumber reject is the grade given to a log or slab that’s higher in grade than firmwood reject, but not high-grade enough to meet the requirements for a sawlog, due to factors like rot, chars, and holes.

The reason there is no grade code 3 or 5 is because they were merged into the lumber reject category as the needs of forestry industries changed.

Grade code 6 – Undersized log

An undersized log is the higher in grade than firmwood reject but cut from a tree which was below the minimum diameter to be processed into high-quality, useable lumber.

Grade code Z – Firmwood reject

The lowest grade of wood, a Grade code Z log is not of a high enough quality to be made into lumber.

A log falls into the firmwood reject category if there is heart rot or a hole that runs the entire length of the log, and any firmwood around the defect makes up less than 50% of the overall log.

A scaler may also grade a log as Z if rot is in the log and they estimate the net length of the log to be less than 1.2 m. Sap rot or charred wood within a log where the residual firmwood is less than 10 cm in diameter at the butt end of the log also makes it Grade code Z.

Portions of healthier logs that are less than 10 cm in diameter or portion of a slab that is less than 10 cm in thickness, are also in this category.

Supporting healthy, resilient forests

Wood that is unsuitable for valuable sawlogs was once seen as a residual of forestry harvest and burned as a means of disposal, emitting CO2, and polluting local air. The biomass market, however, processes low-grade wood into a feedstock for renewable electricity, unlocking the full value of forest resources, as well as enhancing ecosystems.

Slash pile in British Columbia

Newly developed forest management practises aimed at mitigating against wildfires, enhancing areas of habitats for wildlife, or restoring fire or diseased-damaged ecosystems, typically generate high volumes of low-grade wood. Without a local biomass market that can purchase and make use of that wood there’s less incentive to carry out these kinds of activities.

As wildfires and pests, like the mountain pine beetle, become increasing threats for Canadian forests and the rural communities who depend on them for work and leisure, the biomass sector’s participation is key to supporting forest management that ensures healthy, resilient forests.

Click to view/download.

The key to sustainable forests? Thinking globally and managing locally

1 December 2022

Sustainable bioenergy

Key takeaways:

  • Working forests, where wood products are harvested, are explicitly managed to balance environmental and economic benefits, while encouraging healthy, growing forests that store carbon, provide habitats for wildlife, and space for recreation.
  • But there is no single management technique. The most effective methods vary depending on local conditions.
  • By employing locally appropriate methods, working forests have grown while supporting essential forestry industries and local economies.
  • Forests in the U.S. South, British Columbia, and Estonia all demonstrate how local management can deliver both environmental and economic wins.

Forests are biological, environmental, and economic powerhouses. Collectively they are home to most of the planet’s terrestrial biodiversity. They are responsible for absorbing 7.6 billion tonnes of carbon dioxide (CO2) equivalent per year, or roughly 1.5 times the amount of CO2 produced by the United States on an annual basis. And working forests, which are actively managed to generate revenue from wood products industries, are important drivers for the global economy, employing over 13 million people worldwide and generating $600 billion annually.

But as important as forests are globally, the key to maximizing working forests’ potential lies in smart, active forest management. While 420 million hectares of forest have been lost since 1990 through conversion to other land uses such as for agriculture, many working forests are actually growing both larger and healthier due to science-based management practices.

The best practices in working forests balance economic, social, and environmental benefits. But just as importantly, they are tailored to local conditions and framed by appropriate regional regulations, guidance, and best-practice.

The following describes how three different regions, from which Drax sources its biomass, manage their forests for a sustainable future.

British Columbia: Managing locally for global climate change

British Columbia is blanketed by almost 60 million hectares of forest – an area larger than France and Germany combined. Over 90% of the forest land is owned by Canada’s government, meaning the province’s forests are managed for the benefit of the Canadian people and in collaboration with First Nations.

From the province’s expanse of forested land, less than half a percent (0.36%) is harvested each year, according to government figures. This ensures stable, sustainable forests. However, there’s a need to manage against natural factors.

Click to view/download

In 2017, 2018, and 2020 catastrophic fires ripped through some of British Columbia’s most iconic forest areas, underscoring the threat climate change poses to the area’s natural resources. One response was to increase the removal of stands of trees in the forest, harvesting the large number of dead or dying trees created by pests that have grown more common in a warming climate.

By removing dead trees, diseased trees, and even some healthy trees, forest managers can reduce the amount of potential fuel in the forest, making devastating wildfires less likely. There are also commercial advantages to this strategy. Most of the trees removed are low quality and not suitable for processing into lumber. These trees can, however, still be used commercially to produce biomass wood pellets that offer a renewable alternative to fossil fuels. This means local communities don’t just get safer forests, they get safer forests that support the local economy.

The United States: Thinning for healthier forests

The U.S. South’s forests have expanded rapidly in recent decades, largely due to growth in working forests on private land. Annual forest growth in the region more than doubled from 193 million cubic metres of wood in 1953 to 408 million cubic meters by 2015.

This expansion has occurred thanks to active forest product markets which incentivise forest management investment. In the southern U.S. thinning is critical to managing healthy and productive pine forests.

Thinning is an intermediate harvest aimed at reducing tree density to allocate more resources, like nutrients, sunlight, and water, to trees which will eventually become valuable sawtimber. Thinning not only increases future sawtimber yields, but also improves the forest’s resilience to pest, disease, and wildfire, as well as enhancing understory diversity and wildlife habitat.

Click to view/download

While trees removed during thinning are generally undersized or unsuitable for lumber, they’re ideal for producing biomass wood pellets. In this way, the biomass market creates an incentive for managers to engage in practices that increase the health and vigour of forests on their land.

The results speak for themselves: across U.S. forestland the volume of annual net timber growth 36% higher than the volume of annual timber removals.

A managed working forest in the US South

Estonia: Seeding the future

Though Estonia is not a large country, approximately half of it is covered in trees, meaning forestry is integral to the country’s way of life. Historically, harvesting trees has been an important part of the national economy, and the government has established strict laws to ensure sustainable management practices.

These regulations have helped Estonia increase its overall forest cover from about 34% 80 years ago to over 50% today. And, as in the U.S. South, the volume of wood harvested from Estonia’s forests each year is less than the volume added by tree growth.

Sunrise and fog over forest landscape in Estonia

Sunrise and fog over forest landscape in Estonia

Estonia has managed to increase its growing forest stock by letting the average age of its forests increase. This is partially due to Estonia having young, fast-growing forests in areas where tree growth is relatively new. But it is also due to regulations that require harvesters to leave seed trees.

Seed trees are healthy, mature trees, the seeds from which become the forest’s next generation. By enforcing laws that ensure seed trees are not harvested, Estonia is encouraging natural regeneration of forests. As in the U.S. South protecting these seed trees from competition for water and nutrients means removing smaller trees in the area. While these smaller trees may not all be suitable for lumber, they are a suitable feedstock for biomass. It means managing for natural regeneration can still have economic, as well as environmental, advantages.

Different methods, similar results

Laws, landownership, and forestry practices differ greatly between the U.S. South, British Columbia, and Estonia, but all three are excellent examples of how local forest management contributes to healthy rural economies and sustained forest coverage.

While there are many different strategies for creating a balance between economic and environmental interests, all successful strategies have something in common: They encourage healthy, growing forests.

Supporting a circular economy in the forests

16 June 2022

Opinion

Every year in British Columbia, millions of tonnes of waste wood – known in the industry as slash – is burned by the side of the road.

Land managers are required by law to dispose of this waste wood – that includes leftover tree limbs and tops, and wood that is rotten, diseased and already fire damaged – to reduce the risks of wildfires and the spread of disease and pests.

The smoke from these fires is choking surrounding communities – sometimes “smoking out entire valleys,” air quality meteorologist from BC’s Environment Ministry Trina Orchard recently told iNFOnews.ca.

It also impacts the broader environment, releasing some 3 million tonnes of CO2 a year into the atmosphere, according to some early estimates.

Slash pile in British Columbia

Landfilling this waste material from logging operations isn’t an option as it would emit methane – a greenhouse gas that is about 25 times more potent than CO2. So you can see why it ends up being burned.

In its Modernizing Forest Policy in BC, the government has already identified its intention to phase out the burning of this waste wood left over after harvesting operations and is working with suppliers and other companies to encourage the use of this fibre.

This is a very positive move as this material must come out of the forests to reduce the fuel load that can help wildfires grow and spread to the point where they can’t be controlled, let alone be extinguished.

The wildfire risk is real and growing. Each year more forests and land are destroyed by wildfire, impacting communities, nature, wildlife and the environment.

In the past two decades, wildfires burned two and a half times more land in BC than in the previous 50-year period. According to very early estimates, emissions from last year’s wildfires in the province released around 150 million tonnes of CO2 – equivalent to around 30 million cars on the road for a year.

Alan Knight at the log yard for Lavington Pellet Mill in British Columbia

During my recent trip to British Columbia in Canada, First Nations, foresters, academics, scientists and government officials all talked about the burning piles of waste wood left over after logging operations.

Rather than burning it, it would be far better, they say, to use more of this potential resource as a feedstock for pellets that can be used to generate renewable energy, while supporting local jobs across the forestry sector and helping bolster the resilience of Canada’s forests against wildfire.

I like this approach because it brings pragmatism and common sense to the debate over Canada’s forests from the very people who know the most about the landscape around them.

Burning it at the roadside is a waste of a resource that could be put to much better use in generating renewable electricity, displacing fossil fuels, and it highlights the positive role the bioenergy industry can play in enhancing the forests and supporting communities.

Drax is already using some of this waste wood – which I saw in the log yard for our Lavington Pellet mill in British Columbia. This waste wood comprises around 20% of our feedstock. The remaining 80% comes from sawmill residues like sawdust, chips and shavings.

Waste wood for pellets at Lavington Pellet Mill log yard

It’s clear to me that using this waste material that has little other use or market value to make our pellets is an invaluable opportunity to deliver real benefits for communities, jobs and the environment while supporting a sustainable circular economy in the forestry sector.

What is the carbon cycle?

25 March 2022

Carbon capture

What is the carbon cycle?

All living things contain carbon and the carbon cycle is the process through which the element continuously moves from one place in nature to another. Most carbon is stored in rock and sediment, but it’s also found in soil, oceans, and the atmosphere, and is produced by all living organisms – including plants, animals, and humans.

Carbon atoms move between the atmosphere and various storage locations, also known as reservoirs, on Earth. They do this through mechanisms such as photosynthesis, the decomposition and respiration of living organisms, and the eruption of volcanoes.

As our planet is a closed system, the overall amount of carbon doesn’t change. However, the level of carbon stored in a particular reservoir, including the atmosphere, can and does change, as does the speed at which carbon moves from one reservoir to another.

What is the role of photosynthesis in the carbon cycle?

Carbon exists in many different forms, including the colourless and odourless gas that is carbon dioxide (CO2). During photosynthesis, plants absorb light energy from the sun, water through their roots, and CO2 from the air – converting them into oxygen and glucose.

The oxygen is then released back into the air, while the carbon is stored in glucose, and used for energy by the plant to feed its stem, branches, leaves, and roots. Plants also release CO2 into the atmosphere through respiration.

Animals – including humans – who consume plants similarly digest the glucose for energy purposes. The cells in the human body then break down the glucose, with CO2 emitted as a waste product as we exhale.

CO2 is also produced when plants and animals die and are broken down by organisms such as fungi and bacteria during decomposition.

What is the fast carbon cycle?

The natural process of plants and animals releasing CO2 into the atmosphere through respiration and decomposition and plants absorbing it via photosynthesis is known as the biogenic carbon cycle. Biogenic refers to something that is produced by or originates from a living organism. This cycle also incorporates CO2 absorbed and released by the world’s oceans.

The biogenic carbon cycle is also called the “fast” carbon cycle, as the carbon that circulates through it does so comparatively quickly. There are nevertheless substantial variations within this faster cycle. Reservoir turnover times – a measure of how long the carbon remains in one location – range from years for the atmosphere to decades through to millennia for major carbon sinks on land and in the ocean.

What is the slow carbon cycle?

In some circumstances, plant and animal remains can become fossilised. This process, which takes millions of years, eventually leads to the formation of fossil fuels. Coal comes from the remains of plants that have been transformed into sedimentary rock. And we get crude oil and natural gas from plankton that once fell to the ocean floor and was, over time, buried by sediment.

The rocks and sedimentary layers where coal, crude oil, and natural gas are found form part of what is known as the geological or slow carbon cycle. From this cycle, carbon is returned to the atmosphere through, for example, volcanic eruptions and the weathering of rocks. In the slow carbon cycle, reservoir turnover times exceed 10,000 years and can stretch to millions of years.

How do humans impact the carbon cycle?

Left to its own devices, Earth can keep CO2 levels balanced, with similar amounts of CO2 released into and absorbed from the air. Carbon stored in rocks and sediment would slowly be emitted over a long period of time. However, human activity has upset this natural equilibrium.

Burning fossil fuel releases carbon that’s been sequestered in geological formations for millions of years, transferring it from the slow to the fast (biogenic) carbon cycle. This influx of fossil carbon leads to excessive levels of atmospheric CO2, that the biogenic carbon cycle can’t cope with.

As a greenhouse gas that traps heat from the sun between the Earth and its atmosphere, CO2 is essential to human existence. Without CO2 and other greenhouse gases, the planet could become too cold to sustain life.

However, the drastic increase in atmospheric CO2 due to human activity means that too much heat is now retained between Earth and the atmosphere. This has led to a continued rise in the average global temperature, a development that is part of climate change.

Where does biomass fit into the carbon cycle?

One way to help reduce fossil carbon is to replace fossil fuels with renewable energy, including sustainably sourced biomass. Feedstock for biomass energy includes plant material, wood, and forest residue – organic matter that absorbs CO2 as part of the biogenic carbon cycle. When the biomass is combusted in energy or electricity generation, the biogenic carbon stored in the organic matter is released back into the atmosphere as CO2.

This is distinctly different from the fossil carbon released by oil, gas, and coal. The addition of carbon capture and storage to bioenergy – creating BECCS – means the biogenic carbon absorbed by the organic matter is captured and sequestered, permanently removing it from the atmosphere. By capturing CO2 and transporting it to geological formations – such as porous rocks – for permanent storage, BECCS moves CO2 from the fast to the slow carbon cycle.

This is the opposite of burning fossil fuels, which takes carbon out of geological formations (the slow carbon cycle) and emits it into the atmosphere (the fast carbon cycle). Because BECCS removes more carbon than it emits, it delivers negative emissions.

Fast facts

  • According to a 2019 study, human activity including the burning of fossil fuels releases between 40 and 100 times more carbon every year than all volcanic eruptions around the world.
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Proposed Acquisition of Pinnacle Renewable Energy Inc. – a major international supplier of sustainable biomass

8 February 2021

Investors

This announcement contains inside information

RNS Number: 2805O
Drax Group PLC
(“Drax”, “the Group”, “Drax Group”, “the Company”; Symbol: DRX)

Drax is pleased to announce that it has signed an agreement (the “Acquisition Agreement”) with Pinnacle Renewable Energy Inc. (PL.TO) (“Pinnacle”), providing for the acquisition by Drax Canadian Holdings Inc., an indirect, wholly-owned subsidiary of Drax, of the entire issued share capital of Pinnacle (the “Acquisition”). The Acquisition will be implemented by way of a statutory plan of arrangement in accordance with the laws of the Province of British Columbia, Canada, at a price of C$11.30 per share (representing a premium of 13% based on the closing market price as at 5 February of C$10.04 per share and valuing the fully diluted equity of Pinnacle at C$385 million (£226 million(1)), with an implied enterprise value of C$741 million, including C$356 million of net debt(2)). The Acquisition, which remains subject to Drax and Pinnacle shareholder approval, court approval, regulatory approvals and the satisfaction of certain other customary conditions, has been unanimously recommended by the board of Pinnacle and has the full support of Pinnacle’s major shareholder, affiliates of ONCAP (which, together hold shares representing approximately 31% of Pinnacle’s shares as at 5 February 2021). Completion is expected to occur in the second or third quarter of 2021.

The Board believes that the Acquisition advances Drax’s biomass strategy by more than doubling its biomass production capacity, significantly reducing its cost of biomass production and adding a major biomass supply business underpinned by long-term contracts with high-quality Asian and European counterparties. The Acquisition positions Drax as the world’s leading sustainable biomass generation and supply business alongside the continued development of Drax’s ambition to be a carbon negative company by 2030, using Bioenergy Carbon Capture and Storage (BECCS).

Highlights

  • Compelling opportunity to advance Drax biomass strategy
    • Adds 2.9 million tonnes of biomass production capacity
    • Significantly reduces Drax average cost of production(3)
  • Increased global reach and presence in third-party markets
    • C$6.7 billion of contracted sales to counterparties in Asia and Europe
    • 99% of capacity contracted through to 2026, significant volumes contracted post 2027
  • Strong return on investment
    • Cash generative with 2022 EBITDA consensus of C$99 million
    • Expected returns significantly ahead of Drax’s WACC
    • Funded from cash and existing agreements
  • Reinforces sustainable and growing dividend

The world’s leading sustainable biomass generation and supply business

  • Drax and Pinnacle combined
    • 17 pellets plants, three major fibre baskets, four deep water ports
    • 4.9Mt capacity from 2022 – 2.9Mt available for self-supply
    • 2.6GW of renewable biomass generation, with potential for BECCS
  • Global growth opportunities for sustainable biomass

Commenting on today’s announcement Will Gardiner, Chief Executive Officer of Drax, said:

“I am excited about this deal which positions Drax as the world’s leading sustainable biomass generation and supply business, progressing our strategy to increase our self-supply, reduce our biomass production cost and create a long-term future for sustainable biomass.

Drax Group CEO Will Gardiner

Drax Group CEO Will Gardiner in the control room at Drax Power Station [Click to view/download]

“We expect to benefit greatly from Pinnacle’s operational and commercial expertise, and I am looking forward to what we can achieve together.

“It will pave the way for our plans to use Bioenergy with Carbon Capture and Storage (BECCS), and become a carbon negative company by 2030 – permanently removing millions of tonnes of carbon dioxide from the atmosphere each year. Negative emissions from BECCS are vital if we are to address the global climate emergency whilst also providing renewable electricity needed in a net zero economy, supporting jobs and clean growth in a post-COVID recovery.”

Duncan Davies, Chief Executive Officer of Pinnacle, said:

“Pinnacle’s Board of Directors has unanimously determined that the transaction represents the best course of action for the company and its shareholders. On closing, the transaction will deliver immediate, significant and certain cash value to our shareholders. At the same time, 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, which is exciting for our employees, customers and others around the world.”

Drax’s sustainable biomass strategy

Sustainable biomass has an important role to play in global energy markets as a flexible and sustainable source of renewable energy, as well as having the potential to deliver negative emissions. Drax believes that the Acquisition accelerates the Group’s strategic objectives to increase its available self-supply of sustainable biomass to five million tonnes per annum (Drax currently operates 1.6 million tonnes of capacity with 0.4 million tonnes in development) and reduce the cost of biomass to £50/MWh(4) by 2027. Through the delivery of these strategic objectives Drax aims to create a long-term future for sustainable biomass, including third-party supply, BECCS and merchant biomass generation.

Employee at Morehouse BioEnergy in Louisiana

Employee at Morehouse BioEnergy in Louisiana

The Group’s enlarged supply chain will have access to 4.9 million tonnes of operational capacity from 2022. Of this total, 2.9 million tonnes are available for Drax’s self-supply requirements in 2022 (increasing to 3.4 million tonnes in 2027). Drax aims to increase the level of third-party sales and further expand its capacity to meet its target of five million tonnes of self-supply by 2027.

Drax believes that the Acquisition is highly complementary to the Group’s other long-term strategic options for biomass. Once optimised, the enlarged group’s biomass supply chain will support Drax’s own generation requirements, including the potential development of BECCS, whilst also serving the growing biomass markets in Europe and Asia via long-term off-take agreements.

A major producer and supplier of good-quality, low-cost sustainable biomass

Pinnacle, which is listed on the Toronto Stock Exchange, operates 2.5 million tonnes of biomass capacity at sites in Western Canada and the Southeastern US, with a further 0.4 million tonnes of capacity in development (commissioning in 2021). Investment in this new capacity is expected to be substantially complete in the first half of 2021. Once the new capacity is commissioned, Pinnacle’s nameplate production capacity is expected to increase to 2.9 million tonnes per annum.

Pinnacle has ownership of c.80% of this nameplate capacity, with the remaining c.20% co-owned with its forestry industry joint venture partners, ensuring strong commercial relationships and shared interests in security of supply. Pinnacle has sales and marketing rights to 100% of the output from all sites.

Pinnacle is a key supplier of wood pellets for Drax and other third parties in Asia and Europe, with C$6.7 billion of contracted third-party sales (including sales to Drax).

Westview terminal, Canada

Wood pellets loaded onto vessel at Westview Terminal, British Columbia

Through scale, operational efficiency and low-cost fibre sourcing, Pinnacle is currently produces biomass at a lower cost than Drax, with a like-for-like 2019 production cost of US$124/tonne(3), compared to Drax’s 2019 production cost of US$161/tonne(3). The pro forma 2019 production cost for the combined business is US$141/tonne.

Pinnacle’s lower cost partially reflects the use of high levels of low-cost sawmill residues. British Columbia has a large and well-established commercial forestry industry, which has in recent years seen increased harvest levels, in part associated with management of a pine beetle infestation, producing good levels of residue material availability for the production of biomass. This infestation has now run its course and alongside other influences on the forest landscape, including wild-fire, is resulting in a reduction in the annual harvest and sawmill closures. The industry is adjusting to this with some production curtailment as well as developing approaches to fibre recovery and use which is expected to result in some increase in fibre costs.

Since 2017, the Sustainable Biomass Program has conducted annual audits of each of Pinnacle’s operational sites, allowing Drax to ensure, through its diligence, that the material that it purchases from Pinnacle is in line with its sustainability standards.

Drax is committed to ensuring best practice in health and safety, operational efficiency and sustainability across the enlarged group and intends to invest accordingly to deliver this outcome.

Drax is committed to ensuring that its biomass sources are compliant with Drax’s well-established responsible sourcing policy and Drax expects to invest in, adapt and develop sourcing practices to ensure compliance with Drax’s policies to deliver both Drax’s biomass strategy and positive forest outcomes.

A large and geographically diversified asset base

Pinnacle has ownership interests in ten operational plants and one in development (commissioning 2021), six of which are operated through joint venture arrangements, providing access to nameplate production capacity of 2.9 million tonnes per annum.

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 US hub at Aliceville, Alabama (0.3 million tonne nameplate capacity) and is developing a second site in Demopolis, Alabama (0.4 million tonne nameplate capacity), which Pinnacle expects to commission in 2021. Pinnacle’s total operational and development nameplate capacity in the US is 0.7 million tonnes.

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

Forest in LaSalle catchment area

Working forest in LaSalle BioEnergy catchment area, Louisiana

All production sites are located in areas with access to fibre and are able to operate with a range of biomass material from existing commercial forestry activities, including sawmill residues, pre-commercial thinnings and low-grade wood. Combined with a geographic spread of production capacity and access to three separate export facilities, Pinnacle benefits from operational and sourcing flexibility, further enhancing Drax’s security of supply.

Further information is set out in Appendix 1 to this announcement.

Long-term biomass revenues with access to Asian and European markets

Pinnacle has contracted sales of C$6.7 billion, with high-quality Asian and European counterparties (including Drax). This equates to 99% of its current production capacity contracted to third parties through 2026 and a significant volume contracted in 2027 and beyond, providing long-term high-quality revenues.

Vessel carrying biomass pellets at Westview Terminal, British Columbia

Pinnacle has been supplying biomass to Europe since 2004. The location of the majority of Pinnacle’s production capacity in Western Canada, with access to the Pacific Ocean, provides a strong position from which to serve the growing demand for biomass in Asian markets. In 2018 and 2019, Pinnacle entered into 12 new long-term contracts in Japan and South Korea, totalling over 1.3 million tonnes per annum, valued at C$4.6 billion, with most contracts commencing between 2021 and 2023. The average contract duration is nine years, with certain contracts extending significantly beyond this point. Contracts typically operate on a take-or-pay basis.

Global growth opportunities for sustainable biomass

The global biomass wood pellet market has a broad range of providers that are expected to expand their production capacity, including operators such as Enviva, Graanul Invest, Pinnacle, An Viet Phat, Fram and SY Energy.

The market for biomass wood pellets for renewable generation in Europe and Asia is expected to grow in the current decade, principally driven by Asian demand(5). Drax believes that increasingly ambitious global decarbonisation targets, the need for negative emissions and an improved understanding of the role that sustainably sourced biomass can play will result in continued robust demand.

Aerial photo of biomass storage domes, Drax Power Station

Train pulling biomass wagons, storage domes and wood pellet conveyor system Drax Power Station, North Yorkshire

As a vertically integrated producer and consumer of sustainable biomass Drax is differentiated from its peers and well positioned to deliver supply chain efficiencies and an expanded range of sustainable biomass materials for own-use and third-party sales.

Through its expanding lower cost supply chain, expertise in biomass generation and enhanced global footprint, Drax believes that there will be opportunities to work with other companies and countries in developing their own biomass-enabled decarbonisation strategies.

Strong return on investment

The Acquisition is expected to be cash generative and represent an attractive opportunity to create significant value for shareholders, with expected returns significantly in excess of the Group’s weighted average cost of capital.

The addition of long-term contracts with high-quality counterparties in growing international biomass markets will reduce the Group’s relative exposure to commodity prices, in line with the Group’s objective to improve earnings quality and visibility.

In total, the Acquisition increases access to lower cost biomass by a further 2.9 million tonnes after the commissioning of the Demopolis plant in 2021. The price paid for this capacity is consistent with the previously outlined strategy to invest in the region of c.£600 million to deliver Drax’s plans for five million tonnes of self-supply capacity and a biomass cost of £50/MWh by 2027.

For the year ended 27 December 2019, Pinnacle generated Adjusted EBITDA(6) of C$47 million from pellet sales of 1.7 million tonnes.

Pinnacle’s 2019 performance was impacted by fire at its Entwistle plant, reduced rail access due to rail industrial action and weather disrupted forestry activity. At the same time Pinnacle experienced regional Canadian sawmill closures, resulting in some reduction in sawmill residues and an increase in provincial fibre prices.

Fibre diversification and the development of a second hub in the Southeastern US is expected to partially mitigate the risk of fibre price rises.

Taking these factors into account, alongside the commissioning of new capacity and the commencement of Asian supply contracts, Pinnacle’s 2022 consensus EBITDA is C$99 million, increasing to C$126 million in 2023 (Bloomberg).

The Acquisition strengthens the Group’s ability to pay a sustainable and growing dividend. Drax does not expect the Acquisition to have any impact on its expectations for the final dividend payment for 2020.

Financing the Acquisition

The Acquisition is expected to be funded from cash and existing agreements. On 15 December 2020 the Group issued a trading update which noted cash and total committed liquidity of £643 million at 30 November 2020. Following the completion, on 31 January 2021, of the sale of four gas power stations, previously announced on 15 December 2020, the Group received cash of £188 million, being the agreed purchase price consideration of £164 million and £24 million of customary working capital adjustments.

Net debt to Adjusted EBITDA(7) in 2021 is expected to be above Drax’s long-term target of around 2 times immediately after completion of the Acquisition but is expected to return to around this level by the end of 2022.

Management of foreign exchange exposure

The Acquisition price will be paid in Canadian dollars. Pinnacle’s existing contracts with Drax and third parties are denominated in Canadian and US dollars and Drax expects to manage any exposure within its foreign exchange processes.

Drax’s policy is to hedge its foreign currency exposure on contracted biomass volumes over a rolling five-year period. This has given rise to an average foreign exchange rate hedge around 1.40 (US$/GBP£).

Sustainable sourcing

Sustainably sourced biomass is an important part of UK and European renewable energy policy. The renewable status of sustainably sourced biomass is based on well-established scientific principles set out by the Intergovernmental Panel on Climate Change and reflected in the European Union’s (EU) second Renewable Energy Directive and the UK Renewables Obligation.

Drax maintains a rigorous approach to biomass sustainability, ensuring the wood fibre it uses is fully compliant with the UK’s mandatory standards as well as those of the EU.

British Columbia, near Barriere, North Thompson River, aspen trees, dead pine trees behind infected with pine bark beetle (aka mountain pine beetle)

Dead pine trees in background, infected with mountain pine beetle, British Columbia

Drax recognises that the forest landscape in British Columbia and Alberta is different to commercially managed forests in the Southeastern US. Working in partnership with eNGO Earthworm, Drax has a good understanding of the considerations associated with sourcing residues from harvesting of primary forest and the particular characteristics of the forests in British Columbia and Alberta. In line with its responsible sourcing policy, Drax will work closely with eNGO partners, Indigenous First Nation communities and other stakeholders, and invest to deliver good environmental, social and climate outcomes in Pinnacle’s sourcing areas.

Operational efficiencies, improvements and savings

The strong financial returns associated with the Acquisition are not dependent on synergy benefits, but the Group has identified areas for potential operational improvements and efficiencies, and opportunities to invest across the supply chain to achieve consistent standards and improve outputs across the enlarged group.

Portfolio optimisation

Drax aims to leverage Pinnacle’s trading capability across its expanded portfolio. Drax believes that the enlarged supply chain will provide greater opportunities to optimise the supply of biomass from its own assets and third-party suppliers.

With existing plans to widen of the Group’s sustainable biomass fuel mix to include a wider range of lower cost sustainable biomass materials, Drax expects to create further opportunities to optimise fuel cargos for own use and third-party supply.

Logistics optimisation

Drax believes that the transport and shipping requirements of the enlarged group will provide greater opportunities to optimise logistics, with delivery of cargos to a counterparty’s closest port, reducing distance, time, carbon footprint and cost.

Enhanced security of supply

Control of Drax’s biomass supply chain, with geographically diverse production and export facilities, is expected to enhance security of supply, further mitigating the risk of supply interruptions thereby resulting in improved reliability and a reduced risk of supply interruption.

Combined expertise

Drax believes that there will be opportunities to share best practice and drive improved production performance across the enlarged group by leveraging combined expertise in the production of good-quality, low-cost pellets across the enlarged supply chain.

Drax also expects to leverage Pinnacle’s experience in developing and managing third-party off-take agreements alongside its existing commercial and trading capabilities to develop new agreements for supply to third-parties.

Stronger counterparty credit

Drax has a stronger credit rating, which could enable Pinnacle to develop its supply capability and contracts in Asian and European markets beyond its current position.

Reduced cost of debt

Drax’s average cost of debt is lower than Pinnacle’s giving rise to potential future savings.

Corporate cost savings

Drax expects to derive typical corporate cost savings associated with the Acquisition and delisting from the Toronto Stock Exchange.

Shareholder approvals

The Acquisition constitutes a Class 1 transaction under the Listing Rules. As a consequence, completion of the Acquisition is conditional on the Acquisition receiving the approval of Drax shareholders. A combined shareholder circular and notice of general meeting will be posted to shareholders as soon as practicable.

Among other things, the Acquisition is also conditional upon the approval of the Acquisition by Pinnacle’s shareholders, the approval of the Supreme Court of British Columbia, certain antitrust and other regulatory approvals other customary conditions.

A summary of the terms of the Acquisition Agreement is set out in Appendix 2 to this announcement.

Drax’s board has unanimously recommended that Drax’s shareholders vote in favour of the Acquisition, as each of the Drax directors that hold shares in Drax shall do in respect of their own beneficial holdings of Drax’s shares, representing approximately 0.17 per cent. of the existing share capital of Drax as at 5 February 2021, being the last business day prior to the date of this announcement.

Pinnacle’s board has unanimously recommended that Pinnacle’s shareholders vote in favour of the Acquisition at the Pinnacle General Meeting, as the Pinnacle directors (and certain current and former members of Pinnacle management that hold shares in Pinnacle) shall do in respect of their own beneficial holdings of Pinnacle’s shares, representing approximately 4.75 per cent. of the existing share capital of Pinnacle as at 5 February 2021, being the last business day prior to the date of this announcement.

In addition to the irrevocable undertakings from Pinnacle directors described above, Drax has also received an irrevocable undertaking from affiliates of ONCAP (which, together, hold shares representing approximately 31% of Pinnacle’s shares as at 5 February 2021 (being the last business day prior to the date of this announcement)) to vote in favour of the Acquisition at Pinnacle’s General Meeting.

Other

Drax issued a trading update on 15 December 2020 outlining its expectations for 2020 and expects to announce its full year results for the year ended 31 December 2020 on 25 February 2021.

Enquiries:

Drax Investor Relations: Mark Strafford
+44 (0) 7730 763 949

Media:

Drax External Communications: Ali Lewis
+44 (0) 7712 670 888 

Royal Bank of Canada (Financial Adviser and Joint Corporate Broker):

+44 (0) 20 7653 4000
Peter Buzzi
Mark Rushton
Evgeni Jordanov
Jonathan Hardy
Jack Wood

Acquisition presentation meeting and webcast arrangements

Management will host a webcast for analysts and investors at 9:30am (UK Time), Monday 8 February 2021.

The webcast can be accessed remotely via a live webcast link, as detailed below. After the meeting, the webcast recording will be made available and access details of this recording are also set out below.

A copy of the presentation will be made available from 7am (UK time) on 8 February 2021 for download at: https://www.drax.com/ca/investors/results-reports-agm/#investor-relations-presentations

Event Title:
Drax Group plc: Proposed Acquisition of Pinnacle Renewable Energy Inc

Event Date:
9:30am (UK time), Monday 08 February 2021

Webcast Live Event Link:
https://secure.emincote.com/client/drax/drax010

Start Date:
9:30am (UK time), Monday 08 February 2021

Delete Date:
Monday 27 December 2021

Archive Link:
https://secure.emincote.com/client/drax/drax010

Important notice

The contents of this announcement have been prepared by and are the sole responsibility of Drax Group plc (the “Company”).

RBC Europe Limited (“RBC”), which is authorised by the Prudential Regulation Authority (the “PRA”) and regulated in the United Kingdom by the Financial Conduct Authority (“FCA”) and the PRA, is acting exclusively for the Company and for no one else in connection with the Acquisition, the content of this announcement and other matters described in this announcement and will not regard any other person as its clients in relation to the Acquisition, the content of this announcement and other matters described in this announcement and will not be responsible to anyone other than the Company for providing the protections afforded to its clients nor for providing advice to any other person in relation to the Acquisition, the content of this announcement or any other matters referred to in this announcement.

This announcement does not constitute or form part of any offer or invitation to sell or issue, or any solicitation of any offer to purchase or subscribe for, any shares in the Company or in any entity discussed herein, in any jurisdiction nor shall it or any part of it nor the fact of its distribution form the basis of, or be relied on in connection with, any contract commitment or investment decision in relation thereto nor does it constitute a recommendation regarding the securities of the Company or of any entity discussed herein.

RBC and its affiliates do not accept any responsibility or liability whatsoever and make no representations or warranties, express or implied, in relation to the contents of this announcement, including its accuracy, fairness, sufficient, completeness or verification or for any other statement made or purported to be made by it, or on its behalf, in connection with the Acquisition and nothing in this announcement is, or shall be relied upon as, a promise or representation in this respect, whether as to the past or the future. RBC and its respective affiliates accordingly disclaim to the fullest extent permitted by law all and any responsibility and liability whether arising in tort, contract or otherwise which it might otherwise be found to have in respect of this announcement or any such statement.

Certain statements in this announcement may be forward-looking. Any forward-looking statements reflect the Company’s current view with respect to future events and are subject to risks relating to future events and other risks, uncertainties and assumptions relating to the Company and its group’s and/or, following completion, the enlarged group’s business, results of operations, financial position, liquidity, prospects, growth, strategies, integration of the business organisations and achievement of anticipated combination benefits in a timely manner. Forward-looking statements speak only as of the date they are made. Although the Company believes that the expectations reflected in these forward looking statements are reasonable, it can give no assurance or guarantee that these expectations will prove to have been correct. Because these statements involve risks and uncertainties, actual results may differ materially from those expressed or implied by these forward looking statements.

Each of the Company, RBC and their respective affiliates expressly disclaim any obligation or undertaking to supplement, amend, update, review or revise any of the forward looking statements made herein, except as required by law.

You are advised to read this announcement and any circular (if and when published) in their entirety for a further discussion of the factors that could affect the Company and its group and/or, following completion, the enlarged group’s future performance. In light of these risks, uncertainties and assumptions, the events described in the forward-looking statements in this announcement may not occur.

Neither the content of the Company’s website (or any other website) nor any website accessible by hyperlinks on the Company’s website (or any other website) is incorporated in, or forms part of, this announcement.

Appendix 1

Pinnacle Production Capacity

[table “119” not found /]

Capacity by fibre basket in 2021

[table “120” not found /]

Capacity by fibre basket in 2022

[table “121” not found /]

Across its business Pinnacle employs 485 employees, principally in the operation of its assets.

Appendix 2

Principal terms of the Acquisition Agreement

The following is a summary of the principal terms of the Acquisition Agreement.

Parties and consideration

The Acquisition Agreement was entered into on 7 February 2021 between Drax, Drax Canadian Holdings Inc., (an indirect wholly-owned subsidiary of Drax) (“Bidco”) and Pinnacle. Pursuant to the Acquisition Agreement, Bidco has agreed to acquire all of the issued and outstanding shares in Pinnacle and, immediately following completion, Pinnacle will be an indirect wholly-owned subsidiary of Drax. The Acquisition will be implemented by way of a statutory plan of arrangement in accordance with the laws of the Province of British Columbia, Canada.

Conditions

Completion under the Acquisition Agreement is subject to, and can only occur upon satisfaction or waiver of, a number of conditions, including:

(a) the approval of the Acquisition by Drax shareholders who together represent a simple majority of votes cast at a meeting of Drax shareholders;

(b) the approval of the Acquisition by Pinnacle shareholders who together represent not less than two-thirds of votes cast at a meeting of Pinnacle shareholders;

(c) an interim order providing for, among other things, the calling and holding of a meeting of Pinnacle shareholders and a final order to approve the Arrangement, each having been granted by the Supreme Court of British Columbia;

(d) no material adverse effect having occurred in respect of Pinnacle;

(e) in the event that the Competition and Markets Authority (the “CMA”) has requested submission of a merger notice or opened a merger investigation, the CMA having issued a decision that the Acquisition will not be subject to a Phase 2 reference or the period for the CMA considering a merger notice has expired without a Phase 2 reference having been made;

(f) either the receipt of an advance ruling certificate or both the expiry, termination or waiver of the applicable waiting period under the Competition Act (Canada) and, unless waived by Drax, receipt of a no-action letter in respect of the Acquisition from the Commissioner of Competition;

(g) the expiry or early termination of any applicable waiting period (and any extension of such period) applicable to the Acquisition under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (US); and

(h) the receipt a third party consent

In addition, Drax has the unilateral right not to complete the Acquisition where registered Pinnacle shareholders representing more than five per cent. of the outstanding share capital of Pinnacle duly exercise their dissent rights.

If any of the conditions are not satisfied (or waived) by 7 September 2021, either party can terminate the Acquisition Agreement.

Non-solicitation

Prior to obtaining approval from their respective shareholders in relation to the Acquisition, each of Drax and Pinnacle are prohibited from soliciting from any third party any acquisition proposal (relating to 20 per cent. or more of their shares or their group’s assets). However, if prior to obtaining Drax shareholder approval, Drax receives an unsolicited bona fide proposal in respect of 50 per cent. or more of its shares or all or substantially all of the assets of the Drax group and which the Drax board considers would result in a transaction that is more favourable to Drax shareholders from a financial perspective than the Acquisition (a “Drax Superior Proposal”), it may engage in discussions in relation to such Drax Superior Proposal in accordance with the terms of the Acquisition Agreement. Similarly, if prior to obtaining Pinnacle shareholder approval, Pinnacle receives an unsolicited bona fide proposal in respect of 100 per cent. of its shares or all or substantially all of the assets of the Pinnacle group and which the Pinnacle board considers would result in a transaction that is more favourable to Pinnacle shareholders from a financial perspective than the Acquisition (a “Pinnacle Superior Proposal”), it may engage in discussions in relation to such proposal in accordance with the terms of the Acquisition Agreement.

Termination fees payable to Pinnacle

Drax has agreed to pay a break fee of C$25 million to Pinnacle if the Acquisition Agreement is terminated as a result of:

(a) the Drax board withholding, withdrawing or adversely modifying its recommendation that Drax shareholders approve the Acquisition;

(b) the Drax board authorising Drax to enter into any definitive agreement (other than a confidentiality agreement) in respect of a Drax Superior Proposal;

(c) the Drax board terminating the Acquisition Agreement in response to any intervening event that was not known to the Drax board as of the date of the Acquisition Agreement;

(d) Drax breaching its non-solicitation obligations set out in the Acquisition Agreement; or

(e) completion not occurring by 7 September 2021 or a failure to obtain Drax shareholder approval and, in each case, an acquisition of 50 per cent. of Drax’s shares or assets (subject to certain exceptions) is is made or announced prior to the Drax shareholder approval having been obtained and any such acquisition is consummated (or a definitive agreement is entered into in respect of the same) within 12 months of termination.

In addition, Drax has agreed to pay Pinnacle an expense fee of C$5 million in the event that the Acquisition Agreement is terminated as a result of a failure to obtain Drax shareholder approval. The expense fee shall not be payable in the event that the break fee is also payable.

Termination fees payable to Drax

Pinnacle has agreed to pay a break fee of C$12.5 million to Drax if the Acquisition Agreement is terminated as a result of:

(a) the Pinnacle board withholding, withdrawing or adversely modifying its recommendation that Drax shareholders approve the Acquisition;

(b) the Pinnacle board authorising Pinnacle to enter into any definitive agreement (other than a confidentiality agreement) in respect of a Pinnacle Superior Proposal;

(c) the Pinnacle board terminating the Acquisition Agreement in response to any intervening event that was not known to the Pinnacle board as of the date of the Acquisition Agreement;

(d) Pinnacle breaching its non-solicitation obligations set out in the Acquisition Agreement; or

(e) completion not occurring by 7 September 2021 or a failure to obtain Pinnacle shareholder approval and, in each case, an acquisition of 50 per cent. of Pinnacle’s shares or assets (subject to certain exceptions) is made or announced prior to the Drax shareholder approval having been obtained and any such acquisition is consummated (or a definitive agreement is entered into in respect of the same) within 12 months of termination.