CLMT - NASDAQ

Good day, and welcome to the Calumet Specialty Products Partners Second Quarter 2023 Results Conference Call. [Operator Instructions]. I would now like to turn the conference over to Brad McMurray, an Investor Relations. Please go ahead, sir.

Good morning. Thank you for joining us today for our second quarter call. With me on today's call are Todd Borgmann, CEO; Vincent Donargo, CFO; Bruce Fleming, EVP, Montana Renewables and Corporate Development; Scott Obermeier, EVP, Specialties; and Marc Lawn, EVP of Sustainable Products and Strategy. You may now download the slides that accompany the remark made on today's conference call, which can be accessed in the Investor Relations section of our website at www.calumetspecialty.com. Also, a webcast replay of this call will be available on our site within a few hours. Turning to the presentation on Slide 2, you'll find our cautionary statements. I'd like to remind everyone that during this call, we may provide various forward-looking statements. Please refer to the partnership's press release that's issued this morning as well as our latest filings with the SEC for a list of factors that may affect our actual results and cause them to differ from expectations. I'll now pass the call to Todd. Todd?

Thanks, Brad, and welcome to Calumet's Second Quarter 2023 Earnings Call. This was a quarter of many strategic achievements. Most recently, all elements of Montana Renewables, the RD unit, the Renewable Hydrogen Plant and the next-generation pretreater, met or outperformed expectations. Further, our Sustainable Aviation Fuel project came online, catapulting us from nowhere to the largest SAF producer in North America. At the corporate level, we continued the process of improving our balance sheet by successfully issuing unsecured debt, which will eliminate our secured notes. Our Specialties business continued with excellent commercial execution, while asset operations overcame a series of tornadoes and extreme weather that limited production. Ultimately, we generated $67.7 million of adjusted EBITDA for the quarter, which is a decrease of $10 million from the prior period. Our Northwest Louisiana team spent much of the last quarter -- last half of the quarter recovering from weather-driven power disruptions. While doing so, we elected to pull forward maintenance, and at this point, we have no meaningful planned downtime for the remainder of 2023 and we enter the third quarter through running our assets at full rates. At the halfway point of our 3-year plan to fortify operations, our assets continue to demonstrate an improved ability to recover quickly when challenges arise, and we're also adding redundancy to further prevent or lessen the impacts of external events on our business. Commercially, we're executing across all of Calumet with a focus on the customer. Montana Renewables has pointed half of our sales volume to Canada and seamlessly stepped into the SAF market. Our Specialties team continues to capture value from our unique and integrated value chain, and our supply chain and planning teams spent the last half of the quarter ensuring customer needs were met as we navigated around the weather and maintenance. Further, it's nice to see a return to a more normal environment performance brands as input costs have stabilized. This is a business that we can grow, and we're seeing strong signs of that in our Industrial business. Our branded products are well positioned to meet the industry's growing demand for high-performing and energy-efficient solutions, whether it would be Bel-Ray products servicing the global mining industry, or our new biodegradable Bio-MAX products being utilized in the global marine market. The second quarter also saw the completion and full start-up of Montane Renewables, and the team settled into the new operation nicely. As we stepped into this new business, it was essential that we quickly proved out the core operating pillars, which were ensuring the RDU and hydrogen plant to run at planned rates, proving our new and leading pretreater technology, demonstrating catalyst performance and meeting SAF specifications. We've demonstrated all of these core concepts. As expected, we encountered a few blips as the team quickly scale the learning curve, and our commissioning experience feels like minor teething problems relative to the industry experience. MRL's operation is intricate, including a closed recycle in our net 0 hydrogen production and serial #1 of the next-generation feedstock pre-treater technology. As our operators learn the intricacies of this new operation, they quickly got the plant running consistently at the planned 12,000 barrels a day by quarter end, with the subsequently commissioned pre-treater following the same upward trajectory. We took our Board of Directors to visit the plant earlier this week, and we are all once again impressed with the quality and knowledge of our local Montana team and leadership. Naturally, we're in a period of rapid learning as we dig deeper into the operation and understand the true ability of our units. One quarter in, we both developed some new understanding and confirmed a few of our core hypotheses. First and most importantly, we've proven our technology works and our team can operate this facility at expected levels. We are making on-spec products right out of the gate, and even some of our customers were surprised at how quickly we came online. We monitor our catalysts closely and it's performing as planned, even as we introduced higher amounts of feed that we treated ourselves. Further, the capacity creep has already started. As you might remember, we don't know the maximum capacity of our RDU, as we never filled the unit in fossil service, so it's true capacity has not yet been tested. Just a few months in, our team has already demonstrated the RDU's ability to run over 13,000 barrels a day. Next, we're pleased with the decision we made to install the pretreater with ARA technology. The amount of feedstock flexibility this unit opens is tremendous, and we're capturing the yield advantage that we expected. Over previous quarters, we spent a lot of time talking about the need for a pretreater in this business, and we're quickly seeing the field of renewable diesel producers naturally separated into those that have pretreatment ability and those that don't. Last quarter, I mentioned that the difference between treated and untreated feed cost was $0.80 a gallon. Right now, the pretreater advantage is roughly $1 a gallon. At these levels, the ability to process entry at the feed is even more important than location for the time being. Fundamentally, the next-generation technology allows us to lose 4% less feed than a standard treater. At current feedstock prices, that's roughly a $0.20 a gallon advantage. With these data points, we expect the ARA technology will allow us to maintain a structural advantage even within the camp of competitors that do have pretreat. We also are learning how different feeds are handled. They run at various speeds, cause filter changes at different intervals and differ in the amount of time it takes to unload a railcar. These are common items to work through, which will allow us to optimize as we continue to process more untreated material. We're optimizing the drawdown of our previous market purchases of treated feed, and we continue to ramp up the pretreater rates as we gained comfort with the new technology. Further, we've confirmed the location is as important as we thought. We've seen generic industry margins tightening recently, especially for the treated feeds in the . This temporary dynamic has occurred before when markets rebalance from a short-term disruption. While we fully expect it to normalize quickly, our relative location advantage provides flexibility and allows us to pivot rapidly in a changing environment. This is true on both the feed and product side of our business. On the feed side, the location advantage is magnified by our next-generation pretreater that we just discussed. In fact, we just placed our first order for Camelina, which will arrive in a next couple of weeks. Camelina is in its very early stages, but given its indigenous to Montana, extremely low CI and does not compete with food, this cover crop presents tremendous upside to Montana Renewables. On the product side, 50% of our existing R&D is now selling in Canada as we see our early theory playing out that our product will migrate to the spot of optimal logistic advantage. As the largest single market, California is often a reference point for renewable fuels in our industry. But with Canada sharing a land border with Montana, we fully expect our products to all land and premium locations. Next up, the level of ventures in SAF is even bigger than we expected, and industry seems to quickly be aligning that SAF is the best, fastest and most practical path to airline decarbonization. With the SAF market currently being a fully voluntary market, it's been interesting to see the wide range of views that exist on how this material will price long-term. For us, Shell has been a great partner so far, and we're pleased with the value they are bringing to the table in these early days. As Montana Renewables looks forward to the MaxSAF expansion, we continue to be enthusiastic. We expect to be in a position to share some early numbers on expected costs in EBITDA soon, and we believe that with MaxSAF, we can more than double our current EBITDA run rate in 2025. The MaxSAF project leverages our early mover advantage, and we could sell all of the product we could make into California, Oregon, Washington, Canada, and even Illinois and Minnesota with the new state SAF credits. And finally, we're already exploring opportunities to further integrate Montana Renewables molecules into specialty applications. As we speak, our development team is experimenting with renewable naphtha and diesel fractions for uses in our Solvents business. We've seen early successes with other sustainable product lines, and adding another example of unique and advantaged integration to our Specialty platform is exciting as we continue to look for ways to leverage our newly-found renewables expertise across our enterprise. With that, I'll turn the call over to Vincent to take us through the quarterly results. Vince?

Thank you, Todd. Before we move forward, let's pause on Slide 4 to take a closer look at 2 new brands we recently added to our SPS portfolio. Titan

Thanks, Vince. Our priorities and next steps are clear. We entered the third quarter operating well across the board. In Specialties, we have some inventory to rebuild, but otherwise are planning on a strong second half. At Montana Renewables, we'll continue to process what's left of our treated safety stock and maximize pretreat throughput. For the quarter, we've implemented a 1 million-barrel challenge at the site for both our legacy and renewable businesses, and through the end of July, we're tracking ahead on both. Our plan and intention is to demonstrate in the third quarter that Montana Renewables sits the top of the stack of competitively-advantaged renewable diesel and SAF producers. Looking forward a bit more, internal process design work for our MaxSAF expansion has already started, and we expect to make a final investment decision near the end of this year.

[Operator Instructions]. At this time, we will take our first question, which will come from Roger Read with Wells Fargo.

Yes. Lots of hits here. But I guess, really, let's dive into MRL first. Maybe a little more clarity on how some of the advantaged feedstocks have run through? You mentioned some learning curve issues with that. Is there 1 that's worked a little better or is priced a little better? Has come up with a better yield? Just sort of curious any more you can offer there.

Roger, it's Bruce. The -- yes, a couple of things as you think about the optimization. The feedstocks do have different yields, but that's mostly in the split between diesel and SAF. The total distillate yields are substantially similar across feeds, so the pricing is interesting because there's rotation among classes. So TALO can get an advantage and then corn oil can come in on top of it for a while. So we've got a pretty good supply and trading function, trying to follow those rotations. And we're able to do that more quickly than an average competitor because we're quite close to the sources. Most of our feeds are days to maybe 2 weeks away, and so we shift gears pretty quickly.

Yes, that's helpful. And then the other question I have for you, since we are all attuned to California, the LCFS and the other things that drive us to see R&D sales in the U.S. What specifically do you see in Canada's setup that makes it competitive from either in RD or a SAF standpoint?

Higher price.

That's an easy answer. All right. Well, that's my 2 questions. I'll turn it back.

And our next question will come from Amit Dayal with H.C. Wainwright.

Just staying on the feedstock topic, you mentioned Camelina. Could you give us any color on cost advantages Camelina presents for you guys? And whether this is a seasonal feedstock option for you? Or can it be available through the year?

Amit, the best way to think about that is that commercial quantities of Camelina are actually not in the market yet, so this is experimentation. We were fortunate to pick up opportunistically some Camelina oil. We really like it. It's in the low-20s carbon intensity, CI, and dramatically better than vegetable oils, and it grows in our latitude. So what we imagine is going to happen is that now that this is a cash crop, there will be more and more of it. There is some crushing activity now, and that's simply going to speed up. So if you look at some of our public information, we're forecasting commercial availability to us out in 2025, '26 that shows up in some of our charts. The economics of it, I wouldn't read too much into this because it is an experimentation phase. But this is competitive with untreated feeds, so that's going to be quite a good margin, albeit a small volume.

Understood. Got it. So this is a little bit more of a longer-term development effort for you guys. Got it.

Yes, we're -- just to be clear, we're not doing the development. There are 4 developers in Montana. Now they're backed by global majors. I mean this is -- this is very visible, and so it will happen. We're just speculating on how fast. So as I said, we put commercial availability to us about 2 years out.

Okay. Then on the topic of deleveraging, do you think, going into the second half of '23, you could begin some deleveraging efforts just from cash flows? Or will you wait for some sort of a monetization event to undertake sort of that part of the strategy?

Yes. Amit, this is Todd. I think we're certainly going to generate positive cash flow in the second half of the year with Montana Renewables now running fully construction over, so on and so forth. So absolutely, there will be -- we would expect cash flow to be available. That being said, I think the major big bang deleveraging event it's still going to be tied to monetization. There would certainly be the option to delever over time with operating cash flow, with MRL on and our Specialties business operating as well as it has over the past couple of years, we'd expect that to be an option. But I think we've been pretty clear that we want to complete the deleveraging of Calumet as quickly as possible. We've been talking about it for a while here. We want to get back to growing the business, and the most logical path is minority monetization of Montana Renewables.

And our next question will come from Manav Gupta with UBS.

My question to you here is, can you help us understand your SAF strategy? How much are you producing right now? Once you do expand, if you do, then how much SAF could you produce? And then just a quick follow-up is, how much more do you actually expect to make on an EBITDA per gallon basis in SAF versus RD? So if you think you can make 140 million gallons in RD, can you actually make 250 million gallons in SAF? And I'll turn it over after that.

Hi, Manav, it's Bruce. The -- if I take those in reverse order, we've got an undisclosed commercial premium above renewable diesel. That is very sufficient to incent staff recovery. The volume part is we've contracted 30 million gallons per year. That's a percentage of our yield, kind of 12% to 15%. The expansion case, the licensors tell us we can go to full conversion, 100% SAF. We think there will be an optimization short of that, so we are tentatively advertising 230 million gallons of SAF capacity post installation of our yield flexibility project.

Next question here will come from Jason Gabelman with TD Cowen.

I wanted to ask about the monetization strategy and efforts going on? And specifically, Todd mentioned a couple of things at the end that you're receiving indications that the value of MRL is higher than the value of the current enterprise value of the company, so I was wondering if you just could elaborate on that a bit? How do you translate that into actual value for shareholders? And what does that process look like over the next few months? And then tied to that, considerations for converting to a C corp, do you see that as unnecessary step in unlocking the value?

Let's have Bruce start with kind of MRL valuation, and then I'll pile on, if that's all right, with kind of the last question.

Sure. Jason, it's Bruce. The MRL valuation is reasonably clear. The energy transition companies, the public peer companies are trading in an enterprise value of EBITDA multiple that's visible. We expect to lay in with that at a minimum, if not get a premium for the competitive advantages that we've got due to location, due to the advanced pre-treater technology and due to the fact that we're now North America's largest SAF producer. So when you put all that together, that's the public valuation signal that we would expect to target. I'll tell you that the bulge-bracket banks we're talking to have no concern about some kind of an overhang from the parent, which I think is part of what you were getting at. And so we're simply going to stand it up, and it looks like it's going to be a pretty straightforward process. How long that takes and the condition of the capital markets will obviously give us a shot at positioning our timing. But from here in early August, we're presumably targeting first part of next year for closing and funds realization.

Yes. And I think, just to pile on a little bit, we know there's intrinsic value in Calumet, right? Bruce just talked about some of the value that we'd expect. We can look at comps in the marketplace. We can look at a number of points to triangulate into what Montana Renewables is worth. And we've talked about unlocking that through IPO or monetization. Primarily, we think MRL would be very liquid as a publicly traded company, and that would certainly help Calumet. We've also said we're exploring optimal paths, like we always do. Natural time for all stakeholders, I guess, Jason, is to look at the full strategy, would be when we're talking about selling or spinning some of it to create new entities. So could something with the structure be 1 of those options? Sure. I mean, I guess everything is an option. Everyone involved is rational economic creatures, and we all want what's best for Calumet. So I guess I'd just say the entire strategy is complex. It takes time. And what we do from here with this large amount of value sitting in Montana Renewables is arguably the most important decision in the history of Calumet. So getting that step right is the most important thing, and we're going to prioritize that over rushing down a particular path. We'll be talking with the market, we'll be seeking input. And at the end of the day, there's a heck of a lot of value here, so we're focused on unlocking that and we'll go from there.

Got it. I appreciate the comments. And then my follow-up just on the margin outlook and specifically related to RIN prices following the EPA's decision on the renewable volume obligations for '23 to '25, I think. There's a decent amount of concern that RIN prices are going to be volatile next year as the industry brings on new renewable diesel capacity. I know you -- the Calumet has a view of kind of a stable margin for renewable diesel over the medium term. But do you anticipate some elevated bouts of volatility in the renewable diesel margin next year due to a potential RIN oversupply? And how do you think the market kind of evolves through that?

Sure, Jason. It's Bruce again. The individual components of the industry margin index that we use are independently volatile, and RINs is getting a lot of attention. A couple of things that I talked about last, California is clearly going to accelerate their LCFS reduction profile, so that goes on the credit side. And the more SAF we pull out of the renewable diesel pool, the shorter it is, so there's an interaction there. And then the final comment, I don't see a lot of analytics that recognize that Canada is part of our trading market, but it is. And not to be flip, but I'm not sure I care where California goes because we're not going there.

Got it. And just to elaborate on that last point, could you sell 100% of your product into Canada while kind of sustaining the current margin profile?

We could. That would potentially not be optimal distribution, but I'm on record for the last 2 years as saying our physicals shouldn't fall more than 100 miles from Puget Sound. When you look that up, that means we hit Oregon, Washington, British Columbia, and now, all of federal Canada. So we're pretty excited about the fact that there are small rural differences, normal seasonal patterns and a lot of trading volatility. I was a West Coast operator for 12 years before I came to Calumet. There is a lot going on out there, and because of our geographic proximity, we're close in, in time, and we can take advantage of that. So I think the fact that Federal Canada brought an addressable diesel market equal to the PADD V volumes probably ought to get more attention.

Yes. Understood. Appreciate the color, guys.

And our next question will be a follow-up from Roger Read with Wells Fargo.

And maybe just turn off of MRL a little bit here and talk about the other core parts of the business. Obviously, the weather issues had an impact. So Q2 sounds like that's pretty well worked out of the system by the time we get to Q3. But I was just curious, as you look at the overall sort of supply demand that's been in here, we've had a lot of supply chain issues throughout the industry. Just how things are shaking out and how should we think about a normal market because it's been, what, 3 years since we've seen a normal market, I think?

So Roger, this is Scott. I think of a few comments here. I think you hit the nail on the head when you said it feels like we're more of a normal market now after a couple of highly volatile years, and we agree with that assessment. We feel like our business right now is about as normalized as what has been over the past few years. As we look at sort of what I would say, Roger, is additional context here, sort of the headline summary of our view of the market right now, we do see some moderating demand and some of the normalizing margins going on at that macro level. But we remain bullish overall with our business. We've got, as you know, Roger, a diverse portfolio of specialty products, a great base of customers and our unique integrated business model that continues to be strengthened. Just some final color commentary, Roger. As we look at the business through, I'll say, 3 lenses: our Performance Brands business, our SPS fuels business and the SPS Specialties business. On the Performance Brand we've been commenting for the past couple of years, where we felt like a normal market would be for the business, and we're in it now. The demand on the retail side is a little soft, but as mentioned in the call, our Industrial business is very strong right now. Margins are, I'll say, normalized within the business, and so we've got a pretty good outlook going forward on the Performance Brands piece. On the Fuels piece, Roger, overall, tough second quarter is fuel cracks. The 211 came down $9, although was that spiked back up here as we start Q3. But overall, I think, the inventory is relatively short, and we've got constructive outlook within the Fuels business moving forward. And the last piece, I would just say, on the Specialty SPS. This business, we see continuing to perform very well. We've done a lot of work over the past few years to really strengthen the foundation and optimize business, and so we feel really good about where we're at. Yes, the margins are normalizing a little bit, but we're still talking $75, $80 a barrel type of margins, when I think 3, 4, 5 years ago, that number was more in the 30s. So feel really good about where we're at with our Specialty business.

Okay. I guess, I was a little surprised to hear Industrial demand is strong and retail demand is soft. It seems like all the other data points we see at a macro level would imply the opposite of that, but good to hear. One other question to follow-up on. The base oil markets were pretty oversupplied roughly, call it, 2015 to at least 2020, that seems to have improved. I was just curious, as you think about group 1, 2 and 3 on the base oil front, have we seen demand increase? Or are we seeing supply go down? Just kind of what's helped out on that side of the margin ledger.

Roger, Scott again. Actually, let me start that with the comment on the Retail and the Industrial is just to comment on that. On the retail market, I think consistent with what's going on out there, there's a lot of, I'll call it, derisking by the big-box retailers. The consumer market has been strong on the service front. On the retail front, I think a lot of the retail market has been derisking inventory. It's led to some choppy demand on the retail side. The industrial side for our Performance Brands, on the question around how we've seen it strong, I think Todd or Vince alluded to in the earnings statements for the call, a lot of our products are put in the high-value markets. So we've got a great brand and great products that go into mining, as an example, that go into environmentally friendly marine lubricants, that go into the energy transition market. Our high-value products are experiencing great demand, great growth because of the uniqueness of them versus just more of a commoditized industrial play. Now, Roger, on this last question on the base oils, a few thoughts. It's mostly on the production side, so I'll call it less supply on the Group 1 over the past 5 years than what there was. We like our Group 1. It's a niche product. We try to stay out of the commoditized markets and focus more on the high-value applications, Group 1, Group 2. So less supply there, and there's been some global trade disconnects past couple of years on the Group 3 as well.

Appreciate the clarifications.

And our next question will be a follow-up from Amit Dayal with H.C. Wainwright.

Just following up on your comments about the Montana IPO. Did you say you are targeting early next year as a potential window to undertake this? I just wanted to see if that is sort of the time line we should be thinking about?

Yes, Amit, it's Todd. We've said that in the past and continue to think that that's reasonable. Obviously, no commitments. We've got to get through the process, get the feedback and kind of make a final decision. But what we want to do is be ready. A lot of this is going to be driven by the market, and we want to be there when the markets open. And if that's early next year, then great, and if it takes longer than that, then so be it. But we want to be there to kind of be opportunistically ready when an opportunity presents itself.

So should we think about 3Q as a very sort of important quarter for the Renewables business, where you want to demonstrate the full capability of this operation to support that outcome?

You bet. I think our focus has been on the third quarter for a while. We've had a number of milestones at Montana Renewables. First, we had to finance it and we had to construct it, and we had to prove that it all worked. Derisk the technology, improve the operations, I think we've done all of that. And the very last milestone is prove it through a set of audited financials which, we've been saying for a while, we think that we'll do in the third quarter, and that continues to be our intention.

And our next question will be a follow-up from Jason Gabelman with TD Cowen.

Yes. Just following up on MRL. Are you planning on splitting out results for MRL for 3Q, just given it's an important quarter and it sounds like you want to provide more conspiracy of the market? And then just a couple of other operational questions on MRL. Are you running all untreated feed at this point? And do you expect 3Q to be in that EBITDA guidance range that you've previously provided?

Yes. I'll take the -- I'll start us off here and see if Bruce wants to jump in. But yes, it's been our intention to split out Montana Renewables when we reach steady state, and like we said, we expect that to be Q3. As far as all untreated feed, I don't think we're at 100% untreated feed. We're certainly ramping up. Very comfortable with where we've been. The guidance that we've given of about $25 to about $45 per gallon, obviously, is on untreated feed. So as we ramp up and work through the safety stock that we bought in prior periods of treated feed, the blended average EBITDA won't quite be that high. But we're focused on long term about $25 to about $45, and we're seeing that pretty much now when we look at it on an untreated basis. Right, Bruce?

Yes. We remain comfortable with our guidance. Remember that these California indicators that everybody likes to focus on are not that good a capture of our better position. So between Amit's question a second ago and yours, we're committed to proving this in the third quarter. And whether or not we're ready to carve out the audited financials, that's up to Vince. But we'll absolutely be doing a special look, so you'll get a clear, transparent sense of how that works for us.

[Operator Instructions]. Our next question will come from Gregg Brody with Bank of America.

Congrats on getting the facility -- the renewable facility running as you have. My question is more about your optionality here with -- in terms of potential limitations, which are MLP status. So is there some limitations to how -- how does -- does this impact the way you're thinking about monetizing MRL because you're an MLP? And is there some limit to how much cash you can take in? And maybe you could give us a little sense of that. And then also, is there any update on timing, specifically around IPO, that we should be thinking about?

Yes. I think the limitation you may be thinking about is around qualifying income. So sale of Montana Renewables through an IPO or otherwise could be qualifying income. I think there are different points of views on that. So if that's where you're going, that's a possibility. Certainly, the plan always has been to make Montana Renewables a at a certain point in time, at the right point in time. So if that's a step in the process, then so be it. Like I said earlier, I think we have a number of options there as far as sequencing and how we go about that. But we don't see any major, major road stops in monetizing Montana Renewables from our current position.

[Technical Difficulty] too much, because there's tax consequences for your credit unitholders.

Great.

And then maybe just timing on the IPO, it is part of that question?

Yes, I think that's what we're trying to hit on earlier. We've said around Q1, we'd like to be ready. We could probably be ready late this year, but unlikely that the best market is going to be over the holiday season. So our plan right now is to get ready and see what opportunity the market provides us, and if it's early in the year, then we'd be available to take advantage of that opportunity.

And then just moving on to the MaxSAF. I know you said you're going to make a decision by the end of the year. Can you help us think about the capital requirements for that? How you fund it? How does the DOE funding potentially fit into that? And maybe provide an update there as to what's happening with that?

Sure, Gregg. This is Bruce. I'll take that. The ultimate throughput potential of our hardware is the first thing to hold in mind. And we're not sure what the upper bound is because in fossil service, we never filled that unit. We're already substantially above its initial engineering design from when we put it up, so we will find the engineering basis and then we'll stretch it. Our estimates are that's where we get the 18,000 barrel a day throughput number that you've heard us talk about. Optionally, we can install yield flexibility so that, that 18,000 barrels a day can have a mix like the current mix or rotate to -- all the way or almost all the way SAF yield, and that's an incremental capital incremental return decision that we would expect to execute in the field at the same time. So there's two decisions, but we'd like to just do 1 project and have 1 outage to tie it in. That's what's been sorted this year, and by the end of the year, we expect to have that clarified. Capital is obviously contingent on whether or not we add the yield flexibility. So we've floated some super notional ranges in the couple of hundred million dollar source of funds for that. DOE is very interested, cash flow from operations is also sufficient. But if we can fund it that way, we're interacting with the corporate strategy that Todd covered earlier. So by the end of this year, in summary, we'll have our capital pinned down, we'll have our investment basis agreed and we'll have DOE as a source of funds. That is the mainline planning.

And our next question will come from Justin Jenkins with Raymond James.

Great. Sorry, guys, I've just got a couple of modeling questions here. I think over the past few quarters, we've seen a pretty big working capital built. I assume a lot of that is just related to Montana Renewables inventory. But just the progression here maybe going forward on how that unwinds there? Or it doesn't?

Yes, I think you're right. As we've ramped up Montana Renewables, obviously, we've -- obviously, we've built inventory. We'd expect that to normalize over time. This is expensive feedstock, it's expensive product, so it adds up in a hurry kind of on the working capital front. And as we've been building the front end of that supply chain, naturally, we see that. And then over time as revenues come in to offset it, we'll see normalization.

Perfect. And I guess, second question is on managing the RINs liability here in the context of recent EPA decisions and obviously, in the context of you guys producing a lot more RINs here with RD production. Just how we should think about that liability going forward?

This is Bruce, Justin. I think the key is that the obligated parties, which are the downsized Calumet-Montana refinery, which we're referring to as a specialty asphalt refinery now, has got a much, much smaller RIN liability footprint. Shreveport remains about the same. We're simply not very prominent on the RINs landscape. The entire activity around about 29 legal challenges is going to give you the answer, and you're going to find out at the same time we do as the courts rule on these things. So I think I'll leave it at that.

And our next question will be a follow-up from Gregg Brody with Bank of America.

I got cut off there. Just -- is there a timing on the DOE that we should expect in terms of having an answer? Maybe you can talk a little bit about how that process is going?

Gregg, it's Bruce. That's -- the timing is going to be up to them, but I'll tell you that we announced we were admitted into the second part of their application process. The diligence is going well. We have a weekly standing meeting, and the step in front of us would be the conditional loan commitment. That could really come at any time. Again, that's their business and their workload, but we're optimistic that we will have that cornerstone of our strategic balance sheet planning in place this year.

That's helpful. And then just my last one. When you raised the bond deal in June, you talked about a tendering for bonds and actually redeeming the rest to at some point. Curious how you're thinking about that? Is that something we should expect near term? Or are you preserving some optionality there as you think about cash for other uses right now?

Yes. No, we were actually surprised more didn't come through during the tender. And we'll go ahead and move forward, like we said, and call those bonds here in the near future. That's fully the plan.

And this will conclude our question-and-answer session. I'd like to turn the conference back over to Brad McMurray for any closing remarks.

Yes. Thanks, Joe. On behalf of the management team here in the room and all of us here at Calumet, we appreciate your time and interest in joining the call this morning. So thank you for your ongoing interest in Calumet. And with that, have a great weekend, everybody.