Calumet Specialty Products Partners LP
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Calumet Specialty Products Partners LP
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Thank you for standing by and welcome to the Calumet Specialty Products Partners Fourth Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions] As a reminder, today's program may be recorded. And now, I'd like to introduce your host for today's program, Brad McMurray, Head of Investor Relations. Please go ahead, sir.
Good morning. Thank you for joining us today for our fourth quarter and full year 2021 earnings call. With me on today's call are Steve Mawer, CEO; Todd Borgmann, CFO; Bruce Fleming, EVP of Montana/Renewables and Corporate Development; Scott Obermeier, EVP of Specialty Products and Solutions; and Marc Lawn, EVP of Performance Brands. Before we proceed, I will remind everyone that during this call, we may provide various forward-looking statements. Please refer to the Partnership's press release that was 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 our expectations. You may now download the slides that accompany the remarks made on today's conference call which can be accessed in the Investor Relations section of our website, www.calumetspecialty.com. A replay of this call will be available on the website later today. With that, I'll pass the call to Steve.
Thanks, Brad. Let's start by going to Slide 3. Since our last earnings call on November 5, 112 days ago, our team has made very substantial strategic progress. In fact, we describe these 112 days as a milestone period in Calumet's transformation. We closed on the total commitment of $675 million of external capital injected into the company, as well as an extension of our ABL. These well-received and well-timed capital markets transactions mean that our team can focus on delivering our vision of standing up and separating out two best-of-breed businesses, our leading Specialty Products business and, of course, Montana Renewables. Internally, we refer to these milestone accomplishments as Recapitalization 1.0, setting the stage for us to control the timeline and sequencing of the separation and deleveraging of these businesses. As we've mentioned before, we still believe that the most value-creating move for our unitholders is probably for Montana Renewables to be a publicly-traded pure-play renewables company and we continue to progress more than one potential path to deliver that price to our unitholders. On Slide 4, we recap some of our actions. We formed and capitalized Montana Renewables and shortly we'll give you more of an update on where we are with what has become widely known as MRL. We addressed our two most immediate bond holes giving us some very substantial flexibility to address future capital markets opportunities from a position of no urgency. We also started the process of deleveraging the parent. Our business environment continues to improve, although there clearly is current geopolitical uncertainty. With that improvement, stronger expectations of cash flow generation allow us to start to edge our way into selective growth reinvestment in specialties. We'll talk about outlook and growth towards the end. Yesterday, we announced some role changes in our leadership team and we'll touch on that later as well. Slide 5 is our Montana Renewables business update. Strategically, the objectives remain unchanged. One, stand up of leading renewables business. Two, ultimately plan to take public as a pure-play. Three, use some of the value of MRL to delever the parent. Stepping down from the highly strategic to the specific elements of standing up MRL, we are more than happy with our overall progress. On the project, construction, sourcing, etcetera, all continued to track as expected. We have a clear line of sight to our total feedstock supply and a layering in contracts across a range of different materials and time periods to get that right mix of security and optionality that we think should maximize value. Within that procurement strategy, with favorably surprised, with the amount of lower CI feeds that we appear to be able to source locally. Unlike others, we have not advertised low CI feeds as our core advantage and to be honest, we wouldn't be surprised if, in large competitive markets such as the NOLA area, the feed prices tend to gravitate to what we would term CI parity. We believe our core competitive advantages are the everlasting ones of low capital intensity and superior allocation. But if we're going to have low CI feeds to the mix, so much the better. Product placement was several times oversubscribed with strong uptake of interest and we're completing those contracts as well. As we got deeper and deeper into product placement and understanding our customers' needs, we've decided to accelerate our focus on renewable kerosene and have made engineering changes to be able to produce 2,000 barrels a day of RK right from start-up. Yet again, our unique position fuels our competitive advantage in renewable kerosene, as we can and will access both the well-known and very sexy sustainable aviation fuel market but also the less well-known and much less sexy but very real renewable Arctic diesel market. Slide 6 is the results overview which I will cover and then hand over to Todd to take you into the segments. Q4 adjusted EBITDA was $24.6 million, full year EBITDA was $110.3 million. As we've discussed before, the externalities of Winter Storm Uri and the global supply chain were the two themes that dominated our results for the year. Liquidity is strong with us closing the year revolver undrawn and $334 million available. So with that, I'll hand you over to Todd for a deeper dive. Todd?
Thanks, Steve. Let's start with our Specialty Products and Solutions segment on Slide 8. In the fourth quarter, we generated $25.5 million of adjusted EBITDA, compared to $46.3 million in the third quarter. The largest driver of the variance was the reduction of material margin as we saw some specialty margin easing from the all-time highs we saw last quarter. Specialty margins were quite strong compared to the normal winter period and we saw a little seasonality return to this business late in the quarter. Similarly, our fuel and asphalt margins experienced the usual winter margin squeeze as the market switched to winter formulation. That being said, December's average Gulf Coast 2-1-1 crack spread was nearly doubled the level that we ended 2020 with and as the fuels margin outlook trends positive, we are back to that normal state where the ability to produce our own specialty feedstocks in Northwest Louisiana while producing fuels' byproducts is the meaningful competitive advantage. We expect this trend to continue given the incredibly tight supply of global energy and the cost advantage that domestic producers have relative to the price-setting European and Asian refiners given their cost of natural gas and ultimately, hydrogen. This domestic advantage is also very visible in the specialty markets. Earlier I mentioned that we have seen some specialty margin easing from all-time record 2021 levels and we expect that to continue. But at the same time, we expect the high global hydrogen cost to strengthen export markets and provide margin support compared to historical norms. On a full year basis, Specialty Products and Solutions generated $104.6 million in adjusted EBITDA, down from $151 million in 2020. We've talked a lot about Winter Storm Uri over the past year and the estimated $70 million of damage this storm did was really the event that shadowed over the whole year in this segment. We are glad to have that fully behind us. Let's move to Performance Brands on Slide 10. We generated $3.8 million in adjusted EBITDA for the quarter, down from $6.8 million in the third quarter. For the full year, Performance Brands generated $33.9 million in adjusted EBITDA, compared to $61 million in 2020. If we summarize the results, there are three key items that define Performance Brands' 2021 performance. First, raw material and packaging cost inflation outpaced the rate at which we can pass-through price increases, particularly in our consumer channels. This lag is a phenomenon that will come and go but it will balance in the long run. You'll remember it helped us to the tune of $8 million in 2020 and that reversed in 2021. Second and most impactful was the global supply chain crisis. In our other segments, we were able to temper the impact of supply chain but it hit Performance Brands hard. Early in the year, it impacted us across the board as we struggled to get anything from labels to steel cans. The team worked through the majority of the broad systemic challenges and the second half of the year was headlined by two specific matters. Chemtool, one of the largest grease suppliers in the business and our largest grease supplier, suffered a catastrophic loss of their entire facility and Lubrizol, our largest additives supplier has had us on force majeure for over a year now. We've discussed our quality standards before and these high-performance specifications caused us to be very cautious about changing elements of our formulations and it takes us longer than others to do so. We're happy to say that we now believe enough high-quality alternative feedstocks have been gathered that we expect to meet demand from this point forward. It is still a bit uncertain whether we'll receive enough supply to meaningfully eat into our order backlog but we do expect to start building which is a welcome change. These alternatives are roughly 30% more expensive than our typical supply. So while we're thrilled to fulfill more customer demand, our margins will be challenged until supply is back to normal. I've mentioned cost inflation and supply chain issues and the third highlight is a positive one. Demand was exceptional in 2021 and it continues to be the case. Given our supply challenges, we've been forced to measure demand growth through our order backlog, instead of the shipping log and that key reached $34 million by the end of the year which is 3x higher than normal historical levels. One example, despite the year's challenges, TruFuel volumes grew year-over-year and in December, the product line set an all-time sales order record. You'll remember that, to meet growing demand for larger volume containers, we introduced the 2.1-gallon offering in 2021 and we're happy to see it performing. Looking forward, we have some challenges remaining early in the year but we do expect to reach normalcy within 2022. We've seen costs easing and our margins continue to catch up. Steel costs have rescinded [ph] and feedstock costs have plateaued. That being said, we're cognizant of the current geopolitical environment poses a risk of a new round of cost escalation. On availability of supply, Lubrizol recently notified us that our force majeure is being extended through June of 2022. Now that we have introduced replacements, we expect availability to continually improve but it looks like margins will be somewhat squeezed through the first half of the year. Last and excitingly, we expect volumes to meaningfully grow as we believe we can now keep up with demand. On Slide 12, you'll see that in Montana, we delivered $9.1 million of adjusted EBITDA in the fourth quarter versus $24.4 million in the third quarter and $6.4 million in 4Q of 2020. We experienced normal seasonality in Great Falls as gasoline and asphalt demand in the Rocky Mountains is typically low in the winter. Further, we previously reported a hydrogen unit outage during the month of November that led to unplanned downtime for the plant. We brought both the hydrogen unit and the facility back to full operations in December and have been running well ever since. Before I turn the call back over to you, Steve, I just wanted to say that it's been a pleasure being your CFO. I know we are both grateful to so many, our analysts, investors, vendors, customers and ultimately, the great Calumet employees who have made the past couple of years at Calumet a true success. And Steve, well, I know you're not going anywhere, I think I can speak for everyone when I say thank you for your leadership and commitment to Calumet as our CEO. And with that, I'll turn the call back over to you to talk 2022 outlook.
Thank you, Todd and thank you for the very kind words. I'll briefly touch on the transition announcement we issued yesterday, one that has been well received by major unitholders and key partners and then I'll conclude with our outlook. The most consequential transition event is Fred's decision to retire from our Board as Chairman. Fred has been a wonderful leader, mentor and friend to many of us here at Calumet. He co-founded the company, so naturally, we'll miss his perspective, his experience and his expertise. Heritage has been very supportive of management and of Calumet through the years. So firstly, I wish Fred all the best and thank him from our entire Calumet team. Thoughtful and planned transitions are important to Fred and we've approached this one in exactly that manner. Secondly, I just want to reiterate that this is the same management team, although roles are changing. I look forward to continuing in an executive capacity as well as Chair of the Board. We have a great group of directors and a great management team running our business. And third, Todd's going to do just great. It's going to be an easy and smooth transition. He knows as much about Calumet as anybody in the company. He has been here a long time, has deep experience across basically every one of our businesses. He's sharp, he's humble and he loves this company. He's going to be an excellent CEO and I have every confidence in him to lead us into the future. I would add that our transition is not just about Todd, it's about the confidence and belief in our whole team. The last two years have been pretty challenging for Calumet and it takes a strong and close team to circle the wagons, pitching together and emerge from all the challenges of the pandemic with a transformational vision, one that's created a tremendous amount of unitholder value and should be able to continue to create substantially more. We've got about 1,500 people here at Calumet and I'm proud to have had the chance to work with each and every one, everyone committed to staying the course and rising to the challenge, no matter how daunting it might appear. Okay. In conclusion on Slide 13, I wanted to touch on our outlook for this year and how Calumet is thinking about positioning ourselves for continued growth and success. First, let's touch on our core specialties businesses. As you know, that's comprised of Specialty Products and Solutions and Performance Brands. In SPS and you've heard me say it before, through most of the business cycle, we believe we're competitively advantaged by producing our own feedstocks as opposed to purchasing them. And that is definitely very true in this current market. So while Todd mentioned that record specialty margins have eased, product inventories are shockingly low, demand is solid and we definitely appear to be setting the stage for a solid fuels margin contributions that will at least balance, if not, outweigh the easing in specialty margins. In Performance Brands, demand continues to be strong and we believe that if supply chains recover, we will generate even more value in this business. I'm not going to say we are out of the woods on supply chain issues yet but we have had quite a lot of promising signs. I told you about where we are today with MRL, it's a truly superior RD project. We believe the most value to be unlocked for Calumet unitholders is the path for MRL into the public markets and we will continue to position that business accordingly. We can then use some of that unlocked value to delever the Calumet parent, giving our specialties business a competitive cost of capital and the appropriate leverage to return to growth and reinvestment moat for what is an excellent business. And despite geopolitical uncertainty, we think 2022 has the potential to be a good year for Calumet, one that should generate enough earnings and cash flow to give us the option to begin to selectively invest in growth again. We've budgeted about $25 million or so for improvements to modernize, upgrade, optimize and further integrate our plants. It's a basket of small capital projects that are easy to execute and have high returns. So with that, I'd like to turn the call over to the operator to open up the line for Q&A. Operator?
[Operator Instructions] Our first question comes from the line of Manav Gupta from Credit Suisse. Your question, please.
Hey, guys. A quick question here. You seem to have compressed the timeline of start-up of Montana Renewables. As I understand, this is an economic decision, the margins are extremely good and you want to capitalize on those margins. So I'm just trying to understand if you can help us quantify a little bit what would have been the opportunity cost had you taken the decision to start the facility versus now that the margins are really good, you are choosing to continue to operate it as a refinery and then compress the timeline of start-up, so you'll start everything together once the pre-treatment unit is also online?
Manav, it's Bruce. I'll take a run at that. That might have been about six questions, so come back to me, if I don't cover it all. The compression is, I think you correctly captured. It's very interesting because we think we are de-risking both of the businesses there by staying online for the summer asphalt season and capturing that. We're actually supporting the site economics overall. And then on Montana Renewables, what we had initially envisioned was bringing on the hydrocracker early. That makes more sense if we bring it on coincident with our pre-treater and we're continuing to raise our aspirations for the benefit of the feedstock gathering strategy and the low CI feeds that seem to be coming our way. So, while we haven't disclosed that, we suspect that we're going to do better than what we've advertised.
Thank you for taking my questions. I'll turn it over.
Thank you. Our next question comes from the line of Carly Davenport from Goldman Sachs. Your question, please.
Hey, good morning. Thanks for taking the questions today. I just wanted to start on the 2022 capital spending guidance that you provided. Are you able to provide a bit more granularity in terms of the allocations of capital across the segments and maybe, including some of the projects you're considering for the discretionary CapEx? And does the overall budget include all of the remaining spend to get renewable diesel up and running?
Carly, this is Todd. A couple in there. The -- so, I think when you think about CapEx, we think about kind of three buckets and we have the $115 million to $135 million kind of range for the year. We think about a steady-state bucket of kind of $65 million of maintenance environmental, there is obviously some volatility around that number based on turnaround. So this year has kind of higher than normal turnaround spend. As far as segment breakout, we don't break it out all the way down to the segment level but I can tell you the biggest chunk is in the Montana full plant turnaround. If you remember, that's been kind of on the agenda for years now. And that's the turnaround where the full plant comes down and then we do the conversion of the hydrocracker to renewable diesel. So that's a big one. We also have some kind of smaller turnarounds throughout the specialty system that have some cost implications but aren't really expected to have a meaningful impact on sales. If that's helpful? And then we have the -- so that kind of is -- I think about that as a $20 million to $30 million bucket. And then we have the $20 million to $30 million kind of discretionary spend. So these are kind of high-return modernizations that Steve mentioned in the script. And some examples, Shreveport and Cotton Valley, we're doing some spend around some optimization, kind of reliability, utility improvements, doing some electrical work, some integration work, that type of stuff. We're investing in our naphthenic crude oil supply chain to be able to bring in kind of a wider and -- kind of a wider slate of feeds. We're doing some investment at our Shreveport crude tanks, so we can better control and blend specialty crudes. We're doing some automations that will increase white oil volumes out of Karns City. We restarted that whole plant to keep up with growing demand in white oil last year. So those are some that just came out top of my head but give you a feel for, in general, these aren't major risky-type of spend, these are kind of a group of smaller buckets that we think have an extremely high rate of return kind of two year payback-type range and minor controllable spend.
A strong optimization focus.
And then, sorry, just to clarify on that. So, you mentioned the Montana full plant turnaround is included but the renewable diesel, like spend on pre-treatment would not be included in the one that...
That's not included in the range, no.
And then, the follow-up is just kind of a housekeeping item around G&A costs during the quarter came in a bit higher than where we had anticipated. Is there anything that you call out as kind of one-time in nature? Or is that kind of the type of run rate we should be thinking about going forward?
No, I think, in general, we've talked about an $80 million-type run rate for that corporate segment. And I think that's probably still the right guidance going forward.
Great. Appreciate the color.
Thank you. Our next question comes from the line of Amit Dayal from H.C. Wainwright. Your question, please.
Thank you. Good morning, everyone. Thank you for taking my questions. Just with respect to the MRL going public decision, is this concrete? And if it is, can you give us potential timing for this?
I'll take it. This is Todd. I wouldn't say anything is concrete. We're still evaluating kind of a number of options right now. We do think that ultimately at the end of the day, this business is best served in the public market. You probably noticed that you see some things out there alluding to SPAC markets and a lot has changed in that market, that's pretty meaningful I think. One thing that's changed is, that market is kind of bifurcated between real businesses and spreadsheet businesses and that's advantageous for us. I'd say the other thing that's changed is, it's really not a dependable source of capital as redemptions trend up which, for us, is okay. MRL doesn't need much capital. And last, I'd say it's gotten a lot cheaper to do a SPAC. So you think relative to kind of doing a traditional IPO path. So, we think, you really have to plan on receiving very little capital from a SPAC trust. You analyze the cost difference between a traditional IPO and a SPAC and you really compare that cost to the value that you place on accessing the public markets more quickly. So, speed has value to Calumet, we think the public markets have value to Calumet, not unlimited value but obviously expediting the deleveraging of our specialties business and standing up an independent public MRL are both fundamental to our vision. So, CI -- I think that path is when we take seriously, I think we do want to end up in the public markets. It's a matter of time, a traditional IPO path, expedited SPAC path, some combination of private equity investment followed by a future public path, a little bit further down the timeline. So, I hope that helps but try to frame up the options a little bit.
Yes. I mean, this is Steve. I mean, sorry, Amit. Let me just reframe it may be. So the way I would look at it is this. Our base case is that, this is probably a highly IPOable [ph] business, roughly 18 months from now and it stood up and running, right? So that's an easy move into public 18 months from now. In the meantime, it's possible to accelerate it. So as Todd says, SPAC is an interesting option that has evolved in how it works. So, if we have the capital by and large we need, so if we take a SPAC route, it's simply because, at this point in time, the cost of doing a SPAC has dropped dramatically and we wouldn't be doing it for capital raise, so redemptions would be a secondary issue. We'd be doing it as a much accelerated way into the market. So it's possible that we would do that and if you look at the Oaktree transaction, it's clearly designed to facilitate that. And then there's a third strand to weave into that which as Todd said, there might -- there may be private placement at some point in the process. It doesn't have to be private equity, it could be strategic. So, we've got the IPO out there in the future and then we've got these other strands to weave in if we think it makes sense to accelerate the process.
Understood. Thank you for that. That helps us think about the optionality around this asset. And then just staying on MRL, with respect to feedstock, I mean, I'm reading between the lines. I guess, there is some feedstock flexibility over here. What is the go-to feedstock you're targeting near-term? And then what are the other options that you have with respect to this?
Amit, it's Bruce again. The feedstock slate is optimized for our local gathering and we've got a completely different opportunity set than, for example, the Gulf Coast industry. We believe that some of the historical cheap, attractive feedstocks are going to come up, they're going to arb into some sort of CI parity in the large markets and that's going to have an impact on trade flows. So, we've got a pretty good global balance than a North American balance than a microbalance around us. And based on all of that, we're going to run a lot of things. It's kind of like a large crude oil refinery that's got access to 400 different crudes. If you think about it that way, it's going to be a very dynamic price environment. There are going to be opportunities for feedstock sellers that are much, much better coming to us than what they're doing today and all of that plays off of our feedstock pre-treatment unit. It's a next-generation technology and it can run any triglyceride feedstock from anywhere in the world.
Just one last one for me. With respect to the Performance Brands, the $34 million in backlog for this segment, can you give us some color on when this is expected to be delivered by? Is it like next one or two quarters or is it slowly throughout the year?
Amit, it's Marc Lawn. So yes, sort of bringing together some of the things that Todd and Steve referenced during the call. We now believe that based on line of sight that we've got the raw materials coming in to help us to start eating into that backlog, as we would expect that to be going down from here. The costs are still slightly high because we're having to go and source material that we haven't planned for originally as mentioned. So, we're still somewhat in recovery mode on that. And then the unknown quantity within all of this and I know both Steve and Todd mentioned this as well is the geopolitical environment that we operate in. All things being equal, we would expect that to be coming down to a normalized level by the end of the first half but there is still that element of uncertainty. That's what we're planning towards and we'll continue to put the best endeavors behind it.
Okay. Thank you for that. That's all I have guys. Appreciate it.
Thank you. Our next question comes from the line of Jason Gabelman from Cowen. Your question, please.
Hey guys, thanks for taking my questions. I wanted to first ask about the specialties business. Can you just remind us -- I mean, you discussed the competitive advantages in SPS relative to the rest of the market from the integration you have in your Louisiana footprint. Can you just remind us kind of where the competition gets their base oil feed from? What prices that track? And how that gives Calumet a competitive advantage in that business?
Jason, Scott Obermeier here. So -- and Todd can weigh in but just for some background context. So when we think Northwest Louisiana, we're backward integrated in the boiling crude, a lot of the specialty folks are buying raw materials, I'll say, further down that downstream, whether it be VGO or other types of feedstocks. In our case, we've got the flexibility all the way back to crude, not only to control the quality and move around some of our molecules depending on market and customer demand but due to that backward integration, we've got the competitive positioning on the front end of it.
Yes. And this is Todd, I'll jump in just a little bit. So competition kind of depends in what area you're talking about. So remember, our Northwest Louisiana complex is Shreveport, Cotton Valley and Princeton, we make naphthenic lubes, paraffinic lubes and aliphatic solvents. So, we have competitors in the solvents side, for example, that buy distillate, so they're paying diesel price to make solvents, where we're paying crude price making solvents and then sending the remainder of the material to Shreveport to make fuels. We've got competitors in the lubes space is that some buy crude oil like we do, others buy VGO which would obviously be at a premium to crude to further fractionate and treat. So, just wanted to highlight the -- it kind of depends on what business you're talking about. But as a whole, as a network, we have the ability to both go as far upstream as we need to, to optimize input cost and then we also have the ability to optimize between plants as these facilities are all kind of interconnected and in a very short trucking distance to one another. Does that help?
Yes. And then I just had a couple of clarifying questions on the Montana Renewables project. First, you mentioned increasing flexibility to produce renewable kerosene. Does that involve an increase in capital involved in the project? Secondly, you mentioned sourcing more locally available feedstock. I know you have mentioned a $65 million EBITDA benefit from kind of a logistics advantage. So are you expecting that to now be higher given the ability to source more local feedstock? And then thirdly, just on kind of monetization avenues. I appreciate the commentary around IPOs and potential SPAC. But I have -- you've been exploring potential to have another renewable diesel player acquire you. Is there interest you're hearing within the market for maybe operators with a one asset footprint to expand the assets that they operate?
Jason, you bet. It's Bruce. I'll take those in reverse order. So, the -- I guess, last March, we told our investors and you and anybody that wanted to hear it, that we would go this direction and we took 100 phone calls in 100 days that cover the waterfront of possibilities. And as we funnel that down and formed a clear point of view about our superior competitiveness which is both location-driven, that's the $65 million variable cost logistics advantage, as well as capital-driven because we have got the asset in place. So, I will remind you that the capital isn't for the RD production as much as it's for the logistics separation and the things we're spending money on are mostly pretty mundane, techs, lines, rail racks. The one thing that is novel is the renewable hydrogen plant. We're pretty proud of that. And I already mentioned the next-gen pre-treater. So as all that comes together, it's a bolt-on to do a bit more of each of those things, it's a bit more CapEx for oil moving and segregation, it's a bit more CapEx for a small increase in hydrogen. And we're not signaling an enormous turn as much as opportunistically taking advantage of offtaker demand. Backing up to the monetization question again, this is all interrelated, right? So, a complementary operating partner could bring multi-plant synergies and that would be the closer to us that plant would sit the more likely the synergies are a bigger number and that's been proved in a lot of industries over a long time. We're not missing that opportunity. And I think I'll leave it at that.
Does that answer your questions?
Yes, that was great. Thanks.
Thank you. Our next question comes from the line of Gregg Brody from Bank of America. Your question, please.
Hey, good morning, guys. Congrats on all the promotions over there. And Steve, I'll miss you on the call. Todd, looking forward to heading into my Twitter feeds. So, first question for you. I think Brad said something around about a month ago, about a proposed financing at -- in the muni market potentially. I know it's early stages but I'm curious how that fits into your capital raising program? And there was some number in the press release, etcetera, I think $550 million, that seems large. So what do you think about using that for?
Gregg, I'm going to let -- it's Bruce. I'm going to let Todd touch on some of the detail there because it's super interesting and he is leading that effort. But let's pop back up. We -- Steve opened by reminding the group that we took $675 million of capital in, call that Recapitalization 1.0 around the Montana Renewables lever but we're not done. We've signaled an enterprise value for that business to the market that's in our prior public materials, low-2s billion to low-4s billion [ph]. So, as you think about that, the initial capitalization last fall with our partnering with Oaktree which has been a great outcome for us is a mini-bond ladder. So we've got a three year tenure at a $300 million phase and we've got another 10-year tenure of $50 million from Stonebriar. So if you think about the bond ladder for a second, we'd like to fill that in a bit. We'd like to drop something in between and we've got some pretty good ideas there and the muni drops one on the outside is a much longer tenure. So the $550 million you mentioned includes, in 2024, in our business plan a significant expansion and further pivot towards SAF yield wise. So with all that on the table, there's a whole bunch of moving parts for Todd and I'm going to -- I'll ask Todd to color some of that because it is super interesting and the team is doing just a ton of lifting. So it's much, much broader than the muni but you do recall the $550 million correctly.
Yes. No and I'll pile on a bit that, Bruce was right. I mean, the $550 million is a bit of a placeholder. The way these work kind of with the muni tax-exempt bond is, you go out and you say, "Hey, we file an inducement resolution" and you say, "we're going to figure out how much of the supplies we think we know, how much of our plant qualifies for potentially tax-exempt financing". But when you file that inducement resolution, you go out a couple of years and you look at the -- more than a couple of years, you go out -- you got a few years and you look at potential future spend as well. So, I think of it as more of a placeholder than anything else. It's an option. What it does is, it qualifies us to say, "Hey, any spend that occurs that's qualifying for tax-exempt financing from basically December over the next few years, muni bond financing is a potential option for that". So that was kind of the gist of the $550 million. It's not a commitment on anybody's behalf. The municipality, us or anyone else. It's a placeholder and we'll firm up the offering as time goes.
Is it -- I know there was a resolution of intent. Is there so much more you need to go through to be able to tap this opportunity? Or is that something that's available in short-term?
Yes, there are a couple of different steps. The inducement resolution was the first. The second is, how much of our spend qualifies and that's a combination of what percentage of your feed is solid waste feed, wastewater-type investment, those types of things and so that's the second. And then the third phase is, understanding how much volume caps actually available from the state. So it's not just an unlimited supply. The municipality has to allocate their volume cap every year and there is still some work to do on understanding how much of that may be available to us. And again, that can be tapped over a multi-year period. So, that's a little bit of the number we're looking forward like Bruce said, potential future SAF investments, you name it, that this could be an option for.
Got it. And you could raise it on a project financing basis where the facility has gone online, it's more just on the forecast?
Yes. We think you could raise it as a -- the project does not have to be online.
Okay. Just a subtlety here. So you talked about being able to source new supply for the -- for your -- for the Performance Brand business I believe which will allow you to just meet demand. You weren't sure if it would improve you margins. I'm just trying to get a sense of but it would have allowed you to increase volumes. So is there an incremental margin benefit that we should think about that as you grow margins should actually improve just because you're putting more volume to the system?
So, let me kind of clarify a bit and then Marc jump in with some color here. So, it will improve overall margin. These are incredibly high-margin products. So, the margin may be a little bit lower but the fundamental point is, "Hey, we can keep up with volume". And I think you hit the nail on the head there, Gregg. The point is, we want to be able to grow volume. We have the demand. Now that we have supply, we hope to be able to keep up with the demand. Now, we may make 35% margin on that incremental sale instead of a 40% margin, just throwing the numbers out there to represent but it's still a very high-margin business. I'm just saying on a unit relative to maybe a 2020 time period, margins would be squeezed a little bit as we add kind of higher cost alternative feedstocks.
Got it. So is it fair to say about half of the supply side issues is, that have hurt your margins here is addressed with this sourcing agreement?
Gregg, Marc Lawn. So, we believe as we sit at the moment that we managed to cover all of the requirements as we see them today. Now, if we sort of reference just to give you some data points on this is that, the '21 volume was up overall in the year but we're actually tracking a double-digit up in the first half of the year. So you can get some extrapolation there around the impact of those supply chain challenges and how we would sort of expect a normal supply to sort of pan out for 2022 which is implied in your question. The key here is that, we talked again and sort of mentioned it before around the geopolitical piece that we've got to be mindful of in the midst of it all and our aim is, as I mentioned before, still to clear that -- the bulk of that backlog by the end of the first half of the year. And as Todd referenced to sort of circling back to that and hopefully filling out the answer for you is that, the compression is there, we're still in cost recovery mode, as I mentioned but we are expecting those volumes to come back and show the trajectory of growth that we were predicting previously.
Okay. And then just separately, I know you get to pass-through a lot of the cost inflation here but I'm curious, is there -- are you seeing any impacts on your business that's noteworthy with some inflation?
So what we're seeing on an inflationary basis at the moment, Gregg, is that, everything is starting to flatten out. So with that, lag that we talked about before will -- we expect that cost recovery to work it's way through. Now, the unknown quantity in it and sort of plays a little bit to one of the comments that Todd made earlier is that, the forward forecast at the moment suggests that the things will be coming back down again if you look at the indices. However, there's obviously that uncertainty that's out there at the moment. But as we see it, we're working through and that cost recovery mode will catch up.
Yes, this is Steve. I mean, if I could add, I mean, I think simply put, until what happened tragically in Ukraine a couple of days ago, we would have felt pretty good that things have topped out and that at least across the markets that we access the kind of inflation of forces have topped out. Now, who knows, right, as of Wednesday, or whenever it was.
Got it. Have you been able to manage the COVID issues in the first quarter with -- just people maybe not being able to show up to work? How is...
Yes, it's going well. I mean, I think like everybody in the industry, I think we struggled with trucking in the first couple weeks of January is like the entire trucking industry had COVID or it felt like that. But I think both team, Scott's team and Marc's team did a good job scrambling, so it didn't really affect our volumes. And I think like the country, we've just seen cases collapse. The last report I saw earlier this week is in all of Calumet we had one case. So we feel good about that and actually, we're also -- obviously, we're really pleased, generally but we're also very pleased because as we can potentially start to ease COVID protocols during the turnaround, we're going to have a lot of people on the crowded site, right? So actually, pushing back the construction work to get out of the winter which we talked about was we thought was a good de-risk, maybe an even bigger de-risk than we thought because we may be able to operate with more lenient COVID protocols. I mean, obviously, we'll comply with CDC and local authorities and all that good stuff but for us, COVID looks like it's in the rear-view mirror right now, not onward.
And then last one, it wouldn't be a call with me on it, if I didn't ask you this, your thoughts on RINs and any insights you might have on developments that are worth pointing out?
Gregg, it's Bruce. I put the Corporate Dev hat on for a second, I'll set the Montana Renewables hat down. So the EPA's public comment period closed earlier this month and they're off digesting all of that. There are a whole bunch of, a thicket of conflicting legal activities all over the place and they're going to have to pick their way through that. They're under court orders to answer certain questions by certain dates. And so, I think, the first half of this year is going to bring more clarity at the agency level. We're sympathetic for the struggle they have trying to manage all of these conflicting stakeholder groups. That sets up the thing that may be should be more interesting to all of us which is the congressional renewable volume statute is going to sunset. And so, we are at the early stages of a lot of conversations with legislators, Senate Committee on the environment held a hearing, I would direct your attention to the transcripts of that about two weeks ago and we think there's going to be a lot of bipartisan support to help the agency to norm these things. And so, we're optimistic this year.
That's great. Thanks, again, for the time guys. And enjoy your weekend.
Thanks, Gregg.
Thanks, Gregg.
Thank you. This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Steve Mawer for any further remarks.
Well, thank you very much for joining in on the call. We really appreciate it. Really appreciate your support and warm over the last two years. This team has created tremendous amount of unitholder value. We clearly see the potential to stay with our vision and execution here and create a lot more using the same team in different roles. So, we are excited and want to wish you a great weekend. Thank you very much.
Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.