00:00:00 Intro
Welcome to the Power Bytes Podcast, brought to you by Caterpillar Electric Power, with your host Ryan Karlin. Each month we deliver the latest insights, trends, and cutting-edge tools to keep you ahead in the dynamic energy industry. Whether you're streamlining operations, embracing new technologies, or want to stay informed, Power Bytes is your go-to source. Join us as we explore innovation shaping the future and the resources you need to succeed. Welcome to Power Bytes, where energy meets innovation.

00:00:26 Ryan Karlin
Hello listeners, and welcome back to another episode of the Power Bytes Podcast. I'm your host, Ryan Karlin, and I'm thrilled to be with you all today. In today's episode, we're diving into a topic that's been making headlines across various media platforms: data centers. It seems like every time – at least for myself – I open up a newsletter, news app, or whatever medium I use, there's always a story front and center about the explosive growth in data centers. Sometimes I look at these figures and it's truly unbelievable to see the dollars associated with some of these announcements. So that brings us to an important question: How are these customers financing these massive capital expenditures, and how is Cat Finance stepping in to assist? To help answer this question, I wanted to bring in a special guest today, Adam Brown, Senior Manager of Sales for Cat Financial, who specializes in energy and transportation. So, with that, Adam, thanks for joining us.

00:01:21 Adam Brown
Hey, Ryan, thanks for having me. It's good to be here.

00:01:24 Ryan Karlin
Yeah. Excited for the conversation. So first – before we dive in – would love to give the listeners a little bit of background about yourself and your role within Cat. So go ahead and do that.

00:01:35 Adam Brown
Yeah. Great. Thanks, Ryan. Adam Brown, I'm with Cat Financial, close to 30 years with the organization – all of my career – and it's been wonderful. And the majority of that time has been spent on helping our customers grow through financing on the E&T side of Caterpillar’s business (or energy and transportation business), from marine to electric power to oil and gas. It's been a great career – and excited to talk about data centers today.

00:02:03 Ryan Karlin
Awesome. Let's get into a little bit about the data center industry. Could you tell us about some of the underlying trends? I know I mentioned in the intro, some of these figures, talking about not just a billion dollars, but close to half a billion – and things of that magnitude. It's really unbelievable. But could you give us a sense of where the data center industry is at right now?

00:02:25 Adam Brown
Yeah. It's pretty interesting. When I look at how I use my phone and how my kids use their phones now and having an AI prompt come up – and being able to see and understand how that is working in the background since we're involved in this industry – it's pretty cool. When you look at – I pulled some stats just real quick, and when you look at the data center power demands, Goldman Sachs says 165% increase in data center power demands by 2030. When you look at another stat that I read: 15% growth per year in data center build-outs. And then the biggest one (which is probably most relevant to Cat Financial) that in the next couple of years, data center developers are going to need $170 billion to secure for development and permanent financing. $170 billion, right? That's how crazy this is! We here at Cat Financial – and how we can support data centers is pretty cool, and we'll talk about that here in a minute.

00:03:19 Ryan Karlin
Yeah, it is really unbelievable. And just thinking about where the data center industry was five years ago, a site like – maybe a 100 MW data center would be a large site. Now, some of these announcements and some of these customers are coming out and putting out announcements that they want to develop a single project maybe five times that amount. And it just goes to show the overall growth – not just in numbers, but in size of these data centers – is truly astounding. And I think one thing that's really interesting in our industry, Adam, about energy and transportation, is some of these people who may not be traditional power producers – to help meet some of this power demand you talked about a minute ago – are coming to help solve that need. Could you talk about how people – like midstream or upstream gas providers – are coming in and stepping into this fold and helping solve the problem?

00:04:12 Adam Brown
Yeah, it really is kind of amazing to see that. Actually, we were with a customer yesterday who traditionally provides oil and gas services, and they are going full bore and – from growing their asset base to bidding on contracts with data centers to provide power because the demand is so great. We are seeing it firsthand, and that's probably the third or fourth customer this year that we've talked to about potentially doing that. It's nontraditional power providers coming in from all types of different industries, including the midstream and oil and gas sector, to provide the power. It's pretty neat to see. And yeah, we're seeing that, and we expect to see that continue to grow as the power demands grow.

00:04:55 Ryan Karlin
For our listeners, could you unpack why these nontraditional power providers are stepping in to fill the need? I guess, we think – at least in America, we have a stable grid for the most part, for most times of the year, and we rely on that from a day-in/day-out perspective. But why are data centers turning to some of these nontraditional power providers?

00:05:17 Adam Brown
True! We do have a stable grid. Unfortunately, the time to get connected to the grid can take years, right? I think that the average time – depending on the location in the country and what grid utility that the customer is working with, we're talking up to three, to five, to seven years before they can get grid connectivity. Some of these nontraditional power providers are already using power around electrification of the oil field, and so it's a natural – and also if they can use stranded gas, etcetera. So, there's also that angle, where they can utilize some of that to provide power. I think that's why we're seeing those nontraditional folks come in. It’s not only the demand and the utility delay in getting utility grid power – and then the fact that they're already doing some of that in the oil field electrification. So those 3 or 4 things combined for them to come into the market and try to provide a good source of power – and a reliable source of power.

00:06:19 Ryan Karlin
I think one thing, too, to mention is: we talked about the demand side and them having the skills to fill in also on the supply side. America’s positioned – at least in the last, probably, 10-15 years with the growth in gas production – to really be in a state where we have that ample supply of gas, to be able to turn that gas as a resource into power is a key part of part of this story here. So that's a lot about the – I guess, I'll say, technical needs. We need power, obviously, but one of the things that I (leading up to this) probably didn’t think about as much is, obviously, to procure that power. It's a totally different financial structure. A typical structure is, you may pay for some transmission costs to have power from the grid be brought to you and you would pay at a PPA (power purchase agreement) to help consume that power from the grid as you use it. But these data centers, again, for the need to build quickly – and then as you mentioned Adam, some of these interconnects could be years – they're not willing or able to wait years to get connected to the grid, so, again, turn into their own power. From a financial perspective, that is creating a financial shift in the way that they're executing these projects, taking on a lot more CapEx expenses and thus the need for financing. So, what are data center customers (when they're thinking about financing these projects) looking for, and how are they approaching solving that problem?

00:08:00 Adam Brown
Yeah, great question. Again, I said it earlier: $170 billion in assets that are going to need to secure development and/or permanent financing this year alone. That's a lot of money, right? These developers need the capital, and no one lender is going to be able to take the dollars that it's going to require. These developers go to the banks and say, “Hey, we got this facility; we're looking to build. Here's the offtake.” And so they'll work with the lead. These are large banks, well-known, household-name banks, that everybody knows that're putting together these syndicates. They'll go out – and then, again, not one bank or two banks or five banks – they're going to take the dollars that's required to build these facilities. They'll go out to other lenders all over the world and see if they would want to participate in a bank syndicate. That's how Cat Finance assists. If the customers put in Cat generators as standby power and/or prime power, potentially, depending on how the structure is – and that's how Cat Finance can participate. We will usually be part of the bank syndicate up to a certain amount. And, again, usually it equals to the Caterpillar spent. And then typically those are “construction loans” is what we would call those. While the data center is being built, we make progress payments (or the bank syndicate makes progress payments) to the builder or the developer. Then once the data center is built, they usually throw it off into the ABS market where it's financed by pension funds or huge entities that provide funding for the takeout.

00:09:35 Adam Brown
That's how Cat Finance participates, but we can even drop it down to smaller regional data centers and where we just finance the generators. A lot of times there's the Cat generation piece or the backup generator portion is this huge capital investment. Those regional or smaller data center players that may or may not have a big bank syndicate could utilize financing just on the generator sets themselves.

00:09:55 Adam Brown
That's another way on how we participate. And then the other, probably, different way that the data centers are looking for creative financing is they're buying a lot of inventory. As they project out what their data center needs and growth (and as they talk to their off-takers and what their needs are) they can plan out the next two or three years of data centers they're going to build. As part of that, they're going to look at their vendors and their suppliers that go into that data center and the generation – power generation or backup power generation being one of those – and they can start working with their Cat dealer to start planning that out and looking at lead times at the factories, etcetera. They may want to have those generators in hand in anticipation of their build a couple years out, and we also offer inventory lines of credit that allow the data center to go ahead and buy the engine – or buy the generator, and then put it on an inventory line. And then when they need the generator to go into the data center as it's being built, which could be a year from now – once they secure the generator.

00:11:03 Adam Brown
Then they can just pay it off and move to the next one. There's the top three ways: we can do direct lending on generators, we can do an inventory line, and then we can certainly do the bank syndicate. When you look at the industry – and what they're looking for is obviously power. We've talked about that. And then number two on that is the capital: how much money they can get from a financing standpoint. They're obviously talking to equity folks as well that they'll put in equity, but debt, typically, is a big part of a data center financing structure.

00:11:41 Ryan Karlin
Yeah. Thanks, Adam, for the background there. It's really great to hear how Cat Finance is stepping in and bringing their tools to the table and helping customers solve their energy challenges and helping them execute on their goals and their projects. It seems like a great way for Cat Finance to get involved. Could you give us an example of a recent customer who came to Cat Finance and we were able to come to the table and help solve some of their energy finance challenges?

00:12:07 Adam Brown
Yeah, for sure. Cat Financial has been lending into the data center space since 2006. And obviously it was a different market back then, much smaller data centers, not like they are today. This is before AI. And, I mean, you think about the Apple Phone came out in 2006? Around that time, right? So, if you go back in time, the data centers were not what they are today. We had a customer that was a startup, that they had gotten into the business, and at the time the dollars were not that big, and they just needed financing on their Cat generators – the backup generators that went behind the building.

00:12:42 Adam Brown
I think we may have done 2 to 4 generators, and then they paid it off over time and then we grew with them as they started to grow their data center footprint. We provided more financing – direct, just to us, on just the Cat generation portion – and they would finance the rest of the data center in different ways, by equity and maybe another local bank. So, as they continue to grow, they ended up –

00:13:02 Adam Brown
And as I mentioned earlier, they put together a bank facility or bank syndication. And we started participating in that. The bank paid us off on our – just our generator loans, and we then became part of the bigger bank group. As they grew, they got to the point where they sold. Those developers sold off to the bigger data center company. Then there was probably a period of non-compete and then we kind of did it again. So, this person then went back into business, started up another data center, and we were a part of the bank syndicate. We developed a great relationship at the time, as the company got started. And then we grew with them. Then they started up their new data center, and we participated in the bank syndicate, and we have been able to participate in that big syndicate today. They have grown internationally. We looked at some of their international spots outside of the US and are looking at potentially participating in some of those participations as they've grown. And it's just been really a great relationship, taking it from birth to maturity and also seeing a sale within that time. Then just picking up where we left off in a new group and still supporting it.

00:14:14 Adam Brown
And it’s pretty substantial support. We’ve looked at multiple sites. Again, I mentioned the international piece, looking at some international support as well. It’s been a great relationship. The president of this company knows our president, so it's just one of those things at Cat Finance that we try to – we're not a typical bank. We're a relationship lender and very interested in in growing that. It's been just a great example of where we've taken somebody from a start to where they're at today, and they're a large player in the data center space.

00:14:45 Ryan Karlin
Thanks for that, Adam. One thing I probably should have clarified before we got into this is, what bridge-to-grid means. It's a term that I've come to know, and I think you'd probably see in some of the media out there, but I think it's important for our listeners to kind of level set and understand what that term means. Could you unpack that for us a little bit?

00:15:06 Adam Brown
Yeah. As we discussed, because of the lag in getting grid connectivity to the data centers, there needs to be a bridging strategy, right? So, I'm a data center and I need power to meet my contract with my offtake by X date; the grid has given me a date of X; there is a gap between those two dates (typically anywhere from a year to five years). So, “How am I going to power my data center to meet my contract?” That's where they'll come up and talk to a power provider to provide a solution and say, “Hey, can I do this from rental? Can I buy these units so that I can provide power to my data center?”

00:15:41 Adam Brown
And then as I – some of the data centers we've talked to, they want to buy their own power plant and then move it to new data centers as they need, right? Versus a rental solution (which by the way Cat offers both). That's basically it. It's just a bridge until they can get grid connectivity.

00:15:59 Ryan Karlin
Yeah. And I think one thing there that I really take away is there's a lot of ways to solve the problem, and there's a lot of ways that customers are taking on an approach to it. Again, as you mentioned, it could be more of a rental-type situation, it could be more of a permanent installation for prime power, and I think with that, again, comes different considerations – not just from a technical and product standpoint that Cat helps step in and solve, but from a finance standpoint; it's all different. And with that you kind of need to bring different solutions and tools to help solve that.

00:16:38 Adam Brown
Then I think – that's a great point, Ryan. I think the bottom line is if they're looking for a standby or prime power needs, then Cat Finance has a solution. It could provide capital to make sure that they're successful when they get their – that data center, either that backup power or that prime power to meet their PPA requirements.

00:16:38 Ryan Karlin
As we come up close to the end of this episode, just to take us all a step back and see where we're at with the data center industry today and think of where we've gone the past three to five years – if you would have asked me two years ago even, “How is AI and the need for data centers used in my daily life?” I probably wouldn't have had the hands-on experience. Obviously, it was working in the background as I was using my phone and all that, but today with different tools, AI, and the need for data center resiliency and growth is there. As we look forward to the future, Adam, what excites you about the data center industry and where it's going?

00:17:41 Adam Brown
Probably the thing I'm most excited about is AI. When you first heard about it, like you said, Ryan, you're like, “OK, what's this all about?” And now that we're seeing it incorporated in our daily lives, it's pretty neat. You know, I probably shouldn't say this, but I use it now to write my wife's birthday and Valentine's Day cards.

00:18:02 Ryan Karlin
Hopefully, she's not listening. You just gave up your secret sauce!

00:18:03 Adam Brown
I did! So, you know, I've been married almost 25-27 years. I should probably get that date right, but I've been married a bit, and you just kind of run out of words to say, so AI’s been a great tool. I can just put it in there, and, bam, I've got this beautiful message to my wife, and then I fine tune it a little bit. I've seen my kids use it. So, what's the future look like for my kids and their kids someday, my grandkids, right? On how AI  – yeah, there’s some things that you kind of worry about, and you’re kind of like, “OK, how's that going to work?” But for the most part, it's a great tool. Kind of excited to see how that turns out and how that incorporates in our daily life and just the growth as an employee of Caterpillar and a big provider of equipment that goes into these data centers.

00:18:51 Adam Brown
It's just fun to see our business, as we learn to support it better, to understand what our customers’ needs are and come up with creative solutions to meet those needs. It's just exciting as an employee, a longtime employee of Caterpillar, to see that enterprise come around that and try to support that industry the best we can. So, those are the two things: the AI piece and, of course, the enterprise support of the industry are pretty exciting to me.

00:19:21 Ryan Karlin
Yeah. I second that, and I think it's funny: we think about how mainstream – or the adoption rate of AI is coming into our daily lives. I saw an article recently from Sam Altman of Open AI, and he was talking about how when you put in a chat response to Chat GPT – and people will respond back to the to the bot saying “thank you” – how that demand of just that command and the response that the bot will come back with is (he's saying) costing millions of dollars. And it's something that, again, you don't think about. You're trying to work with a Chat GPT bot or whatever, AI interface, or using – but it's kind of the “whole behind the scenes” aspect that I think is interesting, to see articles like that and helps you think about the full big picture there.

00:20:17 Ryan Karlin
Adam, this has been a great discussion. It's been great talking about data centers, talking about financing of those data centers and how Cat Finance is stepping in to help be part of the solution. Lastly, is there anything else you want our listeners to know before we wrap up this episode?

00:20:34 Adam Brown
First of All, Ryan, thanks for your time today. It has been a great discussion – and giving us the opportunity here at Cat Finance to talk about how we support the Caterpillar enterprises, go to market and solutions for our data center customers. As far as what customers need to walk away with, again, just a reminder that we're here for our customers – Caterpillar and both Cat Finance – and just excited to see where the future goes and what the future holds for all of us. And a reminder that we're here to support our data center customers.

00:21:09 Ryan Karlin
Most definitely, Adam. We'll have to – with the pace of things, we may need to have an episode in a year or so to circle back and see what new topics there will be, because I'm sure there will be new topics to discuss! But until then, we'll have to put a pause in it, and we'll have to circle back at a different time. But I really appreciated your coming on the podcast and for our listeners tuning in.

00:21:32 Ryan Karlin
It's been another great episode of the Power Bytes Podcast. I hope you found our discussion as enjoyable and insightful as I did. And, again, big thank you to Adam for joining us and sharing his expertise. Stay tuned for our next episode where we'll continue to explore the fascinating world of energy and technology, but until then, I'm your host Ryan Karlin, signing off. Take care.

00:21:53 Outro
Thanks for tuning in to the Power Bytes Podcast. If you enjoyed the show, head on over to cat.com and check out Electric Power for more exciting content. Let's power tomorrow together.