Bloomberg Audio Studios, Podcasts, Radio News.
Hello and welcome to another episode of the ath Thoughts Podcast. I'm Tracy Alloway.
And I'm Joe Wisenthal.
Joe, imagine you are a utilities analyst.
Yeah.
Fun, and for years you are laboring in the utility analysis mind. Yeah, and you know, we like talking about utilities, We like talking about energy. We find pretty much anything interesting, that's right, equal opportunity interest people we are. But yes, you got to say utilities. For a while, some people would say it was a.
Little POORI no, that's right. I mean for most of our careers. I think if you were utilities analyst, a really big part of your job. And maybe I'm wrong, but I just didn't the popular discourse was like talking about yield relative to treasuries. Right, they were seeing a sort of bond like instruments, et cetera. Maybe a little bit of growth, but real.
Reliable, safe haven ish dividend plays.
I guess totally. And since I know where we're going with this conversation, one of the themes of the last few years has been what I would say is the old industries that were either stable or cyclical becoming secular in the way they grow.
I think that's right. So what is happening now is if you were I don't want to say, a lowly utilities analyst, but you know, maybe a sort of forgotten utilities analyst outside of your sector, suddenly you are very in demand, right because all you hear about nowadays is the AI build out and energy constraints on that, and so obviously a lot of people want to look at it from a utilities perspective.
Totally. I always think, like, what a great luck that some people have in their careers. You know, you could be an analyst and learn modeling skills and all kinds of stuff, and then you get allocated and someone gets allocated I don't know, farm equipment, and another person gets allocated to they wind up in utilities in twenty twenty two, and it's like, man, they're on TV all the time. My old boss at Business Insider, Henry Blodge, it it's like he was there as an Internet enalyst in like
the late nineties. What amazing timing and luck and.
So it's like journalism and the Yeah, it's it's the exact same thing. I started out covering airlines, yeah, of all things, but those were interesting. Anyway, I'm glad to say we do, in fact have the perfect guests. So we're going to be speaking to a utilities analyst, someone who happens to have a very contrarian take on the data center build out and how much energy is actually required.
We've been hearing a lot from people who are very, very bullish on the data center build out, so this will be a useful I love their point.
I love it.
Okay, So, without further ado, Andy Devreese, head of Investment Grade Credit and head of Utilities and power over at Credit Sides, thank you so much for coming on all thoughts.
Thank you the pleasure mine.
So is it great to be a utilities analyst right now? Even better?
Well your your Bloomberg News reporter Josh Saul wrote an article about the how much it's changed for being a utilities analyst now the data centers are here. But to push back, we did have the largest bankruptcy of all time in Enron, Oh yeah, the largest LBO of all time in TXU, which then went bankrupt, and the largest private equity return ever in Calpine twenty five billion, which exceeds Apollos, Lioned, l Trade and Blackstones Hilton Trade. So we have had a lot of fun along the way.
Have you been a utilities analyst throughout that entire timeline? How long have you been doing it?
I started with the first packcast bankruptcy and then went through the second and here we are with data centers, so twenty five years.
Wow, So you really have seen it all. It is fair to say. So, you're absolutely right. There have been some disasters and home runs and utilities. You know, they do get central in the news, obviously with the fires that we saw for example California several years ago, and the court trails about allocation of risk in those situations. You mentioned ron et cetera. But it is also fair to say that much of the discourse in day to
day has been like these are sort of bond like instruments. Absolutely, before we get into that, just like sort of like talk to us about what a normal day is like, and when you're thinking about you til.
It before you know, pre data centers, yeah, pre.
Data centers, five years ago, whatever, Pre data centers.
You're looking at a lot of rate cases of studying, a lot of local news. You're looking at legislation, you're reading you know, dry regulatory documents, and then you're tracking natural gas prices because that's setting the price of power. And then on the federal level you obviously have the renewables displacing coal and that's obviously having a big impact now. So it's a lot I actually think it's a lot of fun.
My impression was always the policy aspect of it seemed kind of the most important thing to keep track of.
Is that right, absolutely, and that's down to the state level, but also the federal as well.
Yeah, we've done a few energy episodes, still trying to wrap my head around the sort of patchwork of that seem to cover our energy infrastructure. But anyway, who should be a.
Little aspy about the way? Like you talk to people in this space and you're like, well, how is this get priced? And they're like, well, are you talking about market or central? It's like, okay, I don't know, you know, it's like are you talking about a rate board or you talk about market prices.
It's so hard anyway, especially in a forty minute podcast, to try to generalize that.
But I love the people, don't get me wrong, those are my favorite people.
Anyway, Andy, what is the mood like at the moment? Among utilities, people, analysts, investors. Wasn't there a conference recently?
Everyone's gung ho on this. So the biggest conference of the year is EI in November and it was packed. I was standing and rolling for some of these presentations. Wow, your competitors at CNBC were broadcasting from the floor the first time. That has probably a sign of a top. So yeah, people are very happy, and it just to
quantify it. Utilities have generally grown around four or five six percent a year, and then that's moved to five to seven percent a year, and now certain names which we'll talk about later are up to eight percent a year, and that's driven by data center growth.
Talk to us a little bit more about that. So what is the I mean, I'm like looking at a chart of the xl U ETF. I don't think it's like done insane, But talk to us a little bit about, like maybe quantify the exuberance for us. So it's like, okay, we we are no longer just in the business of measuring bond proxies and looking at policies, et cetera. There
was a secular growth driver. Talk to us about like the bowl case, and then also how we would see the ball case sort of like how it's manifesting into tradable instruments.
Sure, and you pulled up the graph of the XLU. Obviously it's still a very interest rate sensitive section. Yeah, that's dividends. You can find higher yields and other fixed income instruments. So you know, maybe didn't do so well last year. But the industry argues that as this EPs growth rate goes up to the high single digits, mid to high single digits, that it shouldn't be as interest rate sensitive. So that's the big debate going on with investors right now. And this talk.
I mean, the exo you has done well to ya.
If you zoom out, it looks pretty good. That's my impression of a bitcoin investor, by the way, zoom outoom.
All right, think about you've gotten the end. You've gotten that coupon, right, so like you get so like you might in normal time, just be happy with a coupon. You're getting coupon plus.
I mean, it worked out the Fed zero interest rates for so long, so utilities are the place to be. That's just math. And then as soon as the Fed starts jocking uprates, chat TBT comes on the scene and all of a sudden there's data centers. So now, all of a sudden, you're taking the leg up on growth when you don't need to be so interest rate sensitive.
Interesting. So one of the reasons we wanted to talk to you is because you have that contrarian take on the data center build out, and we wrote it up in the All Thoughts newsletter, which everyone should subscribe to. It got a lot of attention. Your analysis, interestingly, is
just based on some pretty simple math. So why don't you just to start out with why don't you walk us through the calculations that you're actually making to try to analyze how much capacity the utilities are taking on to actually power data centers.
Sure, so, as you said, it's pretty simple math here, so utility, it's so data centers now are consuming around forty five gigawatts of power, and you can switch between capacity and throughput. I'm going to stick with capacity, so
forty five gigabats of power. And then there's lots and lots of third party estimates for where they're going to be in twenty thirty and they center around this, you know, ninety ninety five gigawatts, so you need to add fifty for two thousand and thirty five, there's a lot fewer estimates. You come around one sixty. Now, these estimates, they you know, they're all over the place. They come from sell side banks,
they come from consultants, they come from everyone. Bn EF has one there, I think, one of the best out there, so we use them a lot. So that's on the demand side and where you're going to come out of these. And then you look at the supply, and everyone talks about the demand, right, But then you look at the supply and all these tech are too cool to actually look at the supply and do utility analysis, right, Who
wants to be a utility analysts? You were making fun of us before, but if you look at this.
But when we realize our pity is misplaced. But we were not making fun anyway, it's great.
So you look at the supply and these utilities are tracking all these data centers connecting to the grid because they've got to do a lot of work, spend a lot of money and transmission distribution, new substations, transformers. It's a lot of work, but a boost the earnings growth, so they're happy to talk about this. And so you look at where they're at and where they see things coming, and they've got around one hundred and forty gigawatts a
near term supply. Now, kudos to the utilities. They break out what's firm committed, signed, contracted versus pipeline behind it, because there's a lot of double, triple, quadruple counting. So if you're gonna build a data center in the Southeast, you're gonna tell Duke, You're gonna tell Southern, You're gonna tell Dominion you're gonna build one. So that's the pipeline potential. But looking just at the firm committed whatever they want to call it, you around one hundred and forty gigawats.
Now that's you got a pe adjust So when you connected data center, yeah, when you connect the data center to the grid, you've got lights, you've got cooling. Those third party estimates I gave you are just for raw compute.
Why did you split those out though, because I mean, all data centers are going to need to be cooled down right, what's the point of splitting it out.
I'm not splitting out, I'm just adjusting it downward. Because the third party estimates are just compute. So if you're connecting to the grid. You're going to ask the lights, the cooling and everything. So I want to go apples to apples.
Versus the third party, So what power usage effectiveness or power usage efficiency?
So they're at one forty, so that PUE is down to one ten on apples to apples. So just to go back, you only need fifty on the demand side between now in twenty thirty and the utilities are working at connecting one ten. So the utilities are working on already connecting almost as much as you need by two thy thirty five. So again just to make sure, on the same page, third party estimates forty five gigabatser data centers now going to ninety fives. That's fifty of these
are working on one to ten. They don't give timing for that. Some of it's going to be past twenty thirty. What I'm starting to say is there is a lot of supply of data centers coming and it's very unclear if there's going to be demand for this. So that's the issue there, and then it might be worth pausing that and just saying how we're tracking these things. Yeah, So what we do for the demand side is we use the original AI agent, you know, that is a
Gmail alert the best. So anything that's not on our trade pubs, not on Bloomberg News, we get picked up by a Gmail alert and so then we get all that in a spreadsheet. So that's on the demand side. And then on the supply side we use Diego and that's not a large language model. That's my junior sitting several blocks best of us right now, so he tracks all this on utility calls. Just yesterday, next to Era moved another two gigawatts from the potential into the committed.
And these utilities are chopping at the bit to sign more and more of these deals, and I think it's just going to be oversupply. We're going to overbuild these things.
Just to be clear, the commit the firm commitments, those are signed agreements to actually build this capacity. Yes, okay.
And so I was talking with the CFO of Encore and they made these comments on their call as well. They're owned by Sempra, and I said, you know, no one really believes these DAMA and estimates. Texas is a wald off market, as you guys know, eighty seven gigawatt peak market.
It is the one thing I know about energy Texas.
Is it market?
There?
You go, so eighty seven gigap peak market and the demand estimates or they're going to add thirty gigawatts by twenty thirty. And I said to the CFO of on cars, there's just no way. He said, it might not be thirty, but it's going to be closer to thirty than it is zero. And I said, I just the forward power curves don't reflect that at all, and he said, then they're mispriced. So just for the entire market, just for the benefit of your users, you cannot trade forward power
in Texas on interactive brokers. I know that. Oh that's fair, audience, That's too bad. Everyone's like looking up there, That's what I said.
Great, And this gives us a bunch of technical questions to get into. Let's just keep talking about Texas. Explain to us kind of what the forward power curves are and how you can back out the implicit assumptions that traders are making based on those forward power curves about how much demand there's going to pay.
Sure, So I mean, obviously, if you're gonna go from eighty seven and you're gonna add fifteen or thirty whatever, it is you'd expect that curve to go higher?
How much the curve measuring? Okay, you say there's a forward power, so the forward.
Power curve is a round the clock peak or off peak. There's three separate curves, and the difference between peak and off peak is actually you know, narrowed because data centers run twenty four to seven, so it depends on your North Texas or South Texas and those are in the high fifties.
But what would we be seeing in the curves for like, or is there trading happening every twenty ten.
Thirty might not be so liquid, but twenty seven and twenty eight certainly are.
But there's other energy markets. So if you look at nat gas for instance, although exactly gas traders are really weird about the future's curve in gas, which I don't really understand. But if you look at that, you point out that over the longer term it's downward sloping, which suggests that there isn't going to be as much demand or maybe there's going to be more supply out in the future.
I love it we're morphing into natural gas because that is the main driver of power prices, especially in Texas and the forward curve for gas is much more liquid than it is for power, and the forward curve for gas is inverted. It goes from three seventy to three sixty by the end of the decade. So, as my energy unlest Charles Johnson points out, the bigger driver there isn't data center demand. We're at six pcf day there a lot of people are at at ten twelve. We
can get into that. But LNG exports. We're exporting eighteen bcf day. Now we're going to add another twelve. Like you'd think that curve would be at least upward sloping by twenty five cents. Cents by the way, you can trade that and your attractive broker's account. So that goes into is there going to be a lot of LNG. It starts getting outside of the expertise. But that's what we heard from a lot of clients last week when we went on the road all over New York City.
This is very interesting. Actually want to ask another question about the pure power curve. But since we are on LNG, and then we can get back to the power curve, just setting aside data centers, et cetera. Intuitively, you would think that what is a growth business in the United
States LNG exports. And in fact, one of the sort of policy debates around the whole question of building out LNG terminals is it's going to make gas more expensive for American consumers because now we're going to be competing with European buyers, Whereas when we didn't have LNG export terminals, we were just swimming in it because it had nowhere
to go, nowhere to go. So it's very interesting to hear that, even with everyone acknowledging a booming domestic demand and be the expansion of international demand that downward sloping gas curve.
Yes, maybe, I don't know. Maybe there reflecting world peace in Europe and Russia, LNG isnunacceptable to the rest of the world. That could be a driver.
Then they'd have to rebuild that pipeline there.
Yeah.
But but back to our visual conversation on demand. The reason I was talking to the Encore CFO and asking him about this is he said he's holding two and a half billion dollars of cash collateral postings from some of that demand. And he's like, you're not some you know, Joe Schno startup. I'm gonna build a data center and connect to your grid if you're posting two and a half billion dollars, and he says, and this is what he said on their earnings call as well. You know
that's real demand that is coming. It's it's it's material.
I'm sorry, just now to go back to the power curve, which I get is much less liquid out there. But there are trades that happened. These are price, like, how do you infer volume from price? Because these are price, we.
Don't get the volume. But it's a it's a yearly curve, and then right before the year starts us listen to twelve month curves and then it goes into weekly before.
What I'm saying is, how do you infer what it expected volume in twenty twenty eighty. It goes from a price.
Curve, Sure it's flat, it goes up a dollar from here to twenty thirty. Whereas if you're going to add twenty percent to your group demand and you'd expect it to go up, okay, several dollars a right gas side, I'd want to see forty cents fifty cents.
I assue what you're saying, okay with pat.
And then just to go back to the fore your upper fifties in Texas, low sixties for peak, and the data center companies are paying ninety five. So Vistra just did a deal off tenny five dollars a megab an hour, okay, for round the clock. So Vistra contracted out its commandche peak plant Texas ninety five dollars a megab an hour. So big Tech is paying a very pretty penny. You can argue some of that's for the CO two free aspect of it, and some of it's just a lock and the supply.
So just to go back to the math and your overall argument, I mean, you're basically saying that utilities are already committed to building out. I guess twice as much capacity as is forecast to be needed by twenty thirty. So wildcard to me seems to be the demand forecast, right,
and we're already seeing those change pretty wildly. I know you mentioned Bloomberg NEF, but you know they've raised their forecast because of the data center build out, so they've raised their forecast of how much energy is actually needed. How much confidence do you have in those demand numbers and how could they change over time?
Moderate confidence. But like, look where we're at now, Like open Aye built all of CHATCHYBT using two gigawatts. All the big tech hyperscalers they haven't given their twenty twenty five volumes yet, but if you take their twenty twenty four volumes and then double it, and this is output. So I'm going to transfer it back to capacity and you assumer sixty percent capacity factor. All the hyperscalers combined around fifteen gigawatts, and that's got to be over half
the data center demand. So to talk about ninety five gigawatts, I mean it's a staggering number. And then you get more advances in you know, Navidia chip efficiency. Yeah, obviously Jevins paradox kicks in. You've had numerous guests talk about that. It's just a lot of power, a lot of power.
Can you just remind us one gigawatt is enough to power what I like these comparisons.
There's a million homes, but it depends if you're in Florida or the Northeast, but generally speaking that's.
Where you're at. Not only do I find electricity markets, so in market structure and electricity very difficulty at my head, around. Even after all of these conversations, I have built no heuristics or intuitions for what these A gigawat kill a lot mega like you say these things, and I know gigawats bigger than a kill a lot like what does
actually mean? And then the fact that even there we're talking about the difference between a gigawatt and a gigwot hour and the like, I've yet to develop the sort of intuitions that I haven't.
Haven't you seen back to the future, Yeah, oh, there you go.
We got to print out, you know, a little tape like the way we used to do for credit ratings the financial crisis. We need that up there. And actually credit ratings are going to be interesting from a utilities perspective as well.
Could I just ask, you know, obviously one of the sensitivity is in general with all of thics, data center and utilities, is this view, and I think it's kind of overstated. Is the average ratepayer going to end up paying for a lot of data centers or we'll raise our electricity bill? And I understand, like these are complex
questions and the math isn't so clear. And also from what I understand, the emergence of a data center can actually lower the consumer's electricity bill because there's just that simple math, which is, if there's more buyers splitting the cost of the buildout, than actually your price tag can
go down. But in the scenario you're laying out in which there's a bunch of upfront capital investments and everyone is very excited to build it out and at cart wires and you have to buy transformers and gear and all this stuff, if the demand does not materialize is expected, that does sound like conditions in which we could see consumer rates.
Go up absolutely. So that's what we're spending all our time on. And it's state by state, and even within the same state, you've got numerous jurisdictions. So is it legislatively mandated or is it done by a rate case or in the case of Northern Indiana, have the companies themselves data center companies themselves gotten ahead of it and said we're going to put in a solution where rate payers are absolutely protected and get money back. So you
look at nice source with Midwestern Utility. They own Northern Indiana Public Service NIPSCOE, and they've got a deal where they've got an inside rate base they've got a separate gen Co. So they and that Genco is doing a deal with Amazon and they're going to kick back a billion dollars over fifteen years two rate payers. So rather than have a debate, oh who's funding what it's like done and you get sixty seven million dollars a year and that's the blueprint, that's the gold standard.
Yeah.
I keep in mind, six months before that Genco was launched, nice Or sold twenty percent of Nipsco to Blackstone. So you could argue Blackstone said, hey, let's go ahead and do this. And then the utility right north of Indiana or northeast of the Indiana is Ohio, and the CEO of First Energy is a next black Stone guy, So maybe they look at doing a GENDO or something like that. That's pure speculation. I have no idea pack gas specific
gas electric. They've done a deal where they've got rates in place that protect presidential rate payers Amerin has, but a lot of utilities don't. They don't have these protection.
The point is someone if it turns out that there's an overbuild and there's not as much demand for it, someone's paying for it, and it either it's going to be the customers or perhaps the utility shareholders.
I mean, you just the political risk of having mom and pop bail out, you know, Mark Szuckenberg, Jeff Bezos is just you can't have that happen. But again, six months ago this was coming up on the tail end of conference calls, and now these utility CEOs are having in the prepared remarks, so I'm pretty confident they're going to figure it out.
You mentioned Blackstone just then. I do want to talk about who is currently making a lot of money from the data center build out, but just to stress test the thesis a little bit more, because it is a contrarian take, and so I think we should ask a bunch of questions about it. But does it take into account time lags for projects? So I think, you know, capacity build out in the energy sector is notoriously bureaucratic. That is one thing that Joe and I do actually
know about the sector. Is it possible that a lot of these committed projects actually take much longer to get working on the ground than currently forecast.
I think the delays will be on building the new generation, not the data center. So data center takes two three years, Even if that slips to four or five years. The power plants take six seven years, and as you know, you can't get a g Rnova gas turbine for years and years, which is obviously a bullish backshop here.
Yeah, talk to us more about that element of it all because building out that let's if you overshoot on production, then that's a problem in itself. If you overshoot on production at a time when it's gotten really expensive because there's massive inflation in the construction sector, that's an even greater problem. Talk to us just about like, per any giving unit of productive capacity on the utility side, how much more expensive is it gotten and what do you think we're casting for that?
Sure, so to build a combined cycle gas plant ten years ago is one thousand and twelve hundred kW to build. Then it got to two thousand. Then utility analysts like myself, I was like, WHOA, that's insane. Now we're up to three thousand, and then it's like, who's actually spending this? But that three thousand dollars a kW for a new gas plant compares to the data center itself that cost
forty thousand dollars. So for Big Tech to spend another three to lock in their gas price, its their fuel source. It's like it's nothing. Oh, it's to Minimus, which goes back to the output four powers fifty five sixty and pick TeX's paying ninety five in the grand scheme of things. So the cost of the data center, it's nothing. So that's why our utility and just jaw dropping on how shocking it is Big Tech's willing to pay these amounts.
What about if you don't measure production of new plants and dollars, but new plants in time and again, if you're talking about okay, well we can't get this turbine that is several years ago we could have got delivered next month. How much longer are these projects taken?
So if you can figure this out, I think you're lusing this. If you figure this out, you can make a lot of money. Because obviously Inflation Production Act had enormous I'm going to vibe.
Code a thing to figure it out.
Keep going an inflation Production Act, enormous tax credits for renewables, and then the one big beautiful bill. Obviously clip those if you're not aligned by a certain date. So all this data center numbers are weighted towards the end of the decade, whereas the new solar is right here, right now rushing power prices. So you actually want to be a little short power for the next few years and
then flip to being long. And if you can figure out when that flip is, you can make a lot of money in either the forward power curves or the natural gas curves. But as far as your original question, as I said, data centers two three years to build new power plants, four five, But then you don't need as many new power plants as everyone's saying. So Constellation CEO set on a call the other day he said he used the Texas market. He said, eighty seven gigawat
peep market. You could add ten gigawatts to Texas tomorrow, which would be the equivalent of sending every single Navidia chip for an entire year to Texas and running them twenty four to seven. That's ten gigawatts because you can run it right now, existing grid, existing plants, for all but forty fifty hours a year. We stress tested it. There are some coal plants that can ramp up capacity factor.
There's plenty of gas plants that can. So I don't know if it's forty hours, one hundred hours, one hundred and fifty hours, But it makes more sense to pay someone else not to run their chemical company, their refinery company for forty fifty hours a year, rather than have the utilities go out and spend ten billion dollars connecting far away wind farms. That's the argument. We're sort of
come in the middle of it. But there is plenty of existing capacity on the grid that could ramp up to meet it and then have other guests to point it out on the odd bots, you know, the peak demand of the grid is eight hundred and fifty gigawatts, the overall size of the grid is are twelve hundred gigawatts, and then you're adding fifty gigawatts a year of solar, and then you're gonna start adding twenty gigawatts of gas.
I mean, we're gonna handle it. I'm not really worried about any rochesters or anything.
Oh yeah, talk to us about regional transmission, because this is something that we hear a lot. It's not necessarily the power generation that's an issue here. It's the transmission, which the US you know, seems to struggle with to put it mildly.
So there's regional markets MISO, Midwest, the Mid Continent.
ISO.
These guys are tired the most amount of coal, so I think they're going to be in the worst shape. And then Texas, and then it depends if anyone builds anything in New England. New England's got the faraway more expensive power prices seventy dollars the rest of the countries.
You know, I'm well aware.
Yes I have two because I live in Connecticut. So if anyone builds a data center in New England, they're going to be the tightest. But after that it's really MISO and.
No one's building data centers in Vermont where they occasionally have to switch over to oil and wood, right.
I mean they ISO New England app, which we all have on our phone. Right, they were getting forty percent of their power from oil.
Yeah.
Yeah, the cold snap the other day and it's tough to talk about New England power without talking politics, and we're not going to go down that. So transmission is very important because you've got to connect all these far away renewables to the grid.
You said something that I think is actually kind of important. There's this narrative meme you know, people talking about the AI race US versus China, and that one of the things I've seen people say China is going to win because they could just build out power more easily than we can. It sounds like, I know you're not an ai an list, but sounds like from your perspective, we don't know like what it means or who's going to
win US versus China. But then from your perspective, power is not going to be the decider.
Here, not in China. It's not, but it doesn't.
You said, like, you know that we could ship every current with existing capacity. We could put every in video chip in Texas today and we could run them for fifty hours for all the all exception of a few really hot hours in the summer.
I like the imagery of all the invidio chips going on a field trip to Texas, Texas.
But it sounds like to your view, that really isn't going to be from the US perspective, that won't be the binding constraint.
It's it's going to be a little tight. But I'm not one of these dooms theors. Oh, it's the absolute gating factor. It's all going to stop. I was in Shenzhen, China last year, and a robot got in one floor and the elevator went up and got off another one, Like, what is going on here?
There's another reason we wanted to talk to you, aside from your capacity analysis, which is one of the interesting things that's been happening in the credit market is obviously private credit has been a big story for the past few years, but now private credit is getting in on the data center build out as well. There's sort of, I guess, getting on your turf a little bit in the public bond market, But what sort of activity have you seen there?
Sure, so we think that's where the risk is going to is going to happen. And frankly, Bloomberg News broke the story and Pimco made two billion dollars on day one loaning to the Meta data center in Louisiana. So they priced twenty five billion dollars debt debt at two twenty over treasuries and it immediately started trading at one forty and handed Pimco two billion. Great for Pimco, but then everyone else nice to be Pimco. Is nice to
be Pimco, especially the weather in Newport Beach. But everyone else in private credit is like, oh, these guys just made two billion dollars, we need to start lending to data centers. And we all know how this ends. Covenants start falling, great start falling. And again, if you're big tech, who cares if you overspend? Like you think AI would be all end all, you've been overspend. It's when you
get down to the second tier. The QTS is the vantages of the world, and then you get down to sort of the ones below that, and you get like, you know, the core weaves and the nebiuses of the world, and you know there's a lot of shorts going out on Equinix, and obviously your guest Jim Chanos, and it's all about the chips. I'm not going to get into the chip debate, but it's interesting you look at a core even they got a fifty billion dollar market cap.
That's a real company. You're gonna be around for a long time. But the bond market is saying we want a ten percent yield to win you twenty and thirty paper. You might not be a real company. And if you look at our supply demand outlooks, we're kind of in the camp of the bond market. But timing, which you mentioned earlier, Joe, is so key because this data center is you're gonna ramp for a couple of years, and the oversupply is really a twenty thirty event. So good luck timing that one.
You said something you talked about that Pimco Meta deal, and this question has come up, and I still don't think got a totally satisfactory answer to it. Meta is a very highly rated company as you see it as a credit analyst. What is it about the private credit you know to talk about, Oh, it's flexible, et cetera. But your two twenty spread over treasuries is not nothing at all and is real? Is that two twenty spread really like worth it for like a little bit more flexibility,
et cetera? Like what are they paying for exactly in the private credit market that they couldn't get it cheaper? I would think in the public bond market.
I don't know, but I could speculate. There's okay, couple if the metal question is why did you put this off balance sheet? Yeah, so you've got the state of the art data center with the best Navidia chips out there, and you're a tech company in AI is the be all, end all for everything. Did you kick it off your balance sheet because you didn't want to damage your balance sheet?
But the agencies are imputing it, but maybe quant funds running their screens, they don't impute that, So maybe that helps. Or maybe you didn't want the depreciation running through your income statement, maybe that helps, or maybe you want to walk from this thing in five years. I don't know, but one of those is definitely the reasons, because why else would you pay that much bigger spread one hundred and fifty BIPs over their borrowing costs.
But so the key thing is here when you talk about that pimcoat meta deal, technically this is not meta debt. It is not it's okay, right, okay, So they create a vehicle, they're not gonna okay, that's I think that's an important element that they're not just arbitrarily paying a lot more for like a sort.
Of and if you read the credit docs, they've guaranteed this debt even if the data center shuts down. But our understanding of the docks is if they sell it, then the guarantee goes away, and so that would create
a little risk. But back to my utility routes. What happens that the data center shuts down for rate payers, and they actually have an explicit guarantee from META to protect rate payers, So they have that a lot of other utilities don't, so a lot of states Louisiana, Mississippi, Tennessee, Texas, they need to do better job protecting their rate payers. And by the way, that's just one line in the dock that could fall away in other new data centers. And that's what we spend our time looking at.
You mentioned the credit ratings just then, So the rating agencies they look at the off balance sheet vehicles, even though it's not officially part of the company's.
Debt, they impute the least payments and include that as debt.
I see, and.
For Meta specifically, they won't do that until the least starts when it comes online, but everyone's doing it.
And then I was just thinking, I don't mean to labor this analogy too much, but you know, you started out by talking about all the exciting moments in the history of being a utilities analyst, and one of those was Enron, which I assume means you know, you have some experience with circular deals. But what do you think about all the sort of incestuous financing deals that seem to be happening between all the various players in the data center industry.
You mean, we'll buy your equity so you can buy our chips.
Yeah.
Again, I'm on the side of bondholders in that one. Just look at the market caps, look at the bond yields, and.
Explain what you mean by that. For so, like people who don't have a Bloomberg, so we've goes people like me who have a Bloomberg but are too lazy.
So these names are going out and yeah in either open Ai or Navidia is going out and buying equity in these neocloud companies. So then they can go out and either supply the compute to open Ai and buy the chips from Navidia. So it's all very circular. And I think the example people used twenty years ago is Nortel was doing this called the vendor financing. So there's a little lot of skepticism on that.
Okay, so we can't do a utilities episode. I know we've been focused on data centers, but we can't do a utilities episode without mentioning nuclear power. What's it going to take to actually get some capacity from nuclear sure.
So obviously the Vogel plant was the last big nuclear plant in the line. Was supposed to cost fourteen billion. It ended up costing thirty two billion. It came online ten years late. No utility wants to take that risk. Now everyone's talking about these small modular reactors, and I think that's what you're going to start seeing is more talk of these. The only way we think a small module actor goes final investment decision FID is if big
tech agrees to do two things. They agree to buy some SMRs and they invest equity in those SMR manufacturers to give them the capex to build.
Which sounds like something they would do to be honest for sure.
And I think that's the only way you get one of these off the ground. And I think if those stocks rally on that deal, they're all shorts because they're already reflecting several of those deals happening. So the big ones are our new Scale and Oaklow and Sam Outman of open AI used to be the chairman of Oaklow and then he stepped down so they could do a deal.
So something along those lines would happen. That being said, Donald Trump has talked about doing work with Westinghouse and taking equity ownership to build another AP one thousand and Obviously President Trump is all about taking equity, but none of the utilities in my coverage are going to build something without some sort of backstock.
We did an episode recently with an infrastructure investor and I, you know, I'm a journalist. I look at the past. I don't talk about the future. But I was put on the spot and I said, I think off the next twenty years. Gun to my head, we will never have another local We're not going to have another project like that in America. And sounds like you agree.
I agree. I do think you see some SMRs. I mean, frankly, our country has been making nuclear submarines for sixty seven years. That's an SMR there. So I think that's the way it happens, is big tech goes in and does that.
For sure, in twenty years, we'll have you back on to see whether or not both of you.
This is my only writer.
Wrong, I don't nothing about the future. This is my only one call. And I just don't think we're going to ever get them right. That's we're not going to get a bunch of those times.
I'm with you on that, and in twenty years hopefully I can dial in from the beach.
All right, we see you in twenty years then, no, probably before because this was a fantastic, this is great conversation.
Thank you so much for coming on off of Thanks for having.
Me, Joe. That was a really fun conversation.
That's super fun. I love that.
My the opinion or framing that I'm sort of coalescing around is that AI can be simultaneously under hyped and overvalued, right and actually throughout history, that's kind of what we've seen with transformative technology, right, Like think about the Internet bubble. The Internet changed the world, but it was a bubble. Think about railroads. Railroads in the eighteen hundreds changed the world, but also a bubble. So I think that's kind of
it's kind of what I think. The key issue, which Andy and you both touched on is the timing, right.
The timing, And yeah, I mean I think it's it's very interesting because of course his argument doesn't even you know, doesn't even rest on any valuations right now. It's like there's all of this expectation for build out there is you know, as he put it, there is a number for the amount of the volume of data centered demand.
There is an.
Amount that's being built up, and he's like, the second number looks bigger, and that's going to be a that's going to be a problem. Yeah, and the time to your point, like I thought, you know, really interesting observation he had was a little bit not tangential to his core idea, but this idea that some of our energy policies are encouraging a lot of production right now, particularly the expiring solar credits. At the same time, a lot of this demand is going to come online in the
back end, et cetera. I do think, you know, it seems like a really definitely seems like a fun space. It's very far from when we were just talking about like utilities as raat proxy. So I think for old people to get income.
Well, the other thing I was thinking about on the demand side is I think there's a tendency among AI bulls vibecoders such as yourself that's right to think that demand is just going to go one way, right, So there's going to be more demand for AI because I don't know every piece of software is going to be replicated through clod code or whatever, and so power demand is going to go up as well. But what we've seen so far is that these things are getting more and more efficient.
They're definitely getting right, more and more efficient.
Like faster than anyone expected.
Yeah, you know, this is a little bit tangent to the point, but I do think like one of the recurring phenomenons that we're seeing across this industry is that every I mean and this is I guess it's a bowl case, which is that you know, even the optimist keep getting turned out to be too pessimistic. The pace of say like efficiency gains for the cost of processing a token dropping faster than people expected this morning, recording to this January twenty eighth ASML the big chip equipment company,
way better than expected. The emails, the benchmarks for the models where it's like the optimists say, like maybe it could code at this level by twenty twenty seven, turns out it hits there by like you know, early twenty twenty six, etc. So like if you want to just make I'm not making any case here, but if you just want to make a bowl case, it's like even the optimists keep getting surprised to the upside. On the other hand, it's fascinating to hear him say, look at
what the markets are saying. They're not pricing in any of these expectations. And I was particularly surprised because I didn't realize this that even like you know, for all of the talk of LERG export terminals, et cetera, that gas is expected to be cheaper a few years. Yeah, no than it is right now. Very interesting dissonance between that and the popular narrative.
Maybe gas traders just aren't vibe coders yet.
Then they would understand exactly how much more of this UH plan going.
To Just from an energy perspective, though, there is a push and pull factor here, right, So on the one hand, everyone could use AI and demand goes up, But on the other hand, maybe it gets super super efficient and then demand goes down. I think that's that's the difficulty, or.
It's just there is a number that's out there. It's like some sort of like some reasonable inferences about where it's going to go, and it's very high. And it was actually very striking listening to him talk about some of those super the hyperscaler numbers, because it's like where is it at up right? As he pointed out, Okay, chet GPT like came out two gig loots, et cetera, Like there are a ton of chet GPTs out there, right,
and that's one of the most computationally intensive things. Like maybe there are reasons to think this is all going to go great, there's gonna be a ton of money made in AI, but you can't really just like get to the number. I don't know, I think he it was this was a very useful perspective, just sort of on some of this simple math, and the math sounds like a subtraction, like this sounds like what the sun is learning about.
Well.
The other thing I thought was really interesting was the response to your question about why would you finance these things off balance sheet if you're you know, this massive cash rich technology giant, and the suggestion there was, well, maybe at some point in the future, like five years down the line, you need to get rid of this liability. You don't want to deal with it.
This is why we did that episode with the guy who has you know, the company doing the legal docs right, et cetera. This is why it's pretty crucial to understand some of these things, because some of the questions sound like Facebook's or Meta's option to walk away. Right, there's some call option implicitly to walk away, et cetera. And they how they what they could do, what scenarios, and what they would allow it to be do is obviously going to be pretty crucial for any investors in this
off balance sheet paper. I did not know until you asked this whole idea that the ratings agency is, well, they don't look at his debt, they do back out a lease cost, and therefore it can inform their overall credit sustainability.
Well, the other thing, you know, we touched on this, but there's more and more demand from investors for data center debt, right, like the space is getting more for some reason, the space is getting more competitive, and so naturally what you see in any other credit cycle throughout history is as demand pros and people are competing for deals, the documentation and the protections tend to be weird.
You know.
I find the existence of hype cycles for debt to be a little bit weird because I get like, oh, I really want to get into AI equity, right, because that could one hundred x next year, right, And it's like I'm really excited about getting into data centered debt because it might maaybe fifty BIPs more I find to be very strange, or one hundred BIPs more. It's like, if I haven't fixed look, I'm a simple, simple guy.
But if I have a fixed income allocation, all I care about is minimizing downside and I don't really care, like what sector it is. I'm not participating in the upside.
You're not going to get greedy, You're not going to get rich.
I gotta get super rich. I'm like, I just don't want to lose my like for fixing COF. I just don't want to lose my money.
Fair enough, all right, shall we leave it there?
Let's save it there.
This has been another episode of the All Thoughts podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway and I'm Joe Wisenthal.
You can follow me at The Stalwart. Follow our producers Carmen Rodriguez at Carmen armandsh Oll Bennett at dashbod and kill Brooks at Kelbrooks Now. For more odd Laws content, go to Bloomberg dot com slash odd Lots for the daily newsletter and all of our episodes and you can chat about all of these topics twenty four seven in our discord discord dot gg, slash.
Od lots And if you enjoy all lots, if you like it when we talk about the data center build out, then please leave us a positive review on your favorite podcast platform. And remember, if you are a Bloomberg subscriber, you can listen to all of our episodes absolutely ad free. All you need to do is find the Bloomberg channel on Apple Podcasts and follow the instructions there. Thanks for listening.