Change Makers: Travis Windholz, CFO at Conduit Power

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Hill Vaden:

All right, welcome back to EnergyCents, an S&P Global Commodity Insights podcast covering all topics on the intersection of energy and finance. This is your host, Hill Vaden, here with your other host, Sam Humphreys. Sam, how's it going?

Sam Humphreys:

I'm very good, thank you. I had a bit of FOMO today as you had our guest in the Houston studio. It was like the first time in a while, but yeah, had proper FOMO.

Hill Vaden:

Yeah. Well, it was nice to have you virtually. How's that?

Sam Humphreys:

Yeah. I always hate that.

Hill Vaden:

And our guest was Travis Windholz, who is the CFO of Conduit Power, which is a independent power producer working with distributed generation assets, gas-fired reciprocating engines, primarily around West Texas and the Permian Basin. And they've done a good job identifying value in low-dollar gas molecules and converting that to electricity. Can you talk a little bit about things that maybe listeners should keep their ears open for?

Sam Humphreys:

Yeah, so firstly, there's a lot of acronyms, but I think we got them all, just to give a heads-up. But this was really interesting conversation. So the interesting part about this company is it's kind of, what, two main pillars for its business model, which is... How did he say this? Behind-the-meter and in front-of-the-meter. So this two-pronged approach to kind of having folks off-grid and having a reliable power source and then sort of utilizing the power source, the grid, effectively, which has been really interesting. And they are, like you said, very focused within Texas and the power markets there and the oil fields that we have gotten, the gas associated with those fields. And it was kind of an interesting discussion to see how it could also play out in maybe other regions within the US potentially one day. But it was really interesting to see how they're growing and how they're scaling. But what about you? What were the key takeaways you thought of?

Hill Vaden:

Yeah, I just think that they've done a really good job allowing a gas producer to share in the upside of allowing that molecule to become an electron, right? And in West Texas, gas is often generating $0 because the oil pays for the well, yet there's a need for more and more power and molecules can be converted into electrons and Conduit has created a kind of paper capacity market around that and it's really an interesting innovation. Travis has a much better job describing it than I do. So we'll hand off to Travis now.

Sam Humphreys:

Enjoy.

Hill Vaden:

All right, well Travis, first, thanks for joining us. And second, thanks for joining us in the podcast studio here in Houston. And I'm hoping that Sam has some kind of human guest envy because oftentimes she's got guests in London and-

Sam Humphreys:

I do.

Hill Vaden:

Not often, or not as often do we have guests here in Houston.

Travis Windholz:

Well, I appreciate you having me on the podcast. Thank you.

Hill Vaden:

Yeah, thank you for making the trek down here. I mean, Houston to Houston, so it's not too far.

Travis Windholz:

Not too far.

Hill Vaden:

Well, we are here to talk about Conduit Power, which is one of the more interesting and exciting companies. There's a bunch of natural gas distributed generation companies down here in Houston, Conduit being one of them, doing interesting things around the oil field and things around AI. So can you walk listeners through what Conduit's doing and how you're involved?

Travis Windholz:

Yeah, absolutely. It's funny, the world we are in now, power's exciting again. For the longest time, power was not the exciting business to be in. So Conduit Power... We started Conduit Power right around three years ago with a thesis around providing behind-the-meter power, taking oil and gas companies, midstream companies off the grid, providing that through long-term behind-the-meter power solutions as one silo. Second silo is building distributed generation front-of-the-meter merchant power plants, so ability to source low value gas in, primarily Permian Basin, and take that gas and convert it to power installed into the grid. We started off again three years ago. We've now built a company where we have behind-the-meter solutions deployed in the Permian Basin. We have 40-ish projects under development, under what we call Conduit Edge, our merchant strategy. We've gone from, what I call, three guys, a computer, and a goat on an idea and a dream to... We're mid-40s in employee headcounts and just really blowing and going.

And what's really changed since we started, how fast this power market's changed. When we started three years ago, data center and AI wasn't even on the radar. Crypto was, at that point, but data centers were not. And obviously, with the data center, AI explosion has now completely just put gasoline on the fire of power growth. And so we've taken our learnings from the behind-the-meter for oil and gas companies and the need for resiliency and the need for uptime and a low cost long-term solution and have deployed that into a data center strategy which we're actively pursuing.

Sam Humphreys:

So can you explain a little bit more about your business model? You touched on it there, but you have two key strands, business lines, I never know quite what to call them. Conduit Core and Conduit Edge. Can you just sort frame up for people listening, the difference between the two and the two different markets you're attracting there?

Travis Windholz:

Yeah, absolutely. And it's funny, I have a blend of oil and gas and power experience and the acronyms between both of those industries, you need a glossary just to cross reference. So I'll throw out some words and if there's anything that I'm using that is an acronym that's not familiar, just pause me. But when we talk about our two business strategies, so those are silos or business lines, it's a bucket of between behind-the-meter and front-of-the-meter. Behind-the-meter, meaning you're not pulling power from the grid providing power to the grid, it's isolated, it's provided directly to the user of that power. Our front-of-the-meter or merchant strategy is connecting our generation into the grid and selling that power into... Or into the grid and our focus is primarily around ERCOT, primarily, Texas grid system.

Our focus between those two businesses, our behind-the-meter solution is solving pain points for customers. And again, the buckets of those customers, our target is oil and gas, midstream and data center. It's a combination of speed, the market, it's the access to power, it's the cost of that power and it's the resiliency. And so we're addressing customer pain points around one or multiple of those pain points. And those pain points are different between the target customer, meaning oil and gas midstream or data center. But our design solution is customized to meet their needs to solve those pain points. Our front-of-the-meter or Conduit Edge strategy is driven around capturing the disconnect between an excess amount of gas that is in a certain area and our focus is in LZ West as a... LZ West of ERCOT from a power market which overlaps with the Permian Basin. So in the Permian Basin, gas is not the primary commodity that's being controlled and produced.

It's an associated product with oil. So when you're drilling for oil, you're also producing associated gas. So it's not the primary product, but its volume is intense. Up until this recent slowdown in drilling activity, the Permian Basin was forecast to overtake gas production from the Marcellus, which is a core gas basin. So the consequence of that is oil development is causing associated gas to increase, but it's not a core product and the amount of infrastructure and takeaway and the use of that gas is not there. So the demand isn't. So that causes prices to go down. So we have on one side of our strategy, we have a low feedstock product, and then in the LZ West ERCOT market, we have a increasing demand driven by oil and gas growth and now data center, combined with volatility within that specific zone within ERCOT driven by the capacity of wind, which is... We have the largest installed capacity of any state where 80% of capacity is wind generation and LZ West.

But wind is unpredictable, volatile and that causes volatility and prices on an intraday basis. Our model in our Conduit Edge or front-of-the-meter business, is to capture that disconnect from low cost feedstock, moving to higher prices and volatility of those prices and be able to capture what is called a spark spread, the ability to take fuel, generate electricity, sell it into grid on a frequent basis. And generation we use, we capture that on an hourly basis. We're able to turn on and off our units when wind is blowing, prices are low, we're off. When wind isn't there, demand's high, you capture it. It's very different when going back to how the power markets have changed, it used to not be sexy. This is kind of the new Wild West. We have these intraday high volatility. It's not your old merchant model, whereas you wait for a few key weeks within a summer when supply-demand was just very disconnected.

We're dispatching every single day, multiple hours a day throughout the year. So it's a very different capture, that model. We offer, in addition, to just capturing that gas-to-power spread, we offer participation in our capacity to the same customers we're talking to on behind-the-meter. So if you're... Do that, what we call with our edge capacity participation, we offer to these oil and gas customers. They're selling that same gas into market that we're using and they'd love to see higher price, but in order to receive that higher price, you have to get that gas to market. We're creating an in-basin use of that gas and we're able to pass through our structures, to our customers and counterparties, the ability to participate in that gas-to-power exchange. So those are the linchpins of our business, behind-the-meter, direct physical, disconnecting from grid due to those four pain points that I articulated. And then in the front-of-the-meter, general capture of gas-to-power spread and then ability to offer a participation structure to counterparties.

Hill Vaden:

Which I think... I mean, that's one of the thing that I think is so exciting about this company is that the whole... So gas in the Permian Basin is $0 often, right? It can be negative, it can be a problem because it inhibits oil from getting out the ground. It's hard to connect that story from gas in the ground to power in a line or power and whatever. How was that... So Gray Rock Investment Partners is one of your backers, given how the world is kind of oil and gas or power, can you talk about the challenge or the opportunity in blending those?

Travis Windholz:

Absolutely. Again, the world's changed so much since we started to where we are. Three years ago, everything was energy transition. Fossil fuels were out of vogue. My partners, Matt Herpich and Matt Whitaker, we met with Gray Rock in talking about, "We think there's a thesis for a fossil fuel-driven energy transition story." And that's how we started at the time. And that was displacing what was... Because of this overabundance of gas, lack of takeaway infrastructure, the consequences in basin flaring. And so we have this behind-the-meter strategy. We can take flare gas, convert it into power or just generally de-bottleneck the Permian Basin by using gas and basin. Gray Rock, I would say what excited us about our relationship with them then and now is they understand the commercial aspects, they understand the environmental beneficial aspects of energy transition by utilizing fossil fuels because at the end of the day we're trying to find lower cost ways of lowering emissions generally, but economic ways of doing so. And our two strategies directly hit both needs.

So on our behind-the-meter strategy, again, we're using in basin gas to deliver power back to the customer. On the front-of-the-meter, we're taking that gas, providing higher economic value through conversion into power and we're providing more resiliency to the grid by having dispatchable power available for when pure play renewable sources such as solar and wind aren't available. And that's what's needed in the grid. And we're able to do so in an economic way that's not subsidized by any tax incentives or anything like that.

Sam Humphreys:

So you talked there about your backers partnership with Gray Rock. Can you elaborate a little bit further on some more of the partnerships that you as a company have sort of entered into recently? Because yeah, it's a growing company as you've said, and this is kind of an exciting area for you.

Travis Windholz:

Yeah, absolutely. So I'll go back to where we started. Three guys, a dream, and a computer and goat. We-

Hill Vaden:

Did you really have a goat?

Travis Windholz:

I wish. It would be nice to have as our first employee. We had a thesis, we had a white paper. It was clear there was an opening between this major disconnect between gas prices and power and what was happening. We were looking for test case, you're getting off the ground, starting from zero. And so we had a relationship with Riley Permian. I was a... Previous position, I was the CEO of a company called Jumar Energy Capital. Jumar Energy Capital was backed by a company called Bluescape Energy Partners. My partner, Matt Herpich, came from Bluescape Energy Partners. The CFO from Riley Permian came from Bluescape Energy Partners. And so to get off the ground, we went to Philip at Riley and said, "Philip, we think there's these beneficial reasons why you might want to disconnect from..." Their assets were connected into a co-op. Why you'd want to disconnect. And those are reduce emissions by utilizing associated gas or flared gas to power your own operations. We lower prices and provide higher reliability.

Would you let us look under the hood and try to see if we can craft up a case? We did that. We ended up entering into a joint venture with Riley for the development of initially a 20 megawatt behind-the-meter for their Yoakum Texas operations that's now operational. It's been operational for a little over a year, but one of the things we weren't able to address fully is that they had this gas that they're trying to monetize, but our power conversion, they're load at 20 megawatts only using roughly 4 million a day of gas. They have substantially more gas in that. So how do we use more of their gas, capture more economic value? And so we expanded that partnership for Riley to participate in our Conduit Edge, our front-of-the-meter merchant.

So currently, we're developing with Riley... Or developing in Yoakum County behind-the-meter strategy. We're assisting in other behind-the-meter locations for operations outside of their Yoakum assets. We're developing 40 megawatts of front-of-the-meter edge generation facilities in ERCOT with them. It's been a key relationship. We wouldn't be where we'd be without Riley's help. And I think that Riley has been very appreciative of what we've been able to do that's unique and really forward-thinking on how an oil and gas company can really participate in a fast-changing market that now there aren't clean silos between either oil and gas or power. These worlds are [inaudible 00:15:05]... I mean, we have oil and gas companies now trying to move into data centers. Who would've made that statement a year and a half ago?

Hill Vaden:

Well, if I'm a gas molecule, my goal in life is to become an electron as quickly as possible. And I think some of the challenge in this, from the kind of siloed business model that energy is, is creating that connection for the producer to share in the upside of that electron conversion. Can you talk a little bit more about how... Maybe not go into confidential details or anything, but how you allow that upside share to happen. And surely, other of these oil producers with all this gas they want to convert to electrons, this is going to be easier than building a pipeline. Can you talk a little bit more about this?

Travis Windholz:

Yeah, absolutely. It's much easier for them to get higher realized value for their gas. So I'm going to specifically talk about their Conduit Edge front-of-the-meter on this application. So Conduit is... We have little over 40 projects under development in West Texas. Conduit is responsible for all construction operational aspects. We have a full QSC desk which allows for us to dispatch into ERCOT.

Hill Vaden:

It's qualified service

Travis Windholz:

Qualified... Thank you. There's one of those acronyms. That's right. Thank you. One of those... You need like a ding whenever an acronym comes or something.

Hill Vaden:

Right. Like Jim Cramer.

Travis Windholz:

Yeah, exactly. So we have the full soup to nuts ability to take that molecule that wants to be an electron and make that molecule become an electron. Oil and gas companies, for them to establish all that, it's not workable. And so their alternative is, well, build more midstream, hope for midstream to be built in order to move it. So we simplify that out. Here we have this ability to take a lower value molecule, convert it into a higher value electron. What we try to simplify for customer is it's a simple participation in that capacity that we've now built. So what we demonstrate is what that gas molecule is worth here, what that electron is worth over time, the exchange for what that would be worth in a participation through a capacity payment and what that economic split would be. And to go into a level of detail and you can... Please ask me questions for further explanation, but that capacity, we want to make sure we're aligned with our oil and gas participants.

So within that capacity payment, we offer them a structure that allows for them to receive their money back first. Meaning, they pay a capacity, they get a bulk of the cash flow that's generated from ERCOT, they get the bulk of that back before we're making money. Once we've reached a hurdle, then we get to make money. So it's demonstrating that we can do all the hard work on building the plants, operating them and dispatching them, and that we're putting our money where our mouth is too, on the value of converting that gas molecule into that higher value electron over time. And what that allows Conduit to do is... Our goals are to capture that value overall but also to look for ways to build out to scale more and more of these facilities. These are distribution level generation facilities. So we're talking sub-10 megawatts at each location.

And the finance ability and cost of capital is a key consideration, and through this structure, we're able to go to market and lower our cost to capital. So it's an overall beneficial structure. Oil and gas company gets higher value for their molecule, we're able to utilize capacity payment in order to source lower forms of cost of capital. We're all aligned on benefiting from that gas to power exchange and it allows us to scale more quickly.

Hill Vaden:

And so you've basically manufactured a capacity market within [inaudible 00:18:34] an energy only market using-

Travis Windholz:

That's it.

Hill Vaden:

... paper and steel?

Travis Windholz:

Yeah, you said it much more straightforward than I did. That's it.

Hill Vaden:

It's the only working capacity market in the country, it's right here in West Texas.

Travis Windholz:

Well, and I think that's a key... That's an area just worth talking about. So we're focused on ERCOT, the market power market's exploding everywhere with data center and PJM just cleared a capacity market that was outrageous-

Hill Vaden:

330 or-

Travis Windholz:

It's just-

Hill Vaden:

... something, whatever it was.

Travis Windholz:

... absolutely mind-blowing on those amounts. I mean, last year they set a record and it was like 10. I mean, it's just nuts. ERCOT doesn't have a capacity market. We also... Because of federal subsidies, and Texas has become the largest wind producer... Wind is great, wind has displaced dispatchable generations. So we have had, generally speaking, an overinvestment in wind and underinvestment in dispatchable power. In order to incentivize dispatchable power to be built, it has to have ability to get constructed finance. If you don't have a capacity market and you're looking at forward curve, up until recently, you couldn't justify a building of a greenfield power plant. So we have this underinvestment. What that's created now is a dynamic of the ERCOT market has foundational weaknesses and the ability for these high-demand low-supply works that happen... Throughout the year now, throughout hours within the day, we run short of dispatchable power, and ERCOT solution has... The market's responded by building more BESS, which provides some level of-

Hill Vaden:

Battery Energy storage System. Thank you very much. Sorry. ERCOT's responded by building BESS.

Travis Windholz:

The market's responded by building BESS, but BESS has limitations. It's only dispatchable for the amount of discharge capacity it has within that battery. And on average, it's one to two hours. But when you have these peaks of demand or lack of supply on generation driven by wind and solar falling off, that BESS doesn't cover the amount of hours you need, you need true dispatchable generation. Now there's ways to do that. You build greenfield generation, but again, going to building greenfield generation, you have to have the ability to finance that and that needs a long-term view. And that is generally not underwritten by just looking at the forward curve. That's where a capacity market like PJM is more successful in building greenfield projects because they have that capacity market.

So what we've created is we have a speed to market advantage because we're using reciprocating engines to deliver power. Our supply chain is solid and that's... Before we got on the call, we talked about the Gruppo AB exclusivity, but we have a robust supply chain for very quick construction to COD, commercial operating day, for our facilities. And then we're embedding a capacity market, we're creating that capacity market for participants. So it allows us to hit the market need of dispatchable power with financeability that the ERCOT framework isn't providing for. And we've created that through bilateral relationships.

Sam Humphreys:

So you've sort of touched on it, but you're talking about scaling here and the future of Conduit Power and that could look like, so you're obviously very focused in Texas at the moment and ERCOT, what does the future look like? Are you going to stick within this region? Are you looking to expand into other markets within the US or even outside of the US, potentially?

Travis Windholz:

I'll start with the latter. It won't be outside of the US for the foreseeable future. So we're looking for areas where our market expertise can apply into deployment or for investment. So our expertise around the full turnkey EPC construction of reciprocating engines scaled up to whatever size need for application and that behind-the-meter, front-of-the-meter. Our front-of-the-meter strategy is 10 megawatts and less currently. That's easily scalable up to larger generation sizes. And we look at the market opportunity, in the near term, ERCOT provides everything we need for near term growth, where we see more attractive fundamentals in market. PJM is an excellent market. I mean, it's the one that you have the most demand for, data center combined with a functioning market that is very attractive, but it comes with a major downside. The regulatory permitting in that area is much more difficult.

So you're going into a longer timeline of development in that market. We have that on our radar. It's not our near term focus. We see ourselves growing in two key areas. I'll go back to our business model. Substantial growth opportunity just within Texas, and I'll move that into Mexico as well for behind-the-meter oil and gas midstream. Data center is construction where data center need is needed. So that's not regionally focused. We can move outside region for that deployment. For our front-of-the-meter or Conduit Edge strategy, it's Texas-focused near term. Texas scaled up in size for our merchant and then moving into new markets, applying our analytics capabilities for capturing that spark spread option of low gas, high power or volatility within power.

Hill Vaden:

So can you... Your experience... I mean, data scenarios wasn't on anybody's radar when you and the goat were opening this plant, right? It was very much oil field centric.

Travis Windholz:

The goat saw it.

Hill Vaden:

The goat saw it, the rest of us missed it, right? So the business is changing from really an oil-filled application and you're just finding demand presumably everywhere, all the while, larger CCG, combined cycle gas turbine, that the kit to build anything new is on a five-year wait time. So these modular reciprocating engines, what I would think be in a lot greater demand than they were when you started, is that influencing of the speed to power or like-

Travis Windholz:

It's not influencing the speed to power, but obviously, power generation just generally is becoming more scarce due to the new uptick in demand, where... I'll go to the Gruppo AB relationship and how we got to that point. One would... Key on relationships, a lot of time relation building with the team, articulating our strategy and comfort around it. But what makes us stand out on both behind-the-meter generation, fuel and gas companies and application to data centers is it's not solved by single-source generation technology. The reason why data centers focus on PJM is they tie into the grid-stable. You have the uptime reliability you need to maintain an operated data center. When you look at moving that now to behind-the-meter and now applications getting to that same level of resiliency that data centers are accustomed to and now are requiring, you need multiple sources of technology integrated within a private use network or microgrid, and reciprocating engines by itself don't do it. Turbines don't do it. You need integration with that and other generations such as battery or BESS in order to provide that resiliency.

We've learned from our oil and gas experience, how to do that well and how to scale that to data center needs. So what is attractive to a group like Gruppo AB and how we're doing this is that we have fully engineered scalable solutions modular for fast deployment that we can apply to market and we can do that in a cost-effective solution or at least within competition of the CCGTs with longer delivery times that still require BESS in order to reach those availability factors. And so I'd say that's our differentiation. The other piece to this is because we have the fully integrated front-of-the-meter solution is a lot of the,,, the goal of data centers is to be fully connected to the grid. Maintaining and operating behind-the-meter strategy or long-term is not optimal. It's suboptimal compared to sourcing it from the grid.

Well, if you need it for a temporary basis but you've gone ahead and constructed this facility, how do you capture that value? Well, that's what we're doing on our front-of-the-meter business. So it's our ability to take both of those business models and combine them into an offering for a data center that makes it attractive.

Sam Humphreys:

So we always like to round these conversations off with a sort of look to the future in the near term. So if there's a couple of things that you want folks to be watching out for, say in the next six to 12 months in terms of what Conduit Power's up to, do you want to give folks a little taste of what we should be watching?

Travis Windholz:

Yeah, I mean I think the exciting part about it is we have... As I mentioned, we have these merchant facilities that are under construction throughout LZ West. Those are going to be operational. I think it's a sleepy... No one was focused on merchant facilities, definitely not at sub-10 megawatts. And it's , when we started is like, "Can you get it done?" There's a lot of, "You can't do it in a way that makes sense from a CapEx deployment return perspective." And we've demonstrated we can and we're about to do it to scale. I think that's going to be an exciting part of our business. We have conversations that are pretty far down path with data centers. You're going to see us step up with a unique... Not only unique ability to deploy generation to meet data center needs, but within the construct of what that looks like commercially, it's going to be unique. And that's going to mean that we're going to be active in the markets here fairly soon on capital as we continue to scale.

Those are the... If I'm looking... Going 12 months, 18 months, am I looking back at our success, it's been able to... Our partners such as Riley, helped us get to where we're at. Satisfaction and their continued relationship and happiness with that is going to be a key point for us. It's the ability to deploy, operate, and show the success of our front-of-the-meter strategy, success closing on the data center and success and continuing to raise capital to continue our growth. Our stretch goal is to successfully deploy within ERCOT and our focus area. And Samantha, as you mentioned, the other markets, if we're starting to step out in other markets, we've had some big wins here.

Hill Vaden:

There's a lot of guests in PJM as well.

Travis Windholz:

I've read that somewhere.

Hill Vaden:

Yes. There was a whole conference, I guess, last week some of the big players were at, even... The vice president or the president was there.

Travis Windholz:

Yeah.

Hill Vaden:

Yeah. So everybody's catching on.

Travis Windholz:

Yeah.

Hill Vaden:

Your goat had it right.

Travis Windholz:

It's so funny. You hope you go with... You have a solid idea, solid team and execute. It's great when the market comes behind you, but just provides that massive tailwind. But the world we're in, just three years ago to today, has changed and that's what makes this a really fun space to be in right now. It is a lot of the Wild West, where Conduit is positioned as a very nimble, fast, we're a very talented company, that we're not so big yet, that we're not nimble enough to react to these ever-changing conditions that we're seeing in the market. And I think that's really what sets us apart from... It's our creativity and our solutions that we've created to date and our ability to adapt fast in a fast-changing market.

Hill Vaden:

I think it's great. Well, I'm excited to watch what's coming in next for y'all. Sam, anything from you before we sign off?

Sam Humphreys:

No, I've really enjoyed this conversation. And like Hill said, just looking forward to seeing what comes next.

Travis Windholz:

Great. Well, I really appreciate you having me on. Thank you.

Sam Humphreys:

Thank you.

Hill Vaden:

Yeah, thanks a lot.