A major national credit rating agency downgraded Oracle’s rating last week, citing uncertainty about the tech giant’s investments in artificial intelligence. The drop comes just weeks after the company sued Wisconsin’s utility regulator over new credit requirements for data center operators in We Energies territory — a lawsuit spotlighting the company’s financial condition.
S&P Global Ratings, one of the “big three” ratings agencies responsible for assessing the creditworthiness of government and corporate debt, lowered Oracle’s rating from a BBB to a BBB- on July 9. The rating places Oracle on the bottom edge of S&P’s “investment-grade” tier; any additional downgrades will land the company’s credit rating in the “high yield” or “junk” tier.
“Oracle Corp.’s rapidly expanding AI infrastructure business is increasing its overall credit risk,” S&P analysts wrote in an announcement of the downgrade, pointing to high capital spending, “an uncertain path to profitability” and stiff competition as reasons to be “more cautious” in its approach to AI infrastructure businesses.
Still, S&P isn’t wholly pessimistic about Oracle’s finances.
“Despite the stretched leverage and cash-flow profile over the next two years, we expect Oracle to demonstrate consistent improvements toward profitability as capacity comes online and business scales,” the analysts added.
Oracle is co-developing a vast new data center campus in Ozaukee County, and its BBB- credit rating adds a hurdle to its efforts to connect the campus’ servers to the grid.
The reason: new rules for data centers seeking electrical service in We Energies territory. Wisconsin’s Public Service Commission (PSC) recently approved a rate structure for We Energies’ “very large customers” that requires operators like Oracle to pay for the construction of new power plants needed to meet data center energy needs.
But constructing a new plant can cost hundreds of millions of dollars, and any unpaid debts tied to the plants could fall to We Energies’ other customers if a data center operator becomes insolvent.
To shield ratepayers from a potential cost shift, the PSC set a AAA- credit rating threshold for data center operators seeking electric service from We Energies. Companies below the threshold must post steep collateral, either in cash or lines of credit, as a backstop.
For Oracle, that could mean paying $100 million or more a year as a condition of receiving electric service for Port Washington servers.
We Energies asked the PSC in June to reconsider the credit requirements, arguing that the rule unfairly penalizes Oracle based on an overly cautious reading of the company’s financial health.
“In practical terms, tens of billions of dollars in Oracle’s value would need to be destroyed before creditors or counterparties, such as Wisconsin Electric and its other customers, could experience losses,” the utility’s lawyers wrote.
The PSC declined to reconsider the requirements last week.
Oracle sued the commission in Ozaukee County Circuit Court as a backup to the reopener request. The company’s lawsuit asks Judge Sandy Williams to “set aside, reverse, and remand” the credit rating requirements, arguing that they aren’t “needed to prevent harm” to We Energies’ other customers or shareholders.
In a response filed July 9, the commission accused Oracle of trying to dodge regulatory scrutiny. The company seeks “to overturn over one-hundred years of established caselaw and allow it to dictate one-off preferential terms of service with the utility, bypassing Commission oversight altogether,” commission attorneys wrote.
Wisconsin’s Citizens Utility Board (CUB) and renewable energy advocacy group Clean Wisconsin also weighed in this week to support the credit ratings requirements.
“An investment grade credit rating provides little advance warning of financial difficulties that may worsen rapidly,” CUB attorney Daniel Narvey wrote in a position statement filed Monday in Ozaukee County Circuit Court. “If a data center customer suffered financial distress and had not been required to post collateral, (We Energies) and its other customers could be on the hook for billions of dollars of stranded investments.”
Oracle’s stock value has tumbled by more than 25% in the month since it sued the PSC.
Wisconsin isn’t the only state embroiled in a fight over Oracle’s data center operations. In March, Michigan’s Public Service Commission declined to revisit its approval of an electrical service agreement between utility DTE Energy, Oracle and OpenAI. Michigan’s utility regulator approved the contracts in an expedited, uncontested process that drew criticism from ratepayer advocates and Michigan Attorney General Dana Nessel.
