Oracle (ORCL.US) faces another regulatory blow after S&P downgrade! May be required to pay $7 billion bond for Wisconsin data center

According to Zhitong Finance APP, after power regulators in Wisconsin tightened credit requirements to protect residents from electricity price hikes, Oracle (ORCL.US) may need to provide more than $7 billion in collateral guarantees for its large data center in Wisconsin.

It is reported that the Public Service Commission of Wisconsin, responsible for reviewing and setting utility rates in the state, has refused to reconsider its previous rule imposed on local utility We Energies. Under this regulation, Oracle is required to post a $7 billion guarantee, costing over $100 million annually.

The data center, located in Port Washington, Wisconsin, approaches 1 gigawatt (GW) in scale and is a critical investment for Oracle to fulfill its $300 billion compute supply contract with OpenAI. The increased costs for local electricity supply have further intensified the challenges Oracle faces in pursuing its AI strategy, including rising debt and accelerating cash outflows.

Under We Energies’ rate scheme for “extra-large customers,” any data center developer with a Standard & Poor’s credit rating below A- must provide collateral in the form of cash or a letter of credit. The collateral amount is determined based on the value of the power plants and transmission lines built for the data center. At the time, Oracle’s credit rating was BBB, two notches below the threshold.

Last month, Oracle asked a local court judge to overturn this rule and allow We Energies to exempt it from the collateral requirement. The company stated that the rule could “force Oracle to bear heavy financing costs and may dampen future investment willingness in Wisconsin.”

A spokesperson for the regulator told media on Monday that the Commission “decided not to take action on the petition.” Oracle stated it hopes the Commission will reconsider its position after fully weighing the $15 billion project's job creation and economic growth. Oracle also said the company remains “committed to providing the necessary financial guarantees to ensure Wisconsin's power users do not bear any risks.”

Milwaukee-based utility We Energies originally proposed exempting stricter credit requirements for companies with credit ratings of BBB and above. However, in May this year, regulators intervened and further tightened the rating standard. The regulator stated: “Rate design should ensure that existing Wisconsin power users, now and in the future, are not subsidizing data centers.”

This decision marks an initial setback for Oracle, which is expected to continue challenging the rule through legal means. The incident also highlights growing concerns among state regulators that the new wave of large-scale AI infrastructure projects could become stranded assets if they lack strong enough financial support.

As more people worry that the costs of new power plants and transmission lines built for data centers will ultimately be transferred to ordinary electricity users, 24 states in the U.S. have approved “large load rates,” which specifically regulate rate standards and terms for data centers and other large industrial users. These rate schemes typically require data centers to commit to a minimum contract period, pay early exit fees, and provide collateral. Meanwhile, large tech firms and manufacturers argue that such schemes are discriminatory and impose excessive costs on businesses.

Beyond the major data center project in Wisconsin, Oracle’s $16.5 billion AI super-campus in New Mexico has also faced environmental approval obstacles, forcing a change in power supply plans and leading to a cost surge of several billion dollars.

Originally, Oracle planned to build its own natural gas power plant for its “Project Jupiter” data center campus. The project, located near the Texas border city of El Paso in New Mexico, covers 1,400 acres with a planned installed capacity exceeding 2 GW, primarily catering to OpenAI’s compute needs.

However, the state environmental permit application for the natural gas plant stalled due to concerns over air pollution and greenhouse gas emissions. In April this year, Oracle shifted to plan to power the entire campus with Bloom Energy (BE.US) natural gas fuel cells. These emit less pollution, have slightly lower carbon emissions, and consume almost no water, making them theoretically advantageous in the environmental review process.

But this transition comes with a hefty price tag. According to analysts, the cost of a fuel cell microgrid with an adjusted capacity of 2.45 GW is about $8 billion—several billion dollars more than the original natural gas turbine plan. Additionally, if fuel cells do not run continuously, they age faster, which will limit Oracle’s flexibility to switch to cheaper solar power during sunny periods.

Environmental resistance has not vanished. Last week, New Mexico issued a second denial for the proposed fuel delivery pipeline route, and the state environmental department announced it would hold a public hearing on the air permit on October 19 due to “significant opposition.”

The New Mexico Attorney General is investigating resident complaints that their names were used without consent on support letters submitted to regulators. Local media highlighted that greenhouse gas emissions from the facility's fuel cells alone exceed the combined reported emissions of the state’s two largest cities.

An Oracle spokesperson stated in a statement that the company is "moving quickly" on AI site construction and is "confident in the return on deployed capital." Julia Robin, head of Oracle’s infrastructure planning and procurement, wrote an open letter in a local newspaper stating that the company's adjustments show “we are listening and continuously improving the project.”

Meanwhile, concerns over Oracle’s creditworthiness intensified this month. S&P downgraded its rating to BBB-, just one notch above junk, citing substantial uncertainty over earnings prospects amid large investments in AI.

Oracle’s deteriorating credit status may also affect the tens of billions of dollars in construction loans underwritten by Wall Street banks for its data center builds. Previously, it was reported that facing surging data center financing needs, lenders have been exploring new ways to shift the risks associated with large data center loans.

Concerns about Oracle’s credit status are reflected not only in its stock price but also in the credit market. Oracle’s 5-year credit default swap (CDS) rose to around 2.03 percentage points (203 basis points) on Monday morning, surpassing the previous trading day's 198.23 basis points, reaching the highest level on record since late 2008.

As of the end of fiscal year 2026, Oracle’s outstanding contractual obligations reached $638 billion, a 363% year-on-year increase. Most of these contracts are related to AI cloud computing, meaning customers have pre-booked computing power for the coming years. However, it is noteworthy that of the $638 billion contract balance, only 12% of the revenue is expected to be recognized in the next 12 months.

In fiscal year 2026, Oracle's operating cash flow reached $32 billion, but capital expenditures soared to $55.7 billion, pushing free cash flow to a negative $23.7 billion. Capital expenditure may peak at $95 billion in fiscal year 2027, and the company also plans to raise nearly $40 billion through debt and equity financing.

AI data centers require advance purchases of GPUs, land leases, electricity access, and construction of server rooms. Customers may not complete payments until years later, but the capital expenditures occur now. Orders are growing larger, but revenue recognition still takes time. Oracle must first use its own balance sheet to set up the AI world for its clients. Although Oracle has already asked some customers to prepay for GPU purchases or directly provide GPUs—involving about $75 billion—this reduces some construction costs but cannot eliminate the funding gap.