Oncor Electric Delivery Outlook Revised To Negative Based On Incremental Capital Spending, Ratings Affirmed
- During Sempra’s 2024 fourth-quarter earnings call, the company announced a 50% increase, approximately $12 billion, in capital spending at utility Oncor Electric Delivery Co. LLC. The $36 billion capital plan for the 2025-2029 period largely reflects Oncor’s expected robust demand growth within its service territory.
- Because of the incremental capital spending, we anticipate financial measures starting in 2025 will likely weaken below our downside trigger on Oncor of funds from operations (FFO) to debt of 13%.
- Therefore, we revised our outlook on Oncor to negative from stable. At the same time, we affirmed all our ratings on Oncor, including our 'A' long-term issuer credit rating (ICR), 'A-1' short-term rating, and 'A+' issue-level rating on its senior secured first-mortgage bonds (FMBs).
- The negative outlook reflects our expectation that the company’s financial measures will weaken due to its expected elevated capital spending. After incorporating our expectation for higher capital spending, we estimate the utility's FFO to debt will be 12%-14% through 2027. The negative outlook also reflects the potential for a more challenging operating environment for Oncor due to rising wildfire risk, which could weaken credit quality.
NEW YORK (S&P Global Ratings) March 3, 2025--S&P Global Ratings today took the rating actions listed above.
The negative outlook on Oncor reflects our expectation for its financial measures to weaken due to elevated capital spending below its downside trigger of 13%. The incremental $12 billion of capital expenditures brings Oncor’s total five-year plan to $36 billion for 2025-2029. The incremental capital spending is largely driven by the utility’s approved 2025-2027 System Resiliency Plan (SRP), executed contracts from large commercial and industrial (C&I) customers, and approved projects within the Delaware Basin Load Integration, West Texas Infrastructure Project, and the Permian Basin Reliability Plan. Given the elevated capital spending, we expect the utility’s financial measures will weaken, reflecting FFO to debt of 12%-14% through 2027. Previously, we expected FFO to debt of 13%-14%.
We continue to assess Oncor's business risk profile as excellent. The utility continues to benefit from its lower risk wires-only electric transmission and distribution (T&D) business, which operates under the Public Utility Commission of Texas' (PUCT) supportive regulatory regime. Oncor benefits from interim rate adjustment mechanisms, such as the transmission cost of service (TCOS) and distribution cost revenue factor (DCRF) trackers for capital investments. These trackers support the company's cash flow stability and reduce its regulatory lag. Furthermore, through its distribution rates, Oncor recovers uncollectible amounts from retail electric providers (REPs).
Negatively affecting our view of the company’s business risk profile is Oncor’s exposure to wildfire risks and the potential for a more challenging operating environment going forward. Last year’s Texas wildfire season highlighted the increased operating risk for many Texas utilities. Although the Texas wildfires did not directly affect Oncor's service territory, we think they could be an indication of rising risks for Oncor. We expect to continue to assess Oncor’s operating environment, including its susceptibility to wildfire risks and its implementation of wildfire mitigation efforts that can partially reduce such risks. We note that several legislative initiatives regarding wildfire mitigation and regulatory matters that could reduce regulatory lag and improve the capital structure are pending. We will continue to actively monitor such developments.
The negative outlook on Oncor reflects our expectations for weakening financial measures, such that FFO to debt is not consistently greater than 13%. After incorporating Oncor’s expected elevated capital spending, we estimate FFO to debt will reflect 12%-14% through 2027. The negative outlook also reflects the potential for a more-challenging operating environment for Oncor due to wildfire risk, which could weaken credit quality.
We could lower our ratings on Oncor in the next 6 to 18 months if:
- The company’s financial performance weakens such that FFO to debt is below 13%;
- We conclude that the company’s operating environment is more challenging because of rising wildfire risks, which are not sufficiently offset by mitigation strategies.
We could affirm our ratings on Oncor and revise our outlook to stable over the next 6 to 18 months if the company’s consolidated financial performance remains consistently above 13% and we assess that the company’s overall exposure to wildfire risks have not materially increased.
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