KBRA Resolves LADWP Power System Revenue Bonds Watch Downgrade Placement; Assigns AA, Stable Outlook to Power System Revenue Bonds, 2025 Series A and B

NEW YORK--(BUSINESS WIRE)--KBRA resolves the Watch Downgrade placed on the rating of the Department of Water and Power of the City of Los Angeles (LADWP) Power System Revenue Bonds on January 16, 2025 and assigns a long-term rating of AA to the Power System Revenue Bonds, 2025 Series A, and Power System Revenue Bonds, 2025 Series B. The rating on outstanding Power System Revenue Bonds is affirmed at AA. The Outlook is Stable.

The rating actions reflect KBRA’s view that i) LADWP’s service restoration and planned resiliency improvements in the wake of the 2025 wildfires are proceeding expeditiously, with reimbursement funding from FEMA and the California Governor’s Office of Emergency Services expected for the majority of recovery costs (preliminarily estimated at $75 million for the Power System and $17 million for the Water System); ii) estimated Power System revenue loss due to the 2025 wildfires is nominal; iii) while the situation remains fluid and multiple lawsuits have been filed against the Department by owners of property damaged in the Palisades Fire, management states that there has been no litigation, to date, alleging that LADWP’s power equipment was involved in the fires’ initial ignition (although plaintiffs have alleged that the Department’s Power System facilities were a source of additional ignitions of the Palisades Fire, a liability accusation which the Department denies); and iv) although the extent of litigation exposure relating to the 2025 wildfires may not be fully known for several years, various financial mitigants are available to the Department, including commercial and self-insurance , internal and external liquidity, bonding (including revenue bonds and securitization bonds), and recovery of judgment or settlement costs through various rate adjustment factors.

Irrespective of these considerations, which are the basis for the rating affirmation, KBRA notes that contingent liability risks related to the 2025 wildfire and future wildfires, and to the strict liability standards imposed by California’s inverse condemnation law, remain a key credit concern. Potential adverse litigation outcomes relating to the 2025 wildfire or to future wildfires which pressure the Department’s ability to meet the related liability exposure would likely have a negative impact on the rating.

Key Credit Considerations

The rating was assigned because of the following key credit considerations:

Credit Positives

• LADWP is at the vanguard of U.S. public utilities in the transition to green energy and is well positioned to benefit from emerging technologies.
• Current electricity rates, while well above the national average, are affordable relative to other California utilities, allowing a degree of rate flexibility.
• The rate structure incorporates several pass-through adjustments that effectively decouple revenue generation from changes in customer demand.
• Sound financial coverage and strong liquidity help to offset enterprise risks.

Credit Challenges

• LADWP’s ability to maintain rate affordability and strong financial metrics while meeting highly capital-intensive energy transition mandates is an evolving credit challenge.
• Wildfire liability risk, which is influenced by the State’s doctrine of inverse condemnation and its unique strict liability standard, is a persistent threat that is likely to become increasingly costly to hedge against.
• KBRA calculated leverage, measured as long-term debt to net fixed assets, is very high at 78.7% for FY 2024, and is expected to grow given the System’s ambitious $18.0 billion 2026-2030 CIP, which includes a planned $11.5 billion of borrowing.
• In KBRA’s view, adoption of a new rate ordinance, though overdue, has the potential to trigger challenges relating to CA Proposition 26 that could prohibit the Department from charging more than the cost-of-service provision.

Rating Sensitivities

For Upgrade

• Demonstrated progress in attaining mandated energy transition targets with minimal adverse rate impact.

For Downgrade

• Potential adverse litigation outcomes relating to the 2025 wildfire or to future wildfires which pressure the Department’s ability to meet the related liability exposure would likely have a negative impact on the rating.
• Inadequate or delayed rate recovery that causes a decline in debt service coverage to a level approaching Board-adopted targets.
• Inability to meet State and local directives relating to the transformation of power system resources while maintaining rate affordability, liquidity, fixed charge coverage and manageable leverage.

To access ratings and relevant documents, click here.

Methodologies

• Public Finance: U.S. Municipal Retail Utility Revenue Bond Rating Methodology
• ESG Global Rating Methodology

Disclosures

A description of all substantially material sources that were used to prepare the credit rating and information on the methodology(ies) (inclusive of any material models and sensitivity analyses of the relevant key rating assumptions, as applicable) used in determining the credit rating is available in the Information Disclosure Form(s) located here.

Information on the meaning of each rating category can be located here.

Further disclosures relating to this rating action are available in the Information Disclosure Form(s) referenced above. Additional information regarding KBRA policies, methodologies, rating scales and disclosures are available at www.kbra.com.

About KBRA

Kroll Bond Rating Agency, LLC (KBRA), one of the major credit rating agencies (CRA), is a full-service CRA registered with the U.S. Securities and Exchange Commission as an NRSRO. Kroll Bond Rating Agency Europe Limited is registered as a CRA with the European Securities and Markets Authority. Kroll Bond Rating Agency UK Limited is registered as a CRA with the UK Financial Conduct Authority. In addition, KBRA is designated as a Designated Rating Organization (DRO) by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus. KBRA is also recognized as a Qualified Rating Agency by Taiwan’s Financial Supervisory Commission and is recognized by the National Association of Insurance Commissioners as a Credit Rating Provider (CRP) in the U.S.

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