KBRA Assigns AA Rating to the Department of Water and Power of the City of Los Angeles, CA Power System Revenue Bonds, 2026 Series B; Outlook is Stable

NEW YORK--(BUSINESS WIRE)-- KBRA assigns a long-term rating of AA to the Department of Water and Power of the City of Los Angeles, CA Power System Revenue Bonds, 2026 Series B. The Outlook is Stable.

The long-term rating reflects the stable operating and financial performance of the Power System of the Los Angeles Department of Water and Power ("LADWP?), which benefits from a large, mostly residential service area, with rising, though still affordable customer rates, a diverse generation mix, and conservative, Board-adopted financial planning criteria.

Counterbalancing these strengths are contingent liability risks related to the 2025 wildfires and future wildfires, and to the strict liability standards imposed by California?s inverse condemnation law. These remain a key and evolving credit concern. Potential adverse litigation outcomes relating to the 2025 wildfires 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.

Power System Revenue Bonds are special obligations of the Department payable solely from the Power Revenue Fund. Proceeds of the 2026 Series B Bonds will be used to refund certain outstanding Power System Revenue Bonds and pay costs of issuance. The 2026 Series B Bonds, together with approximately $13.19 billion in outstanding parity bonds, and $3.96 billion in unconditional, off-balance sheet joint powers agency take-or-pay obligations as of May 21, 2026 are special obligations of the Department payable only from the Power Revenue Fund. As of May 22, 2026, the Department will have no outstanding loans under a revolving credit agreement that expires on May 22, 2031. Loans to the Department under the revolver cannot exceed $500 million in principal amount outstanding.

An ATF-led investigation has not publicly issued a formal cause and origin report identifying the source of the Palisades Fire. However, on October 8, 2025, federal prosecutors announced a criminal arrest related to an alleged January 1, 2025 ignition (the ?Lachman Fire?), which investigators say later contributed to the January 7 Palisades conflagration. Although a multi-agency investigation concluded the Palisades Fire was a ?holdover? of the Lachman Fire, and an ATF affidavit expressly ruled out power lines as a potential cause of the Lachman Fire, several hundred lawsuits by thousands of plaintiffs have been, and continue to be filed against the Department and the City of Los Angeles and are pending in the Los Angeles Superior Court. Two were filed as putative class actions, including one seeking more than $10 billion in damages relating to the Palisades Fire.

A Master Complaint consolidating claims was filed on October 8, 2025, and revised in December 2025. The Revised Master Complaint generally alleges inverse condemnation claims related to both the Power System and the Water System, as well as Power System tort claims for dangerous condition of public property and nuisance. It alleges that the Palisades Fire was foreseeable, and with respect to the Power System, that after the fire ignited, power poles broke and the Department failed to de-energize its distribution and transmission electrical facilities, resulting in its overhead power lines arcing and causing additional fires. Numerous complaints also allege that Water System failures materially worsened firefighting outcomes. Additional lawsuits continue to be filed, including by certain insurance carriers asserting subrogation rights and at least one public entity alleging inverse condemnation. Litigation remains at pleading and consolidation stage, and the Department?s ultimate financial exposure cannot yet be estimated.

The Department?s insurance program currently includes multiple financial mitigants, including commercial and self-insurance, internal and external liquidity, bonding capacity, procurement of a wildfire index catastrophe bond, and the potential recovery of judgment or settlement costs through various rate adjustment factors. In addition, the Department has implemented operational mitigants aimed at reducing future wildfire risk exposure.

LADWP is the exclusive provider of electric and water utility services within the City of Los Angeles. The Power System provides energy, transmission, and distribution services to approximately 1.59 million customers, and is responsible for 25% of California?s electric transmission assets. As of FYE December 31, 2025, approximately 34% of energy sales were to residential customers, 61% to commercial and industrial customers, and the remaining 5% to all other purchasers, with revenues by customer class similarly apportioned. LADWP operates as a proprietary, self-supporting department of the City with full rate-setting authority, subject to the approval of City Council by ordinance, and to oversight by the Charter-established Office of Public Accountability. As the nation?s largest municipal, vertically integrated electric utility, the Department enjoys cost advantages, operating reliability, and enhanced risk mitigation capabilities, but is responsible for extensive capital investment.

While the Master Resolution provides for a sum-sufficient rate covenant, Board-adopted criteria conservatively call for electric rates sufficient to maintain full obligation coverage of 1.70x annual debt service. Power System Revenue Bond debt service coverage was a solid 2.98x in FY 2025, having increased steadily since FY 2022. However, debt service coverage will likely trend below recent experience as the Department issues a planned $11.9 billion in debt through 2030 to fund approximately 2/3rds of its $18.5 billion Power System Capital Improvement Program. Fixed charge coverage, calculated as FY 2025 operating revenue coverage of debt service, purchased power, and transfers to the City from the Power Revenue Fund, at 1.47x, was somewhat improved versus the prior five-year average of about 1.30x. As of FYE June 30, 2025, Power System liquidity totaled $1.86 billion or 201 days? cash on hand (?DCOH?), exceeding the Power System?s 170 DCOH liquidity target.

Residential electric rates, though above the national average and rising, remain in line with or below the State?s residential average on an annualized basis. The Power System retains some rate flexibility, supported by strong service-area wealth metrics and relatively low residential electricity usage. However, the long-term costs of transitioning LADWP?s power supply to predominantly renewable resources, along with other capital-intensive priorities, are expected to pressure rate affordability over the medium to long term. LADWP-modeled scenarios estimate that achieving 100% carbon-free energy by 2035 would require cumulative bulk power portfolio costs with a net present value exceeding $80 billion over the 2022?2045 study horizon, including fixed capital and variable operations and maintenance costs. The estimated average annual rate impact ranges from 7.7% to 8.3%, excluding potential savings from alternative funding sources. LADWP expects to release its updated long-term strategic Power System plan, now called the LA100 Plan, in 2026.

The Stable Outlook reflects our expectation of ongoing cost recovery through regular and timely rate increases which allow for sound debt service coverage and stable financial metrics as outstanding indebtedness increases. We will continue to monitor the status of wildfire litigation and the impact of the LA100 Plan on long-term leverage and rate affordability.

Key Credit Considerations

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

Credit Positives

• Diverse generation mix provides ample net dependable capacity versus peak demand and minimizes exposure to energy cost volatility.
• Current electricity rates, while well above the national average, remain 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 liquidity helps to offset enterprise risks.

Credit Challenges

• California?s inverse condemnation doctrine (strict liability) could result in wildfire liabilities exceeding the Department's layers of wildfire financial mitigants, including insurance, liquidity, bonding capacity and potential cost recovery through rate adjustment factors.
• LADWP?s ability to maintain rate affordability and strong financial metrics while addressing potential wildfire liabilities and capital-intensive energy transition mandates is an evolving credit challenge.
• KBRA-calculated leverage is very high and expected to grow, given the ambitious, largely bond-funded Power System 2026-2030 CIP.

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.
• Inadequate or delayed rate recovery that causes a decline in debt service coverage to a level approaching Board-adopted targets.

To access ratings and relevant documents, click here.

Methodology

• Public Finance: U.S. Municipal Retail Utility Revenue Bond 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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Source: Kroll Bond Rating Agency, LLC