Press Release|Public Finance
KBRA Assigns AA Rating, Stable Outlook to the Department of Water and Power of the City of Los Angeles Power System Revenue Bonds, 2024 Series C
24 May 2024 | New York
KBRA has assigned a long-term rating of AA to the Department of Water and Power of the City of Los Angeles Power System Revenue Bonds, 2024 Series C. Concurrently, KBRA has affirmed the AA rating on the Department's outstanding Power System Revenue Bonds. The Outlook is Stable.
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.
- Strong liquidity helps to offset enterprise risks.
Credit Challenges
- The Department’s ability to maintain rate affordability, rate flexibility and financial metrics while meeting highly capital-intensive energy transition mandates is an evolving credit challenge. Increasing operating cost pressures and leverage are likely as the Department works to meet myriad federal, state and local mandates relating to energy efficiency, GHG emissions, renewable energy standards, and environmental stewardship.
- Wildfire liability risk, which is influenced by the State’s doctrine of inverse condemnation and its unique strict liability standard, may become increasingly costly to hedge against.
- KBRA’s measure of leverage, which examines long-term debt to net fixed assets, was a very high 81.8% in FY 2023, exceeding Board criteria, which targets a debt to capitalization ratio of less than 68%,
- In KBRA’s view, adoption of a new rate ordinance, though overdue, has the potential to trigger lawsuits relating to CA Proposition 26 and/or Initiative 35 that could prohibit the Department from charging more than the cost-of-service provision.
Rating Sensitivities
For Upgrade
- Demonstrated progress in implementing the 2022 Power Strategic Long-Term Resource Plan with minimal adverse rate impact.
For Downgrade
- Inadequate rate recovery that weakens the ability to meet the rate covenant and Board-adopted financial metrics.
- Evolving state and local directives relating to the transformation of power system resources that pressure the leverage ratio, financial metrics, and customer rates.
- Other causes of revenue decline that result in a sustained weakening in debt service coverage or liquidity.
To access rating and relevant documents, click here.