KBRA Assigns AA Rating, Stable Outlook to the Department of Water and Power of the City of Los Angeles, CA Power System Revenue Bonds, 2026 Series C
17 Sep 2026 | New York
KBRA assigns a long-term rating of AA to the Department of Water and Power of the City of Los Angeles, CA ("LADWP") Power System Revenue Bonds, 2026 Series C. The Outlook is Stable.
The long-term rating reflects the stable operating and financial performance of LADWP's Power System. 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 1.6 million customers and is responsible for 25% of California's electric transmission assets. LADWP benefits from a large, mostly residential service area, a diverse generation mix, and conservative, Board-adopted financial planning criteria. Residential customer rates, though above the national average and rising, remain in line with or below the State's residential average on an annualized basis. Strong service-area wealth metrics and relatively low residential electricity usage support rate flexibility. 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. Potential adverse wildfire-related litigation outcomes that pressure the Department's ability to meet the related liability exposure would likely have a negative rating impact.
The 2026 Series C Bonds, together with approximately $13.23 billion in outstanding parity bonds and $3.86 billion in unconditional, off-balance sheet joint powers agency take-or-pay obligations, are special obligations of the Department payable solely from the Power Revenue Fund. Proceeds of the 2026 Series C Bonds will be used to fund capital improvements to the Power System, refund certain outstanding Power System Revenue Bonds, and pay certain costs of issuance. As of August 1, 2026, the Department had $250 million of loans outstanding under a revolving credit agreement payable from the Power Revenue Fund, and $150 million of loans outstanding under a revolving credit agreement payable from the Water Revenue Fund which are considered parity obligations under the Master Resolution. Loans to the Department under the revolver cannot exceed $500 million in principal amount outstanding.
Key Credit Considerations
The rating was assigned because of the following key credit considerations:
Credit Positives
- The Department's diverse generation mix provides ample net dependable capacity versus peak demand and minimizes exposure to energy cost volatility.
- Current electricity rates remain affordable relative to other California utilities, allowing for 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, which include 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 2027-2031 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.
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