Press Release|Public Finance
KBRA Downgrades LADWP Water System Revenue Bonds to AA; Outlook Stable
6 May 2025 | New York
KBRA downgrades the long-term rating for the Department of Water and Power of the City of Los Angeles, CA Water System Revenue Bonds to AA (from AA+). The rating Outlook is Stable. This rating action resolves the January 16, 2025 placement of the Department's Water System Revenue Bonds on Watch for possible Downgrade.
Key Credit Considerations
The rating was downgraded because of the following key credit considerations:
Credit Positives
- Established water system serving one of the nation’s largest metropolitan areas, with a primarily residential customer base and low commercial and industrial rate payer concentration.
- Rate structure incorporates several pass-through adjustments that effectively decouple revenue generation from changes in customer demand.
- Water rates remain competitive and affordable considering the relatively wealthy service base, despite having increased annually since 2019 at a compound annual growth rate of 5.9%.
Credit Challenges
- The strict liability standards imposed by California’s inverse condemnation law subject the Department to contingent liability risks relating to the 2025 wildfire and future wildfires.
- Legal challenges relating to Proposition 218 have the potential to constrain the Department’s ability to implement future water rate increases.
- A large share of the $7 billion Water System Capital Plan includes federal and state-mandated water-quality compliance projects with hard, legally enforceable deadlines and little scheduling discretion.
Rating Sensitivities
For Upgrade
- Favorable resolution of existing and future inverse condemnation claims or the Department’s ability to address such claims without significant negative impacts to leverage, liquidity, and rate affordability.
- Sustained reduction in Water System leverage and ongoing strength in debt service coverage.
- Favorable progress in addressing the Water System infrastructure needs.
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.
- Inadequate or delayed rate recovery that causes a sustained decline in debt service coverage below existing Board established coverage metrics and historical averages.
To access ratings and relevant documents, click here.