KBRA assigns a long-term rating of AA to the Department of Water and Power of the City of Los Angeles (LADWP) Power System Revenue Bonds, 2025 Series C. The Outlook is Stable.

The rating reflects KBRA’s view that: i) resiliency improvements following the 2025 wildfires are proceeding expeditiously, with reimbursement funding from FEMA and the California Governor’s Office of Emergency Services expected for most recovery costs, preliminarily estimated at $85 million for the Power System plus $8 million of costs due to windstorm damage, as of April 2025; ii) estimated Power System revenue loss due to the 2025 wildfires is nominal; iii) management cites no litigation, to date, alleging that LADWP’s power equipment was involved in the fires’ initial ignition (although plaintiffs have alleged that Power System facilities were a source of additional ignitions of the Palisades Fire); and iv) various financial mitigants are available to the Department, including commercial and self-insurance, internal and external liquidity, bonding, and recovery of judgment or settlement costs through various rate adjustment factors. To supplement its self-insurance retention, the Department has procured a $100 million wildfire index CAT Bond covering the period August 2025 to September 2028. Operational mitigants to future wildfire risk exposure have also been implemented.

Nonetheless, 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. As of August 29, 2025, 71 state court actions including two putative class actions have been filed against the Department by owners of property damaged in the Palisades Fire, one of which asserts a damages figure of more than $10 billion. Additional lawsuits continue to be filed and the Department’s ultimate financial exposure cannot yet be estimated. 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.

The rating is underpinned by the Power System's large, mostly residential service area; stable operating and financial results; rising, though still affordable customer rates; diverse generation mix; and conservative, Board-adopted financial planning criteria. LADWP is the exclusive provider of electric and water utility services within the City of Los Angeles (“the City”). The Power System provides energy, transmission, and distribution services to over 1.5 million customers and is responsible for 25% of California’s electric transmission assets. 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.

The Power System Revenue Bonds, 2025 Series C (the 2025 Series C Bonds”) will fund Power System capital improvements and refund certain outstanding variable rate Power System Revenue Bonds. The 2025 Series C Bonds, together with approximately $11.99 billion in outstanding parity Bonds, and $3.43 billion in unconditional, off-balance sheet joint powers agency take-or-pay obligations as of August 1, 2025, are special obligations of the Department payable only from the Power Revenue Fund. While the Master Resolution provides for a sum-sufficient rate covenant, Board-adopted financial planning criteria conservatively call for establishment of electric rates sufficient to maintain full obligation coverage of 1.70x annual debt service. Historical debt service coverage was a solid 2.72x in FY 2024. KBRA anticipates that pro-forma debt service coverage will trend below recent experience as the Department issues a planned $11.9 billion in debt through 2030 to fund approximately 2/3^rds of its $18.5 billion Power System Capital Improvement Program for fiscal years 2026-2030. The additional bonds test requires historical revenues equal to 1.25x maximum annual debt service, providing some protection against overleveraging.

Fixed charge coverage, calculated as FY 2024 operating revenue coverage of fixed charges (which encompass debt service, purchased power, and transfers to the City from the Power Revenue Fund), is somewhat low at 1.29x, but consistent with prior years. As of May 31, 2025, Power System liquidity balances totaled $2.57 billion, equivalent to a strong 289 days’ cash on hand (“DCOH”) based on FY 2024 operating expenditures, and above the Power System’s 170 DCOH liquidity target. The Department also maintains a revolving credit facility of $500 million for both Power System and Water System needs which expires in May 2026. As of August 1, 2025, $150 million of loans payable from the Power Revenue Fund and $300 million of loans payable from the Water Revenue Fund were outstanding.

Power System revenues determined through annually adjusted pass-through factors, together with Board-approved increases in the base rate revenue target, are expected to provide continued revenue sufficiency. In June 2025, the Board approved an incremental base rate revenue target of 0.58% for FY 2025-2026. Department staff continues to review the need and proposed schedule for the next power rate action. Adoption of a new rate ordinance would modernize the 2008 Rate Ordinance and improve future rate setting and financial flexibility, but 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. Residential electric rates, while above the national average, are in-line with or lower than the State’s residential average on an annualized basis. Moreover, rate flexibility exists, in KBRA’s view, given the Power System’s solid wealth metrics and the relatively low household electricity usage characteristics of residential users in the service area.

The long-term costs of transitioning LADWP’s power supply to predominantly renewable resources are becoming clearer. Despite substantial progress toward meeting the State’s and City of Los Angeles’ renewable portfolio standards and carbon-free targets, energy transition costs are expected to pressure financial metrics and electric rate affordability over the next decade. These pressures are compounded by other capital-intensive priorities, including infrastructure replacement, water supply, enterprise risk management, and emergency preparedness. According to modeled scenarios in LADWP’s 2022 Power Strategic Long-Term Resource Plan, the cumulative investment required to achieve 100% carbon-free energy by 2045 is estimated at $57 billion to $87 billion. Preliminary projections show retail electric rates rising from 28.6 cents/kWh in December 2024 to 30–42 cents/kWh by 2030, depending on the renewable portfolio standard (RPS) target assumed, with higher targets resulting in higher rates. LADWP is currently updating the 2022 Strategic Plan through the LA100 Plan, expected to be finalized in Q3 2025.

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 2022 Strategic Plan on long-term leverage and rate affordability.

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 its exposure to energy cost volatility.
• 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 addressing capital-intensive energy transition mandates is an evolving credit challenge.
• Wildfire liability risk, 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, is very high and expected to grow given the System’s ambitious, largely bond-funded 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.
• 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.

Recent Publication

• Department of Water and Power of the City of Los Angeles ("LADWP") Power System Rating Report

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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