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

Proceeds of the 2026 Series B Bonds (up to $493.5 million) will refund all or a portion of outstanding 2017 Series A Water System Revenue Bonds, and pay related costs of issuance. Water System Revenue Bonds, including the 2026 Series B Bonds, and other parity indebtedness are secured by the Water Revenue Fund. As of October 1, 2026, the 2026 Series B Bonds are on parity with approximately $6.5 billion of Water System Revenue Bonds and revolving loans, $729.8 million of State Water Resources Control Board loans, and a $2.7 million loan from the California Department of Water Resources.

The long-term rating reflects the Water System’s stable operating and financial performance. LADWP is the nation’s largest municipal utility providing exclusive water and electric utility services to the City of Los Angeles (the “City”). LADWP’s Water System provides service to an expansive, broad, and diversified customer base of approximately 1.6 million customers. Credit positives include the conservative, governing Board adopted financial planning criteria and full rate-setting authority which supports consistently strong liquidity, sound debt service coverage, and elevated but manageable leverage. Counterbalancing these strengths is the need for ongoing increases in elevated water rates and substantial additional indebtedness over the near to medium term, as the Department addresses considerable Water System requirements, including compliance with EPA Safe Drinking Water mandates and the implementation of a $10.1 billion FY 2027 – FY 2031 Water System capital plan (approximately 27% funded from rates).

Additionally, contingent liability risks related to the January 2025 Palisades wildfire and potential future wildfires, and the strict liability standards imposed by California’s inverse condemnation law remain a critical and evolving 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. Management reports the wildfire affected areas of LADWP’s service territory account for approximately 1.1% of the Department’s Water System customers and 1.2% of annual Water System sales revenues.

Several hundred lawsuits have been filed against the City, the Department and other entities, claiming damage from the Palisades wildfire. On February 19, 2026, the Los Angeles Superior Court found that plaintiffs may pursue inverse condemnation claims against the Water System. Litigation remains at pleading and consolidation stage, and the Department’s ultimate financial exposure cannot yet be estimated. The Department and the City of Los Angeles deny all liability claims.

While full litigation exposure may not be known for years, various financial mitigants are available. Inclusive of commercial insurance, the Wildfire Self-Insurance Trust Fund and additional self-insurance, the Department has $319.6 million available for wildfire losses as of May 31, 2026. The portion of the Water Revenue Fund set aside for self-insurance that is specific to the Water System totaled $30.8 million as of this date. The Department has also provided for $200 million of wildfire coverage through wildfire index catastrophe bonds ($100 million available through September 2028, and $100 million available from July 2026 to August 2029.) The Department can also rely, if necessary, on internal and external liquidity, bonding capacity, and the potential recovery of judgement or settlement costs through rate adjustment factors.

While the Master Resolution includes a sum-sufficient rate covenant, internal Board policy targets minimum debt service coverage (“DSC”) of 1.70x. FY 2025 net revenues available for debt service of $798.9 million, provided DSC of 1.83x, down from 2.19x in FY 2024. Other Board-determined financial planning policies include maintenance of at least 150 days operating cash and a debt to capitalization ratio below 65%, both of which were met in FY 2025. The Master Resolution’s additional bonds test requires adjusted net income of at least 1.25x maximum annual debt service, providing protection against overleveraging.

The Stable Outlook reflects our continued view that cost recovery through rate adjustments, ample liquidity, and available financial mitigants should allow for the maintenance of adequate DSC and stable financial metrics as the Department addresses potential wildfire judgement or settlement costs, achieves compliance with EPA mandates, replaces aging infrastructure, and expands local water supplies through implementation of its ambitious Water System Capital Plan.

Key Credit Considerations

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

Credit Positives

  • Established water system serving one of the nation’s largest metropolitan areas, with a generally wealthy, primarily residential customer base.

  • Rate structure incorporates several pass-through adjustments that effectively decouple revenue generation from changes in customer demand.

  • Although Water System liquidity has declined in recent years, it remains sound and provides an important cushion against enterprise risks.

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 may constrain the implementation of future water rate increases, although the Department expects to continue to establish water rates sufficient to meet the rate covenant of the Master Resolution and Board adopted financial policy criteria.

  • A large share of the $10.1 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 current and any 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 maintenance of solid DSC throughout the capital plan period.

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 DSC below existing Board established metrics and historical averages.

To access ratings and relevant documents, click here.

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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