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, 2025 Series A and 2025 Series B. Concurrently, KBRA affirms the AA rating on the Department's Water System Revenue Bonds, approximately $5.79 billion of which were outstanding as of August 1, 2025. The rating Outlook on all Water System debt is Stable.

LADWP is the nation’s largest municipal utility, operating as a proprietary, self-supporting department of the City of Los Angeles (the City). Governed by a five-member Board, the Department maintains full rate-setting authority per City Charter. All revenues from Water System operations are deposited into the Water Revenue Fund, which is maintained separately from the Power System.

Water System Revenue Bonds are secured by the Water Revenue Fund. The Master Resolution includes a sum-sufficient rate covenant, and internal Board policy targets a minimum 1.70x debt service coverage (DSC), debt-to-capitalization under 65%, and at least 150 days of operating cash. The 2025 Series A and B Bonds are not backed by a debt service reserve fund. An Additional Bonds Test requires adjusted net income of at least 1.25x maximum annual debt service. FY 2024 net revenues of $950.5 million provided 2.19x DSC. DSC is projected to decline through FY 2030 with implementation of the $7.74 billion Water System Capital Plan, roughly two-thirds of which will be funded by existing and future Water System Revenue Bonds and parity obligations.

Inverse condemnation claims related to the January 2025 Los Angeles wildfires, along with rising insurance premiums, are expected to necessitate water rate increases and may contribute to elevated Water System leverage, reduced liquidity, and delayed capital spending. While full litigation exposure may not be known for years, various wildfire-specific financial mitigants are available. In KBRA’s view, spreading any uninsured inverse condemnation judgment or settlements over multiple years would likely result in only a modest surcharge to water bills, keeping average rates within affordability limits.

As of July 9, 2025, 57 cases involving approximately 1,455 individual plaintiffs and two putative class actions have been filed against LADWP’s Water System. The Department also faces hundreds of additional civil claims with indeterminate ultimate loss severity. No dollar amounts have been pled, and the cases remain too early in proceedings to estimate potential financial exposure to LADWP or the City. KBRA will continue to monitor the potential financial impact, if any, the resolution of these legal actions may ultimately have on the Department's Water System credit.

Additional information pertaining to the LADWP Water System can be found in prior KBRA reports, the most recent of which is dated May 7, 2025.

Key Credit Considerations

The ratings reflect 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.
• 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.
• System leverage, calculated as the ratio of long-term debt to net fixed assets, remains high at 66.5% for FY 2024. Leverage has steadily improved over the last eight years, given substantial increases in net utility plant.
• A large share of the $7.74 billion Water System Capital Plan includes federal and state-mandated water-quality compliance projects with hard, legally enforceable deadlines and little scheduling discretion.

The Stable Outlook reflects our view that cost recovery through rate adjustments, ample liquidity and other financial mitigants will continue to allow for sound debt service coverage and stable financial metrics as the Department addresses potential judgement or settlement costs associated with the 2025 wildfires, achieves compliance with EPA safe drinking water program mandates, replaces aging infrastructure, and expands local water supplies through the implementation of its ambitious capital program.

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 maintenance of strong debt service coverage.

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.

Related Publication

• Department of Water and Power of the City of Los Angeles Water System

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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