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, 2024 Series E. Concurrently, the rating on outstanding Power System Revenue Bonds is affirmed at AA. The Outlook is Stable.

Key Credit Considerations

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

Credit Positives

• LADWP is at the vanguard of U.S. public utilities in the transition to green energy and is well positioned to benefit from emerging technologies.
• 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 meeting highly capital-intensive energy transition mandates is an evolving credit challenge.
• Wildfire liability risk, which is influenced by the State’s doctrine of inverse condemnation and its unique strict liability standard, may become increasingly costly to hedge against.
• Leverage, as measured by long-term debt to net fixed assets, is very high at 81.8% for FY 2023, and is expected to grow given the System’s ambitious $14.3 billion 2025-2029 CIP, which includes $8.6 billion of borrowing.
• In KBRA’s view, adoption of a new rate ordinance, though overdue, has the potential to trigger lawsuits relating to CA Proposition 26 and/or Initiative 35 that could prohibit the Department from charging more than the cost-of-service provision.

Rating Sensitivities

For Upgrade

• Demonstrated progress in implementing the 2022 Power Strategic Long-Term Resource Plan with minimal adverse rate impact.

For Downgrade

• Inadequate or delayed rate recovery that pressures the rate covenant and/or Board-adopted financial metrics.
• 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.

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.

Only those ratings on securities issued by this Issuer that also are denoted on the Security Ratings tab for this Issuer on KBRA.com as “endorsed” by Kroll Bond Rating Agency Europe Limited into the European Union and/or by Kroll Bond Rating Agency UK Limited into the UK are covered by the disclosures set forth in this press release and the corresponding Information Disclosure Form. No other ratings on issuances by this Issuer have been endorsed into the European Union or the UK, and the disclosures set forth herein and in the corresponding Information Disclosure Form are inapplicable to those ratings and may not be used for regulatory purposes by European Union or UK investors in these securities.

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) is a full-service credit rating agency 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 by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus. KBRA is also recognized by the National Association of Insurance Commissioners as a Credit Rating Provider.

Doc ID: 1006628

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