KBRA grants a AA rating and maintains a stable outlook for the revenue bonds of the Los Angeles Department of Water and Power's water system.
The Los Angeles Department of Water and Power (LADWP) has received a long-term rating of AA with a Stable outlook from the Kroll Bond Rating Agency (KBRA) for its Water System Revenue Bonds, 2025 Series A and 2025 Series B. As of August 1, 2025, approximately $5.79 billion of LADWP's Water System Revenue Bonds were outstanding.
LADWP, the nation's largest municipal utility, operates as a proprietary, self-supporting department of the City of Los Angeles. The Water System Revenue Bonds are secured by the Water Revenue Fund, and all Water System revenues flow into this fund, distinct from the Power System.
The key credit considerations for the Water System include financial metrics and covenants, capital plan and sensitivities, and potential challenges.
Financial Metrics and Covenants
The Water System Revenue Bonds are secured by the Water Revenue Fund under a Master Resolution that includes a sum-sufficient rate covenant. Internal Board policies target a minimum 1.70x debt service coverage (DSC), debt-to-capitalization ratio under 65%, and at least 150 days of operating cash on hand. The 2025 Series A and B bonds lack a debt service reserve fund. An Additional Bonds Test requires adjusted net income of at least 1.25x maximum annual debt service. For FY 2024, net revenues were $950.5 million, providing a robust 2.19x DSC.
Capital Plan and Sensitivities
The Water System is implementing a $7.74 billion Capital Plan through FY 2030. Approximately two-thirds of the Capital Plan will be financed via existing and future Water System Revenue Bonds and parity obligations. This large capital expenditure plan is projected to reduce DSC through FY 2030, representing a key sensitivity and credit challenge as debt service demands increase relative to coverage ratios.
Potential Challenges
The projected decline in DSC is a potential credit risk as it may pressure debt service coverage metrics. The absence of a debt service reserve fund for the 2025 Series bonds could increase liquidity sensitivity. Reliance on robust rate-setting and collection to maintain coverage targets is critical, given the capital spending requirements and financing plans.
Inverse condemnation claims related to the January 2025 Los Angeles wildfires, along with rising insurance premiums, are expected to necessitate water rate increases. The Stable Outlook reflects the 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.
However, the multi-billion-dollar capital program and corresponding debt issuance pose challenges that require careful management to avoid weakening coverage and liquidity over the coming years. 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 could lead to an upgrade.
[1] Kroll Bond Rating Agency Press Release, May 2025. [2] LADWP Water System Information Disclosure Form, available online.
