S&P Global Ratings swapped its CreditWatch with negative implications for a longer-term negative outlook on the Los Angeles Department of Water and Power's water and power-system bonds.
Risks from January's
S&P
The ratings for both the water and power system were affirmed at current levels, but the negative outlook means the ratings could be downgraded multiple notches over the one- to two-year outlook period, S&P analysts wrote in Tuesday's report.
"The removal of LADWP's water system bonds from CreditWatch with negative implications reflects our view that downward credit pressure for the water system related to the investigation into the cause of January's Palisades Fire and related legal implications will likely play out over the next one to two years," S&P analysts wrote in Tuesday's report.
"Further time will also allow us to examine LADWP's various initiatives to bolster its resilience, processes, sustainability, wildfire mitigation and emergency management practices," S&P analysts added.
The rating agency affirmed the AA-minus on its water revenue bonds, A-1 dual rating on LADWP's water system and its power system variable rate bonds, and the A long-term rating on its power system revenue bonds.
It also affirmed the A long-term rating on revenue bonds issued by various Southern California Public Power Authority projects in which LAWDP's power system is the sole or dominant participant, including Mead-Adelanto series 2016A bonds (sole), Mead-Phoenix series 2016 bonds (sole), Milford Wind Corridor Phase 1 Project (dominant), and Southern Transmission Project (dominant).
The investigation into the cause of the Palisades Fire and related legal implications were cited for the negative outlook on the power system, as well as continuing risks from wildfires in general, affordability issues because of a recent rate hike and an elevated number of past due accounts.
The water system faces liabilities from 12 separate lawsuits filed in Los Angeles Superior Court, as of March 17, which allege water supply mismanagement contributed to an inability to extinguish the fires, S&P analysts wrote. On the day the fires started, LADWP's Santa Ynez Reservoir had been emptied of its 117-million-gallon capacity for 11 months, so firefighters were only able to tap 3 million gallons of water storage from three separate tanks, S&P analysts wrote.
"In our analysis of the water system, we view governance as a key risk factor," S&P analysts wrote. "We will continue to evaluate the sufficiency of preventative measures as more information about the Palisades Fire, in particular, the cause and response capabilities, becomes available."
LADWP has hired an independent consultant to recommend changes to its 2026-2028 Wildfire Mitigation Plan and a law firm to defend it in the wildfire-related lawsuits, S&P said, adding it views execution of both critical to the water system ratings.
The power system's outlook could be revised to stable if a final determination is made by investigators that the department's infrastructure did not contribute to the Palisades Fire or any other future significant wildfires, if progress is made on collection of past-due accounts; and if analysts believe financial metrics and rate affordability will remain strong despite rising costs associated with capital needs and power system resilience, S&P analyst stated.
On the water side, the outlook could return to stable if the litigation either ends in LADWP's favor or the liabilities are manageable, and also if contagion from the power system's risks are eased, and analysts are assured that rate affordability will remain strong despite rising costs associated with aging infrastructure and water system resilience.
