Moody's ratings downgrades Los Angeles Department of Water & Power, CA's water system rev bonds to Aa3 from Aa2; outlook

Moody's ratings downgrades Los Angeles Department of Water & Power, CA's water system rev bonds to Aa3 from Aa2; outlook

Moody's Maintains Aa2 Rating for Los Angeles Department of Water & Power, While KBRA and Fitch Downgrade Water System Revenue Bonds

On March 3, 2026, the Los Angeles Department of Water & Power’s (LADWP) water system revenue bonds faced mixed rating actions from credit agencies. While Moody's Investors Service has not altered its Aa2 rating for the bonds, two other major agencies—KBRA and Fitch—recently downgraded their assessments, reflecting growing concerns over legal and financial risks.

KBRA lowered its long-term rating for LADWP's water system revenue bonds to AA from AA+, citing contingent liabilities tied to California's inverse condemnation laws, which expose the department to wildfire-related litigation risks. Similarly, Fitch downgraded its rating to 'AA' from 'AA+', with a negative outlook, emphasizing challenges such as Proposition 218 legal constraints on rate increases and the urgency of $7 billion in federally mandated water-quality compliance projects. Both agencies highlighted the potential strain on LADWP's liquidity and debt service coverage if litigation costs escalate or rate adjustments are delayed.

Despite these downgrades, credit positives remain, including a stable revenue base from a predominantly residential customer base in a high-income service area and a rate structure designed to decouple revenue from consumption fluctuations. However, agencies noted that LADWP's ability to maintain debt service coverage above historical benchmarks will depend on resolving inverse condemnation claims and advancing infrastructure modernization without significant cost overruns.

For investors, the divergent ratings underscore the importance of monitoring legal developments and the department's capacity to balance affordability with compliance demands. While Moody's has not yet acted, the negative outlooks from KBRA and Fitch signal heightened scrutiny of LADWP's risk profile in the coming years.

KBRA, January 2025: KBRA, January 2025; Fitch, April 2025: Fitch, April 2025.