KBRA Assigns AA Rating with Stable Outlook to the Department of Water and Power of the City of Los Angeles Power System Revenue Bonds, 2021 Series B

Kroll Bond Rating Agency (KBRA) assigns a long-term rating of AA with a Stable Outlook to the Department of Water and Power of the City of Los Angeles Power System Revenue Bonds, 2021 Series B.

Key Credit Considerations

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

Credit Positives

• Efforts to-date to transform resources and meet renewable mandates put the Department at the vanguard of U.S. public utilities in the transition to green energy and position it to reap significant benefits from lower generating costs as technologies evolve.
• Electricity rates are extremely competitive and affordable relative to other California utilities, allowing for flexibility to impose rate increases as necessary. The Rate structure incorporates several pass-through adjustments that effectively decouple revenue generation from changes in customer demand.
• Strong liquidity helps to offset enterprise risks.

Credit Challenges

• The Department faces continued operating cost pressure and increased leverage as it works to meet myriad federal, state and local regulations and mandates relating to energy efficiency, GHG emissions, renewable energy standards, supplies and development, and environmental stewardship.
• Climate change creates the potential for increased frequency and severity of wildfires in the service area. Claims related to wildfire litigation could negatively impact the Department’s financial position. Moreover, exposure to 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 in the traditional insurance and catastrophe bond markets.
• Operating margins, though still strong, have declined in recent years, reflecting increased maintenance and operating expenses and higher purchased power costs, which have grown at a faster pace than operating revenues.

Rating Sensitivities

For Upgrade

• Sustained reduction in Power System operating costs and leverage.
• Ability to maintain competitive and affordable rates while maintaining system reliability and meeting highly capital-intensive environmental goals and requirements.

For Downgrade

• Evolving state and local mandates relating to the transformation of power system resources that impose unanticipated, material financial and rate pressures.
• Revenue reduction that results in a sustained decline in DSC or liquidity.

To access ratings and relevant documents, click here.

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 pursuant to the Temporary Registration Regime. 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.

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