The Los Angeles Department of Water and Power plans to price $993 million in power system revenue bonds next week as it grapples with the fallout of January's deadly Palisades wildfire.
The Palisades blaze ranged over 36 square miles and destroyed more than 6,800 structures, killing 12 people, at the same time the Eaton fire, outside L.A. city limits, ravaged the community of Altadena.
The LADWP and city of Los Angeles face lawsuits from roughly 776 plaintiffs, according to the preliminary official statement. Allegations include improper design and maintenance of the water system for firefighting purposes and that LADWP didn't de-energize electrical facilities quickly enough, causing additional fires.
No official cause has been determined for the fire.
The legal uncertainties have become embedded in LADWP's bond ratings, and are likely to be reflected in pricing when the deal comes to market.
"Given LADWP's current situation, it's reasonable to assume that it will pay a wider spread," said Matt Fabian, a partner at Municipal Market Analytics.
Some of the spread widening stems from LADWP's situation, and more from a market still recovering from the dislocations created by President Trump's disjointed
"We have had a flight to safety and a boatload of bonds coming to market, but a situation where the dealers are unable to carry as many bonds as before, because of the volatility," Fabian said. "Everything points to the bonds coming in wider."
Munis have emerged as an opportunity amidst all the volatility and yields remain elevated relative to Treasuries, said Cooper Howard, fixed income strategist focused on munis at Charles Schwab. But he added that muni yields may continue to stay elevated due to supply and demand. He expects near-term supply will be heavy and will likely weigh on near-term performance.
Rating and trading impacts were nearly immediate after the fire started.
By January 14, LADWP had its first
All four rating agencies cited lawsuit risk as a concern for LADWP. The utility's power system sustained $78 million in damage, which could have been worse if 50% of the lines there weren't buried underground, said Kathy Masterson, a Fitch Ratings senior director.
The damage to the power system is "within the magnitude, from a liquidity standpoint, that LADWP can fund it," Masterson said. "And, all of it is eligible for FEMA (Federal Emergency Management Agency) reimbursement. It could handle it at the current rating level until it's reimbursed, or even if portions of the damage don't get reimbursed."
Fitch considers those costs manageable, Masterson said. It revised the credit watch negative it assigned in January on the AA-minus power revenue bonds to a negative outlook April 8, mainly on the potential risk from lawsuits, she said. Last week Fitch downgraded LADWP water revenue bonds to AA-minus from AA, removing a rating watch negative but assigning a negative outlook.
LADWP's power system revenue bonds were assigned ratings of Aa2 by Moody's Ratings and AA by KBRA ahead of the deal.
Moody's assigns a negative outlook.
KBRA ended its downgrade watch on the power revenue bonds April 16, assigning a stable outlook that "reflects our expectation of ongoing cost recovery through regular and timely rate increases which allow for sound debt service coverage and stable financial metrics as outstanding indebtedness increases."
S&P in January downgraded its long-term rating on DWP power revenue bonds to A from AA-minus, and lowered the ratings on the water system revenue bonds to AA-minus from AA-plus in January.
S&P revised its CreditWatch with negative implications on both systems to a negative outlook last week.
The potential liability on the water side "stems from litigation related to the water system's operations and claims that system protocols may have contributed to delays in containing and more expediently extinguishing the wildfire," Fitch analysts wrote.
"Given there have been no allegations, we think the probability is probably low of them being found liable (for damages from the power system), but if they are found liable for the wildfire, the potential liability could be large given the extent of the destruction from the Palisades fire," Masterson said.
An additional risk, according to Fitch, is California's inverse condemnation rule in which a utility can be held strictly liable for wildfire-related property damage if their equipment is determined to have caused or contributed to a wildfire, "even if they are not found negligent in the upkeep or protocols."
The state's municipal utilities also don't benefit from the cap placed on potential wildfire liabilities under Assembly Bill 1054, legislation that created the state's $21 billion
LADWP's power business line has historically carried lower ratings than the department's water side.
From Fitch's perspective, the power side carries more operational risk because of the complexity of the operations and because it's more vulnerable, Masterson said. The utility has been working toward being fully powered by renewable energy by 2035; and by 2023 it reached 58% of power from carbon-free energy sources, according to Fitch's report.
The DWP power enterprise's five-year capital improvement program for fiscal years 2025-29 is "substantial at $14.3 billion," according to Fitch. Of that total, $6 billion is to increase reliability in the system, $2.6 billion is for power resource investments and $2 billion is for improvements to the existing system. LADWP has some wiggle room in the 10-year goal for renewables because the deadline for the state mandates on reaching 100% renewable isn't until 2045, Masterson said.
LADWP's current challenges represent a "buying opportunity" for investors if the bonds come in wider, because the opportunity to buy more yield in California has been rare, Fabian said.
In the era before separately-managed accounts became a fixture, the fact two other Los Angeles issuers were coming this week might have diluted demand, Fabian said. But the days when the market was dependent largely on mutual funds or big institutional investors are long gone. With demand diversified across hundreds of thousands of SMAs, it's less of an issue, he said.
Instead, the fact that the city's wastewater system and Los Angeles Unified School District came to market this week means LADWP can see some price discovery before it heads to market, Fabian said.
"They can get some insight into demand for L.A. paper, which could provide price discovery," Fabian said, "which is good, especially with the uncertainty."
"It doesn't mean lower yields, but it means easier distribution and better liquidity," he said. "If you didn't get any LAUSD, you might go after LADWP."
Goldman Sachs Thursday priced $711 million of subordinate revenue bonds for the city's wastewater system.
Raymond James priced on Wednesday $948 million of LAUSD general obligation bonds.
For LADWP, Barclays, leading a seven-bank syndicate, will hold a retail order period Wednesday and institutional pricing on Thursday. PRAG is municipal advisor and Stradling, Yocca, Carlson & Rauth is bond counsel.
The proceeds will pay for capital improvements to the power system, potentially refund outstanding bonds and pay issuance costs, according to an online presentation for investors.
