The outlook for the Los Angeles Department of Water and Power was revised to negative Tuesday by S&P Global Ratings, which said an FBI investigation that arose from lawsuits over billing issues and management turnover might make future rate increases a hard sell.
S&P also affirmed the AA-plus long-term rating on the nation’s largest utility’s $5.7 billion in water system debt as of fiscal year-end 2018 and an AA long-term rating on $9.3 billion in debt from the power system as of July 31, 2019, said Paul Dyson, an S&P Global Ratings director.
“The outlook revision reflects our view that the department has vulnerabilities with regard to management, governance and internal controls,” Dyson said. “We base this view partially on relatively high turnover among upper management and continued uncertainties and fallout with regard to the department’s billing system, which we previously believed were largely resolved.”
S&P analysts said they could lower the rating one or more notches over the next two years if the vulnerabilities become substantial exposures for the department's credit profile.
The affirmed AA rating and negative outlook apply to the department’s plans to issue $325 million in series 2019C power system revenue bonds next week.
The FBI warrant executed at LADWP and the city attorney’s office on July 22 could undercut public perception of the department’s governance and hence the department’s rate-setting ability, Dyson said.
“We view the turnover in upper management as an outlier, particularly when compared to other utilities of this size,” Dyson said. “When the new manager took over, he also made some internal changes. From what we understand the chief administrative officer was let go, as well as several others.”
When Martin Adams replaced David Wright as general manager in July, he became the ninth new person at the helm since 2007. Neil Gugliemo, who had been LADWP’s chief financial officer since April 2017, left for a position as general manager of the Los Angeles City Employees’ Retirement System on March 5. Ann Santilli, the assistant chief financial officer and controller, was named interim CFO.
The search warrants were executed by the FBI as part of an investigation into the city’s handling of litigation and a settlement over the botched rollout of a DWP billing system.
Problems with the billing system in 2013 led to thousands of customers receiving inaccurate bills, with some being substantially overcharged. The situation prompted a class-action lawsuit that led to a settlement requiring LADWP to reimburse customers about $67 million.
The city and LADWP sued Pricewaterhouse Coopers over its handling of the system’s rollout.
PricewaterhouseCoopers raised questions earlier this year about the city’s relationship with an outside attorney it hired to handle the litigation against the company. The firm alleged that the attorney, Paul Paradis, was hired by the city as a legal consultant in its lawsuit against the company, while he was serving as a legal counsel suing the city on behalf of a DWP customer in the class-action lawsuit.
LADWP “welcomes a thorough review of the settlements” and “does not believe the investigation or the billing system lawsuits will have a material adverse effect on the financial condition of the power system,” according to a disclosure notice the department
When Wright announced June 14 he would be stepping down as general manager effective Oct. 1, Los Angeles Mayor Eric Garcetti named Adams, then LADWP’s chief operating officer, to replace him.
But the day after the FBI raids in July, LADWP’s board voted unanimously to have Adams begin serving as interim general manager effective immediately, with his formal appointment subject to City Council confirmation.
“LADWP needs leadership that maintains the public trust, and commands the respect of people in and outside of the organization,” Garcetti said at the time. “Marty Adams has the experience and integrity to reassure Angelenos — the residents who own this utility — that the agency works for them. I have decided that a change in leadership can’t wait another day, and that’s why I am acting to begin Marty’s service as General Manager effective immediately.”
