Fitch places Los Angeles and its city utility on rating watch negative

Fitch Ratings placed four credits — led by the city of Los Angeles the Los Angeles Department of Water and Power — on rating watch negative, citing the region’s wildfires.

Fitch also placed two utilities tightly linked to LADWP, the Intermountain Power Agency in Utah and Southern California Public Power Authority, on negative watch.

The city holds an AA-plus issuer default rating from Fitch, and LADWP’s water revenue bonds are rated AA and the electric revenue bonds are rated AA-minus. Both SCPPA’s and IPA’s bonds are rated AA-minus.

Early concerns and questions have been raised by the community and political leaders about utility infrastructure resiliency to fire, sufficiency of available water supplies for fire suppression, utility protocols and communications ahead of and during red flag events, and ultimately the source of the ignition for the fires, Fitch said.

The city’s AA-rated general obligation bonds were placed on CreditWatch with negative implications by S&P Global Ratings late Wednesday. S&P had already downgraded LADWP Tuesday.

Kroll Bond Rating Agency put bonds issued by the city and its Department of Water and Power on Watch Downgrade Thursday.

“The Palisades Fire, located on the western edge of the city, is one of the largest with much destruction occurring within the city of Los Angeles and the water and power service of LADWP,” Fitch analysts wrote in the ratings report. “Resulting damage to utility infrastructure and the level of property destruction and personal injury to affected residents is not yet known.”

The rating watch negative designation “indicates the ratings could stay at their current levels, but have a heightened probability of a downward rating change,” Fitch said.

The rating agency cited a high degree of uncertainty about the nature and credit impact of emerging near and medium-term credit pressures.

“These rating factors have the potential to increase pressure on the city’s general operating budget and overall credit quality, due to LADWP’s status as a department of the city,” Fitch said.

The rating agency will review the affected ratings as soon as practical, but no later than six months from the date of the release, it said.

The source of the ignition of the fire “will be a key determination” to public power credit quality due to California’s unique legal application of inverse condemnation, Fitch wrote. California courts “have applied inverse condemnation to hold electric utilities liable for wildfire property damages if its electrical equipment is the cause of the fire without consideration as to whether or not the utility actions were negligent,” Fitch noted.

At this point, there has been “no indication” to suggest LADWP equipment was the source of the fires, nor has the California Department of Forestry and Fire Protection CalFire determined a cause.

Fitch’s working assumption is that LADWP will incur no liability related to the fires, but severe and acute credit risk would result if that assumption proved incorrect.

“The magnitude of the liability for the Palisades fire will be so large, the scale of the potential liability would likely lead to a multi-notch downgrade for the power revenue bonds and related projects,” Fitch wrote.

For the city’s issuer default rating, Fitch said it will focus on potential wildfire-related liabilities as well as its ability to adequately address its budgetary imbalance in its mid-year budget review and the development of its fiscal 2026 budget.

The ratings of IPA and six SCPPA projects are dependent on the credit quality of LADWP’s power revenue bonds, Fitch said.

“A downgrade to the LADWP power revenue bond rating would result in a downgrade to the project ratings,” Fitch said.