Los Angeles Department of Water and Power Faces Financial Risk from Palisades Fire
The Los Angeles Department of Water and Power (LADWP) could face significant financial liability for damages related to its response to the Palisades Fire, warns Pacific Investment Management Company (Pimco).
Wildfire Claims and Liability
The devastating wildfires that have ravaged Southern California since January have left LADWP vulnerable to claims under the legal doctrine of inverse condemnation. This principle allows property owners to seek compensation from utilities for damages caused by inadequate water supply during emergencies.
Pimco estimates that insured and uninsured losses from the Palisades Fire could materially impact LADWP's financial leverage and increase the risk premium demanded by investors holding its $19 billion in outstanding debt.
Legal Risks and Credit Standings
Legal experts and analysts predict that LADWP may be held liable for wildfires despite not directly causing them. Damage claims from just 20% of the structures affected by the Palisades Fire already exceed $4 billion.
As LADWP's preparedness efforts face scrutiny, its financial health could be further challenged. Standard & Poor's recently lowered its rating on LADWP's municipal bonds, citing its exposure to lawsuits.
State Assistance and Market Impact
Pimco believes California has an interest in ensuring the financial stability of its municipally owned utilities and may provide support to cover LADWP's liabilities. However, legal battles and uncertain liabilities still cast a shadow over the utility's credit standing, which could lead to higher risk premiums for its bonds.
Other Los Angeles County Issuers
While LADWP faces financial risks, Pimco assesses other large municipal bond issuers in Los Angeles County as well-positioned to withstand wildfire losses. These entities benefit from strong safeguards, including federal and state aid, and diverse tax bases.