By Maxwell Adler | Bloomberg
The Los Angeles Department of Water and Power is facing the risk of significant financial liability for damages in the utility’s response to the Palisades fire, according to Pacific Investment Management Co.
“Given the sheer size of insured and uninsured losses, managing wildfire claims could have a material impact on the leverage profile of LADWP, and the risk premium investors require to hold roughly $19 billion in outstanding debt,” the asset manager said in a report to clients.
A series of catastrophic wildfires that began on Jan. 7, and are still not fully contained, have devastated Southern California. Legal experts are suggesting the nation’s largest municipal utility may be held accountable under a legal argument called inverse condemnation, which could pave the way for property owners to collect damages from the utility for leaving fire crews without enough water.
Also see: Lawsuits blame SCE, LADWP for Eaton and Palisades fires
The fires have burned nearly 58,000 acres of land in Southern California, destroying more than 16,000 structures.
“Water provider liability for fire damage is not without precedent,” Newport Beach-based Pimco said. “Inverse condemnation laws in California increase the potential of utilities being found liable for wildfires.”
Analysts Holly Froum and Eric Kazatsky agreed.
“Though close, inverse condemnation may be deemed to apply to the LADWP despite the fact it didn’t cause the fire,” they wrote Wednesday. “Damages from only 20% of the structures damaged in the Palisades Fire already exceed $4 billion, according to one insurer.”
While LADWP currently enjoys strong financial health, its exposure to lawsuits — particularly over its preparedness efforts — adds a layer of uncertainty, Pimco said.
Earlier this month, S&P lowered its rating on municipal bonds sold by LADWP two notches to A from AA- and warned that more downgrades may be ahead. As legal battles unfold, the department’s credit standing could come under further pressure, which may translate into a higher risk premium for its bonds, according to Pimco.
Still, the money manager believes the state could step in to help cover the municipal utility’s liabilities because California has an incentive to ensure municipally owned utilities have market access and to make sure the utility’s infrastructure remains in good repair and condition.
Sound footing
Pimco sees most of the other large issuers of municipal bonds in Los Angeles County as well-positioned to absorb potential wildfire-related losses without disrupting payments to investors.
Issuers, including the city, county, school districts, and the state of California, are backed by strong safeguards — such as Federal Emergency Management Agency funding, state aid, and access to the bond market — that ensure revenue continuity post-disaster. These entities also benefit from stable or even improving revenue streams as rebuilding efforts spur economic activity.
“We believe all affected local governments entered this disaster with healthy liquidity and reserve funds, helping to provide near-term funding and a longer-term bridge to potential FEMA reimbursement for rebuilding,” said Pimco in the report.
Historically, California’s major issuers have weathered disasters without substantial credit deterioration. The major issuers all benefit from large and diverse tax bases, and measures that help mitigate disruptions in debt service, such as insurance programs and contingency planning.