Standard & Poor’s placed its A-minus rating on the debt of Long Island Power Authority on CreditWatch negative.

The negative watch is primarily due to what S&P believes will be, in the aftermath of the state adopting reforms for LIPA in June, LIPA’s diminished ability to set rates starting in 2016.

The state government is encouraging LIPA to freeze its rates through 2014 and perhaps 2015 as well. LIPA expects the state to provide it with financial support in the interim.

S&P is primarily concerned with a part of the law that says any proposed rate increases greater than 2.5% would have to be presented at full evidentiary hearings.

“Standard & Poor’s views the transition to a higher level of rate oversight, the regulatory lag that is typically associated with hearings, a contemplated rate freeze, and the implications it might have on financial metrics as capital spending proceeds and the utility faces inflationary pressures, in addition to the political hurdles to rate adjustments, as collectively having the potential to erode the utility’s financial flexibility,” S&P credit analyst David Bodek wrote.

“We believe that [LIPA’s] financial metrics have historically been only adequate for the [A-minus] rating,” Bodek wrote. “However, we viewed the financial flexibility the utility exhibited in its use of adjustment mechanisms and the service area’s demographics as having compensated for thin debt service coverage and high leverage.” Now the utility is losing some of that flexibility in its adjustment mechanisms.

LIPA is rated Baa1 by Moody’s Investors Service and A with a negative outlook by Fitch Ratings.

LIPA has about $7 billion in debt outstanding.

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