Fitch lowers LIPA general revenue bond rating

Fitch Ratings Thursday said it lowered its rating for LIPA general revenue bonds to A-minus from A, citing reduced "financial and operational flexibility."

The downgrade reflects $5.9 billion in outstanding LIPA revenue bonds. Bond downgrades can increase borrowing costs of affected entities by increasing their interest rates.

In a note to investors, Fitch said the "intense political and public criticism of LIPA following superstorm Sandy have reduced the authority's rate and financial flexibility to levels more consistent with those of A-minus rated retail systems."

It cited management and board turnover, decreased confidence in the utility's business model, widespread customer dissatisfaction, and "a material expansion in governmental oversight, including newly enacted reform legislation."

The legislation, Fitch said, will "broaden the operating responsibilities of the new system-operator, PSEG Long Island, and expand the regulatory oversight of LIPA."

"The continued negative outlook reflects rate pressures that are likely to remain high over the near-term, and uncertainty regarding future financial goals and policies," Fitch said.

Fitch noted it viewed positively initiatives in the LIPA legislation, including elimination of a state franchise tax, operating efficiencies and a limit on payments in lieu of taxes on LIPA transmission and distribution assets. But it said oversight by a new Long Island branch of the Department of Public Service for LIPA was "a concern."

In a statement, LIPA said it was "disappointed" but "pleased" Fitch recognized its "strong utility fundamentals" and "aggressive steps" toward getting reimbursement for Sandy expenses.