Fitch Ratings downgraded the Puerto Rico Electric Power Authority’s revenue bonds two notches to BBB-minus from BBB-plus on Monday. The downgrade affects $7.95 billion in debt.

In explaining the downgrade, Fitch pointed to three positive ratings drivers, three negative ones and one mixed one.

On the negative side of the ledger, Fitch-calculated debt service coverage, after adjusting for contributions in lieu of taxes, has remained close to 1.0x in recent years, and Total debt has risen steadily since 2009.

Also, Fitch notes that total receivables remained high at 25% of revenues in fiscal 2012.

Third, Fitch is concerned with PREPA’s reliance on the Government Development Bank of Puerto Rico for occasional monetary support.

On a mixed note, Fitch believes that PREPA’s customer base is diverse. However, the commonwealth’s government is economically weak.

On the positive side, PREPA is the sole provider of electricity to Puerto Rico. It is the largest municipal power system in the United States, with 1.47 million customers and $5 billion in annual revenues.

Fitch also noted that PREPA’s management has been working to reduce dependency on costly oil-fired generation. Use of oil generation has gone from nearly 100% in the 1990s to about 61% now. If planned plant conversions are completed, annual fuel costs could decline by 40% ($1 billion) by 2018.

PREPA has also been taking steps to improve revenue collections and reduce operating costs. For example, it is working to reduce energy theft and contributions in lieu of taxes to municipalities.

The rating also takes into account PREPA’s weakened balance sheet and declining energy sales through fiscal 2013.

Fitch has a stable outlook on the rating.

In late June Standard & Poor’s downgraded PREPA to BBB from BBB-plus and Moody’s Investors Service downgraded it to Baa3 from Baa2.

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