CHICAGO - The water and sewer department at DuPage County, Ill. suffered a downgrade from Standard & Poor's this week amid what the ratings firm warned are volatile debt-service coverage levels.

S&P dropped the county's first-lien water and sewer bonds one notch to AA from AA-plus, and the second-lien debt two notches, to AA-minus from AA-plus.

The outlook is stable at the lower ratings.

"The downgrade reflects our view of the system's all-in debt service coverage, which has exhibited considerable volatility in recent years," said analyst Oladunni Ososami in a statement. The coverage "during a number of years, fell below levels consistent with our AA-plus rating." Coverage was 1.86 times in 2013, falling to 1.4 times in 2014 and S&P said they expect coverage to decline further to 1.3 times in 2015.

If it does not rise to 1.4 times by 2016, or if the system taps its unrestricted cash, S&P could downgrade the bonds again.

DuPage County, an affluent county 20 miles west of Chicago, has a waterworks and sewerage system that serves 38,500 customers.

On the positive side, the debt enjoys strong liquidity levels and benefits from its ties to the Chicago metropolitan area, Ososami said. The water and sewer system also has ample treatment capacity and a manageable capital improvement plan with no immediate borrowing needs, S&P said.

"The stable outlook over the two-year outlook horizon reflects our expectation that the system's use of rate increases can support all-in coverage of at least 1.4 times through 2020 as the utility pursues its capital program," said Ososami. "The strength and stability of DuPage County's diverse economy further support the rating."

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