New York State is spreading the word that a recent $2.3 million revenue bond issue that barely mustered an investment-grade rating will serve as a financing blueprint for private companies forced to comply with federal safe drinking water regulations.

The deal, sold in August by the state's Environmental Facilities Corp., financed capital improvements for three small water companies in upstate New York.

The companies -- Saratoga Water Services Inc., Hunter Water Supply Corp., and Cambridge Water Works Co. -- are required under the federal Safe Drinking Water Act of 1986 to make a variety of improvements to their distribution and filtration systems.

The Environmental Facilities Corp. issues bonds on behalf of municipalities such as New York City and private entities looking to reduce their cost of capital in complying with federal environmental mandates. In the August transaction, the corporation issued a combination of privately placed tax-exempt bonds and negotiated taxable securities.

First Albany Corp. served as agent for $2.04 million in tax-exempt term bonds that yield 7.15% and will mature in November 2014. The firm also underwrote $225,000 of taxable bonds, maturing in November 1999 and yielding 8.50%.

Executives at the facilities corporation say they began work on the issue about two years ago, when the act's mandates began to affect private water companies.

New York's Public Service Commission, which regulates public utilities in the state, called on the corporation to develop a program to help smaller, less capitalized water companies comply with the act's provisions.

The commission identified as many as 300 small water service companies that would find it nearly impossible to comply with the mandates without outside financing assistance.

In 1992, the facilities corporation formally established the Consolidated Water Company Financing Program. Under the program, each private company would leverage surcharges or user fees by pooling these revenues into a fund and then selling bonds. The revenues would pay debt service on bonds sold by the corporation.

The program offers a number of measures to provide bondholder security. For example, each company is required to collect a surcharge from its customers. The money is placed in an escrow account with the facilities corporation.

If one of the companies goes into default, the others will, in effect, pick up at least part of the tab as the facilities corporation taps the escrow account to make up the shortfall.

Officials at the corporation say they expect more private companies to join the program if and when new Safe Drinking Water Act provisions before Congress take effect.

"Standards in the current version of the act before Congress require higher levels of compliance," says David Liebschutz, the corporation's director of marketing and special projects. "That requires more companies to come into compliance."

Even with the security measures, the $2.3 million revenue bond issue received only a minimum investment-grade rating of BBB-minus from Fitch Investors Service.

Market sources speculated that the deal may not have mustered an investment-grade rating from the other major rating agencies, Moody's Investors Service or Standard & Poor's Corp. But underwriters at First Albany said they did not seek a rating from either of those credit agencies because of the additional costs involved.

Facilities corporation officials, for their part, said the three companies would have found it nearly impossible to obtain even a BBB-minus rating on their own. Each company provides water services for fewer than 2,000 customers. Such small-scale operations with little or no credit history are often effectively shut out of the credit markets.

"The program is targeted at smaller companies that have had difficulty in obtaining long-term capital financing," said Edward K. Flynn, a senior vice president at First Albany. "For them, capital is not readily available."

Ronald Fielding, president of the Rochester Funds, said he bought most of the issue -- $1.8 million of $2.3 million. Fielding said he felt comfortable with the rating and the deal's price.

"I happen to think water companies are among the safest revenue projects" from a credit perspective, Fielding said. "Water is a perfectly essential commodity."

Still, the program's overall success was clearly mixed. Corporation officials and underwriters say that originally the deal was to provide financing for seven companies. Officials at the facilities corporation say four of the seven backed out for a variety of reasons, including the ability to obtain better financing terms on their own.

But corporation officials are not flinching. Liebschutz said. He expects many other companies to take part in the program as they come to grips with the potentially stricter federal mandates.

"This will take off as time goes on," Liebschutz said. "It's a new program and it's a good blueprint of financial assistance for small water companies not just in our state but across the country."

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