Fitch Rates Geisinger Health System (PA) $190 MM Variable Rate Bonds 'AA-/F1+';...

NEW YORK -- Fitch Ratings has assigned a rating of 'AA-/F1+' to the $190 million of Geisinger Authority (Montour County, PA) health system revenue bonds, series 2005, (Geisinger Health System) consisting of:

-- $65 million series A;

-- $62.3 million series B;

-- $62.7 million series C.

The 'AA-' long-term rating reflects the credit quality of Geisinger Health System (GHS). The 'F1+' short-term rating for the series A is based on liquidity provided by GHS. The short-term rating of 'F1+' for the series B and C bonds is based on the liquidity support provided by Wachovia Bank, N.A., in the form of two separate standby bond purchase agreements (SBPAs). The SBPAs are sized to provide for the entire principal amount of the series B and C bonds, plus 34 days of interest coverage.

The SBPAs will expire on July 6, 2006, unless such date is extended, or upon the occurrence of other events of termination, according to their terms. Fitch's short-term rating on the series B and C bonds will expire upon any prior termination of the respective SBPAs. The series 2005 A, B, and C bonds are expected to price the week of July 4, 2005 through negotiation led by Citigroup and JPMorgan Securities Inc. The remarketing agent for the series A bonds is Citigroup and JPMorgan is the remarketing agent for the series B and C bonds. The bonds are expected to be available for delivery on or about July 7, 2005.

The series A bonds will bear interest in the weekly rate mode and series B and C will bear interest in the daily rate mode. The bonds can be converted to a daily, weekly, commercial paper, auction, or a long-term rate mode. While the bonds bear interest in the weekly or daily rate mode, interest is payable on the first business day of each calendar month, commencing Aug. 1, 2005. Holders of the bonds bearing interest in the daily or weekly rate modes may tender their bonds for purchase with prior notice. The bonds are subject to mandatory purchase: on any interest rate mode conversion date; on the day following the last day of any long-term rate period; on the termination or expiration of the SBPAs for the series B and C bonds; upon the substitution of the SBPA, if the substitution would result in the withdrawal or reduction in the current short-term rating assigned to the bonds; and on each interest payment date during a commercial paper rate mode. The bonds are also subject to optional and mandatory redemption provisions pursuant to the terms of the trust indenture.

Proceeds of the series 2005 bonds will be used to fund a pooled loan program for GHS' affiliates, current refund the series 2000 bonds, and pay costs of issuance. Of the proceeds, $125 million of the series 2005 B and 2005 C bonds will be held in an escrow deposit account that will be invested in U.S. Government agency obligations, and will be used to pay principal and interest on the refunded 2000 bonds on or about Oct. 5, 2005, the redemption date.

Fitch also affirms the outstanding debt listed below:

-- Geisinger Authority (PA) (Geisinger Health System) health system revenue bonds series 2002 'AA-';

-- Geisinger Authority (PA) (Geisinger Health System) health system revenue refunding bonds series 2000 'AA-/F1+';

-- Geisinger Authority (PA) (Penn State Geisinger Health System) health system revenue bonds series 1998A 'AA-'.

The 'AA-' rating is supported by GHS' strong balance sheet, leading market share, improving patient volume, and low debt burden. GHS had 183.5 days cash on hand ($655 million unrestricted) and cash-to-pro forma debt of 204.7% at March 31, 2005. GHS' status as the leading provider in central Pennsylvania (41% market share in 2004) is supported by its integrated delivery system, which provides broad market penetration through its health plan, and multi-specialty physician practices. The Geisinger Health Plan provides comprehensive health insurance coverage for nearly 220,000 individuals, covering 40 out of the 67 counties in Pennsylvania. As of March 31, 2005, GHS has 616 employed physicians practicing in 56 clinics. In fiscal 2004, there were approximately 1.3 million patient visits to Geisinger Medical Groups. Overall, Fitch believes GHS' integrated delivery model provides a competitive advantage by steering patients to GHS facilities, and by providing greater control over medical costs through its owned physician practices.

Inpatient volume increased 7.5% from fiscal 2003 to fiscal 2004, and as of March 31, 2005, inpatient volume is up nearly 5% compared to the previous year. Increased revenue and improvements in profitability have led to solid pro-forma maximum annual debt service (MADS) coverage of 5.3 times (x) for March 31, 2005, up from 4.3x at June 30, 2004. MADS as a percent of revenue was a low 1.5% and 1.6%, for March 31, 2005 and June 30, 2004, respectively, indicating a low debt burden.

Credit concerns include low historical operating profitability, the possibility of future revenue constraints in the health plan, and the challenge of integrating a new facility. GHS posted breakeven profitability in fiscal 2004 after several years of operating losses. Through the nine months ended March 31, 2005, GHS' operating profit improved to 2.5%, indicating ongoing improvements. As of March 31, 2005, Medicare + choice members accounted for approximately 15.6% of Geisinger Health Plan's (GHP) total members, up from 14.4% at June 30, 2004. Fitch remains concerned that GHP is susceptible to possible federal cutbacks in Medicare premiums. Additionally, Fitch believes the rate of premium growth for commercial contracts going forward could be lower than in recent years.

GHS is planning to acquire most of the assets of Mercy Hospital in Wilkes-Barre, PA, from Catholic Healthcare Partners (rated 'AA-' by Fitch). Mercy Hospital in Wilkes Barre (MWB) is located approximately seven miles away from Geisinger Wyoming Valley Medical Center (GWV) and competes for patient volume in the same service area. MWB has historically been unprofitable with a smaller market share than GWV. The preliminary terms of the transaction that were shared with Fitch include the sale of substantially all of MWB's fixed assets to GHS. GHS will assume only limited liabilities, such as certain leases. While the terms of the transaction are expected to have a minimal impact on GHS' balance sheet, the integration of the hospital into GHS' system could be challenging.

The Rating Outlook is Stable and reflects Fitch's expectation that GHS will continue to improve its operating performance and will remain the leading provider for central Pennsylvania. Also, Fitch expects that the increase in GHS' market share through the acquisition of Mercy Hospital will lead to improved system profitability over the medium term.

GHS entered into a floating- to fixed- interest rate swap on June 30, 2004. The notional amount of the swap is $80 million through Aug. 1, 2022, and $40 million from Aug. 1, 2022 through August 1, 2028. The counterparty on the swap is JPMorgan Chase Bank, N.A. Termination payments are on parity with existing debt, which Fitch views negatively, but notes it is industry standard. GHS can terminate the swap at any time. The swap was originally entered into to synthetically fix the interest costs for the series 2000 bonds. While the series 2000 bonds will be refunded with the series 2005 B and 2005 C bonds, management intends to let the swap mature with the series 2005 bonds.

GHS is composed of the Geisinger Medical Center in Danville (364 licensed beds), Geisinger Wyoming Valley Medical Center in Wilkes-Barre (161 licensed beds), Marworth alcohol and dependency treatment center in Waverly, the Geisinger Health Plan (with approximately 220,000 covered lives), and 56 multi-specialty group practices employing approximately 616 physicians serving 31 counties in Pennsylvania. GHS covenants only to provide annual financial information to bondholders and no quarterly disclosure, which Fitch views negatively. However, Fitch does note that GHS voluntarily provides thorough and timely quarterly disclosure to investors, which includes balance sheet, income statement, cash flows, utilization statistics and management discussion and analysis.

Fitch's rating definitions are available on the agency's public web site, 'www.fitchratings.com'. Published ratings, criteria and methodologies and relevant policies and procedures are also available from this site, at all times. This document will remain on the public site for seven days.