Correction - Fitch Affirms Denver Health and Hospital Authority, CO's Revs at 'BBB+'; Outlook Stable.

NEW YORK -- (This is a revision of a release issued on Oct. 20, 2009. It updates financial data throughout the release.) Fitch Ratings affirms the 'BBB+' rating on the approximately $198 million in outstanding Denver Health and Hospital Authority (DHHA) healthcare revenue bonds series 2007A and 2007B. The Rating Outlook is Stable.

The rating affirmation incorporates the expectation that within the next few weeks DHHA will be exchanging a portion of its 2007B floating-rate notes for fixed-rate bonds. Depending on the final number of notes exchanged, the note exchange is expected to lower DHHA's debt burden. DHHA will terminate a proportional notional value of a floating- to fixed-rate swap, the cost of which will be included in the issuance of the fixed-rate debt. DHHA management indicated that it plans to use some of this additional debt capacity in 2010 to fund a new 80,000 square foot building on its campus. Preliminary indications on the size of the debt issuance have been factored into the analysis and are not a credit concern. Fitch will take appropriate rating action as DHHA finalizes its plans.

The rating recognizes DHHA's critical role in providing public health services to both the city of Denver (rated 'AA+' by Fitch) and the State of Colorado, evidence of strong governmental support, relatively small debt burden, and solid debt service coverage. The essentiality of the services DHHA provides as both the 'safety net' health care system for the region and as a part of Denver and Colorado's public health infrastructure are key credit strengths. DHHS has the busiest trauma center in the state and cares for one in four residents of Denver as well as 35% of its pediatric population. These strengths offset DHHA's historical reliance on governmental subsidies and an extremely high uninsured and Medicaid load.

DHHA's operating performance has improved considerably. For fiscal 2008, the system earned $2.1 million from operations (positive 0.3% operating margin). Investment earnings of $7.6 million produced a positive bottom line of $9.7 million (1.4% bottom line margin). In 2008, disproportionate share and other governmental reimbursement income declined 2.58% from 2007, but DHHA was able to offset declining governmental revenues by achieving a 19% increase in net patient service revenue between 2007 and 2008; premium revenues increased 17% over the same period. For the eight month period ending Aug. 31, 2009, the system has earned $2.9 million from operations (0.6% operating margin) and $6.8 million in excess income (1.4% excess margin).

The system is reliant on governmental support for profitability although that reliance has lessened somewhat as operating performance improves. For the eight month period ending August 2009, DHHS received approximately $42 million in disproportionate share (DSH) and upper payment limit (UPL) payments and additional federal funds support. DHHA continues to diversify its revenue base to offset reliance on governmental sources of revenues.

While net patient service revenue accounts for the majority of total system revenues, DHHA has expanded its revenue base by providing a wide breadth of public health services for the city, including operation of the 911 emergency system, public health services, detoxification facilities, medical services for inmates and psychiatric evaluation. DHHA has secured about $44.1 million in contracts from the city for these services. The system also provides regional health services and operates the Rocky Mountain Center for Medical Response to Terrorism and the Rocky Mountain Regional Trauma Center. Overall, for the eight month period ending August 2009, government support, including the DSH/UPL payments, accounted for almost 23% of total system revenues.

Improvements in operating performance have also been driven by DHHA's adoption of 'Lean' methodology. Various initiatives around accounts receivables, staffing, productivity, and collections had a positive effect on net income of approximately $18 million through fiscal 2008 and will continue to benefit operations moving forward. Since 2005, DHHA has placed an additional 70 beds in service increasing the system's staffed bed capacity by approximately 17%, but Lean initiatives and enhanced throughput efforts implemented by the system over the same period has allowed the system to increase total admissions (excluding newborns) by cumulative 38% over the same period. For fiscal year 2009, facing the potential for further cuts in governmental reimbursement, the system has already implemented contingency plans to enhance cost containment efforts, including restricting the use of overtime and agency use and a reduction in capital expense for new projects.

DHHA continues to have a manageable debt load. Through the interim period, maximum annual debt service (MADS) coverage by EBITDA of 4.0 times (x) was ahead of Fitch's median for the 'BBB' category. Debt service requirements as a percentage of revenues remain very manageable at 1.8%, compared to the category median of 3.5%.

Historically, DHHA's liquidity ratios are below Fitch's 'BBB' category medians, but liquidity ratios are gradually improving as operating performance strengthens for the system. In fiscal year 2008, days cash on hand (DCOH) was 74.9 and for the eight month period ending August 2009, DCOH was 74.7. In fiscal 2007, DHHA had 60 days of cash on hand. Concerns regarding DHHA's low liquidity are mitigated by the system's low debt burden and favorable capital related indicators that have remained at or above 'BBB' category medians. DHHA's cushion ratio as of August 2009 is 9.2x ahead of Fitch's rating median of 8.1x, and the system's debt to capitalization ratio of 33.6% is well below Fitch's median of 49.2% for the category.

The system also has a very conservative investment policy. State statures require that DHHA use eligible depositories for its cash reserves, where the depository is obligated to collateralize those deposits not FDIC insured. In addition, DHHA's investments are restricted to highly rated treasuries or corporate bonds. The system does not have derivatives or hedge funds in its investment portfolio.

The Stable Rating Outlook is based on Fitch's expectation that DHHA will continue to operate at or near current levels of profitability given its critical public health role for the city of Denver. Additionally, with the recent departure of the University of Colorado, St. Anthony's Central Hospital (scheduled to move out in 2012) and the Children's Hospital from downtown Denver, and the recent investments DHHA has made in its facilities, DHHA continues to grow market share in core services as well as new service lines, which should support positive operating performance.

Finally, while DHHA's operating profile has improved over the last few years, the system's exposure to government funding remains a main credit concern. Positive pressure on the rating is dependent on the strengthening of DHHA's balance sheet to offset the payment volatility and risk inherent at this level of exposure to government funding.

Denver Health and Hospital Authority is a regional integrated delivery network which serves as the major safety-net provider in Colorado. The system has 387 operated beds (477 licensed bed capacity) at its main campus in Denver, including a 100-bed substance abuse facility and eight family health centers throughout Denver. DHHA covenants to disclose quarterly unaudited and annual audited financial statements to registered bondholders upon written request. Quarterly disclosure includes a balance sheet and income statement, utilization statistics and management discussion and analysis.

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