Fitch Affirms Gateway Regional Health System -- WV-- Bonds at 'BBB'; Rating Outlook Evolving.

Business Editors

NEW YORK--(BUSINESS WIRE)--May 19, 2004

Fitch Ratings affirms the 'BBB' rating on $16.6 million outstanding Berkeley County Building Commission hospital revenue bonds series 1992, issued on behalf of City Hospital. The Rating Outlook has been revised to Evolving from Negative due to the ongoing discussions for a potential merger with Jefferson Memorial Hospital and the borrowing of additional debt. The obligated group consists of City Hospital and its affiliated Gateway Foundation, which are both part of Gateway Regional Health System (GRHS).

The rating is based on GRHS's leading market position, improved fiscal 2003 results for both operations and cash balances, and GRHS's overall liquidity position. GRHS posted operating margins of 1.2% in 2003, its first positive margin since 1997, as revenues increased 9.1% and expenses increased 3.7% over 2002. GRHS reduced roughly 20 full time equivalent employees (FTEs) in 2003, which coincided with higher patient volumes and subsequent revenues. The weak operations in 2002 were largely due to malpractice issues in the state of West Virginia during that year, which made it difficult to retain and recruit physicians, and resulted in fewer admissions and revenue. However, in 2003, the state of West Virginia legislated a $500,000 cap to malpractice non-economic damages, somewhat improving the situation. Fiscal 2004 is expected to break-even as FTEs increase to 2002 levels to meet volume flow, however, through the 3 month interim period results show an actual .8% operating margin. After declining to 160 days cash on hand in 2001, GRHS's liquidity has improved to 183.9 days cash in 2003, which is stronger than Fitch's 'BBB' 2003 median of 112.1 days. GRHS has cash to debt of 181%.

Credit risks include relative proximity to higher tertiary hospitals in Maryland and Virginia, physician recruitment and retention due to the malpractice environment in West Virginia, low debt service coverage and historic operating losses. The 300-bed Washington County Hospital in Hagerston, MD (25 miles east), and the 300-bed Winchester Medical Center in Winchester, VA (30 miles south), are significant competitors who have benefited from the malpractice environment in West Virginia. GRHS's historic operating losses are a concern, but liquid reserves help mitigate some of the risk. Average age of plant is high at 11.9 years, but GRHS plans to borrow about $7.9 million of loans through Merrill Lynch in 2004 for capital expenditures. The proposed structure will likely require GRHS to collateralize unrestricted funds in excess of the outstanding loan amounts. Fitch views this negatively as it will dilute GRHS's balance sheet indicators. When factoring in this borrowing, GRHS's days cash on hand and cash to debt at December 31, 2003 falls to 126.7 days and 124.5%, respectively. MADS coverage will also drop to 2.0 times (x) from 2.8x in 2003 and 1.7x through the interim period. The hospital's large Medicaid patient load (12.7%) also remains a concern.

This Evolving Outlook takes into account the current potential merger of GRHS and a nearby competitor, Jefferson Memorial Hospital (60 operated beds) in Ranson, W.V., together to potentially be aligned with the West Virginia University Hospitals. No final decision has been made regarding this merger, nor has any details regarding how GRHS debt will be treated in a merger situation. With a revenue size of $32.7 million, Jefferson Memorial Hospital had 13.1 days cash on hand, cash to debt of 47.1%, and an operating loss of $1.3 million in fiscal 2003. GRHS's rating will be reevaluated once decisions are finalized and details are provided to Fitch.

Located in Martinsburg, West Virginia, City Hospital is a 260 licensed-bed community hospital (154 operated beds), providing primary and secondary services, roughly 64 miles from Washington D.C. In fiscal 2003, the Hospital had operating revenues of $80 million. The Gateway Foundation, a not-for-profit corporation, was established to support the hospital and its affiliates.

GRHS covenants only to disclose annual financial information to bondholders and Fitch, which has generally been adequate in terms of content and timeliness. Although the covenants do not require quarterly disclosure, management will provide quarterly financial information when requested. GRHS does not have a separate audit committee or policy to rotate auditors.