Fitch Affirms Lucile Packard Children's Hospital at Stanford (California) Bonds at 'AA'.

SAN FRANCISCO -- Fitch Ratings affirms the underlying 'AA' rating on the outstanding Lucile Packard Children's Hospital (LPCH) bonds listed below. The Rating Outlook is Stable.

--$60,000,000 California Health Facilities Financing Authority (Lucile Salter Packard Children's Hospital at Stanford) series 2003 A and B; Ambac insured;

--$55,000,000 California Health Facilities Financing Authority (Lucile Salter Packard Children's Hospital at Stanford) Series 2003 C; Ambac insured;

--$33,600,000 ABAG Finance Authority for Nonprofit Corporations 1993 certificates of participation (Lucile Salter Packard Children's Hospital at Stanford Project); Ambac insured; liquidity provided by Bayerische Landesbank Girozentrale.

The rating affirmation is based on LPCH's strong operating performance in fiscal 2006, evidenced by good liquidity and high maximum annual debt service (MADS) coverage of 6.8 times (x). Operating income was a healthy $43.1 million in fiscal 2006 (8.5% operating margin), compared with $47.0 million (9.9% operating margin) in fiscal 2005. At Aug. 30, 2006, days cash on hand was 208 days (down from 240 days) and cash to debt was 165% (down from 177%). The reduction in liquidity measures were a result of LPCH's acquisition of two buildings on the Stanford University campus, which were financed from unrestricted cash; however, LPCH will reimburse itself for this cost from unspent proceeds of the 2003 bonds. Other credit strengths include LPCH's history of strong philanthropic support, clinical reputation, close relationship with Stanford University, and low debt burden.

Credit risks remain LPCH's sizable capital plan and exposure to Medi-Cal reimbursement. Phase I of LPCH's large capital plan is under way and is projected to be completed in 2008. Fitch views the plan favorably because it will provide LPCH with seven operating rooms and will result in additional intensive care and oncology capacity with limited impact to the hospital's unrestricted cash position. Phase II of the capital plan is slated to commence in 2009. Cost estimates for the plan are $700 million. Final sources and uses of funds are not yet available, but LPCH expects to finance at least $200 million from ongoing operations; other sources of funds include philanthropy and, if necessary, additional debt. Fitch believes LPCH will continue to achieve solid operating and cash flow margins and continued philanthropic support to help fund the capital plan while maintaining a manageable debt burden and a healthy balance sheet. Medi-Cal reimbursement accounted for 39% of the hospital's gross patient revenues, rising from 32% in the prior year. Given the reliance on Medi-Cal reimbursement rates, vulnerability to state and federal funding remains a concern.

LPCH is a 264-bed hospital devoted to the care of children and expectant mothers. The main facility is located in Palo Alto, California on the Stanford University campus. Total revenue in fiscal 2006 was $504.8 million. LPCH covenants to provide annual and quarterly disclosure to bondholders through the Nationally Recognized Municipal Securities Information Repository (NRMSIR), which Fitch views positively. Quarterly disclosure includes balance sheet, income statement, and statement of cash flows but does not include a management discussion and analysis.

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