Fitch Affirms Northeast Georgia Health System, Georgia Bonds 'A'.

NEW YORK -- Fitch has affirmed the 'A' rating on the approximately $239 million of Northeast Georgia Health System's outstanding debt listed below. The Rating Outlook has been revised to Stable from Positive.

Since Fitch's initial rating in 2001, Northeast Georgia Health System (NGHS) has exhibited weakened profitability trends with a 0.7% operating margin in fiscal 2004 and negative 0.2% through the eight months of fiscal 2005 compared with historical profitability ratios of 2%-3% operating margins. The decline in operating performance has been attributed to rising expenses namely bad debt and salaries, wages, and benefits. The organization has implemented several cost reduction initiatives including a reduction in force and restructuring employee benefits. Management's goal is to reduce costs by $20 million by 2006 and $13 million has already been identified. Fitch believes these initiatives are achievable and expects NGHS to return to historical profitability levels. The full fiscal 2005 budget includes a 1.0% operating margin, which Fitch expects NGHS to meet. Despite the operating loss through the interim period, the budget should be met due to the receipt of approximately $3 million from the indigent trust fund later in the year and labor force reductions anticipated in the remainder of the fiscal year.

NGHS's credit strengths include its strong liquidity and cash flow margins, investment in its plant, favorable market position, and solid utilization trends. NGHS maintains strong liquidity ratios despite healthy levels of capital investment in its plant with 291 days cash on hand at fiscal year-end 2004. Strong cash flow has led to the sound liquidity position with double-digit EBITDA margins that have averaged 14% over the past five years. Capital investment has averaged 145% of depreciation expense over the past five years, which Fitch views favorably and has led to a young average age of plant of 8.3 years. NGHS has transitioned into a regional referral center with the addition of an open heart program in 2002, which has exceeded original volume projections. The open heart program was funded with the series 2001 bond issuance, and the project was on time and on budget. Open heart cases totaled 565 in fiscal 2004. NGHS maintains the leading market position in its total service area with 36% market share in 2004 up from 35% in 2001. In addition, this is five times the market share of the next closest competitor, Gwinnett Medical Center with 7.2% in 2004. Due to the solid population growth, utilization trends have been favorable with an increase in discharges of 7% and 4%, respectively in fiscal years 2003 and 2004 and an increase in outpatient surgeries of 7% and 6%, respectively, over the same time period.

Credit concerns include future capital needs and rising bad debt expense. Due to the strong growth in NGHS' service area, the organization is considering two significant expansion projects. NGHS has already received a certificate of need for an additional 96 beds at its main campus. In addition, the organization may potentially add inpatient capacity in South Hall County, which is one of the fastest growing counties in its service area. The capital plan for fiscal years 2006-2010 totals $330 million and additional debt is expected in 2006. Fitch will evaluate the impact the additional debt on NGHS' rating at the time of issuance. Despite the recent pressures on operating performance, debt service coverage has remained sound, averaging 2.8x over the past three fiscal years and was 3.1x through the eight months ended May 31, 2005. Bad debt expense has increased significantly to $29 million in fiscal 2004 from $17 million in fiscal 2002. Bad debt expense constituted 10% of total revenue through the eight months ended May 31, 2005. Rising bad debt expense has been attributable to NGHS' status as a regional referral center, which has resulted in an increase in self-pay payors. Self-pay constituted 11% of NGHS' gross revenue in fiscal 2004 from 8% in fiscal 2002. Management engaged H*Works on a revenue cycle project that focused on front-end collections. Although bad debt expense has increased, days in accounts receivable has declined to 38.7 days as of May 31, 2005 from 50.2 days at fiscal year-end 2002.

Fitch expects NGHS to return to historical profitability levels due to the implementation of several cost-saving initiatives. The Outlook is Stable due to NGHS' large capital plan over the next five years, which is a considerable increase in spending from prior years. Fitch believes management's greatest challenge is balancing the level of capital investment to meet the demands of the growing service area without overleveraging its balance sheet. If the expected operating improvement is not achieved, there could be downward pressure on the rating due to the additional debt anticipated.

NGHS intends to enter into a forward starting floating-to-fixed interest rate swap this month with Citibank as the counterparty. The swap is intended to lock in a fixed rate in anticipation of the issuance of variable-rate bonds this fall to refund a portion of its outstanding debt.

Northeast Georgia Health System is located in Gainesville, GA (approximately 53 miles northeast of Atlanta) and includes two campuses within the hospital system with a total of 464 staffed beds, two skilled nursing facilities, and a primary care network operating in nine surrounding counties. NGHS had total operating revenue of $384 million in fiscal 2004. NGHS covenants to provide annual and quarterly disclosure to bondholders. Disclosure to Fitch has been good with the receipt of timely financial statements that include a balance sheet, income statement, and utilization statistics. Management has not provided a cash flow statement to date; however, it intends to going forward.

Outstanding debt:

--$96,233,000 The Hospital Authority of Hall County and the City of Gainesville revenue anticipation certificates (Northeast Georgia Health System, Inc. Project), series 2001;

--$92,388,000 The Hospital Authority of Hall County and the City of Gainesville revenue anticipation certificates (Northeast Georgia Health System, Inc. Project), series 1999 (1);

--$50,653,000 The Hospital Authority of Hall County and the City of Gainesville revenue anticipation certificates (Northeast Georgia Health System, Inc. Project), series 1995 (1).

(1) Insured by MBIA whose insurer financial strength is rated 'AAA' by Fitch.

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.