Fitch Affirms San Juan Regional Medical, New Mexico Revs at 'A-'; Outlook Stable.

NEW YORK -- Fitch Ratings affirms the 'A-' rating on approximately $45.3 million City of Farmington, New Mexico (San Juan Regional Medical Center, Inc. Project) hospital revenue bonds listed at the end of the press release. For certain outstanding issues, the action pertains to the underlying rating since the bonds are insured by Ambac Insurance Corp. or backed by an irrevocable bank letter of credit provided by Bank of Nova Scotia. The Rating Outlook is Stable.

The rating affirmation reflects San Juan Regional Medical Center, Inc.'s (SJRMC) dominant market share, solid profitability, and debt service coverage, and strong community support. SJRMC's operating margin continues to trend positively and is strong at 6.4% in fiscal 2004, compared with 4.4% in fiscal 2003. Through the three months ended Sept. 30, 2004, the operating margin was 10%, compared with the budgeted margin of 5.9% for the period. Strong profitability has led to solid MADS coverage of 5.7x in fiscal 2004 and 8.2x through the three months ended Sept. 30, 2004. Operating cash flow has been strong with cash flow margin averaging 12.1% over the past three fiscal years. Fitch believes SJRMC has extremely strong community support, which is exhibited by the approval of a gross receipts tax (GRT) in San Juan County to fund approximately half of the hospital's expansion project.

Short term concerns relate to construction risks associated with SJRMC's hospital expansion. SJRMC is currently constructing a new patient tower that was financed with the series 2004 bond proceeds in conjunction with GRT revenue bonds issued by San Juan County (GRT revenue bonds rated 'A+' by Fitch). The project was originally budgeted to cost $58 million. However, rising raw material costs have resulted in higher-than-expected construction bids for the project that will cost an additional $8 million. SJRMC will fund the cost overruns primarily through operating cash flow in fiscal years 2004 and 2005. In addition, a shelled fifth floor will be added to the project with $1.5 million expected to be funded from a state capital outlay and $1 million from hospital cash flow. The expanded scope of the project will delay the completion time to August 2006. As such, Fitch is concerned with potential additional costs and delays associated with the project. The relatively large scale of the project will continue to require close monitoring from management. An ongoing risk includes SJRMC's unfavorable payor mix. SJRMC's gross revenues are composed of a high proportion of Medicaid (15%) and self-pay (8%) payors, which is reflective of the low income levels of the service area.

The Stable Rating Outlook reflects Fitch's belief that SJRMC will continue to exhibit strong operating profitability due to its dominant market share and sole community provider status. Fitch expects this to translate into strong debt service coverage and cash flow levels. SJRMC's strong operating performance should help mitigate against any unforeseen project costs or delays. However, construction risks related to the hospital expansion, as well as, physician recruitment will continue to challenge management over the short term.

San Juan Regional Medical Center, located in Farmington, NM, approximately 185 miles northwest of Albuquerque, is a sole community provider acute care hospital with 168 staffed beds. Total revenue in fiscal 2004 was $155 million. SJRMC covenants to provide annual audited financials within 150 days of fiscal year-end and quarterly disclosure (includes balance sheet, income and cash flow statements, and utilization data) within 60 days of quarter-end to the nationally recognized municipal securities information repositories. To date, disclosure to Fitch has been good in terms of content and timeliness.

Outstanding debt issues:

-- $16,500,000 City of Farmington, New Mexico hospital revenue bonds (San Juan Regional Medical Center, Inc. Project), series 2004A 'A-';

-- $15,000,000 City of Farmington, New Mexico hospital revenue bonds (San Juan Regional Medical Center, Inc. Project), series 2004B 'A-'*;

-- $13,780,000 City of Farmington, New Mexico hospital revenue bonds (San Juan Regional Medical Center, Inc. Project), series 1997 'A-'**;

*Underlying rating. Fitch was not asked to rate the bonds based on the letter of credit provided by Bank of Nova Scotia. **Underlying rating. The bonds are insured by Ambac Assurance Corp., whose insurer financial strength is rated 'AAA' by Fitch.