Fitch Affs 'AA' Rtg on Duke Univ Hlth Sys, NC $433MM Bnds, Stbl Outlook.

Business Editors

NEW YORK--(BUSINESS WIRE)--March 9, 2004

Fitch Ratings today affirms an 'AA' rating on the approximately $433 million outstanding revenue bonds of Duke University Health System, Inc. (DUHS). The Rating Outlook is Stable. DUHS' hospital bonds have been issued through the North Carolina Medical Care Commission.

The affirmation is supported by DUHS' improving financial profile, dominant market share position, excellent clinical reputation, and association with its parent, Duke University. DUHS' fiscal 2003 year-end (June 30) results indicate an operating surplus of $43.4 million for an operating margin of 3.2%. DUHS recorded excess income of $66.3 million for an excess margin of 4.9% and maximum annual debt service (MADS) coverage by EBITDA of 4 times (x). Liquidity continues to grow, with days' cash on hand at 214 as of June 30, 2003, and 226 at Dec. 31, 2003. Operating profitability has been spurred by increased reimbursement from recently negotiated managed care organizations, improved operations from Durham Regional Hospital (DRH) and Durham University Affiliated Physicians (DUAP), DUHS' owned-physician group practices. In 2003, DUHS had a dominant 88% market share position in Durham County where it receives approximately 35% of its discharges, and a 34% market share (ahead of the number two University of North Carolina Health Care System at 32%) in the expanded and competitive three-county Triangle region, where DUHS receives roughly 50% of its total discharges. Outpatient surgery trends are strong, with 40,865 in fiscal 2003, up from 30,060 in 2000. At Dec. 31, 2003, DUHS reported 23,645 outpatient surgeries to date.

Concerns include a continuing competitive Triangle market and relatively static inpatient utilization trends. DUHS' inpatient discharges were 59,302 in fiscal 2003, stable from fiscal 2000 when it reported 59,342 discharges. Additionally, DUHS' days in accounts receivable are considered high, although somewhat improved from recent trends, down from 84 days at June 30, 2001 to 65 at Dec. 31, 2003. While 65 days is below Fitch's 'AA' 2003 medians, it would be considered good relative to major academic medical centers with high tertiary care services. DUHS estimates that it may sell $100 million of debt in the spring of 2005, and Fitch will determine the impact on the rating, if any, at that time.

Duke University Hospital (DUH), the flagship of DUHS, has a very strong clinical reputation and is closely associated with its parent, Duke University (Duke). Although Duke is not obligated for the payment of any of DUHS' outstanding debt, it has several reserved rights under DUHS' corporate bylaws, including the removal and placement of board members and executive management. Further, DUH is located on the campus of Duke, which owns the land and buildings of DUHS. All buildings are leased to DUHS. Duke had $4.6 billion in unrestricted cash and investments as of June 30, 2003.

Based in Durham, NC, DUHS is a large integrated delivery system with three hospitals and several operating subsidiaries. The three hospitals consist of: DUH, which operates 1,114 acute care and specialty beds and is located in Durham, N.C.; DRH, which operates 369 acute care beds and is located in Durham; and RCH, located in Raleigh, which operates 205 acute care beds. DUH is the flagship hospital and accounted for 68% of DUHS' $1.34 billion operating revenues in fiscal 2003. DUHS does not have a formal auditor rotation policy, but it does not permit its auditor to perform consulting work for DUHS. DUHS does have a separate audit committee and Fitch considers DUHS' disclosure to be excellent. Citigroup was the lead underwriter for the series 1998 bonds.

Issues affirmed at 'AA':

-- $183,615,000 North Carolina Medical Care Commission Hospital

revenue bonds (Duke University Hospital Project), series

1998B;

-- $82,170,000 North Carolina Medical Care Commission Hospital

revenue bonds (Duke University Hospital Project), series

1998A;

-- $104,969,000 North Carolina Medical Care Commission Hospital

revenue bonds (Duke University Hospital Project), series

1996C;

-- $6,720,000 North Carolina Medical Care Commission Hospital

taxable revenue bonds (Duke University Hospital Project),

series 1996A;

-- $28,650,000 North Carolina Medical Care Commission Hospital

variable rate revenue bonds (Duke University Hospital

Project), series 1993A;

-- $5,930,000 North Carolina Medical Care Commission Hospital

variable rate revenue bonds (Duke University Hospital

Project), series 1985D;

-- $28,485,000 North Carolina Medical Care Commission Hospital

variable rate revenue bonds (Duke University Hospital

Project), series 1985C;

-- $43,500,000 North Carolina Medical Care Commission Hospital

variable rate revenue bonds (Duke University Hospital

Project), series 1985B.