Fitch Rates Providence Health & Services (Washington) 2006H & I 'AA'; Outlook Positive.

NEW YORK -- Fitch Ratings has assigned an 'AA' rating to Providence Health & Services' (PHS) approximately $110 million series 2006 H and I bonds as listed below:

--$57,355,160 Alaska Industrial Development and Export Authority revenue bonds, series 2006H;

--$58,735,000 Providence Health & Services Obligated Group direct obligation variable-rate notes, series 2006I.

The 2006 H bonds are expected to price the week of Nov. 13 and the 2006 I bonds are expected to price the week of Nov. 27, both through negotiation led by Merrill Lynch & Co. Fitch also affirms the 'AA' rating assigned to PHS' outstanding debt listed at the end of the release. The Rating Outlook remains Positive.

The series 2006 H and I bonds constitute Phase II of PHS' planned debt issuance for 2006. Phase I consisted of approximately $570 million series 2006 A-G bonds issued in June 2006. The series 2006H bonds will be issued with a fixed interest rate through the Alaska Industrial Development and Export Authority; the series 2006I bonds will be issued by PHS as taxable direct obligation auction rate securities. Series 2006H bond proceeds will be used to build a new comprehensive community cancer center on the campus of Providence Alaska Medical Center, while series 2006I proceeds will fund construction and remodeling at various existing PHS facilities.

The 'AA' rating reflects PHS' strong profitability, solid liquidity, strong debt service coverage, leading market share in geographically dispersed markets, and management practices. Through the first 8 months of fiscal 2006 (Aug. 31, 2006, interim period), PHS reported an operating margin of 5% ($197.5 million in operating income), up from the 4.7% reported in fiscal 2005 and well above Fitch's 'AA' median of 3.4%. Despite funding numerous capital projects from cash flow, PHS has successfully strengthened its liquidity over the last few years.

At Aug.31, 2006, PHS had 168.5 days cash on hand (DCOH) and cash to debt of 163.7%, down slightly from 2005's 176.1 DCOH and cash-to-debt of 181.9%, but above the levels reported for 2003 and 2004. Despite the liquidity improvement, PHS' DCOH is still below the Fitch 'AA' median of 230 days. 2006's year-to-date favorable profitability contributed to very strong pro forma coverage of maximum annual debt service (MADS), rising to 7.9 times (x) from 2005's 6.6x, and well above Fitch's 'AA' median of 4.8 x. Through the interim period, PHS' proforma MADS as a percent of revenue, debt to EBITDA, and debt to capitalization were low at 1.7%, 2% and 28.7%, and all stronger than Fitch's 'AA' medians of 2.8%, 2.7% and 33.1%, respectively.

Primary credit concerns are PHS' increasingly competitive service areas and lack of security for bondholders. PHS controls and operates facilities in what Fitch believes to be competitive markets, most notably in Oregon and Southern California. PHS maintains a leading market share of approximately 38% in its Portland market; however PHS competes for patient volume with a number of other large health systems as well a growing number of independent physician ventures. Some of the geographical regions where PHS operates continue to be pressured by nursing shortages and rising malpractice premiums. In general, PHS' business and financial covenants while standard, are weak, providing minimal bondholder protection.

The Positive Rating Outlook is based on Fitch's expectation that PHS' strong financial performance should be sustainable over the medium term due to strategic growth initiatives and gains in efficiency from a successful consolidation of the recent merger. Fitch also believes PHS is in a position to strengthen its standing within its competitive markets.

PHS, a fully integrated health care system, was created on Jan. 1, 2006 by the consolidation of Providence Health System (PH), with headquarters in Seattle, Washington, and Providence Services (PS), with headquarters in Spokane, Washington. The obligated group members of PH and PS joined to form the new obligated group for PHS. PHS owns (or leases) and operates 26 acute care hospitals and 10 skilled nursing facilities with a combined licensed bed complement of 7,442 beds, all as of Aug.31, 2006, as well as a health plan with over 2.7 million members.

PHS includes health care facilities and related health care service providers located in the states of Washington, Alaska, Oregon, Montana and California. The new obligated group represents 89.5% of PHS' total operating revenues, 84.3% of total income from operations, and 87.5% of total assets and total liabilities. As of Dec. 31, 2005, PHS' debt totaled $933,870,000 and PS' totaled $361,035,000. In 2005, PHS reported unaudited total operating revenues of $5.585 billion. PHS covenants to disclose to the Nationally Recognized Municipal Securities Information Repositories (NRMSIRs) annual financial information but not quarterly information, which Fitch views as a weak legal covenant. PH's disclosure practice has been to provide annual audited information to the NRMSIRs but not quarterly statements, which Fitch views negatively.

However, PHS recently covenanted (through a supplemental to the master trust indenture) to post annual audited financial statements and quarterly unaudited financial statements on its web site, 'www.providence.org', and Fitch views the timely posting of financial information on a provider's website as a favorable management practice. Quarterly information includes balance sheet, income statement, cash flows, management discussion and analysis and some utilization statistics.

Fitch has affirmed the 'AA' rating on the outstanding issues for Providence Health:

Washington Health Care Facilities Authority

--$212,165,000 revenue bonds, series 2006A (1);

--$69,425,000 revenue bonds, Series 2006C (2);

--$69,275,000 revenue bonds, Series 2006D (2);

--$26,350,000 revenue bonds, Series 2006E -(2);

--$105,200,000 revenue bonds, series 2001A (3);

--$24,925,000 revenue bonds, series 2001B (3);

--$9,360,000 revenue bonds, series 1999 (Sisters of Providence);

--$6,285,000 revenue bonds, series 1995 (Sisters of Providence).

Montana Facility Finance Authority

--$68,430,000 Revenue Bonds, Series 2006B (1).

Providence Health and Services Obligated Group

--$64,505,000 taxable refunding bonds, series 2006F;

--$60,575,000 taxable refunding bonds, series 2006G;

--$58,370,000 taxable revenue bonds, series 2005 .

Hospital Facilities Authority of Multnomah County, Oregon 

--$100,000,000 revenue bonds, series 2004.

Alaska Industrial Development and Export Authority

--$18,550,000 revenue bonds, series 2003C;

--$36,000,000 revenue bonds, series 2003H;

--$3,390,000 revenue bonds, series 1985 (Providence Medical Office Building Associates).

Hospital Facility Authority of Clackamas County, Oregon 

--$213,475,000 revenue bonds, series 2003D-G.

California Health Facilities Financing Authority

--$157,400,000 insured variable-rate revenue bonds, series 2001A-C (3);

--$62,540,000 health facility revenue bonds series 1998 (Little Company of Mary Health Services);

--$24,165,000 health facility revenue bonds, series 1996 (Sisters of Providence).

Sisters of Providence Obligated Group

--$23,355,000 direct obligation notes, series 1997.

(1) Underlying rating; the bonds are insured by Financial Guaranty Insurance Company (FGIC), whose insurer financial strength is rated 'AAA' by Fitch.

(2) Underlying rating; the bonds are insured by Financial Security Assurance, Inc (FSA), whose insurer financial strength is rated 'AAA' by Fitch.

(3) Underlying rating; the bonds are insured by MBIA Insurance Corp., whose insurer financial strength is rated 'AAA' by Fitch.

(4) Underlying rating; the bonds are insured by Ambac Assurance Corp., whose insurer financial strength is rated 'AAA' by Fitch.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.