New York, November 20, 2012 -- Moody's Investors Service has affirmed Piedmont Healthcare's (PHC) Aa3 rating on bonds issued through the Fulton County Development Authority, Fayette County Hospital Authority, and Coweta County Development Authority. The outlook remains stable. PHC also has approximately $305 million of debt that does not carry an underlying rating from Moody's, including $102 million of Series 2009B variable rate demand obligation (VRDO) certificates supported by letters of credit (LOC) from SunTrust Bank and confirmed by the Federal Home Loan Bank of Atlanta (FHLB). The LOCs expire November 15, 2015.

PHC is a five hospital tertiary referral healthcare system, providing services throughout the Atlanta area. PHC's significant affiliates include: 25,063 admission Piedmont Hospital flagship in Atlanta (PH); 12,761 admission Piedmont Fayette Hospital (PFH) in Fayetteville, GA; 2,875 admission Piedmont Mountainside Hospital (PMH) in Jasper, GA; 5,636 admission Piedmont Newnan Hospital (PNH) in Newnan, GA; 12,315 admission Piedmont Henry Hospital (PHH) in Stockbridge, GA (affiliated by PHC as of January 1, 2012); Piedmont Medical Care Corporation, a primary care network; and Piedmont Heart Institute.

SUMMARY RATING RATIONALE

The affirmation of the Aa3 rating and stable outlook reflect PHC's improved operating performance in fiscal year (FY) 2012 (after a weak FY 2011), our expectation that PHC will maintain favorable operating results, and that PHC will integrate successfully and improve operationally the recently affiliated PHH (formerly Henry Medical Center). We note that PHC's balance sheet ratios and debt coverage ratios are somewhat modest at the Aa3 rating level (particularly with the addition of PHH) and any deterioration in ratios may pressure the rating.

STRENGTHS

*Sizeable healthcare system with five acute care hospital facilities and large physician practices located throughout the Atlanta metropolitan area. The four satellite hospitals outside of Atlanta each have the leading market share of their respective counties.

*Good demographics in most hospital service areas, particularly Fayette County, Coweta County, and Henry County.

*Track record of double digit operating cash flow margins, with improved results in FY 2012 (10.7% operating cash flow margin) after a weak FY 2011.

*PHC has a track record of acquiring hospitals that are struggling operationally and improving performance significantly. We expect a similar turnaround for PHH.

*Good payer mix, as Medicaid represented 6.7% of PHC gross revenues in FY 2012 (Aa3 median is 15.0%).

CHALLENGES

*Competitive service area, with the presence of multiple prominent hospitals and health systems located in and around Atlanta.

*PHH requires considerable operating improvement after recording steep operating losses in recent years (operating margin of -6.0% in FY 2010 and -8.8% in FY 2011). Management notes that PHH only has minimal capital needs.

*PHC's Moody's adjusted balance sheet and debt coverage ratios are somewhat modest at the Aa3 rating level based on FY 2012 results (182 days cash on hand, 104% cash-to-debt, 3.6 times debt-to-cash flow, and 4.9 times maximum annual debt service coverage).

*Operating leases ($231 million debt equivalent at fiscal year end 2012) and an underfunded defined benefit pension plan ($68 million underfunded compared to a projected benefit obligation of $361 million at fiscal year end 2012) result in significant debt equivalents. PHC's comprehensive debt adjusted cash-to-debt measured 70% at fiscal year end (FYE) 2012. We note that the defined benefit pension plan is frozen to new hires.

OUTLOOK

The stable outlook reflects PHC's improved operating performance in FY 2012, our expectation that PHC will maintain favorable operating results and improve balance sheet and debt coverage ratios over time.

WHAT COULD MAKE THE RATING GO UP

Material increase in market share; steady increase in system volumes leading to materially elevated cash flow generation and significantly stronger balance sheet and debt ratios

WHAT COULD MAKE THE RATING GO DOWN

Steady market share decline; weaker operating margins, balance sheet, and debt ratios; unexpected material increase in debt without commensurate increase in cash flow

RATING METHODOLOGY

The principal methodology used in this rating was Not-For-Profit Healthcare Rating Methodology published in March 2012. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

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