OREANDA-NEWS. Fitch Ratings assigns an 'AA-' rating to the following series of bonds expected to be issued on behalf of UPMC:

--\\$150,000,000 Pennsylvania Economic Development Financing Authority (PEDFA) revenue bonds series 2015B.

Fitch also affirms the 'AA-' rating on UPMC's outstanding parity debt issued through the Pennsylvania Higher Educational Facilities Authority, Allegheny County Hospital Development Authority, University of Pittsburgh Medical Center, Monroeville Finance Authority and Pennsylvania Economic Development Financing Authority.

The Rating Outlook is revised to Stable from Negative.

The series 2015B bonds are expected to be issued as fixed-rate bonds and sold via negotiation the week of Sept. 28, 2015. Proceeds of the 2015 bonds will be used to fund UPMC capital expenditures. The bonds will have a March 2045 final maturity, and maximum annual debt service (MADS) of \\$291.6 million on all outstanding indebtedness occurs in 2016. Debt service reserve fund will not be funded in connection with the 2015 bonds.

SECURITY

The bonds are secured by a revenue pledge of the Obligated Group (OG). UPMC standardized its bond covenants under the 2007 Master Trust Indenture (2007 MTI), and the series 2015 bonds will constitute parity debt under the 2007 MTI. UPMC (the parent corporation), UPMC Presbyterian Shadyside, Magee-Womens Hospital of UPMC, UPMC Passavant and UPMC St. Margaret are members of the obligated group under the 2007 MTI, and accounted for 29% of system revenues in 2015.

KEY RATING DRIVERS

STABILIZING COMPETITIVE LANDSCAPE: The revision of the Outlook to Stable reflects Fitch's view that the non-renewal of the UPMC Highmark contract and the formation of the Allegheny Health Network have not had a materially negative impact on UPMC. The latest sources of patient revenue demonstrate the slow but gradual shift of Highmark enrollees partially to UPMC Health Plan and to the national insurers. However, there remain areas of conflict between UPMC and Highmark regarding reimbursement levels and adherence to the Consent Decree, which are being contested in the courts and whose outcome is uncertain.

MARKET LEADER IN WESTERN PENNSYLVANIA: UPMC's main credit strength continues to be its dominant market share of the Western Pennsylvania market with an estimated 60% share in Allegheny County and a 41% share of the 10 immediately surrounding counties. Additionally, Fitch views UPMC's revenue diversification, which includes the insurance division generating over 45% of system revenues, as a credit positive given its role as a powerful tool as health care delivery moves to a population health management model.

COMPRESSED PROFITABILITY: UPMC's operating profitability has hovered around the breakeven point in the last three years, weaker than historical operating margins, but consistent with management lowering their expectation for operating margin to below 1%. Fitch removes one-time non-recurring gains and losses from other operating income, resulting in operating loss of \\$11.4 million in 2015 and small \\$13.2 million operating income in 2014, adjusted to reduce other operating income by a \\$233 million gain and a \\$47 million gain in 2015 and 2014, respectively. The budget for 2016 is also close to breakeven operating performance.

MANAGEABLE DEBT BURDEN: The system's leverage remains manageable with pro forma MADS remaining at a moderate 2.5% of revenues, in line with Fitch 'AA' median and MADS coverage of pro forma debt by EBITDA at an adequate 2.9x, consistent with the prior year, but lower than the category median of 5.7x. UPMC does not have any major capital plans in the near term and its capital budget of under \\$450 million for the next three years mirrors its annual depreciation expense. Management projects a steady level of borrowing over the next several years roughly equal to principal debt amortization, which is not expected to materially increase long-term debt beyond the current level of approximately \\$3.2 billion.

STABLE LIQUIDITY: While historically lower than Fitch's 'AA' medians, UPMC's days cash on hand (DCOH) were stable at 133.4 days at June 30, 2015 and cash-to-pro forma debt is 126.8%. The lower liquidity is partially mitigated by the diversification of system revenues and geographic coverage, as well as 82% of system debt in fixed-rate mode.

RATING SENSITIVITIES

NEED TO MAINTAIN ADEQUATE OPERATING CASH FLOW: Maintenance of the 'AA-' rating is contingent on UPMC's maintaining adequate operating cash-flow. Going forward, this depends on the continued successful execution of the strategy to replace some of the expected loss of volume to Highmark with volumes generated from contracts with the national insurers and UPMC's own Health Plan. Further compression of profitability, leading to thinner coverage or balance sheet deterioration, could lead to negative rating pressure.

CREDIT PROFILE

UPMC is the largest healthcare system in Pennsylvania, the largest employer in the region, and one of the largest nongovernmental employers in the state. It is also one of the world's leading organ transplant centers and one of the largest cancer networks in the country. The system is affiliated with the University of Pittsburgh of the Commonwealth System of Higher Education (the University), which is among the top 10 recipients of National Institutes of Health research funding.

UPMC owns and operates 21 hospitals in Pennsylvania with close to 5,000 beds in service and more than 400 clinical locations in the region. With a total revenue base of \\$11.8 billion in fiscal 2015 (year-end June 30), 61,000 employees, including approximately 3,500 employed physicians and 2.7 million covered lives in its network of health insurance plans, UPMC ranks as one of the largest integrated healthcare delivery networks in the country.

In February 2015, UPMC signed a definitive agreement to merge Jameson Hospital into UPMC with a commitment to fund \\$70 million of Jameson's capital needs over a period of several years. Jameson has revenues of approximately \\$125 million. The Pennsylvania Attorney General's office has raised anti-trust issues and has asked Jameson to reopen the search for a partner. While the transaction may still go forward, there is currently no certainty regarding the eventual outcome.

Evolent, a health management company providing tools including staff, process and technology to assist health systems in the move to value-based care, of which UPMC was a founding owner, went public in June 2015 with capitalization of more than \\$1.1 billion, resulting in UPMC recording a \\$233 million gain in other operating income. While UPMC includes that in their net available for debt service, Fitch's metrics exclude this gain as a one-time non-recurring item. Similarly, Fitch excluded a \\$47 million gain on UPMC's sale of Intrexon in fiscal 2014.

UPMC HIGHMARK CONSENT DECREE

The revision of the Outlook to Stable is based on the evidence in the most recently completed fiscal year ended June 31, 2015 that UPMC's strategy to replace some of the loss of Highmark subscribers by increasing the enrollees in its own Health Plan and the three national insurers is gradually succeeding. The termination of the Highmark contract as per the Consent Decree, which precludes the access to UPMC in-network rates to Highmark subscribers, with some exceptions, became effective Dec. 31, 2014. The fiscal 2015 sources of gross patient revenue, reflecting six months of the impact of the termination, show the reduction of UPMC's revenue from Highmark subscribers to 15% from 19%, and an increase to 12% from 10% in revenues from UPMC's own Health Plans, as well as an increase for the national insurers to 8% from 7%. Based on the recent results, it appears that the contract termination has not had a material negative impact on UPMC's credit profile as compared to the prior year.

COMPRESSED PROFITABILITY

UPMC's financial metrics have historically been below 'AA' category medians, with the Fitch rating based to a significant degree on the system's very strong market position with an aligned medical staff and a large portfolio of insurance products with 2.7 million members in the UPMC Health Plan. While system revenues increased in 2015 by 4.1%, the increase was driven by higher insurance enrollment revenues, which grew 10.4% year over year, reflecting a 15.8% increase in plan enrollment to 2.7 million. Net patient revenues were 2.2% lower reflecting the 2.7% decrease in inpatient volumes, which was budgeted. Combined with observation days, inpatient volumes were level.

Fiscal 2015 ended with a small operating loss of \\$11.4 million, equal to a negative 0.1% operating margin. The 2015 results reflected a portion of a \\$40 million expense related to a voluntary retirement offer which reduced staff by 1,000 FTEs, and an increase in the medical expense ratio of the Health Plan driven by the large increase in enrollment. At the same time, the system implemented a \\$30 million savings from productivity improvements. The decision of the Commonwealth to expand Medicaid is expected to have a positive impact, but the 2016 budget will mirror the current, close to breakeven results.

A dispute with Highmark over \\$170 million of outpatient oncology billing underpayment, currently in arbitration, is included as a receivable in the 2015 audited report and fully expected by UPMC management to be collectable. Also currently in litigation is UPMC's notice to Highmark that effective Jan. 1, 2016 UPMC will no longer offer in-network rates to Highmark's 180,000 Medicare Advantage enrollees, asserting that Highmark violated the Consent Decree. No assumption has been made regarding the outcome of both issues (UPMC does offer its own Medicare Advantage product, with 144,000 enrollees).

NO INCREASE IN DEBT AND STABLE LIQUIDITY

Following the issuance of the series 2015 bonds, UPMC will have approximately 82% of its debt at fixed interest rates. Management projects that the system will be issuing between \\$100 million and \\$300 million of debt annually over the next several years, roughly equivalent to its principal amortization during those years, with the target of keeping outstanding long-term debt at the current level of approximately \\$3.2 billion. UPMC has a number of swaps, with notional par of \\$375.3 million and negative mark-to-market of \\$14.4 million at June 30, 2015.

Although UPMC's debt burden is moderate (pro forma MADS equated to 2.5% of fiscal 2015 total revenue), most of its debt metrics fall below the 'AA' category medians with 2.9x coverage of pro forma MADS by EBITDA in 2015 including the \\$150 million of new money, as compared to the median of 5.7x, and debt-to-EBITDA of 3.7x compared to the median of 2.4x. MADS is calculated per MTI definitions for the treatment of several balloon payments.

Unrestricted cash and investments were reported at \\$4.14 billion at June 30, 2015, a \\$171 million increase over the prior year, equating to 133.4 DCOH, cushion ratio of 14.2x and cash equal to 126.8% of pro forma debt, all essentially unchanged since the last Fitch review, but lower than the 'AA' medians. However, the system has no major capital spending planned over the near term and its capital budget for the next three years does not exceed the system's depreciation expense. The largest single expenditure in the \\$420 million capital plan for 2016 is \\$120 million for IT.

DISCLOSURE

UPMC's quarterly and annual disclosures to industry participants (including EMMA) have been excellent and consist of full financial statements, utilization and other information, and management's discussion and analysis of results, which Fitch views favorably.