<0> Fitch Affirms St. Francis Regional Medical Center (MN) Bonds at 'A-'; Outlook Revised to Positive </0>
Fitch RatingsPrimary AnalystDana N. Sodikoff, +1 312-368-3215Associate DirectorFitch Ratings, Inc.70 West Madison StreetChicago, IL 60602orSecondary AnalystEmily Wong, +1 212-908-0651Senior DirectororCommittee ChairpersonJim LeBuhn, +1 312-368-2059Senior DirectororMedia Relations, New YorkElizabeth Fogerty, +1 212-908-0526
Fitch Ratings has affirmed the 'A-' rating on approximately $48.7 million of the city of Shakopee, Minnesota's health care facilities revenue bonds (St. Francis Regional Medical Center), series 2004.
The Rating Outlook is revised to Positive from Stable.
SECURITY
The bonds are secured by gross revenues of the obligated group.
KEY RATING DRIVERS
CONTINUED STRONG FINANCIAL PERFORMANCE: The Outlook Revision to Positive from Stable reflects St. Francis Regional Medical Center's (St. Francis) continued strong financial performance including operating profitability and debt service coverage ratios that well exceed the 'A' category medians. Continued strong operating performance will likely result in positive rating movement.
SUFFICIENT LIQUIDITY: St. Francis' liquidity against expenses is good with 198.5 days cash on hand as of March 31, 2013 (three month interim). Cash to debt and cushion ratio are somewhat light compared to the medians but sufficient for the 'A' category.
BENEFICIAL OWNERSHIP STRUCTURE: St. Francis benefits from its ownership structure, which is currently a 33% split ownership by Allina Health (rated 'AA-'; Stable Outlook), HealthPartners (Not rated by Fitch; Park Nicollet Health Services merged with HealthPartners January 2013) and Critical Access Group (a subsidiary of Essentia Health rated 'A-'; Stable Outlook).
RATING SENSITIVITIES
SUSTAINED FINANCIAL PERFORMANCE: The Positive Outlook is based on St. Francis' very strong operating results and debt service coverage over the last few years. Upward rating movement is likely over the next one to two years assuming St. Francis maintains similar levels of financial performance.
CREDIT PROFILE
St. Francis operates an 86-bed acute care hospital in Shakopee, MN, approximately 23 miles southwest of downtown Minneapolis. Net patient revenues for fiscal 2012 were $116.6 million. St. Francis is jointly owned by Allina Health (Allina), HealthPartners and Critical Access Group. Fitch views the benefits of St. Francis' relationship with the joint members as a credit positive. Although one of Fitch's main credit concerns is St. Francis' small revenue base, this is partially mitigated by its ownership structure, which includes benefits such as access to a strong physician network (over 40% of its physicians are employed by one if its owners), and ability to utilize Allina's electronic medical record platform as well as participate in Allina's treasury program. Allina is responsible for managing day-to-day operations, operating and capital budgeting, strategic planning, and cash management.
Operating Performance Consistently Strong
St. Francis' operating performance has been consistently solid over the last few years with an 8% operating margin in fiscal 2012, 8.4% in fiscal 2011 and 10.1% in fiscal 2010; all well exceeding the 'A' category median of 2.8%. Operating EBITDA has also outperformed the 'A' category median, averaging 17.1% over the last three years (2010 - 2012). Strong operating performance has been driven by continued standardization and focus on expense management. Sustained operating performance continuing over the next year or two will likely result in upward rating movement. St. Francis' is budgeting a 6.2% operating margin for fiscal 2013, which Fitch believes is manageable.
St. Francis has about $15.5 million in capital expenditures budgeted over the next three years ($7.2 in fiscal 2013, $6.3 in fiscal 2014 and $2 million in fiscal 2015). Fitch expects St. Francis to maintain its strong operating cash flow to support its growth plans without an impact on its liquidity. St. Francis' EBITDA totaled $20.5 million in fiscal 2012 and $21.3 million in fiscal 2011 (before $8.3 million distribution to members in 2012 and $8.1 million in 2011). The distribution to members is subordinate to debt service and is limited by certain financial targets.
Favorable Service Area
The service area, located just to the southwest of the Twin Cities, has favorable characteristics including population growth and above average median household income. Utilization growth has been relatively flat over the last few years; however, 60% of St. Francis' revenue is from outpatient services. St. Francis does not currently employ any physicians but about 45% of its active medical staff is employed by Allina or HealthPartners. St. Francis maintains the leading market share in its service area at 35.3% as of fiscal 2012 compared to its next closest competitor, Fairview Health Services with 23.2%.
Satisfactory Liquidity Levels
At March 31, 2013 (three month interim), unrestricted cash and investments equaled $56.6 million, which equates to 198.5 days cash on hand, 84.6% cash to debt and 14.1 cushion ratio, which are in line with the respective 'A' category medians of 191 days, 116.4% and 16.3x. Liquidity has been stable over the last few years but has not grown significantly, reflecting significant capital expenditures and distribution to owners.
Manageable Debt Burden
St. Francis' debt burden remains manageable with $51.2 million of debt outstanding, which is 95% fixed rate and 5% variable rate demand bonds (VRDBs). The letter of credit (LOC) on the outstanding series 1987 VRDBs (not rated by Fitch) expires on Jan. 1, 2016. Maximum annual debt service of $4 million accounts for a slightly high 3.3% of fiscal 2012 revenues, compared to the 'A' category median of 2.8%. MADS coverage by EBITDA was a very healthy 5.1x compared to the 'A' category median of 4.1x. The debt and MADS figure exclude a $15.8 million medical office building (MOB) financing that is recorded on St. Francis' balance sheet (cash-to debt ratio does, however, includes the MOB). The MOB was financed through a joint venture that St. Francis is a part owner in and the debt service is paid through the lease income from the MOB. Allina and St. Francis have master leases on the MOB.
Disclosure
St. Francis covenants to disclose annual and quarterly information to EMMA. Annual and quarterly financial statements can also be found on EMMA. Quarterly statements include a balance sheet, income statement, utilization statistics, cash flow statement and management discussion and analysis.
Additional information is available at ''.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', dated June 3, 2013;
--'Nonprofit Hospitals and Health Systems Rating Criteria', dated May 20, 2013.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
Nonprofit Hospitals and Health Systems Rating Criteria — Effective Aug. 12, 2011 to July 23, 2012
Additional Disclosure
Solicitation Status
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: . IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE ''. 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. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.