<0> Fitch Revises Outlook on Central Washington Hospital (WA) to Stable; Affirms 'BBB-' Revs </0>
<0> Fitch RatingsPrimary AnalystMichael Borgani, +1-415-732-5620DirectorFitch Ratings, Inc.650 California StreetFourth Floor, San Francisco, CA 94108orSecondary AnalystEmily Wong, +1-212-908-0651Senior DirectororCommittee ChairpersonEva Thein, +1-212-908-0680Senior DirectororMedia RelationsElizabeth Fogerty, New York, +1-212-908-0526 </0>
Fitch Ratings has affirmed its 'BBB-' rating on $114.2 million in series 2009 revenue bonds for the Washington Health Care Facilities Authority. The bonds are issued on behalf of Central Washington Health Services Association (Central Washington Hospital).
Fitch has also revised the Rating Outlook to Stable from Negative.
Debt payments are secured by a pledge of the gross revenues of Central Washington Hospital (CWH). A fully funded debt service fund and a deed of trust (mortgage) provide additional security for the bond issue.
KEY RATING DRIVERS
STRONG FINANCIAL REBOUND: Fitch's Outlook revision to Stable from Negative is supported by CWH's vastly improved financial performance in fiscal 2012 (audited, ended Dec. 31, 2012) and through the two-month interim period (interim, ended Feb. 28, 2013). Driven by increased patient volumes and cost control measures, financial performance was much stronger after several poor performing years.
VERY GOOD PROFITABILITY: CWH reported an operating income of $5.5 million for fiscal 2012, or a very good 2.7% operating margin, compared to an operating loss of $8.3 million for the prior fiscal year. Additionally, the fiscal year (FY) 2012 results exceeded management's budgeted target of a 1% operating margin. The improved performance continued through the interim period, with CWH posting an 8.6% operating margin.
CWH RESUMPTION OF STRONG CASH GENERATION REPLENISHES BALANCE SHEET: The solid profitability, along with favorable investment returns, propelled liquidity measures higher. At Feb. 28, 2013, CWH had 169.7 days cash on hand and cash to debt of 77.8%. This was up from 105.4 days and 44.5% at fiscal year-end 2011 and in line with Fitch's respective 'BBB' category medians of 138.9 days and 82.7%.
REBOUNDING PATIENT VOLUMES: Inpatient and outpatient volumes rose in FY 2012 after a period of stagnation. The resurgent patient volume is due, in part, to improved physician engagement and the implementation of a transfer center, which resulted in increased referrals from outlying areas.
FAILURE TO SUSTAIN IMPROVED PERFORMANCE: Fitch expects CWH to sustain its improving financial profile, generate profitability measures in line with management's expectation, and preserve liquidity.
CREATION OF CONFLUENCE HEALTH: The Jan. 1, 2013, affiliation with Wenatchee Valley Medical Center (WVMC; 220 physicians and 20 bed hospital) created the entity, Confluence Health. The operations of the integrated entity are expected to result in improved and coordinated healthcare delivery in the service area. Additionally, consolidation savings are expected. Fitch will assess the financial performance of CWH and Confluence Health going forward.
The rating affirmation and the outlook revision to Stable is supported by CWH's success in reversing a three-year trend of successively worsening financial performance and shrinking liquidity by implementing a series of progressively strong cost control measures. Also aiding the turnaround was the resurgence in patient volumes at CWH's facility. Profitability, cash flow generation, and, in turn, liquidity rebounded strongly. As a result, CWH's FY 2012 financial profile is in line with Fitch's 'BBB' category medians.
Very Good Financial Performance
Financial performance for FY 2012 improved dramatically relative to the prior year and exceeded budget. CWH posted a strong 2.7% operating margin, compared to a negative 4.6% margin for FY 2011 and a budgeted 1%. Equally strong was cash flow from operations, nearly tripling year over year and helping to replenish the balance sheet. The improving financial performance continued through the two-month interim period as CWH reported $3.2 million in operating income (8.6% operating margin).
Along with successful cost control initiatives that yielded $7 million in annualized cost savings, the improved profitability stemmed from increased patient volume at CWH's new facility. Additionally, patient utilization rose due, in part, to the closure of WVMC's emergency department, the reopening of CWH's 22-bed skilled nursing facility, and improved referrals from outlying areas.
Replenished Balance Sheet
CWH's balance sheet profited from strong cash flow generation and now boasts favorable liquidity metrics that are in line with Fitch's 'BBB' category medians. As of Feb. 28, 2013, CWH had $88.8 million in unrestricted cash and investments, up from $51.2 million at fiscal year-end 2011 (169.7 days cash on hand and cash to debt of 77.8%). This is higher than the 105.4 days and 44.5% WHEN?. The stronger balance sheet reflects the dramatically improved profitability, decreased accounts receivable, and a lower capital spend rate.
Moderating Debt Burden
The rebounding financial performance helped ameliorate CWH's high debt burden as maximum annual debt service (MADS) coverage by FY 2012 EBITDA strengthened to 3.7 times (x). This compares favorably to Fitch's 'BBB' median of 2.8x. However, MADS still accounted for a relatively high 4.6% of total FY 2012 operating revenue.
On Jan. 1 2013, Confluence Health began operating as a separate non-profit organization, providing administrative and shared functions for the health system, which includes CWH, WVMC (220 physicians), and WVH (20 bed hospital). WVMC is a for profit organization that operates the 20-bed Wenatchee Valley Hospital (WVH) and 11 ambulatory clinics.
WVH is expected to receive nonprofit status by the latter part of 2013. Fitch expects the affiliation to align the three entities' financial incentives along common goals of coordinated care, lower cost, and improved quality outcomes. The revenue base of Confluence Health is over $480 million. Fitch will assess the financial performance of CWH and Confluence Health going forward.
Manageable Capital Needs and Conservative Debt Profile
Following the May 1, 2011 opening of its new five-story 176-bed patient tower, CWH's capital needs are minimal. Projected capital spending for 2013-2017 total $73.8 million and address routine maintenance, information technology needs, new tower expansion projects, and other renovation or strategic needs. The debt profile is conservative with no potential demands on liquidity. Total outstanding debt as of Feb. 28, 2013 was $114.2 million and was 100% fixed rate.
The Stable Outlook is predicated on Fitch's expectation that CWH will sustain its improving financial profile, generate profitability measures in line with management's expectation, and preserve liquidity. Management has budgeted for a 3.7% operating margin for FY 2013.
Located in Wenatchee, Washington, approximately 150 miles east of Seattle, CWH is a 198 licensed bed hospital. In FY 2012, CWH had approximately $205 million in total operating revenue. CWH covenants to provide annual and quarterly disclosure through the Municipal Rule Making Board's EMMA system.
Additional information is available at ''.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (June 12, 2012);
--'Nonprofit Hospitals and Health Systems Rating Criteria' (July 23, 2012).
Applicable Criteria and Related Research
Revenue-Supported Rating Criteria
Nonprofit Hospitals and Health Systems Rating Criteria