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TMCNet:  Fitch Affirms Summit Health's (PA) Bonds at 'A+'; Outlook Stable

[June 10, 2014]

Fitch Affirms Summit Health's (PA) Bonds at 'A+'; Outlook Stable

SAN FRANCISCO --(Business Wire)--

Fitch Ratings has affirmed the 'A+' rating on Summit Health, PA's (Summit) outstanding debt listed below:

--$120.1 million Franklin County Industrial Development Authority revenue bonds, series 2010.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a pledge of gross revenues and debt service reserve fund.

KEY RATING DRIVERS

STRONG FINANCIAL PROFILE: Summit's financial profile is highlighted by its strong balance sheet metrics, consistently solid profitability, and satisfactory maximum annual debt service (MADS) coverage indicators for the 'A' rating category. Financial metrics as of March 31, 2014 (nine months; unaudited) compare favorably to the preceding year.

DOMINANT MARKET POSITION: Fitch views Summit's dominant market position in its primary service area (PSA) as a primary credit strength, as it helps to support the organization's underlying financial condition. In calendar year 2012, Chambersburg Hospital and Waynesboro Hospital held a market share of 73.9% and 66.3% in each of their respective PSAs.

SUCCESSFUL PHYSICIAN ENGAGEMENT: Summit's approach to engaging physicians, which includes employment, joint-venturing, and use of independent contracts, has been successful in sustaining the organization's market presence and profitability.

SOFTENING INPATIENT ADMISSIONS: Similar to other providers nationwide, Summit observed softened inpatient admissions in fiscal 2013 and year-to-date fiscal 2014. However, Fitch notes positively that the financial impact has been minimal to-date and senior leadership continues to actively explore ways to bolster top-line revenue growth, while effectively controlling expense growth.

HIGH EXPOSURE TO GOVERNMENTAL PAYORS: Summit's mix of governmental payors (Medicare and Medicaid) has grown in each of the past four fiscal years. Specifically, Summit's exposure to Medicare and Medicaid was 59.7% in fiscal 2013, up from 56.2% in fiscal 2010. Fitch recognizes that the risk of having an enhanced level of governmental payors can expose the organization to reimbursement pressure at the state and federal level.

MANAGEABLE CAPITAL PLANS: Management entered into a $15 million private placement loan in fiscal 2014 to finance the construction of a new administrative building, which did not materially impact the organization's overall leverage position. Beyond the aforementioned project, Summit's capital needs over the next five years appear manageable (approximately $123 million in investment) and are expected to be entirely funded from operating cash flows.

RATING SENSITIVITY

MAINTAIN STRONG FINANCIAL PROFILE: The Stable Outlook is based on Fitch's expectation that Summit will continue to effectively maintain its strong financial position consistent with historical trends.

CREDIT PROFILE

ORGANIZATIONAL OVERVIEW

Located in south-central Pennsylvania, Summit is anchored by two acute care facilities, Chambersburg Hospital and Waynesboro Hospital (Waynesboro), which have a combined total of 326 licensed beds. In fiscal 2013, Summit had total operating revenues of $408.8 million.

AFFIRMATION OF 'A+' RATING

The 'A+' rating is supported by Summit's strong financial profile, dominant market position with limited competition, good physician engagement strategy, and manageable capital plans.

In fiscal 2013 (June 30, 2013; audited), Summit generated $22.1 million in income, which translated into a 5.4% operating margin and 10.8% operating EBITDA margin. These metrics compare favorably against Fitch's 'A' category medians of 3.3% and 10.7%, respectively. Through the nine-month interimperiod (March 31, 2014; unaudited), the system earned $12.5 million in operating income (4% operating margin), which is already ahead of management's budgeted year-end target income of approximately $7.3 million.

Solid operations and favorable investment returns have helped support good cash growth and satisfactory debt service coverage. Through March 2014, Summit had $371.5 million of unrestricted cash and investments, which is significantly above 2010's $234.4 million absolute cash balance. Further, MADS coverage was 4.4x by EBITDA and 3.5 by operating EBITDA through the interim period, which compare favorably with the respective 'A' category medians of 3.8x and 3.4x.

In fiscal 2015, management is budgeting for $7.3 million in income from operations, which reflects the volume shift that is currently affecting Summit. Fitch notes that Summit has historically budgeted conservatively and outperformed its financial forecast.

Summit's overall debt burden, measured by MADS as a percentage of revenue of 3.1% in fiscal 2013 was identical to Fitch's 'A' category median of 3.1%. Further, MADS coverage is viewed as satisfactory and as a buoying credit factor for Summit at the 'A+' rating level. Over the medium-to-long term, Fitch expects the organization to moderate its debt burden given the lack of large capital investment plans.

The system operates two hospitals that serve patients in Franklin, Fulton, Adams, and Cumberland Counties in PA and Washington County in MD; Summit's nearest competitors are Fulton County Medical Center (FCMC; a critical access hospital) and Meritus Health (rated 'BBB'; Stable Outlook by Fitch). Overall, Fitch views Summit's competitive position as favorable, as illustrated by the system's dominant market share in the PSA.

Like other healthcare providers nationwide, Summit has observed softened inpatient admissions in fiscal 2013 and year-to-date fiscal 2014. Specifically, inpatient admissions decreased to 14,844 in fiscal 2013 (from 15,466 in fiscal 2012) and year-to-date inpatient admissions (as of March 31, 2014) are lagging 3.3% behind the same time last year.

Management reported that inpatient utilization is being affected by various factors, including the reclassification of inpatients as observations patients (observation cases increased by 16% in fiscal 2013 over the preceding year) and changing consumer behavior as a result of lingering economic pressures and high deductible health plans.

Fitch remains concerned about Summit's increasing mix of governmental payors (Medicare and Medicaid), which has grown over the past four fiscal years. Specifically, Summit's exposure to Medicare and Medicaid was relatively high as 59.7% in fiscal 2013, up from 56.2% in fiscal 2010. Fitch recognizes that the risk of having an enhanced level of governmental payors can expose the organization to reimbursement pressure at the state and federal level.

DEBT PROFILE

Management refinanced its fixed-rate series 2009 bonds on April 30, 2014 with a fixed-rate private placement from Susquehanna Bank (not rated by Fitch). At the same time, management also secured an additional $15 million from Susquehanna Bank in a separate private placement loan to finance the construction of a medical office building adjacent to Waynesboro. Approximately 60% of the second private placement is fixed-rate, which the remaining portion is variable rate. Fitch does not view the additional new money debt as having a material adverse impact on debt manageability given Summit's healthy profitability and improving balance sheet strength.

Summit has an outstanding swap with Royal Bank of Canada (RBC; rated 'AA/F1+'; Stable Outlook) that required a collateral posting of $5.8 million at fiscal year-end 2013 (swap expires on March 1, 2038). However, a temporary amendment was negotiated to the original interest rate swap agreement in fiscal 2014 that changed certain stipulations, including reduced collateral thresholds and minimum posting requirements. Currently, Summit has no collateral posted on the swap.

DISCLOSURE

Summit covenants to submit annual and quarterly financial and utilization information to the MSRB's EMMA system. Management was candid and timely in its responses to Fitch during the credit review process.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Nonprofit Hospitals and Health Systems Rating Criteria', May 30, 2014.

Applicable Criteria and Related Research:

U.S. Nonprofit Hospitals and Health Systems Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=746860

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=833980

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON (News - Alert) THE AGENCY'S PUBLIC WEBSITE '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. 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.


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