|[July 23, 2014]
Fitch Affirms Harris County Hospital District (TX) Revs at 'A'; Outlook Stable
CHICAGO --(Business Wire)--
Fitch Ratings has affirmed the 'A' rating on the following Harris County
Hospital District (HCHD) revenue bonds:
--$104.4 million series 2010;
--$199.1 million series 2007A.
The Rating Outlook is Stable.
The bonds are secured by a lien on the pledged revenues of Harris County
Hospital District (excluding ad valorem tax revenues) and a debt service
KEY RATING DRIVERS
WANING CAPITAL DEMANDS: HCHD is nearing completion of its multi-year
capital plan, which includes a significant expansion of its ambulatory
network, and renovation existing facilities to meet increasing patient
demand and capacity needs. No additional debt is planned, and capital
expenditures are expected to decline materially beyond 2015.
HEALTHY LIQUIDITY: Despite several years of significant expenditures,
HCHD's balance sheet has maintained solid liquidity metrics in line with
Fitch's 'A' category medians. Despite the expected reduction in
liquidity due to capital spending, HCHD's solid liquidity position still
provides financial flexibility against HCHD's historically light and
somewhat volatile cash flow, and against its manageable debt burden.
MEDICAID WAIVER PROGRAM REVENUE: HCHD currently benefits from Texas'
1115 waiver program, which have had a supportive impact on HCHD's
historically light profitability, though lags in payment have meant some
volatility in cash flow. Fitch views HCHD's dependence on supplemental
reimbursement and government payors to make debt service coverage as a
credit concern, due to uncertainty related to ongoing funding.
TAX REVENUE SUPPORT: Support from ad valorem tax revenues has
significantly offset operating and management expenses, and HCHD
received $515.9 million in fiscal 2014 and $508.4 million in fiscal
2013. Harris County's financial profile has improved since the
recession, and Fitch notes favorable tax base trends within its most
recent 'AAA'/Outlook Stable general obligation rating review.
SAFETY NET (News - Alert) PROVIDER: HCHD's position as the safety net provider for
Harris County, Texas provides for a significant level community and
legislative support. This position is further cemented by a long
standing relationship with Baylor College of Medicine and the University
of Texas Medical School in support of clinical services and personnel.
SUPPLEMENTAL FUNDING UNCERTAINTY: It remains uncertain whether or not
Texas' Medicaid 1115 waiver program will be extended beyond September
2016, or if Medicaid expansion will occur in its place. Without either,
HCHD would face a significant reduction in reimbursement and
profitability, which could prompt negative rating pressure.
Harris County Hospital District (HCHD) is the fifth largest metropolitan
health system in the country, and consists of three hospitals: 586-bed
Ben Taub General Hospital, 328-bed LBJ Hospital, and 49-bed Quentin
Mease Community Hospital, 18 community care centers, six school-based
clinics, and other ambulatory sites. Other component units of the HCHD
system include a foundation and a Medicaid Health Maintenance
Organization known as Community Health Choice (CHC).
Fitch's analysis is based on HCHD and its component units. In fiscal
2014, HCHD generated $1.9 billion of revenues, including $348.6 million
in net patient service revenue (includes $104.9 million of bad debt
expense classified as deduction from revenue in the audited financials),
$515.9 million of ad valorem tax revenue (classified as non-operating
revenue in the audited financials), $255.9 million of DSH/UPL funding,
$668.4 million of premium revenue, and $120.9 million of other revenue,
including $90.1 million in DSRIP evenue.
CAPITAL PROJECTS NEAR COMPLETION
HCHD is nearing completion of its multi-year strategic capital plan,
which includes the renovation of its Ben Taub campus bed tower and
emergency department, and ambulatory expansion at its Holly Hall campus,
an ambulatory expansion at the LBJ campus, and other various strategic
items. As of Jan. 31, 2014, approximately $75 million remained to be
spent out of $157 million in strategic capital plans for the remainder
of 2014 and 2015. Phase I and II of III total phases are complete, with
some expansion/renovation at Ben Taub as well as a data center
remaining. Other than project spending, routine capital is budgeted near
$46 million for fiscal 2015.
At fiscal 2014 (year-end Feb. 28) HCHD had approximately $107 million in
board designated assets for capital use. Total unrestricted cash
(including board designated) was $685.3 million, equal to 132.2 days of
cash on hand (DCOH) and a healthy 35.0 times (x) cushion ratio and
239.1% cash to debt.
HCHD's total debt equaled approximately $286 million, of which $96
million (34%) was variable rate demand bonds (VRDBs), series 2010. The
VRDBs are supported by a letter of credit provided by JP Morgan (News - Alert) Chase,
valid through Aug. 12, 2016. HCHD is also counterparty to a swap, which
HCHD's debt level is modest, as indicated by a debt to capitalization of
32.1% and maximum annual debt service (MADS) equal to a low 1% of
revenue. HCHD produced 2.2x coverage of MADS by EBITDA per Fitch's
calculation, which includes tax revenues not pledge to debt service.
Though light against Fitch's 'A' category median of 3.8x, any concern is
offset by HCHD's healthy liquidity against its light debt burden. No
additional debt is planned.
HCHD has benefitted from the increased supplemental funding provided via
the Texas 1115 Waiver program, which helped support better operating
performance in fiscal 2014. HCHD received $255.9 million in
Uncompensated Care (UC) Medicaid supplemental revenues and another $90
million in delivery system reform incentive payment (DSRIP) revenues,
which is inflated due to settlement for prior years. The 1115 Waiver
program has a September 2016 term, and funding beyond that is uncertain.
In addition, the state did not expand Medicaid.
Operating profitability was improved in fiscal 2014, due in large part
to the receipt of supplemental payments and narrowed losses at CHC,
which improved to a $4 million operating loss from over $13 million in
losses in fiscal 2013. For fiscal 2015, HCHD has budgeted to near
breakeven operating performance, which includes its tax, DSRIP, and
tobacco settlement revenues, as well as interest income. Attaining
budget will require steadier receipts of supplemental and tax revenues
than in prior years, as well as ongoing management of clinical
operations during HCHD's capital projects.
AD VALOREM TAX SUPPORT
HCHD continues to rely upon the tax support provided by the district
towards operation & management of the health system. For 2014, HCHD
received $516 million in ad valorem tax revenues, following $508 million
in 2013. For tax year 2013 (HCHD fiscal 2014), the district tax rate
declined to $0.170 cents per $100 of assessed value (AV) reduced from
$0.182 the prior year and $0.192 the previous seven years. Fitch also
notes that Harris County (rated 'AAA', Outlook Stable) has substantial
taxing room at $0.398 per $100 of AV, well below its current ceiling of
$0.80. Further, Harris County's total AV is expected to increase 5.2%
for fiscal 2015, following two years of solid gains of 5% and 9% in
fiscal 2013 and 2014, respectively.
Fitch believes HCHD's position as the safety net provider for Houston,
Harris County and the region, as well as its position as a teaching
system for Baylor College of Medicine and The University of Texas Health
Science Center, provide for significant local and state legislative
support. As an offset, its position as a safety net results in reliance
on tax revenues, supplemental funding, and Medicaid and self-pay present
credit risks from possible state or federal legislative changes.
HCHD covenants to provide only annual disclosure to bondholders, via the
Municipal Securities Rulemaking Board's EMMA system. Fitch views
negatively the lack of a provision for quarterly disclosure.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
'U.S. Nonprofit Hospitals and Health Systems Rating Criteria' (May 30,
Applicable Criteria and Related Research:
U.S. Nonprofit Hospitals and Health Systems Rating Criteria
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