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Fitch Affirms PeaceHealth's Rev Bonds at 'A+'; Outlook StableFitch Ratings has affirmed the 'A+' rating on PeaceHealth's outstanding debt, which is listed at the end of the press release. The Rating Outlook is Stable. SECURITY The bonds are secured by a gross revenue pledge of the obligated group (OG). The OG accounted for 99% of total assets and 96% of total revenue of the consolidated entity in fiscal 2014 (June 30 year end). Fitch's analysis is based on the consolidated entity. KEY RATING DRIVERS REGIONAL HEALTH SYSTEM WITH GOOD MARKET POSITIONS: PeaceHealth's primary rating strength continues to be its geographic diversity and the leading market position in its major service areas. PeaceHealth is structured into three networks: Columbia Network (Longview/Vancouver, WA), Oregon West Network (Eugene/Springfield/Florence, OR) and Northwest Network (Bellingham, WA and Alaska facilities), where the system held market share positions of 52%, 75% and 87%, respectively. However, market share in the Columbia Network has declined due to a reduction in volume from the termination of a Kaiser contract in October 2013. REBOUND IN OPERATING PERFORMANCE: Operating performance through the six months ended Dec. 31, 2014 was very strong with a 5.3% operating margin and 12.6% operating EBITDA margin due to improvements in revenue cycle, focus on costs, in addition to the benefit from Medicaid expansion. Management expects to end FY 2015 with an 11-12% operating EBITDA margin. IMPROVED LIQUIDITY: PeaceHealth's liquidity metrics have significantly improved due to better cash flow and good investment returns. Total unrestricted cash and investments were $1.4 billion at Dec. 31, 2014, which equated to 235.4 days cash on hand and 129.5% cash to debt compared to the A category median of 199.2 days and 131.2% cash to debt. DIVERSIFIED DEBT PROFILE: Total outstanding debt was $1.084 billion with $1.023 billion of bonded debt, which is 66% underlying fixed rate bonds and 34% underlying variable rate debt. PeaceHealth has staggered bank renewal dates and diversified liquidity and swap counterparty exposure. There are several bullet maturities, which Fitch believes is mitigated by PeaceHealth's market access and liquidity position. EPIC IMPLEMENTATION UNDERWAY: PeaceHealth has budgeted a total of $357 million for Epic (Care Connect), which will result in a single patient health record across the care continuum. The ambulatory side has been implemented and the timeline for the inpatient side has been extended to give more time for the transition as well as avoid implementation during the conversion to ICD-10. PeaceHealth also expects an additional $20-30 million of costs as more training may be required. Epic will be fully implemented by October 2016. RATING SENSITIVITIES TRANSITIONAL PERIOD: Since late 2014, PeaceHealth has brought on new key leadership personnel and the CEO and CFO roles are to be filled. Fitch will monitor the organization's execution on its strategic initiatives during this management transition. Fitch expects PeaceHealth to maintain operating cash flow margins in line for the rating category. The management team has identified various opportunities to continue to lower costs and improve standardization across the system while Epic operating costs will be realized in fiscal 2016 and 2017. CREDIT PROFILE PeaceHealth is a multi-state health care system with 10 acute care hospitals operating a total of 1,362 beds in Washington, Oregon, and Alaska and had total revenue of $2.2 billion in fiscal 2014. Strong Market Position PeaceHealth's main credit strength is its system's geographic diversity and leading / dominant market position in most of its service areas in Washington, Oregon and Alaska. Fitch views the revenue diversity favorably with the Oregon West Network accounting for 32.4% of consolidated revenue in fiscal 2014, Columbia Network with 30.2% and Northwest Network with 21.4%. The system has been making a substantial investment in physician alignment and its clinical information system in an effort to position the system for value based reimbursment models and population health management capabilities. The Columbia Network region is fairly competitive and Kaiser terminated its contract with PeaceHealth's facilities in the Columbia Network in October 2013. PeaceHealth has been successful in reducing costs due to the lower volume, but longer-term strategies are being evaluated including potential partnerships. Improved Fiscal 2015 Performance After several years of weak performance, financial performance through the six months ended Dec. 31, 2014 is much improved. Operating margin was 5.3% through the six months ended Dec. 31, 2014 compared to 1.7% the same prior year period, 1.1% in fiscal 2014 and negative 0.3% in fiscal 2013. Operating EBITDA margin was 12.6% through the six months ended Dec. 31, 2014 compared to 9.9% the same prior year period, 9.1% in fiscal 2014 and 8.5% in fiscal 2013. Improved profitability has been driven by revenue cycle improvements, continued reduction in cost by discharge, and good volume growth in Oregon West and Northwest networks. Operating EBITDA margin is expected to be around 11-12% for FY 2015. Since half of the inpatient Epic costs will be expensed, operating profitability may be compressed in fiscal 2016 and 2017. However, there are continued efforts to lower costs with a focus on leveraging the system's scale and improving productivity. Care Connect Implementation PeaceHealth completed the implementation of the ambulatory electronic health record (EHR) at a cost of $75 million and the inpatient EHR is underway at a total cost of $277 million. Through Dec. 31, 2014, $135 million has been spent. About half of the cost of the inpatient EHR will be expensed versus capitalized. Diversified Debt Profile Total debt is $1.084 billion with $1.023 billion of bonded debt, which is 66% underlying fixed rate and 34% underlying variable rate. PeaceHealth's debt profile includes $523.6 million direct placements or bank loans, $147.3 million variable rate demand bonds, and $352 million traditional fixed rate. The direct placements and variable rate demand bonds have a three-year term out provision and the expiration dates and counterparty exposure are staggered and diversified, which is viewed favorably. Including the impact of its swaps, PeaceHealth's debt profile is 100% fixed rate. PeaceHealth is not posting any collateral related to its swaps. The debt burden is moderating with MADS accounting for 3.5% of revenue compared to the 'A' category median of 3.1%. MADS coverage has improved through the six months ended Dec. 31, 2014 due to improved profitability at 4.4x, but was an adequate 3.9x in fiscal 2014 and a weaker 2.6x in fiscal 2013 and 3x in fiscal 2012. MADS equals $79.2 million and includes a smoothing of PeaceHealth's bullet maturities ($80.65 million in 2019 for series 2008A, $50 million in 2021 for US Bank loan and $130 million in 2024 for BofA loan) as permitted under the master trust indenture. Debt service is not level. PeaceHealth is in the process of updating its long term capital plan. Fitch believes debt capacity at the current rating level will likely be contingent on maintaining its current operating performance. Disclosure PeaceHealth has covenanted to provide annual audited financial statements to Electronic Municipal Market Access within 150 days of each fiscal year end and unaudited quarterly financial statements (including a consolidated balance sheet, income statement, statement of cash flows, and utilization statistics) within 60 days of each fiscal quarter end. Outstanding Debt: $66,060,000 Oregon Facilities Authority Refunding Revenue Bonds (PeaceHealth Project), 2014 Series A $38,610,000 Washington Healthcare Facilities Authority Refunding Revenue Bonds, Series 2014A (PeaceHealth) $91,505,000 Oregon Facilities Authority (OR) (PeaceHealth) revenue bonds series 2009A $75,160,000 Washington Health Care Facilities Authority (WA) (PeaceHealth) revenue bonds series 2009 $145,975,000 Oregon Facilities Authority (OR) (PeaceHealth) revenue bonds series 2008A&B (LOC: U.S. Bank National Association) $80,650,000 Washington Health Care Facilities Authority (WA) (PeaceHealth) revenue bonds series 2008A $1,295,000 Oregon Health, Housing, Educational, & Cultural Facilities Authority (OR) (PeaceHealth) revenue bonds series 1995 Additional information is available at 'www.fitchratings.com'. Applicable Criteria and Related Research: --'Revenue-Supported Rating Criteria', dated June 16, 2014; --'U.S. Nonprofit Hospitals and Health Systems Rating Criteria', dated May 30, 2014. Applicable Criteria and Related Research: Revenue-Supported Rating Criteria http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012 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=983705 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. |
