SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has affirmed its 'A' rating on the following Harris County Hospital District (TX) revenue bonds:
--$82.7 million series 2010 refunding tax-exempt, variable-rate revenue bonds; underlying rating
--$193.7 million in outstanding 2007A series tax-exempt fixed-rate revenue bonds
The Rating Outlook is Stable.
The bonds are secured by a lien on the pledged revenues of Harris County Hospital District (HCHD or the district) excluding ad valorem tax revenue, and a debt service reserve fund.
KEY RATING DRIVERS
STRONG LIQUIDITY: HCHD's balance sheet exhibits strong liquidity metrics that exceed Fitch's 'A' category medians. Fitch believes the robust liquidity mitigates concerns over HCHD's historically weak profitability. However, HCHD has been building its liquidity position over the last several years in anticipation of future capital spending with approximately $200 million of board designated funds earmarked for its multi-year capital plan.
TAXING CAPABILITY: Support from ad valorem tax revenues has significantly offset operating expenses, with HCHD having received $511.6 million in fiscal 2012 (Feb. 28 year end) and $504.5 million in fiscal 2011. However, profitability is still weak with a 1.9% operating margin in fiscal 2012 compared to negative 1.2% in fiscal 2011.
INCREASED MEDICAID AND DSH/UPL FUNDING: In fiscal 2012, HCHD received increased disproportionate share funds (DSH) and upper payment limit (UPL)) funding that totaled $224 million compared to $185 million in fiscal 2011 and 2010. The increase in funding was due to the redesign of Texas' Medicaid program under a federal waiver. As a safety net provider, HCHD is highly susceptible to changes in DSH/UPL funding levels.
ONGOING CAPITAL PROJECTS: HCHD is nearing the completion of Phase I and is ramping up spending on Phase II of its master facility plan. The multi-year capital plan focuses on expanding HCHD's ambulatory network, renovating existing facilities and increasing patient capacity and access.
SAFETY NET PROVIDER: HCHD's position as the safety net provider for Harris County, Texas provides for significant community and legislative support.
Fitch's analysis is based on HCHD and its component units, which includes a health maintenance organization (Community Health Choice) and a foundation. In fiscal 2012, HCHD generated $1.84 billion of operating revenues, composed of $547.2 million net patient service revenue (includes $238.6 million of bad debt expense classified as deduction from revenue in the audited financials), $511.6 million of ad valorem tax revenue (classified as non-operating revenue in the audited financials), $224.3 million of DSH/UPL funding, $512.6 million of premium revenue, and $45.2 million of other revenue.
Fitch views the district's strong balance sheet as a credit strength and as a mitigant against systemically-weak profitability. As of Feb. 29, 2012, the district had $850.1 million in unrestricted cash and investments, which equated to 204.2 days cash on hand and 303.3% cash to debt, which exceed Fitch's respective 'A' category medians of 194.1 days and 113.8%. Fitch notes that for the hospital only, unrestricted cash and investments totaled $681.6 million at Feb. 29, 2012. Fitch also believes this cash position provides financial flexibility against an operating profile that may have cash flow pressures due to the timing of the receipt of a majority of its revenue sources (tax revenue and supplemental DSH/UPL funding).
The district has the ability to levy taxes, which generated $511.6 million of ad valorem tax revenue in fiscal 2012 compared to $504.5 million in fiscal 2011 and $528.6 million in fiscal 2010. The tax rate has been held at $0.1921/$100 of assessed value for the past seven years and the Harris County Commissioners Court has the ability to raise the tax rate to a maximum of $0.75; however, management doesn't anticipates a change in the tax rate over the medium term. Fitch views this ability favorably as it supports the district's public mission as a safety net provider in Harris County. However, HCHD's profitability remains weak for its rating level.
In fiscal 2012, the district reported a favorable operating income of $35 million compared to an operating loss of $22.3 million in fiscal 2011. Fitch notes that the improved profitability reflects the higher level of DSH/UPL funding in FY 2012 in addition to better revenue cycle management and cost control measures. Through the three-months ended May 31, 2012, the hospital only is behind budget due to an unfavorable shift in its payor mix. The hospital only has a break-even budget for fiscal 2013.
Role as a Safety Net Provider
As typical of public safety-net hospitals, the district's payor mix is heavily concentrated in Medicaid, self-pay and charity care, which combined, accounted for 86% of the district's FY 2012 gross revenues, and is up from 84.5% in the prior year. Given its payor mix, the district receives large supplemental DSH and UPL funding. The increased funding in fiscal 2012 reflects the change in the distribution of UPL funding under Texas' redesigned Medicaid program that received federal approval under a 1115 waiver in December 2011. The redesigned program redirects UPL funding over the next five years (through 2016) into a new reform plan that allows the state to expand Medicaid managed care, improve Medicaid services, and reward performance for quality and lower costs.
Capital Spending Continues
Capital spending totaled $75 million in fiscal 2012 (159.5% of depreciation expense) compared to $67 million in fiscal 2011 and $73 million in fiscal 2010. Completion of Phase I and construction of Phase II projects are behind schedule as the district has elected to slow the pace of construction in response to the ailing economy. Similarly, the district is still reviewing and evaluating several elements of Phase III.
As of June 30, 2012, the total cost of Phase I is $183, down from $208 million, with approximately $10 million remaining to be spent. The total cost of Phase II is $115 million, up from $108.2 million, due to unanticipated additional renovation work at HCHD's Ben Taub facility. Lastly, Phase III is now projected to cost $69 million, down from an earlier estimate of $73 million. The capital budget for fiscal 2013 is only $45 million. As of May 31, 2012, HCHD has $18.7 million in bond project funds for Phase I projects, which will soon be expended; and $181.1 million in Board-Designated funds for future expansion projects (phases II & III).
The district's debt burden is low with MADS composing only 1.1% of revenue, which compares favorably to Fitch's 'A' medians of 2.9%. MADS coverage for the hospital only was 3x for fiscal 2012. Total debt is $280.3 million and includes $193.7 million of series 2007A which are in fixed-rate mode and $82.7 million of series 2010 variable-rate demand bonds. The series 2010 bonds are backed by a letter of credit by JP Morgan Chase, which expires in September 2013. The district has a fixed payor swap associated with the 2010 bonds, with a current mark-to-market value of negative $10.9 million as of Feb. 29, 2012, which currently does not require collateral posting.
The stable rating outlook reflects Fitch's belief that the district will prudently execute its capital plan without significantly impacting its liquidity position.
About the Organization
Harris County Hospital District (HCHD) is the fifth largest metropolitan health system in the country, and consists of three hospitals: 506-operated-bed Ben Taub General Hospital, 258-operated-bed LBJ Hospital, and 49-bed Quentin Mease Community Hospital, 12 primary care outpatient clinics, various school-based clinics, and other ambulatory sites. In addition, the system includes a foundation and a 225,000 member Medicaid Health Maintenance Organization. HCHD covenants to provide only annual disclosure to bondholders, via the Municipal Securities Rulemaking Board's EMMA system, which Fitch views negatively.
Additional information is available at www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
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