Fitch Affirms Nebraska Methodist Revs at 'A-'; Outlook Revised to Positive

CHICAGO--()--Fitch Ratings has affirmed the 'A-' rating on the following revenue bonds issued on behalf of Nebraska Methodist Health System (NMHS):

--$223,230,000 Hospital Authority No. 2 and No. 3 of Douglas County NE health facilities refunding and revenue bonds, series 2015.

In addition, Fitch has withdrawn the 'A-' rating on the following bonds due to prerefunding activity:

--Hospital Authority No. 2 of Douglas County health facilities refunding revenue bonds, series 2008A;

--Hospital Authority No. 3 of Douglas County health facilities refunding revenue bonds, series 2008B.

The Rating Outlook is revised to Positive from Stable.

SECURITY

The bonds are secured by a pledge of gross revenues of the obligated group and a negative mortgage pledge on obligated group property.

KEY RATING DRIVERS

STRONG PROFITABILITY: The Outlook revision to Positive is driven by better than expected operating profitability through 2015 and the six-month interim period ended June 30, 2016, supported by robust clinical activity and expense controls. Net patient revenues grew 14% in 2015 over prior year, versus 12% in total expense growth. Through the interim period, NMHS generated a healthy 5.5% operating and 12.6% EBITDA margin, both ahead of budget. NMHS is expected to generate margins consistent with the rating category medians going forward.

STEADY BALANCE SHEET: NMHS' maintains liquidity metrics in line with the rating category, which are expected to remain solid over the near to medium term. At June 30, 2016 unrestricted liquidity of $393.6 million, equal to 196.3 days of cash on hand, a 21.9x cushion ratio, and 126.8% cash to debt, all in line with Fitch's 'A' category medians of 205.3 days, 18.5x cushion ratio and 143.7% cash to debt.

MANAGEABLE DEBT BURDEN: NMHS maintains a conservative 100% fixed rate debt structure and moderate debt burden, and produced healthy 5.8x coverage of maximum annual debt service (MADS) by EBITDA at June 30, 2016. While NMHS has a material pension liability, it is well funded at 87% and frozen to new entrants, and the system has no additional debt planned. Capital needs between $75 million and $85 million annually over the near term should be easily absorbed by cash flow and philanthropy, as well as $17 million in remaining bond funds at June 30, 2016.

COMPETITIVE LANDSCAPE: While NMHS again gained market share in 2015 (up 3% since 2013), the greater Omaha acute care market remains competitive. CHI Health (revs rated 'BBB+'/Outlook Negative) led with 38% inpatient share, Nebraska Medicine (NM, revs rated 'AA-'/Outlook Stable) had 25% inpatient share in 2015, against NMHS' 23% inpatient share. Still, competitive threat is mitigated somewhat by NMHS' collaborative relationship with NM, its healthier share for certain specialty services, and by Omaha's favorable economic environment.

RATING SENSITIVITIES

SUSTAINED PROFITABILITY: Upward rating movement will be contingent upon Nebraska Methodist Health System generating steady cash flow over the next 12-24 months through the remainder of its larger capital projects, while maintaining liquidity at levels consistent with Fitch's 'A' category median.

CREDIT PROFILE

NMHS operates a 423-bed hospital in downtown Omaha (Methodist Hospital, NMH), a 206-bed hospital in Council Bluffs, IA (Jennie Edmundson Memorial Hospital, MJE), and a 112-bed women's hospital in West Omaha (Methodist Women's Hospital, MWH). NMHS reported total operating revenue of $817 million in the fiscal year ended Dec. 31, 2015.

Fitch's analysis is based on the consolidated entity. Currently the only non-obligated entity is Shared Service Systems, which is a for-profit medical supply distribution entity. For 2015, approximately 98% of NMHS's total revenues and 98% of NMHS's total assets are attributed to the Obligated Group.

ROBUST PROFITABILITY MAINTAINED

NMHS continued to benefit from a competitive landscape shift in its favor in fiscal 2015, with sustained results into 2016 which are thus far ahead of budget. For interim 2016 NMHS is ahead of its 3.3% operating and 10.7% operating EBITDA margin budget, due to better than expected retention of former CHI/ Blue Cross Blue Shield (BCBS) patients and associated volume growth, as well as continued expense management and work on revenue cycle. Despite higher than expected clinical volumes across the system, through June 2016 NMHS outperformed its budget on both Net Revenue and Net Expense per Equivalent Discharge, by 1.7% and 0.7% respectively.

Fitch expects NMHS will maintain operating cash flow near $80 million-$90 million over the medium term, producing coverage between 4.5x to 5x and supporting balance sheet stability against capital needs.

DYNAMIC MARKET

The Omaha metropolitan service area continues to be a dynamic operating environment with generally favorable economic indicators and above average income levels. Low unemployment has created some wage pressure and retention challenges for clinical staff. NMHS implemented a system-wide bonus payment for 2016 to help offset these pressures, and per management, maintains very strong physician satisfaction levels overall.

A public conflict between CHI and BCBS of Nebraska which left CHI out of the insurer's network for approximately nine months in 2014 and 2015, which has benefitted NMHS. While this conflict was resolved during 2015, the overall impact has been accretive due to increased clinical activity and market share growth at NMHS. Thus, operating performance is expected to remain largely steady at 2016 interim levels going forward.

DEBT PROFILE

At fiscal 2015 NMHS had $303.4 million in total debt outstanding, which is 100% fixed rate. Total debt includes approximately $223.2 million in series 2015 public fixed rate debt and $66 million in debt directly placed with JP Morgan Chase and U.S. Bank. Some covenants under the direct placement bank agreements are more restrictive than the covenants contained in the master indenture. Debt service is level, with MADS measured at $17.95 million. For 2015, NMHS reported 7.16x debt service coverage, 37% capitalization, and 191 DCOH per its covenant calculations.

NMHS also has a frozen defined benefit pension plan, with a $423.2 million liability which was 88% funded in 2015. NMHS has no swaps.

DISCLOSURE

NMHS covenants to provide annual disclosure, and quarterly disclosure to the Municipal Securities Rulemaking Board's EMMA system. Disclosure is provided within 60 days of each quarter-end for the first three quarters, and within 150 days of fiscal year end. Disclosure includes both financial and utilization information. Disclosure to Fitch has been routine and timely, with very good access to management.

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

Applicable Criteria

Revenue-Supported Rating Criteria (pub. 16 Jun 2014)

https://www.fitchratings.com/site/re/750012

U.S. Nonprofit Hospitals and Health Systems Rating Criteria (pub. 09 Jun 2015)

https://www.fitchratings.com/site/re/866807

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1011147

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1011147

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Emily Wadhwani
Director
+1-312-368-3347
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Adam Kates
Director
+1-312-368-3180
or
Committee Chairperson
James LeBuhn
Senior Director
+1-312-368-2059
or
Media Relations
Hannah James
+ 1-646-582-4947
New York
hannah.james@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Emily Wadhwani
Director
+1-312-368-3347
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Adam Kates
Director
+1-312-368-3180
or
Committee Chairperson
James LeBuhn
Senior Director
+1-312-368-2059
or
Media Relations
Hannah James
+ 1-646-582-4947
New York
hannah.james@fitchratings.com