Fitch Affirms WellSpan Health (PA) Revs at 'AA-'; Outlook Stable

Fitch Ratings has affirmed the 'AA-' rating on the following revenue bonds issued on behalf of WellSpan Health (WellSpan):

--$167,975,000 General Authority of Southcentral Pennsylvania series 2008A fixed rate revenue bonds;

--$24,570,000 York County Hospital Authority series 1993B auction rate bonds (York Hospital).

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a pledge of gross receipts.

KEY RATING DRIVERS

EXCELLENT OPERATING PROFILE: Fitch views favorably WellSpan's integrated delivery platform, continuous development of its regional care network, and prudent management practices, and believes the organization is well positioned to face changes in reimbursement and care management practices.

GROWING REGIONAL FOOTPRINT: With stable market leadership in York and Adams counties, WellSpan is expanding into the Lancaster market through the merger with Ephrata Community Hospital (ECH). This partnership should bolster WellSpan's regional presence and aid in population health management initiatives.

STABLE FINANCIAL PERFORMANCE: While slightly lagging Fitch's 'AA' medians due to a large employed physician base, profitability metrics were sound in fiscal 2013 and through the three-month interim period ended Sept. 30, 2013 supported by steady volume growth.

HIGH BUT MODERATING DEBT BURDEN: Debt metrics have improved significantly since the 2008 bond issuance but remain weaker than Fitch's 'AA' medians.

RATING SENSITIVITIES

STABILITY EXPECTED: Given WellSpan's operating platform, market position, and strategic plans, Fitch expects consistent financial performance to be sustained.

CREDIT PROFILE

Headquartered in York, Pennsylvania, WellSpan consists of four acute care hospitals (York Hospital, Gettysburg Hospital, Surgical & Rehab Hospital, and Ephrata Community Hospital), ambulatory and outpatient care locations, and various other health care related entities. York Hospital and Gettysburg Hospital are the only members of the obligated group. Fitch evaluated the financial and operating profile of the consolidated entity. In fiscal year ended June 30, 2013, which did not include Ephrata Community Hospital, WellSpan produced $1.2 billion in total operating revenues with total assets of $1.5 billion.

Strong Business Platform and Market Position

WellSpan is well positioned to face changes and challenge related to healthcare reform, supported by its integrated business model, strong primary care physician base, high level of alignment with physicians and through the continuum of care, as well as thoughtful management strategies. Leveraging the considerable footprint and penetration in the service area, WellSpan has maintained a leading market position In the York/Adams market with 59% of inpatient market share. In the newly entered northern Lancaster market, ECH's market share was 40% in 2012, down from 44% in 2010. Developing the local system of care and improving presence in the Lancaster market is a near-term focus, with various strategic initiatives underway.

Merger with Ephrata Community Hospital

Effective Oct. 1, 2013, WellSpan completed a merger with ECH in Lancaster County, located about 40 miles northeast of York Hospital. The affiliation reflects WellSpan's historical approach to methodically fortifying its presence in the region, and in bolstering its ability to pursue population health management efforts in the area. ECH will be consolidated into WellSpan's financials, but each entity will remain separately obligated on its respective debt. Based on ECH's relative size and existing financial profile, Fitch believes the overall financial impact of the transaction will be minimal.

Stable Profitability

Sound operating performance continued, supported by good volume growth. Operating margin was 3.5% in fiscal 2013 and 4.4% in the three-month interim compared to the 2013 budget of 3.3%. Similarly, operating EBITDA margin was steady at 10% in fiscal 2013 and 10.8% in the interim period. Fitch notes that WellSpan's overall profitability is somewhat depressed by its large employed physician base and profitability metrics lag Fitch's 'AA' medians of 4.2% operating margin and 11.8% operating EBITDA margin. Management continues to prepare for revenue pressure in the next several years, and has targeted $25 million in expense reductions in order to produce operating EBITDA margin around 10-10.5%. Given interim results and management's history of meeting budgeted performance, Fitch believes this is attainable.

Stable Liquidity

Unrestricted cash and investments totaled $745.6 million at Sept. 30, 2013, equating to 243 days cash on hand, 19.5x cushion ratio, and 172.9% cash to debt. While liquidity metrics slightly lag Fitch's 'AA' medians of 254.3 days, 23.4x, and 173.6%, respectively, it has exhibited steady growth over the last five fiscal years, and is satisfactory for the rating category.

High Debt Burden

Long-term debt totaled $423.5 million at June 30, 2013, of which $177 million (42%) are fixed rate and $246.5 (58%) are floating rate. Debt metrics remain unfavorable to rating category medians since the 2008 issuance but have moderated considerably over the last five years. In fiscal 2013, MADS coverage of 3.8x, MADS as a%age of revenue of 3.1%, and debt to capitalization of 40.6% were weak compared to respective medians of 5.0x, 2.6%, and 32.7%. However, it is significantly improved from 1.9x, 3.9%, and 55.4% in fiscal 2009.

Concerns with the debt load are mitigated by WellSpan's plans to reduce its debt burden by paying down maturing principal and funding capital expenditures using internally generated cash flow. Modest capital plans are supported by a low average age of plant of 8.5 years. There are no new debt plans.

Fitch expressed concerns related to the erosion in pension funding status in our last review. Over the last year, funded status improved significantly from 61.3% in 2012 to 76.4% in 2013, driven by a combination of investment gains, employer contribution, and an increase in the discount rate. Management anticipates making contributions until it is fully funded.

DISCLOSURE

WellSpan discloses annual financial statements within 150 days and quarter unaudited financial statements within 60 days through the MSRB EMMA website.

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

Applicable Criteria and Related Research:

--'Revenue Supported Rating Criteria', June 3, 2013;

--'U.S. Nonprofit Hospitals and Health Systems Rating Criteria', May 20, 2013.

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=709499

U.S. Nonprofit Hospitals and Health Systems Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=708361

Additional Disclosure

Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=818850

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