Aug 21 - Fitch Ratings affirms the ‘A’ rating on the following New Hampshire Health and Education Facilities Authority bonds issued on behalf of Wentworth-Douglass Hospital (WDH): --$87,827,644 fixed-rate revenue bonds, Wentworth-Douglass Hospital Issue, series 2011A; --$18,328,049 variable-rate demand bonds, Wentworth-Douglass Hospital Issue, series 2011B; --$8,425,000 Wentworth-Douglass Hospital issue, fixed-rate revenue bonds, series 1994 bonds. The rating for the Series 2011B is an underlying rating. The Rating Outlook is Stable. SECURITY: Debt payments are secured by a pledge of the gross revenues of the obligated group and a mortgage. KEY RATING DRIVERS OPERATIONS REMAIN SOLID: Wentworth-Douglass Hospital had a 2.7% operating margin and a 10.8% operating EBITDA in 2011, which while slightly lower year over year still compares well with Fitch’s ‘A’ category medians of 2.6% and 9.4%, respectively. IMPACT OF NEW HAMPSHIRE DSH CUTS: The solid operating results in 2011 are despite New Hampshire’s cutting off of disproportionate share funding (DSH) in the middle of 2011, while continuing to collect a statewide bed tax on hospitals. After essentially breaking even on the program for a number of years, WDH had a net $6.5 million loss between the bed tax it paid and what it received in DSH funding in 2011. In 2012, WDH will pay $12 million for the bed tax while receiving no DSH funding from the state. Six-month interim results show WDH operations holding steady at a 3% operating margin and a 10.9 % operating EBITDA margin. LIQUIDITY GROWING: WDH had $149.1 million in cash and unrestricted investment at June 30, 2012, up 10% from year end 2011, equating to 224.2 days cash on hand, 11.0x cushion ratio, and 115.6% cash-to-debt. All of these figures compare well with their respective ‘A’ medians. GOOD DEBT COVERAGE: Six-month interim results shows maximum annual debt service (MADS) coverage of 2.9x, which trails the ‘A’ category median of 3.7x. However, actual debt service coverage was stronger and at the 3.7x median. Fitch’s MADS figure of $13.5 million includes a bullet payment in 2016, which WDH will likely refinance. Actual debt service till 2016 is approximately $10.9 million a year. NEW TOWER PROJECT PROGRESSES: The project is expected to be finished in October 2012 and is currently on budget. CREDIT CONCERNS: Credit concerns include the continued effect of the bed tax on WDH’s operations and Wentworth-Douglass’ small revenue and bed size for the rating category. CREDIT PROFILE Wentworth-Douglass Hospital is a 178-bed acute care hospital (122 available beds) located in Dover, NH, which is situated in the center of the Seacoast region of New Hampshire, approximately 60 miles from Boston, MA and Portland, ME. WDH had $285.7 million in operating revenue in 2011. The ‘A’ rating reflects WDH’s solid operating performance, leading market share position in a stable service area and excellent physician alignment. WDH’s operating performance is supported by management’s focus on cost control (WDH has one of the lowest cost per patient discharge figures in the region), its growth in acute care services (revenue grew 7% from 2010 to 2012), and the strength of its service area. All of these contributed to WDH’s ability to sustain operating performance in spite of the state of New Hampshire’s DSH cuts. After solid growth, inpatient admissions were down slightly in 2011, but most outpatient volumes showed growth with outpatient surgeries increasing by 1.7%. Volumes were hurt by the loss of an independent cardiology group but WDH is in the process of rebuilding the service line and is expected to employ new cardiologists, which should stabilize and grow volumes over the medium term. WDH has strong physician alignment through two separate entities, a highly functioning physician hospital organization (PHO) that was established in the 1990s, and a physician corporation, Wentworth-Douglass Physician Corporation (WDPC), which is part of the obligated group. Through WDPC, WDH employs approximately a third of its physicians, including most of the area’s primary care physicians, and nine out of 10 of its top admitting physicians are employed. The PHO links WDH with independent and employed physicians, providing managed care contracting and a high level of clinical integration. These two entities have created strong physician alignment and positions WDH well for health care reform. The new tower project is on time and budget and expected to finish by October 2012 and open in January of 2013. Fitch views the project positively as the new tower will significantly enhance the current physical plant at WDH at a reasonable expense relative to investing in a whole new hospital. A new women and children’s center, including a new nursery, will be housed in the tower, providing a major upgrade to the current obstetrics floor and nursery. Two other floors will have 32 private inpatient rooms each, which will allow WDH to renovate existing inpatient rooms to create all private rooms, a major upgrade to the facility. Overall, Fitch believes that the projects will position WDH well to handle future levels of patient growth. WDH’s revenue and bed size are small relative to the ‘A’ category. Concerns about these are mitigated by WDH’s leading inpatient market share and the lack of a large tertiary competitor in the seacoast region. Most of its competitors are approximately WDH’s revenue or bed size or smaller, and operate within fairly discrete service areas, providing a measure of competitive cushion for WDH. The top 10 admitting physicians do represent a high 34% of admission but that is down from 36.6% in 2010. Total long-term debt is $120.9 million and includes a $6.4 million bank note due in 2016, which Fitch does not rate. The debt mix is 80% fixed and 20% variable, with $18.3 million in letter of credit (LOC) supported variable-rate demand bonds. The LOC expires in April 2016. WDH has ample liquidity relative to its puttable debt. WDH has three fixed payor swaps, with a total notional amount of approximately $27 million. Piper Jaffray is the counterparty on all three swaps. Fitch views the lack of counterparty diversity negatively. The aggregate mark-to-market on the three swaps as of June 30, 2012 was a negative $5.6 million. WDH has no collateral posting requirements. The Stable Outlook reflects Fitch’s expectation that WDH’s operating performance and debt service coverage will remain stable over the near term. WDH covenants to disclose annual and quarterly financial information. Quarterly statements include a balance sheet, income statement, and utilization statistics.