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Fitch Rates $176MM Providence Health & Services, OR's Ser 2010A Revs 'AA'; Outlook Stable

CHICAGO--(BUSINESS WIRE)--Fitch Ratings assigns its 'AA' long-term rating to the following Washington Health Care Facilities Authority's (WHCFA) revenue bonds to be issued on behalf of Providence Health & Services (PHS):

-- $176.3 million series 2010A.

The series 2010A bonds are expected to sell the week of June 21, 2010 through a negotiated sale. Proceeds will be used to fund a portion of the costs related to the construction of a new 12-story patient tower at Providence Health Center Everett in Everett, WA and pay costs of issuance.

In addition, Fitch affirms the 'AA' ratings on approximately $1.9 billion of outstanding bonds issued through various authorities in Washington, Oregon, Alaska, California and Montana, and affirms its short-term rating of 'F1+' based on the self-liquidity provided by PHS on its $200 million taxable commercial paper (CP) program and $212.3 million Clackamas County (Oregon) Hospital Facility Authority series 2003 variable-rate demand revenue bonds.

The Rating Outlook is Stable.

RATING RATIONALE:

--PHS maintains leading market share positions in most of its service areas, with facilities in Everett, Olympia and Spokane, WA, Anchorage, AK and Missoula, MT holding dominant market share positions. Fitch views the geographic dispersion of PHS's facilities favorably with no region accounting for more than 37% of total system revenues.

--PHS had strong profitability with operating margins and operating EBITDA margins in excess of 4.1% and 9.7%, respectively, in each of the last four fiscal years.

--PHS' solid operating performance is due, in part, to the system's excellent management practices and controls which have driven improved operating efficiency. PHS' management information system tracks each facility on a 17-item dashboard monthly, which allows management to adjust staffing and supply ordering to changes in patient volumes and clinical use rates.

--PHS' low debt burden results in solid coverage of pro forma maximum annual debt service (MADS). Pro forma MADS is a light 2.2% of fiscal 2009 total revenues which compares favorably to the 'AA' median of 2.8%. As result, historical coverage of pro forma MADS by operating EBITDA in fiscal 2008 and 2009 is a solid 4.1 times(x) and 4.6x, respectively.

--PHS' liquidity is consistent relative to its 'AA' peers. At March 31, 2010, PHS had $3 billion in unrestricted cash and investments equating to 160 days of cash on hand, a pro forma cushion ratio of 18.3 times (x) and cash to long-term debt of 150%.

KEY RATING DRIVERS:

--PHS is among the strongest 'AA' credits rated by Fitch.

--The risks to PHS reflect the general risks to health care providers nationally, including the changing operating and reimbursement environment related to federal health care reform legislation.

SECURITY:

Corporate debenture.

CREDIT SUMMARY:

The 'AA' rating reflects PHS' leading market share in geographically dispersed markets, strong profitability, excellent management practices and controls, a low debt burden resulting in solid historical coverage of pro forma debt service and solid liquidity. PHS owns or leases 26 hospitals in Washington, Oregon, Alaska, Montana and California. PHS maintains strong competitive positions in most of its service areas, with facilities in Portland, OR; Everett, Olympia and Spokane, WA; Anchorage, AK and Missoula, MT holding leading or substantial market share positions. PHS also operates several critical access hospitals and physician groups, which help generate increased volumes. Revenue generation and operating profitability is well balanced with no region accounting for more than 37% of total system revenues in FY 2009.

In fiscal 2008 and 2009 (year ended Dec. 31), PHS generated operating EBIDA (earnings before interest, depreciation and amortization) of $684.5 million and $752.4 million resulting in operating EBIDA margins of 9.7% and 9.8%, respectively. Due to PHS' strong operating cash flow, management has been able to fund roughly $2.6 billion of capital additions since 2006 while adding only $500 million in additional long term debt. Upon closing of the series 2010 issue, PHS' debt burden remains modest with pro forma maximum annual debt service (MADS) being just 2.1% of fiscal 2009 revenues and pro forma debt being 2.9 times(x) of 2009 operating EBIDA compared to the 'AA' medians 2.8% and 3.6x, respectively. Historical coverage of pro forma MADS by EBIDA is solid at strong at 4.7x and 3.8x in fiscal 2008 and 2009, respectively. Fitch notes that debt service coverage in fiscal 2009 was negatively impacted by realized losses incurred during the year from the corporation's decision to rebalance its investment portfolio in an effort to reduce volatility and increase liquidity.

Fitch believes that PHS' strong financial performance reflects the system's excellent management practices and controls. Management has consolidated system services in areas such as supply ordering, human resources, managed care contracting, physician recruitment and revenue cycle management, resulting in improved expense control and efficiency. Excellent financial reporting systems allow management to actively monitor and control the various business units throughout the organization.

PHS' liquidity indicators are consistent with its 'AA' peers. At March 31, 2010, PHS' unrestricted cash and investments totaled $3 billion (as compared to $2.4 billion at March 31, 2009) which translates into 160 days of cash on hand, a 19.1x cushion ratio (based on pro forma MADS) and 150% of long-term debt. As mentioned above, the corporation rebalanced its investment portfolio during 2009 to reduce volatility and raise liquidity in response to the more challenging operating environment and global economic instability.

The 'F1+' rating reflects the sufficiency of PHS' cash and investments position relative to its potential funding obligations on the $212.3 million Clackamas County series 2003D-G bonds and the $200 million taxable CP program. On March 31, 2010 PHS had over $1 billion of cash, cash equivalents and fixed income investments. Based on Fitch's rating criteria related to self-liquidity, PHS' position of eligible cash and investment available for same-day settlement easily exceeds Fitch's 1.25x requirement to cover the maximum tender exposure on any given date. PHS provides Fitch regular liquidity reports that are used to monitor its cash and investment position relative the corporation's total self-liquidity exposure.

The Rating Outlook is Stable. PHS is among the strongest 'AA' credits in Fitch's non-profit health care portfolio. Fitch believes that PHS' strong management practices, geographic dispersion of its operations and solid service area demographics will continue to produce strong financial performance in the near term. Furthermore, Fitch believes management is proactively positioning the organization to meet the changing delivery and reimbursement environment embodied in the federal health care reform legislation and should sustain PHS' strong financial performance in the longer term.

PHS is composed of 27 hospitals and other related health care entities which generated $7.7 billion in total operating revenue in fiscal 2009. Headquartered in Seattle, Washington, the system has core operations in Washington, Oregon, Alaska, California and Montana. PHS posts annual audited financial statements and quarterly unaudited financial statements on its website, 'www.providence.org', which is viewed positively by Fitch. Quarterly information includes balance sheet, income statement, cash flows, management discussion and analysis and some utilization statistics.

Applicable criteria available on Fitch's website at www.fitchratings.com:

'Revenue-Supported Rating Criteria', dated Dec. 29, 2009.

'Non-Profit Hospitals and Health Systems Rating Criteria', dated Dec. 29, 2009.

'Criteria for Assigning Short Term Ratings Based on Internal Liquidity', Dec. 29, 2009

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

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 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.

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