[April 12, 2012]

Fitch Affirms Ector County Hospital District's (TX) Revs at 'A-'; Outlook Stable

Fitch Ratings has affirmed the 'A-' rating on the following Ector County Hospital District (TX) revenue bonds issued on behalf of Medical Center Hospital (Medical Center):

--$8,860,000, hospital revenue refunding and improvement bonds, series 2010A;

--$44,654,000, hospital revenue bonds taxable series 2010B (Build America Bonds - Direct Payment).

The Rating Outlook is Stable.

SECURITY:

The series 2010 bonds are secured by a pledge of the revenues of the district. Specifically excluded from the pledged revenues are the ad valorem and local sales tax receipts.

KEY RATING DRIVERS:

VERY STRONG DEBT SERVICE COVERAGE: The Medical Center's debt burden is light producing a solid debt service coverage ratio of 5.3 times (x) in fiscal 2011, which well exceeds medians for the category.

GOOD MARKET POSITION: The Medical Center, the largest full service provider in the county, is the dominant provider in its service area with a market share that is consistently greater than 60%.

SOLID LIQUIDITY: Medical Center's 144.1% cash to debt and 20.3x cushion ratio at Dec. 31, 2011 (3-month interim) are in line with Fitch's 'A' category medians of 113.8% and 15.4x, respectively.

DEPENDENT ON (News - Alert) GOVERNMENT PAYORS: Medical Center's current operating profile is sufficient to support the rating category, though profitability is highly dependent on tax revenues and government payors, which is a credit concern as it exposes the organization to fluctuations in local taxes and reimbursement reductions at the state and/or federal level.

CREDIT UPDATE:

The 'A-' rating is based on Medical Center's excellent debt service coverage, strong market share position, good liquidity and adequate operating profitability. Concerns include a high reliance on state and federal revenues because of the relatively weak payor mix and volatility in sales and property tax revenues, which Medical Center depends on for operations.

Medical Center's debt profile is light with all fixed rate debt and maximum annual debt service (MADS) equating to just 1.2% of revenue. MADS coverage by EBITDA was a very strong 5.3x in fiscal 2011. Through the three month interim period ended Dec. 31, 2011, MADS coverage by EBITDA was excellent at 7.3x, which well exceeded the 'A' category median of 3.7x.

Medical Center recently completed a $58 million project to construct a Center for Women and Infants ($41.6 million, opened in January 2012) and a Center for Health and Wellness ($16.9 million, opened in October 2010), partially funded from series 2010 bond proceeds. Medical Center has projected capital spending to be about $8 million in fiscal 2012, which Fitch views as manageable. No additional debt issuance is planned in the near to medium term.

Fitch believes Medical Center's market position is a credit strength. It is the largest provider in the service area and has historically held the leading market share position in the region, controlling over 60% of the market share in the primary service area as of 2010. Also, with the addition of the Center for Women and Infants , OB volume is expected to increase in fiscal 2012. One of Medical Center's primary competitors, Midland County Hospital istrict, is opening a new bed tower in December 2012. However, management believes this new facility will have a negligible effect on Medical Center's operations as the two facilities serve somewhat distinct service areas. Inpatient admissions and surgery utilization trends have generally been flat for Medical Center but outpatient visits increased 34% in fiscal 2011 from the prior year, reflecting the opening of the Center for Health and Wellness and increased transient population in the community because of the oil boom.

Medical Center's balance sheet is solid and provides some financial flexibility in light of the modest operating profitability. At Dec. 31, 2011, unrestricted cash and investments equaled $75.5 million, which translates to 20.3x cushion ratio and 144.1% cash to debt, both exceeding the respective 'A' category medians of 15.4x and 113.8%. Cash relative to expenses is adequate for the rating category at 120.8 days cash on hand compared to the 'A' category median of 194.1 days.

In fiscal 2011, Medical Center posted a negative 1% operating margin, a decline from 1.9% in fiscal 2010. The decline in operating results was due in part to lower inpatient volumes as well as a rise in employee health care costs above budget and a significant increase in bad debt expense, which jumped 15% in fiscal 2011 from the prior year. Management responded with expense control initiatives and first quarter 2012 has shown signs of improvement. Through the three months ended Dec. 31, 2011, operating margin was 0.9% and operating EBITDA was 8.1%, still below the 'A' category medians of 2.6% and 9.4%, but in line with budgeted projections.

In addition, while neither ad valorem taxes nor sales taxes are pledged to support debt service payments, the district has the authority to collect a 0.75% sales tax and to levy ad valorem taxes for operating purposes at a rate not to exceed 15 cents on each $100 valuation of taxable real property. In fiscal 2011, the district collected $32.7 million in total taxes and budgeted for $30.5 million in fiscal 2012, which it is on track to exceed. Further, the district has sufficient flexibility at its current property tax rate for an additional property tax increase if necessary.

Fitch's primary credit concern is Medical Center's exposure to government payors with its high percentage of Medicaid payors at 12.2% and self-pay at 13.1% of gross revenues in fiscal 2011. Texas is in the process of transitioning its UPL program to a waiver program, which is not expected to negatively impact Medical Center in fiscal 2012, but Fitch will continue to monitor the developments going forward. Additionally, Medical Center depends on sales and property taxes to stabilize operations. Sales tax, a more volatile tax, was the majority of the total tax receipts at 82% ($26.9 million) in fiscal 2011, causing some concern.

The Stable Outlook reflects Fitch's expectation that Medical Center will continue to maintain its solid credit strengths and that operating performance will be sustained over the near term.

Medical Center Hospital is a 402 licensed bed, tertiary care facility owned and managed by the district and located in Odessa, Texas. It is the largest hospital in the County, with 311 beds in service. Medical Center provides acute patient care services, inpatient rehabilitation services, outpatient diagnostic imaging and radiation oncology services and serves as a teaching hospital for Texas Tech University Health Sciences Center, Odessa College and Midland College. Medical Center covenants to provide audited financial statements to EMMA six months after the end of the fiscal year and within 45 days of the end of each fiscal quarter.

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', dated June 20, 2011;

--'Nonprofit Hospitals and Health Systems Rating Criteria', dated Aug. 12, 2011

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=637130

Nonprofit Hospitals and Health Systems Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648836

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