Fitch Affirms 'BBB+' Rating for Monongalia Health System's (Morgantown, WV) Revs; Outlook Stable.

NEW YORK -- Fitch Ratings affirms the 'BBB+' ratings on Monongalia Health System's (Monongalia) approximately $121,392,396 of series 2008 A, 2005 A and 2005 C revenue bonds issued through the Monongalia County Building Commission and the taxable $14,250,000 series 2008 B issued by the Monongalia Health System. The Rating Outlook is Stable.

The affirmation is supported by Monongalia's improved operating performance, solid liquidity relative to expenses, successful completion of a major construction project, and a strong market share position in a service area which has so far been spared the economic decline felt in most parts of the country. Monongalia completed the construction of a new patient tower in June 2008; renovations, expected to be completed by year end, will update all remaining patient rooms, resulting in the facility having all private rooms, giving Monongalia a competitive advantage over the only other major acute care provider in its service area, West Virginia University Hospital (WVUH).

After two years of operating losses in fiscal 2006 and 2007, primarily as a consequence of significant pension funding requirements, operating performance returned to profitability in fiscal year ended June 30, 2008, with operating margin of 4.8% ($8.4 million operating income), high for its rating category. Profitability has been maintained for the 11 months ended May 31, 2009 with 3.1% operating margin ($5.8 million operating income); well ahead of budgeted operating income of $2 million, but short of the prior interim period operating income of $9.7 million as Monongalia had to absorb additional debt as well as personnel costs associated with the new patient tower. Excess income margin was a solid 5.6% in fiscal 2008 ($9.8 million), but was negatively affected by investment losses for the 2009 interim period, resulting in excess margin of 0.7% ($1.3 million). On May 31, 2009, Monongalia had 155.8 days cash on hand (DCOH), based on $72.5 million of unrestricted cash and investments, a decline from 178.1 DCOH as of the end of 2008 fiscal year; a function of investment losses and increased pension funding, but still very strong for the 'BBB' rating category, as is the cushion ratio at 9.0 times (x). Cash to debt historically has been weak, but has improved slightly to a mid 50% range. Monongalia's investment portfolio is comprised of 60% of equities and 40% fixed income investments, but does not include any alternative investments.

Monongalia has continued to maintain a stable market share of its service area in the low 30% range, competing with the larger WVUH with 42% market share. Management expects an increase in market share based on the new facilities, which include a new and expanded emergency room, as well as a strengthened open heart program, now run independently of WVUH, and with a new surgical team recruited from Charleston. During fiscal 2008 volumes increased both on the impatient and outpatient side; admissions increased by 4.3%, births 13.1%, surgical procedures by 6.7% and emergency room visits were 4% ahead of prior year. At the same time management succeeded in reducing average length of stay to 4.0 days from 4.2 days in 2007. For the 11 months of fiscal 2009, inpatient admissions decreased by 8.4%, primarily as a result of the reclassification of certain cardiac procedures to outpatient status by Medicare (fully one eighth of all cardiac procedures), and ALOS increased to 4.5 days due to increases in acuity, particularly due to increased volume of open heart procedures (250 in 2009). Outpatient utilization remained solid with emergency room visits increasing by 3.9%, outpatient visits by 3.7% and cardiac catheterization procedures by 4.4%. Occupancy at the Village at Heritage Point senior facility is indicative of strong demand. The independent living units are 99% occupied and the assisted living units are at 100% occupancy.

Fitch's primary concern is the organization's debt burden, which is high relative to the rating category, reflective of the recent sizeable investment in facilities and the corresponding increase in debt. Maximum Annual Debt Service (MADS) represents 4% of revenues compared to the 'BBB' median of 3.5% and MADS coverage was relatively modest at 2.5x and 2.4x in fiscal 2008 and for the interim May 2009 period, respectively. No major capital spending is planned after the end of this calendar year and these ratios should moderate over time with continued positive operating performance. Additional risk stems from the composition of Monongalia's debt, which is 55% floating rate; unremarketed draws must be reimbursed within a one-year period, but there are four years left of the five-year term of the letter of credit and the interest rate cannot exceed 12%. This risk is somewhat mitigated by the unrestricted cash and investments which are close to 100% of the floating-rate debt outstanding. Monongalia is counterparty to three floating- to fixed-rate swaps covering their variable debt exposure, with a notional amount of $55.8 million and the mark-to-market on the swaps as of May 31, 2009 was a negative $6.1 million. Collateral posting is not required. Also of concern is the high, though stable, source of governmental revenues, of 66% (Medicare, Medicaid, and the Public Employees Insurance Agency).

The Stable Outlook reflects Fitch's belief that Monongalia will continue to maintain profitability, now that the construction and renovation project is virtually done and the pension funding returns to a somewhat more stable level, which should help maintain liquidity and bring down to a more appropriate level the organization's debt ratios. In Fitch's view the budgeted operating income for fiscal 2010 of $5.4 million is attainable.

Monongalia Health System, headquartered in Morgantown, West Virginia, consists of a 182 staffed bed acute care hospital, Mon Elder Services consisting of 90 independent living units and 40 assisted living units, an ambulance company and a foundation, and is a part owner of several entities, including a durable medical equipment company, a home health agency, a rehabilitation facility, and an ophthalmology surgery center. For the purposes of this analysis Fitch reviewed the financials of the obligated group, which accounts for approximately 99% of system assets and 96% of system revenues. The system interim financial statements were used for the 11-month period ending May 31, 2009 (Monongalia does not prepare monthly statements for the obligated group). Monongalia covenants to disclose annual audited financial statements within 120 days of the end of its fiscal year and quarterly financial statements within 45 days of the end of the quarter (60 days after the end of the last quarter).

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