Fitch Affirms Nebraska Methodist Health System, (NE) at 'A-'; Outlook Remains Negative.

NEW YORK -- Fitch Ratings has affirmed its 'A-' rating on approximately $220.1 million in revenue bonds outstanding issued on behalf of Nebraska Methodist Health System (NMHS). The Rating Outlook remains Negative.

The 'A-' rating reflects NMHS' operating profitability, solid market share in a competitive service area, and good debt service coverage. Through the six-month interim period ending June 30, 2009, NMHS reported $9.1 million in operating income (3.1% margin) and $27.8 million in operating EBITDA (9.4%), which compare favorably to Fitch's medians for the rating category. Operating margin in fiscal year (FY) 2008 would have compared just as favorably if it were not for a one-time $9.9 million non-cash charge to income associated with employee paid time off. NMHS' recent return to profitability is due to more efficient alignment of its employed physicians with system hospitals' financial and operating objectives and tighter control over expenses. While competition in the service area is strong, NMHS has a 26% market share, second behind Alegent Health System, with a 38% share. Moreover, NMHS continues to be the market share leader in inpatient surgeries and newborn deliveries. Finally, NMHS' strong revenue generations provides for a good pro forma maximum annual debt service (MADS) coverage of 3.4 times (x) at June 30, 2009, and 2.8x at fiscal year end (FYE) 2008.

Credit concerns include low liquidity levels and strong competition in the greater metropolitan area. On June 30, 2009, NMHS had $140.3 million in unrestricted cash and investments, equating to 99.3 days-cash-on hand (DCOH). While well below the 171.2 DCOH median for the rating category, Fitch notes that all of NMHS' long-term debt is in fixed-rate mode, thereby obviating the need to maintain excess cash reserves to hedge against any put debt risk.

NMHS' cash and investments at FYE 2008 totaled $136.6 million (100 DCOH). The low levels of liquidity have resulted from the historical use of NMHS' internal funds to finance capital projects and acquisitions. The greater Omaha metropolitan area is characterized by strong competitive behavior among several health care systems and a lack of certificate of need (CON). Though NMHS has been affected by competition from physician joint ventures and specialty hospitals, NMHS and its affiliates have announced their participation in several joint ventures with physicians and a physician-owned neurosurgical hospital to mute the potential negative impact of these market forces.

The Negative Rating Outlook continues to reflect the business risk associated with the construction of NMHS' new Women's Hospital. While this project will position NMHS to capture volume in the growing area west of Omaha over the long term, Fitch believes management will be challenged to prove project feasibility given the emphasis on women's services which makes up less than 20% of total system revenues. An Outlook revision to Stable is predicated on maintaining recent operating profitability throughout the project development and successful backfill with other clinical volumes at the main campus.

Nebraska Methodist Health System operates a 430-licensed bed hospital in Omaha, Nebraska (NMH) and a 236-licensed bed hospital in Council Bluffs, Iowa (JEMH). NMHS had total operating revenue of $565 million in 2008. NMHS covenants to provide only annual disclosure to bondholders, which is viewed negatively. However, quarterly information will be provided to bondholders upon request. Quarterly disclosure is good, with management discussion and analysis, utilization statistics, income statement, balance sheet, and statement of cash flows.

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