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Fitch Affirms Martin County Hospital District at 'BBB'; Outlook Stable.

Austin: Fitch Ratings affirms the following ratings on Martin County Hospital District (MCHD), TX:

--$19.5 million combination limited tax and revenue bonds, series 2011A and 2011B (taxable) at 'BBB';

--Issuer Default Rating (IDR) at 'BBB'.

The Rating Outlook is Stable.

SECURITY

The bonds are direct obligations of MCHD and are secured by a limited ad valorem tax and pledge of net revenues of the hospital district.

ANALYTICAL CONCLUSION

The 'BBB' IDR and long-term rating reflect Fitch's view that MCHD's financial profile is stable through the cycle, anchored in strong operating flexibility and service essentiality as the sole community provider in Martin County. A limited tax margin helps to mitigate the district's exposure to a highly volatile economy concentrated in oil production.

KEY RATING DRIVERS

Revenue Defensibility: 'bbb'; Essential Service Provider in Concentrated Energy Economy

MCHD is a critical access hospital (CAH) providing essential services in rural Martin County. Gross patient revenues are dominated by Medicare and commercial payors. The midrange assessment incorporates a limited tax margin and exposure to a highly concentrated and volatile oil-based economy.

Operating Risk: 'aa'; Strong Operating Performance Incorporates Benefit of Tax Revenues

Fitch expects operating flexibility to remain very strong, anchored in healthy profitability and service essentiality, but to moderate over the next five years based on the district's diminishing available M&O available tax rate capacity and more moderate expected growth in utilization. The district's strong utilization over the past five years was driven by strong regional economic growth. Moderate lifecycle investment needs reflect a low average age of plant, historically robust capital spending and more moderate expected five-year capital needs.

Financial Profile: 'bbb'; Expected Financial Stability Through the Cycle

Fitch expects the district to maintain a stable financial profile through the cycle based on its very strong cost flexibility and essentiality of its services to the community. Fitch's assessment incorporates a base case with moderate growth and a rating case with imposed stress reflecting potential volatility associated with the County's largely oil-based economy.

Asymmetric Additional Risk Considerations

There are no asymmetric additional risk considerations.

RATING SENSITIVITIES

Sound Financial Profile: The current rating assumes that the district will maintain adequate liquidity and limited leverage consistent with its current profile. There is little upward rating moving at this time over the Outlook period. Conversely, while not expected, a material decline in unrestricted reserves or increase in debt, or any material prolonged decline in operational strength, could adversely affect the current rating.

CREDIT PROFILE

Martin County Hospital District (MCHD) owns and operates an 18-bed critical access hospital (CAH) located in Stanton, TX, approximately 20 miles east of Midland. MCHD was established in 1967 and has boundaries that are coterminous with Martin County. The district overlies the Permian Basin oil and gas reserves. In addition to revenues derived from inpatient and outpatient services, MCHD receives tax support for operations and debt service which totaled $10.6 million of its $25.1 million in total fiscal 2017 revenues.

Revenue Defensibility

Gross patient revenues are derived primarily from Medicare (39%) and Commercial (38%) payors, with lesser exposure to Medicaid (12%) and self-payors (11%) As a CAH, MCHD benefits from Medicare reimbursement based on a cost methodology. The district reports a notable presence of plastic surgery patients within the self-payor group, which Fitch believes contributes to lower than otherwise net reimbursements from this payor class.

Property tax revenues account for 42% of total fiscal 2017 revenues and are comprised primarily of maintenance & operations (M&O) tax revenues that support operations. MCHD has the independent legal ability and a demonstrated willingness to adjust its M&O tax rate. The district's current M&O tax rate is $0.23 per $100 of taxable assessed valuation (TAV) in relation to an M&O tax rate cap of $0.30, giving MCHD enhanced, but not unlimited, revenue defensibility. Based on the district's 2017 TAV, Fitch estimates an available tax margin of $3.2 million, representing 13% of total fiscal 2017 revenues.

The tax base upon which property taxes are levied is coterminous with that of Martin County. Mineral values represent a high 88% and top 10 taxpayers a high 45% of the district's 2017 TAV, led by Pioneer Natural Resources (16%). TAV realized a 10-year compound annual growth rate (CAGR) of 17.1% through 2017. This high CAGR incorporated a cumulative two-year TAV value decline of 32.7% during 2015 and 2016, which interrupted 10 consecutive years of high growth.

MCHD estimates its market share at 91%. Fitch expects the district to maintain a strong market position as the sole hospital in Martin County, its primary service territory. Utilization trends reflect most notable growth in outpatient and emergency department services. The hospital maintains relationships with area physicians, physician assistants and nurse practitioners, broadening its admitting base.

Martin County's economy is driven by oil production. The county's five-year population growth and median household income exceed that of Texas and U.S. averages, reflecting an expansionary cycle in the oil-rich Permian Basin. Fitch's assessment recognizes that the local economy and tax base are heavily dependent on oil production. Oil prices over the past five years realized an annual high of $98 per barrel (2013) and a low of $43 per barrel (2016).

Fitch expects oil prices to remain below $50 per barrel over the long-term considering global production costs, U.S. shale production growth and shale production's quick supply response (Oil Prices Likely to Remain Below USD60 for the Long Term (October 2017)). The U.S. Energy Information Administration expects the Permian Basin to account for nearly 30% of total 2018 U.S. crude oil production. Operators in the Permian Basin are expected to continue drilling with sustained West Texas Intermediate (WTI) crude oil process below $50 per barrel. (U.S. crude oil production forecast expected to reach record high in 2018 (EIA July 25, 2017)).

Operating Risk

The district's five-year EBITDA margin averaged a very strong 27% during fiscal 2012 through 2017. A high level of operating flexibility resulted from solid patient utilization, tax revenue growth, and the district's ability to manage costs in a competitive labor market associated with the expanding energy economy. Tax revenue growth reflected the expanding tax base and MCHD's increase to the M&O tax rate (from $0.09 in 2013 to $0.23 in 2017). Fitch expects the district's future revenue growth to moderate as tax revenue growth will be largely dependent on uncertain tax base growth since the district's M&O tax rate capacity is limited to $0.07 (the difference between the current rate of $0.23 and cap of $0.30). Margins may also be dampened by operating disruptions associated with the Cerner information technology system implementation currently underway and industry-wide reductions to supplemental payments, although the payments do not represent a significant component of the district's revenue. Despite these moderating influences, Fitch expects the district's cost flexibility to remain strong considering its unusually high historic and current levels of profitability.

MCHD is in a relatively new facility, accounting for its low 7.3 average age of plant, and robust five-year average spend equal to 204% of depreciation, providing support for a moderate lifecycle assessment. The district's five-year spend included completion of a $4.4 million operating room and physical therapy expansion to support future service needs. Fitch estimates capital spending at 125% of depreciation over the next five years to include $1 million per year on routine needs and MCHD's estimates for its Cerner implementation ($4.5 million over seven years) and outpatient facility expansion ($2 million from internal sources dependent on receipt of grant monies for the balance of$7 million total project costs).

Financial Profile

Fiscal year-end 2017 (April 30) cash to adjusted debt of 53% reflects $19.6 million in outstanding series 2011A and 2011B general obligation bonds and the district's practice of funding capital projects with internally generated funds. The district does not have pension obligations, nor is it a party to swaps.

Fitch expects liquidity and leverage to remain stable through the cycle as demonstrated by a fifth year rating case cash to adjusted debt of 57% and net adjusted debt to adjusted EBITDA of 1.6, reflecting solid recovery from stress supported by strong expected operating performance incorporating the district's essential services to the community.
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Publication:Daily the Pak Banker (Lahore, Pakistan)
Date:May 10, 2018
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