OREANDA-NEWS. Fitch Ratings has assigned a 'BBB+' rating to the approximately \$107 million Washington Health Care Facilities Authority series 2015 revenue bonds issued on behalf of Central Washington Health Services Association (dba) Central Washington Hospital (CWH). In addition, Fitch has upgraded the rating on the outstanding series 2009 bonds to 'BBB+' from 'BBB'.

The Rating Outlook is Stable.

The series 2015 bonds will be fixed rate and expected to price the week of April 20 through negotiated sale. Bond proceeds plus the partial release of the series 2009 debt service reserve fund will be used to refund the majority of CWH's outstanding series 2009 bonds (\$100 million). Annual debt service savings are approximately \$960,000.

SECURITY

Gross revenue pledge and mortgage pledge of the obligated group, which only consists of CWH. CWH is part of Confluence Health (CH) and accounted for 83% of CH's total assets and 45% of CH's total revenue in fiscal 2014 (Dec. 31 year end). Fitch's analysis is based on CWH and CH. The unrefunded portion of the series 2009 bonds will retain a debt service reserve fund (DSRF). The series 2015 bonds will not have a DSRF.

KEY RATING DRIVERS

SUSTAINED PERFORMANCE DUE TO AFFILIATION: The rating upgrade reflects CWH's continued strong performance as the benefits from the affiliation with the major multispecialty physician clinic in town (Wenatchee Valley Medical Center [WVMC]) continue to be realized. The affiliation with WVMC resulted in the formation of CH, which began operations on Jan. 1, 2013. WVMC operated a 20 bed hospital (Wenatchee Valley Hospital [WVH]) and several outpatient clinics, which were transferred to CH and the operations within CH started in July 2013. The affiliation aligns the goals of these healthcare entities, which should allow for better coordinated and cost effective care as well as a rationalization of services and capital spending. CH's financial profile is also solid for the rating level.

CONTINUED STRONG CASH FLOW: CWH had another very strong year in fiscal 2014 due to the continued realization of the benefits from the affiliation, which has been evident in its volume trends with strong growth in both inpatient and outpatient volume. Fiscal 2014 is the third year of continued solid operating performance after financial difficulties in fiscal 2011 due to a decline in patient volume during the opening of its new patient tower in May 2011. Debt service coverage is very good for the rating level due to strong cash flow and a moderate debt burden.

MANAGEABLE CAPITAL NEEDS: Projected capital spending is manageable with the only major project being the conversion to an Epic electronic medical record (EMR) at CWH (WVH is already on Epic). CWH's conversion from Cerner to Epic is expected in fall 2017 at a total cost of approximately \$26 million. There are no additional debt plans.

IMPROVED LIQUIDITY: CWH's liquidity improved in fiscal 2014 due to strong cash flow, good investment returns, and modest capital spending. Certain of CH's liquidity metrics are diluted since only WVMC's operations flow through CH and its balance sheet is not consolidated.

DOMINANT MARKET POSITION: CWH benefits from a dominant market position with inpatient market share of over 78%, which has been increasing. The organization is focused on growing its market share in the secondary service area and reducing outmigration to Spokane. However, CWH's payor mix has high exposure to Medicare and Medicaid, with accounted for 72% of gross revenues in fiscal 2014. However, self pay has declined to only 1.7% of gross revenues in fiscal 2014 from 3.7% the prior year due to Medicaid expansion.

RATING SENSITIVITIES

SUSTAINED FINANCIAL PERFORMANCE: Fitch expects CH/CWH to sustain its solid financial profile for its rating level and continue to benefit from the affiliation.

CREDIT PROFILE

CH, WVMC, and WVH entered into a Master Affiliation Agreement on Jan. 1, 2013. CH is the sole corporate member of CWH and WVH and the hospitals contract with WVMC for physician services under a professional services agreement. WVMC's goals are further aligned with CH through a co-management agreement that includes an annual incentive payment related to contributions to the overall success of CH, quality, patient satisfaction, and financial measures. The master affiliation agreement has an initial termination date of Dec. 31, 2017, which automatically renews for two additional terms of five years each, unless otherwise terminated. Fitch does not expect the affiliation to terminate given the benefits achieved to date and the continued integration efforts underway.

CH includes the 198-staffed bed CWH (176 acute and 22 skilled nursing beds), 20-bed WVH (14 acute and six acute rehab beds), and 10 outpatient clinics. WVMC includes over 250 physicians. CWH is located in Wenatchee, Washington, approximately 150 miles east of Seattle and 170 miles west of Spokane. In fiscal 2014, CWH had approximately \$267 million of total revenue and CH had approximately \$596 million of total revenue. CH, WVH, and WVMC are not obligated to pay debt service on CWH's outstanding bonds.

Continuation of Realization of Benefits from Affiliation
The strong performance to date reflects the continued benefits from the affiliation that resulted in a coordination of resources, which Fitch believes is critical in a tighter reimbursement environment. Management is focused on optimizing the capacity of the system, eliminating duplication of services, implementing lean methodology and a common EMR. Management identified areas of financial improvement opportunities including lab consolidation, continued savings from extending the 340b drug program, supply chain initiatives and throughput. Fitch believes continued cost savings and revenue enhancement will continue to be achieved as the affiliation matures.

Sustained Solid Cash Flow
Fiscal 2014 was CWH's third year of sustained solid cash flow after weak performance in fiscal 2011 due to the opening of its new patient tower in conjunction with a decline in volume. CWH's operating and operating EBITDA margins were 5% and 13.3%, respectively in fiscal 2014 compared to 3.5% and 13.1% the prior year, exceeding the respective 'BBB' category medians of 1.1% and 7.9%. CH's operating and operating EBITDA margins in fiscal 2014 were 3.5% and 7.5%, respectively. Strong performance continues to be attributed to very strong volume growth due to the coordination of resources and aligned goals of the CH entities.

CWH's fiscal 2015 budget is for a 5.4% operating margin and CH's operating margin budget is 3.5%, which Fitch believes is achievable.

Improved Liquidity
Liquidity continues to grow. CWH's unrestricted cash and investments grew to \$98 million at Dec. 31, 2014 from \$78.9 million at Dec. 31, 2012. Days cash on hand (DCOH) and cash to debt of 149.9 and 88.7% at Dec. 31, 2014 are consistent with the 'BBB' category medians of 145 and 93.6%. CWH's balance sheet is expected to continue to strengthen due to limited capital needs. CH has weaker DCOH with 83 days at Dec. 31, 2014 but solid cash to debt of 114.9%.

Moderate Debt Burden

CWH's debt profile is conservative and is 100% fixed rate with no swaps. Total debt after the series 2015 issuance is approximately \$118 million.

CWH's debt burden continues to moderate with the improved financial performance. Debt to EBITDA is now 2.7x from 3.5x in fiscal 2013 and 8.7x in fiscal 2010. Maximum annual debt service (MADS) is expected to decline to \$8.4 million from \$9.4 million upon closing of the series 2015 refunding and equates to a moderate 3.2% of 2014 total revenue; significantly improved from 4.8% in fiscal 2010. Historical coverage of pro forma MADS by EBITDA is strong relative to the 'BBB' category median (2.6x) at 4.9x, 3.9x and 3.5x in 2014, 2013 and 2012 (excludes gain on sale of patient service center), respectively.

Manageable Capital Needs

Following the May 1, 2011 opening of its new five-story 176-bed patient tower (\$122 million), CWH's capital needs are manageable. Total capital expenditures are projected to be \$18 million in fiscal 2015, \$26 million in fiscal 2016, \$20 million in fiscal 2017, \$16 million in fiscal 2018 and \$16 million in fiscal 2019 and includes CWH's Epic project. Capital spending is expected to be funded through operating cash flow. No additional debt is planned.

Disclosure
CWH covenants to provide annual disclosure within 150 days of fiscal year end and quarterly disclosure within 45 days of quarter end for the first three quarters and within 60 days of the fourth quarter.