OREANDA-NEWS. July 01, 2015. Fitch Ratings has removed from Rating Watch Negative and affirmed the following bonds for the El Paso County Hospital District, TX (the district) at 'AA-':

--\\$134.3 million combination tax and revenue certificates of obligation (CO) series 2013;
--\\$110.4 million general obligation (GO) refunding bonds series 2013
--\\$7.2 million GO refunding bonds series 2009;
--\\$116.3 million GO bonds series 2008A;
--\\$1.5 million combination tax and revenue certificates of obligation series 2005.

The Rating Outlook is Stable.

SECURITY
The bonds are direct obligations of the district and are payable from an annual ad valorem tax, levied within the limits described by law. The property tax rate cannot exceed 75 cents per \\$100 taxable assessed valuation (TAV) for both operations and maintenance (O&M) and debt service.

KEY RATING DRIVERS

RATING WATCH REMOVED: Removal of the Rating Watch Negative reflects Fitch's expectation for stable operations despite the El Paso Children's Hospital (EPCH) bankruptcy petition and complaints filed against the district. Fitch believes the district maintains the ability to manage potential resultant losses consistent with the current rating.

STABILIZING OPRERATING PERFORMANCE: Fitch's August 2014 downgrade to 'AA-' from 'AA' reflected then declining University Medical Center (UMC) margins and liquidity due primarily to the inability of EPCH to make expected payments to the district under various service agreements. The district's improved fiscal 2015 year to date profitability reflects volume growth and cost reductions. Fitch anticipates further improvement in fiscal 2016 due to ongoing cost management and increased supplemental funding.

ESSENTIALITY OF SERVICE: UMC's position as a safety-net hospital, which provides an essential service to a growing population, allows it to benefit from increased reimbursement from several supplemental payment programs.

DIVERSIFIED BORDER ECONOMY: The economy of El Paso County includes international trade, manufacturing and distribution, Fort Bliss, the U.S. Army's second largest installation, and the stabilizing presence of education and government sectors. The tax base has realized solid growth and is without concentration.

TAXING CAPACITY; COMMUNITY SUPPORT: The district's fiscal 2015 budget maintains a strong 70% margin under the tax limitation. Community support is evidenced by voter support for the district's general obligation bond programs.

RATING SENSITIVITIES
STABLE FINANCES: The rating assumes ongoing financial stability of the district. Reduced profitability or liquidity could pressure the current rating.

CREDIT PROFILE

The El Paso County Hospital District covers a very large area, totaling 1,058 square miles, and operates the only public hospital located in its primary service area. UMC is a 394-bed acute care facility owned by the district with the legal responsibility to provide medical and hospital care to all El Paso County residents regardless of their ability to pay.

FINANCIAL HIT FROM EPCH APPEARS MANAGEABLE

EPCH filed a voluntary petition for protection under Chapter 11 of the bankruptcy code on May 19, 2015 reportedly to avoid a takeover by the UMC. Children's also filed a complaint against the district on May 19, 2015 seeking a temporary restraining order and injunctive relief against UMC's termination of service and lease agreements in place between UMC and EPCH.

The district entered into a series of agreements with EPCH in support of EPCH administrative, technology, diagnostic imaging and laboratory functions. EPCH has not made full payments to UMC since fiscal 2013 and at April 30, 2015 owed approximately \\$100 million to UMC. UMC has fully reserved against the owed amount in fiscal 2014 and is not budgeting to recognize any contract revenues in FY 2015.

UMC's expense related to the provision of administrative services to EPCH is approximately \\$12 million annually (2.6% of fiscal 2014 operating expenses), and UMC is expecting to continue providing services through the period of the bankruptcy proceedings. Fitch believes the district can maintain stable operations absent payments from EPCH and under various possible outcomes of EPCH litigation against the district.

The Children's Hospital opened in February 2012 and was constructed with series 2008 bond proceeds. It is the first children's hospital in the region and is located within UMC facilities. The district owns the facility and leases it to the separately licensed non-profit EPCH, which has an independent board of governors.

ADEQUATE FINANCIAL PROFILE; UTILIZATION A CREDIT PLUS

UMC's financial profile is typical of a large county hospital district that serves as the primary safety net provider. Historical profitability has been modest, relying heavily on county appropriations and UC/UPL revenues, and liquidity is weak. Profitability was negatively impacted in fiscal 2014 due to UMC reserving against all amounts owed by EPCH. UMC has shown the ability to absorb missed contract payments from EPCH, reporting net income much closer to historical levels through the seven month interim period (ended April 30, 2015) with a \\$2.9 million loss from operations.

UMC's outpatient visits increased 7.3% in 2014, reflecting the ramp-up of several outpatient clinics which were constructed in 2012 and 2013. Fitch expects UMC's outpatient growth to continue given planned construction of three new outpatient clinics and the expansion of a fourth in the summer of 2015. Volume strength continued through the seven-month interim period (ended April 30, 2015).

HEAVY RELIANCE ON SUPPLEMENTAL REVENUE

UMC's operations and profitability, as safety-net provider, rely heavily on receipt of annual Uncompensated Care/UPL revenues. The current programs run through 2016 and are expected to be either renewed or extended. In addition, the district's current capital master plan includes further expansion of its outpatient services, which should position UMC to benefit from increased volumes over the medium term.

Supplemental revenues totaled \\$70.4 million (16% of operating revenues) and \\$63.1 million (20% of operating revenues) in fiscal 2014 and fiscal 2013, respectively, against \\$45.4 and \\$50.3 million in intergovernmental transfers. UMC receives its supplemental funding through the Texas 1115 Waiver program. In addition, UMC was approved to participate in the state's Network Access Improvement Program (NAIP), which pledges approximately \\$1.9 million in additional monthly revenues to UMC.

STABLE TAX BASE; BROAD TAXING MARGIN

The district's taxable assessed valuation (TAV) has grown an average of 2.5% annually between fiscal 2009 and 2015, without realizing a single reduction during the recession. The top 10 taxpayers are represented by refining, utility, healthcare, and retail interests and comprise a low 5% of fiscal 2015 TAV.

Officials have a strong history of managing growth while maintaining a low tax rate. The district's fiscal 2015 effective total tax rate equals just over 22 cents per \\$100 TAV, well below the tax cap of 75 cents per \\$100 TAV.

MULTI-NATIONAL ECONOMY WITH SIZABLE MILITARY PRESENCE

El Paso County and Juarez, Mexico comprise the largest Mexican bi-national metroplex, with a combined population of more than 2.5 million. The county includes the City of El Paso (GO bonds rated 'AA' by Fitch), the sixth largest city in Texas. The economy includes trade and transportation, government, education and health services, professional and business services and leisure and hospitality.

Fort Bliss is the top employer at 40,000, 12% of the county's employment base. The federal government has invested over \\$6 billion in Fort Bliss over the past five years, helping to spur growth in the local economy. Fitch will continue to monitor the impact of potential federal military funding cutbacks on Fort Bliss. The county's unemployment rate (5.2% as of March 2015) remains moderately above the Texas average for the same period (4.2%). Median household income represents 76 percent of the U.S. average.