OREANDA-NEWS. Fitch Ratings has affirmed the 'A-' rating on San Juan Regional Medical Center's (SJRMC) outstanding debt, as listed at the end of this press release.

The Rating Outlook is revised to Positive from Stable.

SECURITY
Debt payments are secured by a pledge of the gross revenues of the obligated group, consisting of San Juan Regional Medical Center and San Juan Regional Rehabilitation Hospital.

KEY RATING DRIVERS

IMPROVED FINANCIAL POSITION: The revision in Outlook to Positive reflects SJRMC's improved financial position since Fitch's last rating review in July 2013. SJRMC's financial profile has improved due to an increase in profitability and decrease in debt due to the early redemption of variable rate demand bonds (VRDBs). The impact of the loss of sole community provider funding was less than expected as supplemental funding under the new Medicaid waiver (through 2018) has been stabilized through the safety net care pool as well as enhanced inpatient Medicaid rates.

STRONG LIQUIDITY: SJRMC has consistently maintained a strong liquidity position and had 233 days cash on hand and 367.6% cash to debt at March 31, 2015. SJRMC has benefited from its relationship with the county, which has provided capital funding in the past from a voter-approved levy. The fiscal 2016 capital budget is manageable at $8 million.

REDUCTION IN DEBT: SJRMC's paid down $17 million of its VRDBs in March 2015 since a letter of credit renewal was approaching in December 2015 in addition to management's concern about rising interest rates. Fitch views this favorably as SJRMC's debt is now 100% fixed rate and its maximum annual debt service (MADS) reduced to $6 million from $8 million. All of SJRMC's debt metrics compare very favorably to the 'A' category medians.

BETTER PROFITABILITY: Operating performance has improved through the nine months ended March 31, 2015 due to some one-time items including RAC settlements, enhanced Medicaid rates related to prior periods and meaningful use. However, despite this, ongoing operating performance is expected to be at a higher level than historical performance due to continued physician recruitment and enhancement of services and focus on revenue cycle management and costs. Operating margin was 4.3% through the nine months ended March 31, 2015 compared to 0.3% in fiscal 2014 and 0.5% in fiscal 2013 and is budgeted to be 1.6% in fiscal 2016.

DOMINANT MARKET POSITION: SJRMC maintains a dominant market share of over 80% in its service area, which is relatively rural, and the closest competitor is 50 miles away in Durango, CO. Although the competitive position is viewed favorably, Fitch believes there are additional challenges given its location, including physician recruitment. Fitch notes that SJRMC's payor mix has considerably improved due to Medicaid expansion with a drop in self-pay to 4.1% of gross revenues through the nine months ended March 31, 2015 compared to 9.4% the same prior year period.

RATING SENSITIVITIES

MAINTENANCE OF IMPROVED OPERATING PERFORMANCE: If San Juan Regional Medical Center can sustain profitability metrics in line with the rating category while maintaining its strong liquidity and debt metrics, upward movement of the rating is likely.

CREDIT PROFILE
SJRMC is a 194 licensed bed acute-care hospital located in Farmington, NM, approximately 185 miles northwest of Albuquerque. Fitch's analysis is based on the consolidated entity, which had total revenue of approximately $251 million in fiscal 2014 (June 30 fiscal year end).

Dominant Market Position

SJRMC has relatively little competition and serves the Four Corners region including northwest New Mexico, northeast Arizona, southwest Colorado, and southeast Utah. Management indicated that most recent market share is approximately 85%, which has increased slightly since Fitch's last rating review. Outmigration is usually for services not provided at SJRMC and generally these cases go to Durango, Grand Junction, or Denver, Colorado.

SJRMC has been focused on building the breadth of services offered in the community, which has been facilitated by its employed physician model (San Juan Health Partners). SJRMC currently employs 78 physicians including hospitalists. SJRMC continues to develop relationships with smaller, rural facilities in the broader service area to assist with physician coverage for higher specialty services, especially cardiology.

Good Relationship with the County

SJRMC is leased from San Juan County and the lease expires in 2051. The relationship with the county has been good. In 2004, the county issued general obligation bonds to fund a portion of SJRMC's capital needs. Ongoing capital support from the county has provided funds for various capital projects including most recently the renovation of the 2nd and 4th floors of the hospital ($6 million), which should be completed by the summer of 2016. The levy that provided these capital dollars expires in December 2015 and there were excess funds of approximately $2 million that will be used for an emergency room renovation project.

SJRMC's total capital budget is very manageable at $8 million for fiscal 2016 and there are no large capital projects or additional debt plans in the near future. Management is evaluating the option to upgrade its information technology platform (Meditech).

Strong Liquidity

SJRMC's strong liquidity position provides a sizable financial cushion to the organization's operating pressures. Total unrestricted cash and investments was $158 million at March 31, 2015, which equated to 233.1 days cash on hand and 367.6% cash to debt compared to the 'A' category medians of 199.2 and 131.2%. This compares to 239.7 days cash on hand and 250.6% cash to debt at fiscal year end June 30, 2014.

Improved Profitability

SJRMC has historically been challenged by flat revenue and declining inpatient volume that led to pressured operating margins. Through the nine months ended March 31, 2015, operating margin improved significantly to 4.3% and operating EBITDA margin was 10.2% compared to 0.3% and 6.8%, respectively, in fiscal 2014 and 0.5% and 6.9% in fiscal 2013. Although there were some one-time items in the interim period, core operating improvement can be attributable to regional outreach and improved outpatient volume, better revenue cycle especially related to billing for Indian Health Services, in addition to the improvement in payor mix. Management expects profitability to be around its fiscal 2016 budgeted levels going forward which includes a $4.4 million operating income (1.6% operating margin) and has conservative assumptions for supplemental funding.

Beginning in January 2014, the state entered into a Medicaid waiver that is in place through 2018. The waiver eliminated the sole community provider funding program and implemented a safety-net care pool as well as the eligibility to receive enhanced inpatient Medicaid rates. SJRMC historically received almost $20 million from sole community provider support. Since a portion of the new program is through enhanced Medicaid rates, the comparability of supplemental funding over the years is not possible. However, the funding through the safety-net care pool is expected to increase for fiscal 2016 due to the reclassification of SJRMC as a medium-sized hospital (under 200 acute care beds).

Debt Profile
SJRMC's total debt outstanding is approximately $44 million and is 100% fixed rate. This is reduced from $62 million at fiscal year end 2014 with the early redemption of the series 2007B and 2010B VRDBs. SJRMC used cash to pay down the debt without affecting its liquidity position due to better cash flow.

With the reduced debt burden, MADS is now $6 million and includes notes and leases. The average life of the debt is also short at 5.7 years. All of SJRMC's debt metrics are favorable with MADS accounting for 2.4% of total revenue in fiscal 2014 compared to the 'A' category median of 3.1%. MADS coverage improved significantly through the nine months ended March 31, 2015 due to better profitability with 5.7x MADS coverage compared to 3.6x in fiscal 2014, 3.7x in fiscal 2013 and the 'A' category median of 3.8x. MADS coverage should be 4.9x in fiscal 2016 based on SJRMC's budget.

Disclosure

SJRMC covenants to provide annual and quarterly disclosure to bondholders through the Municipal Securities Rulemaking Board's EMMA website.

Fitch affirms the following outstanding debt:

--$9,395,000 City of Farmington, New Mexico, hospital revenue bonds (San Juan Regional Medical Center) Series 2007A
--$14,240,000 City of Farmington, New Mexico, hospital revenue bonds (San Juan Regional Medical Center) Series 2004A.