OREANDA-NEWS. Fitch Ratings has assigned an 'AA' rating to the expected issuance of $71.1 million Oregon Facilities Authority (OFA) revenue bonds, series 2015C, on behalf of Providence Health & Services, WA (PH&S).

The Rating Outlook is Stable.

PH&S expects to issue approximately $71.1 million of series 2015C revenue bonds as fixed rate debt through negotiated sale the week of Sept. 14. Bond proceeds will be used to fund capital projects at Providence St. Vincent's in Portland. PH&S is considering issuing approximately $100 million of taxable bonds for general corporate purposes as well as tax exempt refunding bonds before year-end. The new money and refunding issuances have been incorporated into the current rating action.

SECURITY
The bonds are an unsecured corporate obligation of the Obligated Group.

KEY RATING DRIVERS

STRONG MARKET POSITIONS: Fitch views PH&S' geographic diversity and business line diversity as key credit strengths. The increasing breadth of healthcare services across Washington State and in southern California is viewed favorably as it positions the organization for the evolution and development of population health management services. Fitch views PH&S' top-tier market share in nearly each of its markets positively.

IMPROVED OPERATING PERFORMANCE: Operating performance in 2014 and through the six month interim period ended June 30 is significantly improved from 2013. In 2014, PH&S posted operating and operating EBITDA margins of 1.8% and 8.5%, respectively, which is significantly improved from fiscal 2013. Through the six-month interim period, PH&S has sustained the operating performance with operating and operating EBITDA margins of 3% and 8.3%, respectively.

EXCELLENT BUSINESS PRACTICES: Fitch believes management is proactively transitioning the organization to maintain its leadership positions as key markets move to population health management payment models. PH&S' excellent management practices are reflected in a robust IT platform and continued centralization of shared services that allows for detailed operational reporting.

MODEST DEBT BURDEN: Pro forma maximum annual debt service of $296.1 million occurs in 2034. However, for purposes of analysis Fitch is using $268.5 million which incorporates a smoothing of certain bullet maturities as allowed under the bond indentures. PH&S' debt burden is modest equating to 2.2% of 2014 combined system revenues, which compares favorably against Fitch's 'AA' category median of 2.4%. Debt service coverage in 2014 and through the interim period was adequate at 5.5x and 4.6x, respectively, compared to the 'AA' median of 5.7x.

GROWTH IN UNRESTRICTED CASH: At June 30, 2015, PH&S had $6.2 billion of unrestricted cash and investments, which is increased from $3.4 billion at FYE 2010 representing an increase of over 80%. The system's liquidity metrics of 166.4 days cash on hand, 23.5x cushion ratio and 153.9% cash to long-term debt lag the respective 'AA' category medians of 289.1 days, 27.0x and 201.7% but are adequate for the rating.

RATING SENSITIVITIES

CONSISTENT PERFORMANCE EXPECTED: Fitch expects that operating profitability will remain consistent in fiscal 2015 from the prior year's level. Fitch believes it's essential for the organization to maintain recent profitability and cash flow to generate debt service coverage that is consistent with 'AA' medians.

CREDIT PROFILE
PH&S is a large, multi-state health system composed of 34 acute care hospital facilities located across five states, an Oregon health insurer with over 600,000 members and nearly 3,600 employed physicians. In 2014, PH&S generated total revenues of approximately $12.5 billion. Fitch's analysis is based on the consolidated financial results of PH&S, which includes certain non-obligated entities.

STRONG MARKET POSITION
PH&S owns or leases 34 hospitals in Washington, Oregon, Alaska, Montana and California. PH&S maintains strong competitive positions in most of its service areas, with facilities in Seattle, Everett, Olympia and Spokane, WA; Portland, OR; Anchorage, AK and Missoula, MT holding leading or substantial market share positions. PH&S has been increasing its presence in the competitive southern California marketplace through acquisitions of acute care facilities (including 266-bed Providence St. John's Hospital in Santa Monica in March 2014) and physician alignment. Fitch views PH&S' geographic and business line diversity as key credit strengths with the strategy to increase the breadth of healthcare services across Washington State and in southern California as important for the development of population health management services. In 2014, roughly 44% of total system revenues were generated in Washington State, 29% in Oregon (including the health plan), 17% in California and 10% from Alaska and Montana.

On July 31, PH&S and St. Joseph Health System (revenue bonds rated 'AA-' by Fitch) announced they had signed a letter of intent to create a new, single organization. On a combined basis, the new organization would have total revenues of close to $20 billion. The discussions are very preliminary and are expected to continue over the next several months. The impact of a merger has not been factored into the rating.

FISCAL 2014 PERFORMANCE IMPROVEMENT
At Dec. 31, 2014 (fiscal year-end; audited) PH&S generated $219.2 million in operating in operating income, which was significantly improved from fiscal 2013's $37.7 million gain, and equated to a 1.8% operating margin and 8.5% operating EBITDA margin. Fitch views positively the operational improvement, which exceeded budgeted expectations by $89 million. Management attributes the profitability improvement to cost reduction initiatives, decreased IT implementation costs, and solid system volumes, among other things.

Through the six months ended June 30, operating and operating EBITDA margins were solid at 3% and 8.3%, respectively. Management is budgeting to finish fiscal 2015 with a 1.5% operating margin, which Fitch believes will be exceeded.

MODERATE DEBT BURDEN
Upon completion of the 2015 plan of finance, PH&S' debt burden remains modest. Pro forma maximum annual debt service of $296.1 million occurs in 2034. However, for purposes of analysis Fitch is using $268.5 million which incorporates a smoothing of certain bullet maturities as allowed under the bond indentures. Using the $268.5million debt service figure, PH&S' debt burden is modest equating to 2.2% of 2014 combined system revenues, which compares favorably against Fitch's 'AA' category median of 2.4%. Coverage of the $268.5million debt service figure by EBITDA coverage in 2014 and through the interim period was adequate at 5.5x and 4.6x, respectively, compared to the 'AA' median of 5.7x. Pro forma debt-to-capitalization of 33.9% at June 30, 2015 is slightly high but still moderate in comparison with the 'AA' category median of 28.1%. Lastly, Fitch's analysis incorporates the expected issuance of the series 2015D taxable issue as well as possible refunding issues in during the latter half of 2015.

SOLID ABSOLUTE UNRESTRICTED CASH GROWTH
At June 30, 2015, PH&S had $6.2 billion of unrestricted cash and investments which equate to 166.4 days cash on hand, 23.5x pro forma cushion ratio and 153.9% cash to long-term debt lag the respective 2015 'AA' category medians of 289.4, 27.0x and 201.7% but remain adequate for the rating.

DISCLOSURE
PH&S posts annual audited financial statements and quarterly unaudited financial statements on its web site, 'www.providence.org', which is viewed positively by Fitch. Quarterly information includes balance sheet, income statement, cash flows, management discussion and analysis and utilization statistics.