OREANDA-NEWS. Fitch Ratings has affirmed the 'AA-' rating on the following bonds issued by the General Authority of Southcentral Pennsylvania on behalf of WellSpan Health (WellSpan):

--$211,090,000 fixed rate bonds, series 2014A;
--$67,720,000 fixed rate bonds, series 2008A.

The Rating Outlook is Stable.

WellSpan also has outstanding $211,701,000 in series 2008B1-D and $41,742,000 in series 2015AB variable rate bank loans that are not rated by Fitch but incorporated into the analysis.

SECURITY
The bonds are secured by a pledge of gross receipts.

KEY RATING DRIVERS
EXCELLENT OPERATING PROFILE: The 'AA-' rating continues to reflect WellSpan's integrated delivery platform, continuous development of its regional care network, and prudent management practices. WellSpan's management and board have a solid history of executing strategies that has allowed the organization to strengthen its ability to face changes in reimbursement and care management practices.

EXPANDING REGIONAL PRESENCE: Stable market leadership in York and Adams continues, as well as in the newly entered Lancaster market through the merger with Ephrata Community Hospital (ECH) in 2013. Good Samaritan Hospital (GSH) in Lebanon, PA also joined the system effective July 1, 2015, and Philhaven (a behavioral health provider) joined effective Jan. 1, 2016. Fitch believes recent mergers are consistent with the organization's strategic plans in bolstering regional presence to aid population health management initiatives.

SOLID PROFITABILITY: Profitability in the fiscal year ended June 30, 2015 was excellent, with operating and operating EBITDA margins of 7.7% and 13.4%, respectively. Solid volume and revenue growth contributed to the unusually high profitability and cash flow. Profitability through the three months ended Sept. 30, 2015 was lower with 4.7% operating and 10.4% operating EBITDA margins, which are more consistent with historical levels.

MILD LIQUIDITY DILUTION: While unrestricted cash and investments totaling over $1 billion represent steady absolute growth, liquidity ratios weakened somewhat at Sept. 30, 2015 due to the addition of GSH and related debt defeasance and advance pension contribution. However, overall balance sheet metrics remain sound for the rating.

RATING SENSITIVITIES

STABILITY EXPECTED: Fitch believes WellSpan Health's long history of meeting targeted financial performance during a period of expansion reflects a solid operating platform as well as management's disciplined practices. Fitch expects WellSpan to continue producing stable financial results during the upcoming EPIC implementation process as well as further integration of Good Samaritan Hospital and Philhaven.

CREDIT PROFILE
Headquartered in York, Pennsylvania, WellSpan consists of five acute care hospitals (York Hospital, Gettysburg Hospital, Surgical & Rehab Hospital, ECH and GSH), a behavioral health provider (Philhaven), ambulatory and outpatient care locations, and various other health care related entities.

York Hospital, Gettysburg Hospital, and ECH are the only members of the obligated group (OG). ECH joined the OG in 2015. Fitch evaluates the financial and operating profile of the consolidated entity. In fiscal year ended June 30, 2015 (which does not include GSH), WellSpan produced $1.6 billion in total operating revenues with total assets of $2 billion. The OG generated 78.8% of consolidated operating revenues and 142% of consolidated operating income in fiscal 2015.

Strong Business Platform and Market Position
Fitch continues to view WellSpan's integrated business model, highly aligned physician base, and thoughtful management strategies as key credit strengths. The organization has a long history of methodically fortifying its presence in the service area through vertical and horizontal diversification while maintaining stable financials. Leveraging its considerable footprint and penetration in the service area, WellSpan has maintained a leading market position in the York/Adams market with 60% of inpatient market share. Market share is also sound in the more recently entered Lancaster and Lebanon markets at 37% and 46%, respectively. While there is some competition in the area, Fitch believes WellSpan's primary care penetration and close alignment with various providers allows for ongoing stability.

Recent Merger Activity
Effective July 1, 2015, WellSpan completed a merger with GSH, a sole acute care provider in Lebanon County that serves a market contiguous with ECH. GSH's financials are materially weaker than the system, but the financial impact to the overall system will be manageable given the relatively small operating revenues of approximately $170 million. Through the 2016 interim period incorporating three-months of GSH's operations, the system's profitability remained solid. However, some dilution in balance sheet metrics was observed as WellSpan defeased $60.2 million of GSH debt and made an advance pension contribution of $12 million. Fitch expects liquidity metrics to improve as GSH is further integrated into the system, based on the strategic benefits as well as management's history of execution.

Effective Jan. 1, 2016, WellSpan completed a merger with Philhaven, the 13th largest behavioral health provider in the nation with services throughout Lancaster, Lebanon, York, and Dauphin counties. Management stated the primary goal was to better serve the community's needs. Philhaven carries light leverage, near breakeven profitability, and approximately $59 million in annual revenues. Fitch believes this transaction will allow WellSpan to continue enhancing its services without material impact to overall financial strength.

Excellent 2015 Profitability
Fiscal 2015 experienced particularly robust growth in revenues and profitability, which management attributes to solid volume growth, diligent expense containment, and revenue cycle management. Operating and operating EBITDA margins were 7.7% and 13.4% in 2015, up from 3.7% and 10% in 2014. Interim results through the three months ended Sept. 30, 2015 showed some normalized but results continued with operating and operating EBITDA margins of 4.7% and 10.4%, respectively. Management continues to target EBITDA margin around 9%-10%, which Fitch believes is reasonable given the stability provided by WellSpan's operating platform and management's prudent financial management practices.

Health Capital Spending
Capital expenditures are budgeted at an average of $150 million annually for the next five years (137% of depreciation expense). Included in the capital budget is $166.7 million in EPIC implementation costs, which will be spent over three years. Outside of IT, major planned projects include ECH health pavilion and York Hospital emergency department expansion. Fitch expects WellSpan to manage its IT and construction projects without material impact to overall operations, and believes there is financial flexibility to weather some potential volatility at the current rating level.

Sound Liquidity
Unrestricted cash and investments totaled just over $1 billion at Sept. 30, 2015. Stable growth in absolute liquidity continues to be driven by good cash flows and historically manageable capital expenditures. Liquidity metrics of 217 days cash on hand, 28.4x cushion ratio, and 175.9% cash to debt is slightly below WellSpan's historical levels due to the impact of GSH, but remains adequate for the rating.

DEBT PROFILE
Long-term debt totaled $572.3 million at Sept. 30, 2015, consisting of $295.6 million in traditional fixed rate bonds, $211.7 million direct placement bank loans, $41.7 million in private placements, and other smaller loans and capital leases. Debt metrics are solid in 2015 and 2016 year to date, with 7.2x and 7.1x maximum annual debt service (MADS) coverage, respectively. Fitch notes 2015 was a particularly strong year, and historical coverage has trended closer to 4x, which was sufficient for the current rating. Debt burden has also improved significantly, with MADS equating to 2.2% of 2015 revenues and debt to EBITDA of 2.2x compared to the respective medians of 2.4% and 2.4x.

DISCLOSURE
WellSpan discloses annual financial statements within 150 days and quarter unaudited financial statements within 60 days through the MSRB EMMA website.