News Column

Fitch Affirms Culberson County Hospital District, TX LTGO Bonds at 'BBB-'; Outlook Stable

June 5, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has affirmed the following Culberson County Hospital District (the district), TX:

--$6.1 million of outstanding limited tax general obligation (LTGO) bonds, series 2008 and 2009, at 'BBB-';

--Implied unlimited tax general obligation (ULTGO) rating at 'BBB'.

The Rating Outlook is Stable.

SECURITY

The LTGO bonds are secured by an ad valorem tax pledge levied against all taxable property in Culberson County, limited to $0.75 per $100 of taxable assessed value (TAV).

KEY RATING DRIVERS

LIMITED, CONCENTRATED ECONOMY: The local area is sparsely populated and characterized by low income levels and a tax base heavily concentrated in oil and gas companies and pipelines. Assessed values are volatile and subject to changes in the price of oil and gas commodities and the level of well-permitting and drilling activity.

SATISFACTORY FINANCIAL RESERVES: District operations are limited to paying indigent care costs incurred by Culberson County Hospital (the hospital), debt service, and nominal administrative costs. Positive operating margins have produced a healthy level of financial reserves held by the district.

WEAK FINANCIAL REPORTING: The low rating incorporates the persistence of weak financial reporting practices by the district, evidenced by consistently late audits. Hospital reporting practices are sound.

HOSPITAL OPERATIONS ESSENTIAL TO COMMUNITY: Hospital operations are commensurate with a facility of limited size and scope; the revenue base is very small and liquidity is low although improved. The hospital is a 'Critical Access Hospital' (CAH), reflecting its essentiality to the community, yet its small size makes it vulnerable to changes in reimbursement, physician turnover, and pressures imposed by healthcare reform.

LOW DEBT; SUFFICIENT TAXING MARGIN: Debt levels are low to moderate, amortization is average, and capital needs are manageable. Recent TAV growth has enabled tax rate reductions and yielded additional margin under the statutory tax rate cap.

LEASE TERMINATION: The lease between the district and hospital operator terminates prior to bond maturity, which Fitch views as a notable risk, but allows for automatic 10-year renewals.

RATING SENSITIVITIES

TAX BASE VOLATILITY: The rating is sensitive to tax base volatility due to high concentration in oil and gas. A declining TAV trend could erode the taxing margin under the cap and potentially district tax revenues if the decline was severe.

HOSPITAL OPERATING RISK: The rating is also sensitive to the operating risks associated with the hospital.

CREDIT PROFILE

Culberson County Hospital District is the taxing district established to support the provision of health care services for Culberson County (the county). The district's boundaries are coterminous with the county, which is an expansive, remote county located about 120 miles southeast of El Paso.

The district owns the Culberson County Hospital, a 25-bed (14 staffed) CAH in Van Horn, Texas, and leases the facility to Preferred Management Corporation, Inc. (who operates the hospital). The closest hospital facility is located about 85 miles away.

CONCENTRATED AND VOLATILE TAX BASE

The district's TAV increased by a 12.6% in fiscal 2014 and is estimated to increase by a significant 60% in fiscal 2015. The recent TAV trend demonstrates the volatility associated with the taxing of mineral resources, oil and gas exploration/production firms, and pipelines passing through the district.

Tax base concentration is high with the top 10 taxpayers comprising nearly 70% of the fiscal 2014 tax base, and the top payer list is dominated by oil and gas-based activities and resources. Fitch views the concentration risk as partly mitigated by the importance of the particular pipelines in the area, and the long-term contracts that are typically used to support the financing and operations of pipelines. However, Fitch expects continued TAV volatility.

Wealth levels of county residents are low, with per capita income and median household income well below state and national averages. Labor force and employment grew in fiscal 2013 after several years of contraction, further reducing the already-low unemployment rate to 2% in April 2014 from 2.9% 12 months prior.

DISTRICT MAINTAINS A MODEST BUDGET, SUFFICIENT RESERVES

The district collects property taxes to pay debt service, indigent care costs at the hospital, and district administrative costs. Property taxes comprised 66% of fiscal 2012 district revenues. The remainder came from Medicare reimbursements passed through by the hospital for the depreciation expense associated with recent capital improvements. These reimbursements have boosted general fund revenues since their inception in 2011, but are expected to decline gradually with the useful lives of the assets. District operating expenditures are modest at about $1.2 million annually and are primarily for indigent care.

The district's operating profile remains stable. Unaudited fiscal 2013 results marked the fourth consecutive year of positive results, adding an estimated $200,000 to unrestricted fund balance (which totaled more than 100% of expenditures at year-end).

The fiscal 2014 budget is balanced and management reports no material variances in year-to-date results. Fitch expects the district's financial operations to remain stable given its limited purpose and recent track record.

DELAYED FINANCIAL REPORTING

The fiscal 2013 audit of the district is not yet available (Sept. 30 fiscal year), continuing a trend of weak financial reporting practices. The district board switched auditors recently and is confident timeliness of financial reporting will improve, with estimated completion of the fiscal 2013 audit in late June 2014 and fiscal 2014 by late December 2014.

Fitch views the sub-standard financial reporting practice as a risk embedded in the low rating while also noting that the district's unaudited results have aligned closely with audited numbers in recent years.

AFFORDABLE DEBT BURDEN; MANAGEABLE CAPITAL NEEDS

The district's overall debt levels are low to moderate at 1.6% of estimated full value and $3,474 per capita. Management is planning to rebuild their rural health clinic and construction is slotted to begin later this calendar year. Project costs, estimated between $1.0-$1.4 million, will be funded through a bank loan. The district itself has no employees and therefore has no direct long-term liabilities related to pensions or other post-employment benefits.

HOSPITAL FINANCES

Hospitals designated as CAH are reimbursed by Medicare at cost plus 1%, so that rural hospitals can survive financially at very low patient volumes. Approximately 56% of the hospital's patients were Medicare-eligible in 2014. The hospital is leased to and operated by Preferred Management Corporation, and the district's property taxes pay for the indigent care costs on behalf of the hospital under an indigent care agreement. When considered as part of the hospital's revenues, property taxes make up about 16% of total operating revenues. The hospital's unaudited fiscal 2014 liquidity levels remain low at 31.1 days of operating costs or $410,000 (March 31 fiscal year) but have improved from 13 days in fiscal 2010 and are expected to remain at or around their current level.

Operating income and operating EBITDA margins (inclusive of property tax receipts) have remained positive but have narrowed in recent years due to financial pressure mostly associated with personnel turnover. This result highlights the hospital's vulnerability to any change in professional staffing; however, management confirms vacated positions have been re-staffed as of fiscal year 2014 and expects operational improvements going forward. The hospital has limited financial flexibility and is challenged to adapt to the changing healthcare environment. Management does not expect to meet the Affordable Care Act IT meaningful use standards because of the costs associated with implementation of electronic medical records and will incur a small penalty in 2015.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, National Association of Realtors.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 14, 2012);

--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=833180

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Primary Analyst

Leslie Ann Cook

Analyst

+1-212-908-0507

Fitch Ratings, Inc.

33 Whitehall Street

New York, NY 10004

or

Secondary Analyst

Dana Ringer

Director

+1-312-368-3215

or

Committee Chairperson

Steve Murray

Senior Director

+1-512-215-3729

or

Media Relations:

Elizabeth Fogerty, +1-212-908-0526 (New York)

elizabeth.fogerty@fitchratings.com


Source: Fitch Ratings


For more stories on investments and markets, please see HispanicBusiness' Finance Channel



Source: Business Wire


Story Tools






HispanicBusiness.com Facebook Linkedin Twitter RSS Feed Email Alerts & Newsletters