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Rating Update:

MOODY'S AFFIRMS Baa3 RATING ON MEMORIAL HOSPITAL AT NORTH CONWAY'S (NH) OUTSTANDING DEBT; OUTLOOK IS STABLE

22 Sep 2010

AFFIRMATION AFFECTS TOTAL OF $20.2 MILLION OF RATED DEBT OUTSTANDING

New Hampshire Health & Education Fac. Auth.
Health Care-Hospital
NH

Opinion

NEW YORK, Sep 22, 2010 -- Moody's Investors Service has affirmed Memorial Hospital at North Conway's (Memorial) Baa3 debt rating. The outlook is stable. The rating applies to $20.2 million of rated debt outstanding (see debt list below).

LEGAL SECURITY: The Series 2006 bonds are secured by a pledge of gross receipts of Memorial Hospital; mortgage on primary facility; debt service reserve fund; 1.10x rate covenant.

INTEREST RATE DERIVATIVES: None

STRENGTHS

*Recognition as critical access hospital, providing improved reimbursement under Medicare and additional financial stability than other hospitals of similar size

*Leading market share (greater than 80%) with limited competition, which is geographically protected

*Limited future debt and capital spending needs following recent renovations to physical plant

* Improved liquidity position at unaudited fiscal year end (FYE) 2010 with an unrestricted cash balance of $23.6 (145.7 days cash on hand) up from $18.4 million (113.6 days cash on hand) at FYE 2009

*Improved operating performance in unaudited FY 2010 with operating income of $876 thousand (1.4% operating margin) and operating cash flow of $5.2 million (8.3% operating cash flow margin) up from $272 thousand (0.4% operating margin) and operating cash flow of $4.1 million (6.6% operating cash flow margin) in FY 2009 driven largely by expense reductions and in the face of increased charity care

*Large employed medical staff (40 physicians) which provides some stability for Memorial given the vulnerabilities its faces with its small size and revenue base

CHALLENGES

*Very small admissions and revenue base that is susceptible to variability in financial performance due to a reliance on tourism population during the summer and winter months although somewhat aided by the enhanced Medicare reimbursement

*Two consecutive years of positive albeit declining revenue growth places increased pressure on expenses to maintain current levels of financial performance

*High concentration of admissions (90%) from top ten physicians although as mentioned above Memorial has a large employed medical staff and an established track record of physician retention

*Heavy reliance on Blue Cross contract which accounts for 17% of gross revenues although Harvard Pilgrim Health Plan has recently entered the market reducing this reliance from 20% in past years

*Susceptible to future legislative changes to the critical access program, although none are anticipated in the near future and under healthcare reform

RECENT DEVELOPMENTS/RESULTS

In unaudited fiscal year (FY) 2010, Memorial's operating performance improved with operating income of $876 thousand (1.4% operating margin) and operating cash flow of $5.2 million (8.3% operating cash flow margin) from an operating income of $272 thousand (0.4% operating margin) and operating cash flow of $4.1 million (6.6% operating cash flow margin) in FY 2009. With the improved financial performance, maximum annual debt service (MADS) coverage increased to 5.3 times at FYE 2010 from to 3.8 times coverage at FYE 2009. Debt to cash flow improved to 3.16 times from 4.54 times.

Although FY 2010 performance improved over FY 2009, it was largely driven by a 0.3% reduction in expenses given the anemic 1.5% revenue growth. The revenue contraction in FY 2010 denotes the second consecutive year of lower revenue growth and is a primary credit concern. In FY 2010, the low revenue growth reflected flat inpatient admissions, lower surgical volumes and a decline in emergency room (ER) visits which management attributed to a decrease in elective activity and traffic to the ER on the weekends even with tourism in the area holding steady. We note that Memorial is susceptible to variable performance due to its reliance on tourism both during the winter and summer months. Revenue growth also declined in FY 2010 due to increased charity care. Absolute expenses in FY 2010 actually decreased from FY 2009 as management made changes to employee benefits, reduced the match to the employee contribution plan to 3% from 6%, froze salaries, reduced supply costs by 3%, and removed 11 FTES from the system. These actions will yield a total of $2.4 million in expense savings.

In FY 2011, Memorial is budgeting improved operating performance with operating income of $1.8 million (3.0% operating margin) and operating cash flow of $5.2 million (10.4% operating cash flow margin). Management plans to improve operations primarily through continued expense control including: right-sizing FTEs and supply expenses to the volume of admissions in the emergency department and implementing a new charity care program which will limit the allocation to individuals from outside the service area. Management also notes the entry of Harvard Pilgrim Health Plan into the service area which defrays the reliance on Blue Cross as the largest payer. The organization reports favorable rates under both payers.

Memorial's liquidity position has continued to increase. At fiscal year end (FYE) 2010, unrestricted cash and investments increased to $23.6 million (145.7 days cash on hand) from $18.4 million (113.6 days cash on hand). The increase in cash position was driven by improved cash flow and low capital spending in FY 2010. Memorial also benefits from its relatively conservative investment style in which 86% of its unrestricted cash is held in cash and cash equivalents and fixed income, limiting variability in the absolute cash position. With the improved liquidity position, cash to debt at FYE 2010 increased to 117.2% from 90.7% at FYE 2009. With the expected decrease in capital spending ($2.0 million budget in FY 2011) and improvement in operating performance, management expects the unrestricted cash balance to increase to $26 million (167.3 days cash on hand). Large capital spending is behind the organization as it completed the renovations funded with the Series 2006 bonds in 2009.

Memorial has the benefit of leading market share in the primary service area (greater than 80%). The hospital is geographically isolated by mountains and small roads making travel to any of the competition difficult. Memorial has also historically employed a large medical staff at present employing 40 physicians. Although Memorial relies heavily on the top 10 physicians for referrals to the hospital (90%), because the majority of these physicians are employed there is little chance of their referral patterns changing.

Outlook

The stable outlook reflects our expectation that Memorial should reach its FY 2011 budget and continue to improve its liquidity position. Large capital spending is behind the organization following the completion of the new construction and renovation project in 2007.

What could change the rating--UP

Sustained strong operations; rapid and significant growth in liquidity; stable utilization trends

What could change the rating--DOWN

Sustained deterioration of operating performance or liquidity levels; unusually high physician departures that represents a fundamental change in the stability of the medical staff; detrimental change to critical access program

KEY INDICATORS

Assumptions & Adjustments:

-Based on financial statements for The Memorial Hospital at North Conway and Subsidiaries

-First number reflects audit year ended June 30, 2009

-Second number reflects unaudited financials ended June 30, 2010

-Investment returns normalized at 6% unless otherwise noted

*Inpatient admissions: 1,925; 1,915

*Total operating revenues: $62.3 million; $63.2 million

*Moody's-adjusted net revenue available for debt service: $5.4 million; $7.5 million

*Total debt outstanding: $20.3 million; $20.2 million

*Maximum annual debt service (MADS): $1.4 million; $1.4 million

*MADS Coverage with reported investment income: 2.8 times; 4.3 times

*Moody's-adjusted MADS Coverage with normalized investment income: 3.8 times; 5.3 times

*Debt-to-cash flow: 4.5 times; 3.1 times

*Days cash on hand: 113.6 days; 145.7 days

*Cash-to-debt: 91.0%; 117.2%

*Operating margin: 0.4%; 1.4%

*Operating cash flow margin: 6.6%; 8.3%

RATED DEBT (debt outstanding as of June 30, 2010)

-Series 2006 Revenue and Refunding Bonds ($20.2 million outstanding) rated Baa3

CONTACT

Obligor: Mr. John Newton, Chief Financial Officer, 603-356-5461

The last rating action with respect to Memorial Hospital of North Conway was on August 12, 2009 when the Baa3 municipal finance scale rating was affirmed and the outlook was stable. That rating was subsequently recalibrated to Baa3 on May 7, 2010.

The principal methodology used in rating Memorial Hospital at North Conway was Rating Methodology: Not-for-Profit Hospitals and Health Systems, which can be found at www.moodys.com in the Credit Policy and Methodologies directory, in the Ratings Methodologies subdirectory. Other methodologies and factors that may have been considered in the process of ratings this issuer can also be found in the Credit Policy & Methodologies directory.

MOODY'S adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However, MOODY'S is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Analysts

Jennifer Ewing
Analyst
Public Finance Group
Moody's Investors Service

Lisa Goldstein
Backup Analyst
Public Finance Group
Moody's Investors Service

Contacts

Journalists: (212) 553-0376
Research Clients: (212) 553-1653


Moody's Investors Service
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MOODY'S AFFIRMS Baa3 RATING ON MEMORIAL HOSPITAL AT NORTH CONWAY'S (NH) OUTSTANDING DEBT; OUTLOOK IS STABLE
No Related Data.
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