Fitch Affirms Essentia Health (MN) at 'A-'; Outlook Stable

NEW YORK--(Business Wire)--
Fitch Ratings has affirmed the underlying rating of 'A-' on approximately
$291.75 million of health care facilities variable-rate demand revenue bonds,
series 2008A-C and $106.3 million of health care facilities bonds, series
2008D-E issued on behalf of Essentia Health (Essentia) by the following issuers:
$124,800,000 Cass County, North Dakota; $12,975,000 Wisconsin Health and
Educational Facilities Authority; $260,310,000 Minnesota Agricultural and
Economic Development Board, all in conjunction with Essentia's planned
conversion of approximately $197 million of variable-rate demand debt to
fixed-rate debt.

The system also plans to terminate two of its three outstanding standby bond
purchase agreements and a portion of its interest rate swaps. The timing of the
conversion is being determined and Fitch will be asked to rate the fixed-rate
bonds prior to their issuance. The Rating Outlook is Stable.

The 'A-' rating reflects Essentia's position as the dominant market provider in
the upper Midwest region with the leading market position in all of its markets
and consistent though slim profitability trends with an average operating margin
of 1.5% over the past five years.

Liquidity ratios are weak compared to 'A'-category medians and have been further
stressed by market losses, but absolute cash and investments have actually
increased over the past three years. Debt ratios are also slightly higher than
the median for the category but this concern is mitigated by a light debt burden
and good debt service coverage.

With the 2008 merger with Innovis Health, which included the Dakota Clinic and
Innovis Hospital, Essentia has expanded and enhanced its physician alignment
strategy and extended its market with the addition of more than 150 physicians.
Essentia now has a very large physician base of over 700 physicians at its 62
clinics and 15 hospitals.

Both inpatient and outpatient statistics have increased, primarily through the
acquisition of Innovis Hospital. Beds in service for the obligated group have
increased from 912 to 934 while admissions have increased 7.7% in fiscal 2009.
Average length of stay declined slightly. Outpatient surgeries have increased as
have emergency room visits.

Liquidity ratios which have been below category medians declined further in 2008
due primarily to the increased expense base associated with the merger but
stabilized in 2009. In fiscal 2007, Essentia had 121.2 days cash on hand, a 14
times (x) cushion ratio and a 75% cash to debt ratio. In fiscal 2009, days cash
on hand declined to 98.8 days, the cushion ratio declined marginally to 13.3x
and the cash to debt ratio was 73.5%. Other than the cushion ratio, Essentia's
liquidity ratios fall below Fitch's medians for the 'A' category of 171.2 days,
13.3x cushion ratio, and 113.4% cash to debt. Operating margins have been
consistently slim; operating income ranges from 1.4% to 1.6% over the past five
years, well below the category median of 2.7%. However, excess margins have
historically met or exceeded medians, except for 2009, due to investment losses.
Offsetting weak liquidity and slim cash is a low debt burden ratio as a
percentage of revenues, at less than 2% of revenues, and good debt service
coverage. In fiscal 2009, Essentia earned $20.3 million from operations (1.4%
operating margin) and lost $7.8 million (negative 0.6%) on the bottom line.
Medians for the category are 2.7% and 3.9%, respectively. Maximum annual debt
service (MADS) by EBITDA coverage was 2.8x and debt as a percentage of revenues
was 1.8%, compared to 'A' category medians of 3.5x and 3.1%, respectively.

The Stable Rating Outlook is based on the continued development of a fully
integrated, physician-driven, business model. The system's physician integration
strategy is its core strategic component and important to Essentia's long-term
success. Initial performance is encouraging as both utilization trends and
operating performance have improved from prior years. Positive rating pressure
is contingent upon the strengthening of the system's cash reserves to support
future capital needs, particularly at Innovis, improved liquidity to debt
ratios, and the continued evolution of the system's debt profile to reduce its
risk profile.

Essentia is an integrated health care system with acute hospitals and physician
clinics spread throughout northern Minnesota, eastern North Dakota, and
northwest Wisconsin. Its revenue base is largely concentrated in the Duluth, MN
region where Essentia owns and operates its flagship St. Mary's Medical Center
(358-staffed beds), which is adjoined to the SMDC Medical Center (128-staffed
beds) and Nat G. Polinsky Memorial Rehabilitation; Duluth Clinic, a 450
physician multi-specialty clinic; and Innovis Health, which consists of a
160-member multi-specialty physician clinic and an 86-bed acute care hospital
located in Fargo, ND. Essentia's revenue in fiscal 2009 was approximately $1.4
billion. Essentia covenants to provide quarterly unaudited consolidated
financial statements within 60 days of quarter end and annual audited financial
statements and operating data with 120 days to national recognized municipal
securities information repository (NRMSIRs).

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

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 Ratings, New York
Carolyn Tain, 212-908-0259
or
Media Relations:
Brian Bertsch, 212-908-0549
Email: brian.bertsch@fitchratings.com
Sandro Scenga, 212-908-0278
Email: sandro.scenga@fitchratings.com

Copyright Business Wire 2009