OREANDA-NEWS. Fitch Ratings has affirmed the 'A+' rating on the following bonds issued on behalf of Summit Health (Summit):

--$117.4 million Franklin County Industrial Development Authority revenue bonds series 2010.

The Rating Outlook is Stable.

Summit Health has an additional $39.2 million in outstanding bonds which Fitch does not rate.

SECURITY

The bonds are secured by a pledge of gross revenues and debt service reserve funds.

KEY RATING DRIVERS

ROBUST OPERATING PROFILE: Summit's operating profile is characterized by a strong liquidity position, consistent operating profitability and solid debt service coverage over the last four audited years. Most of Summit's financial ratios exceed Fitch's 'A' category medians. Positive rating movement is precluded at this time given Summit's potential capital plans, as well as weaker financial position in comparison to similarly sized issuers in the 'AA-' category.

LEADING MARKET POSITION: Summit holds a significantly leading market share in its primary service area (PSA) at 77% in 2015. Fitch views Summit's competitive position and sizable physician group as a primary credit strength as they help support the organization's profitability and financial position. There has been consolidation activity in central Pennsylvania and Summit has entered into various partnerships with larger health systems in the area to address potential competitive pressures.

INCREASED, BUT MANAGEABLE CAPITAL PLANS: Summit's capital plan calls for approximately $113 million in spending over the next two years, compared to $47 million over the last two years. The majority of the capital spend will be attributed towards the implementation of a common electronic medical record (EMR) system. The EMR transition costs are conservative and Summit is currently evaluating various alternatives and cost structures.

HIGH EXPOSURE TO GOVERNMENTAL PAYORS: Summit's payor mix is comprised of 47.7% Medicare and 13.8% Medicaid through the nine-month interim (ended March 31, 2016). Medicaid levels have risen over the last few years due to Pennsylvania's Medicaid expansion under the Affordable Care Act. The high level of governmental payor exposure makes the organization vulnerable against possible future reimbursement pressures at the state and federal level.

RATING SENSITIVITIES

OPERATING STABILITY EXPECTED: Fitch expects Summit Health to successfully complete its transition to a new electronic medical record over the next three years and to maintain a strong operating profile.

CREDIT PROFILE

Located in south-central Pennsylvania, Summit is anchored by two acute care facilities, Chambersburg Hospital and Waynesboro Hospital, which have a combined total of 313 licensed beds. In fiscal 2015 (June 30 year-end), Summit had total operating revenues of $453.4 million.

ROBUST OPERATING PROFILE

Summit's operating and operating EBITDA margins have averaged 6% and 11.5%, respectively, over the last four years. Operating and operating EBITDA margins of 5% and 10.7% through the interim were ahead of Fitch's 'A' medians of 3.6% and 10.3%, respectively. Robust operations are supported by steady volumes, solid revenue growth (17% over the last four years), and good expense control. In addition, Summit's favorable competitive position and sizable physician base remain a large driver of its strong operating profitability.

Strong operating results have produced consistently solid operating metrics over the last four years; maximum annual debt service (MADS) coverage by EBITDA of 4.4x through the interim compared well to Fitch's median of 4.2x. Additionally, Summit's leverage position has improved over the last three years and MADS as 2.6% of 2016 annualized revenues was favorable to the 2.8% median.

Summit's $379 million in unrestricted cash and investments at March 31, 2016 equated to a very strong 320.8 days cash on hand (DCOH), 30.3 cushion ratio and 241.4% cash to debt, all of which were significantly above Fitch's 'A' medians of 205.3 days, 18.5x and 143.7%, respectively.

Given Summit's regional scope and smaller concentrated revenue base, Fitch would expect its financial ratios to be in-line with similarly sized peers in the 'AA-' category prior to any upward rating movement.

EMR CONVERSION

Summit is contemplating undergoing an EMR conversion over the next two years to bring the organization under a common EMR for both inpatient and outpatient facilities. Management is currently evaluating various options and cost structures for this project; the current projections range from $38 million to $57 million in spending attributed to the system implementation and personnel training. Summit is planning to finance the conversion via cash flows, which may hamper liquidity growth over the medium term. Fitch believes that Summit is well positioned to undertake the project and notes the operational and financial benefits of converting to a common platform; however, Fitch will continue to monitor the progress of the project due to the inherent risk and potential receivables build up associated with sizable EMR implementations.

DEBT PROFILE

Summit has $156.6 million in total outstanding debt, most of which is fixed rate ($6 million is variable rate). Fitch views the conservative debt structure favorably.

Summit has an outstanding floating to fixed rate swap with Royal Bank of Canada (RBC; rated 'AA/F1+'/Stable Outlook) that had a mark-to-market of negative $33.4 million and required a collateral posting of $23.4 million given a $10 million collateral posting threshold at May 4, 2016. Summit continues to evaluate options related to this unhedged swap and may terminate when the fair market value improves.

DISCLOSURE

Summit covenants to submit annual and quarterly financial and utilization information to the MSRB's EMMA system. Management was candid and timely in its responses to Fitch during the credit review process.