Tenet loses $2 billion in quarter but boasts big cash cushion

By Paul Deckelman

New York, March 8 - Tenet Healthcare Corp. on Tuesday reported a net loss of $2.022 billion ($4.33 per share) for its fourth quarter ended Dec. 31, and reported a loss for the full year of $2.64 billion ($5.66 per share). But even as it racked up what the company's president and chief executive officer, Trevor Fetter, called "enormous" losses, the hospital operator - which recently moved its base of operations to Dallas from Santa Barbara, Calif. - claimed to have made "substantial progress" toward turning its fortunes around in a number of key areas, including selling off unwanted assets, lowering bad debt expenses, settling several sticky legal matters, and improving its capital structure.

The company's outgoing chief financial officer, Stephen D. Farber, told analysts on a lengthy conference call following the company's release of its results - his last before turning the CFO's office over to Robert S. Shapard - that at the end of 2004, the company had total debt of $4.4 billion, and net debt - its total debt load minus cash and cash equivalents - of about $3.5 billion.

Unrestricted cash went from $1.323 billion as of Sept. 30, 2004 to $654 million as of year-end due to several large cash outlays during the quarter that impacted the company's cash balances, including its repurchase in November of $105 million of bonds scheduled to mature in 2006 and 2007, as well as its payment of $395 million to settle patient lawsuits related to the problems at its formerly-owned hospital in Redding, Calif., and another $31 million of settlements related to its Palm Beach Gardens, Fla., hospital.

Another drain on cash during the quarter was the $253 million that Tenet put up with Bank of America as collateral on a new facility to issue standby letters of credit, required by various insurers and state health departments to ensure the company's performance under their respective insurance plans. Tenet at the same time terminated an $800 million revolving credit facility, saying it was unneeded - Tenet had not drawn on that facility for many months - and it did not wish to keep paying fees to keep the unused credit line open.

However, On Jan. 25, the company sold an upsized $800 million issue of new 9¼% senior notes due 2015, and used $400 million of the proceeds to redeem the last of its outstanding 2006 and 2007 bonds, leaving it with no maturities before December 2011. The rest of the proceeds went into the company's coffers for general corporate purposes.

Cash back up to $900 million

Farber said that as of last Friday, the cash balance had built back up to $900 million. And Tenet anticipates receiving another $530 million in April as a tax refund, and estimates that including the refund proceeds, minus certain disbursements it will have made in the interim, it will have a total of $1.3 billion of unrestricted cash in its offers at that point.

"This is a very substantial amount of liquidity," Farber said, "and it will support the company during its operational turnaround and as the legal team works to resolve the remaining legacy issues."

New CFO Shapard said that Farber "has done a great job of giving us the flexibility on the balance sheet to give us the time to make some of the changes we need to make," and said that his focus would "be operational - on quality and improving operations, on cost initiatives, and initiatives to improve volumes. That's how we're going to make this thing profitable again."

No plans for new credit line

When asked by an analyst whether his plans included lining up a new credit facility, Shapard, reiterating what his predecessor had said earlier, declared that "there is no near-term need, as I see it, for a new credit facility. We've got a facility in place to give use the LoCs we need to operate, and we have adequate cash on the balance sheet for the liquidity we need, and we don't need the expense of traditional credit facility at this time."

Another analyst noted that on the company's previous conference call, it had indicated that the letters of credit had been characterized as an "interim" facility, with the company planning to renegotiate its then current revolver. Commenting on the change of plans that saw Tenet just terminate the revolver altogether rather than try to line up a new one on better terms, Farber said that "we sold $800 million bonds, so the circumstances had changed," and with the anticipated $1.3 billion cash cushion, no significant impending liabilities and no debt due for seven years, "we can't quite figure out what the use would be of having a $30 million plus monthly carrying cost of having an untapped credit facility."

He added "our feeling is that we can access the bank market at any point that we need to, so there's not a lot of utility in spending that money uselessly."

In other credit-related developments, the company projected interest expense of $420 million in 2005, assuming its debt level remains constant.

During the call, CEO Fetter said that Tenet - which last year announced plans to divest more than a quarter of what was then its nearly 100 hospitals - has succeeded in so far divesting 22 of the 27 hospitals which it wanted to get out from under, announcing separately Tuesday that it had completed the previously announced sale of four southern California hospitals to Integrated Healthcare Holdings Inc. Net after-tax proceeds, including the liquidation of working capital, are expected to be approximately $80 million.

Fetter said that Tenet has "already exceeded the financial targets" the company set last year for total proceeds, although he did not reveal the total amount Tenet has realized so far from the sale of the hospitals, which the company considered either underperforming or outside the core geographic areas it wished to focus upon.

He also noted that Tenet had not been forced to close any of the facilities while they were being sold, and said that talks were underway with potential buyers of the remaining five facilities the company intends to divest. Following completion of the divestiture program, Tent will operate 69 hospitals.

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