Mayo expansion comes at a price; earnings drop 35 percent

The Mayo Clinic's expansion plans are crimping its financial results and raising a note of concern from one of the nation's top ratings agencies.

Audited financial documents filed this week showed that net income in 2012 dropped 35 percent to $395.4 million compared with a year earlier, as the Rochester-based medical organization purchased clinics in Red Wing, Minn., and Waycross, Ga., and took on $300 million in bonds to fund several construction projects.

Mayo remains a well-funded operation, however. Consolidated revenue ticked up 6.3 percent to $8.84 billion, results that also include a clinic system that covers more than 70 communities in the Midwest and hospitals in Scottsdale, Ariz., and Jacksonville, Fla.

Ratings agency Standard & Poor affirmed its AA rating for Mayo's long-term debt, a step below its highest rating, and said the rating reflects S&P's assessment of "Mayo Clinic's excellent enterprise profile" and "international reputation."

However, S&P also revised Mayo's rating outlook to "negative" based on the additional debt, a slowdown in revenue growth and about $1.2 billion in unfunded pension obligations.

In determining a ratings outlook, S&P says it considers any changes in economic and fundamental business conditions.

A change in the outlook is not necessarily a precursor of a rating change, which is a measure of an organization's creditworthiness, but it also is not uncommon for the agencies to adjust an outlook in advance of a forthcoming change.

Mayo is charting what it believes could be a $6 billion remake of southeastern Minnesota and the downtown area around its flagship medical center over the coming decade.

The organization is lobbying state lawmakers for $585 million in taxpayer support to pay for infrastructure costs, as Mayo pays for $3.5 billion in capital projects.

Several major building projects, including a proton beam therapy center and expansion of a wellness facility, are underway and a few are waiting in the wings, including an overhauled emergency department at St. Marys Hospital.

With start-up costs for the projects and pension obligations, growth in expenditures has outstripped growth in revenue. Standard & Poor noted that the investments may not produce net improvements in operating income for a few years.

Mayo officials plan to offer a fuller explanation of its financial performance Wednesday. But a spokesman said Mayo is taking advantage of favorable interest rates as it seeks to expand, which may have a short-term impact on cash flow. The spokesman said the organization's operating margins are in line with its annual target of 4 to 6 percent.