BON SECOURS HEALTH SYSTEM, INC. AND SUBSIDIARIES Consolidated Financial Statements and Combining Schedules in Obligated Group Format August 31, 2017 and 2016 (With Independent Auditors’ Report Thereon) KPMG LLP 1 East Pratt Street Baltimore, MD 21202-1128 Independent Auditors’ Report The Board of Directors Bon Secours Health System, Inc. and Subsidiaries: We have audited the accompanying consolidated financial statements of Bon Secours Health System, Inc. and its subsidiaries (the System), which comprise the consolidated balance sheets as of August 31, 2017 and 2016, and the related consolidated statements of operations and changes in unrestricted net assets, changes in net assets and cash flows for the years then ended and the related notes to the consolidated financial statements. Management’s Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors’ Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Bon Secours Health System, Inc. and its subsidiaries as of August 31, 2017 and 2016, and the results of their operations and their cash flows for the years then ended, in accordance with U.S. generally accepted accounting principles. November 2, 2017 KPMG LLP is a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. BON SECOURS HEALTH SYSTEM, INC. AND SUBSIDIARIES Consolidated Balance Sheets August 31, 2017 and 2016 (In thousands) Assets 2017 Current assets: Cash and cash equivalents $ 2016 274,348 217,931 361,892 32,546 372,917 42,113 394,438 415,030 Assets limited or restricted as to use Inventories Prepaid expenses and other current assets 66,984 61,939 44,372 91,030 57,800 32,036 Total current assets 842,081 813,827 1,376,059 979,057 368,926 1,227,356 1,013,195 372,036 $ 3,566,123 3,426,414 $ 59,656 207,280 175,068 118,453 39,809 173,021 165,315 112,585 560,457 490,730 830,192 646,871 888,514 781,690 2,037,520 2,160,934 1,182,153 294,791 944,928 264,706 1,476,944 1,209,634 38,783 12,876 43,484 12,362 1,528,603 1,265,480 3,566,123 3,426,414 Accounts receivable, net: Patient and third-party payors Other Total accounts receivable, net Assets limited or restricted as to use, less current portion Property, plant, and equipment, net Other long-term assets, net Total assets Liabilities and Net Assets Current liabilities: Current portion of long-term debt Accounts payable Accrued salaries, wages, and benefits Other accrued expenses Total current liabilities Long-term debt, less current portion Other long-term liabilities and deferred credits Total liabilities Net assets: Unrestricted-controlling interest Unrestricted-noncontrolling interest Total unrestricted Temporarily restricted Permanently restricted Total net assets Total liabilities and net assets $ See accompanying notes to consolidated financial statements. 2 BON SECOURS HEALTH SYSTEM, INC. AND SUBSIDIARIES Consolidated Statements of Operations and Changes in Unrestricted Net Assets Years ended August 31, 2017 and 2016 (In thousands) 2017 Revenues: Net patient service revenue before bad debts Provision for patient bad debts $ Net patient service revenue Other revenue Total revenues Expenses: Salaries, wages, and benefits Supplies Purchased services and other Depreciation and amortization Interest Total expenses Operating Income Nonoperating gains (losses), net: Nonoperating investment gains, net Other nonoperating activities, net Excess of revenues over expenses Other changes in unrestricted net assets: Grants for capital Net change in unrealized gains on other-than-trading securities Net assets released from restrictions used for purchase of property, plant, and equipment Net change in equity of joint ventures Distributions to noncontrolling interest owners Pension and other postretirement adjustments Transfers to affiliates and other changes, net $ 3 3,308,143 (199,503) 3,164,696 3,108,640 180,754 144,897 3,345,450 3,253,537 1,727,750 596,203 717,312 135,542 33,099 1,687,599 562,539 714,437 136,499 30,871 3,209,906 3,131,945 135,544 121,592 101,701 (48,557) 12,668 (46,554) 188,688 87,706 20 174 490 362 267,310 Unrestricted net assets, beginning of year See accompanying notes to consolidated financial statements. 3,344,000 (179,304) 8,531 (1,219) (5,918) 82,866 (6,148) Increase (decrease) in unrestricted net assets Unrestricted net assets, end of year 2016 1,942 1,194 (7,666) (145,840) (4,369) (66,497) 1,209,634 1,276,131 1,476,944 1,209,634 BON SECOURS HEALTH SYSTEM, INC. AND SUBSIDIARIES Consolidated Statements of Changes in Net Assets Years ended August 31, 2017 and 2016 (In thousands) Balance at August 31, 2015 $ Unrestricted net assets Temporarily restricted net assets Permanently restricted net assets 1,276,131 39,008 7,763 1,322,902 87,706 — 174 362 — — 14,658 — 74 240 — 505 — 2 — 87,706 15,163 174 438 240 1,942 — 1,194 (7,666) (145,840) — (4,369) (1,942) (8,479) — — — — (75) Excess of revenues over expenses Grants and restricted contributions Grants for capital Net change in unrealized gains on other-than-trading securities Investment income Net assets released from restrictions used for purchase of property, plant, and equipment Net assets released from restrictions used for operations Net change in equity of joint ventures Distributions to noncontrolling interest owners Pension and other postretirement adjustments Inherent contribution – restricted Transfers to affiliates and other changes, net (Decrease) increase in net assets (66,497) Balance at August 31, 2016 4,476 4,599 43,484 12,362 1,265,480 188,688 — 20 490 — — 10,976 — 930 460 — 217 — 297 — 188,688 11,193 20 1,717 460 8,531 — (1,219) (5,918) 82,866 (6,148) Increase (decrease) in net assets 267,310 $ — (8,479) 1,194 (7,666) (145,840) 4,092 (4,444) 1,209,634 Excess of revenues over expenses Grants and restricted contributions Grants for capital Net change in unrealized gains on other-than-trading securities Investment income Net assets released from restrictions used for purchase of property, plant, and equipment Net assets released from restrictions used for operations Net change in equity of joint ventures Distributions to noncontrolling interest owners Pension and other postretirement adjustments Transfers to affiliates and other changes, net Balance at August 31, 2017 — — — — — 4,092 — Total 1,476,944 See accompanying notes to consolidated financial statements. 4 (8,531) (8,536) — — — — (4,701) 38,783 — — — — — — (57,422) — (8,536) (1,219) (5,918) 82,866 (6,148) 514 263,123 12,876 1,528,603 BON SECOURS HEALTH SYSTEM, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended August 31, 2017 and 2016 (In thousands) 2017 Cash flows from operating activities: Increase (decrease) in net assets $ Adjustments to reconcile increase (decrease) in net assets to net cash provided by operating activities: Provision for bad debts Depreciation and amortization, including $4,641 and $5,328 reported in nonoperating activities, net in 2017 and 2016, respectively Amortization of deferred financing costs and bond premium/discount, net Equity in income of joint ventures Distributions received from investments in joint ventures Inherent contribution Net realized/unrealized gains on certain investments and derivative instruments Gain on disposal of assets Unrealized gains on investment in joint venture Pension and other postretirement adjustments Grants received for capital expenditures Contributions restricted by donor Cash distributions to noncontrolling interest owners and affiliates Gain on asset divestiture Changes in assets and liabilities: Increase in accounts receivable Increase in inventories, prepaid expenses and other current assets Decrease in other long-term assets, net Increase in accounts payable and other current liabilities Decrease in other long-term liabilities and deferred credits Net cash provided by operating activities Cash flows from investing activities: Purchase of land held for investment Cash paid for acquisition Sales (purchases) of securities, net Purchases of alternative investments and fixed income commingled funds Proceeds from sale of alternative investments and equity and fixed income commingled funds Property, plant, and equipment additions, net of disposals Cash received from asset divestiture Payments related to interest rate swaps Net cash used in investing activities Cash flows from financing activities: Payments of long-term debt Grants received for capital expenditures Proceeds from contributions restricted by donors Cash distributions to noncontrolling interest owners and affiliates Net cash used in financing activities Net increase in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year $ Supplemental disclosure: (a) Cash paid for taxes was $1,150 and $520 for 2017 and 2016, respectively. See accompanying notes to consolidated financial statements. 5 2016 263,123 (57,422) 179,304 199,503 140,183 (1,084) (13,555) 10,453 — (102,560) — (9,003) (82,866) (20) (11,193) 12,267 (28,159) 141,827 (999) (7,633) 19,362 (4,484) (9,856) (104) (8,169) 145,840 (174) (15,163) 13,928 — (157,226) (16,735) 9,598 41,173 (53,864) (172,445) (7,877) 13,385 16,901 (35,161) 179,836 231,259 (9,063) — 70,423 (220,158) 129,275 (125,918) 80,610 (10,143) — (8,660) (56,148) (25,151) 60,151 (121,996) — (10,675) (84,974) (162,479) (37,391) 20 11,193 (12,267) (37,159) 174 15,163 (13,928) (38,445) (35,750) 56,417 33,030 217,931 184,901 274,348 217,931 BON SECOURS HEALTH SYSTEM, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements August 31, 2017 and 2016 (In thousands) Organization and Mission (a) Organizational Structure Bon Secours Health System, Inc., a Maryland nonprofit, nonstock membership corporation (BSHSI), and all of the other entities that are controlled directly or indirectly by Bon Secours, Inc., a Maryland nonprofit, nonstock membership corporation (BSI) are described collectively as the System. BSI, which is the sole corporate member of BSHSI, has no healthcare operations. The System was organized in June 1983 to fulfill the healthcare mission of the United States Province of the Congregation of the Sisters of Bon Secours of Paris (Sisters of Bon Secours), a congregation of religious women of the Roman Catholic Church founded in France in 1824. The Sisters of Bon Secours have ministered to the healthcare needs of people in the United States since 1881. To ensure the sustainability of the ministry into the future as well as to broaden their collaboration with the laity in areas of influence, the Sisters of Bon Secours petitioned the Vatican to establish Bon Secours Ministries, an entity comprised of both laypersons and Sisters of Bon Secours, to oversee the Catholic healthcare ministry of BSHSI. Bon Secours Ministries, which is referred to as a “public juridic person” in the Catholic Church’s Code of Canon Law, was established by the Vatican on May 31, 2006 with the specific responsibility to oversee (and, as appropriate, initiate) the healthcare ministries within the System and, in particular, BSHSI’s Catholic identity and mission. This formal relationship with the Catholic Church and the specific ministry is commonly referred to as “sponsorship.” The Sisters of Bon Secours formally transferred the responsibility of sponsorship of the System to Bon Secours Ministries on November 1, 2006. Since then, Bon Secours Ministries (of which the majority of its members are Sisters of Bon Secours) has provided an active presence of leadership and direction for the System to ensure its operations and use of resources are aligned with the mission, values and fundamentals of Catholic social teaching. The System’s principal activities comprise health and nursing care services in the states of New York Maryland, Virginia, Kentucky, South Carolina, and Florida. (b) Asset Divestitures In July 2017, Bon Secours New York Health System, Inc. (BSNYHS) sold Frances Schervier Home and Hospital (dba Schervier Nursing Care Center) to a nonrelated entity. Total cash proceeds received as a result of sale of Schervier Nursing Care Center were approximately $80,600, and a net operating gain of approximately $28,200 was recognized in other operating revenue in the consolidated statements of operations and changes in unrestricted net assets for the year ended August 31, 2017. The proceeds were offset with activities resulting from the sale, including write-off of approximately $21,700 net property, plant and equipment, in addition to a liability for withdrawal from Archdiocese pension plan (note 9), a write down of goodwill (note 2(i)), and various other working capital items of approximately $20,600. 6 (Continued) BON SECOURS HEALTH SYSTEM, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements August 31, 2017 and 2016 (In thousands) Effective as of the date of transaction, BSHSI excluded the operating results of Schervier Nursing Care Center in the consolidated statement of operations and changes in unrestricted net assets. Included in the consolidated operating revenue and the excess of revenues over expenses (excluding the gain on sale) of BSHSI for the year ended August 31, 2017 was $40,324 and $(2,962), respectively, for Schervier Nursing Care Center. (c) Mission The Mission of the System is to bring compassion to healthcare and to be good help to those in need, especially those who are poor and dying. As a system of caregivers, the System is committed to helping to bring people and communities to health and wholeness as part of the healing ministry of Jesus Christ and the Catholic Church. The ministry of the System aids those in need, particularly those who are sick and dying, by offering a wide variety of services, including acute inpatient, outpatient, pastoral, palliative, home health, nursing home, rehabilitative, primary and secondary care and assisted living, in Florida, Kentucky, Maryland, New York, South Carolina, and Virginia without regard to race, religion, color, gender, age, marital status, national origin, sexual orientation, veteran status, genetic information, disability or any other characteristic protected by applicable federal, state or local laws and/or regulations. Activities directly associated with this purpose are considered operating activities. Operating activities also include other incidental services that are closely related to healthcare. (d) Community Benefits The System exists to benefit the people in the communities it serves. In pursuing its mission, the System advocates for and provides services to help meet healthcare and related socioeconomic needs of poor and disadvantaged individuals and the broader community. The System provides services in the communities served by holistically ministering to its patients with respect and without regard to their ability to pay. Programs and services for the uninsured and underinsured represent the financial commitment of the System to everyone in the community. The System’s financial assistance policy ensures that all members of the community receive this basic human right to access healthcare. The categories included as programs and services for the poor and disadvantaged are as follows: (i) Charitable Services – Financially Disadvantaged Persons The System provides care to patients regardless of their ability to pay for all or a portion of the charges incurred. This care is classified as charity care based upon the System’s established policies. In accordance with the Catholic Health Association (CHA) guidelines, charity care represents the unpaid costs of free or discounted health services provided to persons who cannot afford to pay and who meet the organization’s criteria for financial assistance. 7 (Continued) BON SECOURS HEALTH SYSTEM, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements August 31, 2017 and 2016 (In thousands) In assessing a patient’s ability to pay, the System utilizes generally recognized poverty income levels, financially supporting 100% of the healthcare services provided to patients with annual family income at or below 200% of the federal poverty guidelines. Additional assistance is provided by a reduction in charges for medically necessary services through a community service adjustment. (ii) Charitable Services – State Programs The System provides services to indigent patients under various state programs, including state Medicaid, that generally pay healthcare providers amounts that are less than the cost of the services provided to the recipients. Estimated unreimbursed costs of the care provided to these disadvantaged patients are also reported as charitable services. (iii) Other Community Benefits Other community benefits include community services for the poor and disadvantaged as well as the broader community. The programs cover a broad spectrum of services and are financially supported by the System: • Primary care access – providing free community-based preventive and primary care services through free-standing clinics and mobile health vehicles; • Health screenings and immunizations – provision of free health screenings and immunizations for a variety of health conditions for women, children, and senior residents; • Child programs – providing oral healthcare, asthma and childhood obesity interventions; • Caregiver and senior programs – focused on support, health screenings, and services to assist older adult populations; • Education – providing medical and other health professional programs; • Leadership activities – a full-time community health leader is provided in each community served who works to expand community capacity, identify community health needs and address social health conditions. 8 (Continued) BON SECOURS HEALTH SYSTEM, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements August 31, 2017 and 2016 (In thousands) The cost of charitable services and community benefits provided by the System is determined in accordance with the System’s accounting policies. These costs are estimated by using the cost to charge ratio applied by Medicaid and other state programs as well as specific patient visits identified under the System’s charity care policies. The estimated cost of these services is as follows for the years ended August 31, 2017 and 2016: 2017 Charitable services and other community benefits: Cost of services to financially disadvantaged persons Unpaid cost of state programs (e.g., Medicaid) to financially disadvantaged persons Cost of other community benefits Total community benefits, at cost $ $ 2016 123,385 122,355 70,320 56,709 56,832 58,228 250,414 237,415 Significant Accounting Policies (a) Principles of Consolidation The consolidated financial statements include the accounts of all members of the corporate group controlled by BSHSI. Members of the corporate group include all entities that BSHSI directly or indirectly controls, even if the System has less than 50% of the ownership or membership interest in the entity. Investments in entities where the System holds 50% or less of an entity’s operations and does not have operational control are recorded under the equity or cost method of accounting. The System has included its equity share of income or losses and changes in net assets from investments in unconsolidated affiliates in other revenue and changes in unrestricted net assets, respectively, in the accompanying consolidated statements of operations and changes in unrestricted net assets. All material intercompany transactions and account balances have been eliminated in consolidation. (b) Use of Estimates The preparation of financial statements in conformity with U.S. generally accepted accounting principles (U.S. GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. In the years ended August 31, 2017 and 2016, the System recorded (loss) income of $(8,489) and $1,986, respectively, related to expense reductions and increases in net patient service revenue as a result of the reassessment of various third-party payor settlement issues and changes in estimates associated with other operating assets and liabilities. 9 (Continued) BON SECOURS HEALTH SYSTEM, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements August 31, 2017 and 2016 (In thousands) (c) Cash and Cash Equivalents For purposes of the consolidated financial statements, cash and cash equivalents include investments in highly liquid debt instruments with original maturities of three months or less, excluding assets limited or restricted as to use. (d) Accounts Receivable, Net Accounts receivable is presented net of allowances for uncollectible accounts. The System grants credits to patients and generally does not require collateral or other security. However, it routinely obtains assignment of patients’ benefits under their health insurance policies. Most of the System’s net patient service revenue is derived from third-party payment programs. Medicare, Medicaid, and managed care contracts comprise approximately 60% and 55% of the System’s consolidated third-party payor revenue for the years ended August 31, 2017 and 2016, respectively. The respective percentages of net amounts due from patients and third-party payors at August 31, 2017 and 2016 are as follows: 2017 Medicare Medicaid Managed care Blue Cross Other commercial payors Self-pay 2016 28 % 9 21 24 4 14 28 % 7 26 21 4 14 100 % 100 % In evaluating the collectability of accounts receivable, the System analyzes historical collections and write-offs and identifies trends for each of its major payor sources of revenue to estimate the appropriate allowance for bad debts and provision for uncollectible accounts. Management regularly reviews its estimate and evaluates the sufficiency of the allowance for bad debts. The System analyzes contractual amounts due from patients who have third-party coverage and provides an allowance for doubtful accounts and a provision for bad debts. For patient accounts receivable associated with self-pay patients, which includes those patients without existing insurance coverage for a portion of the bill, the System records a significant provision for bad debts for patients that are unable or unwilling to pay for the portion of the bill representing their financial responsibility. Account balances are charged off against the allowance for doubtful accounts after all means of collection have been exhausted. 10 (Continued) BON SECOURS HEALTH SYSTEM, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements August 31, 2017 and 2016 (In thousands) (e) Assets Limited or Restricted as to Use and Investment Income Assets limited or restricted as to use include assets held by trustees under indentures, self-insurance trust arrangements, assets related to donor-restricted net assets, and assets designated by the board of directors over which it retains control and may, at its discretion, use for other purposes. The fair value of investments, with the exception of alternative investments, is based upon quoted market prices or other observable market inputs. The System elected to fair value its investments in its equity and fixed income commingled funds. Alternative investments are recorded under the equity method. Unrealized gains or losses on trading securities are included in nonoperating investment gains, net. As of August 31, 2017 and 2016, all investments and assets limited or restricted as to use are designated as trading securities, except for certain foundation investments and trustee held funds, which are designated as other than trading securities. Investment income on donor-restricted funds is recorded as an addition to donor-restricted net assets provided the income has been restricted by the donor. Investment income on trustee-held funds, professional/general liability, workers’ compensation, and health benefit self-insurance funds is reported in other revenue for the years ended August 31, 2017 and 2016, respectively. All other investment income is reported within nonoperating investment gains, net. (f) Inventories Inventories, consisting primarily of pharmaceuticals and medical supplies, are stated at the lower of cost or market, principally on a first-in, first-out basis. (g) Property, Plant, and Equipment, Net Property, plant, and equipment, net are recorded at cost or, if donated, at fair value on the date of receipt. Depreciation is provided over the estimated useful life of each class of depreciable asset and is computed using the straight-line method. Equipment under capital lease obligations is amortized on the straight-line method over the shorter period of the lease term or the estimated useful life of the equipment. Such amortization is included in depreciation and amortization in the accompanying consolidated financial statements. Estimated useful lives of the assets are as follows: Buildings Fixed equipment Major movable equipment Software 11 20 to 50 years 10 to 20 years 5 to 10 years 3 to 7 years (Continued) BON SECOURS HEALTH SYSTEM, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements August 31, 2017 and 2016 (In thousands) Gifts of long-lived assets such as land, buildings, or equipment are reported as unrestricted support and are excluded from the excess of revenues over expenses, unless explicit donor stipulations specify how the donated assets must be used. Gifts of long-lived assets with explicit donor restrictions that specify how the assets are to be used and gifts of cash or other assets that must be used to acquire long-lived assets are reported as restricted support. Absent explicit donor stipulations about how long those long-lived assets must be maintained, expirations of donor restrictions are reported when the donated or acquired long-lived assets are placed in service. Interest cost is capitalized as part of the cost of constructing capital assets, net of any interest income earned on unexpended bond proceeds borrowed for a specific project, during the construction period. The System capitalizes the direct costs, including internal costs, associated with the implementation of new information systems for internal use. Capitalized amounts are amortized over the estimated lives of the software. (h) Asset Impairment The System regularly evaluates whether events or changes in circumstances have occurred that could indicate an impairment in the value of long-lived assets. In accordance with the provisions of the Accounting Standards Codification (ASC) Topic 360-10, Impairment or Disposal of Long-Lived Assets, if events or changes in circumstances indicate that the carrying value of an asset is not recoverable, the System’s management estimates the projected undiscounted cash flows, excluding interest and taxes, of the related individual facilities to determine if an impairment loss should be recognized. The amount of impairment loss is determined by comparing the historical carrying value of the asset to its estimated fair value. Estimated fair value is determined through an evaluation of recent and projected financial performance of facilities using standard industry valuation techniques. In addition to consideration of impairment upon the events or changes in circumstances described above, management regularly evaluates the remaining lives of its long-lived assets. If estimates are changed, the carrying value of affected assets is allocated over the remaining lives. In estimating the future cash flows for determining whether an asset is impaired and if expected future cash flows used in measuring assets are impaired, the System groups their assets at the lowest level for which there are identifiable cash flows independent of other groups of assets. No impairment charges were recorded during the year ended August 31, 2017 or 2016. (i) Other Long-Term Assets, Net Goodwill is an asset representing the excess of the aggregate purchase price over the fair value of the net assets acquired in a business combination. As of August 31, 2017 and 2016, the System had one reporting unit, which included all subsidiaries. Goodwill is evaluated for impairment annually using qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Based on this qualitative assessment, the System concluded that goodwill was not impaired as of August 31, 2017 and 2016. As the result of the sale of Schervier Nursing Care Center (note 1(b)), the System wrote off approximately $3,800 of goodwill. 12 (Continued) BON SECOURS HEALTH SYSTEM, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements August 31, 2017 and 2016 (In thousands) Other long-term assets, net consist of the following at August 31, 2017 and 2016: 2017 Investments in joint ventures (note 12) Goodwill, net Self insurance receivable Pledges and notes receivable Other assets Total other long-term assets, net 2016 $ 205,105 94,578 20,509 31,943 16,791 202,229 98,345 22,216 28,241 21,005 $ 368,926 372,036 (j) Deferred Financing Costs, Net Financing costs incurred in connection with the issuance of long-term debt have been capitalized and included as a reduction of debt. These costs are being amortized using the effective-interest method over the term of the related obligations. Accumulated amortization of long-term debt issuance costs amounted to $9,625 and $8,902 at August 31, 2017 and 2016, respectively. (k) Leases Lease arrangements, including assets under construction, are capitalized when such leases convey substantially all the risks and benefits incidental to ownership. Capital leases are amortized over either the lease term or the life of the related assets, depending upon available purchase options and lease renewal features. Amortization related to capital leases is included in the consolidated statements of operations and changes in unrestricted net assets within depreciation and amortization expense. (l) Other Long-Term Liabilities and Deferred Credits Other long-term liabilities and deferred credits consist of the following at August 31, 2017 and 2016: 2017 Accrued pension liability (note 9) Self-insurance liabilities Derivative instrument valuations (note 7) Medical office building liabilities (note 13(e)) Environmental liabilities Other long-term liabilities Other long-term liabilities and deferred credits 13 2016 $ 394,947 134,072 46,843 30,986 10,318 29,705 507,058 140,829 64,413 30,993 11,281 27,116 $ 646,871 781,690 (Continued) BON SECOURS HEALTH SYSTEM, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements August 31, 2017 and 2016 (In thousands) (m) Donor-Restricted Gifts Unconditional promises to give cash and other assets to the System are reported at fair value at the date the promise is received. Conditional promises to give and indications of intentions to give are reported at fair value at the date the gift is received. The gifts are reported as either temporarily or permanently restricted support if they are received with donor stipulations that limit the use of the donated assets. When a donor restriction is satisfied, temporarily restricted net assets are reclassified as unrestricted net assets and reported in the accompanying consolidated statements of operations and changes in unrestricted net assets as net assets released from restrictions. Such amounts are classified as other revenue or transfers for additions to property, plant, and equipment. Donor-restricted contributions whose restrictions are satisfied within the same year as received are reported as unrestricted contributions in the accompanying consolidated financial statements. (n) Net Assets The System classifies net assets based on the existence or absence of donor-imposed restrictions. Unrestricted net assets represent contributions, gifts, and grants that have no donor-imposed restrictions or that arise as a result of operations. Temporarily restricted net assets are subject to donor-imposed restrictions that must or will be met either by satisfying a specific purpose and/or passage of time. Temporarily restricted net assets of $38,783 and $43,484 at August 31, 2017 and 2016, respectively, primarily consisted of pledges and funds received for capital projects, various healthcare programs, and community outreach programs. Approximately 50% of the temporarily restricted net assets will be expended for capital with the remaining 50% for operating purposes. Permanently restricted net assets are subject to donor-imposed restrictions that must be maintained in perpetuity. Generally, the donors of these assets permit the use of all or part of the income earned on related investments for specific purposes. (o) Fair Values The carrying values of financial instruments classified as current assets and current liabilities approximate fair values. The fair values of assets limited or restricted as to use, with the exception of alternative investments, are based on quoted market prices or other observable inputs. Alternative investments are recorded under the equity method but approximate fair value. The System elected to record its investments in equity and fixed income commingled funds at fair value. See note 4 for additional disclosures of assets limited or restricted as to use. The carrying values of other long-term liabilities approximate fair values. (p) Net Patient Service Revenue The System has agreements with third-party payors that provide for payments to the System at amounts different from its established rates. Payment arrangements include prospectively determined rates per discharge, reimbursed costs, discounted charges, and per diem payments. Net patient service revenue is reported at estimated net realizable amounts from patients, third-party payors, and others for services rendered, including retroactive adjustments under reimbursement agreements with third-party payors. Retroactive reimbursement adjustments are estimated in the period in which the related services are rendered and adjusted in future periods as final settlements are determined. 14 (Continued) BON SECOURS HEALTH SYSTEM, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements August 31, 2017 and 2016 (In thousands) (q) Other Revenue Other revenue includes income from equity investments in joint ventures (note 12), gains on sales of operating activities (note 1(b)), grant revenues (including Meaningful Use-Health Information Technology for Economic and Clinical Health Act (HITECH) Stimulus Grants) (note 11), assisted living, capitated payments from insurance companies, revenues from corporate services provided to Charity, earnings on funds held by bond trustees and cafeteria and meal sales. (r) Other Nonoperating Activities, Net Other activities, which are largely unrelated to the System’s primary mission, are recorded as other nonoperating activities, net and include rental activities of medical office buildings, school of nursing, general donations, and fund-raising activities. (s) Performance Indicator The accompanying consolidated statements of operations and changes in unrestricted net assets include a performance indicator, excess of revenues over expenses. Changes in unrestricted net assets that are excluded from the performance indicator, consistent with industry practice, include net change in unrealized gains and losses on other-than-trading securities, permanent transfers of assets to and from unconsolidated affiliates for other than goods and services, pension and other postretirement adjustments, the System’s allocated share of joint ventures’ change in equity, distributions to noncontrolling interest owners, and contributions of long-lived assets (including assets acquired using contributions, which by donor restriction were to be used for the purpose of acquiring such assets). (t) Income Taxes The System and most of its subsidiaries (including certain joint venture entities) are exempt from federal income taxes under Section 501(c)(3) of the Internal Revenue Code of 1986, as amended. The System accounts for uncertain tax positions in accordance with ASC Topic 740, Income Taxes. Their related income is exempt from federal income tax under Section 501(A). The System accounts for uncertainty in income tax positions by applying a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The System has determined that no material unrecognized tax benefits or liabilities exist as of August 31, 2017 or 2016. Accounting for uncertainty in income taxes, ASC Topic 740-10 prescribes a comprehensive model for how an organization should measure, recognize, present, and disclose in its financial statements uncertain tax positions that an organization has taken or expects to take on a tax return. The System is subject to routine audits by taxing jurisdictions; however, there are currently no audits for any tax periods in progress. The System believes it is no longer subject to income tax examinations for years prior to 2013. As of August 31, 2017 and 2016, the System has no uncertain tax positions. 15 (Continued) BON SECOURS HEALTH SYSTEM, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements August 31, 2017 and 2016 (In thousands) The System’s taxable subsidiaries had approximately $106,393 and $89,895 of net operating loss carryforwards as of August 31, 2017 and 2016, respectively, which expire in varying periods through 2037 and are available to offset future taxable income. The System accounts for income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to be in effect during the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Interest and penalties related to income taxes are accounted for as income tax expense. The System’s deferred tax assets are fully reserved at August 31, 2017 and 2016 as the System considers it more likely than not that these amounts will not be recognized. (u) Derivative Instruments ASC Topic 815, Derivatives and Hedging, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities. An entity is required to recognize all derivatives as either assets or liabilities in the consolidated balance sheets and measure those instruments at fair value. In addition, for those derivative instruments that meet the criteria of an effective hedge, the hedged item must also be recorded at its fair value, with the changes in fair value reflected in other changes in unrestricted net assets. Derivative instruments, specifically interest rate swaps, are recorded on the consolidated balance sheets at their respective fair values and are included in other long-term liabilities and deferred credits. The System’s current derivative instruments do not qualify for hedge accounting, and the changes in fair value of such derivative instruments are reflected in nonoperating investment gains, net in the accompanying consolidated statements of operations and changes in unrestricted net assets in the period of change. Net settlement payments made or received on nonqualifying derivatives are recorded as a component of nonoperating investment gains, net. (v) Self-Insurance Under the System’s self-insurance programs (professional/general liability, workers’ compensation, and employee health benefits), claims are reflected as based upon actuarial estimation, including both reported and incurred but not reported claims, taking into consideration the severity of incidents and the expected timing of claim payments. BSHSI shares certain insurance risks it has underwritten through the use of reinsurance contracts. Amounts that can be claimed from BSHSI’s reinsurers are valued by an independent actuary and are included in other assets. Should BSHSI’s reinsurers be unable to reimburse BSHSI for recoverable claims, BSHSI would still be liable to pay the claims; however, BSHSI contracts with various highly rated insurance carriers to mitigate this risk. 16 (Continued) BON SECOURS HEALTH SYSTEM, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements August 31, 2017 and 2016 (In thousands) (w) Accounting Pronouncements (i) Recently Adopted In May 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2015-07, Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent), which removes the requirement to categorize within the fair value hierarchy all investments whose fair values are measured at net asset value (NAV) under the practical expedient and also removes the requirement to make certain disclosures for these investments from the FASB’s fair value measurement guidance. This change has been applied retrospectively to August 31, 2016, with a disclosure only impact (notes 5 and 9.) In March 2017, the FASB issued ASU No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This guidance amends ASC Topic 715, Compensation – Retirement Benefits, to require employers that present a measure of operating income in their statements of operations to include only the service cost component of net periodic pension cost and net periodic postretirement benefit cost in operating expenses (together with other employee compensation costs). The other components of net benefit cost, including amortization of prior service cost/credit and settlement and curtailment effects, are to be included in nonoperating expenses. Employers are required to include all other components of net benefit cost in a separate line item(s). The line item(s) in which the components of net benefit cost other than the service cost are included need to be identified as such on the income statement or in the disclosures. The standard also stipulates that only the service cost component of net benefit cost is eligible for capitalization. This guidance is effective for the System as of September 1, 2019, with early adoption permitted. Early adoption was elected and the impact of the early adoption is presented in note 9. (ii) Recently Issued In May 2014, FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). This guidance establishes principles for reporting useful information to users of financial statements about the nature, amount, timing, and uncertainty of revenue and cash flows arising from the entity’s contracts with customers. Particularly, the standard requires that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The FASB has since updated the new revenue standard by issuing clarifying implementation guidance, but the core principle of the new standard has not changed. ASU No. 2014-09 is effective for fiscal year 2019. The System expects to record a decrease in net patient service revenue and a corresponding decrease in the provision for patient bad debts upon adoption of the standard. In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires lessees to recognize the assets and liabilities arising from all leases on the consolidated balance sheets and to disclose key qualitative and quantitative information about the entity’s leasing arrangements. This guidance is effective for the System as of September 1, 2019, including interim periods within the fiscal year, and a modified retrospective approach is required. Early adoption is permitted. The 17 (Continued) BON SECOURS HEALTH SYSTEM, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements August 31, 2017 and 2016 (In thousands) System is currently assessing the impact the adoption of this standard will have on the consolidated financial statements. In August 2016, the FASB issued ASU No. 2016-14, Presentation of Financial Statements for Not-for-Profit Entities, to improve the current net asset classification requirements and information presented in financial statements and notes regarding a not-for-profit entity’s liquidity, financial performance, and cash flows. This update requires not-for-profit entities to present two classes of net assets (net assets with donor restrictions and net assets without donor restrictions), rather than the three classes of net assets currently required, and other qualitative information regarding the entity’s liquidity, financial performance and cash flows. The amendments in this update are effective for the System as of September 1, 2018 and for interim periods within the fiscal years beginning September 1, 2019. The System is in the process of assessing the impact the adoption of this standard will have on the consolidated financial statements. (x) Management’s Assessment and Plans During the year ended August 31, 2017, the System adopted ASU No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. This guidance requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or available to be issued, when applicable). Management determined that there were no conditions or events that raise substantial doubt about the System’s ability to continue as a going concern and the System will continue to meet its obligations through November 3, 2018. Property, Plant, and Equipment, Net Property, plant, and equipment, net consist of the following at August 31, 2017 and 2016: 2017 Land Land improvements Buildings Fixed equipment Major movable equipment Leasehold improvements Construction in progress $ Less accumulated depreciation $ 2016 87,119 38,660 973,453 85,465 1,410,166 123,191 41,964 85,393 38,774 967,839 86,603 1,348,157 120,213 41,100 2,760,018 2,688,079 1,780,961 1,674,884 979,057 1,013,195 Included in construction in progress at August 31, 2017 and 2016 are costs mainly associated with new facility construction, and other facility renovations and expansion. The System anticipates expending an 18 (Continued) BON SECOURS HEALTH SYSTEM, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements August 31, 2017 and 2016 (In thousands) additional $144,337 in future periods to complete strategic capital projects. Depreciation and amortization expense for the System was $138,340 and $139,352 for the years ended August 31, 2017 and 2016, respectively. Assets Limited or Restricted as to Use The composition of assets limited or restricted as to use consists of the following at August 31, 2017 and 2016: 2017 Board-designated funds: Cash and cash equivalents Equity mutual funds Equity commingled funds Common and preferred stocks Fixed income mutual funds Fixed income commingled funds U.S. government and agency securities Corporate obligations Alternative investments Land and other investments, at cost $ Donor-restricted funds: Cash and cash equivalents Equity mutual funds Equity commingled funds Common and preferred stocks Fixed income mutual funds Fixed income commingled funds U.S. government and agency securities Corporate obligations Alternative investments 19 2016 78,198 79,442 60,227 303,673 95,238 309,821 12,678 17,388 326,186 9,208 101,469 67,051 57,319 291,464 110,176 199,762 12,891 16,225 311,922 62 1,292,059 1,168,341 10,359 4,802 695 5,374 1,757 3,574 5,266 884 3,763 19,185 4,271 674 5,018 2,196 2,348 699 982 3,666 36,474 39,039 (Continued) BON SECOURS HEALTH SYSTEM, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements August 31, 2017 and 2016 (In thousands) 2017 Funds held by indenture trustees: Cash and cash equivalents Government and agency bonds Corporate obligations $ Self-insurance funds: Cash and cash equivalents Equity commingled funds Common and preferred stocks Fixed income commingled funds Alternative investments Assets limited or restricted as to use Available for current liabilities 13,101 5,940 1,181 11,846 6,097 2,307 20,222 20,250 12,193 23,453 8,852 40,101 9,689 6,523 22,129 8,524 44,558 9,022 94,288 90,756 1,443,043 1,318,386 (66,984) Long-term assets limited or restricted as to use $ 2016 1,376,059 (91,030) 1,227,356 The portion of the System’s assets limited or restricted as to use available for current liabilities consists of the following at August 31, 2017 and 2016: 2017 Self-insurance programs Foundation programs Board-designated 20 2016 $ 45,414 10,118 11,452 63,855 13,803 13,372 $ 66,984 91,030 (Continued) BON SECOURS HEALTH SYSTEM, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements August 31, 2017 and 2016 (In thousands) The System’s consolidated total return on assets limited or restricted as to use consists of the following for the years ended August 31, 2017 and 2016: 2017 Dividends and interest Net realized gains on securities Net change in unrealized gains on securities $ 11,719 29,411 65,722 8,492 8,488 22,405 106,852 39,385 7,427 Change in fair value of derivative instruments, net of payments $ 2016 114,279 (21,037) 18,348 Total return on assets limited or restricted as to use is classified in the accompanying consolidated financial statements as follows for the years ended August 31, 2017 and 2016: 2017 Nonoperating investment gains, net Investment income, net on self insurance and trustee-held funds recorded as other revenue Investment income and net change in unrealized gains on securities in restricted net assets Net change in unrealized gains on other-than-trading securities $ Total return on assets limited or restricted as to use $ 2016 101,701 12,668 10,401 5,002 1,687 490 316 362 114,279 18,348 The System’s ability to generate investment income is dependent in large measure on market conditions. The market value of the System’s investment portfolio, as well as the System’s investment income, have fluctuated significantly in the past and are likely to continue to fluctuate in the future. The System’s investment portfolio assets are designated as trading securities as discussed in ASC Topic 320, Investments – Debt and Equity Securities. The System’s entire portfolio is actively managed by third-party investment managers. Trading generally reflects active and frequent buying and selling, and trading securities are generally used with the objective of generating profits on short-term differences in price. As required by U.S. GAAP, realized and unrealized gains and losses on an investment portfolio designated as a trading portfolio are accounted for as nonoperating investment income and are included in excess of continuing revenues over expenses. Because of this designation as a trading portfolio, management anticipates fluctuations in excess of revenues over expenses. At August 31, 2017 and 2016, the System had invested $339,638 and $324,610, or 23.5% and 24.6%, respectively, of the portfolio in alternative investments, which are allocated between hedge funds of funds, real estate investment funds and long/short equity funds. 21 (Continued) BON SECOURS HEALTH SYSTEM, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements August 31, 2017 and 2016 (In thousands) The hedge funds include two multi-strategy and two dedicated equity long/short hedge funds of funds. The investment objective of the multi-strategy funds is to achieve positive absolute returns with low volatility, achieved through investments with multiple underlying managers who are investing across various strategies. Strategies used within the multi-strategy hedge funds include, but are not limited to: Equity Long/Short: Investment companies that maintain long and short positions in publicly traded equities in order to capture opportunities driven by the perception of securities or industries being over-or undervalued. Credit/Distressed: Investment companies that focus mainly on opportunities in corporate fixed income securities that are in financial distress, or perceived distress, or are going through a restructuring or reorganization. Event Driven: Investment companies that focus on identifying securities that would benefit from the occurrence of a major corporate event. Global Macro: Investment companies that employ broad mandates to invest globally across all asset classes, including interest rates, currencies, commodities and equities, in order to benefit from market movements within various countries. Relative Value: Investment companies that seek to identify valuation discrepancies between related securities, utilizing fundamental and quantitative techniques to establish equity, fixed income and derivative positions. The objective of the dedicated long/short equity fund strategy is to achieve long-term equity market-like returns at a lower level of risk, achieved through investments solely in equity long/short managers. Fair Value of Financial Instruments The System determines the fair values of its financial instruments based on the fair value hierarchy established in ASC Topic 820, Fair Value Measurement, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value: Level 1: Quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include cash and cash equivalents, debt and equity securities and mutual funds that are traded in an active exchange market, as well as government and agency securities. Level 2: Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include debt securities with quoted market prices that are traded less frequently than exchange-traded instruments. This category generally includes certain equity mutual funds, corporate-debt securities, equity commingled funds, fixed income commingled funds, and interest rate swaps. 22 (Continued) BON SECOURS HEALTH SYSTEM, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements August 31, 2017 and 2016 (In thousands) Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. This category generally includes certain private debt and equity instruments. The following discussion describes the valuation methodologies used for financial assets and liabilities measured at fair value. The techniques utilized in estimating the fair values are affected by the assumptions used, including discount rates and estimates of the amount and timing of future cash flows. Care should be exercised in deriving conclusions about the System’s business, its value or consolidated financial position based on the fair value information of financial assets presented below. Fair value estimates are made at a specific point in time, based on available market information and judgments about the financial asset, including estimates of timing, amount of expected future cash flows, and the credit standing of the issuer. In some cases, the fair value estimates cannot be substantiated by comparison to independent markets. In addition, the disclosed fair value may not be realized in the immediate settlement of the financial asset. In addition, the disclosed fair values do not reflect any premium or discount that could result from offering for sale at one time an entire holding of a particular financial asset. Potential taxes and other expenses that would be incurred in an actual sale or settlement are not reflected in amounts disclosed. Fair values for the System’s fixed maturity securities are based on prices provided by its investment managers and its custodian bank. Both the investment managers and the custodian bank use a variety of pricing sources to determine market valuations. Each designate specific pricing services or indexes for each sector of the market based upon the provider’s expertise. The System’s fixed maturity securities portfolio is highly liquid, which allows for a high percentage of the portfolio to be priced through pricing services. Fair values of equity securities have been determined by the System from observable market quotations, when available. Private placement securities and other equity securities where a public quotation is not available are valued by using broker quotes. Fair values for the System’s interest rate swaps have been determined using pricing models developed based on the LIBOR swap rate and other observable market data. The values were determined after considering the potential impact of collateralization and netting agreements, adjusted to reflect nonperformance risk of both the counterparty and the System. BSHSI elected to record equity and fixed income commingled funds using the fair value option contained within FASB ASC Topic 825, Financial Instruments, in prior years and continues to account for these investments at fair value. 23 (Continued) BON SECOURS HEALTH SYSTEM, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements August 31, 2017 and 2016 (In thousands) The following table presents the System’s fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of August 31, 2017: Fair value measurements at August 31, 2017 using Level 1 Level 2 Level 3 Fair value Assets limited or restricted as to use: Cash and cash equivalents $ Equity mutual funds Equity commingled funds Common and preferred stocks Fixed income mutual funds Fixed income commingled funds Government and agency bonds Corporate obligations Assets limited or restricted as to use Liabilities: Interest rate swaps Total liabilities 113,851 84,244 84,375 317,899 96,995 353,496 23,884 19,453 113,851 84,244 — 317,899 96,995 — 20,654 1,181 — — 84,375 — — 353,496 3,230 18,272 — — — — — — — — $ 1,094,197 634,824 459,373 — $ 46,843 — 46,843 — $ 46,843 — 46,843 — The following table presents the System’s fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of August 31, 2016: Fair value measurements at August 31, 2016 using Level 1 Level 2 Level 3 Fair value Assets limited or restricted as to use: Cash and cash equivalents $ Equity mutual funds Equity commingled funds Common and preferred stocks Fixed income mutual funds Fixed income commingled funds Government and agency bonds Corporate obligations Assets limited or restricted as to use Liabilities: Interest rate swaps Total liabilities 139,023 71,322 80,122 305,006 112,372 246,668 19,687 19,514 139,023 71,322 — 305,006 112,372 — 17,032 2,308 — — 80,122 — — 246,668 2,655 17,206 — — — — — — — — $ 993,714 647,063 346,651 — $ 64,413 — 64,413 — $ 64,413 — 64,413 — 24 (Continued) BON SECOURS HEALTH SYSTEM, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements August 31, 2017 and 2016 (In thousands) As noted in note 2(w), the Plan adopted ASU 2015-07 for the year ended August 31, 2017. There were no changes to the fair value hierarchy table as a result of this adoption. During the year ended August 31, 2017, the System also sold $5,572 of alternative investments, which are recorded under the equity method as described in note 2(e) and reinvested the proceeds in Level 1, common and preferred stocks, equity mutual funds, and Level 2, fixed income comingled funds in accordance with the System’s investment strategy. During the year ended August 31, 2017, the System sold $99,500 of Level 1, fixed income mutual funds and reinvested the proceeds in Level 2, fixed income comingled funds in accordance with the System’s investment policy. There were no other significant transfers of Level 1, 2 or 3 during the year ended August 31, 2017. During the year ended August 31, 2016, the System sold $60,151 of alternative investments, which are recorded under the equity method as described in note 2(e) and reinvested the proceeds in Level 1, common and preferred stocks, equity mutual funds, and Level 2, fixed income comingled funds in accordance with the System’s investment strategy. There were no other significant transfers of Level 1, 2 or 3 during the year ended August 31, 2016. The System had no activity in Level 3 assets during the years ended August 31, 2017 and 2016. The System has incorporated an Investment Policy Statement (IPS) into its investment program. The IPS, which has been formally adopted by the Board of Directors, contains numerous standards designed to ensure adequate diversification by asset category and geography. The IPS also limits investments by manager and position size, and limits fixed-income positions based on credit ratings, which serves to further mitigate the risks associated with the investment program. At August 31, 2017 and 2016, management believes that its investment positions are in accordance with the guidelines in the IPS. Long-Term Debt Long-term debt consists of the following at August 31, 2017 and 2016: 2017 Master Trust Notes and Hospital Revenue Bonds: Series 1992B and 1992C Virginia fixed rate term bonds payable in installments through August 2027; interest at 5.93% $ Series 1995 Memorial Regional Medical Center fixed rate serial and term bonds payable in installments through August 2018; interest at 6.38% to 6.50% Series 1996 Virginia fixed rate serial and term bonds payable in installments through August 2020; interest at 5.40% to 6.25% Series 2002B Florida variable rate demand bond payable in installments beginning November 2017 through November 2026 subject to a seven day put provision; interest at 0.84% and 0.64% at August 31, 2017 and 2016, respectively, set at prevailing rates 25 2016 54,043 54,043 4,390 8,520 5,020 6,500 4,175 4,250 (Continued) BON SECOURS HEALTH SYSTEM, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements August 31, 2017 and 2016 (In thousands) 2017 Series 2002B Kentucky variable rate demand bond payable in installments through November 2026 subject to a seven day put provision; interest at 0.84% and 0.64% at August 31, 2017 and 2016, respectively, set at prevailing rates $ Series 2008B-C Virginia fixed rate serial and term bond payable in installments through November 2042; interest at 4.50% to 5.25% at August 31, 2017 and 2016. Series 2008A South Carolina variable rate demand bonds subject to a seven day put provision payable in installments beginning November 2032 through November 2042; interest at 0.79% and 0.65% at August 31, 2017 and 2016, respectively, set at prevailing rates Series 2008D Virginia variable rate demand bonds subject to a seven day put provision payable in installments through November 2025; interest at 0.76% to 0.80% at August 31, 2017 and 0.60% to 0.63% at August 31, 2016, set at prevailing rates Series 2008D South Carolina variable rate demand bonds subject to a seven day put provision payable in installments through November 2025; interest at 0.80% and 0.63% at August 31, 2017 and 2016, respectively, set at prevailing rates Series 2013 Kentucky fixed rate serial and term bonds payable in installments beginning November 2015 through November 2026; interest at 4.0% to 5.0% Series 2013 South Carolina fixed rate serial bonds payable in installments beginning November 2015 through November 2029; interest at 3.75% to 5.0% Series 2013 Virginia fixed rate serial bonds payable in installments beginning November 2016 through November 2030; interest at 4.0% to 5.0% Series 2013B variable rate direct placement bonds payable in installments through November 2043; interest at 1.87% to 2.00% at August 31, 2017 and 1.37% to 1.51% at August 31, 2016, set at prevailing rates Series 2013 New York variable rate term loan payable in installments beginning November 2016 through November 2020; interest at 1.98% at August 31, 2017 and 1.34% at August 31, 2016 26 2016 9,650 10,450 173,355 173,355 69,925 69,925 94,145 98,605 17,345 18,980 35,575 35,575 180,170 180,170 69,245 78,245 55,415 56,960 16,400 20,200 (Continued) BON SECOURS HEALTH SYSTEM, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements August 31, 2017 and 2016 (In thousands) 2017 Series 2014 Virginia variable rate term loan payable in installments beginning November 2016 through November 2025; interest at 1.98% at August 31, 2017 and at 1.48% at August 31, 2016, set at prevailing rates $ 2016 50,860 55,630 Total Master Trust Notes and Hospital Revenue Bonds 839,713 871,408 Other debt secured by certain property, plant, and equipment: 3.27% mortgage note payable due April 2050 Capital leases obligations (interest at 5.00% to 6.00%) Other debt (interest at 3.00% to 6.00%) 21,416 2,596 16,694 21,777 4,947 19,656 40,706 46,380 880,419 917,788 Total other debt Total debt Add bond premium, net of accumulated amortization Less deferred financing costs, net of accumulated amortization 17,535 (8,106) Less current portion Long-term debt, less current portion $ 19,364 (8,829) 889,848 928,323 (59,656) (39,809) 830,192 888,514 Master Notes have been issued by BSHSI on behalf of itself and certain affiliates who collectively constitute the Members of an Obligated Group created by a Second Amended and Restated Master Trust Indenture dated as of March 12, 2014, as restated, supplemented, and amended. Master Notes secure payment of principal and interest on various series of serial and term indebtedness issued for the benefit of the Members of the Obligated Group by various governmental issuers as well as the performance of certain agreements entered into with credit enhancers, liquidity providers, swap counterparties and certain banks, which have purchased indebtedness issued for the benefit of the Obligated Group. Each Master Note is a joint and several obligation of each Member of the Obligated Group and is secured by a pledge of such Member’s unrestricted receivables. Approximately, 51.5% and 52.7% of the indebtedness secured by Master Notes was supported, as to payments of principal and interest, by bond insurance policies or letters of credit as of August 31, 2017 and 2016, respectively. The Master Trust Indenture and certain other agreements require the Obligated Group to maintain minimum financial ratios, place restrictions on the disposition of assets, the incurrence of additional indebtedness and changes in members of the Obligated Group, and provide for the maintenance of certain trustee-held funds, among other things. 27 (Continued) BON SECOURS HEALTH SYSTEM, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements August 31, 2017 and 2016 (In thousands) The Series 2002 Bonds, the Series 2008A Bonds and the Series 2008D Bonds are subject to optional tender by the bondholders, and in certain events, mandatory tender. Tendered bonds, which are not remarketed will be purchased by a bank pursuant to a related letter of credit. No principal payments are due to the bank with respect to such purchased Bonds until at least 367 days after the purchase date. The Obligated Group has delivered letters of credit as additional security for the Series 2002 and 2008A Bonds. Pursuant to each letter of credit, the bank covenants to pay principal of and interest on the related series of Bonds. An existing bond insurance policy with respect to each series of such bonds will only pay principal of and interest on the related series of Bonds if the bank fails to pay pursuant to the letter of credit. The bank can, under certain circumstances, cause the cancellation of each bond insurance policy. The Obligated Group must repay the principal amount of the purchased Series 2002 Bonds and Series 2008A Bonds beginning on the 367th day after the purchase date in ten substantially equal semiannual installments (or if the bond insurance policy has been canceled, in six substantially equal semiannual installments). The Obligated Group must repay the principal amount of the purchased Series 2008D Bonds (x) pursuant to one of the letter of credit agreements, in eight substantially equal semiannual installments commencing on the first business day following the 367th day after the purchase date and (y) pursuant to two of the letter of credit agreements, in eight substantially equal quarterly installments commencing on the first March 31, June 30, September 30 or December 31 occurring at least eighteen months following the date the bank purchases the related bonds. BSHSI issued separate Master Notes to secure its obligations to reimburse the various letter of credit banks. The letters of credit which secure the Series 2002 Bonds, the Series 2008A Bonds and the Series 2008D Bonds have stated expiration dates, which range from November 2017 to November 2019. BSHSI has historically been able to request and receive extensions of the stated expiration dates. The Series 2013B Bonds (as hereinafter defined) were purchased by a financial institution for a stated term less than the maturity of such bonds. The two series of Series 2013B Bonds have final maturities of November 1, 2025 and 2042, respectively, and were purchased by a financial institution (referred to as the Series 2013B Direct Purchase Bank) for an initial term of twelve years. During the initial term, the Series 2013B Bonds will bear interest based on a percentage of LIBOR plus an agreed–upon spread. With respect to the series maturing on November 1, 2042, following the expiration of the initial term, BSHSI may determine to seek an extension of the initial term, convert the interest rate mode on such Series 2013B Bonds or otherwise refinance such Series 2013B Bonds. Payment of the Series 2013B Bonds is secured by Master Notes issued under the Master Indenture. In connection with the issuance of the Series 2013B Bonds, the Obligated Group entered into separate covenant agreements with the Series 2013B Direct Purchase Bank, which contain various covenants that can be enforced or waived solely by the Series 2013B Direct Purchase Bank. Those covenants are similar to covenants BSHSI has provided to various other banks and insurance companies, which have provided credit enhancement with respect to BSHSI’s other outstanding indebtedness. The obligations of the Obligated Group under the covenant agreement are secured by a Master Note. 28 (Continued) BON SECOURS HEALTH SYSTEM, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements August 31, 2017 and 2016 (In thousands) On October 31, 2014, BSHSI borrowed from the Economic Development Authority of the City of Norfolk the proceeds of a series of revenue bonds (referred to as the Series 2014 Bonds) issued by the Norfolk EDA in the principal amount of $58,260. The Series 2014 Bonds bear interest at a variable rate equal to the sum of a percentage of LIBOR plus an agreed-upon spread. The proceeds of the Series 2014 Bonds were used to refinance, in a current refunding transaction, the Series 2011 Bonds. BSHSI contributed equity in the amount of $4,700 to pay the November 15, 2014 principal payment as well as accrued interest on the Series 2011 Bonds. In connection with the issuance of the Series 2014 Bonds, BSHSI, as Credit Group Representative, entered into a Continuing Covenant Agreement with a financial institution (referred to as the Series 2014 Direct Purchase Bank), which purchased the Series 2014 Bonds. The Series 2014 Direct Purchase Bank has agreed to hold the Series 2014 Bonds until the maturity date, November 1, 2025, subject to the right of BSHSI to redeem the Series 2014 Bonds or to convert the Series 2014 Bonds to another interest rate mode. The covenants contained in the Continuing Covenant Agreement are similar to covenants BSHSI has provided to various financial institutions and insurance companies, which have provided credit enhancement with respect to BSHSI’s other outstanding indebtedness or have directly purchased revenue bonds issued for the benefit of the Obligated Group. The obligation of BSHSI to repay the Series 2014 Bonds and obligations of the Obligated Group under the Continuing Covenant Agreement are secured by separate Obligations issued under the Master Trust Indenture. Scheduled principal repayments on long-term debt are as follows: 2018 2019 2020 2021 2022 Thereafter Total $ 59,656 37,139 31,989 40,290 30,438 680,907 $ 880,419 BSHSI maintains a $100,000 revolving credit agreement with a five year term with a commercial bank (the Credit Agreement). Pursuant to the Credit Agreement, BSHSI, as Credit Group Representative, may either request loans or request that the bank issue letters of credit for the benefit of the Obligated Group. The proceeds of any such loan and any such letter of credit are available for general corporate purposes. As of August 31, 2017 or 2016, no loans have been made under the Credit Agreement. The obligations of the Obligated Group under the Credit Agreement are secured by a Master Note. The System has entered into four leases maturing from 2019 to 2028 that are classified as capital leases for building and equipment. In addition, the System consolidates two limited liability corporations that own medical office buildings with notes payable outstanding of $16,597 and $19,309 as of August 31, 2017 and 2016, respectively. Such notes have interest rates of 7.50% and 7.75% and maturity dates in 2020 and 2022, respectively. 29 (Continued) BON SECOURS HEALTH SYSTEM, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements August 31, 2017 and 2016 (In thousands) Total interest expense was $33,099 and $30,871 for the years ended August 31, 2017 and 2016, respectively. Cash paid for interest was $33,828 and $33,188 for the years ended August 31, 2017 and 2016, respectively, and includes capitalized interest for construction projects of $280 and $394, net of investment income, for the years ended August 31, 2017 and 2016, respectively. Presently, BSHSI is implementing the 2017 Plan of Finance and subsequent to August 31, 2017, the Total Master Notes and Hospital Revenue Bonds decreased as the result of the payoff of the Series 2013 New York variable rate term loan and the Series 2002B Florida and Kentucky variable rate demand bonds. Effective November 1, 2017, the System refinanced approximately $250,000 of existing tax exempt debt with approximately $180,000 of taxable bank loans and approximately $70,000 of tax-exempt bank loans. In addition, four basis swaps were terminated, three floating to fixed pay swaps were restricted with existing counterparties and two floating to fixed pay swaps were entered into with new counterparties on October 30, 2017. As a result of the transaction the System recognized approximately $3,000 net gain from the termination of the basis swaps and approximately $6,000 mark to market liability for the restructured and new floating to fixed pay swaps. Interest Rate Risk Management The System uses fixed and variable-rate debt to finance capital needs and develop an appropriate debt structure. Variable-rate debt exposes the System to variability in interest expense due to changes in interest rates. Conversely, fixed-rate debt obligations can be more expensive to the System in times of declining interest rates. The System manages and monitors its cost of capital on a regular basis and from time to time enters into derivative instruments with financial institutions to help manage interest rate risk. The following is a summary of the derivative instruments in place at August 31, 2017: Description Fixed payer Fixed payer Fixed payer Fixed payer Fixed payer Number 1 1 2 2 1 Total fixed payers Fixed basis Variable basis Total derivatives Outstanding notional amount $ 30,280 45,420 89,675 101,150 69,925 7 336,450 1 3 200,000 408,750 11 $ Pay rates Maturity dates 3.448 % 3.491 4.460/3.420 4.485/3.384 3.454 Nov-2025 Nov-2025 2028 2026 Nov-2042 Collateral posted $ — — — — — Mark to market Counterparties Goldman Sachs $ Deutsche Bank Merrill Lynch JP Morgan PNC — SIFMA SIFMA Jan-2029 Nov-2029 945,200 — — $ (2,888) (4,414) (12,482) (13,223) (19,935) Collateral thresholds 15,000 25,000 * 15,000 * (52,942) Citigroup Merrill Lynch 5,875 (1,573) — (48,640) $ Valuation adjustments 20,000 * 75,000 1,797 $ (46,843) * Derivative instrument does not provide for the posting of collateral. 30 (Continued) BON SECOURS HEALTH SYSTEM, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements August 31, 2017 and 2016 (In thousands) The following is a summary of the derivative instruments in place at August 31, 2016: Description Fixed payer Fixed payer Fixed payer Fixed payer Fixed payer Number 1 1 2 2 1 Fixed basis Variable basis Total derivatives Outstanding notional amount $ 33,210 49,815 96,650 105,925 69,925 7 355,525 1 3 200,000 427,500 11 $ Pay rates Maturity dates Collateral posted 3.448 % 3.491 4.460/3.420 4.485/3.384 3.454 Nov-2025 $ Nov-2025 Aug-2026/Nov-2028 Oct-2025/Oct-2026 Nov-2042 — — — 3,786 — Mark to market Counterparties Goldman Sachs $ Deutsche Bank Merrill Lynch JP Morgan PNC 3,786 SIFMA SIFMA Jan-2029 Nov-2029 983,025 — — $ Collateral thresholds (4,215) (6,424) (17,357) (18,289) (27,419) 10,000 20,000 * 15,000 * (73,704) Citigroup Merrill Lynch 8,800 (1,729) 3,786 20,000 * (66,633) $ Valuation adjustments 65,000 2,220 $ (64,413) * Derivative instrument does not provide for the posting of collateral. The unrealized gains of $17,570 and losses of $10,362 for the years ended August 31, 2017 and 2016, respectively, relating to these nonqualifying derivative activities are recorded within nonoperating investment gains, net in the accompanying consolidated statements of operations and changes in unrestricted net assets. The System utilizes a diversified group of swap counterparties and has sought to limit its obligations to post collateral in the agreements governing its derivative instruments. In addition, the System routinely evaluates its derivative portfolio and may decide at any time to terminate certain of the derivative instruments discussed above and/or enter into new derivative instruments. Should the System decide to terminate any of such instruments, it may be required to make termination or breakage payments under the terms of those instruments. Unrestricted Net Assets The System accounts for and presents noncontrolling interests in subsidiaries as a separate component of appropriate class of consolidated net assets. The income attributable to noncontrolling interests is included within the operating income of the consolidated statements of operations and changes in net assets. The following table presents a reconciliation of the changes in consolidated unrestricted net assets attributable to the System’s controlling interest and noncontrolling interest, including amounts such as the performance 31 (Continued) BON SECOURS HEALTH SYSTEM, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements August 31, 2017 and 2016 (In thousands) indicator, change in pension and other postretirement adjustments and other changes in unrestricted net assets as of and for the years ended August 31, 2017 and 2016: Bon Secours Health System, Inc. Balance as of August 31, 2015 $ Excess of revenues over expenses Grants for capital Net change in unrealized gains on other than trading securities Net assets released from restrictions used for purchase of property, plant, and equipment Net change in equity of joint ventures Distributions to noncontrolling interest owners Pension and other postretirement adjustments Transfers to affiliates and other changes, net (Decrease) increase in unrestricted net assets Noncontrolling interests Total unrestricted net assets 1,016,540 259,591 1,276,131 74,925 174 12,781 — 87,706 174 362 — 362 1,942 1,194 — (145,840) (4,369) — — (7,666) — — 1,942 1,194 (7,666) (145,840) (4,369) (71,612) 5,115 (66,497) Balance as of August 31, 2016 944,928 264,706 1,209,634 Excess of revenues over expenses Grants for capital Net change in unrealized gains on other than trading securities Net assets released from restrictions used for purchase of property, plant, and equipment Net change in equity of joint ventures Distributions to noncontrolling interest owners Pension and other postretirement adjustments Transfers to affiliates and other changes, net 152,685 20 36,003 — 188,688 20 490 — 490 8,531 (1,219) — 82,866 (6,148) Increase in unrestricted net assets Balance as of August 31, 2017 $ 32 — — (5,918) — — 8,531 (1,219) (5,918) 82,866 (6,148) 237,225 30,085 267,310 1,182,153 294,791 1,476,944 (Continued) BON SECOURS HEALTH SYSTEM, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements August 31, 2017 and 2016 (In thousands) Pension Plans The System’s employees are covered either by one of the System’s noncontributory defined benefit pension plans, or are covered by defined contribution retirement plans. The System’s noncontributory defined benefit pension plans provide benefits based upon age at retirement, years of credited services, and average earnings. Seven of the System’s eight defined benefit plans are deemed church plans under the Internal Revenue Code. For defined benefit pension plans deemed to be church plans under the Internal Revenue Code, the System’s funding policy is to make contributions to fund the annual service cost of the plans plus a seven year amortization of the unfunded Accumulated Benefit Obligation. The defined benefit pension plan that is subject to the Employee Retirement Income Security Act of 1974 (ERISA) guidelines is funded in accordance with those guidelines. The service cost and projected benefit obligation is based upon the projected unit credit actuarial method. The investment policy and objectives for defined benefit plan assets are established by BSHSI and are based on a long-term perspective. An investment advisory firm engaged by BSHSI reviews asset performance and allocation on a periodic basis throughout the fiscal year. The percentage allocation to each asset class may vary depending upon market conditions and is adjusted when it falls outside the established ranges set for each asset class. The following are deferred pension costs, which have not yet been recognized in periodic pension expense but are accrued in unrestricted net assets, as of August 31, 2017 and 2016. Unrecognized actuarial losses represent unexpected changes in the projected benefit obligation and plan assets over time, primarily due to changes in assumed discount rates and investment experience. Unrecognized prior service cost is the impact of changes in plan benefits applied retrospectively to employee service previously rendered. Deferred pension costs are amortized into annual pension expense over the expected average remaining assumed service period for active employees. Net prior service cost Net actuarial losses Total Amounts in unrestricted net assets to be recognized in fiscal year 2018 Amounts recognized in unrestricted net assets as of August 31, 2017 $ (19) 22,616 (19) 348,237 69 431,015 $ 22,597 348,218 431,084 33 Amounts recognized in unrestricted net assets as of August 31, 2016 (Continued) BON SECOURS HEALTH SYSTEM, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements August 31, 2017 and 2016 (In thousands) The components of the funded status, net periodic benefit costs, and actuarial assumptions used in accounting for defined benefit pension plans as of and for the years ended August 31, 2017 and 2016 are as follows: 2017 Change in projected benefit obligation: Net projected benefit obligation at beginning of year Service cost Interest cost Actuarial loss Settlement/curtailments Gross benefits paid $ Projected benefit obligation at end of year Change in plan assets: Fair value of plan assets at beginning of year Actual return on plan assets Employer contributions Gross benefits paid Fair value of plan assets at end of year $ Net amount recognized at end of year 2016 1,229,125 19,656 37,250 (35,839) (667) (37,840) 1,037,121 19,106 39,188 170,116 — (36,406) 1,211,685 1,229,125 722,067 72,497 60,014 (37,840) 647,027 60,418 51,028 (36,406) 816,738 722,067 (394,947) (507,058) 2017 Accumulated benefit obligation at end of year $ Amounts recognized in the consolidated balance sheets consist of: Accrued benefit costs – long term $ (394,947) (507,058) Components of net periodic benefit cost: Operating: Service cost $ 19,656 19,106 $ 37,250 (55,351) 39,188 (50,729) 29,126 (18) 14,598 (16) 11,007 3,041 Nonoperating: Interest cost Expected return on plan assets Amortization of: Actuarial loss Prior service cost Total net nonoperating periodic benefit costs 34 $ 1,164,721 2016 1,178,040 (Continued) BON SECOURS HEALTH SYSTEM, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements August 31, 2017 and 2016 (In thousands) 2017 2016 Weighted average assumptions used to determine benefit obligations at August 31: Discount rate Rate of compensation increase Mortality table Generational scale 3.77 % 3.00 RP-2014 BB-2D 3.55 % 3.00 RP-2014 BB-2D Weighted average assumptions used to determine net periodic benefit cost at August 31: Discount rate Expected return on plan assets Rate of compensation increase Mortality table Generational scale 3.55 % 7.55 3.00 RP-2014 BB-2D 4.55 % 7.80 3.00 RP-2014 BB-2D As described in note 2(w), the Plan adopted ASU 2017-07 as of August 31, 2017. As a result of the adoption of this ASU, the components of net benefit cost other than the service cost of $3,041 were recorded in other nonoperating activities, net in the consolidated statements of operations and changes in net assets for the year ended August 31, 2016. Service cost is included as a component of fringe benefits recorded as salaries, wages, and benefits in the accompanying consolidated statements of operations and changes in unrestricted net assets. The expected long-term rate of return of the pension plan assets used for determining pension expense was 7.55% and 7.80% for the years ended August 31, 2017 and August 31, 2016, respectively. The rate was determined based upon a review of the System’s long-term rate of return experienced in the capital markets for the target asset allocation employed to invest pension assets. The System’s pension plan asset allocation is planned to include approximately 65% equities, 30% fixed income/cash, and 5% alternative investments. Equity investments are balanced between type and size of investment and investment managers are monitored against benchmarks. As of August 31, 2017 and 2016, the pension plan assets were allocated by asset category as follows: 2017 Asset category: Equity mutual and commingled funds and securities Fixed income mutual funds and securities Alternative investments Cash Total 35 2016 63 % 28 4 5 62 % 26 5 7 100 % 100 % (Continued) BON SECOURS HEALTH SYSTEM, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements August 31, 2017 and 2016 (In thousands) The following table presents the System’s fair value hierarchy for the pension plan assets measured at fair value on a recurring basis as of August 31, 2017: Fair value measurements Fair Cash and cash equivalents Equity mutual funds Equity commingled funds Common and preferred stocks Fixed income commingled funds Government and agency bonds Corporate obligations Alternative investments Total plan assets 1 Reported at Level 3 1 value Level 1 Level 2 NAV $ 44,208 11,680 121,754 381,995 108,182 5,283 112,033 31,603 44,208 11,680 — 381,184 — 2,768 — — — — 121,754 811 108,182 2,515 112,033 — — — — — — — — — — — — — — — — 31,603 $ 816,738 439,840 345,295 — 31,603 Fund investments reported at NAV as practical expedient estimate (note 2(w)) The following table presents the System’s fair value hierarchy for the pension plan assets measured at fair value on a recurring basis as of August 31, 2016: Fair value measurements Fair Cash and cash equivalents Equity mutual funds Equity commingled funds Common and preferred stocks Fixed income commingled funds Government and agency bonds Corporate obligations Alternative investments Total plan assets 1 Reported at Level 3 NAV1 value Level 1 Level 2 $ 48,197 9,023 78,725 360,279 75,492 11,362 101,162 37,827 48,197 9,023 — 358,693 — 2,200 — — — — 78,725 1,586 75,492 9,162 101,162 — — — — — — — — — — — — — — — — 37,827 $ 722,067 418,113 266,127 — 37,827 Fund investments reported at NAV as practical expedient estimate (note 2(w)) As noted in note 2(w), the Plan adopted ASU 2015-07 for the year ended August 31, 2017. As a result of this adoption, alternative investments in the amount of $37,827 were reclassified from Level 3 in the fair value hierarchy to investments reported at NAV at August 31, 2016. During the year ended August 31, 2017, the System sold $8,277 of alternative investments reported at NAV and reinvested the proceeds in Level 2 fixed income commingled funds in accordance with the System’s investment strategy. The System also sold $4,921 of Level 1 common and preferred stock and purchased Level 2 corporate bonds. During the year ended August 31, 2016, the System sold $20,484 of 36 (Continued) BON SECOURS HEALTH SYSTEM, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements August 31, 2017 and 2016 (In thousands) alternative investments reported at NAV and reinvested the proceeds in Level 1 common and preferred stocks and Level 2 fixed income commingled funds in accordance with the System’s investment strategy. There were no other transfers of Level 1 or Level 2 during the years ended August 31, 2017 or 2016. The following summarizes the redemption and commitment terms for the hedge fund-of-funds vehicles held in the pension plan assets as of August 31, 2017: Fund 1 Fund 2 Quarterly 70 days Quarterly 95 days Audit reserve: Percentage held back for audit reserve 10 % 10 % Gates: Potential gate holdback Potential gate release timeframe Unfunded commitments —% n/a — —% n/a — Redemption timing: Redemption frequency Required notice $ The hedge funds include two multi-strategy hedge funds-of-funds. The investment objective of the multi-strategy funds is to achieve positive absolute returns with low volatility, achieved through investments with multiple underlying managers who are investing across various strategies. Strategies used within these hedge funds include, but are not limited to: Equity Long/Short: Investment companies that maintain long and short positions in publicly traded equities in order to capture opportunities driven by the perception of securities or industries being over-or undervalued. Credit/Distressed: Investment companies that focus mainly on opportunities in corporate fixed income securities that are in financial distress, or perceived distress, or are going through a restructuring or reorganization. Event Driven: Investment companies that focus on identifying securities that would benefit from the occurrence of a major corporate event. Global Macro: Investment companies that employ broad mandates to invest globally across all asset classes, including interest rates, currencies, commodities and equities, in order to benefit from market movements within various countries. Relative Value: Investment companies that seek to identify valuation discrepancies between related securities, utilizing fundamental and quantitative techniques to establish equity, fixed income and derivative positions. 37 (Continued) BON SECOURS HEALTH SYSTEM, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements August 31, 2017 and 2016 (In thousands) The System expects to contribute approximately $60,000 to its pension plans during the year ending August 31, 2018. Future fiscal year pension benefit payments, which reflect expected future service, as appropriate, are expected as follows: 2018 2019 2020 2021 2022 2023–2027 $ 50,953 53,165 52,617 53,840 56,576 323,577 The System also has various contributory, tax-deferred annuity, and savings plans with participation available to certain employees. The System matches employee contributions up to 6% of compensation under certain defined contribution plans. The System contributed $41,490 and $38,387 towards these plans during the years ended August 31, 2017 and 2016, respectively. Total expense was $39,841 and $37,862 in 2017 and 2016, respectively. Multi-Employer Plans The system contributes to two multi-employer defined benefit pension plans. These plans include the Archdiocese Pension Plan for the Archdiocese of New York (Archdiocesan Plan) and the 1199 Union Pension Plan. (a) Archdiocesan Plan The Archdiocesan Pension Plan (APP) is a noncontributory, multi-employer defined benefit plan, which covers substantially all of the System’s full-time nonunion employees in the state of New York. The Employer Identification Number is 13-3089351. The APP is a Church plan approved by the Internal Revenue Service and is exempt from the provisions of the ERISA. Contributions to the APP were based on actuarial valuations. The contributions of all participating employers are pooled. The present value of the vested benefits has not been specifically calculated; however, the APP consultant indicated that as of January 1, 2016, the APP’s market value of assets was $1,175,257 and the present value of accrued plan benefits was $1,485,191 resulting in a funded status of 79.1%. Contributions to the APP were $354 and $498 for the years ended August 31, 2017 and 2016, respectively. As of the closing of the sale of Schervier Nursing Care Center, BSNYHS discontinued its participation in the APP, and therefore, employees of BSNYHS and its subsidiaries were no longer covered by the APP effective as of the closing date of the sale. This exit from participation in the APP triggered a withdrawal liability of approximately $6,300, which became due and was paid as of the closing (note 1(b)). Net Patient Service Revenue BSHSI has agreements with third-party payors that provide for payments to the System at amounts different from its established rates. Payment arrangements include prospectively determined rates per 38 (Continued) BON SECOURS HEALTH SYSTEM, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements August 31, 2017 and 2016 (In thousands) discharge, reimbursed costs, discounted charges, and per diem payments. Net patient service revenue is reported at estimated net realizable amounts from patients, third-party payors, and others for services rendered, including retroactive adjustments under reimbursement agreements with third-party payors. Retroactive reimbursement adjustments are estimated in the period in which the related services are rendered and adjusted in future periods as final settlements are determined. The System estimates the allowance for uncollectible accounts based on the aging of the accounts receivable, historical collection experience, payor mix and other relevant factors. A significant portion of the allowance for uncollectible accounts relates to self-pay patients, as well as co-payments and deductibles owed by patients with insurance. There are various factors that can impact collection trends, such as changes in the economy, which in turn have an impact on unemployment rates and the number of uninsured and underinsured patients. Other factors include the volume of patients through the emergency departments and the increased level of co-payments and deductibles due from patients with insurance. These factors continuously change and can have an impact on collection trends and the estimation process. The activity in the allowance for uncollectible accounts is summarized as follows for the years ended August 31, 2017 and 2016: 2017 2016 Beginning balance Provision for bad debts Write-offs $ 141,852 179,304 (174,955) 131,483 199,503 (189,134) Ending balance $ 146,201 141,852 Reimbursement Programs The Medicare and Medicaid reimbursement programs represent a substantial portion of the System’s revenues. Payment rates for inpatient and outpatient services provided to program beneficiaries are governed by the applicable regulations and implementation provisions thereunder, based generally on prospectively determined rates. The system has certain portions of Medicare payments, which are outside of the PPS and fee for service payment rates and are based on historical costs. These include Allied Health, a Critical Access Hospital, and certain Medicaid capital reimbursements. The Medicare program includes certain value based and pay for performance (PFP) incentives, such as reductions in readmission and specific quality of healthcare measurements. The measurements center on quality and efficiency measurements. The System fully participates in these programs and closely monitors performance criteria. Any significant shift in not meeting these criteria can result in reduced revenues. The Medicare program will be moving to implement more value based and PFP incentives over the foreseeable future. 39 (Continued) BON SECOURS HEALTH SYSTEM, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements August 31, 2017 and 2016 (In thousands) The System facilities receive significant reimbursement from Disproportionate Share and Uncompensated Care Pool distributions. Both of these areas are subject to regulatory review and audit adjustments on a year by year basis. The System has fully participated in the Medicare and Medicaid electronic health record (EHR) incentive program established under the Health Information Technology for Economic and Clinical Health Act (the HITECH Act). While the incentive payments have fully expired the requirements to maintain the EHR continue and are subject to audit review. CMS utilizes Recovery Audit Contractors (RACs) as part of the CMS’s further efforts to assure accurate patient payments. The System participated in a CMS RAC settlement, which adjudicated all claims prior to October 1, 2013. While additional RAC assessments against the System are ongoing, the impact of such assessments is still unknown. The System affiliates may from time to time be subject to other audits by state or federal agencies, including Medicaid programs. The outcome of these audits is uncertain and the impact cannot be reasonably estimated at this time. Section 603 of the Bipartisan Budget Act of 2015 significantly restricted the provider based reimbursements on a future basis. CMS continues to review provider based reimbursements and may reduce or restrict payments in the future. The System has several facilities that qualify for 340B drug purchasing discounts. The qualifying criteria are strict and a facility may lose its 340B status if the qualifying criteria are not maintained. The 340B regulations are continually under review and may be subject to significant revisions in future time periods. Additionally, 340B facilities must comply with stringent requirements in reporting the 340B drug discounts received. Each of these programs can be subjected to audit and recoupment if these requirements are not met. The health care environment continues to have a migration of services from inpatient to the outpatient setting. This can result in decreased revenues depending upon the service affected. Failure to maintain required regulatory approvals and licenses and/or changes in such regulatory requirements could have a significant adverse effect on the System. Changes in federal and state reimbursement funding mechanisms and related government budgetary constraints could have a significant adverse effect on the System. Investments in Joint Ventures The System has invested in a number of joint ventures, limited liability corporations and other entities to provide specialty healthcare services or engage in other activities. These investments range from minority investments with no control to majority investments or investments with control. The most significant of these investments are presented below. The System accounts for its interest in these entities under the equity method of accounting and includes its interest in the excess of revenues over expenses of these entities in its consolidated statements of operations and changes in unrestricted net assets as other 40 (Continued) BON SECOURS HEALTH SYSTEM, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements August 31, 2017 and 2016 (In thousands) revenue. None of these entities are otherwise affiliated with BSHSI and are not members of the Obligated Group. (a) Roper St. Francis Healthcare – South Carolina BSHSI, The Medical Society of South Carolina, and the Carolinas Health System, Inc. are members of Care Alliance Health Services (d/b/a Roper St. Francis Healthcare). Roper St. Francis Healthcare is the sole member of and operates Bon Secours – St. Francis Xavier Hospital, Roper Hospital, a supporting foundation and physician practices located in Charleston, South Carolina. BSHSI is obligated to provide 27% of any capital contribution to Roper St. Francis Healthcare and is entitled to 27% of any surplus capital. The System recorded operating losses of $311 and operating income of $452 related to its equity interest for the years ended August 31, 2017 and 2016, respectively. Included in these amounts were the System’s allocated share of investment gains of $4,519 and $2,007 for the years ended August 31, 2017 and 2016, respectively. In addition, adjustments of $(1,219) and $3,000 were recorded as net change in equity of joint ventures for the years ended August 31, 2017 and 2016, respectively, to reflect the System’s 27% interest in the net assets of this joint venture. The System received cash distributions of $0 and $5,400 related to its equity interest during the years ended August 31, 2017 and 2016, respectively. As of August 31, 2017 and 2016, the System’s investment in the joint venture was $94,544 and $96,074, respectively. The total assets, total liabilities, and net assets as of August 31, 2017 and 2016 and the total revenue, total expenses, investment gains (losses), net, and change in unrestricted net assets for the years then ended for Roper St. Francis Healthcare are as follows: 2017 Total assets Total liabilities Unrestricted net assets Restricted net assets Total revenue Total expenses Investment gains (losses), net Change in unrestricted net assets $ 1,109,384 732,766 350,163 26,455 885,813 912,796 25,831 (5,666) 2016 973,155 593,358 355,829 23,968 853,087 839,297 (8,888) (7,213) (b) Sentara Princess Anne BSHSI, DePaul Medical Center and Bon Secours Hampton Roads Health System (referred to as Bon Secours Hampton Roads) and Sentara Healthcare (Sentara) are members in a Virginia not-for-profit, nonstock, corporation that owns and operates Sentara Princess Anne Hospital located in Virginia Beach, Virginia. Sentara holds a 70% membership interest and DePaul Medical Center holds a 30% membership interest in the corporation. The joint venture is managed by Sentara and the agreements 41 (Continued) BON SECOURS HEALTH SYSTEM, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements August 31, 2017 and 2016 (In thousands) provide the members with rights to “put” and “call” the Bon Secours Hampton Roads’ membership interest at fair market value terms upon the occurrence of certain events and dates. The System recorded income of $9,895 and $9,481 and received cash distributions of $8,123 and $11,337 related to its equity interest during the years ended August 31, 2017 and 2016, respectively. As of August 31, 2017 and 2016, the System’s investment in the joint venture was $27,828 and $26,056, respectively. The total assets, total liabilities, and net assets as of August 31, 2017 and 2016 and the total revenue, total expenses, and change in unrestricted net assets for the years then ended for Sentara Princess Anne Hospital are as follows: 2017 Total assets Total liabilities Unrestricted net assets Restricted net assets Total revenue Total expenses Change in unrestricted net assets $ 245,415 152,175 93,200 40 243,810 210,773 6,371 2016 256,502 169,651 86,829 22 237,865 206,827 (6,236) (c) Bon Secours Charity Health System, Inc. BSHSI, the Sisters of Charity and Westchester Medical Center (Westchester), are members of Bon Secours Charity Health System (Charity). Westchester holds a 60% controlling interest and BSHSI holds the remaining 40% interest in Charity. The System recorded gains of $836 and $823 in operating revenue related to its equity interest in Charity for the years ended August 31, 2017 and 2016, respectively. As of August 31, 2017 and 2016, the System’s investment in Charity was $53,000 and $52,164, respectively. 42 (Continued) BON SECOURS HEALTH SYSTEM, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements August 31, 2017 and 2016 (In thousands) The total assets, total liabilities, and net assets as of August 31, 2017 and 2016 and the total revenue, total expenses, and change in unrestricted net assets for the years then ended for Charity are as follows: 2017 Total assets Total liabilities Unrestricted net assets Restricted net assets Total revenue Total expenses Change in unrestricted net assets $ 288,927 242,497 41,541 4,889 528,633 527,026 1,383 2016 279,419 234,861 40,158 4,401 515,485 512,283 (10,528) Other Commitments and Contingent Liabilities (a) General and Professional Liability Insurance The System participates in a self-insurance program for health professional/general liability (HPL/GL Program) by policies issued under a member of the System, Bon Secours Assurance Company, LTD (BSAC). BSAC is incorporated in the Cayman Islands. BSHSI is the sole shareholder of BSAC. Assets are available under the HPL/GL Program to provide specified levels of claims-made coverage for health professional liabilities and occurrence-based coverage for general liabilities, with excess layers reinsured through commercial carriers under policies written on a claims-made basis. The provision for claims and related funding levels for the HPL/GL Program is established annually based upon the recommendations of consulting actuaries. BSAC has accrued claims including liabilities for incidents incurred but not reported of approximately $97,045 and $105,977 at August 31, 2017 and 2016, respectively. The current portion of such accruals, $18,696 at August 31, 2017 and $19,665 at August 31, 2016, is included in other accrued expenses, and the remainder, $78,349 at August 31, 2017 and $86,312 at August 31, 2016, is included within other long-term liabilities in the accompanying consolidated balance sheets. Amounts recorded for unpaid claims are based upon the estimated present value of future claim payments and such amounts are undiscounted and based upon an actuarial estimate. (b) Workers’ Compensation Insurance The System’s workers’ compensation program primarily consists of self-insurance programs in various states with excess coverage through a commercial insurer. Mary Immaculate Hospital, which is also a participant of the System’s workers’ compensation program, is insured under a large deductible policy. Accrued workers’ compensation claims of $64,873 and $63,817, of which the current portion, $9,150 and $9,300 at August 31, 2017 and 2016, respectively, is reported as other accrued expenses and the remainder, $55,723 and $54,517 at August 31, 2017 and 2016, respectively, is reported within other long-term liabilities in the accompanying consolidated balance sheets, include estimates for incidents incurred but not reported at August 31, 2017 and 2016, respectively. Amounts recorded for unpaid 43 (Continued) BON SECOURS HEALTH SYSTEM, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements August 31, 2017 and 2016 (In thousands) claims are based upon the estimated present value of future claim payments and such amounts are undiscounted and based upon an actuarial central estimate. (c) Employee Health Insurance Employee health benefits of the System are principally provided through the System’s self-insurance program. Accrued claims associated with this program, which are reported as other accrued expenses in the accompanying consolidated balance sheets, of approximately $20,135 and $19,578, include estimates for claims incurred but not reported, at August 31, 2017 and 2016, respectively. (d) Litigation The healthcare industry is subject to numerous laws and regulations from federal, state, and local governments. The System’s compliance with these laws and regulations can be subject to periodic governmental review and interpretation, which can result in regulatory action unknown or unasserted at this time. Management is aware of certain asserted and unasserted legal claims and regulatory matters arising in the ordinary course of business, but cannot reasonably predict any particular outcomes or operational or financial effects from these matters at this time. BSHSI believes that certain of its sponsored pension plans are “church plans” under the ERISA. “Church plans” are employee benefit plans established and maintained by a church or by nonprofit organizations controlled by or associated with a church, and are exempt from ERISA’s coverage. Catholic and other religious based health systems across the country have been the target of class action lawsuits, focusing on whether pension plans sponsored by the health systems qualify under the ERISA church plan exemption, primarily relating to the issue of whether only a “church” may establish and maintain a church plan. A defined benefit pension plan covered under ERISA would be subject to minimum funding rules, certain vesting rules, notice requirements, additional Internal Revenue Code requirements, and would be required to pay premiums to the Pension Benefit Guaranty Corporation. Two such class action “church plan” lawsuits were filed against Bon Secours Health System and individual defendants in the Federal District Court for the District of Maryland. These cases have been consolidated into one class action lawsuit. Bon Secours and plaintiffs, through counsel, met on April 11, 2017 and reached agreement on terms of a settlement of the consolidated case. The BSHSI Board has approved this settlement, which will go before the federal district court for review and approval in November 2017. On June 5, 2017, the Supreme Court issued a decision holding that pension plans maintained by religious based health systems may qualify for the church plan exemption under ERISA. (e) Operating Leases Leases that do not meet the criteria for capitalization are classified as operating leases with related rentals charged to operations as incurred. Total rental expense was $69,522 and $68,215 in 2017 and 44 (Continued) BON SECOURS HEALTH SYSTEM, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements August 31, 2017 and 2016 (In thousands) 2016, respectively. Future rental payments under noncancelable operating leases with durations in excess of one year are as follows: 2018 2019 2020 2021 2022 Thereafter $ 47,735 40,833 34,988 25,024 14,598 24,492 Certain local systems entered into agreements to lease space in medical office buildings (MOBs) under construction by external development companies. Based on the provisions of ASC Topic 840-40-05-5, Lessee Involvement with Construction, local systems were considered the owner of the MOBs during construction. These transactions do not qualify for sale-leaseback accounting and as such are treated as financing transactions. Accordingly, the associated financing obligations, along with their related construction in progress or building assets of approximately $31,000 at August 31, 2017 and 2016 are included in other long-term liabilities and construction in progress or buildings and equipment in the accompanying consolidated balance sheets. The financing obligations associated with these transactions will not result in cash payments in excess of amounts paid under the related operating lease payments. All future cash obligations related to leased space within these MOBs are included as future minimum lease payments in the amounts reported above. (f) Guaranty Agreements Affiliates of the System entered into eleven limited partnership agreements during the period from 1997 through 2017. The limited partnerships are involved in housing projects in the System’s Baltimore market. System affiliates have entered into guaranty agreements with the limited partnerships during 1997 through 2017, whereby they have agreed to advance funds to the partnerships under specified conditions. The termination of each guaranty agreement is predicated on the occurrence of certain events. Seven such guaranty agreements are still in effect as of August 31, 2017. System affiliates have not been obligated to make any guarantee payments under the guaranty agreements to date through August 31, 2017. The maximum potential amount of future payments the System affiliates are obligated to make was $20,822 and $18,896 as of August 31, 2017 and 2016, respectively. Net Assets The System’s endowments consist of approximately 78 individual funds established for a variety of purposes as of August 31, 2017 and 2016. Net assets associated with endowment funds, including board-designated funds, are classified and reported based on the existence or absence of donor or board-imposed restrictions and the nature of the restrictions, if any. The System’s endowment net assets are comprised of permanently restricted funds, which were $12,876 and $12,362 at August 31, 2017 and 2016, respectively. The System does not hold any board-designated endowment funds within unrestricted net assets or temporarily restricted net assets. 45 (Continued) BON SECOURS HEALTH SYSTEM, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements August 31, 2017 and 2016 (In thousands) From time to time, the fair value of assets associated with individual donor-restricted endowment funds may fall below the level that the donor or Uniform Prudent Management of Institutional Funds Act requires the System to retain as a fund of perpetual duration. Deficiencies of this nature are reported in unrestricted net assets. There were no deficiencies at August 31, 2017 or 2016. The System has investment and spending policies for endowment assets that attempt to provide a predictable stream of funding to programs supported by its endowment while seeking to maintain the purchasing power of the endowment assets. Endowment assets include those assets of donor-restricted funds that the System must hold in perpetuity or for a donor-specified period as well as board-designated funds. The practice allows the endowment assets to be invested in a manner that is intended to produce investment returns that exceed the price and yield the results of the allocation index while assuming a moderate level of investment risk. The System expects its endowment funds to provide a rate of return that preserves the gift and generates earnings to achieve the endowment purpose. To satisfy its long-term rate-of-return objectives, the System relies on a total return strategy in which investment returns are achieved through both capital appreciation (realized and unrealized) and interest and dividend income. The System uses diversified asset allocation to achieve its long-term return objectives within prudent risk constraints to preserve capital. The System has a practice of distributing the major portion of current year earnings on the endowment funds, if the restrictions have been met. This is consistent with the System’s objective to maintain the purchasing power of the endowment assets held in perpetuity, as well as to provide additional real growth through new gifts and investment return. Functional Expenses The functional breakdown of expenses incurred by the System in fulfilling its mission for the years ended August 31, 2017 and 2016 is as follows: 2017 Healthcare services General and administrative Fundraising Total expenses 2016 $ 2,976,694 230,234 2,978 2,891,861 237,422 2,662 $ 3,209,906 3,131,945 Subsequent Events Management evaluated all events and transactions that occurred after August 31, 2017 and through November 2, 2017. The System did not have any material recognizable subsequent events during this period other than disclosed in the above notes (note 6). 46 BON SECOURS HEALTH SYSTEM, INC. AND SUBSIDIARIES Index to Combining Information Independent Auditors’ Report on Supplementary Information Schedule 1 – Combining Schedule – Balance Sheet Information at August 31, 2017 Schedule 2 – Combining Schedule – Operating Information for the year ended August 31, 2017 Note: The “Obligated Group” is defined in Section 1.01 of the Second Amended and Restated Master Trust Indenture, dated as of March 12, 2014 by and among the Bon Secours Health System, Inc., certain affiliated corporation, and Mellon Bank, N.A., as Master Trustee. KPMG LLP 1 East Pratt Street Baltimore, MD 21202-1128 Independent Auditors’ Report on Supplementary Information The Board of Directors Bon Secours Health System, Inc. and Subsidiaries: We have audited the consolidated financial statements of Bon Secours Health System, Inc. and its subsidiaries as of and for the years ended August 31, 2017 and 2016, and have issued our report thereon dated November 2, 2017 which contained an unmodified opinion on those consolidated financial statements. Our audit was performed for the purpose of forming an opinion on the consolidated financial statements as a whole. The supplementary information included in Schedules 1 and 2 is presented for the purposes of additional analysis and is not a required part of the consolidated financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the consolidated financial statements. The information has been subjected to the auditing procedures applied in the audit of the consolidated financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the consolidated financial statements or to the consolidated financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated in all material respects in relation to the consolidated financial statements as a whole. November 2, 2017 47 KPMG LLP is a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. BON SECOURS HEALTH SYSTEM, INC. AND SUBSIDIARIES Combining Schedule - Balance Sheet Information Obligated and Non-Obligated Group Members (in thousands) August 31, 2017 Combined Combined Non- Schedule 1.1 Consolidated Bon Combining Secours Health Eliminations System, Inc. Obligated Group Obligated Group 430,792 23,935 340,251 21,641 23,396 9,195 (45) 32,546 363,647 30,836 (45) 394,438 Assets limited or restricted as to use 28,715 38,269 - 66,984 Inventories 59,451 2,488 - 61,939 Prepaid expenses and other current assets 51,938 7,332 (14,898) 44,372 934,543 102,860 (195,322) 842,081 Assets Current assets: Cash and cash equivalents $ (180,379) 274,348 Accounts receivable, net: Patient and third-party payors Other Total accounts receivable, net Total current assets Assets limited as to use and restricted, less current portion - 361,892 1,243,187 132,872 - 1,376,059 Property, plant and equipment, net 900,667 78,390 - 979,057 Other long-term assets, net 403,431 50,053 (84,558) 368,926 3,481,828 364,175 (279,880) 3,566,123 Total assets $ Liabilities and Net Assets Current Liabilities: Current portion of long-term debt 40,412 19,244 Accounts payable $ 175,049 32,350 Accrued salaries, wages and benefits 173,011 2,057 Other accrued expenses 109,489 23,862 (14,898) 3,271 25 494,665 80,784 (14,992) Long-term debt, less current portion 794,985 35,206 1 830,192 Other long-term liabilities and deferred credits 632,328 88,084 (73,541) 646,871 Due to (from) affiliate (3,296) Total current liabilities Due to (from) affiliate, less current portion Total liabilities - 59,656 (119) - 207,280 175,068 118,453 560,457 (18,747) 199,126 (180,379) 1,903,231 403,200 (268,911) 2,037,520 - 1,279,906 (86,784) (10,969) 1,182,153 289,544 5,246 1 294,791 1,569,450 (81,538) (10,968) 1,476,944 8,973 29,811 (1) 38,783 174 12,702 1,578,597 (39,025) (10,969) 1,528,603 3,481,828 364,175 (279,880) 3,566,123 Net assets: Unrestricted-controlling interest Unrestricted-noncontrolling interest Total unrestricted Temporarily restricted Permanently restricted Total net assets Total liabilities and net assets See accompanying independent auditors' report on supplementary information $ - 12,876 BON SECOURS HEALTH SYSTEM, INC. AND SUBSIDIARIES Combining Schedule - Balance Sheet Information Obligated Group Members (in thousands) Schedule 1.2 1 of 3 August 31, 2017 Richmond Community Hospital Memorial Regional Medical Center Bon Secours Hospital Baltimore Maryview Medical Center Bon Secours Maryview Nursing Care Center (76,142) (28,286) 15,340 392,994 106,602 191,743 - 10,660 854 11,514 32,107 595 32,702 1,264 41 1,305 69,039 786 69,825 18,865 19 18,884 33,272 2,792 36,064 - Assets limited or restricted as to use Inventories Prepaid expenses and other current assets Total current assets 1,028 615 (62,985) 76 8,323 4,130 16,945 16 16,661 7,957 2,326 473,102 2,090 2,453 130,029 5,346 2,090 235,243 - Assets limited as to use and restricted, less current portion Property, plant and equipment, net Other long-term assets, net Total assets 13,646 27,861 9,359 (12,119) 124,775 72,164 19,306 233,190 201 1,439 372 18,673 419,871 135,815 14,188 1,042,976 13,099 1,569 144,697 15,875 78,966 8,993 339,077 6,960 876 7,836 556 7,930 5,442 9,965 (3,728) 20,165 1,000 15,171 18,405 5,796 501 40,873 200 565 172 62 24 1,023 340 35,269 17,485 73,259 19,346 29,440 (11,934) 77,725 3,064 371 4,458 (85,601) (85,601) 155,326 155,326 223 (85,378) (12,119) 139 155,465 233,190 St. Mary's Hospital of Richmond, Inc. BS Richmond Health System Assets Current assets: Cash and cash equivalents $ Accounts receivable, net: Patient and third-party payors Other Total accounts receivable, net Liabilities and Net Assets Current Liabilities: Current portion of long-term debt Accounts payable Accrued salaries, wages and benefits Other accrued expenses Due to (from) affiliate Total current liabilities $ $ Long-term debt, less current portion Other long-term liabilities and deferred credits Due to (from) affiliate, less current portion Total liabilities Net assets: Unrestricted-controlling interest Unrestricted-noncontrolling interest Total unrestricted Temporarily restricted Permanently restricted Total net assets Total liabilities and net assets $ See accompanying independent auditors' report on supplementary information 3,075 26,430 55,390 4,808 (522) 89,181 1,703 (16) 748 (41) 2,394 4,390 14,562 1,307 5,469 (442) 25,286 (1,133) (1,133) 31,959 187,424 37,689 346,253 2,310 2,584 7,288 (78) 81,528 41,880 148,616 (172) (1,305) 14,215 14,215 696,723 696,723 137,409 137,409 190,341 190,341 14,215 18,673 696,723 1,042,976 137,409 144,697 120 190,461 339,077 (162,193) 171,334 9,141 9,141 7,836 BON SECOURS HEALTH SYSTEM, INC. AND SUBSIDIARIES Combining Schedule - Balance Sheet Information Obligated Group Members (in thousands) Schedule 1.2 2 of 3 August 31, 2017 St. Francis Medical Center RHS Shared Services Our Lady of Bellefonte Hospital, Inc. Bellefonte Physician Services Mary Immaculate Hospital, Inc. Bon Secours DePaul Medical Center, Inc. Hampton Roads Shared Services Assets Current assets: Cash and cash equivalents $ 38,581 (10,227) 59,572 (108,101) 155,137 (162,526) 356 16,725 266 16,991 18,306 79 18,385 - Accounts receivable, net: Patient and third-party payors Other Total accounts receivable, net 29,188 456 29,644 Assets limited or restricted as to use Inventories Prepaid expenses and other current assets Total current assets 3,105 1,383 72,713 1,955 1,213 (7,038) 4,151 1,645 86,103 273 1,718 (104,696) 1,420 3,760 877 178,185 66 4,324 1,358 (138,393) 98,774 8,424 179,911 - 10,610 47,865 7,634 152,212 1,162 (103,534) 35,776 35,042 5,527 254,530 16,137 42,730 40,443 (39,083) 1 919 Assets limited as to use and restricted, less current portion Property, plant and equipment, net Other long-term assets, net Total assets Liabilities and Net Assets Current Liabilities: Current portion of long-term debt Accounts payable Accrued salaries, wages and benefits Other accrued expenses Due to (from) affiliate Total current liabilities $ $ Long-term debt, less current portion Other long-term liabilities and deferred credits Due to (from) affiliate, less current portion Total liabilities Net assets: Unrestricted-controlling interest Unrestricted-noncontrolling interest Total unrestricted Temporarily restricted Permanently restricted Total net assets Total liabilities and net assets $ See accompanying independent auditors' report on supplementary inform 21 21 26 (7,012) 20,161 574 20,735 1,413 1 1,414 98 464 918 - 5,947 142 6,089 9,754 6,462 2,473 (653) 18,036 654 272 6 330 1,262 9,599 1,579 996 284 12,458 8,325 2,503 1,289 532 12,649 3,769 1,314 (222) 4,861 12,816 80,000 106,842 348 6,437 68,041 86,077 16 1,278 7,375 (2,691) 17,142 9,724 46,739 69,112 10 4,871 73,069 73,069 (13,449) (13,449) 66,134 66,134 (104,812) (104,812) 236,421 236,421 (108,188) (108,188) (3,957) (3,957) 73,069 179,911 (13,449) (7,012) 1 66,135 152,212 (104,812) (103,534) 913 54 237,388 254,530 (7) (108,195) (39,083) 5 (3,952) 919 10,635 987 2,612 (208) 14,026 BON SECOURS HEALTH SYSTEM, INC. AND SUBSIDIARIES Combining Schedule - Balance Sheet Information Obligated Group Members (in thousands) Schedule 1.2 3 of 3 August 31, 2017 St. Francis Hospital, Inc. Maria Manor Nursing Care Center, Inc. St. Francis Physician Services Bon Secours Health System Office Combining Eliminations Combined Obligated Group Assets Current assets: Cash and cash equivalents 167,171 52 5,731 38,418 73,904 403 74,307 12,830 1,869 14,699 2,517 2,517 14,639 14,639 - Assets limited or restricted as to use Inventories Prepaid expenses and other current assets Total current assets 16,912 5,644 264,034 9,044 23,795 435 128 130 8,941 26,718 16,833 96,608 1 (1) (355,622) 28,715 59,451 51,938 934,543 Assets limited as to use and restricted, less current portion Property, plant and equipment, net Other long-term assets, net Total assets 28,684 177,333 81,088 551,139 1,888 14,122 39,805 4,638 2,938 16,517 221,553 154,931 293,860 766,952 356,059 (105,295) (104,858) 1,243,187 900,667 403,431 3,481,828 31,190 28,058 48,209 67,999 4,028 179,484 1 14 1 (17) (1) 40,412 175,049 173,011 109,489 (3,296) 494,665 740,354 250,763 (500,323) 670,278 (84,275) (4) (84,280) 794,985 632,328 (18,747) 1,903,231 89,414 89,414 (138,787) 118,210 (20,577) 1,279,906 289,544 1,569,450 7,260 96,674 766,952 (1) (20,578) (104,858) 8,973 174 1,578,597 3,481,828 $ Accounts receivable, net: Patient and third-party payors Other Total accounts receivable, net Liabilities and Net Assets Current Liabilities: Current portion of long-term debt Accounts payable Accrued salaries, wages and benefits Other accrued expenses Due to (from) affiliate Total current liabilities $ $ 26,174 22,452 4,300 (826) 52,100 4,297 7,473 2,653 (271) 14,152 Long-term debt, less current portion Other long-term liabilities and deferred credits Due to (from) affiliate, less current portion Total liabilities 13,462 259,300 324,862 14,020 28,172 Net assets: Unrestricted-controlling interest Unrestricted-noncontrolling interest Total unrestricted 226,277 226,277 11,633 11,633 226,277 551,139 11,633 39,805 Temporarily restricted Permanently restricted Total net assets Total liabilities and net assets $ See accompanying independent auditors' report on supplementary inform 1,462 1,059 171 (932) 1,760 3,686 10,700 16,146 (69) (69) 440 371 16,517 (355,623) 1 1 430,792 340,251 23,396 363,647 BON SECOURS HEALTH SYSTEM, INC. AND SUBSIDIARIES Combining Schedule - Balance Sheet Information Non-Obligated Group Members (in thousands) Schedule 1.3 1 of 5 August 31, 2017 Bon Secours Bon Secours of Bon Secours Bon Secours Professional Health Bon Secours Bon Secours Richmond Maryland Baltimore Health Maryview Health Care Management Maryview Richmond Health Healthcare Bon Secours Virginia Foundation System Foundation Corporation Services Foundation Corp. Foundation Healthsource, Inc. Assets Current assets: Cash and cash equivalents $ 3,109 (2,964) 338 (9,949) 429 7,420 (2,432) (79,895) Patient and third-party payors - - - 72 - - - Other 519 41 - (1) 188 - 2,133 477 519 41 - 71 188 - 2,133 4,492 Accounts receivable, net: Total accounts receivable, net Assets limited or restricted as to use Inventories Prepaid expenses and other current assets Total current assets 1,761 - - - 2,922 - 2,703 - - - - - - - 3,611 - 9,000 (2,923) Assets limited as to use and restricted, less current portion 39 Property, plant and equipment, net 35,467 Other long-term assets, net Total assets 406 $ 4,015 44,912 338 16 - - (9,862) 3,539 7,420 2,438 34 7,613 - - 1,325 - 13,811 - - 6,526 - - 37 - 850 4,690 1,188 - - 294 (3,042) 66 4,930 7,420 735 2,044 18,330 5,732 (68,936) 9,485 11,825 (47,626) Liabilities and Net Assets Current Liabilities: Current portion of long-term debt $ Accounts payable 64 526 Accrued salaries, wages and benefits 7 (4) - 311 - - - - - 113 32 - - 137 - - Other accrued expenses 5,339 - - 21 - - Due to (from) affiliate 2,923 - Total current liabilities 8,884 Long-term debt, less current portion Other long-term liabilities and deferred credits Due to (from) affiliate, less current portion Total liabilities 7 (1,594) - - - (1,129) - - 121 - - - - - - - - 3,688 - - 8,560 - (150) 405 1,149 (150) - 7 8 - (150) 16,048 33,492 1,712 (380) 2,886 6 6,042 8,928 154 - - - 2,713 - - 127 - Net assets: Unrestricted-controlling interest (4,049) 3,933 1,338 (5,755) 2,090 7,420 (2,481) Unrestricted-noncontrolling interest 13,708 - - - - - - (60,944) 1,338 (5,755) 2,090 7,420 (2,481) (56,554) - 4,390 Total unrestricted 9,659 3,933 Temporarily restricted 1,761 750 - - 2,212 - 15,925 Permanently restricted - - - - 628 - 4,759 11,420 4,683 1,338 (5,755) 4,930 7,420 18,203 (56,554) 44,912 4,690 1,188 (3,042) 4,930 7,420 18,330 (47,626) Total net assets Total liabilities and net assets $ See accompanying independent auditors' report on supplementary information - BON SECOURS HEALTH SYSTEM, INC. AND SUBSIDIARIES Combining Schedule - Balance Sheet Information Non-Obligated Group Members (in thousands) Schedule 1.3 2 of 5 August 31, 2017 Chesterfield Bon Secours Bon Secours Home Laburnum Healthcare Center, Community RHS Enterprises, Ambulatory Health Services Rappahannock Chesapeake General Hospital Rappahannock Properties , Inc. Inc. Inc. Services, LLC LLC General Hospital Medical Group Foundation, Inc. Assets Current assets: Cash and cash equivalents $ (4,360) (16,056) (2,126) - - (3,240) (16,409) (24,336) (7,738) 480 Accounts receivable, net: Patient and third-party payors - Other Total accounts receivable, net 160 34 202 3 8 34 202 3 168 3,878 (207) 3,671 8,429 8,429 343 - - 508 343 508 - - Assets limited or restricted as to use - - - - - 182 Inventories - - - - - 980 12 - 107 405 13 Prepaid expenses and other current assets 33 Total current assets (4,293) (15,854) (2,016) - Assets limited as to use and restricted, less current portion 4,686 - Property, plant and equipment, net 3,473 - Other long-term assets, net Total assets - 96 21 (3,051) 11 (12,727) (14,340) (7,370) - - - - 51 1,093 7,347 14,448 3,244 24 19 418 651 5 $ 3,866 (15,758) (1,941) (1,939) $ - - - - (4,962) 759 988 8,590 (4,121) 9,578 Liabilities and Net Assets Current Liabilities: Current portion of long-term debt Accounts payable 12 Accrued s alaries, wages and benefits - Other accrued expenses 46 Due to (from) affiliate - Total current liabilities 58 Long-term debt, less current portion Other long-term liabilities and deferred credits Due to (from) affiliate, less current portion Total liabilities - 17 678 41 183 268 - - 77 7 65 464 583 13 - - 5 13 107 17 (1) 1,133 - 29 176 1,249 2,255 313 1,401 - - 743 - 414 443 - - - 150 1,472 150 - 1,655 - 1,414 - 98 - 23 - 19 - 52 195 - 22 - 6 2 - - 1,663 2,720 1,062 1,403 7,312 Net assets: Unrestricted-controlling interest Unrestricted-noncontrolling interest Total unrestricted 2,394 (15,908) (1,993) (2,134) (6,625) (2,143) (5,183) - - - - - - - - 2,394 (15,908) (1,993) (2,134) (6,625) (2,143) (5,183) 7,312 Temporarily restricted - - - - - 182 - Permanently restricted - - - - - - - - 2,394 (15,908) (1,993) (2,134) (6,625) (1,961) (5,183) 8,175 3,866 (15,758) (1,941) (1,939) (4,962) (4,121) 9,578 Total net assets Total liabilities and net assets $ See accompanying independent auditors' report on supplementary informa 759 863 BON SECOURS HEALTH SYSTEM, INC. AND SUBSIDIARIES Combining Schedule - Balance Sheet Information Non-Obligated Group Members (in thousands) Schedule 1.3 3 of 5 August 31, 2017 IVNA Health Tidewater Bayley Properties, DePaul Health St. Francis Nursing Mary Immaculate Upstate Surgery St. Francis Services Diversified, Inc. Inc. Foundation Care Center, Inc. Medical Pavilion Center Foundation 5,451 58 Assets Current assets: Cash and cash equivalents $ (262) 1,327 889 94 924 825 Accounts receivable, net: Patient and third-party payors 3 Other - Total accounts receivable, net 3 - - - 1,117 - 538 - 168 - 425 - - - 427 168 - 425 1,117 - 538 427 - 726 Assets limited or restricted as to use 243 - - 2,646 - - Inventories 312 352 - - - - 97 Prepaid expenses and other current assets - 200 - - - 16 97 58 1,575 2,075 5,688 Total current assets 296 Assets limited as to use and restricted, less current portion 3,165 6,609 - 1,315 - - - 5 45 - - 971 675 170 - Other long-term assets, net 1 325 - 276 412 275 290 2,081 4,539 2,417 4,756 7,992 1,008 2,035 9,844 - - - $ - 889 - Property, plant and equipment, net Total assets 4,237 2,047 41 889 Liabilities and Net Assets Current Liabilities: Current portion of long-term debt $ - Accounts payable 293 32 Accrued s alaries, wages and benefits - 14 Other accrued expenses - 5 Due to (from) affiliate - Total current liabilities 4 293 Long-term debt, less current portion - Other long-term liabilities and deferred credits - Due to (from) affiliate, less current portion - Total liabilities 6 - - - - 375 - 289 - 121 - 52 - - 25 2 36 - 9 - 2 386 - - 17 - 538 - - - - - - 42 399 - 413 2,804 - - (497) - 3,498 2,691 - - (86) - 4,449 5,497 386 - 975 739 3,524 (4,489) 788 6,068 - - - - 861 975 739 3,524 (4,489) 97 - - 12 - - - 55 - 293 6 Net assets: Unrestricted-controlling interest (234) Unrestricted-noncontrolling interest - Total unrestricted (234) 2,320 2,320 - 1,649 6,068 3,185 Temporarily restricted 243 - - 2,903 - - Permanently restricted 4,237 - - 1,114 - - - 4,246 2,320 975 4,756 3,543 (4,489) 1,649 9,844 4,539 2,417 889 4,756 7,992 1,008 2,035 9,844 Total net assets Total liabilities and net assets $ See accompanying independent auditors' report on supplementary informa 19 591 BON SECOURS HEALTH SYSTEM, INC. AND SUBSIDIARIES Combining Schedule - Balance Sheet Information Non-Obligated Group Members (in thousands) Schedule 1.3 4 of 5 August 31, 2017 St. Francis Schervier Housing Schervier Long Bon Secours Ambulatory Frances Schervier Development Fund Bon Secours New Term Home Health Schervier Kentucky Health Bon Secours Place Maria Manor Health Services, LLC Home and Hospital Corp. York Parent Corp. Care Apartments, LLC System Foundation at St. Petersburg Resources 1,206 - 170 - Assets Current assets: Cash and cash equivalents $ (7,343) 16,462 - 298 - 3,702 1,679 - - - 278 1,679 - - Assets limited or restricted as to use - 3,000 - Inventories - - - 986 - - - - - 98 19 4 - - 98 19 174 - - - 5,133 - - - - - - - - - Accounts receivable, net: Patient and third-party payors 275 Other 3 Total accounts receivable, net 31 Prepaid expenses and other current assets Total current assets (7,034) Assets limited as to use and restricted, less current portion Property, plant and equipment, net Other long-term assets, net Total assets 1 - - - 154 21,142 - 298 - 9,087 1,005 3,127 - - - 5,812 - - 6,000 - - - 849 1,045 - - - - 7,018 5,084 $ - (905) 1,487 - 28,629 - 297 (1) - 50 - 17,004 - (7) 4,125 85 - 1,465 - 510 1,000 7,787 1,000 - Liabilities and Net Assets Current Liabilities: Current portion of long-term debt $ - 16,400 - - - 373 - - 81 23,399 - - 162 107 - 129 - 130 164 - - 7 - 90 - Other accrued expenses 18 1,573 - - - 187 - 215 - Due to (from) affiliate 12 - - - - - - 323 (40) 241 41,536 - 162 674 - 757 (40) Accounts payable Accrued s alaries, wages and benefits Total current liabilities Long-term debt, less current portion - Other long-term liabilities and deferred credits Due to (from) affiliate, less current portion (110) 64 - - - - 73 - - 44,055 - 64 (15,426) - 233 - - - (15,426) - 233 6 2,556 247 (1,152) (1,152) - Total liabilities 64 - 20,310 - - - 19 46 - 511 - - - 3,479 - 181 21,030 - 4,747 (40) (181) (4,026) 986 3,040 - Net assets: Unrestricted-controlling interest Unrestricted-noncontrolling interest Total unrestricted (181) (4,026) 986 1,040 - - 3,040 1,040 Temporarily restricted - - - - - - 1,765 - - Permanently restricted - - - - - - 1,374 - - (1,152) (15,426) - 233 (4,026) 4,125 3,040 1,040 28,629 - 297 17,004 4,125 7,787 1,000 Total net assets Total liabilities and net assets $ See accompanying independent auditors' report on supplementary informa (905) (181) - BON SECOURS HEALTH SYSTEM, INC. AND SUBSIDIARIES Combining Schedule - Balance Sheet Information Non-Obligated Group Members (in thousands) Schedule 1.3 5 of 5 August 31, 2017 St. Petersburg Bon Secours Home Care Bon Secours Shannon Health BSB MOB Bon Secours Good Good Help Assurance Combining Combined Non- Services, Inc. Associates, LLC MOB Partnership 1 Partnership 2 HelpCare LLC Connections, LLC Company, Ltd. Eliminations Obligated Group Assets Current assets: Cash and cash equivalents $ (1,158) - 694 421 - (4,082) (5,973) - 167,145 23,935 Accounts receivable, net: Patient and third-party payors 962 - - - - - Other (55) - 615 54 337 3,240 - (45) 9,195 907 - 615 54 337 3,240 - (45) 30,836 Total accounts receivable, net - 21,641 Assets limited or restricted as to use - - - 259 - - 18,696 (2) 38,269 Inventories - - - - - - - - 2,488 - - - 312 - (3,607) 7,332 - 1,309 - - 8 Prepaid expenses and other current assets Total current assets (243) 734 11 (3,734) (2,421) 18,696 - - 75,592 163,491 102,860 - Assets limited as to use and restricted, less current portion - Property, plant and equipment, net Other long-term assets, net Total assets $ - - 132,872 55 - 4,177 1,565 - - - (24,319) 78,390 1 1,721 18,117 10,995 - - 6,005 (15,267) 50,053 1,721 23,603 13,294 (3,734) (2,421) (187) 100,293 123,905 364,175 Liabilities and Net Assets Current Liabilities: Current portion of long-term debt $ - - 1,608 826 - - - (64) 19,244 124 - 315 393 303 1,156 - (394) 32,350 Accrued s alaries, wages and benefits 87 - - - 446 254 - Other accrued expenses 92 - - - - 659 18,696 Accounts payable Due to (from) affiliate Total current liabilities 875 - - - 1,178 - 1,923 1,219 749 - - 2,069 18,696 (31) 2,057 (5,339) 23,862 (2) 3,271 (5,830) 80,784 Long-term debt, less current portion - - 8,240 5,923 - - - (15,948) 35,206 Other long-term liabilities and deferred credits - - - 2,616 - - 81,597 (14,982) 88,084 Due to (from) affiliate, less current portion Total liabilities - - 6,578 2,598 1,178 - 16,741 12,356 - (1,365) 1,721 6,862 460 (4,483) (4,490) - - - - 478 - - - (14,191) (1,365) 1,721 6,862 938 (4,483) (4,490) - (11,157) 749 2,069 100,293 171,820 199,126 135,060 403,200 Net assets: Unrestricted-controlling interest Unrestricted-noncontrolling interest Total unrestricted 3,034 (86,784) 5,246 (81,538) Temporarily restricted - - - - - - - 3 Permanently restricted - - - - - - - (1) (1,365) 1,721 6,862 938 (4,483) (4,490) - (11,155) (39,025) (187) 1,721 23,603 13,294 (3,734) (2,421) 123,905 364,175 Total net assets Total liabilities and net assets $ See accompanying independent auditors' report on supplementary informa 100,293 29,811 12,702 BON SECOURS HEALTH SYSTEM INC., AND SUBSIDIARIES Combining Schedule - Operating Information Obligated and Non-Obligated Group Members (in thousands) Schedule 2.1 August 31, 2017 Combined Obligated Group Combined NonObligated Group Consolidated Bon Secours Health System, Inc. Combining Eliminations Revenues: Net patient service revenue before bad debts $ Provision for patient bad debts, net Net patient service revenue 3,178,971 171,081 (172,746) (6,558) 3,006,225 Other revenue Total revenue 164,523 (6,052) - 3,344,000 (179,304) (6,052) 3,164,696 116,441 80,832 (16,519) 180,754 3,122,666 245,355 (22,571) 3,345,450 1,727,750 Expenses: Salaries, wages and benefits 1,589,887 139,970 (2,107) Supplies 570,216 25,992 (5) 596,203 Purchased services and other 667,949 69,376 (20,013) 717,312 Depreciation and amortization 125,718 10,076 (252) 135,542 31,933 1,354 (188) 33,099 2,985,703 246,768 (22,565) 3,209,906 (6) 135,544 Interest Total expenses Income (loss) from operations 136,963 (1,413) Nonoperating gains (losses), net: Nonoperating investment gains, net 100,737 Other nonoperating activities, net (35,001) (13,611) 55 (48,557) 202,699 (14,060) 49 188,688 Excess (deficit) of revenues over expenses 964 - 101,701 Other changes in net assets: Grants for capital - - 20 172 20 318 - 490 of property, plant, and equipment 2,504 6,309 Net change in equity of joint ventures (1,219) - - (5,919) - (5,918) 2,215 - 82,866 Net change in unrealized gains (losses) on other-than-trading securities Net assets released from restrictions used for the purchase Distributions to noncontrolling interest owners 1 Pension and other post retirement adjustments 80,651 Transfers to affiliates and other changes, net Increase (decrease) in unrestricted net assets See accompanying independent auditors' report on supplementary information $ (282) 12,242 (18,122) (268) 297,070 (29,259) (501) 8,531 (1,219) (6,148) 267,310 BON SECOURS HEALTH SYSTEM INC., AND SUBSIDIARIES Combining Schedule - Operating Information Obligated Group Members (in thousands) Schedule 2.2 1 of 3 August 31, 2107 Bon Secours Hospital Baltimore Maryview Medical Center Bon Secours Maryview Nursing Care Center St. Mary's Hospital of Richmond, Inc. Richmond Community Hospital 110,485 342,073 10,096 571,612 151,373 379,287 (22,760) (10,778) (24,070) - 548,852 140,595 355,217 - Memorial Regional Medical Center Bon Secours Richmond Health System Revenues: Net patient service revenue before bad debts $ Provision for patient bad debts, net (3,297) Net patient service revenue 107,188 Other revenue Total revenue (24,252) 317,821 (406) 9,690 - 3,820 13,678 20 6,572 201 2,589 - 111,008 331,499 9,710 555,424 140,796 357,806 - 52,447 152,354 5,939 210,604 35,991 132,432 - 8,504 64,838 1,115 96,098 32,134 59,823 - Expenses: Salaries, wages and benefits Supplies Purchased services and other 44,338 111,259 3,322 176,946 29,010 134,896 Depreciation and amortization 6,320 15,430 155 14,451 1,762 8,353 - Interest 1,457 2,456 57 6,912 - 4,439 - 113,066 346,337 10,588 505,011 98,897 339,943 - 50,413 41,899 17,863 - - Total expenses (Loss) income from operations (2,058) (14,838) (878) Nonoperating gains (losses), net: Nonoperating investment gains (losses), net Other nonoperating activities, net (Deficit) excess of revenues over expenses 1,075 9,302 81 35,555 385 1,768 (1,427) 1,718 (11) (10,710) 387 (13,057) 8 (2,410) (3,818) (808) 75,258 42,671 6,574 8 - - Other changes in net assets: Grants for capital - - - 20 (92) - of property, plant, and equipment - 285 - - - - - Net change in equity of joint ventures - - - - - - - Net change in unrealized (losses) gains on other-than-trading securities (3) - (2) - Net assets released from restrictions used for the purchase Distributions to noncontrolling interest owners - - - - - - Pension and other post retirement adjustments 5,546 3,720 - 28,942 - 14,106 - Transfers to affiliates and other changes, net Increase (decrease) in unrestricted net assets See accompanying independent auditors' report on supplementary information (930) $ 2,226 1 2,708 (51) (8,694) - (2,772) 210 2,803 (859) 95,503 42,671 17,906 219 BON SECOURS HEALTH SYSTEM INC., AND SUBSIDIARIES Combining Schedule - Operating Information Obligated Group Members (in thousands) Schedule 2.2 2 of 3 August 31, 2107 St. Francis Medical Center RHS Shared Services Our Lady of Bellefonte Hospital, Inc. Bellefonte Physician Services Mary Immaculate Hospital, Inc. Bon Secours DePaul Medical Center, Inc. Hampton Roads Shared Services Revenues: Net patient service revenue before bad debts $ Provision for patient bad debts, net Net patient service revenue 267,549 - (16,609) - 250,940 Other revenue Total revenue 168,524 (7,650) - 25,230 (1,206) 175,964 (9,760) 183,535 - (14,550) - 160,874 24,024 166,204 168,985 - 2,544 220,332 3,525 984 2,248 12,455 97,862 253,484 220,332 164,399 25,008 168,452 181,440 97,862 32,666 Expenses: Salaries, wages and benefits 99,547 85,147 68,102 30,797 54,675 84,781 Supplies 38,393 16,044 29,947 2,268 43,035 29,633 3,665 Purchased services and other 93,522 103,075 51,820 8,463 47,965 67,349 59,198 Depreciation and amortization 7,314 16,066 8,592 695 6,905 12,082 2,332 Interest 5,121 - 2,112 - 1,605 2,233 42,223 154,185 196,078 (17,215) 14,267 (14,638) (167) 3,634 Total expenses 243,897 (Loss) income from operations 9,587 220,332 - 160,573 3,826 97,861 1 Nonoperating gains (losses), net: Nonoperating investment gains (losses), net 75 Other nonoperating activities, net (65) (2,977) (Deficit) excess of revenues over expenses 6,685 65 - 924 (718) 412 594 (129) (5,401) (150) (651) (17,532) 17,183 (13,632) (821) - - - - - (949) Other changes in net assets: Grants for capital - - - - Net change in unrealized (losses) gains on other-than-trading securities - - - - of property, plant, and equipment - - - - Net change in equity of joint ventures - - - - 43 Net assets released from restrictions used for the purchase 55 - - - - - Distributions to noncontrolling interest owners - - - - - - - Pension and other post retirement adjustments - - 3,383 - - - - (4,784) - (1,759) 1,901 - Transfers to affiliates and other changes, net Increase (decrease) in unrestricted net assets See accompanying independent auditors' report on supplementary information $ 973 - (1,269) (2,154) (706) (17,532) 16,012 (15,786) (1,655) BON SECOURS HEALTH SYSTEM INC., AND SUBSIDIARIES Combining Schedule - Operating Information Obligated Group Members (in thousands) Schedule 2.2 3 of 3 August 31, 2107 St. Francis Hospital, Inc. St. Francis Physician Services Maria Manor Nursing Care Center, Inc. Bon Secours Health System Office Combining Eliminations Combined Obligated Group Revenues: Net patient service revenue before bad debts $ Provision for patient bad debts, net 612,612 (32,995) Net patient service revenue 579,617 Other revenue Total revenue 154,344 (4,652) 149,692 - 26,287 - 239 - - 26,526 - - 3,178,971 (172,746) 3,006,225 2,066 9,227 951 304,328 (566,961) 116,441 581,683 158,919 27,477 304,328 (566,961) 3,122,666 (1) 1,589,887 Expenses: Salaries, wages and benefits 198,297 171,330 14,132 160,647 Supplies 138,679 14,746 2,638 (11,344) Purchased services and other 128,440 39,083 8,001 95,463 (534,201) 667,949 Depreciation and amortization 18,160 2,454 531 40,248 (36,132) 125,718 8,490 - 494 (3,443) - Interest Total expenses (Loss) income from operations 492,066 227,613 25,796 281,571 89,617 (68,694) 1,681 22,757 2,673 (201) - 570,216 31,933 (570,334) 2,985,703 3,373 136,963 - 100,737 Nonoperating gains (losses), net: Nonoperating investment gains (losses), net Other nonoperating activities, net 162 (Deficit) excess of revenues over expenses (37) - 45,452 19 718 (3,400) 68,927 (27) (35,001) - 92,452 (68,895) 1,663 202,699 Grants for capital - - - - Net change in unrealized (losses) gains on other-than-trading securities - - - 227 of property, plant, and equipment 2,164 - - - - 2,504 Net change in equity of joint ventures - - - (1,219) - (1,219) - Other changes in net assets: - 20 (1) 172 Net assets released from restrictions used for the purchase Distributions to noncontrolling interest owners - - - - Pension and other post retirement adjustments - - - 24,877 77 (79,992) 68,866 43,666 372 136,478 421 Transfers to affiliates and other changes, net Increase (decrease) in unrestricted net assets See accompanying independent auditors' report on supplementary information $ 14,624 (29) (469) 1,194 1 80,651 12,2420 297,070 BON SECOURS HEALTH SYSTEM INC., AND SUBSIDIARIES Combining Schedule - Operating Information Non-Obligated Group Members (in thousands) Schedule 2.3 1 of 5 August 31, 2017 Bon Secours of Maryland Foundation Bon Secours Baltimore Health System Foundation Bon Secours Maryview Health Corporation Professional Health Care Management Services Bon Secours Maryview Foundation Bon Secours Richmond Health Corp. Bon Secours Richmond Healthcare Foundation Bon Secours Virginia HealthSource, Inc. Revenues: Net patient service revenue before bad debts $ Provision for patient bad debts, net Net patient service revenue Other revenue Total revenue - - - - - - - - - 6,654 - 6,654 - 2,100 256 9 - - - - - - (2,046) 9 - - - 49,088 - 4,926 - - - 8,221 - 4,935 - - - 57,309 - - 4,106 - - - 37,825 - - 398 - - - 6,872 - 1,387 - - - 14,566 3,391 - 51,134 Expenses: Salaries, wages and benefits Supplies Purchased services and other 3,592 Depreciation and amortization 1,499 - - 396 - - - 715 - - 48 - - - - Interest Total expenses Operating (loss) income 1 8,162 1 - 6,335 - - - 62,654 (1,508) (1) - (1,400) - - - (5,345) Nonoperating gains (losses), net: Nonoperating investment gains (losses), net - Other nonoperating activities, net Excess (deficit) of continuing revenues over expenses 647 (160) (947) (1,668) (301) 2 - 1 49 (361) (676) (1,760) (627) - - 103 2 38 (27) (451) (11,693) (1,630) (11,720) (7,426) - - - 38 Other changes in net assets: Net change in unrealized (losses) gains on other-than-trading securities - - Net assets released from restrictions used for the purchase of property, plant, and equipment - - - 239 - 7,739 Net change in equity of joint ventures - - - - - - - - Distributions to noncontrolling interest owners - - - - - - - (5,723) Pension and other post retirement adjustments - - - - - - - Transfers to affiliates and other changes, net (13) - - (2,113) 350 - 4,152 (141) (3,873) 65 171 (13,290) Increase (decrease) in unrestricted net assets See accompanying independent auditors' report on supplementary information $ (1,681) 56 (245) 2 38 - BON SECOURS HEALTH SYSTEM INC., AND SUBSIDIARIES Combining Schedule - Operating Information Non-Obligated Group Members (in thousands) Schedule 2.3 2 of 5 August 31, 2017 Laburnum Properties, Inc. Chesterfield Community Healthcare Center, Inc. RHS Enterprises, Inc. Bon Secours Ambulatory Services, LLC Bon Secours Home Health Services LLC Rappahannock General Hospital Chesapeake Medical Group, Inc. 35,283 4,823 Rappahannock General Hospital Foundation, Inc. Revenues: Net patient service revenue before bad debts $ Provision for patient bad debts, net Net patient service revenue Other revenue Total revenue - - - - - - - - - 2,543 (443) 2,100 16,625 (567) 16,058 (2,501) 32,782 (95) 4,728 - - - 626 165 2 277 156 - - - 626 2,265 16,060 33,059 4,884 - - Expenses: Salaries, wages and benefits - - 509 1,967 18,161 17,001 5,534 Supplies - - 31 98 1,619 7,670 583 - Purchased services and other - 226 506 4,444 8,574 1,228 - Depreciation and amortization - - 5 205 456 1,101 420 - Interest - - - - 687 74 - 2,776 24,680 35,033 7,839 - (8,620) (1,974) (2,955) - (74) (137) (46) 606 792 (17) (353) 7 - Total expenses - 7 771 Operating (loss) income - (7) (145) (511) Nonoperating gains (losses), net: Nonoperating investment gains (losses), net Other nonoperating activities, net 366 (82) (314) 7 52 (82) Excess (deficit) of continuing revenues over expenses (11) (16) - (34) 3,142 (561) (5,552) (1,319) (3,018) (156) 253 Other changes in net assets: Net change in unrealized (losses) gains on other-than-trading securities - - - - - - - - Net assets released from restrictions used for the purchase of property, plant, and equipment - - - - - - - - Net change in equity of joint ventures - - - - - - - - Distributions to noncontrolling interest owners - - - - - - - - Pension and other post retirement adjustments - - - - - - - - Transfers to affiliates and other changes, net - - - - - Increase (decrease) in unrestricted net assets See accompanying independent auditors' report on supplementary information $ 52 (82) (156) (561) (5,552) (425) (1,744) 201 (2,817) 253 BON SECOURS HEALTH SYSTEM INC., AND SUBSIDIARIES Combining Schedule - Operating Information Non-Obligated Group Members (in thousands) Schedule 2.3 3 of 5 August 31, 2017 IVNA Health Services Tidewater Diversified, Inc. Bayley Properties, Inc. DePaul Health Foundation St. Francis Nursing Care Center, Inc. Mary Immaculate Medical Pavilion Upstate Surgery Center St. Francis Foundation Revenues: Net patient service revenue before bad debts $ Provision for patient bad debts, net Net patient service revenue Other revenue Total revenue 395 - - - - - - - 8,216 395 - - - 7,915 - 4,053 - 148 2,966 - - 13 - 1 - 543 2,966 - - 7,928 - 4,054 - (301) - 4,278 - (225) - Expenses: Salaries, wages and benefits 229 417 - - 4,539 - 1,423 - Supplies 340 2,428 - - 786 - 1,343 - Purchased services and other 90 93 - - 3,366 - 833 - Depreciation and amortization 9 16 - - 136 - 59 - - - - 46 - - - 668 2,954 - - 8,873 - 3,658 - 12 - - (945) - 396 - - Interest - Total expenses Operating (loss) income (125) Nonoperating gains (losses), net: Nonoperating investment gains (losses), net Other nonoperating activities, net Excess (deficit) of continuing revenues over expenses (3) 5 5 45 29 (3) 136 1 (10) 11 (454) (7) 22 (17) 429 7 16 (409) (923) 22 376 565 144 (127) Other changes in net assets: Net change in unrealized (losses) gains on other-than-trading securities - - - - - - - Net assets released from restrictions used for the purchase of property, plant, and equipment - - - 201 - - - (2,078) Net change in equity of joint ventures - - - - - - - - Distributions to noncontrolling interest owners - - - - - - Pension and other post retirement adjustments - - - - - - Transfers to affiliates and other changes, net - (13) - 127 (43) (11) (315) 847 (81) (966) 11 (135) (522) Increase (decrease) in unrestricted net assets See accompanying independent auditors' report on supplementary information $ (127) (6) 16 (196) - - BON SECOURS HEALTH SYSTEM INC., AND SUBSIDIARIES Combining Schedule - Operating Information Non-Obligated Group Members (in thousands) Schedule 2.3 4 of 5 August 31, 2017 St. Francis Ambulatory Services, LLC Frances Schervier Home and Hospital 6,012 37,898 Schervier Housing Development Fund Corp. Bon Secours New York Parent Corp. Schervier Long Term Home Health Care Bon Secours Kentucky Health System Foundation Schervier Apartments, LLC Bon Secours Place at St. Petersburg Maria Manor Health Resources Revenues: Net patient service revenue before bad debts $ Provision for patient bad debts, net - Net patient service revenue 6,012 Other revenue - - - - 37,784 - - (114) 21 - - - - - (17) - 21 - - (17) - - - 21 30,699 - 1,663 54 2,948 - 4,320 - 6,033 68,483 - 1,663 75 2,948 - 4,303 - 3,835 25,711 - 526 - 299 - 2,593 - 597 2,183 - 2 - 22 Purchased services and other 2,037 13,360 Depreciation and amortization 367 1,463 - - Interest - 307 - - Total revenue Expenses: Salaries, wages and benefits Supplies Total expenses 6,836 Operating (loss) income (803) 1 1,135 920 6 - 43,024 1 1,663 926 25,459 (1) - (851) 650 2 - 392 1,176 (173) 386 - 276 - 728 - 140 - 2,085 2 863 (2) 4,577 (274) (173) 173 Nonoperating gains (losses), net: Nonoperating investment gains (losses), net (95) Other nonoperating activities, net - Excess (deficit) of continuing revenues over expenses (898) (55) - (207) - 25,197 - (1) (1) (1) (851) 6 33 (1,572) (692) (703) (661) 8 (266) 173 Other changes in net assets: Net change in unrealized (losses) gains on other-than-trading securities - - - - - - 71 - - Net assets released from restrictions used for the purchase of property, plant, and equipment - - - - - - 152 - - Net change in equity of joint ventures - - - - - - - - - Distributions to noncontrolling interest owners - - - - - - - - - Pension and other post retirement adjustments - 2,215 - - - - - - - - Transfers to affiliates and other changes, net Increase (decrease) in unrestricted net assets See accompanying independent auditors' report on supplementary information (186) $ (1,084) (19,860) (484) 981 (2,006) 237 579 7,552 (485) 980 (2,857) (466) 141 (266) 173 BON SECOURS HEALTH SYSTEM INC., AND SUBSIDIARIES Combining Schedule - Operating Information Non-Obligated Group Members (in thousands) Schedule 2.3 5 of 5 August 31, 2017 St. Petersburg Home Care Services, Inc. Bon Secours Associates, LLC Shannon Health MOB Partnership 1 BSB MOB Partnership 2 Bon Secours Good HelpCare LLC Good Help Connections, LLC Bon Secours Assurance Company, Ltd. Combined NonObligated Group Combining Eliminations Revenues: Net patient service revenue before bad debts $ Provision for patient bad debts, net 3,843 (248) Net patient service revenue 3,595 Other revenue Total revenue - - - - - - 1 - - - - - - (1) - - - - - - - 171,081 (6,558) 164,523 - - - - 533 15,679 17,600 (16,840) 80,832 3,595 - - - 533 15,679 17,600 (16,840) 245,355 2,800 - - - 3,866 5,296 - 1,233 139,970 98 - - - 6 186 - 80 1,222 - - - 1,131 6,579 17,600 (15,175) 69,376 20 10,076 Expenses: Salaries, wages and benefits Supplies Purchased services and other Depreciation and amortization 25,992 - - - - 1,533 - (1,668) - - - - - 52 - (1,443) 1,354 4,140 - - - 5,003 13,646 17,600 (16,973) 246,768 (545) - - - (4,470) 2,033 - Nonoperating investment gains (losses), net (15) - - - - (21) Other nonoperating activities, net - - 324 (82) - - - 888 (13,611) - 324 (82) (4,479) 2,066 - 1,000 (14,060) - - - - - - - - 318 6,309 Interest Total expenses Operating (loss) income 133 (1,413) Nonoperating gains (losses), net: Excess (deficit) of continuing revenues over expenses (560) (9) 33 964 Other changes in net assets: Net change in unrealized (losses) gains on other-than-trading securities Net assets released from restrictions used for the purchase of property, plant, and equipment - - - - - - - - Net change in equity of joint ventures - - - - - - - - - Distributions to noncontrolling interest owners - - - - - - - - (5,919) Pension and other post retirement adjustments - - - - - - - - Transfers to affiliates and other changes, net - - - - - - - 14 (18,122) - 324 (82) (4,479) 2,066 - 1,014 (29,259) Increase (decrease) in unrestricted net assets See accompanying independent auditors' report on supplementary information $ (560) 2,215