Memorial Hermann Healthcare System County Cultural Education Facilities Finance Corporation Hospital Revenue Refunding Bonds (Memorial Hermann Health System) Series 2013A and 2013B

1

Memorial Hermann Health System

ANNUAL REPORT ON FINANCIAL INFORMATION

AND OPERATING DATA

(Pursuant to S.E.C. Rule 15c2-12)

Fiscal Year End

June 30, 2016

Contact Information:

Dennis L. Laraway Anthony P. Frank

Chief Financial Officer Chief Accounting Officer

Memorial Hermann Health System Memorial Hermann Health System

929 Gessner, Suite 2703 909 Frostwood

Houston, Texas 77024 Houston, Texas 77024

(713) 242-2707 (713) 338-4122

2

ANNUAL REPORT ON FINANCIAL INFORMATION

AND OPERATING DATA

(Pursuant to S.E.C. Rule 15c2-12)

Dated: November 30, 2016

Due: November 30, 2016

Relating to: Harris County Cultural Education Facilities Finance Corporation Hospital Revenue Bonds

(Memorial Hermann Health System) Series 2016A, 2016B, 2016C, 2016D, 2016E

Harris County Cultural Education Facilities Finance Corporation Hospital Revenue Bonds

(Memorial Hermann Health System) Series 2015B

Harris County Cultural Education Facilities Finance Corporation Hospital Revenue Bonds

(Memorial Hermann Health System) Series 2014A, 2014B, 2014C and 2014D

Harris County Cultural Education Facilities Finance Corporation Hospital Revenue Refunding Bonds

(Memorial Hermann Health System) Series 2013A and 2013B

Harris County Cultural Education Facilities Finance Corporation Hospital Revenue Refunding Bonds

(Memorial Hermann Healthcare System) Series 2010A

CUSIP Nos.: 414009EF3, 414009EG1, 414009EH9, 414009EJ5, 414009EN6, 414009EK2, 414009EP1, 414009EL0,

414009EQ9, 414009EM8, 414009FZ8, 414009GA2, 414009GB0, 414009GS3, 414009GC8, 414009GT1,

414009GD6, 414009GU8, 414009GE4, 414009GV6, 414009GF1, 414009GW4, 414009GG9, 414009GX2,

414009GH7, 414009GY0, 414009GJ3, 414009GZ7, 41009GK0, 414009HA1, 414009GL8, 414009HB9,

414009GM6, 414009GN4, 414009GQ7, 414009HC7, 414009GP9, 414009GR5, 414009FP0, 414009FQ8,

414009FR6, 414009FS4, 414009FT2, 414009FU9, 414009FV7, 414009FW5, 414009FX3, 414009FY1,

414009HN3, 414009HP8, 414009HQ6, 414009HR4, 414009HS2, 414009HT0, 414009HU7, 414009HV5,

414009HW3, 414009HX1, 414009HY9, 414009HZ6, 414009JA9, 414009JB7, 414009JC5, 414009JE1,

414009HM5, 414009HL7, 414009JF8, 414009KF6, 414009KG4, 414009KH2, 414009KN9, 414009KJ8,

414009KK5, 414009KM1, 414009KL3, 414009KP4, 414009KT6, 414009KU3, 414009KV1, 414009KS8,

414009KQ2, 414009KR0

The following Annual Report on Financial Information and Operating Data is filed by Memorial Hermann Health System. The

information in this Annual Report is provided solely to comply with contractual commitments, made in connection with the

above bond issues, to provide specified information. Descriptions of the bonds, the source of payment and security for the

bonds, and risks associated with an investment in the bonds are described in the Official Statements related to the bonds, as

supplemented, copies of which are on file with the Municipal Securities Rulemaking Board. This Annual Report is not made

in connection with a purchase or sale of bonds by Memorial Hermann and accordingly is not intended to contain all

information material to a decision to purchase or sell bonds.

Any statement in this Annual Report which includes a matter of opinion, whether or not expressly so stated, is intended as

such, and not as a representation of fact. The information contained in this Annual Report is provided as of the respective dates

specified herein and is subject to change without notice, and the filing of this Annual Report shall not, under any

circumstances, create any implication that there has been no change in the affairs of the entities referred to herein or in the

other matters described herein since the date as of which such information is provided. The historical information set forth in

this Annual Report is not necessarily indicative of future results or performance due to various factors, including, among

others, those discussed in the Official Statements referred to above.

In its continuing disclosure agreements, Memorial Hermann Health System (“MHHS”) disclaims any contractual or tort

liability for damages resulting in whole or in part from any breach of the disclosure agreements or from any statement made

pursuant to the agreements, although holders of bonds may seek a writ of mandamus to compel MHHS to comply with its

agreement. See "Continuing Disclosure of Information" in the Official Statements

3

Table of Contents

General ..................................................................................................................................................................... 4

Beds in Service ........................................................................................................................................................ 4

Competitive Environment ........................................................................................................................................ 6

Medical Staff ........................................................................................................................................................... 7

Utilization Data ........................................................................................................................................................ 8

Sources of Revenue ................................................................................................................................................. 9

Employees................................................................................................................................................................ 9

Pension Plan............................................................................................................................................................. 9

Summary of Revenues and Expenses .................................................................................................................... 10

Consolidated Financial Statements ........................................................................................................................ 11

Management’s Discussion of Recent Financial Performance ................................................................................ 11

Investment Income ................................................................................................................................................. 11

Investments and Investment Policy ....................................................................................................................... 12

Trends in Liquidity ................................................................................................................................................ 13

Long-Term Indebtedness of the Obligated Group ................................................................................................. 14

Long-Term Debt Service and Other Obligations ................................................................................................... 15

Debt Service Coverage .......................................................................................................................................... 17

Floating Rate Notes and Self Liquidity.................................................................................................................. 18

Interest Rate Swaps ................................................................................................................................................ 18

Memorial City Lease ............................................................................................................................................. 19

4

MEMORIAL HERMANN HEALTH SYSTEM

General

Memorial Hermann Health System (“MHHS”) is a Texas not-for-profit corporation that operates a multi-hospital, community-

based health system through directly and indirectly controlled affiliates principally in the Houston, Texas metropolitan area.

MHHS is exempt from federal income tax under section 501(a) of the Internal Revenue Code (the “Code”) by reason of being

an organization described by Section 501(c)(3) of the Code. With respect to its affiliates, MHHS has the right to elect the

Board of Directors and must approve any amendments to the articles of incorporation and bylaws. Further, it has the authority

to approve major expenditures and long-term borrowings by its affiliates.

MHHS and its affiliates operate twelve general acute care hospitals (including Memorial Hermann Texas Medical Center -

primary teaching hospital in conjunction with the University of Texas Medical School at Houston), three heart and vascular

institutes, one nursing center, home health services, a prevention and recovery center, two rehabilitation hospitals (including

The Institute for Rehabilitation and Research “TIRR”), numerous sports medicine rehabilitation clinics and surgical centers,

two 501(a) employed physician groups, a comprehensive Independent Practice Association (IPA), two insurance companies

that underwrite group health coverage for employers and the Medicare Advantage program, a captive insurance company,

various medical office buildings, and a foundation that raises financial support for MHHS. The Obligated Group under

MHHS’s Second Amended and Restated Master Indenture of Trust Security Agreement (the “Master Indenture”) consists of

MHHS and all of its active controlled affiliates except The Health Professionals Insurance Company, Ltd. (“HePIC”) and

Memorial Hermann Health Solutions Health Plan. Unless otherwise noted, “MHHS” or “System” is used herein to include

Memorial Hermann Health System and its consolidated affiliates.

Beds in Service

The following are the twelve acute-care hospitals and the non-acute services of MHHS with their respective beds in service as

of June 30, 2016 and the percent of consolidated net patient service revenue that each hospital contributed for Fiscal Year 2016

then ended.

Percent of

MHHS Net

Patient Service

Facility Beds in Service Revenue

Memorial Hermann Hospital Texas Medical Center 691 25.8 %

Memorial Hermann Orthopedic & Spine Hospital 63 1.6 %

234 9.0 %

417 8.6 %

444 11.5 %

277 7.9 %

62 0.8 %

225 5.1 %

351 10.3 %

Memorial Hermann Katy Hospital 203 5.3 %

Memorial Hermann Sugar Land Hospital 87 4.1 %

218 5.4 %

3,272 95.4 %

134 2.7 %

Memorial Hermann Katy Rehab 35 0.5 %

Kingwood Surgical 6 0.6 %

Sugar Land Surgical 6 0.8 %

Non-Acute Hospital System Services 206 0.0 %

Total MHHS 3,659 100.0 %

Memorial Hermann The Woodlands Hospital

Total Acute Facilities

Memorial Hermann TIRR

Memorial Hermann Northeast Hospital

Children's Memorial Hermann Hospital

Memorial Hermann Southwest Hospital

Memorial Hermann Memorial City Hospital

Memorial Hermann Southeast Hospital

Memorial Hermann Greater Heights Hospital

Memorial Hermann Pearland Hospital

5

The following table reflects total beds in service by type in all facilities operated by MHHS as of June 30, 2016

Bed Category Beds In Service

Adult (Excluding Special Care)

Skilled Nursing…………………………………. 38

Medicine/Surgery………………………………. 1,996

Rehabilitation…………………………………… 233

Chemical Dependency…………………………………………….146

Obstetrics……………………………………….. 399

CCU/ICU……………………………………………….. 433

Pediatric………………………………………………… 27

Total Adult, Special Care & Pedi Beds in Service 3,272

Neonatal ICU…………………………………………… 262

Neonatal Intermediate…………………………………………… 7

LTACH…………………………………………………. 30

Observation……………………………………………. 88

Total Beds In Service 3,659

Total Licensed Beds 4,016

[Remainder of Page Intentionally Left Blank]

6

Competitive Environment

Set forth below is information relating to the admissions of patients residing in the MHHS service area for MHHS and its

major competitors during the Fiscal Years 2012-2016 the most recent data available.

Largest Providers FY 2012 FY 2013 FY 2014 FY 2015 FY 2016

Number of

Hospitals (2)

Change

FY2015-16

Memorial Hermann Health System (3)

23.2% 23.7% 24.3% 24.2% 24.5% 13 0.3%

HCA Healthcare 19.4% 18.8% 19.5% 19.9% 20.3% 10 0.4%

Houston Methodist Healthcare System 12.8% 12.9% 15.2% 15.2% 15.5% 7 0.3%

CHI St. Luke's Health 8.9% 8.1% 7.3% 6.9% 7.0% 7 0.1%

Physician Owned** 6.4% 6.0% 5.4% 5.3% 5.1% 10 (0.2%)

Harris Health (Formerly HCHD) 6.7% 6.4% 6.8% 6.8% 6.2% 3 (0.6%)

Tenet Healthcare Corporation 5.8% 5.3% 5.0% 5.1% 5.0% 4 (0.1%)

83.2% 81.2% 83.5% 83.4% 83.6%

(2) The number of hospitals with discharges anytime from 7/1/15 to 6/30/16.

(3) Includes 11 acute care hospitals and 2 rehabilitation hospitals

*Physician Owned is made up of the following:

United Memorial MC (formerly Doctor's Hospital Tidwell)North Cypress Medical Center

Sugar Land Surgical Hospital St Joseph Medical Center

Kingwood Specialty TOPS Surgical Specialty Hospital

Houston Physicians Hospital Foundation Surgical (formerly University)

St Joseph Heights Bay Area Regional Hospital

(1) The Expanded Greater Houston MSA includes Austin, Brazoria, Chambers, Fort Bend, Galveston, Harris, Liberty, Montgomery, San Jacinto,

Waller, Walker and Wharton counties. Previous years have been recast using the new Greater Houston MSA definition.

Source: Texas Hospital Inpatient Discharge PublicUse Data File Calendar Years 2010 Q1 - 2016 Q1 (from Texas Department of State Health Services) and

Texas Hospital Association Public Data System FY2010 Q1 - FY2016 Q4 (from Truven - formerly Thomson Reuters) excluding Normal Newborns and SNF.

Expanded Greater Houston MSA (1)

Percent of Inpatient Admissions

By Fiscal Year

24.5%

20.3%

15.5%

7.0%

5.1%6.2%

5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

Memorial

Hermann HealthSystem (3)

HCA Healthcare Houston

MethodistHealthcare

System

CHI St. Luke's

Health

Physician

Owned**

Harris Health

(FormerlyHCHD)

Tenet Healthcare

Corporation

FY 2012

FY 2013

FY 2014

FY 2015

FY 2016

7

Medical Staff

The chart below shows the number of physicians and dentists affiliated with MHHS according to practice status as of June 30,

2016. The Medical Staff is organized into groups according to type of hospital affiliation.

Physician and Dentist Status Total

Active 3,547

Courtesy 1,088

Provisional 663

Total 5,298

Source: MHHS Medical Staff Rosters

The categories of MHHS Medical Staff membership are as follows:

Active — physicians and dentists who regularly perform a major part of their hospital medical practice at an MHHS hospital

Courtesy — physicians and dentists, who qualify as Active members of the Medical Staff, but use MHHS infrequently and are

limited to a specified number of patient contacts

Provisional — physicians and dentists who are serving probationary periods of Medical Staff appointment

The following table indicates the number of medical staff members by specialty as of June 30, 2016

Specialty Total

Allergy and Immunology 39

Anesthesiology 292

Cardiovascular Diseases 264

Dentistry, Including Oral and Maxillofacial Surgery and Orthodontics 75

Dermatology 85

Emergency Medicine 236

Family Medicine 335

Gastroenterology 139

Infectious Diseases 69

Internal Medicine 371

Nephrology 166

Neurology and Neurosurgery 190

Obstetrics and Gynecology 320

Oncology, including Radiation Oncology 125

Ophthalmology 122

Orthopedic Surgery 191

Other 473

Otolaryngology 110

Pathology 85

Pediatrics, includes general Pediatrics and subspecialties 535

Physical Medicine and Rehabilitation 69

Podiatry 119

Psychiatry 35

Pulmonary Disease 113

Radiology 260

Surgery 480

Grand Total 5,298

8

Utilization Data

The following are selected consolidated operating data for the acute care hospitals of MHHS for Fiscal Years 2012-2016.

2012 2013 2014 2015 2016

Beds In Service 2,831 2,875 2,858 3,056 3,272

Admissions (1) 130,598 136,402 142,706 147,571 151,736

Patient Days (1) 648,569 675,842 714,489 749,118 780,606

Average Length of Stay (Days) 5.0 5.0 5.0 5.1 5.1

Emergency Room Visits 450,010 476,909 509,615 564,052 595,611

Diagnostic & Therapeutic Visits 924,764 1,013,179 1,128,025 1,228,058 1,295,735

Outpatient Surgeries 76,845 81,481 85,194 86,982 106,007

Occupancy % (1) 68.7% 64.4% 64.1% 62.7% 65.4%

Gross Outpatient Revenue As a Percent

of Total Gross Patient Revenue 38% 38% 38% 38% 39%

Fiscal Year Ended June 30,

(1) Includes adult, pediatric, and neonatal intensive care patients. Newborns are excluded.

The following table reflects acute admissions for each facility for Fiscal Years 2012-2016, detailed by facility.

2012 2013 2014 2015 2016

TMC Adult 22,356 23,604 24,180 25,573 25,449

MH Ortho & Spine - - - - 1,773

TMC Children's 10,927 10,961 11,708 12,085 11,974

Southwest 17,198 17,575 18,207 17,244 17,163

Memorial City 18,533 19,434 20,360 21,559 21,350

Northeast 10,124 11,068 11,741 11,971 12,326

Greater Heights 11,298 11,344 11,829 11,814 11,517

Southeast 12,668 14,321 14,846 15,908 15,999

Pearland - - - - 642

The Woodlands 13,495 13,426 14,458 16,124 17,666

Katy 9,738 9,828 9,806 9,464 9,602

Sugar Land 4,261 4,841 5,571 5,829 6,275

Acute Care Total 130,598 136,402 142,706 147,571 151,736

Fiscal Year Ended June 30,

9

Sources of Revenue

MHHS derives its patient revenue from managed care companies, Medicare, Medicaid, commercial insurers, self-paying

patients and other sources. Set forth below is a table showing the source of payment of gross patient revenues of MHHS for

each Fiscal Year ending June 30 of the years indicated:

2014 2015 2016

Managed Care 38% 39% 39%

Medicare 35 36 36

Medicaid 14 14 13

Self Pay/Indemnity/Other 13 11 12

Total 100% 100% 100%

Employees

MHHS employed approximately 26,000 full and part-time employees as of June 30, 2016. There is no union representation of

employees. Management considers MHHS’ relationships with its employees to be excellent. Employee problem resolution is

provided through both an open door policy with management and a formal grievance procedure available to all regular full and

part-time employees. MHHS provides a competitive compensation and benefits program which includes a pension plan, a

403(b) retirement plan with employer matching, life insurance, medical, dental and disability insurance plans as well as paid

vacation, holiday and sick leave programs. MHHS is not immune to labor shortages and has taken steps that have eased

potential staffing shortfalls, including establishing an internal staffing agency, several full-time nurse recruiters and a robust

employee retention program.

Pension Plan

MHHS has both a cash balance pension plan and defined contribution plans covering eligible employees of the System. As of

fiscal year end the pension plan was 85.0% funded. The plan’s funding status and MHHS accrued pension costs are shown in

note 9 to the MHHS audited financial statements attached to this report. The pension plan was closed to new employees

effective July 1, 2011.

10

Summary of Revenues and Expenses

The following information should be read in conjunction with the audited consolidated financial statements of MHHS for the

years indicated, including those for Fiscal Year 2016 attached hereto.

2012 2013 2014 2015 2016

Revenues, gains, and other support:

Net patient service revenue and

other revenue $3,353,171 $3,578,490 $3,938,451 $4,422,334 $4,894,244

Total revenues, gains, and other support 3,353,171 3,578,490 3,938,451 4,422,334 4,894,244

Operating expenses excluding

depreciation, amortization & interest 2,856,379 3,115,985 3,454,331 3,815,227 4,339,665

Depreciation & amortization 221,125 220,866 223,881 233,406 248,796

Interest 81,357 75,787 68,280 71,640 80,740

3,158,861 3,412,638 3,746,492 4,120,273 4,669,201

194,310 165,852 191,959 302,061 225,043

Loss on bond refunding - (83,481) (2,948) - -

Non-controlling Interest (26,736) (27,186) (32,649) (41,992) (54,109)

Change in fair value of interest rate

swap agreements (85,237) 18,739 (24,237) (23,393) (49,295)

Investment Income (Loss) (1) 42,363 64,663 182,517 5,289 (67,547)

Other income, net 2,283 4,048 8,055 7,373 (1,386)

Revenues in excess of expenses

(continuing operations) (1)

126,983$ 142,635$ 322,697$ 249,338$ 52,706$

Fiscal Year Ended

June 30, (000's O mitted)

Operating income

Non-operating Items and Other:

Expenses:

Total expenses

___________________________

(1) June 30, 2015 results include realized gains of $42.9 million, unrealized losses of $78.9 million and dividends and interest income of $48.7 million. June

30, 2016 results include realized losses of $27.9 million, unrealized losses of $71.9 million and dividend and interest income of $32.3 million. See

“Investment Income” herein.

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

2012 2013 2014 2015 2016

Operating Margin

EBIDA Margin

11

Consolidated Financial Statements

The consolidated financial statements of MHHS and its affiliates as of June 30, 2015 and 2016 and for the years then ended

have been audited by Ernst and Young LLP, independent auditors, and are attached hereto together with such firm’s report on

the statements.

Management’s Discussion of Recent Financial Performance

Operating income has remained strong over the five year period from Fiscal Year 2012 through Fiscal Year 2016. During this

five-year period, operating margin ranged from 4.6% to 6.8%, and earnings before interest depreciation and amortization

(EBIDA) margin ranged from 11.3% to 14.8%. In recent years management efforts have been focused on performance

improvement through:

Managed care contracts with terms that provide for annual payment increases and termination of unprofitable

contracts;

Financial improvement plans that focus on revenue enhancements and cost reduction activities;

Internal and external benchmarking;

Focused collection efforts on accounts receivable that reduced days in accounts receivable and increased days

cash on hand;

Improved resource utilization through care management initiatives;

Expansion of facilities to position MHHS for growth in market share with emphasis on key service lines and

Maximization of the uncompensated care program, and other supplemental programs to fill the shortfall in

Texas Medicaid reimbursement

Operating income was $194.3 million, $165.8 million, $191.9 million, $302.1 million and $225.0 million in Fiscal Years 2012,

2013, 2014, 2015, and 2016 respectively. In Fiscal Years 2012, 2013, 2014, 2015 and 2016 MHHS recognized $86.5 million,

$32.0 million, $36.7 million, $29.0 million and $36.4 million respectively, in net patient revenues from cost report settlements.

MHHS management conducts monthly operational review (MOR) meetings with key personnel at each of its hospitals and

other operating units to monitor performance against budget and to identify action plans for improvement. In addition, a best

practice benchmarking system is utilized to measure MHHS’s performance against other healthcare organizations with various

clinical, financial and customer satisfaction indicators.

Recent performance of investments held by MHHS is discussed in the section “Investment Income” herein.

Investment Income

MHHS recorded investment losses of $67.5 million for Fiscal Year 2016. That amount is composed of dividend and interest

income of approximately $32.3 million and net realized losses of $27.9 million. Net unrealized investment losses were

approximately $71.9 million. Unrealized losses, resulting from the changes in the market value of interest rate swap

agreements, were $49.3 million.

12

Investments and Investment Policy

The Investment Committee, a sub-committee of the Finance Committee, is entrusted with the responsibility for oversight of the

corporate investment policy. The composition of investments between asset classes is governed by MHHS policies and varies

according to the fund designation and the length of time until intended utilization. MHHS employs investment advisors and

professional investment management companies to advise MHHS on various investment allocation strategies. All individual

securities are held in custody or trustee accounts by The Bank of New York Mellon Trust Company, N.A. Investments may be

classified by intentions and purposes for which the funds are to be ultimately used, such as operating funds, insurance funds,

bond funds and donor funds.

The target and actual allocations of general operating funds investments, totaling $2.25 billion as of June 30, 2016 were as set

forth in the table below:

Asset Category Actual Target

Money Market 12.5% 10.0%

Fixed Income 17.3% 16.0%

Domestic Equity 22.1% 19.0%

International Equity 16.6% 15.0%

Risk Parity 6.6% 0.0%

Private Equity/Hedge Funds 24.9% 40.0%

Total 100.0% 100.0%

June 30, 2016

The target and actual allocations of the System’s pension plan investments, totaling $551.7 million as of June 30, 2016 were as

set forth in the table below:

Asset Category: Actual Target

Short Term Investments 7.6% 2.0%

Fixed Income 24.2% 27.0%

Domestic Equity 22.0% 22.5%

International Equity 18.9% 18.5%

Risk Parity 4.5% 0.0%

Private Equity/Hedge Funds 22.8% 30.0%

Total 100.0% 100.0%

June 30, 2016

Note – Management and the Investment Committee are in the process of implementing a new investment allocation

framework, partially complete in 2016. Differences between Actual and Target allocation will come into alignment as the new

program matures.

13

Trends in Liquidity

The following table sets forth the consolidated cash position and liquidity of MHHS as of June 30, 2014, 2015 and 2016.

2014 2015 2016

Unrestricted Operating Cash and Investments $1,940,315 $2,444,685 2,245,330$

Average Daily Operating Expenses $9,653 $10,649 $12,137

Days Cash on Hand (1)

201 230 185

Maximum Annual Debt Service (2)

$134,855 $147,484 $166,384

Cushion Ratio (2)(3)

14.4x 16.6x 13.5x

Fiscal Year Ended

June 30,

(000s omitted)

(1)

The amount of cash and investments expressed as the number of days of average daily operating expenses for the year.

(2) See “Long Term Debt Service and Other Obligations” herein for assumptions used. Debt service includes capital lease obligations. Actual debt service could be higher.

(3) The ratio of total unrestricted cash and investments on hand at year end to the Maximum Annual Debt Service

45.0% 44.3%47.4%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

50.0%

2014 2015 2016

Debt to Capitalization

100.0%

110.0%

90.0%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

2014 2015 2016

Cash To Debt Ratio

14

Long-Term Indebtedness of the Obligated Group

The following schedule details the obligations issued under the Memorial Hermann Health System Master Trust Indenture at

June 30, 2016 (000’s omitted):

Series 2014C & Series 2014D 70,400$

Series 2015A, Series 2015B, Series 2015C 263,100

Series 2016B, Series 2016C, Series 2016D, Series 2016E 326,305

Series 2013B 89,340

Series 2014B 70,425

Series 2010A 46,140

Series 2013A 315,515

Series 2014A 145,005

Series 2016A 132,900

Other Long Term Debt Obligations

Capital Lease Obligations 748,720

Line of credit and Other Notes 69,908

Total Current and Long Term Portion 2,277,758$

Premiums on long term debt 49,534

Deffered Financing fees (8,999)

Total Debt 2,318,293$

(443,227)

Total Long Term Debt 1,875,066$

Less: Current Portion, including amounts subject to self-liquidity

Revenue Bonds, in variable rate demand mode, with interest rates ranging from .41%

to .86% at June 30, due in varying installments through July 1, 2046:

Revenue Bonds, in variable rate mode, with interest rates ranging from .41% to .99% at

June 30, due in varying installments through July 1, 2042:

Revenue Bonds, in fixed rate mode, bearing interest from 2.40% to 5.30%, due in

annual installments through July 1, 2046:

Commercial Obligations – As of June 30, 2016 MHHS had qualified certain reimbursement obligations for standby letters of

credit relating to its self-insurance program, aggregating approximately $10.0 million (the “Commercial Obligations”) as

Master Debt secured by the Master Indenture. No letter of credit advances were then or are currently outstanding.

15

Long-Term Debt Service and Other Obligations

The following table and graph sets forth the total debt service, as of June 30, 2016, due in each future fiscal year on obligations

outstanding based on the following assumptions. Net interest on all hedged variable rate bonds was calculated at the respective

fixed rates payable by MHHS under existing associated interest rate swap agreements (plus, in the case of the Series 2013B,

2015A, 2015B, and 2015C Bonds, the fixed interest spread to the applicable interest rate index borne by such bonds to their put

dates or maturity, as applicable); or, if not hedged, at the 12 month historical average rate plus any applicable spread, to the

first day of the earliest fiscal year in which they may be tendered for purchase or, if none, to their maturity. From the earliest

tender date, debt service attributable to such bonds has been calculated by assuming that they are then refunded by long-term

fixed rate debt amortized over 30 years from 2016 so as to minimize aggregate maximum annual debt service requirements and

bearing interest at 5.00% per annum (an estimated taxable rate), as permitted by the Master Indenture in calculating Annual

Debt Service Requirements, and interest rate swap payments or receipts have been excluded from the calculation. Actual

interest rates and principal amortization may vary materially from the assumed rates and amortizations. Credit, liquidity, and

remarketing and other fees are also excluded.

Interest on any drawing of the Revolving Line of Credit was calculated at the historical 12 month average 1 month LIBOR rate

plus the applicable spread to the first day of the year of such facility's maturity date. At such date, debt service is calculated

assuming any outstanding balance is then refunded by long-term fixed rate debt amortized over 30 years from 2016 so as to

minimize aggregate maximum annual debt service requirements and bearing interest at 5.00% per annum (an estimated taxable

rate), as permitted by the Master Indenture in calculating Annual Debt Service Requirements. Actual interest rates and

principal amortization may vary materially from the assumed rates and amortizations. See “Long-Term Indebtedness of the

Obligated Group” and “Interest Rate Swaps” herein.

[Remainder of Page Intentionally Left Blank]

16

Period

Ending

Series

2010A

Series

2013A

Series

2013B

Series

2014A

Series

2014B

Series

2014C

Series

2014D

Series

2015AB

Series

2015C

Series

2016A

Series

2016B

Series

2016C

Series

2016D

Series

2016E

Total Capital

Leases

Total Debt

Service

2017 7,115,544$ 20,845,250$ 15,005,338$ 8,405,750$ 470,982$ 1,756,772$ 1,756,772$ 9,431,104$ 11,761,850$ 3,439,363$ 4,229,167$ 3,057,863$ 2,039,801$ 3,546,179$ 61,271,422$ 154,133,155$

2018 7,116,419 20,834,225 14,555,372 10,861,625 471,848 1,760,000 1,760,000 9,448,432 11,851,680 6,099,363 7,500,000 3,118,500 2,080,250 3,616,500 61,563,893 162,638,105

2019 7,117,619 20,825,100 14,087,101 11,334,250 471,848 1,760,000 1,760,000 9,448,432 11,616,720 6,099,363 7,500,000 3,118,500 2,080,250 3,616,500 61,867,613 162,703,295

2020 7,113,594 20,819,225 13,612,428 9,154,750 3,277,072 1,763,228 1,763,228 9,465,760 11,683,531 6,099,363 7,500,000 3,118,500 2,080,250 3,616,500 64,860,473 165,927,901

2021 7,116,500 20,826,350 13,224,123 6,870,500 3,514,792 1,756,772 1,756,772 8,213,996 11,616,002 6,099,363 7,500,000 3,118,500 2,080,250 3,616,500 67,838,413 165,148,833

2022 7,113,750 20,830,475 12,829,491 7,265,875 3,521,250 1,760,000 1,760,000 8,120,000 11,552,480 6,099,363 7,500,000 3,118,500 2,080,250 3,616,500 68,155,658 165,323,591

2023 7,116,500 20,825,025 12,318,735 7,776,500 3,521,250 1,760,000 1,760,000 8,120,000 11,570,880 6,099,363 7,500,000 3,118,500 2,080,250 3,616,500 68,479,247 165,662,749

2024 7,113,750 20,820,325 11,903,320 8,200,375 3,527,708 1,763,228 1,763,228 8,134,892 11,575,570 6,099,363 7,500,000 3,118,500 2,080,250 3,616,500 68,809,307 166,026,315

2025 - 19,706,225 - 25,315,375 3,514,792 1,756,772 1,756,772 8,105,108 11,654,312 6,099,363 7,500,000 3,118,500 2,080,250 3,616,500 72,160,225 166,384,194

2026 - 21,892,750 - 20,117,375 3,521,250 1,760,000 1,760,000 8,120,000 11,520,080 6,099,363 7,500,000 3,118,500 2,080,250 3,616,500 59,875,072 150,981,139

2027 - 22,404,250 - 20,825,000 3,521,250 1,760,000 1,760,000 8,120,000 11,570,640 6,099,363 7,500,000 3,118,500 2,080,250 3,616,500 58,207,675 150,583,427

2028 - 22,378,750 - 20,848,000 6,316,142 2,991,699 2,913,700 11,879,892 - 6,099,363 7,500,000 3,118,500 2,080,250 3,616,500 56,783,974 146,526,769

2029 - 22,926,375 - 20,300,500 6,316,831 2,990,760 2,911,870 11,878,202 - 6,099,363 7,500,000 3,118,500 2,080,250 3,616,500 56,783,974 146,523,124

2030 - 22,556,875 - 17,205,875 6,318,217 2,990,721 2,911,214 11,874,750 - 6,099,363 7,500,000 3,118,500 2,080,250 3,616,500 60,252,273 146,524,538

2031 - 22,547,725 - 13,439,125 6,315,728 2,989,225 2,914,219 11,877,750 - 6,099,363 7,500,000 3,118,500 2,080,250 3,616,500 64,026,905 146,525,291

2032 - 22,532,350 - 13,234,500 6,315,117 2,991,692 2,911,476 11,878,657 - 6,099,363 7,500,000 3,118,500 2,080,250 3,616,500 64,245,715 146,524,119

2033 - 42,811,175 - - 4,077,875 2,992,437 2,912,262 7,069,511 - 6,099,363 7,500,000 3,118,500 2,080,250 3,616,500 64,245,715 146,523,588

2034 - 40,868,200 - - 6,012,236 2,986,866 2,916,860 7,082,500 - 6,099,363 7,500,000 3,118,500 2,080,250 3,616,500 64,245,715 146,526,989

2035 - 40,891,825 - - 2,486,000 2,565,468 2,914,865 7,082,500 - 6,099,363 7,500,000 3,118,500 2,080,250 3,616,500 68,169,888 146,525,159

2036 - 38,804,550 - - 2,490,559 1,178,658 2,101,666 7,095,489 - 6,099,363 7,500,000 3,118,500 2,080,250 3,616,500 72,440,650 146,526,184

2037 - - - - 6,313,551 2,988,013 2,913,939 18,634,511 - 6,099,363 7,500,000 7,918,500 8,200,250 13,266,500 72,688,213 146,522,840

2038 - - - - 6,316,533 2,989,759 2,913,005 18,629,250 - 25,424,963 7,500,000 2,878,500 1,774,250 5,409,000 72,688,213 146,523,473

2039 - - - - 6,314,797 2,989,516 2,915,262 18,633,000 - 25,432,781 7,500,000 2,878,500 1,774,250 5,965,250 72,123,108 146,526,465

2040 - - - - 6,320,191 2,985,694 2,913,903 17,925,899 - 25,428,250 7,500,000 2,878,500 1,774,250 2,873,000 75,923,545 146,523,233

2041 - - - - 6,320,062 2,987,286 2,913,194 16,540,011 - 25,432,125 7,500,000 2,878,500 1,774,250 2,873,000 77,305,005 146,523,433

2042 - - - - 6,316,721 2,992,164 2,911,034 18,627,500 - 2,292,750 7,500,000 9,243,500 8,194,250 13,273,000 75,173,518 146,524,437

2043 - - - - 6,317,988 2,989,672 2,911,792 18,627,750 - 2,292,750 7,500,000 9,240,250 8,198,250 13,273,000 75,173,518 146,524,971

2044 - - - - 6,317,110 2,991,453 2,911,934 18,631,152 - 2,292,750 37,980,000 16,346,250 8,196,000 13,272,000 37,586,759 146,525,408

2045 - - - - 6,319,060 2,990,107 2,909,240 18,628,824 - 2,292,750 75,566,000 16,350,250 8,197,000 13,268,750 - 146,521,980

2046 - - - - 6,314,422 2,993,200 2,911,195 18,627,000 - 25,429,500 52,426,500 16,353,750 8,195,250 13,272,000 - 146,522,816

2047 - - - - - - - - - 25,428,125 - - - - - 25,428,125

$-

$20,000,000

$40,000,000

$60,000,000

$80,000,000

$100,000,000

$120,000,000

$140,000,000

$160,000,000

$180,000,000

201

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Annual Debt Service

Bonds

Leases (Primarily Memorial City)

17

Debt Service Coverage

The following table presents MHHS’s consolidated historical net revenue available for debt service for Fiscal Years Ended

June 30, 2015, 2015, and 2016 and the coverage of the pro forma maximum annual debt service requirement as of the

respective fiscal year ended, based on footnoted assumptions:

2014 2015 2016

Operating Income $191,959 $302,061 $225,043

Depreciation & amortization 223,881 233,406 248,796

Interest 68,280 71,640 80,740

Realized Investment Income 95,234 91,551 4,384

SWAP Agreements (24,237) (23,393) (49,295)

Non Controlling Interest (32,649) (41,992) (54,109)

Net Revenue available for debt service $522,468 $633,273 $455,559

Maximum annual debt service requirement (1)

$134,855 $147,484 $166,384

Maximum annual debt service coverage ratio 4.1x 4.3x 2.7x

Master Indenture Required Minimum 1.1x 1.1x 1.1x

Fiscal Year Ended

June 30,

(000’s omitted)

_________________________

(1)

See “Long Term Debt Service and Other Obligations” herein for assumptions used. Debt service includes capital lease obligations. Fiscal year 2016

Maximum Annual Debt Service excludes debt related to the line of credit.

18

Floating Rate Notes and Self Liquidity

The Series 2013B bonds are structured as floating rate notes with serial maturities and no put privileges. The Series 2014B

bonds, also structured as floating rate notes, bear interest at a variable index rate to December 1, 2019, when they must be

purchased and may be remarketed by MHHS.

The Series 2014C bonds and Series 2014D bonds were issued as variable rate demand bonds supported by the System’s self-

liquidity program.

The Series 2010B variable rate demand bonds were refinanced by issuing the Series 2015A and Series 2015B refunding bonds.

These bonds were purchased by banks and have no “put feature” for a term of five years. The Series 2008A-1 variable rate

demand bonds were refinanced by issuing the Series 2015C refunding bonds. These bonds were purchased by a bank until the

final maturity of the bonds and do not have a “put” option.

The Series 2016B was issued as variable rate demand bonds in commercial paper mode. The Series 2016C Series 2016D are

variable rate demand bonds. The Series 2008A-2 bonds were refinanced by issuing the Series 2016E variable rate demand

refunding bonds. The Series 2016B, Series 2016C, Series 2016D and Series 2016E bonds were issue under the Health

System’s self-liquidity program.

The System intends to maintain cash, lines of credit, and investments as well as liquidation procedures sufficient to purchase

the bonds on demand.

Interest Rate Swaps

MHHS’s swap obligations are secured under the Master Indenture. The counterparty may terminate each swap for certain

events of default by MHHS (including under other specified swaps and indebtedness) or certain acts of insolvency. In

addition, MHHS may terminate each swap at any time. More details on MHHS’ interest rate swap agreements can be found in

note 7 to the MHHS’ audited financial statements attached to this report. MHHS has no collateral posting requirements in

conjunction with these swap agreements, unless its Moody’s or S&P rating is reduced below “A-“ or “A3”, respectively, in

which case it must fully collateralize the counterparty’s exposure. The following table summarizes the Health System’s swap

portfolio, the fair values at June 30, 2016 and 2015, and the change in value, in thousands:

Swap

Description

Term

Date

Interest

Rate

Agreements

Notional

Amount

Fair Value

Asset (Liability) Change in Fair Value

June 30, 2016 June 30, 2015 June 30, 2016 June 30, 2015

LIBOR-based to

Fixed (5.3425%) 2032 1 $ 113,120 $ (55,830) $ (40,433) $ (15,397) $ (3,603)

LIBOR-based to

Fixed (3.6290%) 2029 3 131,700 (36,087) (26,531) (9,556) (2,175)

LIBOR-based to

Fixed (3.6350%) 2024 2 88,000 (11,549) (11,205) (344) 1,778

LIBOR-based to

Fixed (3.6850%) 2027 3 172,600 (30,711) (26,817) (3,894) 1,784

9 $ 505,420 $ (134,177) $ (104,986) $ (29,191) $ (2,216)

The notional amounts under each of the interest rate swap agreements are reduced in conjunction with the Health System’s

principal payments on the associated bonds. At June 30, 2016 and 2015, the fair value of swap agreements was $134,177,000

and $104,986,000, respectively, and has been included in other long-term liabilities. As of June 30, 2016, none of the Health

System’s swap agreements include provisions that would require posting of collateral.

The Health System classified the net interest cost on its interest rate swaps for the years ended June 30, 2016 and 2015, of

$20,104,000 and $21,177,000, respectively, in non-operating expenses (interest rate swap agreements) in the consolidated

statements of operations and changes in net assets.

19

Memorial City Lease

MHHS has a master lease and development agreement with Metro National Corporation (“Metro”) under which MHHS leases

Memorial City Hospital from Metro through 2043. MHHS has the right to extend the lease for an additional five year term

through December 31, 2048. Additionally Metro has constructed a new patient tower and renovated certain existing facilities,

which are subject to this agreement and associated agreements. MHHS reflects the Memorial City Lease as a capital lease on

its consolidated balance sheet.