UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS CHRISTUS Health March 31, 2009

Transcription

1 UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS CHRISTUS Health March 31, 2009

2 CHRISTUS Health Unaudited Consolidated Financial Statements March 31, 2009 Contents Unaudited Consolidated Financial Statements Unaudited Consolidated Balance Sheets...1 Unaudited Consolidated Statements of Operations and Changes in Net Assets...3 Unaudited Condensed Consolidated Statement of Cash Flows...5 Unaudited Notes to Consolidated Financial Statements...7

3 CHRISTUS HEALTH UNAUDITED CONSOLIDATED BALANCE SHEETS (In thousands) ASSETS MARCH 31, JUNE 30, CURRENT ASSETS: Cash and cash equivalents $ 306,694 $ 174,474 Short-term Investments 186, ,738 Equity investments in managed funds 148, ,262 Assets whose use is limited or restricted, required for current liabilities 51,776 55,245 Patient accounts receivable, net of allowance for uncompensated care of $231,874 and $192,195 at March 31, 2009 and June 30, 2008, respectively 382, ,705 Estimated third-party payor settlements 15,181 2,371 Notes and other receivables 160, ,503 Inventories 82,279 83,017 Assets held for sale 1,816 2,021 Securities pledged to creditors 88,562 36,502 Security lending collateral 88,044 39,789 Collateral Held by Banks 13,210 - Other current assets 55,044 31,291 Total current assets 1,581,338 1,547,918 ASSETS WHOSE USE IS LIMITED OR RESTRICTED Less current portion 450, ,719 PROPERTY, PLANT, AND EQUIPMENT Net of accumulated depreciation 1,872,607 1,921,396 OTHER ASSETS Investments in unconsolidated organizations 154, ,337 Derivative investments 3,727 2,941 Goodwill, net of amortization 115, ,387 Other assets 78,391 86,315 Other restricted assets 25,142 27,366 Total other assets 377, ,346 TOTAL $ 4,281,608 $ 4,577,379

4 CHRISTUS HEALTH UNAUDITED CONSOLIDATED BALANCE SHEETS (In thousands) LIABILITIES AND NET ASSETS MARCH 31, JUNE 30, CURRENT LIABILITIES Accounts payable and accrued expenses $ 311,686 $ 373,241 Accrued employee compensation and benefits 156, ,987 Accrued benefits current portion 6,500 3,551 Estimated third party settlements 17,771 14,332 Current portion of long-term debt 39,398 30,306 Liabilities related to assets held for sale - Payable under security lending agreement 90,969 39,789 Long term obligations subject to remarketing adjustments 216, ,535 Total current liabilities 838, ,741 LONG-TERM DEBT Less current portion 1,126,568 1,097,381 ACCRUED PENSION BENEFITS LONG-TERM PORTION 83,033 86,614 OTHER LONG-TERM OBLIGATIONS Primarily related to self-funded liabilities less current portion 136, ,027 Total liabilities 2,184,869 2,060,763 MINORITY INTEREST 77,650 78,021 COMMITMENTS AND CONTINGENCIES Unrestricted 1,955,122 2,372,539 Temporarily restricted 50,602 52,939 Permanently restricted 13,365 13,117 Total net assets 2,019,089 2,438,595 TOTAL $ 4,281,608 $ 4,577,379

5 CHRISTUS HEALTH UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS FOR THE NINE MONTHS ENDED (In thousands) MARCH 31, MARCH 31, UNRESTRICTED REVENUES: Net patient service revenue $ 2,341,175 $ 2,057,145 Premium revenue 112, ,093 Other revenue 121, ,067 Equity in (loss) income of unconsolidated organizations (10,321) 25,308 Total revenues 2,565,081 2,325,613 EXPENSES: Employee compensation and benefits 1,176,010 1,005,632 Services and other 667, ,986 Supplies 443, ,109 Depreciation and amortization 175, ,339 Provision for uncollectible accounts 116, ,187 Interest 36,996 30,973 Total expenses 2,616,026 2,310,226 OPERATING (LOSS) INCOME (50,945) 15,387 NONOPERATING INVESTMENT LOSS (332,540) (107,958) NONOPERATING INCOME (11,261) (882) REVENUES IN DEFICIT OF EXPENSES (394,746) (93,453)

6 CHRISTUS HEALTH UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS FOR THE NINE MONTHS ENDED (In thousands) MARCH 31, MARCH 31, OTHER CHANGES IN UNRESTRICTED NET ASSETS: Net change in unrealized (loss) gain on investments (12,560) (7,607) Other (10,109) (583) CHANGES IN UNRESTRICTED NET ASSETS (417,415) (101,643) TEMPORARILY RESTRICTED NET ASSETS: Contributions 4,597 13,654 Net change in unrealized loss on investments (3,175) (1,289) Net assets released from restrictions and other (3,760) (909) CHANGES IN TEMPORARILY RESTRICTED NET ASSETS (2,338) 11,456 CHANGES IN PERMANENTLY RESTRICTED NET ASSETS 247 1,834 CHANGES IN NET ASSETS (419,506) (88,353) NET ASSETS Beginning of period 2,438,595 2,582,940 NET ASSETS End of period $ 2,019,089 $ 2,494,587

7 CHRISTUS HEALTH UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED (In thousands) MARCH 31, MARCH 31, OPERATING ACTIVITIES: Changes in net assets $ (419,506) $ (88,353) Adjustments to reconcile changes in net assets to net cash provided by operating activities: Change in pension liabilities (3,581) (9,308) Other changes in net assets (4,597) (13,654) Equity in loss (income) of unconsolidated organizations 10,321 (25,308) Equity losses (earnings) on investments in managed funds 91, Depreciation and amortization 175, ,339 Provision for uncollectible accounts 116, ,187 Decrease in swap fair value 120,920 80,728 Changes in operating assets and liabilities: Increase in net patient accounts receivable (123,325) (191,467) Decrease (increase) in trading securities 323,217 (109,399) Increase in notes and other receivables (5,704) (47,543) Increase in inventories 738 (3,444) Collateral held by banks (13,210) - Increase in other current assets (23,753) (6,957) Decrease in accounts payable, accrued expenses, and accrued employee compensation and benefits (43,893) 24,754 Decrease in net third-party payor settlements (9,371) (17,416) Increase (decrease) in liability for self-funded liabilities 5,024 (26,073) Net cash provided by (used in) operating activities 196,198 (114,304) INVESTING ACTIVITIES: Purchases of property, plant, and equipment (122,353) (162,865) Proceeds from sale or disposal of property, plant, and equipment 3,717 1,285 (Increase) decrease in equity investments in managed funds 86,320 13,799 Decrease (increase) in investments in unconsolidated organizations 16,273 7,375 (Increase) decrease in securities pledged to creditors (52,060) 38,025 Decrease (ncrease) in other assets 17,087 (11,118) (Increase) decrease in security lending collateral (48,255) 39,184 Decrease due to acquisitions - (73,444) Net cash used in investing activities (99,271) (147,759)

8 CHRISTUS HEALTH UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED (In thousands) MARCH 31, MARCH 31, FINANCING ACTIVITIES: Contributions of temporarily restricted net assets $ 4,597 $ 13,654 Other costs associated with debt refinancing (10,344) (5,921) Proceeds from debt issuance 651, ,581 Payments on long-term debt (661,470) (12,856) Increase (decrease) in payable under security lending agreements 51,180 (39,184) Net cash used in by financing activities 35, ,274 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 132,220 3,211 CASH AND CASH EQUIVALENTS Beginning of year 174, ,733 CASH AND CASH EQUIVALENTS End of period $ 306,694 $ 249,944 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash $ 11,690 $ 8,712 paid during the year for interest (net of amount capitalized)

9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -UNAUDITED AS OF AND FOR THE NINE MONTHS ENDED MARCH 31, 2009 AND MARCH 31, MISSION, VISION, AND ORGANIZATION OF CHRISTUS HEALTH CHRISTUS Health (CHRISTUS) was incorporated as a Texas nonprofit corporation on December 15, CHRISTUS Health is sponsored by the Congregation of the Sisters of Charity of the Incarnate Word of Houston, Texas and the Congregation of the Sisters of the Incarnate Word of San Antonio, Texas. The Congregation of the Sisters of Charity of the Incarnate Word of Houston, Texas sponsors the Sisters of Charity Health Care System (SCH), and the Congregation of the Sisters of Charity of the Incarnate Word of San Antonio, Texas sponsors the Incarnate Word Health System (IWHS). SCH and IWHS continue to exist and carry out their ministries. The mission of CHRISTUS Health is to extend the healing ministry of Jesus Christ. The Gospel values underlying the mission statement challenge CHRISTUS Health to make choices that respond to the economically disadvantaged and the underserved with health care needs. The growth and development of CHRISTUS Health are determined by the health care needs of the communities that CHRISTUS Health serves, our available resources, and the interrelationship of those serving and those being served. Responsible stewardship mandates that we search out new, effective means to deliver quality health care and to promote wholeness in the human person. The vision of CHRISTUS Health is to be a leader and advocate in creating exemplary health care services, processes, and structures that improve the health of individuals and of local and global communities so all may experience God s healing presence and love. The consolidated financial statements of CHRISTUS Health include activities of its affiliated market-based organizations and other related entities, all of which are wholly or majority owned and commonly referred to as regions or entities. For purposes of these consolidated financial statements, the System is defined as CHRISTUS Health s affiliated market-based organizations and other related entities. The other related entities include, but are not limited to, hospital foundations, professional office buildings, management services organizations, physician groups, a collection agency, self-insurance trusts, an offshore captive insurance company, a health plan, integrated community health networks, and diagnostic imaging companies. Certain entities of CHRISTUS Health, otherwise included in the consolidated financial statements of CHRISTUS Health, are not included in the financial information for the CHRISTUS Health Obligated Group. These entities include, but are not limited to, the CHRISTUS Health Liability Retention Trust, Emerald Assurance, CHRISTUS St. Vincent Regional Medical Center, CHRISTUS Health Utah, Dubuis Health System, C.H. Wilkinson Physician Network, CHRISTUS HomeCare, CHRISTUS Muguerza, S.A. de C.V., and various philanthropic foundations. CHRISTUS Health and certain affiliated nonprofit corporations are generally exempt from federal income taxes under 501(c)(3) of the Internal Revenue Code.

10 2. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included and are of a normal and recurring nature. Operating results for the nine months ended March 31, 2009, are not necessarily indicative of the results to be expected for the year ending June 30, For further information, refer to the audited consolidated financial statements and notes thereto for the year ended June 30, Basis of Consolidation- The consolidated financial statements include the accounts of all entities of the System (see Note 1). All significant inter-entity transactions and accounts have been eliminated in consolidation. 3. FAIR VALUE MEASUREMENTS In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurement (SFAS 157). SFAS 157 provides enhanced guidance for using fair value to measure assets and liabilities, provides a common definition of fair value and establishes a framework to make the measurement of fair value in generally accepted accounting principles more consistent and comparable among entities. SFAS 157 also expands the required disclosures concerning the extent to which fair value is used to measure assets and liabilities, the methods and assumptions used to measure fair value and the effect of fair value measure on changes in net assets. The adoption of SFAS 157, effective January 1, 2008, did not have a material impact on the Corporation s financial position or results of operations. SFAS 157 establishes a three-level hierarchy for disclosure of fair value measurements. The valuation hierarchy is based on the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows: Level 1 inputs to the valuation methodology are quoted prices for similar assets and liabilities in active markets. Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement. A financial instrument s categorization within the valuation hierarchy is based on the lowest level of input that is significant to the fair value measurement.

11 4. FAIR VALUE MEASUREMENTS (continued) The following table presents the financial instruments carried at fair value as of March 31, 2009 (in thousands), by caption on the Statement of Financial Position and by SFAS 157 valuation hierarchy (as described above): Level 1 Level 2 Level 3 Total Assets Investments Cash and cash equivalents $576,921 - $576,921 Fixed income funds 105, ,647 Domestic Common stocks 144, ,637 Preferred stocks Debt securities 61,084-61,084 International equities 45,932-45,932 U.S. government securities 97,259-97,259 Alternative investments Other investments 35,795-35,795 Interest rate swaps 3,727 3,727 Total Investments $1,067,720 $3,727 $0 $1,071,447 Total Assets at fair value $1,067,720 $3,727 $0 $1,071,447 Liabilities Interest rate swap agreements $ - $ 144,567 $ - $ 144,567 Total Liabilities at fair value $ - $ 144,567 $ - $ 144,567 The valuation methodologies used for instruments measured at fair value as presented in the table above are as follows: Investments Investments are valued at quoted prices available in an active market and are classified within level 1 of the valuation hierarchy. Interest rate swap agreements Interest rate swap agreements are valued using third party models that use as their input observable market conditions and are classified within level 2 of the valuation hierarchy. 4. INVESTMENTS IN UNCONSOLIDATED ORGANIZATIONS Investments in Unconsolidated Organizations- The System has investments in certain organizations of which the System does not have a majority-ownership interest that do not require consolidation. These investments are recorded using the equity method of accounting. Baptist St. Anthony s Health System- CHRISTUS Health has a 50% membership interest in Baptist St. Anthony s Health System (BSAHS), a Texas nonprofit corporation. CHRISTUS Health recorded its share of BSAHS s changes in net assets of ($16,908,000) and $16,446,000 at March 31, 2009 and 2008, respectively.

12 4. INVESTMENTS IN UNCONSOLIDATED ORGANIZATIONS (continued) Preferred Professional Insurance Company- CHRISTUS Health has a 12% ownership interest in Preferred Providers Insurance Company (PPIC), a taxable Nebraska corporation. This corporation, formed in 1988, was established to provide excess professional and general liability insurance. The System recorded its share of PPIC s income (loss) from operations at March 31, 2009 and 2008 of $1,651,000 and $3,789,000, respectively. CS/USP Surgery Centers, L.P.- CHRISTUS Spohn Health System Corporation has a 50% ownership interest in a joint venture with United Surgical Partners International, INC. (USP), a Texas limited liability partnership for the purpose of owning and operating ambulatory surgery centers in Corpus Christi, Texas. The System recorded its share of income from operations at March 31, 2009 and 2008 of $607,000 and $635,000, respectively. Consolidated Catholic Casualty Risk Retention Group- CHRISTUS Health has a 23% ownership interest in Consolidated Catholic Casualty Risk Retention Group (CCCRRG), a taxexempt Vermont corporation. This corporation, formed in 1987, was established to provide excess professional and general liability insurance. The System recorded its share of CCCRRG s income from operations at March 31, 2009 and 2008 of $347,000 and $470,000, respectively. SJMDHS, L.L.C. - Dubuis Health System, a wholly owned subsidiary of CHRISTUS Health System, has a 50% ownership interest in SJMDHS, L.L.C. (Dubuis Hospital of St. Louis). Dubuis Hospital of St. Louis is a joint venture with St. John's Mercy Health System. In addition, Dubuis Health System provides the management and administrative services to the 54-bed long term acute care facility. Dubuis Health System recorded its share of loss from operations in fiscal years 2009 and 2008 of ($349,000) and ($87,000), respectively. 5. DERIVATIVE FINANCIAL INSTRUMENTS As of March 2009, CHRISTUS Health has interest rate swap agreements to manage interest rate risk exposure, not designated as hedging instruments under SFAS 133, with a total notional amount of $1,423,640,000. At March 31, 2009 the fair value of these swap agreements was a liability of $140,840,000 with $144,567,000 recorded as Other Long-Term Debt and $3,727,000 recorded as a Long-Term Investment within the Other Assets section of the consolidated Balance Sheet. At June 30, 2008 the fair value of these swap agreements was a liability of $19,920,000 with $22,861,000 recorded as Other Long-Term Debt and $2,941,000 recorded as a Long-Term Investment within the Other Assets section of the consolidated Balance Sheet. The change in value is recorded in the Income Statement as a Non-Operating Investment loss of $120,920,000 and $80,825,000 for the nine months ending March 31, 2009 and In accordance with SFAS 161 the following tables summarize financial statement location and fair value at March 31, 2009 and June 30, 2008 and the income (loss) recorded related to the interest rate swap agreements as of and for the nine months ended March 31, 2009 and 2008, in thousands.

13 5. DERIVATIVE FINANCIAL INSTRUMENTS (continued) Termination Interest Rate Notional Balance Sheet Fair Value Counterparty Description Date Agreements Amount Location 3/31/2009 6/30/2008 Merrill Lynch Variable Basis $470,000 Long-term Debt ($30,753) ($298) Citigroup Fixed Payer 2022 and ,380 Long-term Debt (53,207) (4,882) Citigroup Constant Maturity ,000 Other Assets 3,727 2,941 Citigroup Fixed Payer ,100 Long-term Debt (36,352) (10,906) Citigroup Fixed Payer ,160 Long-term Debt (24,255) (6,775) 13 $1,423,640 ($140,840) ($19,920) Termination Interest Rate Notional Income Statement Change in Fair Value Counterparty Description Date Agreements Amount Location 3/31/2009 3/31/2008 Merrill Lynch Variable Basis $470,000 Non-Operating Gain/(Loss) ($30,456) ($18,845) Citigroup Fixed Payer 2022 and ,380 Non-Operating Gain/(Loss) (48,325) (42,351) Citigroup Constant Maturity ,000 Non-Operating Gain/(Loss) 786 8,238 Citigroup Fixed Payer ,100 Non-Operating Gain/(Loss) (25,445) (16,986) Citigroup Fixed Payer ,160 Non-Operating Gain/(Loss) (17,480) (10,881) 13 $1,423,640 ($120,920) ($80,825) As of the nine months ending March 31, 2009 and 2008 CHRISTUS Health has paid interest of $11,211,169 and $45,706, respectively, related to the interest rate swap agreements. The following table summarizes this interest recorded as Other Expense in the Income Statement. Termination Notional Income Statement Paid/(Received) Counterparty Description Date Agreements Amount Location 3/31/2009 3/31/2008 Merrill Lynch Variable Basis $470,000 Other Expense $876 ($1,449) Citigroup Fixed Payer 2022 and ,380 Other Expense 7, Citigroup Constant Maturity ,000 Other Expense (1,697) n/a Citigroup Fixed Payer ,100 Other Expense 2, Citigroup Fixed Payer ,160 Other Expense 1, $1,423,640 $11,220 $46 Per the SWAP contracts CHRISTUS Health is required to post collateral for negative valuations of greater than $25.0 million on the uninsured basis SWAPS. CHRISTUS Health has complied with this requirement. The fixed payor SWAPS are insured by either AMBAC, FSA, or MBIA. CHRISTUS Health is currently not required to post collateral on the insured SWAPS. On July 1, 2008 CHRISTUS adopted the Statement of Financial Accounting Standards No. 157, Fair Value Measurement (SFAS 157). The fair value of the swap agreements as of March 31, 2009 has been calculated in accordance with SFAS 157 guidance. The adoption of SFAS 157 did not have a material impact on the value calculated under the previous methodology used to value the agreements as of March 31, 2008.

14 6. CASH BALANCE PLAN AND POSTRETIREMENT HEALTH CARE BENEFITS Cash Balance Plan- The System has established a noncontributory, defined-benefit retirement plan that operates as a cash balance plan and covers substantially all CHRISTUS Health employees who meet age and service requirements. The plan benefits are calculated based on a cash balance formula where participants earn an annual accrual of 6% of compensation, and participant account balances accrue interest at a rate that tracks ten-year treasury notes; maximum rate is 8%, minimum rate is 4%. Postretirement Health Care Benefits - Comprehensive medical benefits are provided to eligible active employees who, immediately upon retirement and attainment of age 55, will receive a pension under the CHRISTUS Health retirement plan. Postretirement benefits are also provided to former employees who are currently receiving pension benefits. The comprehensive medical program, which is self-insured, provides reimbursement benefits until the participant attains age 65. The program also covers dependents of retirees, in addition to former employees. Contributions are required. Retirees may choose one of two self-insured indemnity plan options. Effective February 1, 1999, the CHRISTUS Health postretirement benefit plan was curtailed prospectively. As of the effective date, new employees or employees that had not vested as of that date are not eligible for the postretirement health care benefits. The liability associated with the postretirement plan will be reduced as employee participation decreases. Simplified Early Retirement Plan (SERP) - Prior to the formation of CHRISTUS, a plan for executives was curtailed prospectively. Under this plan, eligible participants receive a cash benefit payment until death and participate in the System s retiree health, dental and group-term life program. Fewer than two dozen participating retirees currently maintain benefit payment status. Benefits are recalculated when participants attain age 65 and remain constant thereafter. At March 31, 2009 and 2008, the total liability recorded pertaining to this SERP plan was $5,351,000 and $5,378,000, respectively. Restoration Plan- The restoration plan, a nonqualified deferred compensation plan, was designed to restore benefits that are lost under the cash balance plan due to the statutory limit on recognizable compensation. Eligibility is limited to designated executives. The plan provides benefits upon termination of employment to qualifying participants. Plan benefits are calculated using the same methodology for the cash balance plan; vesting requirements are also the same. The restoration plan is unfunded. The measurement date for all plans is June 30, Components of net periodic benefit cost of the cash balance plan, recorded as a component of employee compensation and benefits, for the nine months ended March 31, 2009 and 2008, consisted of the following (in thousands): Cash Balance Plan 3/31/09 3/31/08 Service cost $ 11,146 $ 10,191 Interest cost 10,584 10,063 Expected return on assets (11,609) (11,965) Amortization of prior service cost (213) (213) Recognized net actuarial loss (gain) 1, Net benefit cost $ 11,378 $ 8,396

15 6. CASH BALANCE PLAN AND POSTRETIREMENT HEALTH CARE BENEFITS (continued) The net periodic benefit costs of the postretirement plan, SERP and restoration plan are deemed to be immaterial for the nine months ended March 31, 2009 and The system has an accrued net liability for defined benefit pension plans recorded of $86,282,000 recorded at March 31, Contributions- In fiscal year 2009, CHRISTUS expects to contribute $49 million to the cash balance plan based on asset values for the plan year beginning January 1, Contributions to the cash balance plan of $44,523,000 were made for plan year beginning January 1, 2007 during fiscal year Since the postretirement plan, SERP, and restoration plan are unfunded, no cash contributions are expected. 7. PURCHASE OF ADDITIONAL HEALTHCARE FACILITIES On February 1, 2008 CHRISTUS Santa Rosa Health Care Corporation acquired McKenna Memorial Hospital, a 132-bed general acute care hospital, and McKenna Medical Group, as well as the investments in the McKenna Ambulatory Surgery Center (MASC) and McKenna Equipment Leasing Company (MELC), and other operations such as Home Care in accordance with the terms of the Asset Purchase Agreement for a cash consideration of $73,443,000. Subsequent to the transaction the hospital name was changed to CHRISTUS Santa Rosa New Braunfels (New Braunfels). Contingent on the completion of the sale, CHRISTUS Health agreed to provide the McKenna Legacy Foundation, a Texas non-profit corporation a $14,000,000 contribution of which $2,000,000 was paid at the close of the transaction and with the remaining pledge to be paid in annual installments of $2,000,000. The total purchase price, including the contribution by CHRISTUS Health $85,443,000. The resulting goodwill of $37,700,000 will be amortized over a period of twenty years from the date of the transaction. On April 9th, 2008 CHRISTUS entered into a contribution agreement with St. Vincent Hospital (SVH) and SVH SupportCo to become a 50% member of St. Vincent Regional Medical Center in Santa Fe, New Mexico. Subsequent to the transaction, the entity name was changed to CHRISTUS St. Vincent Regional Medical Center which consists of a general acute care hospital licensed for 180 beds, a physician group practice, and interest in an imaging center. Per the contribution agreement CHRISTUS Health agreed to make a charitable contribution of $74,250,000 to SupportCo in exchange for its membership interest. At the close of the transaction, CHRISTUS Health paid cash of $57,250,000 to SupportCo and withheld the remaining $17,000,000 pending resolution of certain outstanding issues over the next five years. CHRISTUS provides certain management and other services to SVRMC including the employment of Senior Management. CHRISTUS exercises full operating authority of the facility and significant control of the Board. The transaction was accounted for as a business combination under relevant accounting guidance and the financial results of the joint venture since the date of the transaction have been consolidated in the financial results of the of the System at 100% less the 50% minority interest. The resulting goodwill of $22,606,000 will be amortized over a period of twenty-five years from the date of the transaction.

16 8. COMMITMENT AND CONTINGECIES From time to time, the System is subject to litigation in the ordinary course of operations. In management s opinion, any future settlements or judgments on asserted or unasserted claims will not have a material effect on the System s financial statements. 9. SIGNIFICANT EVENTS 2008 Bond Offering - On November 25, 2008 CHRISTUS Health refinanced the 2005 A-1, B-1, C-1, B-3 Variable Rate Demand Bonds (VRDBs) as Assured Guaranty insured Fixed Rate bonds 2008 A in the amount of $196,525,000 and 2008 B in the amount of $46,345,000. The all-in true interest cost on both series is 7.24%. On December 19, 2008, CHRISTUS Health refinanced the 2005A-2, 2007A and 2007B VRDBs as VRDBs 2008C in the amount of $268,560,000 and refinanced 2005C-2 VRDBs as VRDBs 2008D in the amount of $130,415,000, secured by Loan Agreements (i.e. Letter of Credit) with three banks, Bank of America, Compass Bank and Bank of Nova Scotia. As of May 20, 2009, these agreements have not been drawn upon. As a result of this refinancing, CHRISTUS total bond debt outstanding is $1,123,110,000 with $258,675,000 in fixed rate, $485,135,000 in VRDB Bonds, and $379,300,000 in Auction Rate Bonds. CHRISTUS Health currently plans to refinance the 2007C VRDBs partially backed by Bank Letter of Credit with Bank of New York and Compass and the remainder as uninsured fixed rate Bond Offering In November 2007, the system issued $293,160,000 in variable rate demand bonds consisting of Series 2007A, 2007B, and 2007C bonds (collectively, the Series 2007 Bonds). Of this amount, $287,047,000 was issued to fund new capital projects and $6,113,000 was used for insuring and issuing the bonds. Failed Remarketing of Variable Rate Demand Bonds Beginning in June 2008, a significant portion of our variable rate demand bonds were unable to be remarketed due to the credit downgrade of the bond insurers insuring the debt. As of December 31, 2008, all of the VRDB series backed by insurance and standby purchase agreements, with the exception of series 2007C, were refinanced with Bank letters of credit. All of the refinanced series are trading well and none are held by the banks. The 2007C series has an outstanding balance of $86,160,000, which is secured by MBIA and backed by a standby purchase agreement with Heleba. The amount of bonds purchased under this agreement totals $84,360,000 as of March 31, The agreement calls for bank bond interest rates based on prime and require accelerated amortization of the debt. CHRISTUS has plans to refinance the 2007C series prior to August 13, Also, refinance 2008D1&2 letter of credit backed VRDBs as uninsured fixed rate by August 13, Recovery Audit Contractors (RAC) Reviews Certain payments for services provided under the Medicare and Medicaid programs and other organizations are subject to review of the medical necessity of admission and propriety of discharge, diagnosis, and coding. As part of the Tax Relief and Health Care Act of 2006, Congress directed the expansion of the Recovery Audit Contractors (RAC) reviews. Management believes net revenues under the programs to be fairly stated based on current information.