Duke University Health System, Inc. and References to “Bonds” Or “Securities” Mean the 2017 Bonds Offered Hereby

This preliminary offering memorandum and the information contained herein are subject to completion and amendment. Under no circumstances shall this preliminary offering memorandum constitute an offer to sell or the solicitation of an offer to buy these securities nor shall there be any sale of these securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of such jurisdiction. Limited Information: Underwriters’ Counsel: Our Counsel: Redemption: Interest PaymentDates: Denominations: Delivery Date: Dated: Registration Exemption: Tax Status: Source ofPayment: Security and Use ofProceeds: Our Business: New Issue/DTCBook-EntryOnly + * June __,2017

responsibility forthe accuracy ofsuch data. CUSIP data herein is provided for convenience of reference only. We, the underwriters and their agents take no Preliminary, subject tochange. $600,000,000* __%TermBond,DueJune1,2047*-Yield:____%CUSIP PRELIMINARY OFFERING MEMORANDUM DATED MAY 18, 2017 J.P. M D u organ k the 2017Bonds. offering memoranduminitsentiretytomakeaninformed decisionregarding Only selectedinformationispresentedonthiscover. Youshouldreadthis Robinson, Bradshaw&Hinson,P.A.,Charlotte,North Carolina. Georgia. and ParkerPoeAdams&BernsteinLLP,Raleigh,North CarolinaandAtlanta, Christy M.Gudaitis,AssociateUniversityCounsel, Durham, NorthCarolina “Description ofthe2017Bonds—Redemption”onpage 24. The 2017Bondsaresubjecttooptionalredemption priortomaturity.See June 1andDecemberofeachyear,commencing1,2017. $1,000 oranymultiplethereof. On oraboutJune6,2017. Date ofdelivery. Securities Actof1933,asamended. reliance uponanexemptionfromregistrationunderSection3(a)(4)ofthe The 2017Bondshavenotbeenregisteredunderfederalsecuritieslawsin thereof forfederalincometaxpurposes.See“TaxTreatment”onpage29. Interest onthe2017Bondswillbeincludableingrossincomeofowners “Security andSourcesofPayment”onpage5. issue ObligationNo.46undertheMasterIndenturetoBondTrustee.See evidence ofourpaymentobligationswithrespecttothe2017Bonds,wewill The 2017Bondswillbegeneral,unsecuredobligationsofours.Asfurther Finance” onpage27. purposes, and(3)topaycertaincostsofissuingthe2017Bonds.See“Plan improvements toourhealthcaresystem,(2)forothereligiblecorporate We willusetheproceedsof2017Bonds(1)tofinancevariouscapital among thecountry’sleadinghospitals.SeeAppendixA. healthcare deliverysystemthatincludesDukeUniversityHospital,whichis We areaNorthCarolinanonprofitcorporation.operateanacademic e U

v ersity $600,000,000* Taxable Bonds Series 2017 H ealth S ystem J efferies , I nc . Ratings: Moody’s:Aa2 (See “Ratings”herein) LLC + : ______Fitch: AA S&P: AA

You should rely only on the information contained in this offering memorandum. We have not, and the underwriters have not, authorized any person who offers or sells the 2017 Bonds to provide you with information in addition to or inconsistent with the information contained in this offering memorandum, or to represent anything else about us, the other members of the Combined Group or the 2017 Bonds. If anyone provides you with additional or inconsistent information, you should not rely on it.

Unless we specify an earlier date, the information appearing in this offering memorandum is current as of the date of this offering memorandum shown on the front cover. Our business, financial condition, results of operations or prospects may have changed since that date.

The underwriters have provided the following sentence for inclusion in this offering memorandum. The underwriters have reviewed the information in this offering memorandum in accordance with, and as part of, their respective responsibilities to you under the federal securities laws as applied to the facts and circumstances of this transaction, but the underwriters do not guarantee the accuracy or completeness of such information.

We are not, and the underwriters are not, offering to sell the 2017 Bonds or soliciting an offer to buy the 2017 Bonds in any jurisdiction where the offer or sale of the 2017 Bonds is not permitted.

By placing an order for the 2017 Bonds with an underwriter, you agree that if you are allocated 2017 Bonds, the underwriters may disclose your identity as an initial purchaser of the 2017 Bonds to us unless you advise your sales representative otherwise.

In reliance upon exemptions, we are not (1) registering the 2017 Bonds under the Securities Act of 1933, as amended, or any state securities laws or (2) qualifying the Trust Agreement under the Trust Indenture Act of 1939. Neither the Securities and Exchange Commission nor any other federal or state securities commission or regulatory authority has recommended, approved or disapproved the 2017 Bonds or determined if this offering memorandum is adequate, accurate or complete. Any representation to the contrary is a criminal offense.

In connection with this offering, the underwriters may overallot or effect transactions that stabilize or maintain the market price of the 2017 Bonds at a level above that which might otherwise prevail in the open market. The underwriters may discontinue any such stabilizing at any time.

* * * * *

Certain statements included or incorporated by reference in this offering memorandum constitute “forward-looking statements.” Such statements are generally identifiable by the terminology used such as “plan,” “project,” “expect,” “anticipate,” “intend,” “believe,” “estimate,” “budget” or other similar words. The achievement of certain results or other expectations contained in such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements described to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. We do not plan to issue any updates or revisions to those forward-looking statements if or when our expectations, or events, conditions or circumstances on which such statements are based, occur.

INFORMATION CONCERNING OFFERING RESTRICTIONS IN CERTAIN JURISDICTIONS OUTSIDE THE UNITED STATES

ANY REFERENCES IN THIS OFFERING MEMORANDUM TO THE “ISSUER” MEAN DUKE UNIVERSITY HEALTH SYSTEM, INC. AND REFERENCES TO “BONDS” OR “SECURITIES” MEAN THE 2017 BONDS OFFERED HEREBY.

MINIMUM UNIT SALES

THE BONDS WILL TRADE AND SETTLE ON A UNIT BASIS (ONE UNIT EQUALING ONE BOND OF $1,000 PRINCIPAL AMOUNT). FOR ANY SALES MADE OUTSIDE THE UNITED STATES, THE MINIMUM PURCHASE AND TRADING AMOUNT IS 150 UNITS (BEING 150 BONDS IN AN AGGREGATE PRINCIPAL AMOUNT OF $150,000).

NOTICE TO INVESTORS IN THE EUROPEAN ECONOMIC AREA (“EEA”)

THIS OFFERING MEMORANDUM IS NOT A PROSPECTUS FOR THE PURPOSES OF EUROPEAN COMMISSION REGULATION 809/2004 OR EUROPEAN COMMISSION DIRECTIVE 2003/71/EC (AS AMENDED, INCLUDING BY EUROPEAN COMMISSION DIRECTIVE 2010/73/EU, AS APPLICABLE) (THE “PROSPECTUS DIRECTIVE”). IT HAS BEEN PREPARED ON THE BASIS THAT ALL OFFERS OF THE 2017 BONDS WILL BE MADE PURSUANT TO AN EXEMPTION UNDER ARTICLE 3 OF THE PROSPECTUS DIRECTIVE, AS IMPLEMENTED IN MEMBER STATES OF THE EEA, FROM THE REQUIREMENT TO PRODUCE A PROSPECTUS FOR SUCH OFFERS. THIS OFFERING MEMORANDUM IS ONLY ADDRESSED TO AND DIRECTED AT PERSONS IN MEMBER STATES OF THE EEA WHO ARE “QUALIFIED INVESTORS” WITHIN THE MEANING OF ARTICLE 2(1)(E) OF THE PROSPECTUS DIRECTIVE AND ANY RELEVANT IMPLEMENTING MEASURE IN EACH MEMBER STATE OF THE EEA (“QUALIFIED INVESTORS”). THIS OFFERING MEMORANDUM MUST NOT BE ACTED ON OR RELIED ON IN ANY SUCH MEMBER STATE OF THE EEA BY PERSONS WHO ARE NOT QUALIFIED INVESTORS. ANY INVESTMENT OR INVESTMENT ACTIVITY TO WHICH THIS OFFERING MEMORANDUM RELATES IS AVAILABLE ONLY TO QUALIFIED INVESTORS IN ANY MEMBER STATE OF THE EEA AND WILL NOT BE ENGAGED IN WITH ANY OTHER PERSONS.

NOTICE TO PROSPECTIVE INVESTORS IN THE UNITED KINGDOM

THIS OFFERING MEMORANDUM HAS NOT BEEN APPROVED FOR THE PURPOSES OF SECTION 21 OF THE FINANCIAL SERVICES AND MARKETS ACT 2000 (“FSMA”) AND DOES NOT CONSTITUTE AN OFFER TO THE PUBLIC IN ACCORDANCE WITH THE PROVISIONS OF SECTION 85 OF THE FSMA. THIS OFFERING MEMORANDUM IS FOR DISTRIBUTION ONLY TO, AND IS DIRECTED SOLELY AT, PERSONS WHO (I) ARE OUTSIDE THE UNITED KINGDOM, (II) ARE INVESTMENT PROFESSIONALS, AS SUCH TERM IS DEFINED IN ARTICLE 19(5) OF THE FINANCIAL SERVICES AND MARKETS ACT 2000 (FINANCIAL PROMOTION) ORDER 2005, AS AMENDED (THE “FINANCIAL PROMOTION ORDER”), (III) ARE PERSONS FALLING WITHIN ARTICLE 49(2)(A) TO (D) OF THE FINANCIAL PROMOTION ORDER, OR (IV) ARE PERSONS TO WHOM AN INVITATION OR INDUCEMENT TO ENGAGE IN INVESTMENT ACTIVITY (WITHIN THE MEANING OF SECTION 21 OF THE FSMA) IN CONNECTION WITH THE ISSUE OR SALE OF ANY SECURITIES MAY OTHERWISE BE LAWFULLY COMMUNICATED OR CAUSED TO BE COMMUNICATED (ALL SUCH PERSONS TOGETHER BEING REFERRED TO AS “RELEVANT PERSONS”). THIS OFFERING MEMORANDUM IS DIRECTED ONLY AT RELEVANT PERSONS AND MUST NOT BE ACTED ON OR RELIED ON BY PERSONS WHO ARE NOT RELEVANT PERSONS, INCLUDING IN CIRCUMSTANCES IN WHICH SECTION 21(1) OF THE FSMA APPLIES TO THE INSTITUTION. ANY INVESTMENT OR INVESTMENT ACTIVITY TO WHICH THIS OFFERING MEMORANDUM RELATES IS AVAILABLE ONLY TO RELEVANT PERSONS AND WILL BE ENGAGED IN ONLY WITH RELEVANT PERSONS. ANY PERSON WHO IS NOT A RELEVANT PERSON SHOULD NOT READ, ACT OR RELY ON THIS OFFERING MEMORANDUM OR ANY OF ITS CONTENTS.

TABLE OF CONTENTS

Page

INTRODUCTION AND SUMMARY ...... 1 Our Purpose ...... 1 Issuance of the 2017 Bonds ...... 1 Use of the 2017 Bond Proceeds ...... 1 Issuance of Obligation No. 46 ...... 1 Master Indenture; Combined Group; Obligations ...... 2 Security and Sources of Payment for the 2017 Bonds ...... 4 Bondholders’ Risks ...... 4 Financial Statements ...... 4 Ongoing Disclosure ...... 4 Definitions ...... 4 Bond Trustee and Master Trustee ...... 4 Limitation of Summaries; Obtaining Copies of Documents ...... 5 SECURITY AND SOURCES OF PAYMENT ...... 5 Source of Payment ...... 5 Trust Agreement Funds and Accounts ...... 5 Unconditional Obligation of Us and Obligated Group ...... 5 The Obligated Group ...... 5 Combined Group; Designated Members ...... 6 Limitation on Liens; Negative Pledge ...... 7 Replacement Master Indenture ...... 8 BONDHOLDERS’ RISKS ...... 9 Risks Relating to the 2017 Bonds ...... 9 Risks Relating to Our Business ...... 13 DESCRIPTION OF THE 2017 Bonds ...... 23 Denominations, Principal, Maturity, Interest and Payments ...... 23 Book-Entry Only System and Global Clearance Procedures ...... 24 Redemption ...... 24 Registration, Transfer and Exchange ...... 26 Acceleration ...... 26 PLAN OF FINANCE ...... 27 ESTIMATED SOURCES AND USES OF FUNDS ...... 27 ANNUAL DEBT SERVICE REQUIREMENTS ...... 28 ONGOING DISCLOSURE ...... 29 LITIGATION ...... 29 LEGAL MATTERS ...... 29 TAX TREATMENT ...... 29 Tax Considerations Applicable to U.S. Holders ...... 30 Tax Considerations Applicable to Non-U.S. Holders ...... 32 ERISA AND CERTAIN RELATED CONSIDERATIONS ...... 35 General Fiduciary Matters ...... 35 Prohibited Transaction Issues ...... 36 Representation ...... 37

TABLE OF CONTENTS (continued) Page

UNDERWRITING ...... 37 RATINGS ...... 38 FINANCIAL ADVISOR ...... 38 CERTAIN RELATIONSHIPS ...... 39 MISCELLANEOUS ...... 39

Appendix A – Information Concerning Duke University Health System, Inc. and Affiliates Appendix B – Financial Statements Appendix C – Definitions of Certain Terms and Summary of the Master Indenture and the Trust Agreement Appendix D – Book-Entry Only System and Global Clearance Procedures

$600,000,000* Duke University Health System, Inc. Taxable Bonds Series 2017

INTRODUCTION AND SUMMARY

This introduction and summary highlights selected information appearing elsewhere in this offering memorandum and may not contain all of the information that is important to you. You should carefully read this offering memorandum, including the appendices, before making an investment decision.

In this offering memorandum, the terms “we,” “our” and “us” mean Duke University Health System, Inc.

Our Purpose

Issuance of the 2017 Bonds

We are issuing our Taxable Bonds Series 2017, which we refer to as the “2017 Bonds,” pursuant to a trust agreement between us and The Bank of New York Mellon Trust Company, N.A., as bond trustee, which we refer to as the “Trust Agreement.”

You should review the information under the heading “DESCRIPTION OF THE 2017 BONDS” for a description of certain provisions of the 2017 Bonds.

Use of the 2017 Bond Proceeds

We will use the proceeds from the sale of the 2017 Bonds:

• to finance various capital improvements at our health care facilities,

• for other eligible corporate purposes, and

• to pay certain costs of issuing the 2017 Bonds.

See “PLAN OF FINANCE” below.

Issuance of Obligation No. 46

We will agree to issue a promissory note to the Bond Trustee as further evidence of our obligations arising from the issuance of the 2017 Bonds. We refer to this promissory note as “Obligation No. 46.” We will issue Obligation No. 46 pursuant to:

* Preliminary, subject to change.

• our master trust indenture, which we refer to as the “Master Indenture,” and

• a supplement to the Master Indenture that specifically provides for the issuance of Obligation No. 46.

Master Indenture; Combined Group; Obligations

The Master Indenture authorizes the creation of a “Combined Group,” which consists of the “Obligated Group” and any “Designated Members.”

Each member of the Obligated Group may issue notes, bonds or other forms of debt under the Master Indenture, which are referred to in the Master Indenture as “Obligations.”

Members of the Obligated Group are jointly and severally liable for the payment of all Obligations, including Obligation No. 46; however, as of the date of this offering memorandum, we are the sole member of the Obligated Group.

Designated Members may not issue Obligations under the Master Indenture and are not directly obligated to pay Obligations issued under the Master Indenture, including Obligation No. 46; however, we and any future members of the Obligated Group have promised in the Master Indenture to cause the Designated Members to provide funds to the Members of the Obligated Group to pay such Obligations. As of the date of this offering memorandum, there are two Designated Members: Gothic HSP Corporation, a North Carolina nonprofit corporation, which we refer to as “Gothic HSP,” and Gothic Corporation, a North Carolina nonprofit corporation, which we refer to as “Gothic.” We refer to Gothic HSP and Gothic as the “Existing Designated Members.”

Gothic HSP is a controlled affiliate of ours that has been designated by us as a Designated Member.

Gothic is a controlled affiliate of Duke University, which we refer to as the “University,” that has become a Designated Member by entering into an “Obligating Contract” with us which requires Gothic to provide funds to us to pay Obligations issued under the Master Indenture, but only from assets held by Gothic for our benefit. The assets held by Gothic for the benefit of the University are not subject to the Obligating Contract.

Only we, the Existing Designated Members and any future members of the Combined Group are or will be directly or indirectly liable for amounts due under Obligation No. 46. We are a controlled affiliate of the University; however, the University is not a member of the Combined Group and is not liable for amounts due under any Obligations.

We have previously issued Obligations under the Master Indenture relating to bonds the North Carolina Medical Care Commission has issued for our benefit. The following Obligations previously issued by us are outstanding:

Related Original Outstanding Obligation Principal Amount Principal Amount* Name of Bonds North Carolina Medical Care Commission Obligations Nos. 17- $ 214,760,000 $ 133,185,000 Health Care Facilities Revenue Refunding 18 Bonds, Series 2005A-B, which we refer to as our “2005 Bonds” North Carolina Medical Care Commission Obligations Nos. 23- $ 150,715,000 $ 121,620,000 Health Care Facilities Revenue Bonds, Series 25 2006A-C, which we refer to as our “2006 Bonds” North Carolina Medical Care Commission Obligation No. 35 $ 300,000,000 $ 279,570,000 Health Care Facilities Revenue Bonds, Series 2012A, which we refer to as our “2012A Bonds” North Carolina Medical Care Commission Obligation No. 36 $ 28,650,000 $ 28,650,000 Health Care Facilities Revenue Refunding Bonds, Series 2012B, which we refer to as our “2012B Bonds” North Carolina Medical Care Commission Obligation No. 40 $ 167,075,000 $ 167,075,000 Health Care Facilities Revenue Refunding Bonds, Series 2016A, which we refer to as our “2016A Bonds” North Carolina Medical Care Commission Obligations Nos. 41- $ 180,000,000 $ 180,000,000 Health Care Facilities Revenue Refunding 42 Bonds, Series 2016B-C, which we refer to as our “2016B-C Bonds” North Carolina Medical Care Commission Obligation No. 45 $ 125,100,000 $ 125,100,000 Health Care Facilities Revenue Refunding Bonds, Series 2016D, which we refer to as our “2016D Bonds” Total $ 1,035,200,000

We have also issued Obligations Nos. 29-33, 38, 43 and 44 to the bank holders of the 2005 Bonds, the 2006 Bonds, the 2012B Bonds and the 2016B-C Bonds. We refer to these Obligations as the “Bank Obligations.” The Bank Obligations mainly evidence the same liabilities as Obligations Nos. 17, 18, 23-25, 36, 41 and 42. To learn more about our long-term indebtedness, you should read the information under the heading “SELECTED HISTORICAL FINANCIAL INFORMATION— Outstanding Long-Term Indebtedness” in Appendix A and note 7 in Appendix B.

The outstanding Obligations issued under the Master Indenture are, and Obligation No. 46 will be, general, unsecured obligations of the members of the Obligated Group; however, members of the Combined Group may pledge collateral as security for Obligations issued under the Master Indenture if such pledge is a Permitted Encumbrance under the Master Indenture.

* Amount outstanding prior to any redemptions scheduled to occur on June 1, 2017.

Under certain circumstances, a member of the Combined Group may withdraw from the Combined Group and thereby cease to be directly or indirectly liable to pay Obligations issued under the Master Indenture.

Security and Sources of Payment for the 2017 Bonds

The 2017 Bonds will be general, unsecured obligations of ours. Before you invest in the 2017 Bonds, you should carefully review the discussion below under the heading “SECURITY AND SOURCES OF PAYMENT.”

Payment of the 2017 Bonds will depend upon the ability of us, the Existing Designated Members and any future members of the Combined Group to generate revenues sufficient to provide for the payment of the 2017 Bonds and other debt while paying operating and other expenses.

Bondholders’ Risks

Before you invest in the 2017 Bonds, you should carefully review the discussion of certain risks associated with the 2017 Bonds and the Combined Group’s business found below under the heading “BONDHOLDERS’ RISKS.”

Financial Statements

You should review the consolidated financial statements of us and our affiliates as of and for the years ended June 30, 2016 and 2015, which are included in Appendix B. KPMG LLP, independent auditors, audited these financial statements as stated in their report appearing in Appendix B.

Because certain of our affiliates are not Designated Members under the Master Indenture, the audited consolidated financial statements in Appendix B include supplemental consolidating information for the Combined Group and these non-member affiliates. The consolidated financial statements of us and our affiliates in Appendix B include our affiliates that are not members of the Combined Group. For each of the Fiscal Years ended June 30, 2016 and 2015, the non-member affiliates contributed less than 6% of the consolidated total unrestricted revenues, gains and other support and less than 6% of the consolidated total assets reported in such consolidated financial statements.

Ongoing Disclosure

We have agreed to provide certain information on an ongoing basis, as described in more detail below under the heading “ONGOING DISCLOSURE.”

Definitions

Many terms used in this offering memorandum, whether capitalized or not, are defined in the Trust Agreement and the Master Indenture. You can find complete definitions of those terms in Appendix C under the heading “DEFINITIONS OF CERTAIN TERMS.”

Bond Trustee and Master Trustee

The Bank of New York Mellon Trust Company, N.A., will serve as the trustee under the Trust Agreement, and is referred to in that capacity as the “Bond Trustee.” The Bank of New York Mellon Trust Company, N.A. also serves as the trustee under the Master Indenture, and is referred to in that capacity as the “Master Trustee.”

Limitation of Summaries; Obtaining Copies of Documents

This offering memorandum summarizes certain provisions of the 2017 Bonds, the Trust Agreement, the Master Indenture and Obligation No. 46. We have not included or summarized all of the provisions of those documents in this offering memorandum. You should read those documents if you want to understand all of their provisions, which define your rights if you purchase a 2017 Bond. You can obtain a copy of the Trust Agreement, the Master Indenture and Obligation No. 46 from us, any of the underwriters shown on the cover page of this offering memorandum, or the Bond Trustee.

SECURITY AND SOURCES OF PAYMENT

The following summary of certain provisions of the Trust Agreement, the Master Indenture and Obligation No. 46 does not purport to be complete and is subject to, and is qualified in its entirety by reference to, all the provisions of the Trust Agreement, the Master Indenture and Obligation No. 46, copies of which you can obtain in the manner described under “INTRODUCTION AND SUMMARY— Limitation of Summaries; Obtaining Copies of Documents.”

This summary should be read together with the discussion of the “Risks Relating to the 2017 Bonds” under the heading “BONDHOLDERS’ RISKS.”

Source of Payment

The 2017 Bonds are general, unsecured obligations of ours payable from amounts paid by us under the Trust Agreement and by us and the other Members of the Combined Group under Obligation No. 46.

Trust Agreement Funds and Accounts

The Trust Agreement establishes the Cost of Issuance Fund, the Bond Fund, in which there is established an Interest Account and a Principal Account, and the Redemption Fund. Each of these funds and accounts will be held by the Bond Trustee in trust and will be subject to a lien and charge in favor of the Holders of the 2017 Bonds until paid out or transferred as provided in the Trust Agreement. See “SUMMARY OF THE TRUST AGREEMENT” in Appendix C.

Unconditional Obligation of Us and Obligated Group

Obligation No. 46 constitutes the unconditional obligation of us and the other Members of the Obligated Group to provide funds for payment of debt service on the 2017 Bonds. Obligation No. 46 is a joint and several obligation of each Member of the Obligated Group.

The Obligated Group

The Master Indenture authorizes the creation of an Obligated Group. Each member of the Obligated Group may issue notes, bonds or other forms of debt under the Master Indenture, which are referred to in the Master Indenture as “Obligations.” Members of the Obligated Group are jointly and severally liable for the payment of all Obligations issued under the Master Indenture, including Obligation No. 46. As of the date of this offering memorandum, we are the sole member of the Obligated Group under the Master Indenture.

The Master Indenture does not limit the ability of any member of the Obligated Group to withdraw from the Obligated Group if the ratio of income available for debt service of the

Combined Group to the annual debt service requirement of the Combined Group (which we refer to as the “Coverage Ratio”) for our most recently ended fiscal year for which audited financial statements are available is at least 2.0. If a member of the Obligated Group withdraws from the Obligated Group, then it is no longer jointly and severally liable for the payment of Obligation No. 46 or any other Obligation issued under the Master Indenture.

The provisions of the Master Indenture regarding admission to and withdrawal from the Obligated Group are discussed in Appendix C under the heading “SUMMARY OF THE MASTER INDENTURE —Admission of Obligated Group Members” and “—Withdrawal of Obligated Group Members.”

Combined Group; Designated Members

In addition to the Obligated Group, the Master Indenture provides for a Combined Group, which consists of the Obligated Group and other entities designated by any member of the Obligated Group, which are referred to in the Master Indenture as “Designated Members.”

Designated Members are not directly obligated to pay Obligations issued under the Master Indenture, including Obligation No. 46. Instead, we and each future Member of the Obligated Group have promised in the Master Indenture to cause each Designated Member to pay, loan or otherwise transfer to us or such Member of the Obligated Group, as applicable:

• amounts needed to pay debt service on all Obligations which were issued for the benefit of such Designated Member or the proceeds of which were loaned or otherwise made available to such Designated Member, and

• other amounts needed to enable us or such other member of the Obligated Group to pay debt service on all other Obligations.

As of the date of this offering memorandum, Gothic HSP and Gothic are the only Designated Members. As described below, Gothic is a Designated Member only to the extent it holds assets for our benefit.

The Master Indenture requires us to cause our, and each future member of the Obligated Group to cause its, Designated Members to comply with the covenants and restrictions in the Master Indenture that are applicable to Designated Members. For example, we and each future member of the Obligated Group must cause Designated Members to establish, charge and collect rates, fees and charges for their services and goods and use of their property sufficient for the Combined Group to maintain the required Coverage Ratio of at least 1.20 during each fiscal year.

The ability of us and any future member of the Obligated Group to require Designated Members to make payments or to comply with covenants of the Master Indenture may be restricted by a variety of factors. See the discussion of the “Risks Relating to the 2017 Bonds” under the heading “BONDHOLDERS’ RISKS.”

In order for an entity to become a Designated Member, we or a future member of the Obligated Group must:

• either:

○ “control” such Designated Member in the manner described below, or

○ have entered into an agreement with such Designated Member that, in the judgment of counsel to such member of the Obligated Group, is sufficient to assure that such Designated Member will be required to comply with the terms and conditions of the Master Indenture applicable to it, which is referred to in the Master Indenture as an “Obligating Contract,” and

• deliver to the Master Trustee:

○ an officer’s certificate making the designation and evidencing the existence of control or an Obligating Contract, and

○ an opinion of counsel stating that the member of the Obligated Group has control over such Designated Member or the Obligating Contract is sufficient to require such Designated Member to comply with the terms of the Master Indenture applicable to it.

Under the Master Indenture, “control” means the power to direct the management, policies, disposition of assets and actions of an entity, directly or indirectly, to the extent required to cause a Designated Member to comply with the terms and conditions of the Master Indenture applicable to it. Such control can be exercised through the ownership of a majority of voting securities or partnership interests or by contract, membership, reserved powers or the power to appoint members, trustees or directors or otherwise.

We control Gothic HSP. We have entered into an Obligating Contract with Gothic, which requires Gothic to provide funds to us to pay Obligations issued under the Master Indenture, but only from assets held by Gothic for our benefit. The assets held by Gothic for the benefit of the University are not subject to the Obligating Contract. Because of this limitation in the Obligating Contract, only the assets held by Gothic for our benefit, and any related revenues and expenses, are taken into account in applying the provisions of the Master Indenture with respect to Gothic.

Any Designated Member may be released from the Combined Group if the member of the Obligated Group that designated such entity delivers to the Master Trustee an officer’s certificate requesting such release and stating that no event of default under the Master Indenture would arise out of such release. If a Designated Member is released, then it is no longer indirectly liable for the payment of Obligation No. 46 or any other Obligation issued under the Master Indenture.

The Master Indenture does not otherwise limit our ability or the ability of any future member of the Obligated Group to release a Designated Member if the Coverage Ratio of the Combined Group for our most recently ended fiscal year for which audited financial statements are available is at least 2.0.

The provisions of the Master Indenture regarding designation and release of Designated Members are discussed in Appendix C under the heading “SUMMARY OF THE MASTER INDENTURE— Control of Designated Members” and “—Release of a Designated Member.”

Limitation on Liens; Negative Pledge

Except for “Permitted Encumbrances” described in the Master Indenture, we and each future member of the Obligated Group may not (and may not permit any Designated Members to) grant, create, assume or incur or suffer to be granted, created, assumed or incurred or to exist any mortgage, deed of trust or pledge of security interest in or encumbrance on any property owned by a member of the

Obligated Group or a Designated Member, which is referred to in the Master Indenture as “Combined Group Property.”

One example of a Permitted Encumbrance is any lien on Combined Group Property that does not exceed the greater of 20% of the “Base Value” of the property, plant and equipment of the members of the Combined Group or 20% of the unrestricted net assets of the members of the Combined Group. The Combined Group Property subject to such liens could consist in part or in whole of cash, marketable securities or accounts receivable. “Base Value” means, at the option of the Obligated Group, either (1) the cost basis of property, plant and equipment, net of accumulated depreciation, of the members of the Combined Group as shown on the financial statements for the most recently ended fiscal period for which such statements are available, or (2) the appraised value of such property, plant and equipment as determined in writing by an appraiser selected by the Obligated Group and acceptable to the Master Trustee, such appraisal taking place within the one-year period preceding the date such value is used in any computation or calculation pursuant to the Master Indenture.

We, the Existing Designated Members and any future members of the Combined Group may pledge Combined Group Property as security for other Obligations issued under the Master Indenture without pledging such Combined Group Property as security for Obligation No. 46, if such pledge is a Permitted Encumbrance under the Master Indenture.

To learn more about Permitted Encumbrances, you should read the complete definition of “Permitted Encumbrances” in Appendix C under the heading “SUMMARY OF THE MASTER INDENTURE —General Covenants and Provisions—Liens.”

Replacement Master Indenture

We, without the consent of, or notice to, the holders of the 2017 Bonds, may replace the Master Indenture with an existing or new master trust indenture. The conditions for substitution are described in Appendix C under the heading “SUMMARY OF THE MASTER INDENTURE —Replacement Master Indenture.”

BONDHOLDERS’ RISKS

Before you invest in the 2017 Bonds, you should carefully review the following discussion of the risks involved and the information contained elsewhere in this offering memorandum.

Risks Relating to the 2017 Bonds

Payment of the 2017 Bonds depends on our ability and the ability of the other members of the Combined Group to generate sufficient revenues for such payment.

We operate an academic healthcare delivery system that includes Duke University Hospital, one of the country’s leading hospitals. Please read Appendix A for more information about us and our affiliates, including our governance and management, facilities, services and operations and certain financial information. We cannot represent or assure that the Combined Group will be able to generate revenues sufficient to pay the principal of and interest on the 2017 Bonds. You should read the discussion of “Risks Relating to Our Business” below.

Only we, the Existing Designated Members and any future members of the Combined Group are or will be directly or indirectly obligated to make payments due under Obligation No. 46.

As further evidence of our obligation to pay the 2017 Bonds, we will issue to the Bond Trustee Obligation No. 46 under the Master Indenture. Because members of the Obligated Group are jointly and severally liable for the payment of all Obligations issued under the Master Indenture, they will be directly obligated to make the payments due under Obligation No. 46, which correspond to the payments due on the 2017 Bonds. As of the date of this offering memorandum, we are the sole member of the Obligated Group; however, any future member of the Obligated Group will be jointly and severally liable for the payment of all Obligations issued under the Master Indenture, including Obligation No. 46.

Designated Members are not directly obligated to pay Obligations issued under the Master Indenture; however, Designated Members, including the Existing Designated Members, are indirectly obligated to pay Obligations issued under the Master Indenture, including Obligation No. 46, because we and each future member of the Obligated Group have agreed to cause each Designated Member to pay, loan or otherwise transfer to us or such future member of the Obligated Group, as applicable, amounts necessary to pay debt service on all Obligations issued under the Master Indenture.

Neither the Bond Trustee nor you will have any claim against any Designated Member. The filing of a bankruptcy case by or against a Designated Member is not an event of default under the Master Indenture or the Trust Agreement. Moreover, unless a Designated Member has a contractual obligation to pay money to us or a future member of the Obligated Group that it can use to pay the 2017 Bonds, no member of the Obligated Group will have a claim against such Designated Member in a bankruptcy case filed by or against such Designated Member.

We are a controlled affiliate of the University; however, the University is not liable for amounts due under Obligation No. 46.

No member of the Combined Group has pledged any collateral as security for the payments due under Obligation No. 46.

We and the Existing Designated Members have not pledged any real or personal property, such as land, buildings, equipment, accounts receivable or investments, to secure payments due under Obligation No. 46. As of the date of this offering memorandum, we and the Existing Designated Members have not pledged any real or personal property as security for other Obligations issued under the Master Indenture.

Members of the Combined Group can pledge Combined Group property as security for other Obligations issued under the Master Indenture without pledging such Combined Group property as security for Obligation No. 46, if such pledge is a Permitted Encumbrance under the Master Indenture. If this occurs, such Combined Group property may not be available to satisfy any money judgment you may obtain or claim you may have in bankruptcy if the 2017 Bonds are not paid when due.

Bankruptcy or other applicable law may limit your ability to collect from any member of the Combined Group.

Bankruptcy or other applicable law may limit your ability to collect from any member of the Combined Group, including the Existing Designated Members. For example, with respect to any member of the Combined Group other than us, a creditor or the trustee in a bankruptcy case of such member could ask a court to declare that the obligations of such member with respect to the 2017 Bonds are not enforceable because they are a “fraudulent conveyance.” Federal and state fraudulent conveyance law provides that a liability incurred by a co-obligor may be avoided if, for example, (1) the co-obligor did not receive “fair consideration” or “reasonably equivalent value” in exchange for its liability and (2) the liability renders the co-obligor insolvent. It is possible that a court would agree.

An action to enforce a charitable trust and to see to the application of its funds could be brought against any member of the Combined Group that is a charitable nonprofit corporation if honoring its requirements with respect to the 2017 Bonds would result in:

• such member of the Combined Group not having sufficient assets to carry out its charitable purposes, or

• cessation or discontinuation of any material portion of the health care or related service previously provided by such member of the Combined Group.

An action to enforce a charitable trust could arise on the court’s own motion or pursuant to a petition of the state attorney general or such other persons who have interests different from those of the general public.

The liabilities of a Combined Group member also may not be enforceable to the extent that such payments are:

• requested to be made from assets which are donor-restricted or which are subject to a direct, express or charitable trust which does not permit the use of such assets for such payments, or

• if the Combined Group member is a charitable nonprofit corporation, made with respect to a liability that is not consistent with the charitable purposes of such Combined Group member or was incurred for the benefit of an entity that is not governmental or tax-exempt.

Even though the liabilities of a Combined Group member with respect to Obligation No. 46 may not be enforceable for the reasons discussed above, the accounts of all Combined Group members will be combined for financial reporting purposes and will be used to determine whether the Combined Group meets various covenants and tests contained in the Master Indenture.

The Master Indenture does not limit the amount of debt that members of the Combined Group can incur.

The Master Indenture does not limit the amount of debt that we, the Existing Designated Members and any future members of the Combined Group may incur. We and future members of the Obligated Group may issue additional Obligations under the Master Indenture for which the members of the Combined Group will be directly or indirectly liable. We and any other members of the Combined Group also may incur additional debt that is not evidenced by an Obligation issued under the Master Indenture. We and any other members of the Combined Group also may pledge collateral to secure other Obligations issued under the Master Indenture or other debt if the pledge of such collateral is permitted under the Master Indenture.

The Master Indenture allows members of the Combined Group to transfer assets or to merge and allows us to change the membership of the Combined Group under certain conditions.

If the Coverage Ratio of the Combined Group for our most recently ended fiscal year for which audited financial statements are available is at least 2.0, then the Master Indenture permits:

• the members of the Combined Group to transfer property, plant and equipment, cash and investments and receivables to any entity which is not a member of the Combined Group, including the University,

• the members of the Combined Group to merge (except for certain nonfinancial conditions) with an entity that is not a member of the Combined Group, or

• any entity to be admitted to or withdraw from the Combined Group.

Because this test is based on past financial performance, members of the Combined Group could take these actions even if they would lead to a payment default on the 2017 Bonds or cause the Combined Group’s Coverage Ratio during the current fiscal year to be less than the required 2.0.

Even if the Combined Group’s Coverage Ratio for our most recently ended fiscal year for which audited financial statements are available is less than 2.0, the members of the Combined Group may transfer property, plant and equipment, cash and investments and receivables and may merge (subject to certain nonfinancial conditions) and any entity may be admitted to or withdraw from the Combined Group if:

• all the outstanding bonds issued by the North Carolina Medical Care Commission or which have been approved by the Local Government Commission of North Carolina that are secured by an Obligation issued under the Master Indenture are rated investment grade by each rating agency maintaining a rating on any such bonds, or

• the Local Government Commission of North Carolina and the North Carolina Medical Care Commission approve the transaction.

The Master Indenture does not restrict the ability of members of the Combined Group to make budgeted transfers of funds to the University for the benefit of its health care programs.

The Master Indenture permits members of the Combined Group to make unlimited transfers of funds to the University, as long as those transfers are:

• included in the final form of the applicable member’s annual budget, as initially adopted, and

• made for the benefit of the University’s health care programs, including the schools of medicine, nursing and allied health professions, or research projects in medicine or, if reasonably related to the University’s health care programs or the health care operations of a member of the Combined Group, in an allied health science.

Such transfers could have a material adverse effect on the Combined Group’s financial condition and result in a reduction in the ratings of the 2017 Bonds. For more information about transfers made by us to the University and its School of Medicine, you should review the discussion under the heading “SELECTED HISTORICAL FINANCIAL INFORMATION - Transfers” in Appendix A and note 1 in Appendix B.

The Master Indenture does not limit the ability of members of the Combined Group to make acquisitions or engage in joint ventures, collaborations or affiliations.

We regularly evaluate potential acquisitions, joint ventures, collaborations and affiliations as part of our overall strategic planning and development process. The Master Indenture does not limit our ability or the ability of any other members of the Combined Group to make acquisitions or engage in joint ventures, collaborations or affiliations. Such transactions could have a material adverse effect on the Combined Group’s financial condition and result in a reduction in the ratings of the 2017 Bonds.

The Master Indenture may be replaced with an existing or new master trust indenture that may be substantially different.

If certain conditions are met, the Master Indenture provides that it may be replaced with an existing or new master trust indenture. One of those conditions is that the ratings on the 2017 Bonds at the time the replacement master indenture becomes effective would not be reduced below the then-current rating category. Another condition is that the Local Government Commission of North Carolina and the North Carolina Medical Care Commission must approve the replacement master indenture. If the conditions in the Master Indenture are satisfied, a replacement master indenture is not required to contain any specific terms, conditions and covenants. A replacement master indenture could change any or all of the provisions of the Master Indenture. You should read the information in Appendix C under the heading “THE MASTER INDENTURE-Replacement Master Indenture.”

Risks Relating to Our Business

Impact of national healthcare reform on us is uncertain.

On March 23, 2010, President Obama signed into law H.R. 3590, entitled the “Patient Protection and Affordable Care Act,” and on March 30, 2010, he signed into law H.R. 4872, entitled the “Health Care and Education Reconciliation Act of 2010.” We refer to both of these collectively as the “Healthcare Reform Acts.” Some provisions of the Healthcare Reform Acts are already in effect, while others are being phased in through September 30, 2019.

The changes to various aspects of the healthcare system in the Healthcare Reform Acts are far reaching and include, among many others, substantial adjustments to Medicare reimbursement, establishment of individual mandates for healthcare coverage, extension of coverage to certain populations primarily through the expansion of Medicaid and private insurance, provision of incentives for employer-provided healthcare insurance and increased oversight provisions. The provisions of the Healthcare Reform Acts which encourage or mandate healthcare coverage for individuals can be expected to reduce the amount of uncompensated care we provide. However, the revisions to the Medicare reimbursement program could reduce our revenues.

The Healthcare Reform Acts also impose additional requirements for tax-exempt hospitals, including obligations to conduct a community needs assessment every three years, adopt an implementation strategy to meet those identified needs, adopt and publicize a financial assistance policy, limit charges to patients who qualify for financial assistance to the lowest amount charged to insured patients, and control the billing and collection processes. Failure to satisfy these conditions may result in the imposition of fines and loss of tax-exempt status.

Because national healthcare reform has such far reaching implications on the healthcare system in the United States and is expected to result in the promulgation of new regulations and guidelines for an indefinite but lengthy period of time into the future, the impact of national healthcare reform on us is uncertain. The Healthcare Reform Acts have been subject to substantial litigation, with the constitutionality of the Healthcare Reform Acts being challenged in courts around the country. In June 2012, the United States Supreme Court held that the requirement for individuals to buy health insurance (the so-called “individual mandate”) was constitutional, but declared unconstitutional the provision requiring all states to expand Medicaid coverage or lose existing Medicaid funds. Additionally, in June 2015, the United States Supreme Court ruled in King v. Burwell that health insurance subsidies provided under the Healthcare Reform Act would be available in all states, including those with a federally- facilitated healthcare exchange.

In addition to legal challenges in court, attempts to repeal all or a portion of the Health Care Reform Acts are pending in Congress, taking on renewed emphasis and urgency since the new administration took office in January 2017. On May 4, 2017, the U.S. House of Representatives passed H.R. 1628, formally known as the “American Health Care Act of 2017,” which would significantly revise many aspects of the Healthcare Reform Acts, including eliminating the individual mandate and converting federal Medicaid financing to a per capita cap beginning in 2020. The U.S. Senate, which also must approve the bill, has not yet taken it up. Based on comments from multiple senators, it is expected that an entirely different version of the legislation will be introduced there. While we consider it likely that changes will be made to the Healthcare Reform Acts, we cannot yet predict with any certainty what those changes will be or when they will occur. The outcomes of legislative attempts to amend the Health Care Reform Acts and legal challenges to the Health Care Reform Acts are unknown, making it difficult for us to know for certain how the Healthcare Reform Acts will ultimately affect our operations and revenues.

In addition to the Healthcare Reform Acts, other legislation proposing to regulate, control or alter the methods of delivering and financing health care is regularly introduced and debated in Congress and State legislatures. Examples include bills that incentivize managed care enrollment, require provision of reduced cost or free care, impose mandatory or voluntary rate reductions and cost controls, affect competition among health care providers, establish new patient rights, establish quality standards, mandate technology investment or prohibit and punish certain healthcare activities or certain provider relationships deemed as incentivizing behavior detrimental to the healthcare system. Future health care legislation and proposals are likely to vary widely, and no determination can be made at this time as to whether any such legislation will be enacted into law, or, if enacted, what effect, if any, it may have on our operations or revenues.

We receive almost all of our gross patient revenues from government and managed care payers who are likely to continue to seek to reduce what they pay us.

We expect to be paid appropriately for the services we provide, but third-party payers continue to require or request that we accept lower rates of payment even as the costs of providing medical care continue to rise.

We receive a substantial portion of our revenues from the Medicare and Medicaid programs. For example, approximately 43.3% of our 2016 fiscal year gross patient revenue came from Medicare and approximately 10.6% came from Medicaid. Medicare is a federal program that provides certain hospital and medical insurance benefits primarily to persons age 65 and older. Medicaid is a jointly funded federal-state program administered by the states that provides hospital and medical benefits to qualifying individuals who are unable to afford health care.

Because the federal government funds the Medicare program and contributes to the funding of the states’ Medicaid programs, the rapidly rising cost of healthcare has put pressure on the federal budget.

In recent years, there have been numerous federal legislative and administrative actions that have reduced the rate of increase in Medicare payments to hospitals and other healthcare providers. For example, as a result of the Budget Control Act of 2011 and the American Taxpayer Relief Act of 2012, an automatic 2% reduction of Medicare program payments for all healthcare providers, known as “sequestration,” took effect in March 2013. Since then, Congress has passed a number of bills, which the President has signed into law, that have impacted sequestration, including spending reductions, adjustments to sequestration caps, and extending sequestration into additional federal fiscal years. The sequestration cuts that have been in place since 2013 are expected to continue to have an impact on our annual net revenues. Both sequestration and any possible abandonment of sequestration in favor of targeted healthcare spending decreases are likely to result in a net decrease in our operating revenues. The Healthcare Reform Acts have also made changes to the Medicare program that have reduced or are expected to reduce payments to healthcare providers.

The federal government also has reduced its matching payments made to the states to subsidize the cost of their Medicaid programs. As discussed below, North Carolina may also reduce its Medicaid expenditures. Attempts to further reduce Medicare and Medicaid funding will likely intensify as the pressure to reduce the federal deficit and balance the federal budget increases, and we believe that the federal government is likely to implement other reductions in Medicare and Medicaid funding.

Before investing in the 2017 Bonds, you should consider whether it is likely that the federal government and the State of North Carolina will continue to provide reasonable levels of reimbursement to healthcare providers to cover the costs of providing care to Medicare and Medicaid patients.

Before investing in the 2017 Bonds, you also should consider the impact on us from reductions in government reimbursement to other health care providers, such as physicians. For example, in response to reductions in reimbursement, physicians who practice at our facilities are seeking alternative contractual arrangements with us, resulting in a reduction of our operating income. Physicians are also competing for services with hospitals in such areas as imaging and ambulatory surgery. Reductions in physician reimbursement also could make the predicted nationwide shortage of physicians discussed below worse, which could result in decreased use of programs and services at our facilities.

We also receive a substantial portion of our revenues from managed care programs. For the 2016 fiscal year, approximately 38.6% of our gross patient revenue came from managed care payers. After giving effect to contractual allowances and discounts, managed care reimbursement exceeds reimbursement from governmental payers, so a larger portion of our operating income is derived from managed care revenues. See note 3 to our financial statements included in Appendix B. Managed care companies and employers also are increasing their efforts to control healthcare costs. For example, managed care companies and employers are shifting more costs to patients and limiting what costs are covered. If this trend continues, payment increases may not keep up with costs and increased use of our facilities.

Historically, medical inflation has outpaced general inflation. In addition, medical inflation could outpace our ability to increase reimbursement under long-term managed care contracts.

Pressures on the North Carolina budget may impact healthcare funding.

As a result of current economic conditions, many states, including North Carolina, continue to face budgetary and fiscal challenges. Shortfalls between state revenues and spending demands, along with balanced budget requirements, have in the past and may in the future result in cutbacks to state- funded healthcare programs such as Medicaid. In recent years, North Carolina has reduced the rate of increase of Medicaid reimbursement to hospitals and continues to be under pressure to limit Medicaid expenditures.

Because Duke University Hospital serves a disproportionately large share of low income or indigent patients, it has historically received additional Medicaid reimbursement payments under North Carolina’s “Medicaid Reimbursement Initiative.” Under this program, we are eligible for additional reimbursement payments based on the cost deficits and treatment of a disproportionate share of indigent patients. The reimbursement payments are subject to final settlement based upon upper payment limits for Medicaid and uncompensated care. Elimination of, or reductions to, the Medicaid Reimbursement Initiative payments we receive could adversely affect our financial performance.

In September 2015, driven largely by a desire for State budget predictability, the General Assembly enacted Session Law 2015-245, which required the State’s Department of Health and Human Services (which we refer to as the “NC DHHS”) to submit a Section 1115 waiver application proposing a restructuring of the State’s Medicaid program to the Centers for Medicare & Medicaid Services (which we refer to as “CMS”). The NC DHHS submitted its final waiver application to CMS on June 1, 2016, which CMS formally accepted on June 16, 2016. Subsequently, the General Assembly enacted Session Law 2016-121 to make certain administrative and technical changes necessary to continue moving forward with the restructuring.

The changes proposed in the application, if approved by CMS, would transition the State’s Medicaid program from a largely fee-for-service system to a system based on capitated contracts operated by prepaid health plans. The prepaid health plans will include both commercial plans and “provider-led entities.” The General Assembly has called for three statewide contracts with prepaid health plans and up

to ten regional contracts with provider-led entities. The capitated contracts will be awarded though a request for proposal process. The initial capitated contracts may be awarded on staggered terms of three to five years, to prevent gaps in coverage if a contract is terminated. For now, behavioral health will continue to be separately managed by Local Management Entity - Managed Care Organizations. CMS must approve the State’s waiver application prior to implementation, so implementation of the new managed care approach is not expected before 2019.

We, along with a group of 10 other health systems spanning the entire state, have formed a limited liability company which may ultimately become a state-wide prepaid health plan. Participating systems are: us, Cape Fear Valley Health System, Carolinas HealthCare System, Cone Health, Mission Health, New Hanover Regional Medical Center, Novant Health, University of North Carolina Health Care System, Vidant Health, Wake Forest University Baptist Medical Center, and WakeMed Health & Hospital. This group has selected Presbyterian Health Plan of New Mexico, a provider-led health plan, as a key partner in their collaboration to explore the formation of a new prepaid health plan. We will also explore other Medicaid alternatives, including becoming a regional provider-led entity or remaining as a contracting provider to other risk-bearing organizations.

Pressures on the North Carolina budget may impact state tax exemptions.

As a nonprofit healthcare provider, we are exempt from (or entitled to a refund of) North Carolina income, franchise and sales taxation. The property used by us for charitable hospital purposes is exempt from North Carolina ad valorem property taxation. From time to time, legislation has been introduced in the North Carolina legislature to limit or repeal the state tax exemptions available to nonprofit healthcare providers like us. Continued economic pressures may give rise to renewed efforts to limit or repeal these exemptions.

Our volume of indigent care and uninsured and underinsured patients may increase.

We provide care, without charge or at discounted rates, to self-pay patients (who are typically uninsured) who meet certain criteria under our charity care and discount policies. A key element used to determine eligibility for charity care is a patient’s demonstrated inability to pay based upon family size and household income relative to federal income poverty guidelines. In addition, our policies also provide discounts for any patient who experiences catastrophic illnesses or injury.

We receive partial reimbursement under the Medicaid program for care provided to many, but not all, of our indigent patients. Medicaid is designed to reimburse healthcare providers like us at less than actual cost and has not kept pace in recent years with the healthcare industry’s rapidly rising cost of personnel, supplies and technology.

The weak economic recovery may lead to inadequate increases in state Medicaid budgets, more individuals and employers not purchasing insurance, and insurers requiring patients to pay higher co- payments and deductibles, all of which may increase the volume of indigent care and uninsured or underinsured patients at our facilities. Additionally, many patients who are uninsured or underinsured lack access to a primary care physician and may seek care through our hospitals’ emergency departments. This often requires more costly care, resulting in higher billings, but lower collection rates. As discussed above, the Healthcare Reform Acts, by encouraging and mandating healthcare coverage for individuals, may reduce the number of patients that are uninsured, but there is no assurance that any benefit to us from a reduction in the number of uninsured patients will be sufficient to offset a material portion of the costs of providing indigent care, particularly given the reductions in disproportionate share hospital (“DSH”) payments described below.

Beginning October 1, 2013, Medicare DSH payments, made to certain healthcare providers to reimburse a portion of the costs of providing indigent care, were reduced initially by 75%. Thus, disproportionate share hospitals receive 25% of the amount they would have received under the statutory formula for Medicare DSH payments prior to the Healthcare Reform Acts. The remaining 75% of the funds was transitioned into an uncompensated care pool to be paid to hospitals for providing uncompensated care services. These pool payments are expected to decrease as uninsured consumers obtain insurance through the healthcare exchanges. Additionally, states’ Medicaid DSH allotments from federal funds were scheduled to be reduced beginning October 1, 2013; however, the Pathway for SGR Reform Act of 2013 subsequently repealed the reductions for fiscal years 2014 and 2015. The Protecting Access to Medicare Act of 2014, which became law on April 1, 2014, further delayed the reductions until October 1, 2016, but extended them through fiscal year 2024.

The health care industry is subject to extensive and complex regulations.

Extensive federal, state and local laws and regulations govern the healthcare industry. These laws and regulations require that hospitals meet various requirements, including, for example, those relating to licensure and certification, the screening, stabilization and transfer of individuals who have emergency medical conditions, the adequacy of medical care, equipment, personnel, operating policies and procedures, billing patients for services, filing of Medicare and Medicaid claims and reports, payments for services and supplies, relationships with referring physicians and entities, maintenance of adequate records, privacy and security of patient information, building codes, environmental protection and occupational health and safety. Regular inquiries, audits and investigations, some of which are ongoing, review compliance with these laws and regulations

These laws and regulations are extremely complex and subject to interpretation. Often there is little or no regulatory or judicial interpretation of these laws and regulations to guide healthcare providers. Moreover, frequent modification of the laws and regulations and interpretations of the laws and regulations creates additional uncertainty when trying to comply with applicable laws and regulations. As described in Appendix A, we have implemented formal programs to comply with applicable healthcare laws and regulations. Brief descriptions of some prominent regulatory areas follow.

Patient Billing Practices.

The Medicare Recovery Audit Contractor Program implemented by the Centers for Medicare and Medicaid Services uses recovery audit contractors to identify improper payments for services provided to Medicare beneficiaries by various providers, including hospitals. Federal and state government agencies have engaged in coordinated civil and criminal enforcement efforts to reduce improper payments. In addition, the Office of Inspector General (which we refer to as “OIG”) of the Department of Health and Human Services (which we refer to as “HHS”), which is responsible for investigating healthcare fraud and abuse, and the United States Department of Justice, periodically establish enforcement initiatives focusing on specific patient billing practices or other suspected areas of abuse. To the extent that these enforcement activities are part of the overall effort by federal and state governments to control and reduce health care costs, these enforcement activities may take on additional importance and may become more intense.

Additionally, federal and state statutes impose civil (including substantial monetary penalties and damages) and criminal liability for the presentment of false or fraudulent claims to a government payor.

Privacy and Security of Patient Information.

Provisions in the Health Information Technology for Economic and Clinical Health Act (which we refer to as the “HITECH Act”) increase the maximum civil monetary penalties for violations of the Health Insurance Portability and Accountability Act of 1996 (which we refer to as “HIPAA”) and grant enforcement authority for HIPAA to state attorneys general. The HITECH Act also (1) extends the reach of HIPAA beyond “covered entities,” (2) imposes a breach notification requirement on HIPAA covered entities, (3) limits certain uses and disclosures of individually identifiable health information and (4) permits harmed individuals to receive a share of civil monetary penalties.

Many states, including North Carolina, have also enacted laws requiring businesses to notify individuals of security breaches that result in the unauthorized release of personal information. State consumer protection laws may also provide the basis for legal action for privacy and security breaches and may authorize a private right of action. In particular, the public nature of security breaches exposes healthcare organizations to increased risk of individual or class action lawsuits from patients or other affected persons, in addition to government enforcement. Failure to comply with restrictions on patient privacy or to maintain effective information security safeguards, including taking steps to ensure that contractors who have access to sensitive patient information maintain the confidentiality of such information, could consequently damage a healthcare provider’s reputation and materially adversely affect its business operations.

In 2013 and 2014, we implemented the EPIC electronic health records system which fully integrated patient medical records throughout our hospital and clinic environments.

Clinical Trials.

Academic medical centers such as ours also face increasing enforcement of laws and regulations governing the conduct of clinical trials at hospitals. HHS has strengthened its Office of Human Research Protection, one of the agencies responsible for monitoring federally funded research. The National Institutes of Health (which we refer to as “NIH”) has significantly increased the number of facility inspections that these agencies perform. The Food and Drug Administration (which we refer to as “FDA”) also has authority over the conduct of clinical trials performed in hospitals when these trials are conducted on behalf of sponsors seeking FDA approval to market the drug or device that is the subject of the research. In its recent work plans, the HHS OIG has included several enforcement initiatives related to reimbursement for experimental drugs and devices (including kickback concerns) and has issued compliance program guidance directed at recipients of extramural research awards from NIH and other agencies of the U.S. Public Health Service. Although the Duke University School of Medicine is the direct recipient of research awards, we receive indirect benefits in the form of payments for healthcare items and services under many of these grants as a subcontractor of the University and are subject to complex and ambiguous coverage principles and rules governing billing for items or services we provide to patients participating in clinical trials funded by governmental agencies and private sponsors. These agencies’ enforcement powers range from substantial fines and penalties to exclusion of researchers and suspension or termination of entire research programs, and errors in billing Medicare for care provided to patients in clinical trials ineligible for Medicare reimbursement could subject us to sanctions and repayment obligations.

We routinely cooperate with audits, inquiries and investigations and have received requests for information relating to a variety of subjects because of these enforcement activities. As a result of these audits, inquiries and investigations, claims have been and may be brought against us from time to time. We cannot predict the results of any claims that have been or may be brought against us. The ultimate resolution of these claims, and any lawsuits that may arise as a result, individually or in the aggregate,

may have a material adverse effect on our business, financial condition, results of operations or cash flows.

We could lose our federal tax-exempt status.

We are exempt from federal income taxation because we have been determined to be a charitable nonprofit organization described in Section 501(c)(3) of the Internal Revenue Code. Our federal tax- exempt status is subject to audit by the Internal Revenue Service. If an audit reveals that we have violated the provisions of federal tax law applicable to tax-exempt organizations, the IRS could assess monetary penalties against us or revoke our tax-exempt status, depending on the severity of the violation. A loss of federal tax-exempt status would likely materially adversely affect our financial condition.

In recent years the federal and state governments have begun to scrutinize the amount of tax benefits received by charitable nonprofit hospitals in light of the amount of community benefits provided by such organizations. As described above, the Healthcare Reform Acts impose additional requirements for tax-exempt hospitals, including obligations to conduct a community needs assessment every three years and adopt an implementation strategy to meet those identified needs. The passage or adoption of laws or regulations requiring the Combined Group to increase the amount of community benefits it provides, revoking its exemptions from income, franchise, sales or property taxation in whole or in part, or placing additional restrictions on tax-exempt bonds issued for our benefit, could materially adversely affect the financial condition of the Combined Group.

Our hospitals face competition for patients.

Our hospitals face increased competition from freestanding physician-owned ancillary service providers for market share in high margin services (for example, imaging services such as magnetic resonance imaging and computerized tomography). If competitors are better able to attract patients, expand high margin ancillary services or obtain favorable payer contracts, we may experience a decline in patient volume that could negatively impact our operations and financial performance.

We are subject to restrictions and regulations not faced by all of our competitors.

Our operations are subject to extensive restrictions and regulations arising from our tax-exempt status and our use of tax-exempt bonds to finance a portion of the costs of our facilities that are not faced by our for-profit competitors. These restrictions and regulations may adversely affect our ability to charge for services or to enter into contracts with individuals or businesses. Such regulations, for example, may restrict our ability to form joint ventures with individuals or companies or to undertake other activities that may improve our financial operations. Congress, the IRS or the North Carolina legislature may impose new restrictions on tax-exempt organizations that could restrict our financial flexibility or otherwise adversely affect our operations.

Many new forms of healthcare providers may not be subject to the restrictions imposed on us by its participation in governmental healthcare programs, by our status as a tax-exempt organization, and, in the case of Duke University Hospital, by its status as a teaching hospital and as an affiliate of the University.

Compliance with these restrictions and regulations places an additional burden on us. Schedule H to IRS Form 990-Return of Organizations Exempt from Income Tax requires certain hospitals and health systems, like us, to report how they provide community benefit and to specify certain billing and collection practices. In addition, Schedule K to Form 990 requests detailed information related to all

outstanding bond issues of nonprofit borrowers, including information regarding operating, management and research contracts, as well as private use compliance.

We may not be able to offer new services, facilities or equipment without a certificate of need.

North Carolina has adopted a certificate of need law that regulates various types of activities and expenditures, including hospitals, certain imaging technologies and surgery centers, undertaken by or on behalf of health facilities including hospitals and physician practices. The purpose of the certificate of need law is to prevent unnecessary duplication of expensive healthcare services and equipment in an effort to contain healthcare costs.

Before undertaking certain types of activities or expenditures in North Carolina, healthcare providers, including us, are required to obtain a certificate of need. We cannot be assured that we will receive certificates of need for future activities. The failure to receive certificates of need could have an adverse effect on our business.

Increased competition resulting from changes to certificate of need requirements in North Carolina could have an adverse effect on our business.

Although the certificate of need law limits our ability to offer new services, facilities and equipment, it also limits the ability of other healthcare providers to do so. Recently, some states have amended their certificate of need laws to reduce or remove the restrictions imposed with respect to undertaking covered activities or expenditures related to health care facilities. In each of these states, there were substantial increases in the number of health care facilities providing services in major urban areas. There have been increasing efforts in the North Carolina General Assembly to amend the certificate of need law in a similar manner. If the North Carolina certificate of need law were to be repealed and all healthcare providers were free to offer new services, facilities and equipment without regard to need or cost and without being required to treat all patients regardless of ability to pay, our business could be adversely affected.

Our business could be adversely affected by the rising cost and decreasing availability of malpractice and general liability insurance.

In recent years, the dollar amounts being sought and recovered in malpractice and general liability suits have increased nationwide, resulting in substantial increases in malpractice and general liability insurance premiums. We self-insure portions of our professional and general liability coverage and maintain excess loss policies for professional and general liability coverage. We fund our self- insurance programs annually based upon actuarial estimates. These estimates are based on a number of factors, including amount and timing of historical payments, severity of individual cases, anticipated volume of services provided and discount rates for future cash flows. Changes in these factors resulting in increases in these estimates could adversely affect our business.

The excess professional and general liability insurance we purchase is subject to policy aggregate limitations. If such policy aggregate limitations are partially or fully exhausted in the future, or actual payments of claims materially exceed projected estimates of claims, our business, financial position, results of operations or cash flows could be materially adversely affected.

We may not be able to recruit and retain a sufficient number of quality physicians for our medical staffs.

Physicians direct the majority of hospital admissions, and the success of our hospitals depends, in part, on the number and quality of the physicians on the medical staffs of our hospitals, the admitting practices of those physicians and maintaining good relations with those physicians. Those physicians may terminate their affiliation with our hospitals at any time. If we are unable to provide adequate support personnel or technologically advanced equipment and hospital facilities that meet the needs of those physicians, the physicians may be discouraged from referring patients to our hospitals, admissions may decrease and our operating performance may decline. Our relationships with the Private Diagnostic Clinic and the School of Medicine, described in Appendix A, are critical to the recruitment and retention of physicians for our hospitals.

Over the next decade, a nationwide shortage of physicians, and specialists in particular, is expected to emerge as a result of several factors, including population increases generally, the additional amount of healthcare needed for an aging population, the possibility of increased demand for healthcare services due to the Healthcare Reform Acts’ expansion of healthcare coverage described above and more physicians reaching retirement age than those entering medical practice. Reductions in government reimbursement could also adversely affect physicians, exacerbating this anticipated shortage. Medical schools across the country are being encouraged to increase enrollment to combat this expected shortage. A future shortage of physicians in our service area could reduce use of programs and services at our hospitals and materially adversely affect our financial condition.

A nationwide shortage of nurses and other skilled technicians is anticipated.

In recent years, the hospital industry has suffered from a scarcity of nurses and some skilled clinicians to staff its facilities. Factors underlying this industry trend include an increase in the proportion of the population that is elderly, an increase in the tendency to institutionalize senior citizens as opposed to providing nursing care in the home, a decrease in the number of persons entering the nursing profession and an increase in the number of nurses specializing in home health care. These factors may intensify in years to come, aggravating the shortage of skilled personnel.

Because of this nationwide shortage of nurses and skilled technicians, we may be forced to pay higher than anticipated salaries to such personnel or to hire such personnel on a temporary basis through outside agencies at a higher cost. As competition for such employees intensifies, staffing shortages could significantly increase our personnel costs and could have a material adverse effect on our financial results and on our ability to sustain minimum staffing levels necessary to maintain licensure, certification and accreditation. Although we have maintained adequate nurse and skilled technician staffing levels to date through the use of employed and contract personnel, there is no assurance that qualified candidates will remain available to us.

Research grants and contracts and private contributions and gifts received by the School of Medicine may be reduced by economic downturns and other factors.

In recent years, the Duke University School of Medicine has received substantial governmental and private research grants and contracts which have indirectly benefitted us. The competition for such funding is vigorous, and the availability of funding may be adversely affected by reductions or discontinuance of both governmental programs and programs sponsored by private businesses and nonprofit foundations. The School of Medicine, as a department of the University, also receives substantial contributions and gifts. These sources of funding may also be reduced by economic downturns, changes in tax law or other factors adversely affecting private research funding or charitable

donations for such purposes. Although we do not directly receive government research grants or contracts and do not directly receive significant charitable contributions, any reduction in these sources of funding experienced by the University would be likely to affect us. For more information on the relationship between us and the University, see Appendix A.

Members of the Combined Group have entered into Swap Agreements.

We have entered into a number of interest rate swap agreements (which we refer to as the “Swap Agreements”) with financial counterparties. Although the Swap Agreements are intended to hedge the variable interest rate exposure on our floating rate debt, they also present risk. Under certain circumstances, the Swap Agreements will be subject to termination prior to their respective scheduled termination dates. Depending on market conditions upon any such termination, we or the counterparty may owe a termination payment to the other. There can be no assurance that we will have sufficient funds to pay a termination payment to the counterparty or that we will be able to obtain replacement swap agreements with comparable terms. Conversely, we may not receive a termination payment or other benefit of the Swap Agreements if the counterparty is facing financial difficulty. In either case, payments due upon early termination may be substantial. Under certain circumstances, the Swap Agreements require us to deliver collateral to the counterparty or a third-party custodian as security for its obligations under the Swap Agreements. As of March 31, 2017, we had posted $11.1 million in securities to meet such collateral requirements. Additional collateral postings in the future could have an adverse effect on us.

To the extent that the Swap Agreements hedge the interest rate risk of variable rate bonds, the floating rates payable by the counterparty may not match the interest rates that we pay on the related variable rate bonds. See “SELECTED HISTORICAL FINANCIAL INFORMATION – Derivatives” in Appendix A and note 8 in Appendix B for more information regarding the terms and purpose of each Swap Agreement.

The Combined Group is obligated to pay debt service on variable rate bonds that are subject to certain risks.

As of May 15, 2017, the Combined Group is obligated to pay debt service on $463,455,000 of outstanding variable rate bonds. All of these variable rate bonds have been privately placed with commercial banks for holding periods that currently range from six to eleven years. See “SELECTED HISTORICAL FINANCIAL INFORMATION –Outstanding Long-Term Indebtedness” in Appendix A and note 7 in Appendix B to learn more about our variable rate bonds.

The Combined Group’s variable rate bonds expose the Combined Group to two primary risks:

• “interest rate risk” – the risk that the interest rate on the variable rate bonds will increase, and

• “bank renewal risk” – the risk that ownership of the Combined Group’s variable rate bonds will not be able to be renewed or replaced on reasonable terms.

The Combined Group’s variable rate bonds bear (or are expected to bear) interest at rates that are determined based on a LIBOR index. These interest rates are subject to market rate fluctuation and the maximum interest rate is not capped. To attempt to manage interest rate risk, we have entered into the Swap Agreements.

To manage bank renewal risk, the Combined Group has sought relatively long holding periods for its variable rate bonds and will seek to extend the holding periods as far in advance as is reasonable. To

date the Combined Group has been able to renew or replace bank facilities on reasonable terms; however, there is no assurance that the Combined Group will continue to be able to do so. As of May 15, 2017, $129,265,000 of the $463,455,000 outstanding variable rate bonds are not subject to renewal risk because the holders thereof have agreed to hold such bonds until the final maturity thereof.

The Combined Group has financial exposure to general economic conditions and the conditions of the securities and financial markets, including illiquidity.

Investment income is a significant source of revenue for the Combined Group. We believe our investments are being managed prudently and have adopted policies designed to ensure sound management. However, the Combined Group may be affected by volatility in the securities markets which may have an adverse effect on the market value of its investments, the income they generate or the liquidity of such investments. In addition, we utilize interest rate derivatives and investment tools that may be affected by interest rate fluctuations and other economic developments.

Beginning in fiscal year 2010, we shifted from investing in the University’s long-term pool to a strategy that better suits our liquidity needs. We, through Gothic HSP and Gothic, continue to hold a substantial position in the University’s unitized legacy pool, which is primarily comprised of alternative investments that are illiquid and that could not be bifurcated upon our withdrawal from the long-term pool. The remaining funds of ours are invested to provide additional liquidity while meeting investment performance targets.

DESCRIPTION OF THE 2017 BONDS

The following summary of certain provisions of the Trust Agreement does not purport to be complete and is subject to, and is qualified in its entirety by reference to, all the provisions of the Trust Agreement.

Denominations, Principal, Maturity, Interest and Payments

We will issue the 2017 Bonds as registered bonds in denominations of $1,000 or any whole multiple thereof

The 2017 Bonds will be dated the date of their original delivery. Interest on each 2017 Bond will accrue from that original delivery date or, in the case of any 2017 Bond authenticated after the original delivery date, from the most recent interest payment date or from the date to which interest has been paid if any bond interest is in default. Interest on the 2017 Bonds will be computed upon the basis of a 360- day year, consisting of twelve 30-day months.

Interest on the 2017 Bonds will be payable on December 1, 2017, and semiannually thereafter on each June 1 and December 1 at the rate set forth on the cover of this offering memorandum. Such interest will be paid to each person in whose name a 2017 Bond is registered at the close of business on each May 15 and November 15 (each of which we refer to as a “regular record date”). The 2017 Bonds will mature, subject to the redemption provisions described below, on June 1 in the year and amount set forth on the cover of this offering memorandum.

Any interest on a 2017 Bond that is not paid on time will be considered defaulted interest and will cease to be payable to the person who is the registered owner of the 2017 Bond as of a regular record date. Such defaulted interest will be paid to the person in whose name the 2017 Bond is registered as of a special record date or in any other lawful manner determined by us in accordance with the Trust Agreement.

Book-Entry Only System and Global Clearance Procedures

The Depository Trust Company (“DTC”), New York, New York, will act as securities depository for the 2017 Bonds. The 2017 Bonds will be issued as fully-registered securities registered in the name of Cede & Co. (DTC’s partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully-registered 2017 Bond certificate will be issued for each maturity of the 2017 Bonds, each in the aggregate principal amount of the 2017 Bonds of such maturity, as set forth on the front cover hereof, and will be deposited with DTC. Beneficial interests in the 2017 Bonds may be held through DTC, Clearstream Banking, S.A. (“Clearstream”) or Euroclear Bank S.A./N.V. (“Euroclear”) as operator of the Euroclear System, directly as a participant or indirectly through organizations that are participants in such system. Additional information about DTC and the Book-Entry System and Global Clearance Procedures is included herein in Appendix D.

Redemption

Optional Redemption. We may redeem the 2017 Bonds prior to their maturity at our option, in whole or in part on any date, (1) on or after December 1, 2046* at a redemption price equal to 100% of the aggregate principal amount of such 2017 Bonds to be redeemed, together with accrued interest thereon to the redemption date and (2) prior to December 1, 2046* at a Redemption Price equal to the greater of:

• 100% of the principal amount of the 2017 Bonds to be redeemed; or

• the sum of the present value of the remaining scheduled payments of principal and interest to the maturity date of the 2017 Bonds to be redeemed, not including any portion of those payments of interest accrued and unpaid as of the date on which the 2017 Bonds are to be redeemed, discounted to the date on which the 2017 Bonds are to be redeemed on a semi- annual basis, assuming a 360-day year consisting of twelve 30-day months, at the Treasury Rate, plus __ basis points, plus, in each case, accrued interest on the 2017 Bonds to be redeemed to the redemption date.

“Treasury Rate” means, with respect to any redemption date for a particular 2017 Bond, the yield to maturity as of such redemption date of United States Treasury securities with a constant maturity (as compiled and published in the most recent Federal Reserve Statistical Release H.15 (519) that has become publicly available at least two Business Days prior to the redemption date (excluding inflation indexed securities) (or, if such Statistical Release is no longer published, any publicly available source of similar market data)) most nearly equal to the period from the redemption date to the maturity date of the 2017 Bond to be redeemed; provided, however, that if the period from the redemption date to such maturity date is less than one year, the weekly average yield on actually traded United States Treasury securities adjusted to a constant maturity of one year will be used.

At the request of the Bond Trustee to us, the Redemption Price of the 2017 Bonds to be redeemed at our option shall be determined by an independent accounting firm, investment banking firm or financial advisor retained by us at our expense to calculate such Redemption Price. The Trust Agreement provides that we and the Bond Trustee may conclusively rely on the determination of such Redemption Price by such independent accounting firm, investment banking firm or financial advisor and shall not be liable for such reliance.

* Preliminary, subject to change.

General Redemption Provisions. If less than all of the 2017 Bonds are to be redeemed, the particular maturities of 2017 Bonds to be redeemed at our option will be determined by us in our sole discretion.

If the 2017 Bonds are registered in book-entry only form and so long as DTC or a successor securities depository is the sole registered owner of such 2017 Bonds, if less than all of the 2017 Bonds of a maturity are called for prior redemption, the particular 2017 Bonds or portions thereof to be redeemed shall be allocated on a pro rata pass-through distribution of principal basis in accordance with DTC procedures, provided that, so long as the 2017 Bonds are held in book-entry form, the selection for redemption of such 2017 Bonds shall be made in accordance with the operational arrangements of DTC then in effect, and, if the DTC operational arrangements do not allow for redemption on a pro rata pass- through distribution of principal basis, the 2017 Bonds will be selected for redemption, in accordance with DTC procedures, by lot.

We intend that redemption allocations made by DTC be made on a pro rata pass-through distribution of principal basis as described above. However, neither we nor the underwriters can provide any assurance that DTC, DTC’s direct and indirect participants or any other intermediary will allocate the redemption of 2017 Bonds on such basis.

In connection with any repayment of principal, the Bond Trustee will direct DTC to make a pass- through distribution of principal to the holders of the 2017 Bonds. For purposes of calculation of the “pro rata pass-through distribution of principal,” “pro rata” means, for any amount of principal to be paid, the application of a fraction to each denomination of the respective 2017 Bonds where

• the numerator of such fraction is equal to the amount due to the respective bondholders on a payment date, and

• the denominator of such fraction is equal to the total original par amount of the respective 2017 Bonds.

If the 2017 Bonds are no longer registered in book-entry only form, each owner will receive an amount of 2017 Bonds equal to the original face amount then beneficially held by that owner, registered in such investor’s name. Thereafter, any redemption of less than all of the 2017 Bonds of any maturity will continue to be paid to the registered owners of such 2017 Bonds on a pro-rata basis, based on the portion of the original face amount of any such 2017 Bonds to be redeemed.

Notice of Redemption. The Bond Trustee will give notice of any redemption to all registered owners of 2017 Bonds being redeemed at least 30 days, and no more than 60 days, before the date of redemption. Failure to send a redemption notice to any registered owner or any defect in any notice mailed will not affect the redemption of the 2017 Bonds of any other registered owner. While the book- entry only system is in effect, all redemption notices will be sent to DTC as discussed in Appendix D.

Conditional Redemption. In the case of an optional redemption, the redemption notice may state that:

• it is conditioned upon the deposit by us of moneys, defeasance obligations or a combination of both, in an amount sufficient to pay the redemption price of the 2017 Bonds, with the Bond Trustee no later than the scheduled redemption date or

• we retain the right to rescind such notice on or prior to the scheduled redemption date (in either case, a “Conditional Redemption”).

If such moneys are not deposited or the notice is rescinded, such notice and optional redemption shall not be effective and the 2017 Bonds to be redeemed will remain outstanding. If the redemption does not occur, the Bond Trustee will immediately give notice by electronic means to DTC. In the case of a Conditional Redemption subject to the deposit of moneys, our failure to make funds available in part or in whole on or before the scheduled redemption date shall not constitute an Event of Default under the Trust Agreement.

Effect of Calling for Redemption. If on the redemption date the Bond Trustee holds money, “Defeasance Obligations” or a combination of both sufficient to pay the redemption price of the 2017 Bonds to be redeemed, plus accrued interest to the redemption date, in trust for the registered owners of the 2017 Bonds to be redeemed, then interest on such 2017 Bonds will cease to accrue and such 2017 Bonds will no longer be deemed to be outstanding or secured under the Trust Agreement. Furthermore, the registered owners of such 2017 Bonds will have no rights with respect thereto except to receive payment of the redemption price plus accrued interest to the redemption date. “Defeasance Obligations” are limited to certain types of investments as described in Appendix C under the heading “DEFINITIONS OF CERTAIN TERMS.”

Registration, Transfer and Exchange

If the book-entry only system is in effect, transfers and exchanges will occur as described in Appendix D.

If the book-entry only system is not in effect, a registered owner may transfer or exchange 2017 Bonds in accordance with the Trust Agreement. A registered owner must furnish an appropriate assignment to the Bond Trustee in connection with any transfer or exchange. We and the Bond Trustee may require the registered owner of a 2017 Bond to pay a sum sufficient to cover any tax or other governmental charge in connection with any transfer or exchange.

Neither the Bond Trustee nor we are required to transfer or exchange any 2017 Bond that has been selected for redemption in whole or in part. Moreover, neither the Bond Trustee nor we are required to issue, transfer or exchange 2017 Bonds within 15 days before the date of mailing a notice of redemption of 2017 Bonds.

Acceleration

The principal of and interest on the 2017 Bonds may be accelerated if an event of default under the Trust Agreement occurs, including our failure to pay the principal of or interest on the outstanding 2017 Bonds when due and payable. For a description of the events of default and the circumstances under which acceleration may occur and other remedies available to the Bond Trustee and the registered owners of the 2017 Bonds, you should read “SUMMARY OF THE TRUST AGREEMENT—Events of Default” and “—Remedies of Bondholders” in Appendix C.

PLAN OF FINANCE

We will use the proceeds from the sale of the 2017 Bonds to finance:

• capital improvements at our facilities,

• other eligible corporate purposes, and

• certain costs of issuing the 2017 Bonds.

To learn more about our five-year capital plan, you should read the information under the heading “CAPITAL PLAN” in Appendix A.

ESTIMATED SOURCES AND USES OF FUNDS

The estimated sources and uses of funds with respect to the 2017 Bonds are as follows:

Sources

Par Amount of 2017 Bonds $ TOTAL SOURCES OF FUNDS $ Uses

Capital improvements and general corporate purposes $ Costs of Issuance1 TOTAL USES OF FUNDS $ ______1 Includes underwriters’ discount, financial advisor fees, legal fees and expenses, trustee fees and expenses, rating agency fees, printing costs and other costs of issuance of the 2017 Bonds.

ANNUAL DEBT SERVICE REQUIREMENTS

The following table sets forth, for each of our fiscal years ending June 30, beginning with the fiscal year ending June 30, 2018, the principal of and interest on the 2017 Bonds we are required to pay and total debt service on all other Obligations. In some cases, totals in the following table may not foot due to rounding.

Fiscal Year Debt Service Ending Debt Service on 2017 Bonds on Other June 30 Principal Interest Obligations1,2 Total 2018 $ $ $ 79,895,118 $ 2019 79,347,185 2020 78,060,745 2021 76,685,490 2022 76,707,335 2023 76,026,274 2024 76,796,896 2025 76,915,745 2026 77,001,090 2027 77,085,206 2028 77,159,943 2029 76,152,829 2030 76,338,235 2031 76,542,162 2032 76,766,606 2033 75,770,984 2034 76,005,491 2035 76,259,309 2036 76,522,866 2037 76,797,713 2038 77,087,565 2039 77,276,050 2040 77,528,128 2041 78,098,282 2042 78,688,324 2043 10,897,953 2044 11,203,096 2045 11,516,783 2046 11,839,253 2047 12,170,752 TOTAL $ $ $ 1,985,143,406 $ ______1 Includes capitalized lease obligations relating to Duke Regional Hospital, which are treated as our long-term debt, but are not evidenced by an Obligation. 2 Interest on the 2005A Bonds, the 2005B Bonds, the 2006 Bonds, the 2012B Bonds and the 2016C Bonds has been calculated using assumed interest rates of 4.445%, 4.130%, 4.466%, 5.906% and 4.285% per annum, respectively. Assumed interest rate on the 2016B Bonds is a blended rate of a fixed rate (4.155%) with respect to an existing swap on a portion of such bonds and 1.446% for the unhedged portion. No assurance can be given that actual interest rates will match the assumed interest rates. This table reflects payments made on our basis swap and 2007 swap.

ONGOING DISCLOSURE

Because the 2017 Bonds are taxable securities issued directly by us, the Electronic Municipal Market Access system (“EMMA”) website of the Municipal Securities Rulemaking Board (the “MSRB”) is not directly available for the filing of annual reports or enumerated event notices relating to the 2017 Bonds. We will, however, file reports and notices with respect to our outstanding tax-exempt bonds on EMMA, using the CUSIP numbers for such tax-exempt bonds in accordance with our existing undertakings made for the benefit of the holders and beneficial owners of such tax-exempt bonds. The existing undertakings require annual information to be filed on or before the 180th day following the end of each Fiscal Year. The information required to be included in such annual reports is set forth in the undertakings relating to such tax-exempt bonds.

We have agreed that, when, as and if no such tax-exempt bonds are outstanding, we will provide equivalent annual information either to an available information repository or through our website for so long as the 2017 Bonds are outstanding. Failure to provide such information, however, is not an event of default with respect to the 2017 Bonds.

LITIGATION

See “OTHER OPERATIONAL INFORMATION – Litigation, Other Contingencies and Insurance” in Appendix A for information relating to litigation regarding us.

LEGAL MATTERS

Certain legal matters relating to this offering will be passed upon:

• for us by Christy M. Gudaitis, Associate University Counsel, Durham, North Carolina and Parker Poe Adams & Bernstein LLP, Raleigh, North Carolina and Atlanta, Georgia, and

• for the underwriters by Robinson, Bradshaw & Hinson, P.A., Charlotte, North Carolina.

TAX TREATMENT

The following is a summary of certain U.S. federal income tax consequences relating to the purchase, ownership, and disposition of the 2017 Bonds. It does not provide a complete analysis of all potential tax considerations relating to the purchase, ownership and disposition of the 2017 Bonds.

This summary is based on the provisions of the Internal Revenue Code of 1986, as amended (the “Code”), the applicable Treasury Regulations promulgated or proposed under the Code (the “Treasury Regulations”), judicial authority, and administrative rulings and practice, all of which are subject to change, possibly retroactively, or to different interpretation.

This summary applies only to initial purchasers who acquire the 2017 Bonds at their original issue price within the meaning of Section 1273 of the Code and hold the 2017 Bonds as capital assets. A capital asset is generally an asset held for investment rather than as inventory or as property used in a trade or business. This summary does not discuss all of the aspects of U.S. federal income taxation that may be relevant to investors in light of their particular investment or other circumstances. It also does not discuss the particular tax consequences that might be relevant to investors who are subject to special rules under the federal income tax laws. Special rules apply, for example, to trusts; estates; tax-exempt investors; foreign investors; banks, thrifts, insurance companies, regulated investment companies, or other financial institutions or financial service companies; brokers or dealers in securities, commodities or

foreign currency; U.S. persons who have a functional currency other than the U.S. dollar; partnerships or other flow-through entities; real estate investment trusts, financial asset securitization investment trusts, or subchapter S corporations; persons subject to alternative minimum tax; persons who own the 2017 Bonds as part of a straddle, hedging transaction, constructive sale transaction or other risk-reduction transaction; persons who have ceased to be U.S. citizens or to be taxed as resident aliens; or persons who acquire the 2017 Bonds in connection with their employment or other performance of services.

This summary does not address all tax consequences. In particular, except as specifically described below, it does not discuss any estate, gift, generation skipping, transfer, state, local or foreign tax consequences. No ruling from the Internal Revenue Service (the “IRS”) has been sought with respect to the statements made and the conclusions reached in the following summary, and there is no assurance that the IRS will agree with those statements and conclusions. For all these reasons, you should consult with your tax advisor about the federal income tax and other tax consequences of the acquisition, ownership, and disposition of the 2017 Bonds.

For purposes of this discussion, a “U.S. Holder” is a beneficial owner of the 2017 Bonds who is a “United States person” and whose status as a U.S. Holder is not overridden under the provisions of an applicable tax treaty. For these purposes, a “United States person” is a citizen or resident of the United States; a corporation or partnership that is created or organized in or under the laws of the United States or any of the fifty states or the District of Columbia, unless, in the case of a partnership, otherwise provided by the Treasury Regulations; an estate the income of which is subject to federal income taxation regardless of its source; or a trust if a court within the United States is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have the authority to control all substantial decisions of the trust. For purposes of this discussion, a “Non-U.S. Holder” is a beneficial owner of a 2017 Bond that is neither a U.S. Holder nor an entity treated as a partnership for U.S. federal income tax purposes.

Tax Considerations Applicable to U.S. Holders

This section describes certain U.S. federal income tax consequences to U.S. Holders.

Interest. A U.S. Holder generally must include the stated interest on the 2017 Bonds in its gross income as ordinary interest income (1) when it is received, if the U.S. Holder uses the cash method of accounting for U.S. federal income tax purposes; or (2) when it accrues, if the U.S. Holder uses the accrual method of accounting for U.S. federal income tax purposes.

Original Issue Discount. Any 2017 Bond issued at an issue price less than its principal amount will have “original issue discount,” a portion of which will accrue as taxable income to the owner in each taxable year in addition to taxation of regular stated interest, regardless of whether the owner uses the cash or accrual method of accounting and regardless of the owner’s receiving no actual payment of the original issue discount until the maturity of the 2017 Bond. Taxation of original issue discount in this manner is subject to a de minimis exception based on the amount of the original issue discount in relation to the maturity of the 2017 Bond. You should consult your tax advisor regarding the accrual of original issue discount and the effect of such accruals on the tax basis of their 2017 Bonds.

Market Discount. A U.S. Holder who acquires a 2017 Bond in a secondary market transaction at a price below the principal amount may be subject to federal income tax rules providing that accrued market discount will be subject to taxation as ordinary income on the sale or other disposition of a “market discount bond.” Dispositions subject to this rule include a redemption or retirement of a 2017 Bond. The market discount rules may also limit a holder’s deduction for interest expense for debt that is incurred or continued to purchase or carry a 2017 Bond. A market discount bond is defined generally as a

debt obligation purchased subsequent to issuance, at a price that is less than the principal amount of the obligation, subject to a de minimis rule. The Code allows a taxpayer to compute the accrual of market discount by using a ratable accrual method or a constant interest rate method. Also, a taxpayer may elect to include the accrued discount in gross income each year while holding the 2017 Bond, as an alternative to including the total accrued discount in gross income at the time of a disposition, in which case the tax basis of the 2017 Bond will be increased by the amount of discount included in gross income.

Bond Premium. A purchaser of a 2017 Bond who acquires it at a cost greater than the sum of all amounts payable on such 2017 Bond after the acquisition date (other than payments made at least annually over the term of such 2017 Bond of stated interest) will have amortizable bond premium. If the holder elects to amortize the bond premium, such election will apply to all 2017 Bonds held by the holder on the first day of the taxable year to which the election applies, and to all taxable bonds then held or thereafter acquired by the holder. The premium must be amortized using constant yield principles based on the purchaser’s yield to maturity. Amortizable bond premium is generally treated as an offset to interest income, and a reduction in basis is required for amortizable bond premium even though such premium is applied to reduce interest payments. Bond premium on a 2017 Bond held by a holder that has not elected to amortize bond premium will decrease the gain or increase the loss otherwise recognized on the disposition of the 2017 Bond. If you acquire 2017 Bonds at issue or in a secondary market transaction at a premium, you should consult with your own tax advisors with respect to the determination and treatment of such premium for income tax purposes.

Sale, Exchange, or Redemption of 2017 Bonds. A U.S. Holder generally will recognize gain or loss upon the sale, exchange, redemption, retirement, or other disposition of a 2017 Bond measured by the difference between (i) the amount of cash proceeds and the fair market value of any property received (except to the extent attributable to accrued interest income not previously included in income, which will generally be taxable as ordinary income, or attributable to accrued interest previously included in income, which amount may be received without generating further income), and (ii) the U.S. Holder’s adjusted tax basis in such 2017 Bond. A U.S. Holder’s adjusted tax basis in a 2017 Bond generally will equal its cost of the 2017 Bond, less any principal payments received by the U.S. Holder. Gain or loss on the disposition of 2017 Bonds will generally be a capital gain or loss (although any gain attributable to accrued market discount of the 2017 Bond not yet taken into income will be ordinary) and will be a long- term gain or loss if the 2017 Bonds have been held for more than one year at the time of disposition. The deductibility of capital losses is subject to limitations.

Defeasance. Defeasance of any 2017 Bond may result in a reissuance thereof, in which event a U.S. Holder will recognize taxable gain or loss equal to the difference between the amount realized from the deemed exchange (less any accrued qualified stated interest which will be taxable as such) and the U.S. Holder’s adjusted tax basis in the 2017 Bond.

Tax-Exempt Organizations. Income or gain from 2017 Bonds held by a tax-exempt organization will be subject to the tax on unrelated business taxable income if the 2017 Bonds are “debt-financed property” of the organization under Section 514(b) of the Code.

Unearned Income Tax. A U.S. Holder that is an individual or estate, or a trust that does not fall into a special class of trusts that is exempt from such tax, will be subject to a 3.8% tax on the lesser of (1) the holder’s “net investment income” for the relevant taxable year and (2) the excess of the holder’s adjusted gross income (increased by certain amounts of excluded foreign income) for the taxable year over a certain threshold (which in the case of individuals will be between $125,000 and $250,000, depending on the individual’s circumstances) (the “Unearned Income Tax”). A U.S. Holder’s net investment income will generally include its interest income and net gain from the disposition of the 2017 Bonds, unless such interest income and net gain is derived in the ordinary course of the conduct of a trade

or business (other than a trade or business that consists of certain passive or trading activities). Net investment income may, however, be reduced by properly allocable deductions to such income.

Information Reporting and Backup Withholding Tax. In general, information reporting requirements will apply to payments to certain noncorporate U.S. Holders of principal and interest on a 2017 Bond and the proceeds of the sale of a 2017 Bond. A U.S. Holder may be subject to backup withholding when it receives interest with respect to the 2017 Bonds or when it receives proceeds upon the sale, exchange, redemption, retirement, or other disposition of the 2017 Bonds. The backup withholding rate currently is 28%. In general, an investor can avoid this backup withholding by properly executing under penalties of perjury an IRS Form W-9 or substantially similar form that provides (1) such investor’s correct taxpayer identification number; and (2) a certification that such investor (a) is exempt from backup withholding because it is a corporation or comes within another enumerated exempt category, (b) has not been notified by the IRS that it is subject to backup withholding, or (c) has been notified by the IRS that it is no longer subject to backup withholding.

If an investor does not provide its correct taxpayer identification number on the IRS Form W-9 or substantially similar form, such investor may be subject to penalties imposed by the IRS. Backup withholding does not apply to payments made to certain holders, including corporations, tax-exempt organizations, and certain foreign persons, provided their exemptions from backup withholding are properly established. Amounts withheld are generally not an additional tax and may be refunded or credited against an investor’s federal income tax liability if such investor furnishes the required information to the IRS. The amount of any reportable payments for each calendar year and the amount of tax withheld, if any, with respect to those payments will be reported to the U.S. Holders of 2017 Bonds and to the IRS.

Tax Considerations Applicable to Non-U.S. Holders

This section describes certain U.S. federal income tax consequences to Non-U.S. Holders.

Payments of Interest. Subject to the discussion below on backup withholding and FATCA, interest paid on a 2017 Bond to a Non-U.S. Holder generally will not be subject to U.S. federal income tax, or withholding tax of 30% (or such lower rate specified by an applicable income tax treaty), provided that:

• such interest is not effectively connected with the Non-U.S. Holder’s conduct of a trade or business within the United States;

• the Non-U.S. Holder is not a controlled foreign corporation related to us through actual or constructive stock ownership;

• the Non-U.S. Holder is not actually or constructively a “10-percent” shareholder under Section 871(h) of the Code;

• the Non-U.S. Holder is not a bank receiving interest described in Section 881(c)(3)(A) of the Code; and

• either

○ the Non-U.S. Holder certifies in a statement provided to the applicable withholding agent under penalties of perjury on IRS Form W-8BEN or W-8BEN-E (or other applicable documentation) that it is not a United States person and provides its name and address;

○ a securities clearing organization, bank or other financial institution that holds customers’ securities in the ordinary course of its trade or business and holds the 2017 Bond on behalf of the Non-U.S. Holder certifies to the applicable withholding agent under penalties of perjury that it, or the financial institution between it and the Non-U.S. Holder, has received from the Non-U.S. Holder a statement under penalties of perjury that such holder is not a United States person and provides a copy of such statement to the applicable withholding agent; or

○ the Non-U.S. Holder holds its 2017 Bond directly through a “qualified intermediary” (within the meaning of applicable Treasury Regulations) and, in each case, certain other conditions are satisfied.

If a Non-U.S. Holder does not satisfy the requirements above, such Non-U.S. Holder may be entitled to a reduction in or an exemption from withholding on such interest as a result of an applicable tax treaty. To claim such entitlement, the Non-U.S. Holder must provide the applicable withholding agent with a properly executed IRS Form W-8BEN or W-8BEN-E (or other applicable documentation) claiming a reduction in or exemption from withholding tax under the benefit of an income tax treaty between the United States and the country in which the Non-U.S. Holder resides or is established.

If interest paid to a Non-U.S. Holder is effectively connected with the Non-U.S. Holder’s conduct of a trade or business within the United States (and, if required by an applicable income tax treaty, the Non-U.S. Holder maintains a permanent establishment in the United States to which such interest is attributable), the Non-U.S. Holder will be exempt from the U.S. federal withholding tax described above. To claim the exemption, the Non-U.S. Holder must furnish to the applicable withholding agent a valid IRS Form W-8ECI, certifying that interest paid on a 2017 Bond is not subject to withholding tax because it is effectively connected with the conduct by the Non-U.S. Holder of a trade or business within the United States.

Any such effectively connected interest generally will be subject to U.S. federal income tax at the regular graduated rates. A Non-U.S. Holder that is a corporation also may be subject to a branch profits tax at a rate of 30% (or such lower rate specified by an applicable income tax treaty) on such effectively connected interest, as adjusted for certain items.

The certifications described above must be provided to the applicable withholding agent prior to the payment of interest and must be updated periodically. Non-U.S. Holders who do not timely provide the applicable withholding agent with the required certification, but that qualify for a reduced rate under an applicable income tax treaty, may obtain a refund of any excess amounts withheld by timely filing an appropriate claim for refund with the IRS. Non-U.S. Holders should consult their tax advisors regarding their entitlement to benefits under any applicable income tax treaty.

Sale or Other Taxable Disposition. Subject to the discussion below on backup withholding and FATCA, a Non-U.S. Holder generally will not be subject to U.S. federal income tax on any gain realized upon the sale, exchange, redemption, retirement or other taxable disposition of a 2017 Bond (such amount excludes any amount allocable to accrued and unpaid interest, which generally will be treated as interest and may be subject to the rules discussed above in “—Tax Considerations Applicable to Non-U.S. Holders—Payments of Interest”) unless:

• the gain is effectively connected with the Non-U.S. Holder’s conduct of a trade or business within the United States (and, if required by an applicable income tax treaty, the Non-U.S. Holder maintains a permanent establishment in the United States to which such gain is attributable); or

• the Non-U.S. Holder is a nonresident alien individual present in the United States for 183 days or more during the taxable year of the disposition and certain other requirements are met.

Gain described in the first bullet point above generally will be subject to U.S. federal income tax on a net income basis at the regular graduated rates. A Non-U.S. Holder that is a foreign corporation also may be subject to a branch profits tax at a rate of 30% (or such lower rate specified by an applicable income tax treaty) on such effectively connected gain, as adjusted for certain items.

Gain described in the second bullet point above will be subject to U.S. federal income tax at a rate of 30% (or such lower rate specified by an applicable income tax treaty), which may be offset by U.S. source capital losses of the Non-U.S. Holder (even though the individual is not considered a resident of the United States), provided the Non-U.S. Holder has timely filed U.S. federal income tax returns with respect to such losses.

Non-U.S. Holders should consult their tax advisors regarding any applicable income tax treaties that may provide different rules.

Information Reporting and Backup Withholding. Payments of interest to a Non-U.S. Holder generally will not be subject to backup withholding, provided the applicable withholding agent does not have actual knowledge or reason to know the holder is a United States person and the holder certifies its non-U.S. status as described above under “—Tax Considerations Applicable to Non-U.S. Holders— Payments of Interest.” However, information returns are required to be filed with the IRS in connection with any interest paid to the Non-U.S. Holder, regardless of whether any tax was actually withheld. In addition, proceeds of the sale or other taxable disposition of a 2017 Bond (including a retirement or redemption of the 2017 Bond) within the United States or conducted through certain U.S.-related brokers generally will not be subject to backup withholding or information reporting if the applicable withholding agent receives the statement described above and does not have actual knowledge or reason to know that such holder is a United States person or the holder otherwise establishes an exemption. Proceeds of a disposition of a 2017 Bond paid to a Non-U.S. Holder outside the United States and conducted through a non-U.S. office of a non-U.S. broker generally will not be subject to backup withholding or information reporting.

Copies of information returns that are filed with the IRS may also be made available under the provisions of an applicable treaty or agreement to the tax authorities of the country in which the Non-U.S. Holder resides or is established.

Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules may be allowed as a refund or a credit against a Non-U.S. Holder’s U.S. federal income tax liability, provided the required information is timely furnished to the IRS.

FATCA Withholding. Withholding taxes may be imposed under Sections 1471 to 1474 of the Code (such Sections commonly referred to as the Foreign Account Tax Compliance Act, or “FATCA”) on certain types of payments made to non-U.S. financial institutions and certain other non-U.S. entities. Specifically, a 30% withholding tax may be imposed on payments of interest on, or gross proceeds from the sale or other disposition of, a 2017 Bond paid to a “foreign financial institution” or a “non-financial foreign entity” (each as defined in the Code), unless

• the foreign financial institution undertakes certain diligence and reporting obligations,

• the non-financial foreign entity either certifies it does not have any “substantial United States owners” (as defined in the Code) or furnishes identifying information regarding each substantial United States owner, or

• the foreign financial institution or non-financial foreign entity otherwise qualifies for an exemption from these rules.

If the payee is a foreign financial institution and is subject to the diligence and reporting requirements described in the first bullet point above, it must enter into an agreement with the U.S. Department of the Treasury requiring, among other things, that it undertake to identify accounts held by certain “specified United States persons” or “United States-owned foreign entities” (each as defined in the Code), annually report certain information about such accounts, and withhold 30% on certain payments to non-compliant foreign financial institutions and certain other account holders. Foreign financial institutions located in jurisdictions that have an intergovernmental agreement with the United States governing FATCA may be subject to different rules.

Under the applicable Treasury Regulations and Notices, withholding under FATCA generally applies to payments of interest on a 2017 Bond and will apply to payments of gross proceeds from the sale or other disposition of a 2017 Bond on or after January 1, 2019.

You should consult your tax advisors regarding the potential application of withholding under FATCA to their investment in the 2017 Bonds.

ERISA AND CERTAIN RELATED CONSIDERATIONS

The following is a summary of certain considerations associated with the purchase of the 2017 Bonds by employee benefit plans that are subject to Title I of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), plans, individual retirement accounts and other arrangements that are subject to Section 4975 of the Code or provisions under any other federal, state, local, non-U.S. or other laws or regulations that are similar to such provisions of the Code or ERISA (collectively, “Similar Laws”), and entities whose underlying assets are considered to include “plan assets” of any such plan, account or arrangement (each, a “Plan”).

General Fiduciary Matters

ERISA and the Code impose certain duties on persons who are fiduciaries of a Plan subject to Title I of ERISA or Section 4975 of the Code (an “ERISA Plan”) and prohibit certain transactions involving the assets of an ERISA Plan and its fiduciaries or other interested parties. Under ERISA and the Code, any person who exercises any discretionary authority or control over the administration of such an ERISA Plan or the management or disposition of the assets of such an ERISA Plan, or who renders investment advice for a fee or other compensation to such an ERISA Plan, is generally considered to be a fiduciary of the ERISA Plan.

In considering an investment in the 2017 Bonds of a portion of the assets of any Plan, a fiduciary should determine whether the investment is in accordance with the documents and instruments governing the Plan and the applicable provisions of ERISA, the Code or any Similar Law relating to a fiduciary’s duties to the Plan including, without limitation, the prudence, diversification, delegation of control and prohibited transaction provisions of ERISA, the Code and any other applicable Similar Laws.

Prohibited Transaction Issues

Section 406 of ERISA and Section 4975 of the Code prohibit ERISA Plans and other plans such as individual retirement accounts that are subject to Section 4975 but not Title I of ERISA, including entities whose underlying assets are considered to include “plan assets” of any such plan, account or arrangement, from engaging in specified transactions involving plan assets with persons or entities who are “parties in interest,” within the meaning of ERISA, or “disqualified persons,” within the meaning of Section 4975 of the Code, unless an exemption is available. A party in interest or disqualified person who engaged in a non-exempt prohibited transaction may be subject to excise taxes and other penalties and liabilities under ERISA and the Code. In addition, the fiduciary of the ERISA Plan that engaged in such a non-exempt prohibited transaction may be subject to penalties and liabilities under ERISA and the Code.

The acquisition and/or holding of 2017 Bonds by an ERISA Plan with respect to which the issuer or an underwriter is considered a party in interest or a disqualified person may constitute or result in a direct or indirect prohibited transaction under Section 406 of ERISA and/or Section 4975 of the Code, unless the investment is acquired and is held in accordance with an applicable statutory, class or individual prohibited transaction exemption. In this regard, the U.S. Department of Labor has issued prohibited transaction class exemptions, or “PTCEs,” that may apply to the acquisition and holding of the 2017 Bonds. These class exemptions include, without limitation,

• PTCE 84-14 respecting transactions determined by independent qualified professional asset managers,

• PTCE 90-1 respecting insurance company pooled separate accounts,

• PTCE 91-38 respecting bank collective investment funds,

• PTCE 95-60 respecting life insurance company general accounts and

• PTCE 96-23 respecting transactions determined by in-house asset managers.

In addition, Section 408(b)(17) of ERISA and Section 4975(d)(20) of the Code provide relief from the prohibited transaction provisions of ERISA and Section 4975 of the Code for certain transactions, provided that neither the issuer of the securities nor any of its affiliates (directly or indirectly) have or exercise any discretionary authority or control or render any investment advice with respect to the assets of any ERISA Plan involved in the transaction and provided further that the ERISA Plan pays no more than adequate consideration in connection with the transaction. There can be no assurance that all of the conditions of any such exemptions will be satisfied.

Because of the foregoing, the 2017 Bonds should not be acquired or held by any person investing “plan assets” of any Plan, unless such acquisition and holding will not constitute a non-exempt prohibited transaction under ERISA and the Code or a similar violation of any applicable Similar Laws.

Representation

Accordingly, by acceptance of a 2017 Bond, each purchaser and subsequent transferee of a 2017 Bond will be deemed to have represented and warranted that

• Either

○ no portion of the assets used by such purchaser or transferee to acquire or hold the 2017 Bonds constitutes assets of any Plan or

○ the acquisition, holding and disposition of the 2017 Bonds by such purchaser or transferee will not constitute a non-exempt prohibited transaction under Section 406 of ERISA or Section 4975 of the Code or a similar violation under any applicable Similar Laws, and

• the purchaser will not transfer the 2017 Bonds to any person or entity, unless such person or entity could itself truthfully make the foregoing representations and covenants.

The foregoing discussion is general in nature and is not intended to be all inclusive. Due to the complexity of these rules and the penalties that may be imposed upon persons involved in non-exempt prohibited transactions, it is particularly important that fiduciaries, or other persons considering purchasing the 2017 Bonds on behalf of, or with the assets of, any Plan, consult with their counsel regarding the potential applicability of ERISA, Section 4975 of the Code and any Similar Laws to such investment and whether an exemption would be applicable to the purchase and holding of the 2017 Bonds.

UNDERWRITING

We have entered into a purchase agreement with J.P. Morgan Securities LLC (which we refer to as “J.P. Morgan Securities”), on its own behalf and on behalf of Jefferies LLC, as the underwriters of the 2017 Bonds. Subject to the terms and conditions set forth in the purchase agreement, the underwriters have agreed to purchase the 2017 Bonds at a price of $______, which equals the aggregate principal amount of the 2017 Bonds less the underwriters’ discount of $______.

The underwriters must purchase all of the 2017 Bonds if any of the 2017 Bonds are purchased. We have agreed to indemnify the underwriters as to certain matters in connection with the 2017 Bonds.

The underwriters may offer and sell the 2017 Bonds to certain dealers (including dealer banks and dealers depositing the 2017 Bonds into investment trusts) and others at prices lower than the public offering price shown on the cover of this offering memorandum. From time to time the underwriters may change the initial public offering price or yield shown on the cover of this offering memorandum.

J.P. Morgan Securities has entered into negotiated dealer agreements (each of which we refer to as a “J.P. Morgan Dealer Agreement”) with each of Charles Schwab & Co., Inc. (which we refer to as “Charles Schwab”) and LPL Financial LLC (which we refer to as “LPL”) for the retail distribution of certain securities offerings, including the 2017 Bonds, at the original issue prices. Pursuant to each J.P. Morgan Dealer Agreement (if applicable to this transaction), each of Charles Schwab and LPL will purchase 2017 Bonds from J.P. Morgan Securities at the original issue price less a negotiated portion of the selling concession applicable to any 2017 Bonds that such firm sells.

Jefferies LLC (which we refer to as “Jefferies”), an underwriter of the 2016D Bonds, has entered into an agreement (which we refer to as the “Jefferies Agreement”) with E*TRADE Securities LLC (which we refer to as “E*TRADE”) for the retail distribution of municipal securities. Pursuant to the Jefferies Agreement, Jefferies will sell 2017 Bonds to E*TRADE and will share a portion of its selling concession compensation with E*TRADE.

The underwriters and their respective affiliates are full service financial institutions engaged in various activities, which may include sales and trading, commercial and investment banking, advisory, investment management, investment research, principal investment, hedging, market making, brokerage and other financial and non-financial activities and services. Under certain circumstances, the underwriters and their respective affiliates may have certain creditor and/or other rights against us and our affiliates in connection with such activities. In the course of their various business activities, the underwriters and their respective affiliates, officers, directors and employees may purchase, sell or hold a broad array of investments and actively trade securities, derivatives, loans, commodities, currencies, credit default swaps and other financial instruments for their own account and for the accounts of their customers, and such investment and trading activities may involve or relate to assets, securities and/or instruments of ours (directly, as collateral securing other obligations or otherwise) and/or persons and entities with relationships with us. The underwriters and their restrictive affiliates may also communicate independent investment recommendations, market color or trading ideas and/or publish or express independent research views in respect of such assets, securities or instruments and may at any time hold, or recommend to clients that they should acquire, long and/or short positions in such assets, securities and instruments.

RATINGS

Moody’s Investors Service, Inc. (which we refer to as “Moody’s”) has assigned a rating of “Aa2” to the 2017 Bonds. S&P Global Ratings, a division of Standard & Poor’s Financial Services LLC (which we refer to as “S&P”), has assigned a rating of “AA” to the 2017 Bonds. Fitch, Inc. (which we refer to as “Fitch”), has assigned a rating of “AA” to the 2017 Bonds. These ratings reflect the views of Moody’s, S&P and Fitch. We have furnished Moody’s, S&P and Fitch with certain materials and information not included in this offering memorandum. You should contact Moody’s, S&P and Fitch to obtain an explanation of the significance of their respective ratings.

We cannot assure you that these ratings will remain in effect for any given period of time. Moody’s, S&P or Fitch may lower, suspend or withdraw its rating. The underwriters are not obligated to notify you if Moody’s, S&P or Fitch lowers, suspends or withdraws its rating. If Moody’s, S&P or Fitch lowers, suspends or withdraws its rating, the market price of the 2017 Bonds could be adversely affected.

FINANCIAL ADVISOR

We have retained Kaufman, Hall & Associates, LLC, Skokie, Illinois, as financial advisor in connection with the issuance of the 2017 Bonds. Although Kaufman, Hall & Associates, LLC has assisted in the preparation of this offering memorandum, Kaufman, Hall & Associates, LLC was not and is not obligated to undertake, and has not undertaken to make, an independent verification and assumes no responsibility for the accuracy, completeness or fairness of the information contained in this offering memorandum.

CERTAIN RELATIONSHIPS

You should be aware of the following relationships among us and members of the financing team for the 2017 Bonds:

• JPMorgan Chase Bank, N.A. and DNT Asset Trust, each of which is an affiliate of one of the underwriters of the 2017 Bonds, are the owners of the 2005 Bonds and the 2016B Bonds, respectively.

• Robinson, Bradshaw & Hinson, P.A., underwriters’ counsel, has served and may serve in the future as counsel to us in matters unrelated to the 2017 Bonds and has served and may serve in the future as bond counsel to the North Carolina Medical Care Commission in connection with its issuance of tax-exempt bonds on our behalf.

• Parker Poe Adams & Bernstein LLP, our counsel, has served, is serving or expects to serve in the future as counsel to the underwriters in matters unrelated to the 2017 Bonds.

MISCELLANEOUS

We have furnished all information in this offering memorandum relating to us and our affiliates.

Any statements in this offering memorandum involving matters of opinion, whether or not expressly stated as an opinion, are intended to be opinions and not facts.

We have duly authorized the execution and delivery of this offering memorandum.

DUKE UNIVERSITY HEALTH SYSTEM, INC.

By: Senior Vice President, Chief Financial Officer and Treasurer

[THIS PAGE INTENTIONALLY LEFT BLANK]

APPENDIX A

INFORMATION CONCERNING DUKE UNIVERSITY HEALTH SYSTEM, INC. AND AFFILIATES

TABLE OF CONTENTS

Page

INTRODUCTION ...... A-1

ORGANIZATION AND GOVERNANCE ...... A-2 Organization; Relationship to Duke University ...... A-2 Board of Directors...... A-3 Executive Administration and Key Officers ...... A-4

COMPONENTS OF DUHS ...... A-6 The Hospitals ...... A-6 Subsidiaries and Affiliates ...... A-8 Academic Medical Center ...... A-11 Services ...... A-12

MEDICAL STAFF AND EMPLOYEES ...... A-14 Medical Staff ...... A-14 Physician Affiliations and Related Clinics ...... A-16 Employees ...... A-17

CLINICAL SERVICE AREA ...... A-18 Description ...... A-18 DUHS Position in the Clinical Service Area ...... A-20 Collaborative Strategies ...... A-22

SELECTED OPERATING INFORMATION ...... A-23 Historical Utilization and Occupancy ...... A-23 Third-Party Payments ...... A-23

SELECTED HISTORICAL FINANCIAL INFORMATION ...... A-24 Consolidated Balance Sheets ...... A-24 Consolidated Statements of Operations ...... A-25 Management’s Discussion and Analysis...... A-26 Historical and Pro-Forma Debt Service Coverage of the Combined Group ...... A-28 Outstanding Long-Term Indebtedness ...... A-29 Investments ...... A-29 Derivatives ...... A-30 Transfers to the University ...... A-30

CAPITAL PLAN ...... A-31

OTHER OPERATIONAL INFORMATION ...... A-32 Litigation, Other Contingencies and Insurance ...... A-32 Compliance Program ...... A-32 Information Technology Security and Privacy ...... A-33 Enterprise Risk Program ...... A-33 Licenses and Accreditations ...... A-33 Community Benefits and Affiliations ...... A-34

INTRODUCTION

Duke University Health System, Inc. (“DUHS”) is an integrated health care network founded by Duke University (the “University”) in 1998. DUHS is dedicated to providing efficient, effective patient care, while adapting to the changing health care environment, and to employing the University’s strengths in education and research to enhance and improve health care throughout North Carolina and southern Virginia. DUHS provides quality health services across the entire continuum of care, from wellness to hospice.

DUHS’s flagship facility is Duke University Hospital, an academic medical center that is recognized nationally and internationally for excellence in patient care, medical education, and biomedical research. Duke University Hospital is located on the campus of the University in Durham, North Carolina. With 957 licensed beds, it is one of the largest private hospitals in the Southeast. DUHS also operates two general acute care community hospital facilities. Duke Regional Hospital in Durham, North Carolina, with 369 licensed beds, provides both secondary and tertiary care. Duke Raleigh Hospital in Raleigh, North Carolina, with 186 licensed beds, provides secondary care. These hospitals, together with the other facilities operated and services offered by DUHS and its affiliates, are described in greater detail below under “COMPONENTS OF DUHS.”

DUHS’s mission is “Advancing Health Together.” Its vision is to deliver tomorrow’s health care today, accelerate discovery and its translation, provide transformative education, build healthy communities locally, and connect with the world to improve health globally.

Duke University Hospital, together with the Duke University School of Medicine (the “SOM”), the Duke University School of Nursing, the SOM’s faculty practice plan known as the “Private Diagnostic Clinic” (the “PDC”), and various research and other facilities, is sometimes referred to in this Offering Memorandum as “Duke University Medical Center” or “DUMC.”

Specific highlights of DUHS and the SOM include:

DUKE UNIVERSITY HEALTH SYSTEM

• Duke University Hospital was ranked as one of the top 16 hospitals in the country by U.S. News and World Report for 2016/2017; • U.S. News and World Report for 2016/2017 ranked Duke University Hospital among the top 10 in four specialty areas of the 16 areas for which it provides rankings and among the top 25 in four additional specialty areas; • Duke University Hospital was ranked nationally in 13 specialties and 10 Children’s specialties by U.S. News and World Report for 2016/2017; • Duke University Hospital, Duke Regional Hospital and Duke Raleigh Hospital are all “Nursing Magnet” hospitals, a status awarded by the American Nurses Credentialing Center for nursing excellence; • In 2016/2017, Duke University Hospital was ranked among the 100 best hospitals in America by Becker’s Hospital Review; • Duke Raleigh Hospital was the first hospital in the state to earn the North Carolina Nurses Association Hallmarks of Healthy Workplaces distinction.

A-1

DUKE UNIVERSITY SCHOOL OF MEDICINE AND SCHOOL OF NURSING

• Duke University’s School of Medicine was ranked seventh in the nation for Medical Schools: Research by U.S. News and World Report in 2016/2017; • In 2016/2017, the SOM was ranked ninth in Family Medicine, in the top six in Internal Medicine, and fifth in Geriatrics, according to U.S. News and World Report; • In 2016/2017, the SOM’s Physician Assistant Program was ranked first and its Doctor of Physical Therapy Program was ranked tenth by U.S. News and World Report; • In 2016/2017 Duke University School of Nursing and its Doctor of Nursing Practice Programs were both ranked first nationally by U.S. News and World Report; • The SOM received approximately $700 million to conduct sponsored research in fiscal year 2016.

ORGANIZATION AND GOVERNANCE

Organization; Relationship to Duke University

DUHS is a private, nonprofit corporation exempt from taxation under Section 501(a) of the Internal Revenue Code of 1986, as amended (the “Code”), as an organization described in Section 501(c)(3) of the Code. The University, a private, nonprofit institution of higher education, research, and health care based in Durham, North Carolina, established DUHS in March 1998 and leased or transferred its health system assets to DUHS in April 1999.

DUHS is a corporation separate and distinct from the University, although its articles of incorporation and bylaws vest in the University certain controls, including the power to appoint and remove the members of DUHS’s Board of Directors and a requirement that the President and Chief Executive Officer of DUHS be the individual who serves as the University’s Chancellor for Health Affairs. Pursuant to the operating agreement between DUHS and the University, DUHS provides certain financial and other support for the academic programs of the SOM. For more information concerning the financial relationship between the SOM, the University and DUHS, please see “SELECTED HISTORICAL FINANCIAL INFORMATION – Transfers to the University” herein and Note 1 to the consolidated financial statements and supplementary schedules (unaudited) included as Appendix B.

The University is not a member of the Combined Group and neither the University nor any of its schools, including the SOM and the Duke University School of Nursing, is liable for amounts due under Obligation No. 46 with respect to the 2017 Bonds or any other Obligation issued by DUHS under the Master Indenture. See “SECURITY AND SOURCES OF PAYMENT” in the front portion of this Offering Memorandum.

The consolidated financial statements and supplementary schedules (unaudited) of DUHS and its affiliates included in Appendix B reflect only the consolidated income and expenses of DUHS and its affiliates and do not include the financial results of research and teaching conducted by the University or any of its schools, including the SOM and the Duke University School of Nursing.

A-2

Board of Directors

The Board of Directors of DUHS must consist of at least 13 and not more than 22 members, all of whom are appointed by the Board of Trustees of the University. Five positions serve as ex officio voting members of the Board of Directors: the President of the University; the Chancellor for Health Affairs of the University, who is also the President and Chief Executive Officer of DUHS; the Chair of the Board of Trustees of the University; the Dean of the SOM; and the President of the faculty practice plan. At least one member of the Board of Directors must be a Chair of a Clinical Department in the SOM. The current members of the Board of Directors are as follows:

Name Term Expires Occupation/Affiliation Thomas M. Gorrie, Ph.D. 6/30/2019 Retired, Corporate Vice President, Government (Chair)* Affairs and Policy, Johnson and Johnson New Brunswick, NJ William A. Hawkins III (Vice 6/30/2018 Retired, Chairman & CEO Medtronic Lead Chair)* Director, Immucor Norcoss, GA

Farad Ali 6/30/2018 President & CEO, The Institute of Minority Economic Development, Durham, NC

Nancy Andrews, M.D. Ex Officio Dean, Duke University School of Medicine Durham, NC Leslie E. Bains* 6/30/2017 Retired, Managing Director and Lead of New Client Development Nationwide, Citi Private Bank New York, NY Gail M.D. Belvett, D.D.S. 6/30/2019 Southpoint Family Dentistry Durham, NC Jack O. Bovender, Jr.* 6/30/2018 Retired, Chairman, Hospital Corporation of America Nashville, TN Richard H. Brodhead, Ph.D.* Ex Officio President, Duke University Durham, NC James F. Goodmon 6/30/2017 President & CEO, Capitol Broadcasting Company Raleigh, NC Mary Klotman, M.D. Ex Officio Chief, Department of Medicine – Duke University School of Medicine Durham, NC Michael Marsicano, Ph.D. 6/30/2019 President & CEO, Foundation For The Carolinas Charlotte, NC Lloyd B. Morgan* 6/30/2017 Retired, Arthur Andersen, Managing Partner, Health Care Group, Chicago and Midwest Region, Chicago, IL Mark Newman, M.D. Ex Officio President, Private Diagnostic Clinic Durham, NC

A-3

Name Term Expires Occupation/Affiliation David M. Rubenstein* Ex-Officio Co-CEO The Carlyle Group Washington, DC Nancy M. Schlichting 6/30/2019 Retired, CEO Henry Ford Health System Detroit, MI Steven Scott, M.D.* 6/30/2019 Chairman, Scott Holdings, LLC Boca Raton, FL Susan M. Stalnecker* 6/30/2017 Retired, Vice President & Treasurer, DuPont Wilmington, DE G. Richard Wagoner, Jr. 6/30/2017 Retired, Chairman & CEO, General Motors Birmingham, MI A. Eugene Washington, M.D.* Ex Officio Chancellor for Health Affairs, Duke University and President & CEO, Duke University Health System, Durham, NC Jim Whitehurst 6/30/2018 President & CEO, Redhat Raleigh, NC

*Member of the Executive Committee

Executive Administration and Key Officers

Brief descriptions of the backgrounds of the principal executive, operational, financial and business officers and personnel of DUHS are set forth below.

A. Eugene Washington, MD (66), Chancellor for Health Affairs, Duke University and President and Chief Executive Officer (CEO), DUHS. Over the past 25 years, Dr. Washington has held academic leadership positions and senior executive posts with increasing levels of responsibilities in three prominent academic health systems. In April of 2015, he was appointed Chancellor for Health Affairs at Duke University and President and CEO of DUHS. Previously, he served from 2010 to 2015 as Vice Chancellor of Health Sciences, Dean of the David Geffen School of Medicine at the University of California, Los Angeles (UCLA), and Chief Executive Officer of the UCLA Health System. He was also a Distinguished Professor of Gynecology and Health Policy at UCLA. Before UCLA, Washington worked at his alma mater, the University of California, San Francisco, where he took on progressively senior roles, including serving as Executive Vice Chancellor and Provost from 2004 to 2010.

William J. Fulkerson, Jr., MD (65), Executive Vice President, DUHS and Professor of Medicine, Duke University School of Medicine. As Executive Vice President he is responsible for DUHS’s clinical enterprise: acute, ambulatory, home care and hospice services. Dr. Fulkerson is a North Carolina native and received his undergraduate and medical degrees from the University of North Carolina. He completed his internship and residency at Vanderbilt University where he also completed a fellowship in pulmonary and critical care medicine. Dr. Fulkerson earned his MBA from Duke University Fuqua School of Business in 2002. Dr. Fulkerson has served previously as CEO of Duke University Hospital and VP of DUHS. He is a nationally recognized specialist in pulmonary and critical care medicine and has authored/co-authored numerous books, chapters and peer reviewed publications. Dr. Fulkerson has been active in the North Carolina Hospital Association, having served on its Policy Development Committee and Board of Trustees as a member and as Chair. He has served on the American Hospital Association’s Regional Policy Board. A-4

Kenneth C. Morris (65), Senior Vice President, Chief Financial Officer and Treasurer, DUHS. Mr. Morris provides top-level financial leadership for DUHS. Mr. Morris directs accounting, financial reporting, financial planning and budgeting, patient accounting, billing and registration, insurance and managed care contracting. Mr. Morris received a BA in political science from the University of Rhode Island and went on to serve as a commissioned officer in the U.S. Army. Before beginning his career in finance at Tulane University in New Orleans, he earned a master’s of public administration from the University of Colorado. Later he served as assistant vice president for finance at Loyola University and then vice president for finance and treasurer at Loyola University Health System in Chicago. Immediately prior to coming to DUHS in 1999, Mr. Morris served as senior vice president of finance for Mission St. Joseph’s Health System in Asheville, North Carolina.

Thomas Owens, MD (48), Vice President for Medical Affairs and Chief Medical Officer, DUHS. In overseeing medical affairs throughout DUHS, Dr. Owens’ responsibilities include setting the DUHS quality agenda, and ensuring alignment of physicians and physician services with DUHS strategic plans and clinical programs. He directly manages DUHS employed faculty physicians, Duke Primary Care, Duke Home Care and Hospice, Graduate Medical Education programs, population health management programs and payer value based contracts through Duke Connected Care. Dr. Owens has held a number of increasingly significant medical leadership positions within DUHS over the past 10 years, previously holding the position of Chief Medical Officer for Duke University Hospital and Chief of the Hospital Medicine Program. He received his MD from the University at Buffalo SUNY School of Medicine & Biomedical Sciences in 1995. Dr. Owens completed his Internal Medicine and Pediatrics internship and residency in 1999, followed by a General Internal Medicine fellowship in 2000 and subsequent Chief Resident year in 2001, all at Duke University Medical Center. Dr. Owens has received numerous awards and honors including the Eugene A. Stead, Jr. Award for Outstanding Teaching Faculty (2004, 2008), Samuel L. Katz Faculty Award for Excellence in Teaching (2002) and the Duke University Presidential Award for Executive Leadership (2006).

Jeffrey M. Ferranti, MD, MS (43), Chief Information Officer and Vice President for DUHS. Dr. Ferranti is responsible for the visioning, strategic planning, and effective adoption of integrated technology and information solutions that enable high quality clinical care, research and education. He also serves as an informatics thought leader, both internal and external to DUHS, and, in partnership with our wider medical community, develops the overarching informatics strategy in support of the DUHS mission. Since 2006 Dr. Ferranti has served in leadership roles with increasing responsibility throughout DUHS and was the leader of DUHS’s enterprise-wide Epic installation, deploying a single seamless electronic health record across four hospitals and over 300 ambulatory clinics. He received his medical degree from McGill University, Montreal, Quebec and earned a master’s degree in Biomedical Engineering and Medical Informatics from the Duke Pratt School of Engineering. Dr. Ferranti completed both his Pediatric Residency and Neonatology Fellowship at Duke University Medical Center and maintains an active practice in neonatal critical care at Duke University Hospital.

Monte D. Brown, MD (57), Secretary and Vice President for DUHS, and Associate Dean of Veterans Affairs for the Duke University School of Medicine. In addition to coordinating all DUHS Board activity, Dr. Brown directs Facilities Planning, Design & Construction, Maintenance, Occupational and Environmental Health for DUHS, and is the liaison between DUHS and the Durham VA Medical Center. Dr. Brown previously served as chief operating officer of the Private Diagnostic Clinic (Duke Faculty Practice Plan), and before coming to DUHS, he spent eight years on the faculty of Harvard Medical School and served as vice chairman of the Department of Medicine at Brigham and Women’s Hospital, Boston. Dr. Brown earned his medical degree from Baylor College of Medicine in 1986 and completed training in internal medicine and cardiology at Stanford University in 1995. He spent six years in various roles on the Stanford faculty at the Palo Alto Veterans Administration Medical Center, including medical director of the medical intensive care unit and associate chief of staff for ambulatory

A-5

care. He then spent two years as the associate chief medical officer at Stanford before moving to Harvard in 1997.

Robert N. Willis, Jr., CPA (55), Vice President, Corporate Controller, and Chief Accounting Officer, DUHS. Mr. Willis has been a member of the University and DUHS staff for 29 years. He was promoted to Vice President, Corporate Controller and Chief Accounting Officer for DUHS in 2012. Before that he had served as the Corporate Controller for DUHS since 1999. In his current role, Mr. Willis is primarily responsible for DUHS’s general accounting, financial consolidation and reporting, internal accounting controls, accounting policies and procedures, and coordination of the accounting and finance support provided by the University to DUHS. Mr. Willis’s staff coordinates the external audit effort and the annual combined financial statements and disclosures, the monthly internal financial reporting packages, and many other regulatory filings for DUHS hospitals. Mr. Willis also functions as the Associate Treasurer for DUHS and his staff manages all investment banking and borrowing activities, as well as coordinating all commercial banking activities with the University Treasury staff. Prior to becoming the DUHS Corporate Controller, Mr. Willis served as the University’s Associate Treasurer from 1995 to 1999 and in the office of the Corporate Controller of the University from 1988 to 1995. Mr. Willis was employed by the Greensboro, North Carolina office of KPMG from 1984 to 1988 in the audit department and was the lead auditor on the University engagement for several years before coming to the University in 1988.

COMPONENTS OF DUHS

The principal facilities operated and services offered by DUHS are described below. Additional information about DUHS’s subsidiaries and affiliates is contained in Note 1 to the consolidated financial statements and the supplementary schedules (unaudited) included as Appendix B.

The Hospitals

Duke University Hospital is a 957-licensed bed quaternary care hospital located in Durham, North Carolina and is DUHS’s flagship hospital. Located primarily on the University’s campus, which encompasses 68 buildings on 210 acres, Duke University Hospital consists of approximately 1.6 million square feet of space. A majority of the inpatient and surgical activities are performed in the main part of the hospital known as “Duke University Hospital - North,” which was completed and occupied in 1980 and has been frequently updated, and in the Duke Medicine Pavilion, an approximately 600,000 square foot addition placed in service in July 2013. Other recent additions to the Duke University Hospital campus were the Duke Cancer Center, designed to centralize ambulatory cancer care delivery, and the Hudson building at Duke Eye Center. Duke University Hospital houses comprehensive diagnostic and therapeutic facilities, including a regional emergency/trauma center, a major surgery suite containing 51 operating rooms, 10 endoscopy rooms, the Ambulatory Surgery Center with nine operating rooms, an Eye Center with five operating rooms, and an extensive diagnostic and interventional radiology area. As part of DUMC, Duke University Hospital is a research hospital, where medical advances are achieved and applied, and a teaching hospital for students of medicine, nursing, and the allied health sciences. Duke University Hospital provides care for residents of the Greater Triangle but also attracts patients from across the country and around the world. Duke University Hospital is consistently rated by U.S. News and World Report as one of the top hospitals in the United States.

Duke Raleigh Hospital, acquired by the University in 1998, is a 186-licensed bed general acute care community hospital providing secondary care primarily to residents of Wake County, North Carolina. The hospital is located in Raleigh, North Carolina, approximately 28 miles from Duke University Hospital. Duke Raleigh Hospital’s campus consists of 15 buildings on 23 acres, totaling approximately 374,000 square feet. Originally completed and occupied in 1978, Duke Raleigh Hospital has been extensively renovated and expanded through several projects completed in 2005, 2006, 2011,

A-6

and 2016. Duke Raleigh Hospital blends community-based physicians and other dedicated health professionals with a growing number of specialized services. Duke Raleigh Hospital offers high-quality diagnostic, therapeutic, rehabilitation, prevention, support and health education services within an intimate, patient-friendly atmosphere. The hospital provides a comprehensive array of services including cardiovascular, orthopedic and spine, outpatient imaging, intensive and progressive care, telemetry, pain, same-day surgery, neurosciences, including the Duke Raleigh Skull Base and Cerebrovascular Center, advanced digestive care, disease management and prevention, wound healing, community outreach and educational programs, Emergency Department, and oncology, including the Duke Raleigh Cancer Center.

The University leases both Duke University Hospital and Duke Raleigh Hospital to DUHS. The lease, which ends in 2049, automatically extends to a date which coincides with the maturity date of any DUHS debt obligation if the maturity date of the debt is beyond the lease term. The lease also provides that the University is not permitted to terminate the lease unless provision for the payment of any Obligation under the Master Indenture is made, as more particularly described in “APPENDIX C- SUMMARY OF THE MASTER INDENTURE - General Covenants and Provisions - Termination or Amendment of the Lease.”

Duke Regional Hospital is a 369-licensed bed general acute care community hospital located in Durham, North Carolina, approximately four miles from Duke University Hospital. Duke Regional Hospital’s 100.5-acre campus contains eight buildings comprising approximately 450,000 square feet. Duke Regional Hospital opened in 1976 and was extensively renovated and expanded through several projects completed in 1985, 1998, and 2001. Duke Regional Hospital provides secondary and tertiary care primarily to residents of Durham, Alamance, Orange, Person, and Granville counties and surrounding communities. Duke Regional Hospital focuses on providing outstanding medical care with compassionate, personalized service in a comfortable community hospital setting. The hospital offers a comprehensive range of medical, surgical, and diagnostic services, including orthopedics, weight loss surgery, women’s services, and heart and vascular disease services. Duke Regional Hospital offers care at the Duke Rehabilitation Institute and Davis Ambulatory Surgical Center and also operates the Watts School of Nursing on behalf of DUHS. In partnership with Mount Olive College, the Watts School of Nursing offers an associate degree in science and a diploma in nursing and currently enrolls 148 students.

Duke Regional Hospital is owned by Durham County, North Carolina and leased to the Durham County Hospital Corporation, which has in turn subleased Duke Regional Hospital to DUHS for the identical duration under a 40-year “evergreen” lease. The lease automatically renews for an additional year, every year, until notice of an election to terminate is given by one of the two parties, at which time the 40-year term will begin to decrease. As of the date of this Offering Memorandum, neither party has provided notice of termination.

The table below indicates the number of licensed beds, staffed beds, operating rooms, birthing rooms and endoscopy rooms at each of the three hospitals as of March 2017:

Duke Duke Duke University Regional Raleigh Bed/Facilities Hospital Hospital Hospital Total Licensed Beds 957 369 186 1,512 Staffed Beds 951 356 170 1,477 Operating Rooms 65 15 15 95 Birthing Rooms 21 8 0 29 Endoscopy Rooms 10 7 3 20

A-7

Duke University Hospital, Duke Regional Hospital and Duke Raleigh Hospital collectively account for approximately 95% of DUHS’s net patient revenue.

Subsidiaries and Affiliates

Associated Health Services, Inc., doing business as the James E. Davis Ambulatory Surgical Center, operates an outpatient surgery facility located in Durham, North Carolina, licensed for eight operating rooms.

Duke University Affiliated Physicians, Inc. is DUHS’s community based primary care network, consisting of 33 separate practices at 34 practice sites and staffed by approximately 236 physicians and mid-level providers. For more information regarding Duke University Affiliated Physicians, see “MEDICAL STAFF AND EMPLOYEES - Physician Affiliations and Related Clinics” herein.

Duke HomeCare & Hospice offers hospice, home health, and infusion services. Home health services are available to patients who are homebound and in need of nursing services and/or physical therapy, speech therapy or occupational therapy. Duke Home Infusion offers a full-range home infusion therapy program serving three states and providing compounding and administration of intravenous medications in patients’ homes. Duke Hospice cares for terminally ill patients in their homes, at skilled- nursing facilities, assisted-living facilities, a six-bed inpatient facility in Hillsborough, North Carolina, and a 12-bed inpatient care facility in Durham, North Carolina.

Duke PRMO, LLC manages the billing and accounts receivable activity of DUHS, the PDC and the SOM.

Durham Casualty Company, Ltd., domiciled in Bermuda, is a captive insurer, wholly-owned by DUHS, which insures a portion of the medical malpractice risks and patient general liability risks of DUHS clinical providers and the PDC.

Gothic HSP Corporation (“Gothic HSP”) holds certain investments in the Health System Pool (“HSP”) as part of the separation from the University’s pooled investment strategy discussed in “SELECTED HISTORICAL FINANCIAL INFORMATION – Investments.” DUHS has designated Gothic HSP as a Designated Member under the Master Indenture, making Gothic HSP part of the Combined Group.

Gothic Corporation (“Gothic”) holds certain investment assets of the University and its affiliates. Gothic has become a Designated Member under the Master Indenture by entering into an Obligating Contract with DUHS (the “Obligating Contract”), which requires Gothic to provide funds to DUHS to pay Obligations issued under the Master Indenture, but only from assets held by Gothic for the benefit of DUHS. To the extent of such assets, Gothic is part of the Combined Group. The assets held by Gothic for the benefit of the University are not subject to the Obligating Contract. See “SELECTED HISTORICAL FINANCIAL INFORMATION - Investments.”

Duke Quality Network, Inc. (“DQN”) is a separately incorporated, wholly-controlled affiliate of DUHS established to hold an interest in DLP Healthcare, LLC (“DLP”). DLP is a joint venture between DQN and DLP Partner, LLC, an indirect subsidiary of LifePoint Hospitals, Inc. DQN owns a minority interest in DLP, and DLP Partner, LLC, owns a majority interest in DLP. The purpose of DLP is to build a network of community hospitals in North Carolina, South Carolina, Virginia, and surrounding areas, although its activities are not limited geographically and it considers opportunities in other regions of the country.

A-8

Health System Medical Strategies, Inc. contracts to provide, on a fee basis, health-related management and other wellness services to a continuing care retirement community near Pittsboro, North Carolina.

Duke Integrated Network, Inc. established Duke Connected Care, LLC as a single-member limited liability company to develop and operate a clinically-integrated network, which was approved as an Accountable Care Organization to participate in the Medicare Shared Savings Program.

Duke Affiliations Network, Inc. is a DUHS affiliate established to hold DUHS’s interests in certain joint ventures with other health care providers.

DUHS Global, LLC is a North Carolina limited liability company formed to conduct international activities of DUHS.

Set forth on the next page is an organizational chart for DUHS and its subsidiaries and affiliates discussed above. As of the date of this Offering Memorandum, the Combined Group under the Master Indenture consists of DUHS, which is the sole member of the Obligated Group, and Gothic HSP and Gothic (the “Existing Designated Members”), which are the only Designated Members. Only DUHS, the Existing Designated Members and any future members of the Combined Group are or will be directly or indirectly liable for amounts due under Obligation No. 46 with respect to the 2017 Bonds. The University is not a member of the Combined Group and is not liable for amounts due under Obligation No. 46 with respect to the 2017 Bonds or any other Obligation issued by DUHS under the Master Indenture. See “SECURITY AND SOURCES OF PAYMENT” in the front portion of this Offering Memorandum.

A-9

DUHS Organization Chart

DUKE UNIVERSITY

Duke University Health System, Inc.* including Duke University Hospital Duke Raleigh Hospital Duke Regional Hospital Duke HomeCare & Hospice

Associated Duke Duke Health Duke Duke Health Integrated Quality System Affiliations University Services, Inc. Network, Inc. Network, Inc. Medical Network, Affiliated Strategies, Inc. Inc. Physicians, Inc.

Duke Duke Durham DUHS Gothic HSP Connected PRMO, LLC Casualty Global, LLC Corporation** Care, LLC Company, Ltd.

Denotes Members of the Obligated Group Denotes Members of the Combined Group

* DUHS is the sole member of the Obligated Group. ** Gothic HSP Corporation is a Designated Member of the Combined Group. Gothic Corporation, which is a controlled affiliate of Duke University, is not shown on the organization chart above, but is a Designated Member of the Combined Group pursuant to an Obligating Contract. A-10

Academic Medical Center

Duke University Hospital is the principal clinical teaching hospital for the University’s medical and nursing schools. The SOM offers Doctor of Medicine and Doctor of Physical Therapy degrees. During the 2016 academic year, the SOM enrolled 478 medical students and Duke University Hospital employed 1,020 residents and fellows. The SOM also offers continuing medical education opportunities to practicing physicians and supports numerous allied-health training programs, including programs in clinical leadership and clinical research and programs for pathologist’s assistants and physician assistants. In 2016, U.S. News & World Report ranked the SOM among the top 10 research programs in the United States. Approximately 20% of SOM students are enrolled in the Medical Scientist Training Program, which culminates in both medical and doctoral degrees.

The Duke University School of Nursing has 1,034 students and offers an Accelerated Bachelor of Science Degree, a Master of Science degree, Post-Master’s certificates and three doctoral degrees: Doctor of Philosophy in Nursing, Doctor of Nursing Practice and Doctor of Nursing Practice – Nurse Anesthesia Specialty.

In addition to the education programs described above, the SOM, together with other departments of the University, conducts a wide range of research in basic biomedical sciences and various applied research projects on current problems in many medical specialties. Research programs, projects, facilities, and resources include:

• Duke University Biological Sciences (Graduate Education and Research) • Udall Parkinson’s Disease Research Center • Bryan Alzheimer’s Disease Research Center • Duke Translational Medicine Institute • Duke Global Health Institute • Duke Integrative Medicine • Duke Clinical Research Institute • Center for HIV-AIDS Vaccine Immunology • Duke Cancer Institute • Alice and Y.T. Chen Center for Genetics and Genomics Research • General Clinical Research Center • Duke Human Vaccine Institute • Institute for Genome Sciences and Policy • Sarah W. Stedman Nutrition and Metabolism Center

The SOM received approximately $700 million to conduct sponsored research in fiscal year 2016, and was ranked 10th among American academic medical centers in National Institutes of Health grant funding. In addition, DUMC earned a 2015-2016 Consumer Choice Award from the National Research Corporation for the 15th consecutive year.

As described above under “ORGANIZATION AND GOVERNANCE – Organization; Relationship to Duke University,” DUHS is a corporation separate and distinct from the University. The University is not a part of the Combined Group and its revenues and assets are not pledged to, and not expected to be available for, payment of DUHS’s obligations, including its obligations with respect to the Series 2017 Bonds.

A-11

Services

DUHS provides a comprehensive range of inpatient and outpatient services and programs for adults and children, including the following:

Aesthetics Integrative Medicine Pediatrics Anesthesiology International Health Physical and Occupational Therapy Blood Conservation Life Flight Plastic and Reconstructive Surgery Bone Marrow/Stem Cell Transplant Medical Genetics Primary Care Cardiology and Cardiothoracic Surgery Medical Oncology Psychiatry and Behavioral Sciences Cellular Therapy Minimally Invasive Surgery Pulmonary, Allergy, and Critical Care Clinical Pharmacology Neonatal-Perinatal Medicine Radiation Oncology Community and Family Medicine Nephrology Rheumatology and Immunology Dermatology Neurology Speech Pathology and Audiology Diet and Fitness Neurosurgery Spine Emergency Medicine Nuclear Cardiology Sports Medicine Endocrinology, Metabolism, and Nutrition Obstetrics and Gynecology Surgical Intensive Care Gastroenterology Occupational and Environmental Medicine Thyroid General Internal Medicine Oncology Transplant Care General Surgery Ophthalmology Trauma Center Geriatrics Oral and Maxillofacial Surgery Urgent Care Gynecologic Oncology Orthopedics Urogynecology Hematology-Oncology Otolaryngology-Head & Neck Surgery Urologic Oncology HomeCare and Hospice Pain and Palliative Care Urology Hospital Medicine Pathology Vascular Surgery Infectious Diseases Pediatric Dentistry Weight Loss Surgery

Services of particular note include:

Cardiology and Cardiothoracic Surgery. In order to provide the highest quality continuum of care, the Duke Heart Center is focused on pioneering technological innovations, participating in the leading major clinical trials, delivering new models of care and helping to establish national quality standards and guidelines for heart care. Duke University Hospital was ranked 5th in the country by U.S. News & World Report for cardiology and heart surgery for 2016/2017.

Geriatrics. Duke geriatricians provide multidisciplinary care to evaluate and treat elderly patients suffering from a broad range of health and wellness concerns. In addition, active support programs provided by Duke Geriatrics serve as resources for patients, families, and caregivers facing aging-related challenges.

Neuroscience. Through its neurology and neurosurgery programs, DUMC provides comprehensive evaluation of and care for conditions such as brain tumors, epilepsy, sleep disorders, and strokes, as well as other disorders affecting the brain and spine.

Oncology. In 1972, the Duke Cancer Institute, then known as the Duke Comprehensive Cancer Center (the “DCI”), was established and designated by the National Cancer Institute (“NCI”) as one of the eight original comprehensive cancer centers. Today the DCI is one of only 45 NCI-designated comprehensive cancer centers. Continually ranked among the leading cancer programs in the nation by U.S. News & World Report, the DCI integrates and aligns patient care and research with the goals of improving patient outcomes, decreasing the burden of cancer, and accelerating scientific progress.

More than 300 DCI clinicians and researchers are dedicated to a broad spectrum of cancer research and the translation of that research into the latest in patient care. The DCI comprises 13 disease- site research programs and nine NCI-designated programs representing areas of specialized expertise, and focusing on basic, translational, clinical, and population research. A-12

Duke University Hospital and the DCI have approximately 10,000 inpatient and almost 193,000 outpatient encounters annually for patients with cancer as a primary or secondary diagnosis. Patients treated at the DCI represent virtually every county in North Carolina and every state in the nation. The Duke Cancer Center facility for ambulatory care is a cornerstone of the DCI.

The DCI offers care for patients with all - even the most rare - forms of cancer and is nationally recognized for its brain tumor and blood and marrow transplantation programs. Patients at the DCI receive a complete spectrum of care, from prevention and diagnosis through treatment and survivorship. Their care is managed by multidisciplinary teams of specialists providing individualized and coordinated care. Patients benefit from the most advanced treatments, many of which are available through the DCI’s large portfolio of clinical trials. Support services and survivorship resources are also available to patients and their families throughout their experience with cancer.

The Duke Cancer Network provides an array of oncology-related clinical and research services in a regional network of community cancer programs in North Carolina and the Southeast. Through the Duke Cancer Network, the DCI offers patients and their providers access to state-of-the-art research and education programs. These community collaborations also provide patients and their providers with greater access to the most advanced treatments and clinical trials.

The DCI has developed global partnerships in Africa, India, Brazil and China. In addition, the University and the National University of Singapore (“NUS”) agreed in 2010 to expand the growth of the Duke-NUS Graduate Medical School located in Singapore. The venture continues to strengthen Duke’s contribution as a research and educational partner and positions Singapore as a global hub of biomedical expertise.

Ophthalmology. The Duke Eye Center has pioneered several advances in ophthalmic care, and physicians at the Duke Eye Center use exceptionally specialized equipment and technologies including the full spectrum of ophthalmic lasers and many surgical instruments designed at DUMC. In 2016/2017, Duke University Hospital was ranked 6th in the country by U.S. News & World Report for ophthalmology.

Organ Transplantation. The Duke Transplant Center provides a comprehensive multidisciplinary approach to transplant patient care in each of the following solid organ transplant programs: Kidney, Kidney-Pancreas, Liver, Intestine, Heart, Heart-Lung, and Lung. DUHS transplant patients also benefit from the dedicated Transplant Infectious Disease providers. DUHS’s survival rates among organ transplant recipients consistently rank among the best in the United States. According to the Organ Procurement and Transplantation Network, DUHS is also one of the leading providers of combination multi-organ transplants in the country as of March 2017. The DUHS transplant programs regularly accept patients who are declined at other transplant programs due to high risk factors or severity of illness.

Orthopedics. Duke Orthopedics combines the expertise of many specialties - surgery, reconstructive plastic surgery, radiology, physical therapy, occupational therapy, and orthopedic nursing - to address diseases and injuries of the bone, joint, soft tissue, hand, elbow, foot, ankle, and spine. In 2016/2017, Duke University Hospital was ranked 15th in the country by U.S. News & World Report for orthopedics.

Pulmonology and Respiratory Medicine. The Duke Division of Pulmonary, Allergy and Critical Care Medicine provides care for acute lung injuries as well as chronic diseases such as asthma, cystic fibrosis and emphysema. DUMC’s pulmonology program maintains one of the most respected and highest-volume lung transplantation programs in the nation. In 2016/2017, Duke University Hospital was ranked 5th in the country by U.S. News & World Report for treatment of respiratory disorders.

A-13

Urology. Duke Urology combines the expertise of world-renowned urologic surgeons with specialists in radiology, urogynecology, psychiatry, and oncology, as well as specialized urologic nurses to ensure that each patient receives the best and most appropriate treatment available. In 2016/2017, Duke University Hospital was ranked 9th in the country by U.S. News & World Report for urology.

Women’s Services. Duke Ob/Gyn combines world-class expertise and state-of-the-art techniques to care for women seeking fertility and high-risk pregnancy care, minimally-invasive surgical options and treatment for urogynecologic disorders including urinary incontinence, pelvic organ prolapse, and urinary fistulas. DUHS’s gynecologic oncologists coordinate specialized care plans as part of the Duke Cancer Center. DUHS has experts focusing on the treatment of women with autoimmune disorders, cardiac disease and diabetes.

MEDICAL STAFF AND EMPLOYEES

Medical Staff

The combined medical staffs of the DUHS hospitals number 2,244 physicians, which includes a limited number of employed hospitalists. The respective medical staffs of Duke University Hospital, Duke Regional Hospital and Duke Raleigh Hospital are described below.

The active medical staff of Duke University Hospital consists of 1,798 physicians and one dentist, all of whom are members of the clinical faculty of the SOM. In addition to full-time members of the active medical staff, 60 part-time physicians on the faculty of the SOM comprise the consulting medical staff of Duke University Hospital.

Duke Regional Hospital has approximately 169 physicians who are active or affiliated members of its medical staff (not including those members who are also members of the medical staff of Duke University Hospital). At Duke Raleigh Hospital, approximately 277 physicians are active members of the medical staff (not including those members who are also members of the staff of Duke University Hospital). Not all physicians at Duke Regional Hospital and Duke Raleigh Hospital are members of the faculty of the SOM.

The following tables set forth the number of physicians in each specialty, the number of those that are board certified, the percentage of those that are board certified, and the average age of the active medical staff, each as of March 31, 2017:

A-14

Duke University Hospital

Number of Number of % Board Department Physicians Board Certified Certified Average Age Anesthesiology 145 118 81% 45 Community & Family Medicine 150 143 95% 47 Dermatology 22 20 91% 49 Medicine 587 556 95% 47 Neurology 49 45 92% 46 Neurosurgery 21 21 100% 46 OB/GYN 86 68 79% 45 Ophthalmology 76 49 64% 42 Orthopedics 66 59 89% 49 Pathology 47 46 98% 48 Pediatrics 197 185 94% 47 Psychiatry 47 43 91% 48 Radiation Oncology 29 26 90% 47 Radiology 90 66 73% 45 Surgery 146 128 88% 46 Emergency Medicine 40 25 63% 38 1,798 1,598 89% 46*

*Weighted average.

Duke Regional Hospital

Number of Number of % Board Department Physicians Board Certified Certified Average Age Anesthesiology 1 - 0% 44 Emergency Medicine 16 14 88% 47 Family Medicine 4 4 100% 56 Medicine 37 35 95% 44 OB/GYN 16 15 94% 47 Orthopedics 17 15 88% 46 Pediatrics 4 4 100% 49 Physical Medicine & Rehab 7 6 86% 48 Radiology 34 33 97% 45 Surgery (excludes oral surgeons) 28 28 100% 46 Urology 5 5 100% 47 169 159 94% 46*

*Weighted average.

A-15

Duke Raleigh Hospital

Number of Number of % Board Department Physicians Board Certified Certified Average Age Anesthesiology 47 47 100% 45 Emergency Medicine 19 18 95% 43 Family Medicine 10 10 100% 51 Medicine 116 108 93% 48 OB/GYN 1 1 100% 46 Ophthalmology 6 6 100% 42 Pediatrics 1 1 100% 43 Podiatry 8 7 88% 49 Radiology 2 2 100% 45 Surgery 67 64 96% 47 277 264 95% 47*

*Weighted average.

Physician Affiliations and Related Clinics

DUHS maintains affiliations with a number of physician networks and outpatient clinics, which are described below.

Duke University Affiliated Physicians, Inc. (“DUAP”). DUAP is DUHS’s community based primary care network. The network operates at 34 locations, including 26 primary care practices located in Alamance, Chatham, Durham, Granville, Orange, Person, Vance, and Wake Counties, six urgent care centers located in Durham County and Wake County, and a pediatric practice with two locations in Durham County. DUAP employed 160 physicians and 76 mid-level providers as full time employees and served over 600,000 patient visits in fiscal year 2016. DUAP’s financial results are included in DUHS’s consolidated financial statements. DUAP conducts business as Duke Primary Care.

Private Diagnostic Clinic, PLLC (“PDC”). The PDC is a professional limited liability company consisting of approximately 1,542 physicians who are employees of the University by virtue of their faculty appointments at the SOM. The PDC is neither owned nor controlled by DUHS or the University. The purpose of the PDC is to provide a structure separate from the University and DUHS in which the members of the physician faculty of the SOM may engage in the private practice of medicine and still serve as members of the faculty of the University conducting clinical research and teaching. The PDC owns and operates 43 specialty and primary care medical outpatient clinics. There were approximately 1.6 million patient visits to the PDC during its fiscal year ended December 31, 2016. Faculty members have established community-based practices throughout North Carolina and southern Virginia, collectively known as the Community PDC or the “CPDC.” The CPDC, a separate operating division of the PDC, operates 43 specialty and primary care medical outpatient clinics. The PDC and the University are parties to an agreement that sets forth their relationship and mutual commitments, including the PDC’s obligation to make annual support payments to the SOM. The agreement is renewable from year to year. The PDC physicians are not employed by DUHS and the PDC is not included in DUHS’s consolidated financial statements.

A-16

Employees

As of March 31, 2017, DUHS employed a total of 16,698 full-time equivalent employees (“FTEs”). Of the total FTEs, approximately 62% are related to direct patient care (about one half of which is nursing staff), 6% are service oriented, such as housekeeping, and 32% are administrative and clerical in nature.

In areas in which labor is more competitive (low supply/high demand positions), DUHS actively manages the recruitment and retention of employees with specific initiatives. DUHS also actively supports the supply side of these competitive labor categories by providing scholarships or other financial aid.

Recruiting clinical nurses can often prove difficult. DUHS has approximately 5,500 clinical nurses including direct caregivers, managers, administrators and advance practice nurses. The current vacancy rate is less than 2% with a turnover rate of 15%. Seventy-five percent of the nursing staff is less than 50 years old, and the average age is 39 years old.

DUHS offers numerous nursing benefits, loan/tuition reimbursement programs, a relocation bonus, on-line and on-site continuing education, paid educational days, tuition assistance for the Duke University School of Nursing, certification and recertification bonuses, preceptor pay and charge-nurse pay. DUHS also offers support for attending and presenting at conferences and recognition for nursing excellence through the Friends of Nursing Program. Duke University Hospital, Duke Regional Hospital and Duke Raleigh Hospital are all “Nursing Magnet” hospitals, a status awarded by the American Nurses Credentialing Center for nursing excellence. Nurses from each hospital are consistently recognized as North Carolina’s Great 100 Nurses. DUHS was awarded the American Board of Nursing Specialties Award for Nursing Certification Advocacy for being strong advocates of specialty nursing certification. In addition, DUHS participates in the National Database of Nursing Quality Indicators and University Health System Consortium New Nurse Residency Program. DUHS also conducts an annual work culture survey that is used to enhance both the work environment and staff engagement, and improve quality. Additionally, DUHS engages in many nursing recruitment initiatives each year, including nursing expositions, career fairs and focused service-line recruitment. Current nursing students are also offered summer externships.

DUHS’s medical and professional employees are not members of a collective bargaining unit. Approximately 3.2% of DUHS’s employees, all in housekeeping, are part of a collective bargaining unit of The American Federation of State, County and Municipal Employees that also includes University employees. DUHS nurses are periodically contacted by labor organizations. DUHS management is of the opinion that its relationship with its employees is good.

A-17

CLINICAL SERVICE AREA

Description

The primary service area (“PSA”) for DUHS is comprised of the seven-county region surrounding its three hospitals: Alamance, Durham, Granville, Orange, Person, Vance, and Wake. This region is home to several major universities and houses the Research Triangle Park (“RTP”) which includes more than 200 companies in industries such as microelectronics, telecommunications, biotechnology, chemicals, pharmaceuticals, and environmental sciences. The secondary service area (“SSA”) for DUHS includes the 15-county region contiguous to the PSA, and extends from counties bordering South Carolina into southern Virginia. The PSA and SSA are relatively similar in size in terms of population, accounting for almost 3.6 million people across both regions.

DUHS’s PSA is home to approximately 18% of North Carolina’s residents with a population of 1.8 million people. Truven Health Analytics (“Truven”) projects a five-year population growth rate for the PSA of 7.3%, compared to 10.1 million people in North Carolina with a projected five-year growth rate of 4.9%. The SSA, while similar in size to the PSA, is expected to grow at a slower rate (4.1%) over the next five years.

In 2016, the median age for populace in the PSA was 37.1 years, with only 12.6% of the population above 65 compared to the national and North Carolina rates of 15.1% and 15.3%, respectively. The RTP counties of Durham, Wake, and Orange also boast lower unemployment rate (4.9%) compared to the overall North Carolina unemployment rate of 6.3%. The fastest growth is anticipated to occur in Wake County, home to one million people, with population projected to grow 8.7% by 2021. The median household income in Wake County is $67,000, roughly 1.5x the North Carolina median of $45,000. Wake County residents are also more educated on average, with 42.7% having a Bachelor’s Degree or greater.

[Remainder of page left blank intentionally]

A-18

The following map shows the 7 counties comprising the PSA and the 15 counties comprising the SSA:

The following table based on federal fiscal year 2015 inpatient discharges depicts the geographic origin of patients by hospital for DUHS:

Duke Duke Duke University Regional Raleigh Hospital Hospital Hospital DUHS PSA (7 Counties) 58.1% 87.4% 71.5% 67.0% SSA (15 Counties) 16.9% 7.2% 18.2% 14.7% Rest of NC 16.7% 3.7% 7.4% 12.3% Other 8.3% 1.7% 2.9% 6.0% Total 100.0% 100.0% 100.0% 100.0%

A-19

As shown above, Duke University Hospital is less reliant on the PSA for its patients than DUHS’s two community hospitals. The tertiary and quaternary care offerings at Duke University Hospital extends its geographical reach nationally and internationally.

DUHS Position in the Clinical Service Area

DUHS has two principal competitors in its PSA: the University of North Carolina (“UNC”) Health System and WakeMed. The three health systems (DUHS, UNC, and WakeMed) treat more than 80% of all inpatients residing in the PSA. DUHS leads the service area in overall inpatient share with 30.6% of patient discharges in federal fiscal year (“FFY”) (October 1 through September 30) 2015. FFY 2015 is the latest year for which data is available. UNC and WakeMed held 27.7% and 22.7%, respectively, of the inpatient share in FFY2015. WakeMed is more reliant on the PSA for its patients than either DUHS or UNC. The following table sets forth the volume of patients discharged by each system, each system’s respective share of the PSA’s total discharges, and the percentage of each system’s total discharges that are PSA discharges.

Inpatient Discharges Inpatient Share % of Hospital

Patient Origin: PSA PSA Discharges from PSA Hospital and Health System FFY 2014 FFY 2015 FFY 2014 FFY 2015 FFY 2014 FFY 2015 Duke University Hospital 23,430 23,680 16.6% 16.6% 58.8% 58.1% Duke Regional Hospital 13,819 14,018 9.8% 9.8% 88.3% 87.4% Duke Raleigh Hospital 5,541 5,979 3.9% 4.2% 72.6% 71.5% Duke University Health System 42,790 43,677 30.4% 30.6% 67.8% 67.0% University of North Carolina Hospitals 18,251 18,321 13.0% 12.8% 48.2% 47.5% Rex Healthcare 20,202 20,300 14.3% 14.2% 76.3% 74.0% Johnston Medical Center-Smithfield 757 887 0.5% 0.6% 8.7% 8.9% High Point Regional Hospital 73 44 0.1% 0.0% 0.4% 0.3% Chatham Hospital 27 37 0.0% 0.0% 4.7% 5.5% Caldwell Memorial Hospital 2 3 0.0% 0.0% 0.1% 0.1% UNC Health Care 39,312 39,592 27.9% 27.7% 42.1% 41.1% WakeMed Raleigh 22,432 21,850 15.9% 15.3% 69.2% 71.1% WakeMed Cary 8,891 9,247 6.3% 6.5% 87.8% 86.5% WakeMed Rehabilitation Hospital 1,037 1,024 0.7% 0.7% 62.6% 62.0% WakeMed North - 302 0.0% 0.2% 0.0% 78.9% WakeMed Health 32,360 32,423 23.0% 22.7% 73.2% 74.6% All Other NC Hospitals 26,375 26,998 18.7% 18.9% 3.3% 3.3% Grand Total 140,837 142,690 100.0% 100.0% 13.9% 13.9% Source: Truven Health Analytics (North Carolina Inpatient State Data); excludes Normal Newborns

The share in the SSA is best expressed by calculating the percentage of patients who leave their home county for treatment (outmigration). In FFY 2015, 22% of inpatients from the SSA left their home county for care and received care in hospitals located in the PSA. Approximately 78% of these patients received care at four hospitals in the PSA: UNC Hospitals, WakeMed-Raleigh, Duke University Hospital and Rex Healthcare. Patients from the SSA account for approximately 15% of all DUHS inpatients and almost 30% of inpatients treated at UNC hospitals. While UNC Hospitals holds the highest share for patients in-migrating from the SSA when comparing across all service lines, Duke University Hospital leads the overall service area share in high acuity discharges in DUHS’s strategic service lines (Oncology, Heart, Orthopedics, Neurosciences, and Transplant) with a 31% market share in these services lines compared to UNC Hospitals and WakeMed-Raleigh market share percentages of 29% and 19%, respectively, based on Truven Health Analytics FFY2015 North Carolina Inpatient State Data.

A-20

The following table highlights the outmigration rate by geography within the SSA.

Inpatient Discharges Out-Migration to % Out-Migration SSA County (FFY 2015) PSA Hospitals to PSA Hospitals Caswell, NC 1,434 811 57% Mecklenburg, VA1 435 415 95% Halifax, VA1 452 422 93% Pittsylvania, VA1 611 298 49% Danville, VA1 1,446 749 52% Warren, NC 2,122 1,949 92% Chatham, NC 4,941 3,505 71% Franklin, NC 5,566 5,127 92% Lee, NC 7,207 2,149 30% Wilson, NC 9,646 1,313 14% Nash, NC 12,814 2,371 19% Harnett, NC 14,244 5,189 36% Johnston, NC 16,043 6,615 41% Robeson, NC 20,259 1,743 9% Cumberland, NC 31,457 3,694 12% Guilford, NC 49,664 2,654 5% Total 178,341 39,004 22%

1 Only includes discharges to North Carolina hospitals as Virginia hospital data not available. Source: Truven Health Analytics (North Carolina Inpatient State Data); excludes Normal Newborns

The following table sets forth the volume, by hospital, of inpatient discharges of SSA patients who received care at a PSA hospital, the percentage of total patients from the SSA, and the outmigration market share for each PSA hospital. FFY 2014 FFY 2015 Service Area Patient Origin: SSA Patient Origin: SSA Inpatient Share % of % of Inpatient Inpatient FFY FFY PSA Hospital Hospital Hospital Discharges Discharges 2014 2015 Discharges Discharges University of North Carolina Hospitals 10,725 28.3% 11,411 29.6% 28.7% 29.3% WakeMed – Raleigh 7,734 23.9% 7,049 22.9% 20.7% 18.1% Duke University Hospital 6,755 16.9% 6,909 16.9% 18.1% 17.7% Rex Healthcare 4,326 16.3% 4,864 17.7% 11.6% 12.5% Maria Parham Hospital 1,420 27.5% 1,476 27.9% 3.8% 3.8% Duke Raleigh Hospital 1,280 16.8% 1,520 18.2% 3.4% 3.9% Alamance Regional Medical Center 1,089 9.9% 1,260 10.7% 2.9% 3.2% Duke Regional Hospital 1,093 7.0% 1,156 7.2% 2.9% 3.0% WakeMed - Cary 934 9.2% 1,079 10.1% 2.5% 2.8% Other PSA Hospitals 1,962 14.2% 2,280 15.3% 5.4% 5.7% Total 37,318 18.6% 39,004 19.1% 100.0% 100.0% Source: Truven Health Analytics (North Carolina Inpatient State Data); excludes Normal Newborns

A-21

Collaborative Strategies

DUHS regularly evaluates potential collaborations and affiliations as part of its overall strategic planning and development process. DUHS currently has a number of initiatives in the planning stages related to population health, value-based contracting, and clinical integration. The population health aspiration of DUHS is to create the preferred network and health management platform, caring for local and regional populations in North Carolina under value-based contracts. To that end, DUHS plans to:

• Rapidly and cost effectively build or acquire a comprehensive, integrated, and scalable set of competencies to manage populations under value-based care or at risk; • Build and partner to form a DUHS-linked preferred local and regional delivery network as a high-performing population health system for purchasers; • Pursue contracts that maximize DUHS’s service to local and regional populations while managing the level of financial risk assumed in accordance with DUHS’s rate of competency maturation and the market’s evolution; • Harness innovations and insights from DUHS’s clinical, academic, and research platforms to advance and differentiate our model for population health management.

DUHS is involved in ongoing discussions with several regional providers regarding possible clinical integration and collaboration designed to enhance the delivery of high-quality care, meet community health needs, improve the health of the population, and reduce the cost of care in North Carolina. Recently, DUHS and WakeMed signed agreements to create an innovative heart care collaboration known as “Heart Care Plus+” (effective March 1, 2017) and an innovative cancer care services collaboration known as “Cancer Care Plus+” (effective May 1, 2017). These collaborations do not represent a merger between DUHS and WakeMed, and both organizations retain their full independence. Each collaboration will be governed by a Board of Managers of a new limited liability company, consisting of five DUHS and four WakeMed members with administrative leadership coming from a DUHS service line executive. Heart Care Plus+ brings together DUHS’s nationally-recognized specialty and sub-specialty services and providers with WakeMed’s legacy for excellence in Wake County and results in a county-wide distribution of providers, outpatient practices and facilities, and hospitals that work together to provide high-quality coordinated care for patients in Wake County across the broad spectrum of heart and vascular disease. Cancer Care Plus+ is designed to integrate DUHS’s specialty services and providers with WakeMed’s cancer surgery platform and network of locations to enhance the delivery of easily accessible, high quality cancer care across all of Wake County. It will also increase access to coordinated care to effectively meet an expected increase in demand for comprehensive cancer services in Wake County in coming years due to the county’s rapid population growth.

A-22

SELECTED OPERATING INFORMATION

Historical Utilization and Occupancy

The following table shows certain utilization, occupancy, and other information for DUHS during each of the fiscal years ended June 30, 2014, 2015 and 2016 and interim periods ended March 31, 2016 and March 31, 2017:

Fiscal Year ended June 30, Interim period ended March 31, March 31, 2014 2015 2016 2016 2017 Adult Inpatient Days 371,650 384,584 390,561 293,328 306,720 Average Adult Daily Census 1,018 1,054 1,067 1,067 1,119 Licensed Beds 1,512 1,512 1,512 1,512 1,512 Average Number of Available Beds 1,416 1,420 1,437 1,437 1,477 Average Adult Occupancy (based on available beds) 72% 74% 74% 74% 76% Adult Discharges 62,733 64,222 66,085 49,478 51,573 Average Adult Length of Stay (in days) 5.9 6.0 5.9 5.9 5.9 Number of Deliveries 5,397 5,485 5,696 4,362 4,272 Number of Surgical Procedures 64,897 67,919 68,824 51,532 52,638 Performed Endoscopy Cases 20,464 20,810 21,985 16,497 15,815 Emergency Department Visits 170,101 179,549 186,209 138,441 140,672 Outpatient Visits 1,841,458 1,965,264 2,080,315 1,543,646 1,619,982

Third-Party Payments

A substantial portion of DUHS’s revenues are derived from third-party payors. The percentage distributions of DUHS’s gross patient revenue by financial source for each of the fiscal years ended June 30, 2014, 2015, and 2016 and for the interim periods ended March 31, 2016 and March 31, 2017 were as follows:

Fiscal Year ended June 30, Interim period ended March 31, March 31, 2014 2015 2016 2016 2017 Medicare 41.2% 42.5% 43.3% 43.4% 43.2% Medicaid 12.1 10.9 10.6 10.7 11.0 Managed Care 37.2 38.6 38.6 38.4 37.9 Self-Pay 4.4 3.3 3.3 3.3 3.5 Other 5.1 4.7 4.2 4.2 4.4 Total 100.0% 100.0% 100.0% 100.0% 100.0%

A-23

SELECTED HISTORICAL FINANCIAL INFORMATION

Consolidated Balance Sheets

The following Consolidated Balance Sheets of DUHS and its affiliates as of June 30, 2014, 2015 and 2016 have been derived from audited consolidated financial statements of DUHS and its affiliates for such fiscal years. The following Consolidated Balance Sheets as of March 31, 2016 and March 31, 2017 are unaudited; however, in the opinion of DUHS’s management, the interim Consolidated Balance Sheets below reflect all adjustments necessary to fairly present the assets and liabilities and net assets for the interim periods then ended.

The Consolidated Balance Sheets should be read in conjunction with the audited consolidated financial statements and supplementary schedules (unaudited) of DUHS and its affiliates for the fiscal years ended June 30, 2015 and 2016 and related notes to such consolidated statements included as Appendix B. As of June 30, 2014, 2015 and 2016 and as of March 31, 2016 and March 31, 2017, the affiliates of DUHS that are not members of the Combined Group contributed less than 6% of the consolidated total assets reported for DUHS and its affiliates.

Consolidated Balance Sheets (000’s omitted) As of June 30, As of March 31, Assets 2014 2015 2016 2016 2017 Current Assets: Cash and cash equivalents $ 167,190 $ 434,336 $ 281,143 $ 270,050 $ 241,926 Patient accounts receivable, net 369,954 401,561 367,459 427,958 367,390 Short-term investments 210,426 156,374 237,859 125,267 182,564 Other current assets 137,113 147,743 678,206 217,671 221,464 Total current assets 884,683 1,140,014 1,564,667 1,040,946 1,013,344 Investments 2,359,481 2,320,919 2,024,867 2,442,708 2,333,261 Property and equipment, net 1,510,987 1,459,817 1,458,462 1,428,937 1,481,115 Other noncurrent assets 112,197 119,026 116,929 121,155 120,259 Total assets $ 4,867,348 $ 5,039,776 $ 5,164,925 $ 5,033,746 $ 4,947,979

Liabilities and Net Assets Current Liabilities: Current portion of indebtedness $ 14,945 $ 22,250 $ 22,275 $ 22,250 $ 22,275 Current portion of capital lease obligations 1,148 1,416 1,764 1,764 2,077 Other current liabilities 343,088 340,372 894,767 372,573 372,538 Total current liabilities 359,181 364,038 918,806 396,587 396,890 Indebtedness, net of current portion 1,065,085 1,042,336 1,055,784 1,041,914 1,071,129 Capital lease obligations, net of current portion 124,839 123,417 121,653 121,653 125,813 Other noncurrent liabilities 305,487 327,103 673,790 484,289 523,365 Total liabilities 1,854,592 1,856,894 2,770,033 2,044,443 2,117,197 Net Assets: Unrestricted 2,953,673 3,125,303 2,337,076 2,930,849 2,772,910 Temporarily restricted 47,826 46,075 44,116 44,166 43,342 Permanently restricted 11,257 11,504 13,700 14,288 14,530 Total net assets 3,012,756 3,182,882 2,394,892 2,989,303 2,830,782 Total liabilities and net assets $ 4,867,348 $ 5,039,776 $ 5,164,925 $ 5,033,746 $ 4,947,979

A-24

In April 2015 the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-03, Interest – Imputation of Interest (Subtopic 835-30) Simplifying the Presentation of Debt Issuance Costs. This ASU required that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts, and the amortization of the debt issuance costs be reported as interest expense. DUHS adopted ASU 2015-03 in 2015, and the historical consolidated balance sheets presented above have been restated to conform with the June 30, 2015 presentation.

Consolidated Statements of Operations

The following Consolidated Statements of Operations of DUHS and its affiliates for the fiscal years ended June 30, 2014, 2015 and 2016 have been derived from audited consolidated financial statements of DUHS and its affiliates. The following Consolidated Statements of Operations for the interim period from July 1, 2015 to March 31, 2016 and for the interim period from July 1, 2016 to March 31, 2017 are unaudited; however, in the opinion of the DUHS’s management, the interim Consolidated Statements of Operations below reflect all adjustments necessary to fairly present revenues and expenses for the interim periods then ended.

Consolidated Statements of Operations (000’s omitted) Fiscal Year ended June 30, Interim period ended March 31, March 31, 2014 2015 2016 2016 2017 Net patient service revenue (NPSR) $ 2,515,465 $ 2,951,531 $ 3,049,954 $ 2,295,721 $ 2,405,075 Provision for bad debts (77,697) (81,512) (72,841) (61,163) (34,114) NPSR less provision for bad debts 2,437,768 2,870,019 2,977,113 2,234,558 2,370,961 Other revenue 162,249 179,689 183,221 135,694 145,849

Total operating revenue 2,600,017 3,049,708 3,160,334 2,370,252 2,516,810

Operating expenses 2,320,462 2,506,157 2,663,522 1,982,130 2,165,976 Depreciation and amortization 142,958 146,975 152,460 113,902 116,226 Interest 40,189 41,649 41,198 31,182 26,624 Total expenses 2,503,609 2,694,781 2,857,180 2,127,214 2,308,826

Operating income 96,408 354,927 303,154 243,038 207,984

Non-operating income (loss) 386,835 53,363 (163,395) (231,539) 184,250

Excess of revenues over expenses 483,243 408,290 139,759 11,499 392,234

Transfers to the University, net (69,050) (230,830) (614,574) (75,374) (76,495) Other changes in net assets 257 (5,830) (313,412) (130,579) 120,095 Increase (decrease) in unrestricted net assets $ 414,450 $ 171,630 $ (788,227) $ (194,454) $ 435,834

The Consolidated Statements of Operations should be read in conjunction with the audited consolidated financial statements and supplementary schedules (unaudited) of DUHS and its affiliates for the fiscal years ended June 30, 2015 and 2016 and related notes to such consolidated statements included as Appendix B. For each of the fiscal years ended June 30, 2014, 2015 and 2016 and for the interim periods ended March 31, 2016 and March 31, 2017, the affiliates of DUHS that are not members of the Combined Group contributed less than 6% of the consolidated total unrestricted revenues, gains and other support, which is shown as “total operating revenue” in the table above.

A-25

Management’s Discussion and Analysis

The discussion set forth below should be read in conjunction with the audited consolidated financial statements and supplementary schedules (unaudited) of DUHS and its affiliates and related notes included as Appendix B.

Nine Months Ended March 31, 2017 Compared with Nine Months Ended March 31, 2016. Total operating revenue for the interim accounting period ended March 31, 2017 (i.e., through the third quarter of fiscal year 2017) increased 6.2% ($146.6 million) over the interim accounting period ended March 31, 2016 (i.e., through the third quarter of fiscal year 2016). The increase in revenue is primarily driven by growth in volume. Inpatient discharges and average daily census increased 4.2% and 4.9%, respectively. Surgical procedures (inpatient and outpatient combined) increased 2.1%, and outpatient visits, excluding surgical procedures, increased 5.0%. Included in the $136.4 million increase in net patient service revenue for the nine months ended March 31, 2017 is a $29.6 million favorable adjustment due to a re- evaluation of the need for additional liabilities related to inherent uncertainties in the estimation process for out-of-period revenue cycle adjustments and settlements.

Total expenses increased 8.5% ($181.6 million) for the nine months ended March 31, 2017 over the nine months ended March 31, 2016. Within operating expenses, the most significant increases are in labor expenses which increased 11.7% ($116.9 million) and medical supplies’ expenses which increased 8.2% ($43.8 million) over the nine months ended March 31, 2016. The increase in labor is attributed to a 5.6% increase in the number of FTEs as well as an increase in the salary per FTE. The number of FTEs includes a 23.0% increase in temporary labor FTEs. The increase in FTEs, including higher utilization of temporary FTEs, is partly attributed to an increased nursing staff as DUHS made available an additional 40 beds during the 2017 interim accounting period to meet the increased volume demands. DUHS’s overall average daily census, excluding observation patients, increased 4.9% from the nine months ended March 31, 2016 through the same period in 2017. In addition to volume demands causing increased staffing costs, DUHS has worked to hire new nurses to fill permanent positions, reducing the nursing vacancy rate by approximately 3%. This results in an increase in overall salary expense as new nurses do not assume a full patient load while going through orientation and preceptorship. The medical supplies expense increase is due to increased utilization.

Operating income decreased 14.4% ($35.1 million) to $208.0 million in the interim accounting period ended March 31, 2017 as compared to the same period ended March 31, 2016. Non-operating income improved from a loss of $231.5 million to a net gain of $184.3 million primarily due to improved investment performance. The interim accounting period ended March 31, 2017 reflects an 8.0% return on the unrestricted portfolio of investments compared to a 6.9% loss for the same period ended March 31, 2016. Other changes in net assets are driven by non-periodic changes in defined benefit plans. The increasing interest rate environment required a policy-defined increase in benefit plan discount rates. Applying this to the University plans in which DUHS participates and in conjunction with positive investment performance in the defined benefit plan investment pool, DUHS recorded a $119.6 million decrease in pension and post retirement liabilities in the nine months ended March 31, 2017. This compares to the opposite environment that existed in fiscal year 2016 which required a reduction in benefit plan discount rates and in conjunction with negative investment performance in the defined benefit plan investment pool caused DUHS to record a $131.3 million increase in pension and post retirement liabilities for the interim accounting period ended March 31, 2016. For more information regarding the benefit plans in which DUHS participates, see Note 11 to the consolidated financial statements and supplementary schedules (unaudited) of DUHS included as Appendix B.

A-26

Fiscal Year Ended June 30, 2016 Compared with Fiscal Year Ended June 30, 2015. Total operating revenue increased 3.6% ($110.6 million) in fiscal year 2016 over fiscal year 2015. The increase in revenue is primarily driven by volume growth. Outpatient volume growth continued to outpace inpatient volume growth as more procedures transition to an outpatient setting, generally a less costly mode of care. Inpatient discharges and surgical cases increased 2.9% and 1.0%, respectively. Outpatient surgical cases increased 1.5%, outpatient endoscopy procedures increased 8.5%, and total outpatient visits, excluding surgeries and endoscopies, increased 5.9% over the prior year.

Total expenses increased 6.0% ($162.4 million) in fiscal year 2016 compared to the prior year. The significant increases in fiscal year 2016 were primarily in labor costs and medical supplies. Labor costs increased $75.7 million due to a 3.5% increase in personnel, attributed primarily to volume growth, and planned increases in annual pay rates. The medical supplies increase includes a $47.4 million increase in drug expenses due to increased utilization.

Operating income decreased $51.8 million to $303.2 million in fiscal year 2016. Operating margin decreased to 9.6% in fiscal year 2016 from 11.6% in 2015. Non-operating income decreased $216.8 million in fiscal year 2016 relative to fiscal year 2015 primarily due to investment losses in fiscal year 2016 as compared to a 3.1% investment return in to fiscal year 2015.

Transfers to the University increased $383.7 million due to a $510 million transfer payable to the SOM recorded in June 2016 after approval by the DUHS Board of Directors and the University Board of Trustees. On July 1, 2016, DUHS transferred $510 million ($501.4 million in investments and $8.6 million in cash) to the SOM to fund future academic activities. The $510 million of investments and cash are reported in current assets limited as to use and current due to the University, net, in the consolidated June 30, 2016 financial statements. For more information, please see the “Transfers to the University” section below. In addition to the $510 million accrued transfer, DUHS continued its history of providing annual operating support for the University-based medical faculty research and education with net transfers for such purposes, which were made primarily to the SOM totaling $104.6 million.

Other changes in net assets are driven by non-periodic changes in defined benefit plans. As mentioned above in the section describing the nine months ended March 31, 2017, the interest rate environment required a policy-defined reduction in benefit plan discount rates and in conjunction with negative investment performance in the defined benefit plan investment pool, DUHS recorded a $316.0 million increase in pension and post retirement plan liabilities in fiscal year 2016.

Fiscal Year Ended June 30, 2015 Compared with Fiscal Year Ended June 30, 2014. Total operating revenue increased 17.3% ($449.7 million) in fiscal year 2015 over fiscal year 2014. The significant growth in revenue is primarily driven by volume growth, enhanced collection processes, and clinical documentation improvements resulting from the optimization of Maestro Care. Maestro Care is the DUHS brand given to the EPIC Electronic Medical Record/Revenue Cycle Management System now used across all units of DUHS. Inpatient discharges and surgical cases increased 2.4% and 2.1%, respectively. Outpatient volume growth outpaced inpatient volume growth as less complex inpatient cases continue to shift to an outpatient setting. Outpatient surgical cases increased 6.1% over the prior year, and total outpatient visits, excluding surgeries, increased 6.7% over the prior year.

Total expenses increased 7.6% ($191.2 million) in fiscal year 2015 compared to the prior year. The significant increases in fiscal year 2015 were in purchased services and medical supplies and were primarily driven by volume increases. A portion of the expenses in purchased services related to performance improvement efforts and are non-recurring.

A-27

Operating income increased $258.5 million to $354.9 million in fiscal year 2015. Operating margin increased to 11.6% in fiscal year 2015 from 3.7% in 2014. Non-operating income decreased $333.5 million in fiscal year 2015 relative to fiscal year 2014 primarily due to less favorable investment performance in fiscal year 2015 as compared to fiscal year 2014. This reflects decreased market performance in fiscal year 2015. Other changes in net assets are due to a one-time $150 million transfer of investments to the SOM to establish a Research and Development Augmentation Fund. In addition to the one-time transfer, DUHS continued its history of providing annual operating support for the University-based medical faculty research and education with net transfers for such purposes, which were made primarily to the SOM totaling $80.8 million.

Historical and Pro-Forma Debt Service Coverage of the Combined Group

The following table sets forth the historical debt service Coverage Ratio for the Combined Group for each of the fiscal years ended June 30, 2014, 2015 and 2016 (dollars in thousands).

Fiscal Year ended June 30, 2014 2015 2016 Excess of Revenues Over Expenses $ 459,589 $ 392,159 $ 140,933 Depreciation and Amortization 139,770 143,750 149,203 Interest (including debt derivative realized losses) 57,368 58,257 56,685 Add Gain/Loss from Sale of Property and Equipment (190) (781) 25,396 and/or Gains/Loss from Extinguishment of Debt Adjustment for Investments at Market (170,596) 41,665 197,811 Adjustment for Derivative Agreements at Market (3,436) (654) 27,829 Income Available for Debt Service (A) $ 482,505 $ 634,396 $ 597,857 Actual Long-Term Debt Service Requirement (B)1 $79,499 $ 74,456 $ 69,001 Long-Term Debt Service Coverage Ratio (A)/(B) 6.07x 8.52x 8.66x Pro-Forma Maximum Annual Debt Service $ 115,120 $ 115,120 $ 115,120 Requirement* (C)1, 2 Pro-Forma Maximum Annual Debt Service Coverage 4.19x 5.51x 5.19x Ratio* (A)/(C) ______1 Including capitalized lease obligations relating to Duke Regional Hospital, which are treated as long- term debt of DUHS, but are not evidenced by an Obligation. 2 Although compliance with the rate covenant in the Master Indenture is determined based on the Combined Group’s actual annual debt service requirement for each fiscal year (which includes Obligations issued pursuant to the Master Indenture and capital lease obligations), the pro-forma maximum annual debt service coverage ratio in the table above is being calculated based on maximum annual debt service in order to demonstrate the maximum impact that issuance of the 2017 Bonds would have had on the Combined Group’s historical debt service Coverage Ratio for the years ended June 30, 2014, 2015 and 2016. In computing the maximum annual debt service requirement, (1) the 2017 Bonds are assumed to be issued in the amount shown in the front part of this Offering Memorandum at current market rates, with the principal payments on the 2017 Bonds assumed to be amortized over 30 years on an approximately level debt service basis, and (2) the variable rate debt is assumed to bear interest as described in the footnotes to the table under “ANNUAL DEBT SERVICE REQUIREMENTS” in the front part of this Offering Memorandum. No assurance can be given that actual interest rates will match the assumed rates.

* Preliminary, subject to change. A-28

Outstanding Long-Term Indebtedness

The following table sets forth the outstanding Long-Term Indebtedness secured by Obligations issued under the Master Indenture as of March 31, 2017. In the case of a series of bonds placed directly with a bank and bearing interest at a bank rate, the date upon which the bonds mature or are currently subject to mandatory tender by the bank is shown. DUHS’s directly placed variable rate debt is held by five different banks or bank affiliates, and the bank covenants are generally consistent with the covenants in the Master Indenture.

Par Amount Mandatory Outstanding Final Series Underlying structure Tender Date (dollars in thousands) Maturity 2005A Direct placement 06/01/20281 $ 100,615 06/01/2028 2005B Direct placement 05/30/2023 32,570 06/01/2028 2006A/B/C Direct placement 03/19/2025 121,620 06/01/2039 2012B Direct placement 06/01/20231 28,650 06/01/2023 2016B Direct placement 05/26/2026 90,000 06/01/2042 2016C Direct placement 05/26/2026 90,000 06/01/2042 Total variable rate 463,455

2012A Fixed rate N/A 279,570 06/01/2042 2016A Fixed rate N/A 167,075 06/01/2028 2016D Fixed rate N/A 125,100 06/01/2042 Total fixed rate 571,745 Total indebtedness $ 1,035,200

1 Credit to Maturity.

For more information regarding DUHS’s outstanding indebtedness, see Note 7 to the consolidated financial statements and supplementary schedules (unaudited) of DUHS included as Appendix B. For a discussion of certain risks associated with DUHS’s variable rate bonds, see “BONDHOLDER’S RISKS—Risks Relating to Our Business” in the front part of this Offering Memorandum.

Investments

DUMAC, LLC (“DUMAC”), a limited liability company organized and controlled by the University, is primarily responsible for managing the University’s and DUHS’s investment assets. DUMAC allocates the investments across a number of domestic and international asset groups. Contracting with an array of external investment firms to manage discrete segments of the securities portfolios in accordance with objectives set by the DUMAC Board, and consistent with policies established by the University’s Board of Trustees, DUMAC oversees and monitors the performance of these investment managers for all investment pools in which DUHS participates, including the Non- Academic Retirement Plan. A 10-member Board of Directors, appointed by the Trustees of the University, governs DUMAC.

DUHS’s investment portfolio is primarily managed in two discrete pools: (1) the Health System Pool (“HSP”) established in fiscal year 2010 for unrestricted investments, and (2) the University’s Long Term Pool (“LTP”) for restricted investments. Both the HSP and LTP consist of diversified portfolios of debt, equity, and other investments. The HSP is managed to achieve liquidity and investment returns to support DUHS’s capital and operating requirements. As of March 31, 2017, DUMAC had $2.3 billion under management for DUHS in the HSP and $24.6 million under management for DUHS in the LTP.

A-29

DUMAC utilizes various strategies to aggregate the investments it manages on behalf of DUHS and other entities. Most DUHS investments are held directly by DUHS or Gothic HSP. A portion of the Gothic HSP investments is a participation in the University’s Unitized Legacy Pool (“ULP”) held primarily by Gothic. The ULP holds investments, such as private equity investments, that were unable to be divided between DUHS and the University upon DUHS’s withdrawal of its unrestricted investments from the LTP in 2010. Gothic HSP holds a fixed 15.824% participation in the ULP and will continue at this fixed level until all ULP underlying investments are liquidated over approximately the next 10 years and the proceeds distributed to the pool participants. The value of Gothic HSP’s participation in the ULP was $268.8 million as of March 31, 2017. Additionally, DUHS holds a small amount of liquid securities on a combined basis with the University. The value of these investments was $51.4 million as of March 31, 2017.

In fiscal year 2014, DUHS began investing unrestricted cash and distributions from the HSP in the LTP in anticipation of the $510 million transfer to the SOM. For more information, see “Transfers to the University” below and Notes 1 and 5 to the consolidated financial statements and supplementary schedules (unaudited) included as Appendix B.

Derivatives

DUHS has entered into three interest rate swap agreements whereby DUHS pays based on a fixed rate and the counterparties each pay on a variable rate. These swap agreements are designed to synthetically decrease the variable rate exposure associated with its portfolio of indebtedness. DUHS has also entered into a basis swap whereby each party pays based on a floating rate. This swap agreement is designed to reduce the interest rate risk on variable rate indebtedness by utilizing the spread between the yield curves for taxable debt securities and tax-exempt municipal debt securities. The basis swap has a stated notional amount of $100 million with a multiple of four used in the calculation. All swaps require the bi-lateral posting of collateral held by a trustee when swap fair values exceed certain thresholds, set contractually based on ratings benchmarks. As of March 31, 2017, DUHS posted $11.1 million in securities to meet collateral requirements.

Investment strategies employed by DUMAC and investment managers retained by DUMAC on behalf of DUHS incorporate the use of various derivative financial instruments with off balance sheet risk. DUMAC uses these instruments for a number of investment purposes, including hedging or altering exposure to certain asset classes and cost-effectively adding exposures to portions of the portfolio. Positions are intended to create gains or losses that, when combined with the applicable portion of the total investment portfolio, provide an expected result. For more information about swap related risks and the financial impact of terminating swaps prior to their expiration date, see Note 8 to the consolidated financial statements and supplementary schedules (unaudited) of DUHS included as Appendix B and “BONDHOLDER’S RISKS—Risks Relating to Our Business” in the front part of this Offering Memorandum.

Transfers to the University

The Master Indenture permits members of the Combined Group to make unlimited transfers of funds to the University, as long as those transfers are both included in the final form of the applicable member’s annual budget, as initially adopted, and made for the benefit of the University’s health care programs, including the schools of medicine, nursing and allied health professions, or research projects in medicine or, if reasonably related to the University’s health care programs or health care operations of a member of the Combined Group, in allied health science. In addition, if the Combined Group’s Coverage Ratio for the most recently ended fiscal year of DUHS for which audited financial statements are available is at least 2.0, the members of the Combined Group may make transfers to the University for its health care programs or any other purpose without limit.

A-30

In June 2006, DUHS transferred units of the LTP valued at $280 million to serve as DUHS support to the SOM for the 10 year period July 1, 2006 through June 30, 2016. The $280 million provided a steady flow of approximately $43 million per year to the SOM while DUHS continued to make annual and ad hoc transfers to the SOM. On July 1, 2016, DUHS transferred $510 million to the SOM to provide future funding for SOM academic activities. Of the $510 million transfer, $310 million is intended to cover, in advance, planned SOM funding support for the ten-year period beginning July 1, 2016 (similar to the $280 million transfer described above); the remaining $200 million will be used to establish a quasi-endowment which, from 2017 to 2026, the SOM will leave intact with all income accumulated and added to the principal of the fund. The DUHS Board of Directors and the University Board of Trustees approved this transfer in June 2016, and the transfer was accrued in the June 30, 2016 consolidated financial statements.

Excluding the $510 million accrued transfer described above, DUHS transferred $104.6 million, $230.8 million and $69.1 million in fiscal years 2016, 2015 and 2014, respectively, to the University, essentially all of which was for the benefit of the SOM. The increase in transfers in 2015 was primarily due to a one-time $150 million transfer of LTP Investments to the SOM to establish a Research and Development Augmentation Fund. For more information concerning the financial relationship between the SOM, the University and DUHS, please see “ORGANIZATION AND GOVERNANCE – Organization; Relationship to the University” above and Note 1 to the consolidated financial statements and supplementary schedules (unaudited) included as Appendix B.

CAPITAL PLAN

DUHS updates its multi-year capital plan as part of its annual budgeting process. For the 10-year period ended June 30, 2008, DUHS averaged expenditures of approximately $90 million annually for capital assets, which were primarily funded through operating cash flows. From fiscal years 2009 through 2014 the average annual capital expenditures increased to $230 million. These expenditures included three of the largest capital initiatives ever undertaken at DUHS: the Duke Cancer Center (opened February 2012), the Duke Medicine Pavilion (opened July 2013), and Maestro Care (operational at all 3 hospitals, Duke Primary Care and the PDC by March 2014). The Duke Cancer Center and the Duke Medicine Pavilion were partially financed with tax-exempt bonds, with the remaining capital expenditures funded by operating cash flows and existing reserves. DUHS’s capital expenditures returned to maintenance levels in fiscal years 2015 and 2016 at $107 million and $141 million, respectively.

DUHS has identified approximately $1.7 billion of projected capital expenditures in its capital plan for the five-year period ending June 30, 2022. The proposed fiscal year 2018 to 2022 capital plan includes the following key strategic projects: (1) a new Duke University Hospital inpatient bed tower to allow Duke University Hospital to fully utilize its licensed bed capacity to better serve DUHS patients, as well as support clinicians and staff; (2) a new Duke Raleigh Hospital inpatient bed tower and operating room (OR) modernization project that enables Duke Raleigh Hospital to operate its licensed beds as single occupancy rooms, as well as expand OR and Perioperative Services for growth of key clinical services; (3) a new Duke Regional Hospital addition that consolidates Behavioral Health services for Durham County on the hospital campus in an efficient and modern new facility and the renovation and expansion of the existing Emergency Department; and (4) ambulatory expansions adding new or expanded sites enabling DUHS to reach new communities and meet growing demand.

The three major hospital additions described in the immediately preceding paragraph (comprising approximately $700 million of the capital plan) primarily modernize and expand existing hospital facilities to alleviate capacity constraints while accommodating future growth opportunities. Even though healthcare delivery continues to shift to lower-cost ambulatory care settings, DUHS expects patients who require the highest level of acute care to continue to utilize services at DUHS inpatient hospital facilities. The ambulatory expansion component (comprising approximately $300 million of the capital plan) of the

A-31

strategic capital projects enables DUHS to provide care close to patients’ homes, extend access to new communities and meet growing population needs efficiently and effectively. The initial ambulatory expansion focuses on expanding DUHS’s eastern footprint in Wake County and extends to strategic points west of Durham County. The remainder of the five-year capital plan is comprised of routine, maintenance capital expenditures. DUHS expects to fund these capital expenditures through a combination of cash flow from operations, investment earnings and debt financing.

OTHER OPERATIONAL INFORMATION

Litigation, Other Contingencies and Insurance

DUHS has incurred general liability losses in each of the last five years, but the amounts of such losses have not been material in any year, either individually or in the aggregate. There are a number of such actions currently pending against DUHS. DUHS believes coverage under existing and prior insurance programs and provision for contingent liabilities when deemed appropriate by management are adequate to protect DUHS against any material liability arising from those actions.

DUHS has incurred medical malpractice losses in each of the last five fiscal years, but the amounts of such uninsured losses have not been material in any year, either individually or in the aggregate. A number of such actions have been brought and are currently pending against DUHS involving alleged malpractice by DUHS and PDC physicians. DUHS believes coverage under the existing and prior insurance programs is adequate to protect DUHS against any material liability arising from those actions. However, if a final judgment was entered in any such action in an amount in excess of its insurance coverage, DUHS could be liable for the excess.

Durham Casualty Company, Ltd., a wholly-owned affiliate of DUHS, provides medical professional liability and patient general liability insurance for DUHS. A self-insured retention is augmented by a reinsurance program. For more information regarding DUHS’s professional liability risk program, see Note 10 to the consolidated financial statements and supplementary schedules (unaudited) included as Appendix B.

Compliance Program

DUHS is committed to a comprehensive compliance program and has implemented a fully operational program to prevent, detect, and correct violations of laws and regulations, improve and enhance operational processes, and improve quality of services. The compliance program is structured in accordance with the seven elements detailed in the Compliance Guidance for Hospitals and Physicians issued by the Office of Inspector General, U.S. Health and Human Services and the federal sentencing guidelines. The Compliance/Audit Committee of the DUHS Board of Directors oversees the compliance program and receives regular reports from the Compliance Officer, including review and approval of the annual Compliance Office work plan.

The compliance program includes the following components:

• DUHS has developed a code of conduct providing DUHS’s fundamental principles and values, including an overview of key regulations and policies that guide DUHS’s activities; • DUHS has system-wide and departmental policies and procedures to guide employees; • DUHS has a toll-free compliance hotline answered by a third party, and permits staff to report concerns anonymously; • The Compliance Office continuously provides training to staff regarding regulatory concerns;

A-32

• The Compliance Office establishes and prepares an annual work plan of process reviews and audits to monitor DUHS activities; • The Compliance Office assists departments in developing and completing corrective actions necessary to address deficiencies identified in the reviews; and • DUHS performs sanction screening to ensure employees, staff, volunteers, and vendors are not excluded from participation in federal programs. Information Technology Security and Privacy

The DUHS Compliance Officer is also the DUHS Privacy Officer and works in conjunction with the Information Security Officer to address the information technology security and privacy concerns of DUHS. DUHS has developed a comprehensive, proactive information security and privacy management program to:

• Develop policies and procedures to provide staff with guidance regarding the appropriate use, disclosure, and access of protected health information; • Provide training to staff and vendors to ensure compliance with state and federal regulations; • Identify and prioritize potential threats and vulnerabilities; • Implement reasonable and appropriate security controls; • Proactively monitor the effectiveness of the program and make improvements as needed; and • Identify, remediate, and insure privacy breaches. DUHS has implemented its policy and provided training to address the Federal Trade Commission “Red Flag” regulations.

Enterprise Risk Program

DUHS has implemented an enterprise risk management (“ERM”) program. The ERM program is an organization-wide approach to the identification, assessment, communication, and management of risk, including strategic, financial, operational, technology, human capital, and regulatory areas. DUHS senior management oversees the process to identify risks, including the ongoing identification of new risks, reassessment of current risks, development of mitigation steps, and analysis of the effectiveness of responses to address the identified risks. Operational areas develop and implement mitigation or monitoring plans, review current steps to determine the effectiveness of these plans, and monitor regulatory changes. DUHS has mitigation strategies to address the most significant risks and senior leaders are updated regularly on the progress made. Regular reports on ERM are made to the Compliance/Audit Committee of the DUHS Board of Directors and to the full Board, as well.

Licenses and Accreditations

Each of DUHS’s hospitals is licensed by the Division of Health Service Regulation of the North Carolina Department of Health and Human Services and is fully accredited by the Joint Commission. Duke University Hospital was last surveyed by the Joint Commission in April 2016, Duke Regional Hospital in October 2015 and Duke Raleigh Hospital in December 2015. Each hospital is certified for Medicare and Medicaid participation and each is a member of the American Hospital Association and the North Carolina Hospital Association. Duke University Hospital is also a member of the Association of American Medical College’s Council of Teaching Hospitals. Associated Health Services, Inc. is accredited by the Accreditation Association for Ambulatory Health Care, Inc. and was last reviewed in August 2014. Duke University Affiliated Physicians, Inc. was last surveyed by The Joint Commission and received full accreditation in September 2015.

A-33

Community Benefits and Affiliations

DUHS has partnered with the community to improve the health of all its members through a variety of programs and services, many of longstanding duration, including:

• Charity care and certain other community benefits at cost (as defined by the Internal Revenue Service) of $242.3 million in fiscal year 2016; • Unreimbursed costs of treating Medicare patients of $183.1 million and unrecoverable patient debt of $19.3 million in fiscal year 2016; • In fiscal year 2016 DUHS provided $11.6 million in cash and in kind support for community groups, including: $7.5 million for Lincoln Community Health Center and its satellite community clinics, which serve a majority poor and uninsured population, $2.4 million for Durham County’s Emergency Medical Services program, and $1.7 million in cash contributions to other community organizations; • Providing primary care case management for Medicaid patients in Durham, Vance, Granville, Warren, Franklin, and Person Counties under a contract with the State of North Carolina Medicaid program covering more than 68,000 patients. A similar DUHS program has delivered primary care case management for more than 17,000 uninsured residents of Durham County since the program’s inception; • Delivering medical and mental health services at clinics located inside local public schools; • Delivering primary care to low-income patients, with fees based on a sliding scale according to income, in three free-standing medical clinics in the community in partnership with Lincoln Community Health Center; • Providing care management services in partnership with Lincoln Community Health Center, The Durham County Departments of Health and Social Services, El Centro Hispano, and other community based organizations for Durham County’s uninsured population; • Providing access to DUHS specialty care services for uninsured patients in Durham and Wake Counties through Project Access programs; • Collaborating with the Durham County Health Department to help coordinate flu shots and flu information and sponsoring free health screenings and health information booths throughout the year at public events; • Delivering multiple direct patient education services and family caregiver support, as well as multiple, ongoing support groups for patients with cancer, heart disease, diabetes, bereavement and other conditions that are free and open to anyone in the community; and • Providing, together with the University, opportunities for health sciences learners as well as other graduate and undergraduate students to work under faculty supervision with community programs that target low income and vulnerable populations. For more information regarding DUHS’s charity care, see Note 4 to the consolidated financial statements and supplementary schedules (unaudited) included as Appendix B.

A-34

APPENDIX B

FINANCIAL STATEMENTS

[THIS PAGE INTENTIONALLY LEFT BLANK] DUKE UNIVERSITY HEALTH SYSTEM, INC. AND AFFILIATES Consolidated Financial Statements June 30, 2016 and 2015 (With Independent Auditors’ Report Thereon) DUKE UNIVERSITY HEALTH SYSTEM, INC. AND AFFILIATES

Table of Contents

Page(s)

Independent Auditors’ Report 1–2

Consolidated Balance Sheets 3

Consolidated Statements of Operations 4

Consolidated Statements of Changes in Net Assets 5

Consolidated Statements of Cash Flows 6–7

Notes to Consolidated Financial Statements 8–41

Supplementary Schedules Schedule 1 – Combining and Consolidating Balance Sheet Information, June 30, 2016 42

Schedule 2 – Combining and Consolidating Statement of Operations Information, Year ended June 30, 2016 43 KPMG LLP Suite 1900 440 Monticello Avenue Norfolk, VA 23510

Independent Auditors’ Report

Board of Directors Duke University Health System, Inc.:

We have audited the accompanying consolidated financial statements of Duke University Health System, Inc. and Affiliates (the Health System), which comprise the consolidated balance sheets as of June 30, 2016 and 2015, and the related consolidated statements of operations, 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 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 Health System’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 Health System’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 Duke University Health System, Inc. and Affiliates as of June 30, 2016 and 2015, and the results of their operations and their cash flows for the years then ended, in accordance with U.S. generally accepted accounting principles.

KPMG LLP is a Delaware limited liability partnership, the U.S. member firm of KPMG International Cooperative (“KPMG International”), a Swiss entity.

Supplementary Information Our audits were performed for the purpose of forming an opinion on the consolidated financial statements as a whole. The supplementary information 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.

September 29, 2016

DUKE UNIVERSITY HEALTH SYSTEM, INC. AND AFFILIATES Consolidated Balance Sheets June 30, 2016 and 2015 (In thousands)

Assets 2016 2015 Current assets: Cash and cash equivalents $ 281,143 434,336 Patient accounts receivable, net 367,459 401,561 Other receivables 28,993 28,205 Inventories of drugs and supplies 82,398 77,157 Other assets 19,334 15,912 Short-term investments 237,859 156,374 Assets limited as to use 547,481 26,469 Total current assets 1,564,667 1,140,014 Assets limited as to use 78,617 84,081 Investments 2,024,867 2,320,919 Property and equipment, net 1,458,462 1,459,817 Due from the University 708 846 Other noncurrent assets 37,604 34,099 Total assets $ 5,164,925 5,039,776 Liabilities and Net Assets Current liabilities: Accounts payable $ 130,316 119,947 Due to the University, net 523,739 4,895 Other current liabilities 41,935 45,478 Accrued salaries, wages, and vacation payable 157,834 145,181 Estimated third-party payor settlements, net 19,244 6,813 Current portion of postretirement and postemployment benefit obligations 6,087 6,052 Current portion of indebtedness 22,275 22,250 Current portion of capital lease obligations 1,764 1,416 Current portion of estimated professional liability costs 15,612 12,006 Total current liabilities 918,806 364,038 Other noncurrent liabilities 65,138 66,509 Postretirement and postemployment benefit obligations, net of current portion 465,020 137,386 Indebtedness, net of current portion 1,055,784 1,042,336 Capital lease obligations, net of current portion 121,653 123,417 Derivative instruments 117,187 89,358 Estimated professional liability costs, net of current portion 26,445 33,850 Total liabilities 2,770,033 1,856,894 Net assets: Unrestricted 2,337,076 3,125,303 Temporarily restricted 44,116 46,075 Permanently restricted 13,700 11,504 Total net assets 2,394,892 3,182,882 Total liabilities and net assets $ 5,164,925 5,039,776

See accompanying notes to consolidated financial statements.

3 DUKE UNIVERSITY HEALTH SYSTEM, INC. AND AFFILIATES Consolidated Statements of Operations Years ended June 30, 2016 and 2015 (In thousands)

2016 2015 Unrestricted revenues, gains, and other support: Net patient service revenue (net of contractual allowances and discounts) $ 3,049,954 2,951,531 Provision for bad debts (72,841) (81,512) Net patient service revenue less provision for bad debts 2,977,113 2,870,019 Other revenue 183,221 179,689 Total unrestricted revenues, gains, and other support 3,160,334 3,049,708 Expenses: Salaries, wages, and benefits 1,349,876 1,274,148 Medical supplies 712,028 656,990 Interest 41,198 41,649 Depreciation and amortization 152,460 146,975 Other operating expenses 601,618 575,019 Total expenses 2,857,180 2,694,781 Operating income 303,154 354,927 Nonoperating (loss) income: Investment (loss) income (139,946) 53,063 Loss on extinguishment of debt (25,078) — Other 1,629 300 Total nonoperating (loss) income (163,395) 53,363 Excess of revenues over expenses 139,759 408,290 Change in funded status of defined benefit plans (316,047) (7,060) Net assets released from restrictions for purchase of property and equipment 2,635 1,230 Transfers to the University, net (614,574) (230,830) (Decrease) increase in unrestricted net assets $ (788,227) 171,630

See accompanying notes to consolidated financial statements.

4 DUKE UNIVERSITY HEALTH SYSTEM, INC. AND AFFILIATES Consolidated Statements of Changes in Net Assets Years ended June 30, 2016 and 2015 (In thousands)

2016 2015 Unrestricted net assets: Excess of revenues over expenses $ 139,759 408,290 Change in funded status of defined benefit plans (316,047) (7,060) Net assets released from restrictions for purchase of property and equipment 2,635 1,230 Transfers to the University, net (614,574) (230,830) (Decrease) increase in unrestricted net assets (788,227) 171,630 Temporarily restricted net assets: Contributions for restricted purposes 5,188 4,788 Transfers from (to) the University, net 102 (149) Net assets released from restrictions used for operations (2,916) (5,189) Net assets released from restrictions for purchase of property and equipment (2,635) (1,230) Net realized and unrealized (losses) gains (1,698) 29 Decrease in temporarily restricted net assets (1,959) (1,751) Permanently restricted net assets: Contributions for endowment funds 2,089 61 Transfers from the University, net — 245 Net realized and unrealized gains (losses) 107 (59) Increase in permanently restricted net assets 2,196 247 (Decrease) increase in net assets (787,990) 170,126 Net assets, beginning of year 3,182,882 3,012,756 Net assets, end of year $ 2,394,892 3,182,882

See accompanying notes to consolidated financial statements.

5 DUKE UNIVERSITY HEALTH SYSTEM, INC. AND AFFILIATES Consolidated Statements of Cash Flows Years ended June 30, 2016 and 2015 (In thousands)

2016 2015 Cash flows from operating activities: (Decrease) increase in net assets $ (787,990) 170,126 Adjustments to reconcile (decrease) increase in net assets to net cash provided by operating activities: Depreciation and amortization 152,460 146,975 Investment loss (income) 141,644 (53,092) Loss on the extinguishment of debt 25,078 — Net gains on other investments and disposals of property and equipment (421) (679) Transfers to the University, net 614,472 230,734 Provision for bad debts 72,841 81,512 Restricted contributions received for long-term capital projects (795) (834) Permanently restricted contributions and associated realized and unrealized gains (2,196) (2) (Increase) decrease in: Patient accounts receivable (38,739) (113,119) Other receivables (58) 10,547 Inventories of drugs and supplies (5,241) (3,899) Other assets (4,173) (1,380) Increase (decrease) in: Accounts payable (8,166) 22,111 Due to the University, net 8,697 (6,597) Other current liabilities (1,867) (636) Accrued salaries, wages, and vacation payable 12,653 2,747 Estimated third-party payor settlements, net 12,431 (12,811) Postretirement and postemployment benefit obligations 327,669 23,229 Other noncurrent liabilities (1,370) 14,437 Estimated professional liability costs (3,799) (15,482) Net cash provided by operating activities 513,130 493,887 Cash flows from investing activities: Capital expenditures (141,060) (106,670) Increase in assets limited as to use (10,649) (3,065) Sales of investments 1,601,666 1,520,795 Purchases of investments (1,987,621) (1,518,723) Investment and endowment loss (21,240) (10,986) Proceeds from sale of fixed assets 388 1,481 Increase in other assets (1,363) (17,133) Net cash used in investing activities (559,879) (134,301)

6 (Continued) DUKE UNIVERSITY HEALTH SYSTEM, INC. AND AFFILIATES Consolidated Statements of Cash Flows, continued Years ended June 30, 2016 and 2015 (In thousands)

2016 2015 Cash flows from financing activities: Payments on indebtedness and bank borrowings $ (392,789) (15,045) Proceeds from issuance of indebtedness 383,990 — Bond issuance costs (1,459) — Proceeds from restricted contributions and associated realized gains 4,873 2,475 Payments on capital lease obligations (1,416) (1,154) Transfers to the University, net (99,643) (78,716) Net cash used in financing activities (106,444) (92,440) Net (decrease) increase in cash and cash equivalents (153,193) 267,146 Cash and cash equivalents, beginning of year 434,336 167,190 Cash and cash equivalents, end of year $ 281,143 434,336 Supplemental disclosure of cash flow information: Cash paid for interest, net of amount capitalized $ 41,999 41,775 Supplemental disclosures of noncash investing/financing activities: Change in fixed asset payables as of June 30 $ (18,525) 1,908 Net transfers to the University of property and equipment 4,681 4,799 Net transfers payable between the Health System and University 511,443 1,294 Support transfer of investments to the University — 150,000

See accompanying notes to consolidated financial statements.

7 DUKE UNIVERSITY HEALTH SYSTEM, INC. AND AFFILIATES Notes to Consolidated Financial Statements June 30, 2016 and 2015 (In thousands)

(1) Description of Organization, Related Parties, and the Private Diagnostic Clinic (a) Duke University Health System, Inc. (the Health System) The Health System is a North Carolina nonprofit corporation organized and controlled by Duke University (the University or the Parent). The Health System includes three hospitals operated as divisions and several subsidiaries and controlled affiliates, the most significant of which follow:

Duke University Hospital (DUH) – a quaternary care teaching hospital located on the campus of the University in Durham, North Carolina, licensed for 957 acute care and specialty beds, leased from the University, operated by the Health System and providing patient care and serving as a site for medical education provided by the Duke University School of Medicine (School of Medicine or SOM) and clinical research conducted by the School of Medicine.

Duke Regional Hospital (DRH) – a full service community hospital located in Durham, North Carolina, licensed for 369 acute care beds, leased from Durham County and operated by the Health System under agreements with concurrent terms of forty years and providing patient care.

Duke Raleigh Hospital (DRaH) – a community hospital located in Raleigh, North Carolina, licensed for 186 acute care beds, leased from the University, operated by the Health System and providing patient care.

Duke University Affiliated Physicians, Inc. (DUAP) – a North Carolina nonprofit corporation, doing business as Duke Primary Care, consisting of twenty-six primary care physician practices located in Alamance, Chatham, Durham, Granville, Orange, Vance, and Wake Counties, North Carolina, five urgent care centers located in Durham and Wake Counties, and a pediatric practice with two locations in Durham County.

Durham Casualty Company, Ltd. (DCC) – a wholly owned subsidiary of the Health System, domiciled in Bermuda, insuring a portion of the medical malpractice risks and patient general liability risks of Health System clinical providers and the Private Diagnostic Clinic (PDC).

The Health System also includes other separately incorporated affiliates and subsidiaries and unincorporated divisions not listed above whose accounts are included in the accompanying consolidated financial statements. All significant intercompany accounts and transactions are eliminated in consolidation. The Health System’s accounts are included in the consolidated financial statements of the University.

(b) The University Pursuant to a lease and operating agreement between the University and the Health System, the Health System acquired, or has acquired the right to operate, all of the operating assets of the University’s health system and has assumed all of the University’s liabilities and obligations related to the transferred assets. Under the Health System’s current Master Trust Indenture, the owners of Health

8 (Continued) DUKE UNIVERSITY HEALTH SYSTEM, INC. AND AFFILIATES Notes to Consolidated Financial Statements June 30, 2016 and 2015 (In thousands)

System bonds look solely to the Health System for repayment of those obligations. The operating agreement between the University and the Health System provides for certain common administrative services, human resources policy and practice, fiduciary responsibility, investment policies, and support for the School of Medicine.

Certain shared administrative and general service expenses are incurred by the University for the benefit of the Health System. These are included within other operating expenses and amounted to approximately $34,697 and $35,133 in 2016 and 2015, respectively.

(c) School of Medicine (SOM) The SOM is one of the top-ranked medical schools and one of the largest biomedical research enterprises in the United States. The SOM is organized and operated as part of the University and is included in the University’s consolidated financial statements (not in the Health System’s consolidated financial statements). The Health System provides support to the SOM in the form of cash (and some noncash) equity transfers. Examples of transfers to the SOM include but are not limited to support of specific initiatives, specific departments, or general support for the Chancellor for Health Affairs or a departmental chair. For the years ended June 30, 2016 and 2015, unrestricted transfers to the University and other changes are as follows: 2016 2015 Transfers to the School of Medicine $ 91,676 223,711 Transfers to the University 8,263 5,541 Transfers from the University/School of Medicine (46) (3,221) Total funded transfers, net 99,893 226,031 Transfer payable to the School of Medicine 510,000 — Fixed assets and other unfunded transfers, net 4,681 4,799 Unrestricted transfers to the University, net $ 614,574 230,830

On July 1, 2016, the Health System transferred $510,000 consisting of $501,417 of Long Term Pool (LTP) investments and $8,583 in cash to the SOM to fund future academic activities. Of the $510,000 transfer, $310,000 is intended to cover, in advance, planned SOM support for the ten-year period beginning July 1, 2016; the remaining $200,000 will be used to establish a quasi-endowment fund which, from 2017-2026, the SOM will leave intact with all income accumulated and added to the principal of the fund. The $510,000 of investments and cash subsequently transferred and $510,000 payable are reported in current assets limited as to use and current due to the University, net, respectively, in the consolidated balance sheet as of June 30, 2016. In addition to the $510,000 transfer, the Health System plans to transfer $107,800 in cash (and some noncash) equity transfers to the University in 2017.

9 (Continued) DUKE UNIVERSITY HEALTH SYSTEM, INC. AND AFFILIATES Notes to Consolidated Financial Statements June 30, 2016 and 2015 (In thousands)

(d) Private Diagnostic Clinic, PLLC (PDC) The PDC is a professional limited liability company consisting of physicians practicing primarily within Health System facilities and PDC clinics. The purpose of the PDC is to provide a structure separate from the University and the Health System in which the members of the physician faculty of the School of Medicine may engage in the private practice of medicine and still serve as members of the faculty of the University conducting clinical teaching and medical research. The PDC, under agreements with the University and the Health System, occupies and utilizes certain of the Health System’s facilities. PDC physicians are not employed by the Health System, and the PDC is not included in the Health System’s or the University’s consolidated financial statements.

The Health System has numerous agreements with the PDC. Many are for services related to clinical operations such as professional service agreements (PSA) for physician staffing of certain Health System facilities, medical directors, and lab services. The Health System, through its Patient Revenue Management Organization (PRMO), has contracted responsibility for the billing and accounts receivable operations of the PDC. DCC provides the malpractice insurance coverage for the PDC. The PDC subleases, at market rates, clinical and administrative space owned by the University and leased to the Health System. The Health System also subleases to the PDC, at full cost, leased space from nonaffiliated third parties. The following table summarizes the PDC-related revenue reported in other operating revenue in the Health System’s consolidated statements of operations: 2016 2015 Billing and collection services $ 35,857 37,668 Revenue under service agreements 53,048 43,871 DCC malpractice insurance premiums 6,234 9,980 Rental income 11,854 11,965 Total $ 106,993 103,484

For the years ended June 30, 2016 and 2015, other operating expenses in the Health System’s consolidated statements of operations include PDC-related expenses under service agreements of $113,388 and $100,382, respectively. The Health System has net payables to the PDC of $4,666 and $10,145, respectively, as of June 30, 2016 and 2015 related to various transactions.

(e) DUMAC, Inc. (DUMAC) DUMAC, a separate nonprofit support corporation organized and controlled by the University, manages multiple investment pools on behalf of the Health System and the University including the Health System Pool (HSP) and the LTP. DUMAC also manages the investment assets of the Employee’s Retirement Plan of the University (ERP).

10 (Continued) DUKE UNIVERSITY HEALTH SYSTEM, INC. AND AFFILIATES Notes to Consolidated Financial Statements June 30, 2016 and 2015 (In thousands)

(2) Summary of Significant Accounting Policies Significant accounting policies of the Health System are as follows:

(a) Cash and Cash Equivalents Cash and cash equivalents include certain assets invested in the University Short Term Account (STA), which the Health System utilizes to fund daily cash needs. The STA currently invests in short-term and highly liquid investments, which can be liquidated within thirty days.

Cash and cash equivalents that are invested in the HSP and LTP are reported within short-term and noncurrent investments as these funds are not typically used for current operating needs.

(b) Short-Term Investments Short-term investments include debt securities and other instruments with maturities of one year or less from the balance sheet date and are not included in cash and cash equivalents.

(c) Investments Reporting Investments are classified as trading securities. As such, investment income or loss (including realized and unrealized gains and losses on investments, interest, and dividends) is included in excess of revenues over expenses unless the income or loss is restricted by donor or law.

Valuation Investments are recorded in the consolidated financial statements at estimated fair value. For investments made directly by the Health System whose values are based on quoted market prices in active markets, the market price of the investment is used to report fair value. For shares in mutual funds, fair values are based on share prices reported by the funds as of the last business day of the fiscal year. The Health System’s interests in alternative investment funds such as fixed income, equities, hedged strategies, private capital, and real assets are generally reported at the net asset value (NAV) reported by the fund managers. Unless it is probable that all or a portion of the investment will be sold for an amount other than NAV, the Health System has concluded, as a practical expedient, that the NAV approximates fair value.

Derivatives Derivatives are used by the Health System and external investment managers to manage market risks. The most common derivative strategies entered into are total return swaps, futures contracts, and short sales. These derivative instruments are recorded at their respective fair values (note 8).

(d) Assets Limited as to Use Assets limited as to use include funds on deposit with bond trustees, funds pledged as collateral under derivative swap agreements, investments and cash designated to fund the $510,000 transfer to the 11 (Continued) DUKE UNIVERSITY HEALTH SYSTEM, INC. AND AFFILIATES Notes to Consolidated Financial Statements June 30, 2016 and 2015 (In thousands)

University, externally restricted funds, and amounts required to settle estimated professional liability costs recorded in DCC.

(e) Property and Equipment Property and equipment acquisitions are recorded at original cost or, where original cost data is not available, at estimates of original cost. Property and equipment under capital leases are initially valued and recorded based on the present value of minimum lease payments. Costs associated with the development and installation of internal-use software may be capitalized or expensed. These costs are expensed if they are incurred in the preliminary project or post-implementation/operation stages and capitalized if they are incurred in the application development stage and meet certain capitalization requirements. Depreciation and amortization is calculated on the straight line basis over the estimated useful lives of the respective assets, except for leasehold improvements and property and equipment held under capital leases, which are amortized over the shorter of the expected useful life of the asset or related lease term. The estimated useful lives by asset type are as follows: Asset type Useful life Buildings and utilities 10–50 years Furnishings and equipment 3–20 years Computer software 5–10 years

Gains and losses from the disposal of property and equipment are included in operating income. Interest on borrowings to finance facilities is capitalized during construction, net of any investment income earned through the temporary investment of project borrowings.

(f) Asset Impairment The Health System assesses the recoverability of long lived assets by determining whether the carrying value of these assets can be recovered through undiscounted future operating cash flows generated by these assets. The amount of impairment, if any, is measured by comparison of the fair value of the assets to their carrying value. Fair value is determined using market data, if available, or projected discounted future operating cash flows using a discount rate reflecting the Health System’s weighted average cost of capital.

(g) Net Assets Net assets and revenues, expenses, gains, and losses are classified based on the existence or absence of externally imposed restrictions. Accordingly, net assets of the Health System and changes therein are classified and reported as follows:

Unrestricted net assets – Net assets that are not subject to externally imposed stipulations.

Temporarily restricted net assets – Net assets subject to externally imposed stipulations that may or will be met either by actions of the Health System and/or the passage of time. 12 (Continued) DUKE UNIVERSITY HEALTH SYSTEM, INC. AND AFFILIATES Notes to Consolidated Financial Statements June 30, 2016 and 2015 (In thousands)

Temporarily restricted net assets are available for the following purposes at June 30: 2016 2015 Health care services: Health education $ 5,891 4,899 Capital expenditures 19,973 21,882 Other 18,252 19,294 $ 44,116 46,075

Permanently restricted net assets – Net assets subject to externally imposed stipulations that they be maintained by the Health System in perpetuity.

Revenues are reported as increases in unrestricted net assets unless use of the related asset is limited by externally imposed restrictions. Expenses are reported as decreases in unrestricted net assets. Gains and losses are reported as increases or decreases in unrestricted net assets unless use of the related asset is limited by externally imposed restrictions or law. Expirations of temporary restrictions of net assets (i.e., the externally stipulated purpose has been fulfilled and/or the stipulated time period has elapsed) are reported as reclassifications between the applicable classes of net assets if used to acquire capital assets; otherwise, they are recorded as unrestricted operating revenue. Unrealized gains and losses on permanently restricted net assets are included in the change in temporarily restricted net assets unless the donor stipulates that such activity be restricted to endowment, in which case it is included in change in permanently restricted net assets.

(h) Excess of Revenues over Expenses Changes in unrestricted net assets that are excluded from excess of revenues over expenses include certain nonperiodic defined benefit plan accounting adjustments, permanent transfers of assets to and from affiliates for other than goods and services, and assets acquired using contributions, which by externally imposed restriction, were used for the purposes of acquiring long lived assets.

(i) Net Patient Service Revenue (Net of Contractual Allowances and Discounts) The Health System recognizes revenues in the period in which services are rendered. The Health System has agreements with third-party payors that provide for payments to the Health System at amounts that are generally less than its established rates. Payment arrangements include prospectively determined rates per discharge, reimbursed costs, discounted charges, and per diem payments. Accordingly, net patient service revenue is reported at the estimated net realizable amounts from patients, third-party payors, and others, including estimated retroactive adjustments under reimbursement agreements with third-party payors. Adjustments are accrued on an estimated basis in the period the related services are rendered and retroactively adjusted in future periods as changes to estimates become known and tentative and final settlement adjustments are identified.

13 (Continued) DUKE UNIVERSITY HEALTH SYSTEM, INC. AND AFFILIATES Notes to Consolidated Financial Statements June 30, 2016 and 2015 (In thousands)

(j) Charity Care The Health System provides care to patients who meet certain criteria under its financial assistance policy without charge or at amounts less than its established rates. Because the Health System does not pursue collection of amounts determined to qualify as charity care, they are not reported as revenue or included in patient accounts receivable.

(k) Meaningful Use Incentive Revenue The American Recovery and Reinvestment Act of 2009 established incentive payments under the Medicare and Medicaid programs for certain professionals and hospitals that meaningfully use certified electronic health record technology. The Health System has recorded as revenue the estimated incentive amount for the entire reporting period in a lump sum at the point reasonable assurance of satisfying compliance requirements was determined by management. The Health System recognized meaningful use revenues of $5,081 and $9,340, in fiscal years 2016 and 2015, respectively, which is reported in other operating revenue. The income recognized is based on the cost report data, which is subject to change and audit by the government. In addition, the attestation of compliance is subject to audit by the government and subject to change.

(l) Derivative Financial Instruments The Health System has elected not to use hedge accounting with respect to any of its debt derivative financial instruments. Derivative financial instruments are recognized as assets or liabilities in the consolidated balance sheets at fair value. Realized and unrealized gains and losses on derivatives are included in investment income in the consolidated statements of operations.

(m) Income Taxes The Health System and substantially all of its affiliates are organizations described under Section 501(c)(3) of the Internal Revenue Code. Such organizations are not subject to federal and state income tax on income related to their exempt purpose. Accordingly, no provision for income taxes is made in the consolidated financial statements for these entities. As of June 30, 2016, there were no material uncertain tax positions.

(n) Use of Estimates The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant items subject to such estimates and assumptions include valuation allowances for receivables, third-party reimbursement settlements, self-insurance liabilities, retirement obligations, and the carrying amounts of property, equipment, investments, and derivative instruments. Actual results could differ from those estimates.

14 (Continued) DUKE UNIVERSITY HEALTH SYSTEM, INC. AND AFFILIATES Notes to Consolidated Financial Statements June 30, 2016 and 2015 (In thousands)

(o) Recently Issued Accounting Standards The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU 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, 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. ASU 2014-09 is effective for fiscal year 2019. The Health System expects to record a decrease in net patient service revenue related to self-pay patients and a corresponding decrease in bad debt expense upon adoption of the standard.

The FASB issued ASU 2016-02, Leases (Topic 842) in February 2016. This ASU requires the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP which have terms of greater than 12 months. This ASU defines a lease as a contract, or part of a contract, that conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration. This ASU retains a distinction between finance leases and operating leases. The result of retaining a distinction between finance leases and operating leases in the statement of operations and the statement of cash flows is largely unchanged from existing GAAP. ASU 2016-02 is effective for fiscal year 2020. The Health System expects to record an increase in lease assets and lease liabilities presented in the consolidated balance sheets upon adoption of the standard.

(p) Recently Adopted Accounting Standards The FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities in January 2016. This ASU, among other things, removes the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities. The Health System early adopted this specific provision of ASU 2016-01 in 2016 and removed the fair value disclosure for its fixed rate debt.

15 (Continued) DUKE UNIVERSITY HEALTH SYSTEM, INC. AND AFFILIATES Notes to Consolidated Financial Statements June 30, 2016 and 2015 (In thousands)

(3) Net Patient Service Revenue and Estimated Third-Party Payor Settlements Patient service revenue, net of contractual allowances and discounts, but before the provision for bad debts, recognized in 2016 and 2015 from major payor sources is as follows:

2016 2015 Amount Percentage Amount Percentage Commercial payors $ 1,790,723 58.7% $ 1,693,475 57.4% Medicare 868,575 28.5 807,539 27.4 Medicaid 302,383 9.9 314,014 10.6 Self-pay patients 23,594 0.8 43,753 1.5 Other third-party payors 64,679 2.1 92,750 3.1 Total $ 3,049,954 100.0% $ 2,951,531 100.0%

The Health System has entered into payment agreements with third-party payors including certain commercial insurance carriers, health maintenance organizations, and preferred provider organizations. The basis for payment to the Health System under these agreements includes prospectively determined rates per discharge, prospectively determined daily rates, and discounts from established charges. The Health System recognizes patient service revenue associated with services provided to patients who have third-party coverage on the basis of contractual rates for the services rendered.

Net patient service revenue includes estimated retroactive adjustments under reimbursement agreements with governmental programs. Adjustments are accrued on an estimated basis in the period the related services are rendered and retroactively adjusted in future periods as changes to estimates become known and tentative and final settlement adjustments are identified. The effects of these retroactive adjustments are to increase net patient service revenue by $4,404 and $4,459 in 2016 and 2015, respectively. The amounts due to and from governmental programs (Medicare and Medicaid) for final settlement of reimbursements are determined based upon cost reports filed annually with the respective programs. The reports for all years through June 30, 2007 for Medicare and June 30, 2006 for Medicaid have been substantially resolved with the respective fiscal intermediary. In the opinion of management, adequate provisions have been made in the consolidated financial statements for adjustments that may result from final settlements of reimbursable amounts.

The Health System receives supplemental Medicaid payments from the State of North Carolina through a federally approved disproportionate share program (Medicaid DSH). Medicaid DSH payments are part of the Medicaid Program and are designed to offset a portion of the Medicaid losses incurred. Amounts

16 (Continued) DUKE UNIVERSITY HEALTH SYSTEM, INC. AND AFFILIATES Notes to Consolidated Financial Statements June 30, 2016 and 2015 (In thousands)

recognized in the Health System’s consolidated financial statements related to supplemental Medicaid follows: 2016 2015 Supplemental Medicaid amounts included in net patient service revenue $ 154,469 156,417 Medicaid assessments included in other operating expenses (68,032) (70,024) Net supplemental Medicaid revenue in operating income $ 86,437 86,393 Net (payable) receivable from supplemental Medicaid included in estimated third-party payor settlements, net $ (9,982) 105

There can be no assurance that the Health System will continue to qualify for future participation in this program or that the program will not be discontinued or materially modified.

For uninsured patients who do not qualify for charity care, the Health System recognizes revenue on the basis of its discounted rates. Uninsured patients automatically receive a discount from billed charges (excluding cosmetic services). On the basis of historical experience, a significant portion of the Health System’s uninsured patients who do not qualify for charity care will fail to pay for the services provided. Thus, the Health System records a significant provision for bad debts related to uninsured patients in the period the services are provided.

Patient accounts receivable, net at June 30 consists of the following:

2016 2015 Patient accounts receivable $ 1,239,379 1,331,736 Less: Allowance for bad debts (61,811) (59,608) Allowance for contractual adjustments (810,109) (870,567) Patient accounts receivable, net $ 367,459 401,561

The Health System analyzes historical collections and write-offs and identifies trends for each of its major payor sources of revenue to estimate the appropriate balance sheet allowance for bad debts and statement of operations provision for bad debts. For receivables associated with services provided to patients who have third-party coverage, the Health System analyzes contractually due amounts and provides an allowance for bad debts, allowance for contractual adjustments, provision for bad debts, and contractual adjustments on accounts for which the third-party payor has not yet paid or for payors who are known to be having financial difficulties that make the realization of amounts due unlikely. For receivables associated with self-pay patients or with balances remaining after the third-party coverage has already paid, the Health System records a significant provision for bad debts in the period of service on the basis of its historical collections. The

17 (Continued) DUKE UNIVERSITY HEALTH SYSTEM, INC. AND AFFILIATES Notes to Consolidated Financial Statements June 30, 2016 and 2015 (In thousands)

difference between the discounted rates and the amounts collected after all reasonable collection efforts have been exhausted is charged off against the allowance for bad debts.

The activity in the allowance for bad debts by major payor sources is as follows:

Other Allowance for bad debts Commercial Medicare Medicaid Self-Pay Third-Party Total

Balance as of June 30, 2014 $ 18,895 15,578 5,845 14,798 1,654 56,770 Provision for bad debts 41,985 18,335 4,386 11,273 5,533 81,512 Less: net write-offs (41,372) (11,309) (2,626) (22,012) (1,355) (78,674)

Balance as of June 30, 2015 19,508 22,604 7,605 4,059 5,832 59,608

Provision for bad debts 42,026 9,066 2,407 17,927 1,415 72,841 Less: net write-offs (37,734) (9,592) (4,028) (16,973) (2,311) (70,638)

Balance as of June 30, 2016 $ 23,800 22,078 5,984 5,013 4,936 61,811

The Health System’s net write-offs decreased $8,036 from 2015 to 2016 and increased $21,796 from 2014 to 2015. The increase from 2014 to 2015 is partially a resolution of the decrease that occurred from 2013 to 2014 due to an increase in lag time in writing off accounts attributable to the implementation of a new patient accounting system. In addition, the Health System experienced an increase in bad debt write-offs due to the growing levels of patient liability as a result of increased participation in high deductible health plans. This includes patients obtaining insurance through the Health Exchange established in accordance with the Affordable Care Act, who previously would have been eligible for some level of charity care.

The Health System grants credit without collateral to its patients, most of whom are insured under third-party payor agreements. The mix of gross receivables from patients and third-party payors at June 30 is as follows: 2016 2015 Commercial payors 41.2% 39.6% Medicare 35.8 35.2 Medicaid 11.4 12.8 Self-pay patients 3.2 3.8 Other third-party payors 8.4 8.6 100.0% 100.0%

(4) Charity Care and Other Community Benefits The Health System provides services at no charge or at a substantially discounted rate to patients who are approved under the guidelines of its financial assistance policy. The Health System does not pursue collection of amounts determined to qualify as charity care. Services qualifying for charity care consideration include emergent and medically necessary services as determined by a Health System physician. Patient

18 (Continued) DUKE UNIVERSITY HEALTH SYSTEM, INC. AND AFFILIATES Notes to Consolidated Financial Statements June 30, 2016 and 2015 (In thousands)

household income in relation to the federal poverty guidelines and the equity value of real property assets is included in the determination for charity care qualification.

While charity care is excluded from net patient revenue and receivables, the Health System maintains records to identify and monitor the level of charity care it provides. These records include the amount of charges foregone and estimated costs incurred for services and supplies furnished under its financial assistance policy and other equivalent service statistics. Costs incurred are estimated based on the ratio of total operating expenses to gross charges applied to charity care charges. The Health System received gifts and grants of $25 and $155 in 2016 and 2015, respectively, to subsidize charity care.

In addition to charity care, the Health System provides services under the Medicare and Medicaid programs, medical education (for which payments received from Medicare and Medicaid are less than the full cost of providing these activities), and research activities. The Health System also provides both in-kind service contributions and direct support payments to Lincoln Community Health Center (LCHC) and the Durham Emergency Medical Services (EMS). LCHC is an outpatient clinic serving the Durham County, North Carolina community, supported in part by a U.S. Public Service Grant. EMS serves as the primary provider of emergency ambulance service in Durham County and is a unit of the Durham County government.

The Health System estimates charity care and other community benefits in accordance with Internal Revenue Code Section 501(r). Estimates of the cost of charity care and other community benefits provided during the years ended June 30 are as follows:

2016 2015 Charity care at cost $ 81,504 70,060 Unreimbursed Medicaid 86,398 65,316 Total charity care and means-tested programs 167,902 135,376 Health professionals education 62,835 61,429 Cash and in-kind contributions to community groups 11,592 11,265 Total other benefits 74,427 72,694 Total charity care and other community benefits at cost $ 242,329 208,070

In addition to the above total charity care and other community benefits reported on Internal Revenue Service (IRS) Form 990, Schedule H, the Health System also provided services under the Medicare program for which payments received were less than the full cost of providing the services. The estimated unreimbursed costs attributable to providing services under Medicare are $183,077 and $179,456 for the years ended June 30, 2016 and 2015, respectively. The Health System provides additional uncompensated care in the form of bad debts. Estimated uncompensated costs associated with bad debt accounts were $19,251 and $21,458 for June 30, 2016 and 2015, respectively.

19 (Continued) DUKE UNIVERSITY HEALTH SYSTEM, INC. AND AFFILIATES Notes to Consolidated Financial Statements June 30, 2016 and 2015 (In thousands)

(5) Cash and Investments The following is a summary of cash and investments included in consolidated balance sheets at June 30: 2016 2015 Cash and cash equivalents $ 281,143 434,336 Short-term investments 237,859 156,374 Investments 2,024,867 2,320,919 Cash and investments available for operations 2,543,869 2,911,629 Assets limited as to use, current 547,481 26,469 Assets limited as to use, noncurrent 78,617 84,081 Less: receivables and other assets included in assets limited as to use (6,731) (7,405) Total cash and investments $ 3,163,236 3,014,774 The Health System invests through separate accounts and commingled vehicles (including limited partnerships). The fair value of cash and investments consists of the following at June 30: Unfunded 2016 2015 commitments2 Cash and cash equivalents $ 305,636 451,375 — Deposits with bond trustees 1,628 372 — Short-term investments 259,728 170,837 — Fixed income 319,195 376,508 — Equities 413,919 548,793 — Hedged strategies 599,831 629,311 554 Private capital 394,172 384,149 160,421 Real assets 288,266 274,483 134,079 Investment in LTP 524,422 140,011 — Other 56,439 38,935 — Total cash and investments 1 3,163,236 3,014,774 295,054 Less cash and investments included in assets limited as to use (619,367) (103,145) Cash and investments available for operations $ 2,543,869 2,911,629 1 Includes the Health System’s participation in pooled assets of $871,918 and $592,879 at June 30, 2016 and 2015, respectively, which are managed by DUMAC. 2 Future commitments likely to be called at various dates through 2020. The Health System expects to finance these commitments with available cash and expected proceeds from the sales of securities. 20 (Continued) DUKE UNIVERSITY HEALTH SYSTEM, INC. AND AFFILIATES Notes to Consolidated Financial Statements June 30, 2016 and 2015 (In thousands)

The Health System’s investment classes are described in further detail below. Classes include direct holdings, which are generally marketable securities, or interest in funds, which are stated at NAV as a practical expedient for which the related investment strategies are described.

Short-term investments include short-term U.S. Treasury, agency, corporate, and other highly liquid debt securities with an aggregate duration of less than a year. Short-term investments of $29,001 and $35,127 at June 30, 2016 and 2015, respectively, were posted as collateral under derivative agreements (including both debt and investment derivatives) and thus are not readily available for use.

Fixed income includes U.S. Treasury debt securities with maturities of more than one year and funds that invest in these types of investments and nongovernment U.S. and non-U.S. debt securities.

Equities includes U.S. and non-U.S. stocks and interests in funds that invest predominantly long but also short stocks and in certain cases are nonredeemable. The breakout by market is approximately: 15% domestic, 25% developed international, 30% emerging international, and 30% global.

Hedged strategies include interests in funds that invest both long and short in U.S. and non-U.S. stocks, credit-oriented securities and arbitrage strategies. Approximately 80% of the hedged strategies portfolio is invested through equity oriented strategies with the balance split between credit strategies and multi-strategy funds. Nearly all of the Health System’s investments in these funds are redeemable, and the underlying assets of the funds are predominately marketable securities and derivatives.

Private capital includes primarily interest in funds or partnerships that hold illiquid investments in venture capital, buyouts, and credit. These funds typically have periods of 10 or more years during which committed capital may be drawn. Distributions are received through liquidation of the underlying assets of the funds, which are anticipated to occur over the next 4 to 10 years.

Real assets include interests in funds or partnerships that hold illiquid investments in residential and commercial real estate, oil and gas production, energy, other commodities, and related services businesses. These funds typically have periods of 10 or more years during which committed capital may be drawn. Distributions are received through liquidations of the underlying assets of the funds, which are anticipated to occur over the next 5 to 12 years.

Investment in LTP includes the Health System’s participation in the LTP. Participation in or withdrawal from the LTP is based on the fair value per unit at quarterly intervals during the year.

21 (Continued) DUKE UNIVERSITY HEALTH SYSTEM, INC. AND AFFILIATES Notes to Consolidated Financial Statements June 30, 2016 and 2015 (In thousands)

The allocation of underlying assets in the LTP at June 30 is as follows:

2016 2015 Short-term investments $ 12.1% 14.0% Equities 15.5 17.8 Fixed Income 1.8 1.5 Hedged Strategies 29.4 28.1 Private capital 22.9 22.1 Real Assets 16.4 15.6 Other 1.9 0.9 Totals $ 100.0% 100.0%

As of June 30, 2016, redemption frequency and the corresponding redemption notice period in days are shown below:

Quarterly Greater Redemption or than notice Daily Monthly Annually 1 year Total period

Cash and cash equivalents $ 305,636 — — — 305,636 1 Deposits with bond trustees 1,628 — — — 1,628 1 Short-term investments 259,728 — — — 259,728 1 Fixed income 226,544 92,651 — — 319,195 1 to 30 Equities 34,208 216,123 161,980 1,608 413,919 1 to 90 Hedged strategies — 108,941 459,382 31,508 599,831 2 to 95 Private capital — — — 394,172 394,172 N/A Real assets — 8,339 — 279,927 288,266 N/A Investment in LTP — — 501,417 23,005 524,422 30 Other — — 49,170 7,269 56,439 N/A

Total $ 827,744 426,054 1,171,949 737,489 3,163,236

The Health System’s investments are exposed to several risks, including liquidity, currency, interest rate, credit, and market risks. The Health System attempts to manage these risks through diversification, ongoing due diligence of fund managers, and monitoring of economic conditions. Due to the level of risk associated with certain investment securities, it is at least reasonably possible that changes in the values of investment securities will occur in the near term and that such changes could materially affect the amounts reported in the Health System’s consolidated financial statements.

The Health System may participate in programs to lend securities to brokers. To limit risk, collateral is posted and maintained daily at 100% to 105% of the market value of the lent securities depending on the type of security. Collateral generally is limited to cash, government securities, and irrevocable letters of credit. Both the Health System and security borrowers have the right to terminate a specific loan of securities at any time. The Health System receives lending fees and continues to earn interest and dividends on the loaned securities.

22 (Continued) DUKE UNIVERSITY HEALTH SYSTEM, INC. AND AFFILIATES Notes to Consolidated Financial Statements June 30, 2016 and 2015 (In thousands)

The Health System’s total investment return for the years ended June 30 is detailed below: 2016 2015 Net realized gains from sales of investments $ 101,980 103,443 Net unrealized losses (218,760) (47,012) Total net (losses) gains (116,780) 56,431 Investment income 24,619 18,566 Investment (losses) gains (92,161) 74,997 Net realized losses on debt derivatives (15,487) (16,609) Net unrealized (losses) gains on debt derivatives (27,829) 654 Total investment return $ (135,477) 59,042

Investment return is classified in the consolidated statements of operations and changes in net assets as follows:

2016 2015 Other operating revenue $ 6,060 6,009 Nonoperating (loss) income (139,946) 53,063 (Decrease) increase in temporarily restricted net assets (1,698) 29 Increase (decrease) in permanently restricted net assets 107 (59) Total investment return $ (135,477) 59,042

Investment expenses charged directly to the Health System and netted in investment income were $3,039 and $3,103 for 2016 and 2015, respectively.

23 (Continued) DUKE UNIVERSITY HEALTH SYSTEM, INC. AND AFFILIATES Notes to Consolidated Financial Statements June 30, 2016 and 2015 (In thousands)

A summary of assets limited as to use and externally restricted funds at June 30 is as follows:

2016 2015 Assets limited as to use: Deposits with bond trustees $ 1,628 372 Investment securities posted as collateral for debt derivative marks-to-market 21,869 14,463 Cash and investments designated to settle transfer to the University 510,000 — Cash, receivables and investments designated to settle estimated professional liability costs 34,785 38,136 Externally restricted assets 57,816 57,579 Total assets limited as to use 626,098 110,550 Less current portion of assets limited as to use (547,481) (26,469) Assets limited as to use, excluding current portion $ 78,617 84,081

(6) Property and Equipment A summary of property and equipment at June 30 is as follows:

2016 2015 Buildings and utilities $ 1,601,864 1,552,767 Furnishings and equipment 810,080 766,733 Buildings and equipment under capital lease obligations 115,751 115,772 Computer software 342,365 331,410 Depreciable property and equipment 2,870,060 2,766,682 Less accumulated depreciation and amortization (1,567,358) (1,432,970) Depreciable property and equipment, net 1,302,702 1,333,712 Land and land improvements 88,262 87,816 Construction in progress 67,498 38,289 Property and equipment, net $ 1,458,462 1,459,817

24 (Continued) DUKE UNIVERSITY HEALTH SYSTEM, INC. AND AFFILIATES Notes to Consolidated Financial Statements June 30, 2016 and 2015 (In thousands)

The following table summarizes other property and equipment information for 2016 and 2015:

2016 2015 Depreciation expense $ 149,603 144,112 Amortization of capital leases 2,857 2,863 Capital leases’ accumulated amortization 21,465 18,628

(7) Indebtedness A summary of indebtedness at June 30 is as follows: Tax-exempt revenue bonds:

Mandatory Fiscal Effective Underlying tender year of interest Outstanding principal Series structure date1 maturity rate 2016 2015

2005A Direct placement 6/1/2028 2028 1.25 $ 100,615 107,380 2005B Direct placement 5/29/2023 2028 0.90 32,570 107,380 2005C Direct placement 5/30/2022 2028 1.08 — 107,380 2006A/B/C Direct placement 3/19/2025 2039 0.93% 121,620 121,620 2012B Direct placement 6/1/2023 2023 1.19 28,650 28,650 2016B Direct placement 5/26/2026 2042 1.05 90,000 — 2016C Direct placement 5/26/2026 2042 1.14 90,000 —

Total variable rate 463,455 472,410

2009A Fixed rate N/A 2042 5.06 — 180,000 2010A Fixed rate N/A 2042 4.93 120,000 120,000 2012A Fixed rate N/A 2042 4.73 279,570 281,515 2016A Fixed rate N/A 2028 2.08 167,075 —

Total fixed rate 566,645 581,515

Total indebtedness 1,030,100 1,053,925

Plus unamortized premium – net 53,599 16,716 Less unamortized debt issuance costs – net (5,640) (6,055)

Indebtedness, net 1,078,059 1,064,586

Less current portion (22,275) (22,250)

Indebtedness, net of current portion $ 1,055,784 1,042,336

1Represents the date upon which the bonds are currently subject to mandatory tender by the bank.

On May 26, 2016, the Series 2016A, B, and C bonds (collectively, the Series 2016 bonds) were issued in the aggregate par amount of $347,075 to (1) fund an escrow account that was irrevocably placed with a trustee to meet the principal and interest payments of the 2009A refunded bonds ($180,000) until the first call date; (2) refund the 2005C privately placed bonds ($107,380); and (3) refund a portion of the 2005B privately placed bonds ($72,620). The Series 2016A bonds were issued at a premium of $36,915. The refunding meets the requirements for derecognition of the bond liability. Therefore, neither the escrow nor the refunded bonds are included in the consolidated balance sheet as of June 30, 2016. The refunding transaction resulted in a 25 (Continued) DUKE UNIVERSITY HEALTH SYSTEM, INC. AND AFFILIATES Notes to Consolidated Financial Statements June 30, 2016 and 2015 (In thousands)

loss on extinguishment of debt of $25,078 representing the write-off of the unamortized bond issue costs and discount on bonds payable related to the refunded bonds and the escrow funding requirements for principal and interest payments in excess of the face value of the 2009A refunded bonds.

On August 11, 2016, the Series 2016D bonds were issued in the par amount of $125,100 to fund an escrow account that was irrevocably placed with a trustee to meet the principal and interest payments of the 2010A refunded bonds ($120,000) until the first call date. The refunding meets the requirements for derecognition of the bond liability in fiscal year 2017. The refunding transaction resulted in a loss on extinguishment of debt to be recognized in fiscal year 2017 of $18,328 representing the write-off of the unamortized bond issue costs related to the refunded bonds and the escrow funding requirements for principal and interest payments in excess of the face value of the 2010A refunded bonds.

All Duke University Health System, Inc. Tax Exempt Revenue Bonds were issued by the North Carolina Medical Care Commission (NCMCC). The Health System is obligated to make payments of principal and interest that correspond to the obligations of the NCMCC under the bond agreements. The aggregate annual maturities of indebtedness issued through the NCMCC for each of the five fiscal years subsequent to June 30, 2016 and thereafter are as follows: 2017 $ 22,275 2018 23,338 2019 23,760 2020 24,923 2021 25,969 Thereafter 909,835 Total $ 1,030,100

The Health System must remain compliant with certain covenants and restrictions required by the trust indentures underlying its revenue bonds. These covenants include maintaining a required debt service coverage ratio and a specific liquidity target, as well as other nonfinancial restrictions.

(8) Derivatives and Other Financial Instruments (a) Debt Derivatives The Health System has executed derivative financial instruments in the normal course of managing its debt portfolio. The Health System has three interest rate swap agreements that are designed to synthetically decrease the variable rate exposure associated with its portfolio of indebtedness. In addition, the Health System has one basis swap designed to reduce the interest rate risk on variable rate indebtedness by utilizing the spread between the yield curves for taxable debt securities and tax-exempt municipal debt securities.

26 (Continued) DUKE UNIVERSITY HEALTH SYSTEM, INC. AND AFFILIATES Notes to Consolidated Financial Statements June 30, 2016 and 2015 (In thousands)

The following summarizes the general terms for each of the Health System’s swap agreements:

Current Health Associated Original notional System Effective date debt series term amount pays Health System receives

Interest rate: August 12, 1993 2012B 30 years $ 28,650 5.090% SIFMA May 19, 2005 N/A 23 years 301,835 3.601 61.520% of one-month LIBOR plus 0.28% April 1, 2009 Portfolio1 30 years 127,505 3.746 67.000% of one-month LIBOR Basis: July 6, 2001 N/A 20 years 400,000 SIFMA 72.125% of one-month LIBOR

1 The notional amount of the April 2009 Interest Rate Swap declines coincident with the principal for the Series 2012C bonds, which were paid off in June 2015, and the Series 2006 bonds. The residual portion is $5,885. The rate the Health System pays increased from 3.717% to 3.746% in June 2015.

The fair value of each swap is the estimated amount the Health System would receive or pay to terminate the swap agreement at the reporting date, taking into account current interest rates and the current creditworthiness of the swap counterparties. The fair value is included in derivative instruments on the consolidated balance sheets, while the change in fair value and the net settlement amount incurred on the swaps are included as a gain or loss in investment income on the consolidated statements of operations. The debt derivative instruments contain cross-collateralization provisions that require each counterparty to post collateral if the fair value meets certain thresholds.

The related financial information on each of these instruments at June 30 is as follows:

Financial information related to debt derivative instruments 2016 2015 Unrealized Realized Unrealized Realized gain or (loss) gain or (loss) gain or (loss) gain or (loss) Fair recognized recognized Fair recognized recognized value1 in income2 in income2 value1 in income2 in income2

Derivatives not designated as hedging instruments under ASC Topic 815: August 1993: Interest rate swap $ (6,134) 28 (1,431) (6,162) 291 (1,445) May 2005: Interest rate swap (52,869) (8,320) (9,996) (44,549) 1,224 (10,354) April 2009: Interest rate swap (56,442) (17,757) (4,502) (38,685) (5,338) (5,108) July 2001: Basis swap (1,742) (1,780) 442 38 4,477 298

Total derivatives not designated as hedging instruments $ (117,187) (27,829) (15,487) (89,358) 654 (16,609)

1 Balance sheet classifications are noncurrent derivative instruments. 2 The unrealized and realized gain (loss) on derivative instruments recognized in income is included in nonoperating investment (loss) income.

27 (Continued) DUKE UNIVERSITY HEALTH SYSTEM, INC. AND AFFILIATES Notes to Consolidated Financial Statements June 30, 2016 and 2015 (In thousands)

Health System debt derivative instruments contain provisions requiring long term, unsecured debt to be maintained at specified credit ratings from Moody’s Investor Service and Standard and Poor’s Rating Service, major rating agencies. If the ratings of the Health System’s debt were to fall below certain benchmarks, the counterparty could request immediate payment on derivatives in net liability positions. At June 30, 2016 and 2015, the Health System’s long term debt ratings exceeded these requirements. The aggregate fair value of all derivative instruments with credit risk related contingent features that are in a liability position on June 30, 2016 and 2015 is $117,187 and $89,396, respectively, for which the Health System has posted collateral of $21,869 and $14,463, respectively, in the normal course of business. If the credit risk related features underlying these agreements were triggered on June 30, 2016 and 2015, the Health System would be required to post an additional $95,318 and $74,933, respectively, of collateral to its counterparties.

The 2009 interest rate swap is subject to a mandatory early termination right on April 2, 2018. When this right is exercised, the Health System may revoke it, at which time the Health System’s collateral threshold reduces to $0 for the remainder of the swap agreement.

The Health System is exposed to financial loss in the event of nonperformance by a counterparty to any of the financial instruments described above. General market conditions could impact the credit standing of the counterparties and, therefore, potentially impact the value of the instruments on the Health System’s consolidated balance sheets. The Health System controls this counterparty risk by considering the credit rating, business risk, and reputation of any counterparty before entering into a transaction, monitoring for any change in credit standing of its counterparty during the life of the transaction, and requiring collateral be posted when predetermined thresholds are crossed. The Health System is also exposed to interest rate risk driven by factors influencing the spread between the taxable and tax-exempt market interest rates on its basis swap.

(b) Investment Derivatives Investment strategies employed by DUMAC and investment managers retained by DUMAC incorporate the use of various derivative financial instruments with off balance sheet risk. DUMAC uses these instruments for a number of investment purposes, including hedging or altering exposure to certain asset classes and cost-effectively adding exposures to portions of the portfolio. Positions are expected to create gains or losses that, when combined with the applicable portion of the total investment portfolio, provide an expected result.

28 (Continued) DUKE UNIVERSITY HEALTH SYSTEM, INC. AND AFFILIATES Notes to Consolidated Financial Statements June 30, 2016 and 2015 (In thousands)

The following table provides the net notional amounts and fair value of the Health System’s investment derivative activities at June 30, 2016 and 2015. It also provides the net loss amounts included in investment (loss) income during 2016 and 2015.

Location in financial 2016 2015 statements Net notional amounts $ 2,278,740 1,681,276 N/A Derivative assets 49,942 35,625 Investments Derivative liabilities (16,121) (22,056) Investments Net loss (25,485) (35,128) Investment (loss) income Posted collateral 7,132 20,664 Short-term investments

(9) Fair Value Measurements The fair value of a financial instrument is the amount that would be received to sell an asset or paid to transfer or settle a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820, Fair Value Measurement, establishes a three-level fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The classification of an investment within the hierarchy is based upon the pricing transparency or ability to redeem the investment and does not necessarily correspond to the perceived risk of that investment. Inputs are used in applying various valuation techniques that are assumptions, which market participants use to make valuation decisions, including assumptions about risk. Inputs may include price information, volatility statistics, operating statistics, specific and broad credit data, liquidity statistics, recent transactions, earnings forecasts, future cash flows, market multiples, discount rates, and other factors.

Assets and liabilities measured and reported at fair value are classified within the fair value hierarchy as follows:

Level 1 – Valuations based on quoted market prices in active markets.

Level 2 – Investments that trade in markets that are considered to be active, but are based on dealer quotations or alternative pricing sources supported by observable inputs or investments that trade in markets that are not considered to be active, but are valued based on quoted market prices, dealer quotations or alternative pricing sources supported by observable inputs.

Level 3 – Investments classified within Level 3 have significant unobservable inputs, as they trade infrequently or not at all.

29 (Continued) DUKE UNIVERSITY HEALTH SYSTEM, INC. AND AFFILIATES Notes to Consolidated Financial Statements June 30, 2016 and 2015 (In thousands)

The following is a summary of the levels within the fair value hierarchy for the Health System’s financial assets and liabilities measured at fair value at June 30:

Investments reported June 30, 2016 Level 1 Level 2 Level 3 at NAV1

Assets: Cash and cash equivalents $ 305,636 305,636 — — — Deposits with bond trustees 1,628 1,628 — — — Short-term investments 259,728 126,056 133,672 — — Fixed income 319,195 16,044 262,311 — 40,840 Equities 413,919 120,915 4,795 — 288,209 Hedged strategies 599,831 44,736 5,294 — 549,801 Private capital 394,172 224 — 39,177 354,771 Real assets 288,266 13,160 540 4,468 270,098 Investment in LTP 524,422 — — — 524,422 Other 56,439 4,275 44,895 — 7,269

Total assets $ 3,163,236 632,674 451,507 43,645 2,035,410

Liabilities: Interest rate derivatives $ 115,445 — 115,445 — — Basis swap derivative 1,742 — 1,742 — —

Total liabilities $ 117,187 — 117,187 — —

1 Fund investments reported at NAV as a practical expedient estimate of fair value at June 30, 2016.

30 (Continued) DUKE UNIVERSITY HEALTH SYSTEM, INC. AND AFFILIATES Notes to Consolidated Financial Statements June 30, 2016 and 2015 (In thousands)

Investments reported June 30, 2015 Level 1 Level 2 Level 3 at NAV1

Assets: Cash and cash equivalents $ 451,375 451,375 — — — Deposits with bond trustees 372 372 — — — Short-term investments 170,837 24,949 145,888 — — Fixed income 376,508 60,391 275,420 280 40,417 Equities 548,793 190,262 (6,409) — 364,940 Hedged strategies 629,311 9,086 925 — 619,300 Private capital 384,149 311 — 46,409 337,429 Real assets 274,483 796 (645) 3,283 271,049 Investment in LTP 140,011 — — — 140,011 Other 38,935 — 31,217 — 7,718

Total assets $ 3,014,774 737,542 446,396 49,972 1,780,864

Liabilities: Interest rate derivatives $ 89,396 — 89,396 — — Basis swap derivative (38) — (38) — —

Total liabilities $ 89,358 — 89,358 — —

1 Fund investments reported at NAV as a practical expedient estimate of fair value at June 30, 2015.

The following methods and assumptions are used by the Health System in estimating the fair value of each class of financial instruments:

Cash and cash equivalents, patient accounts receivable, other receivables, accounts payable, accrued salaries, wages, and vacation payable and related accruals, estimated third-party payor settlements, and other liabilities: The carrying amounts approximate fair value because of the short maturity of these instruments.

Investments and deposits with bond trustees: Reported at fair value as of the date of the consolidated financial statements.

Capital lease obligations: Estimated as the present value of future minimum lease payments during the lease term.

Derivative instruments: Based on a mid-market position obtained from the swap counterparties. The Health System engages a management advisor to validate the reasonableness of the swaps’ recorded fair value. Collateral posting requirements are determined each month using the mid-market positions.

31 (Continued) DUKE UNIVERSITY HEALTH SYSTEM, INC. AND AFFILIATES Notes to Consolidated Financial Statements June 30, 2016 and 2015 (In thousands)

The following tables present additional information about Level 3 assets measured at fair value. Both observable and unobservable inputs may be used to determine the fair value of positions that the Health System has classified within the Level 3 category. As a result, the unrealized gains and losses for assets within the Level 3 category in the tables below may include changes in fair value that were attributable to both observable and unobservable inputs.

Net realized Net transfers Balance as of and unrealized (from) to Balance as of June 30, 2015 gains (losses) Purchases Sales Level 3 June 30, 2016

Asset category: Fixed income $ 280 1 — — (281) — Private capital 46,409 (3,752) 8,724 (6,769) (5,435) 39,177 Real assets 3,283 (1,019) 2,026 (1,261) 1,439 4,468

Total $ 49,972 (4,770) 10,750 (8,030) (4,277) 43,645

Net realized Net transfers Balance as of and unrealized (from) to Balance as of June 30, 2014 gains (losses) Purchases Sales Level 3 June 30, 2015

Asset category: Fixed income $ — 2 280 (2) — 280 Private capital 35,978 7,056 36,650 (33,275) — 46,409 Real assets 5,256 (1,489) 4,017 (4,501) — 3,283

Total $ 41,234 5,569 40,947 (37,778) — 49,972

The change in net unrealized losses and gains related to Level 3 assets still held at June 30, 2016 and 2015 was $(3,763) and $15,755, respectively. During 2016, there were net transfers of $4,277 between Level 3 investments and investments reported at NAV. There were no transfers between Level 1 and Level 2 investments during 2016 and 2015.

(10) Professional Liability Risk Program The accompanying consolidated financial statements include the assets and liabilities of DCC, a wholly owned subsidiary of the Health System that insures a portion of the medical malpractice risks and patient general liability risks of Health System clinical providers and the PDC. Policy limits for the years ended June 30, 2016 and 2015 were $110,000 per incident and $155,000 in the aggregate. DCC limits its exposure to loss through reinsurance and excess loss agreements.

Estimated professional liability costs include the estimated cost of professional liability in 2016 and 2015 for reported claims incurred in the DCC program. DCC evaluates its estimated professional liability on a discounted actuarial basis. The discount rate at June 30, 2016 and 2015 is 3.5%. Accrued professional liability costs as of June 30, 2016 and 2015 amounted to $34,785 and $38,136, respectively. Cash, other receivables, and investments in this amount have been designated by the Health System to settle these claims. Also included in estimated professional liability costs are estimated claims incurred but not reported related to the Health System in the amounts of $7,272 and $7,720 as of June 30, 2016 and 2015, respectively.

32 (Continued) DUKE UNIVERSITY HEALTH SYSTEM, INC. AND AFFILIATES Notes to Consolidated Financial Statements June 30, 2016 and 2015 (In thousands)

The estimated liability for professional and patient general liability claims will be significantly affected if current and future claims differ from historical trends. While management monitors reported claims closely and considers potential outcomes as estimated by its actuaries when determining its professional and general liability accruals, the complexity of the claims, the extended period of time to settle the claims and the wide range of potential outcomes complicate the estimation. In the opinion of management, adequate provision has been made for this related risk.

(11) Benefit Plans (a) Pension and Retirement Plans Staff members of the Health System are eligible to participate in the University’s defined contribution retirement plan. For the years ended June 30, 2016 and 2015, the Health System contributed approximately $40,400 and $38,700, respectively, to this plan, which is reported in salaries, wages, and benefits expense in the consolidated statements of operations. The Health System expects to contribute $41,800 to this plan in fiscal year 2017.

In addition, other full time Health System employees participate in the University’s noncontributory defined benefit pension plan (ERP). The benefits for the defined benefit plan are based on years of service and the employee’s compensation during the last ten years of employment. The Health System expects to contribute $13,800 to this plan in 2017. The allocation of the prepaid pension asset or pension liability between the University and the Health System is based primarily on compensation expense of covered employees.

(b) Postretirement Medical Plan In addition to the Health System’s pension plans, the Health System sponsors an unfunded, defined benefit postretirement medical plan that covers all its full time employees who elect coverage and satisfy the plan’s eligibility requirements when they retire. The plan is contributory with retiree contributions established as a percentage of the total cost for retiree healthcare and for the healthcare of their dependents. The Health System pays all benefits on a current basis. Employees hired after June 30, 2002 are not eligible for Health System contribution to the cost of this benefit and must bear the full cost themselves if elected at retirement. As a healthcare provider, the Health System utilizes an incremental cost approach to determine its liability for the postretirement medical plan. The total liability reflects estimated additional costs to provide healthcare benefits to retirees within the Health System plus the full cost to provide healthcare benefits to retirees at facilities other than Health System facilities.

33 (Continued) DUKE UNIVERSITY HEALTH SYSTEM, INC. AND AFFILIATES Notes to Consolidated Financial Statements June 30, 2016 and 2015 (In thousands)

(c) Pension and Postretirement Medical Plans The measurement date for both the defined benefit pension plan and the postretirement health benefit plan is June 30. Pension and postretirement expense, pension contributions, and the associated liabilities are included in the following tables, which provide a reconciliation of the changes in the Health System’s portion of the plans’ benefit obligations and fair value of assets for the years ended June 30:

Pension benefits Postretirement benefits 2016 2015 2016 2015 Reconciliation of projected benefit obligation: Obligation at beginning of year $ 1,007,657 963,230 66,141 63,151 Service cost 47,518 48,576 628 732 Interest cost 47,171 42,759 2,887 2,768 Actuarial loss (gain) 216,003 (20,608) 3,928 2,768 Benefits payments (28,335) (24,762) (3,979) (3,278) Administrative expenses (estimated) (1,685) (1,538) — — Projected benefit obligation at end of year $ 1,288,329 1,007,657 69,605 66,141 Reconciliation of fair value of plan assets: Fair value of plan assets at beginning of year $ 938,903 918,516 — — Actual (loss) return on plan assets (29,329) 31,635 — — Employer contributions 15,163 15,074 — — Benefits payments (28,335) (24,762) — — Administrative expenses (1,838) (1,560) — — Fair value of plan assets at end of year $ 894,564 938,903 — — Funded status: Net accrued benefit liability $ (393,765) (68,754) (69,605) (66,141)

34 (Continued) DUKE UNIVERSITY HEALTH SYSTEM, INC. AND AFFILIATES Notes to Consolidated Financial Statements June 30, 2016 and 2015 (In thousands)

The pension and postretirement benefits expected to be paid for the ten years subsequent to June 30, 2016 are as follows: Pension Postretirement benefits benefits 2017 $ 30,410 3,405 2018 32,853 3,670 2019 35,684 3,764 2020 38,684 3,845 2021 42,434 4,005 2022–2026 276,391 20,947

The expected benefits to be paid are based on the same assumptions used to measure the Health System’s benefit obligation at June 30 and include estimated future employee service.

The following table provides the components of net periodic benefit cost for the plans for the years ended June 30: Pension benefits Postretirement benefits 2016 2015 2016 2015 Service cost $ 47,518 48,576 628 732 Interest cost 47,171 42,759 2,887 2,768 Expected return on plan assets (66,433) (58,948) — — Amortization of prior-service cost (asset) 1,024 1,119 (1,225) (1,756) Recognized actuarial loss — 3,071 — — Net periodic benefit cost $ 29,280 36,577 2,290 1,744

The prior-service costs are amortized on a straight-line basis over the average remaining service period of active participants. The expected amortization of prior-service cost for 2017 is $847 and $0 for the pension benefits and postretirement benefits, respectively. The expected amortization of actuarial losses (gains) for 2017 is $14,133 for the pension benefits and ($58) for postretirement benefits.

35 (Continued) DUKE UNIVERSITY HEALTH SYSTEM, INC. AND AFFILIATES Notes to Consolidated Financial Statements June 30, 2016 and 2015 (In thousands)

Included in unrestricted net assets are the following amounts that have not been recognized in net periodic benefit cost at June 30, 2016 and 2015, respectively: Pension benefits Postretirement benefits 2016 2015 2016 2015 Unrecognized prior service cost (asset) $ 3,901 4,925 — (160) Unrecognized actuarial losses (gains) 332,010 20,092 (15,636) (20,629)

The assumptions used in the measurement of the Health System’s benefit obligation and benefit cost are shown in the following table:

Pension benefits Postretirement benefits 2016 2015 2016 2015 Obligation Cost Obligation Cost Obligation Cost Obligation Cost

Weighted average assumptions as of measurement date: Discount rate 3.50% 4.75% 4.75% 4.50% 3.50% 4.50% 4.50% 4.50% Expected return on plan assets N/A 7.5% N/A 7.5% N/A N/A N/A N/A Rate of compensation increase 2.5% 3.0% 3.0% 3.0% N/A N/A N/A N/A

In order to determine the benefit obligation as of June 30, 2016, the per capita costs of covered healthcare benefits was assumed to increase to 8.0% for non-Medicare eligible employees and 7.3% for Medicare eligible employees, declining to an ultimate annual rate of increase of 5.0% by 2023. The benefit expense for 2016 was driven by the rates used to determine the benefit obligation as of June 30, 2015, which were 8.0% for non-Medicare eligible employees and 7.3% for Medicare eligible employees, declining to an ultimate annual rate of 5.0% by 2023 for non-Medicare eligible employees and 2022 for Medicare eligible employees.

Assumed healthcare cost trend rates have a significant effect on the amounts reported for healthcare plans. A 1.0% change in assumed healthcare cost trend rates would have the following effects: One One percentage percentage increase decrease Effect on net periodic postretirement health care benefit cost $ 437 (367) Effect on accumulated postretirement benefit obligation 8,602 (7,275)

36 (Continued) DUKE UNIVERSITY HEALTH SYSTEM, INC. AND AFFILIATES Notes to Consolidated Financial Statements June 30, 2016 and 2015 (In thousands)

The defined benefit pension plan’s investment strategy focuses on maximizing total return and places limited emphasis on liability matching and no emphasis on generating income. Over the long term, the plan’s average exposure target is 49% equity (public and private investments in companies), 13% commodity (direct commodity exposure, commodity related equities, and private investments in energy, power, infrastructure and timber), 11% real estate (private real estate and REITs), 13% credit (investment-grade bonds, corporate bonds, bank debt, asset backed securities, etc.), 5% interest rates (public obligations including treasuries and agencies) and 9% other (U.S. Treasury Inflation Protected Securities, non-U.S. inflation linked bonds and absolute return oriented hedge funds).

The expected return on plan assets is established at an amount that reflects the targeted asset allocation and expected returns for each component of the plan assets. The expected return on pension plan assets was developed using a stochastic forecast model of long term expected returns for each asset class. The rate is reviewed periodically and adjusted as appropriate to reflect changes in the expected market performance or in targeted asset allocation ranges.

The same levels of the fair value hierarchy as described in note 9 are used to categorize the pension plan assets. The fair value of the Health System’s portion of assets available for pension benefits as of the June 30 measurement date is as follows:

Investments June 30, Reported 2016 Level 1 Level 2 Level 3 at NAV1

Asset category: Short-term investments $ 146,074 (330) 146,404 — — Fixed income 21,654 3,261 18,393 — — Equities 176,257 65,101 8,261 — 102,895 Hedged strategies 229,370 19,726 4,703 — 204,941 Private capital 173,580 115 — 16,501 156,964 Real assets 132,288 5,902 603 — 125,783 Other investments 15,341 (4,035) 19,376 — —

$ 894,564 89,740 197,740 16,501 590,583 1 Fund investments reported at NAV as a practical expedient estimate.

37 (Continued) DUKE UNIVERSITY HEALTH SYSTEM, INC. AND AFFILIATES Notes to Consolidated Financial Statements June 30, 2016 and 2015 (In thousands)

Investments June 30, Reported 2015 Level 1 Level 2 Level 3 at NAV1

Asset category: Short-term investments $ 191,368 (803) 192,171 —— Fixed income 16,950 2,598 14,234 — 118 Equities 212,161 73,355 4,729 — 134,077 Hedged strategies 215,272 2,128 1,785 — 211,359 Private capital 167,745 111 — 18,818 148,816 Real assets 126,521 375 (262) — 126,408 Other investments 8,886 (3,989) 12,875 — —

$ 938,903 73,775 225,532 18,818 620,778

1 Fund investments reported at NAV as a practical expedient estimate of fair value at June 30, 2015.

The following tables present additional information about the Level 3 pension benefit assets measured at fair value. Both observable and unobservable inputs may be used to determine the fair value of positions that the Health System has classified within the Level 3 category. As a result, the unrealized gains and losses for assets within the Level 3 category in the tables below may include changes in fair value that were attributable to both observable and unobservable inputs;

Balance Net realized Net transfers Balance as of June 30, and unrealized (from) to as of June 30, 2015 gains (losses) Purchases Sales Level 3 2016

Private capital $ 18,818 (1,934) 3,557 (1,556) (2,384) 16,501

Balance Net realized Net transfers Balance as of June 30, and unrealized (from) to as of June 30, 2014 gains (losses) Purchases Sales Level 3 2015

Private capital $ 15,529 3,329 11,153 (11,193) — 18,818

The change in net unrealized gains and losses related to Level 3 assets still held at June 30, 2016 and 2015 was $(1,627) and $7,684, respectively, and was recorded within change in funded status of defined benefit plans on the consolidated statements of changes in net assets. During 2016, there were net transfers of $(2,384) between Level 3 and investments reported at NAV. There were no transfers between Level 1 and Level 2 investments during 2016 or 2015.

At June 30, 2016 and 2015, the accumulated benefit obligation for pension benefits is $1,164,883 and $899,442, respectively, as compared to the fair value of the plan assets of $894,564 and $938,903,

38 (Continued) DUKE UNIVERSITY HEALTH SYSTEM, INC. AND AFFILIATES Notes to Consolidated Financial Statements June 30, 2016 and 2015 (In thousands)

respectively. At June 30, 2016 and 2015, the plan is (under) over funded in relation to accumulated benefits by $(270,319) and $39,461, respectively.

(12) Functional Expenses The Health System provides general healthcare services to residents within its geographic location. Expenses related to providing these services for each year ended June 30 are as follows:

2016 2015 Health care services $ 2,131,791 2,007,780 General and administrative 725,389 687,001 $ 2,857,180 2,694,781

(13) Commitments and Contingencies (a) Leases Capital The DRH facility lease, which is a forty year evergreen lease, is classified as a capital lease. The Health System made principal and interest payments for this lease of $9,600 and $9,512 in 2016 and 2015, respectively.

Operating The Health System leases various machinery, equipment, healthcare facilities and office space under operating leases expiring at various dates through 2031. Total rental expense in 2016 for all operating leases is $39,026, consisting of $9,463 for machinery and equipment leases and $29,563 for facilities and office space leases. Total rental expense in 2015 for all operating leases is $42,344, consisting of $10,193 for machinery and equipment leases and $32,151 for facilities and office space leases.

39 (Continued) DUKE UNIVERSITY HEALTH SYSTEM, INC. AND AFFILIATES Notes to Consolidated Financial Statements June 30, 2016 and 2015 (In thousands)

Commitments The following is a schedule by year of future minimum lease payments under leases as of June 30, 2016 that have initial or remaining lease terms in excess of one year and future minimum capital lease payments: Capital Operating leases leases Total Year ending June 30: 2017 $ 9,589 40,088 49,677 2018 9,744 33,432 43,176 2019 8,454 30,652 39,106 2020 7,267 24,994 32,261 2021 7,436 22,822 30,258 Thereafter 277,479 93,919 371,398 Total minimum lease payments 319,969 245,907 565,876 Less sublease rentals from the PDC — (29,607) (29,607) Total minimum lease payments less subleases 319,969 $ 216,300 536,269 Less interest portion (196,552) Capital lease obligations 123,417 Less current portion capital lease obligations (1,764) Capital lease obligations, net of current portion $ 121,653

(b) Construction and Purchase Commitments At June 30, 2016, open contracts for the construction of physical properties and other capital expenditures amounted to approximately $57,100, and outstanding purchase orders for normal operating supplies and equipment amounted to approximately $3,000.

(c) Line of Credit The Health System has an agreement with a commercial bank for a line of credit providing unsecured advances to the Health System of up to $50,000 for working capital needs. At June 30, 2016 and 2015, there was no balance due under the agreement. Management expects to renew this line of credit annually under the same general terms and conditions as the existing facility.

40 (Continued) DUKE UNIVERSITY HEALTH SYSTEM, INC. AND AFFILIATES Notes to Consolidated Financial Statements June 30, 2016 and 2015 (In thousands)

(d) Self Insurance The Health System provides employee healthcare benefits, long term disability benefits, unemployment benefits, and workers’ compensation benefits primarily through employer contributions, participant contributions, and excess loss insurance and manages those programs through third party administrators. In the opinion of management, adequate provision has been made for the related risks.

(e) Legal Considerations Laws and regulations governing Medicare and Medicaid programs are complex and subject to interpretation. The Health System, in part through its Compliance Program, seeks to ensure compliance with such laws and regulations, and to rectify instances of noncompliance with governmental program (Medicare, Medicaid, and Tricare) rules. The Health System believes that it is in compliance with all applicable laws and regulations and is not aware of any pending or threatened investigations involving allegations of potential wrongdoing that would have a material effect on the Health System’s consolidated financial statements. Compliance with such laws and regulations is subject to future government review and interpretation as well as significant regulatory action, including fines, penalties, and exclusion from the Medicare and Medicaid programs.

In addition to the above, the Health System is involved in various legal actions occurring in the normal course of business. While the final outcomes cannot be determined at this time, management is of the opinion that the resolution of these matters will not have a material adverse effect on the Health System’s financial position.

(14) Subsequent Events The Health System has evaluated subsequent events from the balance sheet date through September 29, 2016, the date at which the consolidated financial statements were issued, and determined that there are no other items to disclose.

41 Schedule 1 DUKE UNIVERSITY HEALTH SYSTEM, INC. AND AFFILIATES Combined Group under April 13, 1999 Master Trust Indenture (MTI) and Consolidated Combining and Consolidating Balance Sheet Information June 30, 2016 (In thousands)

Duke Duke Duke MTI Duke Univ. Durham 2016 total University Regional Raleigh Other Combined Affiliated Casualty Other DUHS Assets Hospital Hospital Hospital MTI Group Physicians Company Non-MTI consolidated Current assets: Cash and cash equivalents $ — — — 268,289 268,289 — 12,763 91 281,143 Patient accounts receivable, net 282,838 32,367 42,616 (29) 357,792 7,612 — 2,055 367,459 Other receivables 12,561 1,635 2,473 11,013 27,682 1,059 — 252 28,993 Inventories of drugs and supplies 57,391 7,118 12,885 3,450 80,844 533 — 1,021 82,398 Other assets 2,431 586 200 15,415 18,632 542 — 160 19,334 Short-term investments — — — 237,859 237,859 — — — 237,859 Assets limited as to use — — — 531,869 531,869 — 15,612 — 547,481 Total current assets 355,221 41,706 58,174 1,067,866 1,522,967 9,746 28,375 3,579 1,564,667 Assets limited as to use — — — 59,444 59,444 — 19,173 — 78,617 Investments — — — 1,882,117 1,882,117 — 142,750 — 2,024,867 Property and equipment, net 911,976 152,618 143,935 222,555 1,431,084 20,558 — 6,820 1,458,462 Due from the University — — — 708 708 — — — 708 Other noncurrent assets — — 20,466 13,730 34,196 — — 3,408 37,604 Total assets $ 1,267,197 194,324 222,575 3,246,420 4,930,516 30,304 190,298 13,807 5,164,925 Liabilities and Net Assets Current liabilities: Accounts payable $ 61,188 8,782 20,248 31,975 122,193 3,141 111 4,871 130,316 Due to (from) the University, net 145,887 30,215 22,434 328,618 527,154 (870) 620 (3,165) 523,739 Other current liabilities 14,805 3,460 1,949 19,460 39,674 948 — 1,313 41,935 Accrued salaries, wages, and vacation payable 66,604 13,581 12,529 40,751 133,465 13,626 — 10,743 157,834 Estimated third-party payor settlements, net 18,640 (1,459) 2,063 — 19,244 — — — 19,244 Current portion of postretirement and postemployment benefit obligations — — — 6,087 6,087 — — — 6,087 Current portion of indebtedness — — — 22,275 22,275 — — — 22,275 Current portion of capital lease obligations — — — 1,764 1,764 — — — 1,764 Current portion of estimated professional liability costs ——————15,612—15,612 Total current liabilities 307,124 54,579 59,223 450,930 871,856 16,845 16,343 13,762 918,806 Other noncurrent liabilities 4,505 4,676 2,300 49,471 60,952 2,120 — 2,066 65,138 Postretirement and postemployment benefit obligations, net of current portion — — — 465,020 465,020 — — — 465,020 Indebtedness, net of current portion — — — 1,055,784 1,055,784 — — — 1,055,784 Capital lease obligations, net of current portion — — — 121,653 121,653 — — — 121,653 Derivative instruments — — — 117,187 117,187 — — — 117,187 Estimated professional liability costs, net of current portion — — — 7,272 7,272 — 19,173 — 26,445 Total liabilities 311,629 59,255 61,523 2,267,317 2,699,724 18,965 35,516 15,828 2,770,033 Net assets: Unrestricted 955,568 135,069 161,052 921,287 2,172,976 11,339 154,782 (2,021) 2,337,076 Temporarily restricted — — — 44,116 44,116 — — — 44,116 Permanently restricted — — — 13,700 13,700 — — — 13,700 Total net assets 955,568 135,069 161,052 979,103 2,230,792 11,339 154,782 (2,021) 2,394,892 Total liabilities and net assets $ 1,267,197 194,324 222,575 3,246,420 4,930,516 30,304 190,298 13,807 5,164,925

See accompanying independent auditors’ report.

42 Schedule 2 DUKE UNIVERSITY HEALTH SYSTEM, INC. AND AFFILIATES Combined Group under April 13, 1999 Master Trust Indenture (MTI) and Consolidated Combining and Consolidating Statement of Operations Information Year ended June 30, 2016 (In thousands)

Duke Duke Duke MTI Duke Univ. Durham 2016 total University Regional Raleigh Other MTI Group Combined Affiliated Casualty Other Other DUHS Hospital Hospital Hospital MTI eliminations Group Physicians Company Non-MTI eliminations consolidated Unrestricted revenues, gains, and other support: Net patient service revenue (net of contractual allowances and discounts) $ 2,181,516 288,046 406,436 41,519 — 2,917,517 114,957 — 17,486 (6) 3,049,954 Provision for bad debts (43,455)(10,179)(14,214)(489) — (68,337)(3,780) — (724) — (72,841) Net patient revenue less provision for bad debts 2,138,061 277,867 392,222 41,030 — 2,849,180 111,177 — 16,762 (6) 2,977,113 Other revenue 66,553 8,707 14,218 150,702 (104,717) 135,463 3,321 15,768 145,651 (116,982) 183,221 Total unrestricted revenues, gains, and other support 2,204,614 286,574 406,440 191,732 (104,717) 2,984,643 114,498 15,768 162,413 (116,988) 3,160,334 Expenses: Salaries, wages, and benefits 691,718 134,963 113,752 236,228 — 1,176,661 83,258 — 89,957 — 1,349,876 Medical supplies 495,562 42,979 114,711 42,210 — 695,462 10,179 — 6,387 — 712,028 Interest 31,545 5,217 3,903 533 — 41,198 ————41,198 Depreciation and amortization 82,307 11,934 15,008 39,954 — 149,203 1,204 — 2,053 — 152,460 Other operating expenses 673,611 87,321 100,260 (129,440)(104,717) 627,035 21,841 7,716 62,014 (116,988) 601,618 Total expenses 1,974,743 282,414 347,634 189,485 (104,717) 2,689,559 116,482 7,716 160,411 (116,988) 2,857,180 Operating income (loss) 229,871 4,160 58,806 2,247 — 295,084 (1,984) 8,052 2,002 — 303,154 Nonoperating income (loss): Investment income (loss) 4— —(129,217) — (129,213) — (10,733) ——(139,946) Loss on the extinguishment of debt — — — (25,078) — (25,078) ————(25,078) Other 87 45 — 8 — 140 — — 1,489 — 1,629 Total nonoperating income 91 45 — (154,287) — (154,151) — (10,733) 1,489 — (163,395) Excess (deficit) of revenues over expenses 229,962 4,205 58,806 (152,040) — 140,933 (1,984) (2,681) 3,491 — 139,759 Change in funded status of defined benefit plans (120,376) (26,068) (19,630) (142,416) — (308,490) (7,557) — — — (316,047) Net assets released from restrictions for purchase of property and equipment 2,615 — — 20 — 2,635 ————2,635 Intracompany transfers, net (68,745) 12,936 (31,021) 84,006 — (2,824) 9,334 — (6,510) —— Transfers (to) from the University, net (99,760) 12 21 (515,317) — (615,044)(248) — 718 — (614,574) (Decrease) increase in unrestricted net assets $ (56,304) (8,915) 8,176 (725,747) — (782,790) (455) (2,681) (2,301) — (788,227)

See accompanying independent auditors’ report.

43 [THIS PAGE INTENTIONALLY LEFT BLANK]

APPENDIX C

DEFINITIONS OF CERTAIN TERMS AND SUMMARY OF THE MASTER INDENTURE AND THE TRUST AGREEMENT

[THIS PAGE INTENTIONALLY LEFT BLANK]

DEFINITIONS OF CERTAIN TERMS

The following is a summary of the definitions of certain terms used in this Offering Memorandum which correspond to terms contained in the Trust Agreement or the Master Indenture:

“2017 Bonds” means the Duke University Health System, Inc. Taxable Bonds, Series 2017 in the aggregate principal amount of $______.

“Accountant” means a firm of independent certified public accountants that is a member of the American Institute of Certified Public Accountants (or its successor organization) and is licensed to practice in the State.

“Accountant’s Report” means a report of an Accountant with respect to a computation as set forth in the Master Indenture, based on the Financial Statements for the most recent period for which such Financial Statements are available.

“Adverse Deviation” means a deviation from GAAP that causes (i) an increase in the Base Value of the property, plant and equipment of the Combined Group, the value of Combined Group Property, or Net Assets or (ii) an increase in the Coverage Ratio from below 1.20 to 1.20 or above, in each case when compared with the determination of such ratio or value under GAAP without giving effect to such deviation. The determination of whether a deviation is an Adverse Deviation will be made with respect to the most recent completed Fiscal Year of DUHS.

“Affiliate” means, as used in reference to any specified Person, any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For purposes of this definition, “control” when used with respect to any Person means the power to direct the management and policies of such Person through the ownership of not less than a majority of its voting securities or the right to designate or elect not less than a majority of the members of its board of directors or other governing board or body by contract or otherwise; and the terms “controlling” and “controlled” have meanings correlative to the foregoing.

“Annual Debt Service Requirement” means, for any Fiscal Year of DUHS, the principal of and interest due in such year on all Long-Term Indebtedness of the Members of the Combined Group; provided, that (i) any principal installment of Balloon Indebtedness due in such year, whether at maturity or pursuant to mandatory redemption, shall be excluded from such calculation if the debtor has designated prior to the payment or redemption date available and unrestricted funds for such payment or redemption or has received a binding commitment from a recognized financial institution to refinance such principal on reasonable terms, (ii) interest on Long-Term Indebtedness shall be excluded from such calculation to the extent such interest is provided from the proceeds of such Long-Term Indebtedness or reimbursed by the United States government (such as, but not limited to, interest subsidy payments under the so-called Build America Bonds program) and (iii) the interest on Derivative Indebtedness during any Derivative Period thereunder shall be calculated by adding (x) the amount of interest payable by a Member of the Combined Group on such Derivative Indebtedness pursuant to its terms and (y) the amount of interest payable by such Member of the Combined Group under the Derivative Agreement and subtracting (z) the amount of interest payable by the Derivative Agreement Counterparty at the rate specified in the Derivative Agreement, except that to the extent that the Derivative Agreement Counterparty has defaulted on its payment obligations under the Derivative Agreement, the amount of interest payable by the Member of the Combined Group from the date of default shall be the interest calculated as if such Derivative Agreement had not been executed.

“Audited Financial Statements” means combined financial statements of DUHS and its affiliates (under GAAP) for a 12-month period, or for such other period for which an audit has been performed, prepared in accordance with GAAP, which have been audited and reported upon by an Accountant. If any Designated Member is an Outside Designated Member or any Member of the Obligated Group is an Outside Member of the Obligated Group, “Audited Financial Statements” means (i) the financial statements described in the previous sentence and (ii) combined financial statements of (A) each Outside Designated Member and its affiliates (under GAAP) and (B) each Outside Member of the Obligated Group and its affiliates (under GAAP), in each such case for the same period as DUHS’s financial statements (or a period of the same duration ended within the last six months of the period covered by DUHS’s financial statements), prepared in accordance with GAAP, which have been audited and reported upon by an Accountant. In either case, Audited Financial Statements will also include, in an additional information section, unaudited combined financial statements for the same period from which the accounts of any Person that is not an Obligated Group Member or a Designated Member have been eliminated.

“Balloon Indebtedness” means Long-Term Indebtedness 20% or more of the principal of which is due in a single year, which portion of the principal is not required by the documents pursuant to which such Balloon Indebtedness is incurred to be redeemed prior to such year.

“Base Value” means, at the option of the Obligated Group Representative, which may be exercised either with respect to all or any one or more items of property, plant and equipment, (a) the cost basis of property, plant and equipment, net of accumulated depreciation, of any Member of the Obligated Group and the Designated Members as shown on the Financial Statements for the most recent period for which Financial Statements are available or (b) the appraised value of such property, plant and equipment as determined in writing by an appraiser selected by the Obligated Group Representative and acceptable to the Master Trustee, such appraisal taking place within the one-year period preceding the date such value is used in any computation or calculation pursuant to the Master Indenture.

“Beneficial Owner” means the Person in whose name a 2017 Bond is recorded as beneficial owner of such 2017 Bond by the Securities Depository or a Participant or an Indirect Participant on the records of such Securities Depository, Participant or Indirect Participant, as the case may be, or such Person’s subrogee.

“Board Resolution” of any specified Person means a copy of a resolution certified by the Person responsible for maintaining the records of the Governing Body of such Person to have been duly adopted by the Governing Body of such Person and to be in full force and effect on the date of such certification and delivered to the Master Trustee.

“Bond Fund” means the Duke University Health System Inc. Taxable Bond Series 2017 Bond Fund created and so designated by the Trust Agreement and consisting of an Interest Account and a Principal Account.

“Bond Trustee” means the Bond Trustee at the time serving under the Trust Agreement, whether the original or a successor trustee, which initially will be The Bank of New York Mellon Trust Company, N.A.

“Book Entry Bonds” means 2017 Bonds for which a Securities Depository or its nominee is the Holder.

“Business Day” means any day on which banks in the city in which the corporate trust office of the Bond Trustee is located are open for commercial banking purposes.

C-2

“Closing Date” means the date on which the 2017 Bonds are delivered against payment therefor.

“Code” means the Internal Revenue Code of 1986, as amended, and all regulations promulgated thereunder.

“Combined Group” means all Obligated Group Members and all Designated Members.

“Combined Group Property” means any and all rights, titles and interests in and to any and all property, whether real or personal, tangible or intangible, of the Combined Group, as such may exist from time to time, wherever situated and whether now owned or hereafter acquired. The term “Combined Group Property” specifically excludes any portion of such property the right, title and interest to which is not owned, leased or otherwise held by a Member of the Combined Group, and specifically excludes all facilities, property, plant and equipment of any Person that is not a Member of the Combined Group, including all additions, improvements, extensions, alterations and appurtenances thereto, equipment used in connection therewith, and all real property upon which the same are located, whether the same existed on the date of the Master Indenture or are thereafter constructed, installed or acquired.

“Commission” means the North Carolina Medical Care Commission of the Department of Health and Human Services of the State of North Carolina and any successor thereto.

“Commission Bonds” means any Related Bonds issued by the Commission or the issuance of which was subject to approval by the LGC. Notwithstanding any provision of the Master Indenture, if at any time the only Commission Bonds then outstanding are bonds not issued by the Commission, no consents under the Master Indenture will be required of the Commission and no notices or other documents need to be sent to the Commission.

“Consent,” “Order” and “Request” of any specified Person, with respect to the Master Indenture, mean, respectively, a written consent, order or request signed in the name of such Person by the chair of its Governing Body, its president, any of its vice presidents or another executive officer of such Person, and delivered to the Master Trustee.

“Corporation Representative” means each of the persons at the time designated to act on behalf of DUHS in a written certificate furnished to the Bond Trustee, which certificate will contain the specimen signature(s) of such person(s) and will be signed on behalf of DUHS by its chief financial officer or other designated officer.

“Cost of Issuance Fund” means the Duke University Health System, Inc. Taxable Bonds Series 2017 Cost of Issuance Fund created and so designated by the Trust Agreement.

“Coverage Ratio” means, with respect to a Fiscal Year of DUHS, the ratio determined by dividing Income Available for Debt Service for such Fiscal Year by the Annual Debt Service Requirement for such Fiscal Year.

“Credit Agreement” means, with respect to any Obligation, any agreement or other obligation of an Obligated Group Member entered into to provide credit or liquidity support relating to such Obligation, or relating to other obligations secured by such Obligation, and designated as a Credit Agreement by a Supplemental Master Indenture or an Order of such Obligated Group Member.

“Credit Facility” means, with respect to any Obligation, any letter of credit, bond insurance policy or other instrument or undertaking issued with respect to such Obligation or other obligations

C-3

secured by such Obligation and designated as a Credit Facility by Order of an Obligated Group Member or Supplemental Master Indenture.

“Defeasance Obligations” means, with respect to the Master Indenture, (a) with respect to any Obligation that secures a series of Related Bonds, the obligations permitted to be used to defease such series of Related Bonds under the Related Bond Indenture and (b) with respect to any Obligation for which there are no Related Bonds, unless otherwise provided in the Supplemental Master Indenture for such Obligation, the following:

(1) Government Obligations;

(2) evidences of direct ownership of a proportionate or individual interest in future principal or interest payments on specified Government Obligations, which Government Obligations are held by a bank or trust company organized and existing under the laws of the United States of America or any state thereof in the capacity of custodian pursuant to the terms of a custody agreement with respect to which there exists an Opinion of Counsel to the effect that the Government Obligations are not available to satisfy creditors of the custodian;

(3) obligations issued by or on behalf of any of the states of the United States of America or the political subdivisions thereof, (A) provision for the payment of the principal of, premium, if any, and interest on which have been made by irrevocable deposit with a bank or trust company in the capacity of trustee or escrow agent of cash or obligations described in (1) or (2) above, the maturing principal of and interest on which, when due and payable (without further investment or reinvestment of either the principal amount thereof or the interest earnings therefrom), provide sufficient money to pay the principal of, redemption premium, if any, and interest on such obligations issued by or on behalf of such states or political subdivisions; (B) all of which obligations that are assumed to be redeemed in the provision for payment set forth in (A) have been irrevocably called for redemption on the date assumed in such provision for payment; and (C) which obligations are rated at the time of acquisition for the purposes of the Master Indenture in the highest rating category by at least one Rating Service; and

(4) obligations issued by or on behalf of any of the states of the United States of America or the political subdivisions thereof that are rated in the highest rating category by one or more of the Rating Services and not rated below the highest rating category by any Rating Service at the time of acquisition of such obligations for the purposes of the Master Indenture.

“Defeasance Obligations” means, with respect to the Trust Agreement, (i) Government Obligations, (ii) evidences of ownership of a proportionate interest in specified Government Obligations, which Government Obligations are held by a bank or trust company organized and existing under the laws of the United States of America or any state thereof in the capacity of custodian, (iii) Defeased Municipal Obligations, (iv) evidences of ownership of a proportionate interest in specified Defeased Municipal Obligations, which Defeased Municipal Obligations are held by a bank or trust company organized and existing under the laws of the United States of America or any state thereof in the capacity as custodian, and (v) full faith and credit obligations of state or local government municipal bond issuers which are rated in the highest rating category by S&P and Moody’s..

“Defeased Municipal Obligations” means obligations of state or local government municipal bond issuers which are rated in the highest rating category by S&P and by Moody’s, provision for the payment of the principal of and interest on which shall have been made by deposit with a trustee or escrow agent of (i) Government Obligations or (ii) evidences of ownership of a proportionate interest in specified Government Obligations, which Government Obligations are held by a bank or trust company

C-4

organized and existing under the laws of the United States of America or any state thereof in the capacity of custodian, and the maturing principal of and interest on such Government Obligations or evidences of ownership, when due and payable, shall provide sufficient money to pay the principal of, premium, if any, and interest on such obligations of state or local government municipal bond issuers.

“Derivative Agreement” means (i) any contract known as or referred to or which performs the function of an interest rate swap agreement, currency swap agreement, forward payment conversion agreement or futures contract; (ii) any contract providing for payments based on levels of, or changes or differences in, interest rates, currency exchange rates, or stock or other indices; (iii) any contract to exchange cash flows or payments or series of payments; (iv) any type of contract called, or designed to perform the function of, interest rate floors or caps, options, puts or calls or to hedge or minimize any type of financial risk, including, without limitation, payment, currency, rate or other financial risk; and (v) any other type of contract or arrangement that the Member of the Combined Group entering into such contract or arrangement determines is to be used, or is intended to be used, to manage or reduce the cost of Indebtedness, to convert any element of Indebtedness from one form to another, to maximize or increase investment return, to minimize investment return risk or to protect against any type of financial risk or uncertainty.

“Derivative Agreement Counterparty” means, with respect to a Derivative Agreement, the Person that is identified in such agreement as the counterparty to, or contracting party with, the Member of the Combined Group that is party to such agreement.

“Derivative Indebtedness” means Indebtedness or any portion thereof with respect to which a Member of the Combined Group has entered into a Derivative Agreement.

“Derivative Period” means the period during which a Derivative Agreement is in effect.

“Designated Member” means any Person that has been designated as a Designated Member pursuant to the Master Indenture, but excluding any Person that subsequent to such designation has been released from its obligations as a Designated Member pursuant to the Master Indenture.

“DTC” means The Depository Trust Company, New York, New York.

“DUHS” means Duke University Health System, Inc., a North Carolina nonprofit corporation, and its successors.

“Electronic Means” means facsimile transmission, email transmission, secure electronic transmission containing applicable authorization codes, passwords and/or authentication keys issued by the Bond Trustee, or another method or system specified by the Bond Trustee as available for use in connection with its services under the Trust Agreement.

“Event of Default” means, with respect to Trust Agreement, each of those events set forth under the caption “SUMMARY OF THE TRUST AGREEMENT—Events of Default” herein, and, with respect to the Master Indenture, each of those events set forth under the caption “SUMMARY OF THE MASTER INDENTURE—Defaults and Remedies--Events of Default” herein.

“Financial Statements” means the unaudited combined financial statements of DUHS and its affiliates (under GAAP) derived from the Audited Financial Statements of DUHS and its affiliates (under GAAP) and set forth in an additional information section in the Audited Financial Statements and covering the same period as the Audited Financial Statements, from which the accounts of any affiliate (under GAAP) of DUHS that is not a Member of the Combined Group have been eliminated. If any

C-5

Designated Member is an Outside Designated Member or any Member of the Obligated Group is an Outside Member of the Obligated Group, “Financial Statements” means (i) the financial statements described in the previous sentence, (ii) the unaudited combined financial statements of (A) each Outside Designated Member and its affiliates (under GAAP) derived from the Audited Financial Statements of such Outside Designated Member and its affiliates (under GAAP) and (B) each Outside Member of the Obligated Group and its affiliates (under GAAP) derived from the Audited Financial Statements of such Outside Member of the Obligated Group and its affiliates (under GAAP), and set forth in an additional information section in the Audited Financial Statements and covering the same period as the Audited Financial Statements, from which the accounts of any affiliate (under GAAP) of the Outside Designated Member or the Outside Member of the Obligated Group that is not a Member of the Combined Group have been eliminated and (iii) a separate schedule prepared by DUHS combining the accounts set forth in the financial statements described in clauses (i) and (ii).

“Fiscal Year” of any specified Person means an annual period adopted by such Person as the accounting period used for preparation of the Audited Financial Statements required to be delivered pursuant to the Master Indenture.

“Fitch” means Fitch Ratings, Inc., a Delaware corporation, its successors and assigns, and if such corporation is dissolved or liquidated or no longer performs the functions of a securities rating agency, “Fitch” will be deemed to refer to any other nationally recognized securities rating agency designated by DUHS by notice to the Bond Trustee.

“GAAP” means generally accepted accounting principles as they exist on the date of applicability thereof; provided that, any Member of the Combined Group may deviate from generally accepted accounting principles if (A) each of DUHS and each Obligated Group Member affected, either by virtue of its deviation or the deviation of its Designated Member, by resolution of its Governing Body, determines annually that such deviation is in its best interest and will not constitute an Adverse Deviation, (B) the Obligated Group Representative delivers to the Commission and the LGC along with the financial statements required by the Master Indenture an Officer’s Certificate setting forth the financial statement line items affected by the deviation and the Coverage Ratio, in each case calculated both with and, without giving effect to such deviation and (C) the Audited Financial Statements of each Member of the Combined Group affected by the deviation (1) include an opinion of such Member’s Accountant to the effect that, except for the permitted deviation, the Audited Financial Statements have been prepared in accordance with generally accepted accounting principles and (2) quantify the effects of the deviation in either the audit report or the footnotes to the Audited Financial Statements. In such event, references in the Master Indenture to GAAP, as applied to such Member of the Combined Group, will be subject to such deviation, except as otherwise provided in the Master Indenture or in a Supplemental Master Indenture.

“Governing Body” of any specified Person means the board of directors or board of trustees of such Person or any duly authorized committee of that board, or if there be no board of trustees or board of directors, then the person or body which pursuant to law or the Organizational Documents of such Person is vested with powers similar to those vested in a board of trustees or a board of directors.

“Government Obligations” means direct obligations of, or obligations the full and timely payment of principal and interest on which are fully and unconditionally guaranteed by, the United States of America.

“Holder” means, with respect to the Master Indenture, a Person in whose name an Obligation is registered in the registration books maintained by the Master Trustee, and, with respect to the 2017 Bonds, a Person who is the registered owner of a 2017 Bond.

C-6

“Income Available for Debt Service” means, as to any Fiscal Year of DUHS, the excess of revenues over expenses (plus unrestricted contributions to the extent not included in such computation) of the Members of the Combined Group, to which will be added depreciation, amortization and interest expense, all as determined in accordance with GAAP consistently applied; provided, however, that (1) no determination thereof will take into account any gain or loss resulting from either the sale, exchange or other disposition of capital assets constituting property, plant and equipment not made in the ordinary course of business or the extinguishment of Indebtedness; (2) no determination thereof will take into account any non-cash gains or losses that were used in computing excess of revenues over expenses, including (i) any unrealized gains or losses resulting from the periodic valuation of investments or Derivative Agreements or (ii) any “other-than-temporary” impairment loss; (3) no determination thereof will take into account the financial results of any affiliate of any Member of the Combined Group that is not a Member of the Combined Group; (4) no determination thereof will take into account any nonrecurring items which do not involve the receipt, expenditure or transfer of assets; and (5) with respect to Derivative Indebtedness, any amount of regularly scheduled payments made by a Member of the Combined Group to a Derivative Agreement Counterparty will be treated as an interest expense and any amount of regularly scheduled payments made by a Derivative Agreement Counterparty to a Member of the Combined Group will offset interest expense and will not be included in revenue, except to the extent that the Derivative Agreement Counterparty has defaulted on its payment obligations under the Derivative Agreement, in which case no determination thereof will take into account regularly scheduled payments payable by the Member of the Combined Group from the date of default.

“Indebtedness” means any indebtedness of a Person for the repayment of borrowed money (including capital leases, installment purchase contracts and guarantees of indebtedness) that is shown as a liability on the balance sheet of such Person or that is properly capitalized on the balance sheet of such Person in accordance with GAAP (including indebtedness evidenced by Obligations issued under the Master Indenture and indebtedness not evidenced by Obligations issued under the Master Indenture).

“Independent,” when used with respect to any specified Person, means a Person who (1) is in fact independent, (2) does not have any direct financial interest or any material indirect financial interest in any Member of the Combined Group or in any Affiliate of any Member of the Combined Group, and (3) is not connected with any Member of the Combined Group or with any Affiliate of any Member of the Combined Group as an officer, employee, promoter, trustee, partner, director or person performing similar functions. Whenever it is provided that any Independent Person’s opinion or certificate will be furnished to the Master Trustee, such Person will be appointed by Order of the Person making such appointment and such opinion or certificate will state that the signer has read this definition and that the signer is Independent within the meaning of it.

“Indirect Participant” means a broker-dealer, bank or other financial institution for which the Securities Depository holds Bonds as a securities depository through a Participant.

“Interest Account” means the account in the Bond Fund created and so designated by the Trust Agreement.

“Interest Payment Date” means December 1, 2017 and each June 1 and December 1 thereafter, to and including June 1, 20__.

“Investment Grade” means that rating of any Rating Service or any other rating service of national recognition acceptable to the LGC and the Commission with a rating then in effect with respect to any Related Bonds that represents the lowest rating that any of such rating services recognizes as being investment grade.

C-7

“Investment Obligations” means any of the following:

(i) Government Obligations;

(ii) Repurchase agreements for Government Obligations with a qualified depository bank or securities dealers fully collateralized by Government Obligations, maturing on or before the date when such funds will be required for disbursement;

(iii) Prime commercial paper rated either “P-1” by Moody’s or “A-1” by S&P and, if rated by both, not less than “P-1” by Moody’s and “A-1” by S&P; or

(iv) Interests in any money market fund or trust, the investments of which are restricted to obligations described in clauses (i) through (iii) of this definition or obligations determined to be of comparable quality by the board of directors of such fund or trust.

“Issuance Costs” means issuance costs incurred in connection with the 2017 Bonds.

“Lease” means the Lease, dated as of the date of the Master Indenture, by and between the University and DUHS, pursuant to which DUHS leases from the University certain real property and improvements relating to the health care operations of DUHS.

“Letter of Representations” means, when all the 2017 Bonds are Book Entry Bonds, the Blanket Letter of Representations dated May 10, 2017, executed by DUHS and delivered to The Depository Trust Company and any amendments thereto or successor blanket agreements between the DUHS and any successor Securities Depository, relating to a system of Book Entry Bonds to be maintained by such Securities Depository with respect to any bonds, notes or other obligations issued by the DUHS.

“LGC” means the Local Government Commission of North Carolina, a division of the Department of the State Treasurer, and any successor thereto.

“Lien” means any mortgage, deed of trust or pledge of security interest in or encumbrance on any Combined Group Property, excluding Liens applicable to Combined Group Property in which the only interest held by a Member of the Combined Group is a leasehold interest, unless the Lien is with respect to such leasehold interest.

“Long-Term Indebtedness” means Indebtedness having a stated maturity date or stated maturity dates longer than one year from the date of its incurrence.

“Management Consultant” means a nationally recognized firm of Independent professional management consultants or an Independent health care management organization knowledgeable in the operation of health care facilities and having a favorable reputation for skill and experience in the field of health care management consultation.

“Master Indenture” means the Master Trust Indenture, dated as of April 13, 1999, among DUHS, Durham Therapies, Incorporated and The Bank of New York, succeeded by The Bank of New York Mellon Trust Company, N.A., as Master Trustee, including any amendments or supplements thereto.

“Master Trustee” means The Bank of New York Mellon Trust Company, N.A., a national banking association, serving as trustee under the Master Indenture, and its successors and assigns permitted thereby.

C-8

“Maturity,” when used with respect to any Obligation, means the date on which the principal of such Obligation becomes due and payable as therein provided or as provided in the Master Indenture, whether at the Stated Maturity thereof or by declaration of acceleration, call for redemption or otherwise.

“Member of the Combined Group” or “Combined Group Member” means, at any time, each of the Obligated Group Members and each of the Designated Members.

“Moody’s” means Moody’s Investors Service, Inc., a Delaware corporation, its successors and assigns, and, if such corporation is dissolved or liquidated or no longer performs the functions of a securities rating agency, “Moody’s” will be deemed to refer to any other nationally recognized securities rating agency designated by DUHS by notice to the Bond Trustee.

“Net Assets” means the sum of the net assets of each Member of the Combined Group, as determined with respect to each such entity in accordance with GAAP, or other equivalent accounting classification, representing the net worth of the Combined Group.

“New Obligor” has the meaning given to such term under the caption “SUMMARY OF THE MASTER INDENTURE—Replacement Master Indenture” herein.

“Obligated Group” means all Obligated Group Members.

“Obligated Group Member” or “Member of the Obligated Group” means DUHS and any other Person which joins the Obligated Group pursuant to the Master Indenture and not including any Person which has withdrawn from the Obligated Group pursuant to the Master Indenture.

“Obligated Group Representative” means the Person at the time designated to act on behalf of the Obligated Group in a written certificate furnished to the Master Trustee, which certificate will contain a specimen signature of such Person and will be signed on behalf of the Obligated Group by the President of DUHS or by his designee.

“Obligation” means any obligation of the Obligated Group issued, authenticated and delivered pursuant to the Master Indenture.

“Obligation No. 46” means Obligation No. 46 dated as of the Closing Date, issued, authenticated and delivered under the Master Indenture and Supplement No. 46, delivered to the Bond Trustee as evidence of DUHS’s obligation to repay the 2017 Bonds.

“Officer’s Certificate” of any specified Person means a certificate signed by the chair of its Governing Body, its president, any of its vice presidents or another executive officer of such Person, and delivered to the Master Trustee.

“Opinion of Bond Counsel” means an opinion in writing signed by an attorney or firm of attorneys acceptable to the Master Trustee and experienced in the field of municipal bonds whose opinions are generally accepted by purchasers of municipal bonds.

“Opinion of Counsel” means, with respect to the Trust Agreement, an opinion in writing signed by an attorney or firm of attorneys acceptable to the Bond Trustee who may be counsel for the DUHS or other counsel.

C-9

“Opinion of Counsel” means, with respect to the Master Indenture, a written opinion of counsel, who may (except as otherwise expressly provided in the Master Indenture) be counsel to any member of the Combined Group, and is acceptable to the Master Trustee.

“Order” is defined above along with the terms “Consent” and “Request.”

“Organizational Documents” of any corporation means the articles of incorporation, certificate of incorporation, charter or other document pursuant to which such corporation was organized, and its bylaws, each as amended from time to time, and as to any other Person, means the instruments pursuant to which it was created and which govern its powers and the authority of its representatives to act on its behalf.

“Outside Designated Member” means a Designated Member that is not an affiliate of an Obligated Group Member under GAAP.

“Outside Member of the Obligated Group” means a Member of the Obligated Group that is not an affiliate of DUHS under GAAP.

“Outstanding” means, when used with reference to the 2017 Bonds as of a particular date, all 2017 Bonds theretofore issued under the Trust Agreement, except:

(i) 2017 Bonds theretofore cancelled by the Bond Trustee or delivered to the Bond Trustee for cancellation;

(ii) 2017 Bonds for the payment of which money, Defeasance Obligations, or a combination of both, sufficient to pay, on the date when such 2017 Bonds are to be paid or redeemed, the principal or the Redemption Price, as the case may be, of, and the interest accruing to such date on, the 2017 Bonds to be paid or redeemed, has been deposited with the Bond Trustee in trust for the Holders of such 2017 Bonds; Defeasance Obligations shall be deemed to be sufficient to pay or redeem 2017 Bonds on a specified date if the principal of and the interest on such Defeasance Obligations, when due, will be sufficient to pay on such date the principal or the Redemption Price, as the case may be, of, and the interest accruing on, such 2017 Bonds to such date;

(iii) Series 2017 Bonds in exchange or substitution for or in lieu of which other Series 2017 Bonds have been authenticated and delivered pursuant to the Trust Agreement; and

(iv) Bonds deemed to have been paid in accordance with the Trust Agreement.

“Outstanding” means, with respect to Obligations, as of the date of determination, all Obligations theretofore authenticated and delivered under the Master Indenture, except:

(i) Obligations deemed paid and discharged pursuant to the Master Indenture; and

(ii) Obligations upon transfer of or in exchange for or in lieu of which other Obligations have been authenticated and delivered pursuant to the Master Indenture; provided, however, that in determining whether the Holders of the requisite principal amount of Outstanding Obligations have given any request, demand, authorization, direction, notice, consent or waiver under the Master Indenture, Obligations owned by any Obligated Group Member or any Affiliate of any Member of the Combined Group or any Affiliate of any Member of the Combined Group will be

C-10

disregarded and deemed not to be Outstanding, except that, in determining whether the Master Trustee is protected in relying upon any such request, demand, authorization, direction, notice, consent or waiver, only Obligations which the Master Trustee knows to be so owned will be so disregarded. The Master Trustee will be under no duty to investigate whether any Obligations are so owned, but may, in its discretion, make such further investigation or inquiry as it may see fit. Obligations so owned which have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the satisfaction of the Master Trustee the pledgee’s right so to act with respect to such Obligations and that the pledgee is not a Member of the Combined Group or any Affiliate of any Member of the Combined Group.

“Participant” means a broker-dealer, bank or other financial institution for which the Securities Depository holds 2017 Bonds as a securities depository.

“Paying Agent” means, initially, the Master Trustee, and thereafter any other Person authorized by the Obligated Group Representative to pay the principal of and premium, if any, or interest on any Obligations on behalf of any Member of the Obligated Group.

“Permitted Encumbrances” has the meaning given such term under the caption entitled “SUMMARY OF THE MASTER INDENTURE—General Covenants and Provisions--Liens”.

“Person” means any individual, corporation, limited liability company, partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof.

“Principal Account” means the account in the Bond Fund created and so designated by the Trust Agreement.

“Rating Service” means, with respect to the Master Indenture, (a) Moody’s, (b) S&P, and (c) Fitch, and, if any of such entities are dissolved or liquidated or no longer perform the functions of a securities rating agency, any other nationally recognized securities rating agency designated (1) so long as any Commission Bonds are outstanding, by the Commission, with the approval of the LGC, by notice to the Master Trustee and each Related Bond Trustee, and (2) if no Commission Bonds are outstanding, by the Obligated Group Representative by notice to the Master Trustee and each Related Bond Trustee.

“Redemption Fund” means the Duke University Health System, Inc. Taxable Bonds Series 2017 Redemption Fund created and so designated by the Trust Agreement.

“Redemption Price” means, with respect to any 2017 Bonds or portion thereof, the redemption price specified in the Trust Agreement.

“Regular Record Date” means the 15th day (whether or not a Business Day) of the month preceding any Interest Payment Date.

“Related Bond Indenture” means any indenture, bond resolution or similar instrument pursuant to which any series of Related Bonds is issued.

“Related Bond Issuer” means any issuer of Related Bonds.

“Related Bond Trustee” means any trustee under any Related Bond Indenture and any successor trustee thereunder.

C-11

“Related Bonds” means (a) any revenue bonds or similar obligations issued by any state, territory or possession of the United States or any municipal corporation or other political subdivision formed under the laws thereof or any constituted authority, agency or instrumentality of any of the foregoing empowered to issue obligations on behalf thereof, and (b) any bonds issued by any Person, in either case the proceeds of which are loaned or otherwise made available to any Member of the Combined Group in consideration, whether in whole or in part, of the execution, authentication and delivery of an Obligation or Obligations to such governmental issuer or Person.

“Related Loan Document” means the document or documents (including, without limitation, any loan agreement, lease, financing agreement, installment sales contract or other financing agreement) pursuant to which any proceeds of any Related Bonds are made available to or for the benefit of any Member of the Combined Group.

“Replacement Master Indenture” has the meaning given to such term under the caption “SUMMARY OF THE MASTER INDENTURE—Replacement Master Indenture” herein.

“Request” is defined above along with the terms “Consent” and “Order.”

“S&P” means S&P Global Ratings, a part of Standard & Poor’s Financial Services LLC, its successors and assigns, and, if S&P is dissolved or liquidated or no longer performs the functions of a securities rating agency, “S&P” will be deemed to refer to any other nationally recognized securities rating agency designated by DUHS by notice to the Bond Trustee.

“Securities Depository” means DTC or other recognized securities depository selected by the Commission, which maintains a book entry system in respect of the 2017 Bonds, and includes any substitute for or successor to the securities depository initially acting as Securities Depository.

“Securities Depository Nominee” means, as to any Securities Depository, such Securities Depository or the nominee of such Securities Depository in whose name there are registered on the registration books maintained by the Bond Trustee certificates to be delivered to and immobilized at such Securities Depository during the continuation with such Securities Depository of participation in its book entry system.

“Series Resolution” means the resolution of DUHS providing for the issuance of the 2017 Bonds that is required to be adopted prior to the issuance of the 2017 Bonds pursuant to the Trust Agreement.

“State” means the State of North Carolina.

“Stated Maturity” when used with respect to any Obligation or any installment of interest thereon means the date specified in such Obligation as the fixed date on which the principal of such Obligation or such installment of interest is due and payable.

“Substitute Obligation” has the meaning given to such term under the caption “SUMMARY OF THE MASTER INDENTURE—Replacement Master Indenture” herein.

“Supplement No. 46” means Supplemental Indenture for Obligation No. 46, dated as of June 1, 2017, between DUHS and the Master Trustee.

“Supplemental Master Indenture” means an indenture amending or supplementing the Master Indenture entered into pursuant to the provisions thereof.

C-12

“Transaction” means (a) the admission to, or withdrawal from, the Combined Group of any Person (but not the withdrawal of a Person from the Obligated Group simultaneously with the designation of such Person as a Designated Member or the de-designation of a Person as a Designated Member simultaneously with the admission of such Person to the Obligated Group); (b) any consolidation, merger, conveyance or transfer pursuant to the provisions of the Master Indenture, and (c) any transfer by any Member of the Combined Group of any property of any kind, real or personal, tangible or intangible or mixed, to any Person that is not a Member of the Combined Group other than (1) transfers of Combined Group Property that, in the judgment of the Member of the Combined Group transferring the property, has been or is inadequate, obsolete, worn out, unsuitable, or unprofitable; (2) transfers of Combined Group Property for which the transferor receives or has received, as consideration for such transfer, cash, services or property (including rights or interests in property, including partnership interests) equal in value to the fair market value of the asset so transferred, such fair market value to be determined by the Obligated Group Representative as set forth in an Officer’s Certificate; (3) transfers of Combined Group Property to any transferee that, simultaneously with such transfer, becomes a Member of the Combined Group; (4) transfers of funds by a Member of the Combined Group to the University in an amount in the aggregate in any Fiscal Year of such Member of the Combined Group not to exceed the amount budgeted for such purpose by such Member of the Combined Group in its annual budget for such Fiscal Year as initially adopted in final form to be used for the benefit of the University’s health care programs, including its schools of medicine, nursing and allied health professions (the “University Health Programs”), and/or research projects conducted by the University in medicine or, where the research is reasonably related to one or more of the University Health Programs or the health care operations of a Member of the Combined Group, in an allied health science, provided that no such funds are used for the benefit of any for-profit Affiliate of the University; and (5) in addition to transfers mentioned in clauses (1) through and including (4) above, transfers of property the book value of which in any Fiscal Year of DUHS is not greater than 10% of the Net Assets as shown on the Financial Statements for the most recent Fiscal Year for which such Financial Statements are available, provided that the value of any transfer to the University under this clause (5) will be determined net of the fair market value, as determined by the Obligated Group Representative as set forth in an Officer’s Certificate, of any assets transferred by the University to a Member of the Combined Group in the Fiscal Year of DUHS in which the transfer to the University is made, unless the transfer by the University is accounted for under clause (2).

“Trust Agreement” means the Trust Agreement securing the 2017 Bonds, dated as of June 1, 2017 between DUHS and The Bank of New York Mellon Trust Company, N.A., as Bond Trustee, including any trust agreement amendatory thereof or supplemental thereto.

“University” means Duke University, a North Carolina nonprofit corporation with its principal place of business in North Carolina, and its legal successors.

C-13

SUMMARY OF THE MASTER INDENTURE

AUTHORIZATION, AMOUNT AND DESIGNATION OF OBLIGATIONS

Each Obligated Group Member may issue Obligations, without any authorization or approval from the Designated Members, but subject to the provisions of the Master Indenture and the provisions of any Supplemental Master Indenture authorizing the issuance of Obligations. No Obligations may be issued under the Master Indenture except in accordance with the provisions of the Master Indenture. The total principal amount of Obligations and the number of Obligations that may be issued under the Master Indenture are not limited, except with respect to any Obligations as provided in the Supplemental Master Indenture providing for the issuance thereof, and except as limited by law.

SECURITY FOR OBLIGATIONS

Except as permitted by the Master Indenture and provided for in any Supplemental Master Indenture, all Obligations issued and Outstanding under the Master Indenture will be direct, general and unsecured, joint and several, obligations of the Members of the Obligated Group and will be equally and ratably secured by the Master Indenture.

Obligations may be issued under the Master Indenture to evidence and secure any type of Indebtedness, including, without limitation, any Indebtedness issued or incurred as notes, bonds or other forms of Indebtedness. If any Indebtedness is not issued directly in the form of an Obligation, an Obligation may be issued under the Master Indenture as evidence and security for the payment of such Indebtedness in lieu of directly issuing such Indebtedness as an Obligation.

Any Obligation may be secured by additional security (including, without limitation, liens on property, security interests in accounts receivable or other property, security interests in debt service or depreciation reserve or similar funds, or a Credit Facility), so long as any liens created in connection therewith are permitted under the Master Indenture. Such security need not extend to any other Indebtedness (including any other Obligations) unless required by the Master Indenture. The Supplemental Master Indenture pursuant to which any Obligation is issued may provide for such security and permit realization upon such security solely for the benefit of the Obligations entitled thereto, and as are not inconsistent with the intent of the Master Indenture; provided that, except as otherwise expressly provided by the Master Indenture, all Obligations will be equally and ratably secured by the Master Indenture.

GENERAL COVENANTS AND PROVISIONS

Performance of Covenants

Each Obligated Group Member covenants that it will (a) faithfully perform at all times any and all covenants, undertakings, stipulations and provisions contained in the Master Indenture and in each and every Obligation; and (b) exercise any and all control and contract rights it may have with respect to its Designated Members to cause its Designated Members to comply with the terms and conditions of the Master Indenture that are applicable to such Designated Members, and of the Related Loan Documents, if any, to which such Designated Members are a party.

Payment of Obligations

(a) Payment of Principal, Premium, Interest and Other Amounts. Each Obligated Group Member covenants that it will, jointly and severally, duly and punctually pay the principal of, premium, if

C-14

any, and interest on all Obligations, and any other payments, including the purchase price of Related Bonds tendered for purchase pursuant to the terms of a Related Bond Indenture or Related Loan Document, required by the terms of such Obligations, on the dates, at the times and at the places and in the manner provided in such Obligations, the applicable Supplemental Master Indenture and the Master Indenture, when and as the same become payable, whether at Stated Maturity, upon call for redemption, by acceleration of maturity or otherwise.

(b) Payments by Designated Members. Each Obligated Group Member covenants that it will exercise any and all control and contract rights it may have with respect to its Designated Members to cause each such Designated Member to pay, loan or otherwise transfer to such Obligated Group Member (1) such amounts as are necessary to pay, when due, the principal of, premium, if any, and interest on all Outstanding Obligations or portions thereof the proceeds of which were loaned or otherwise made available to such Designated Member or that were otherwise issued for the benefit of such Designated Member and any other payments, including the purchase price of Related Bonds tendered for purchase pursuant to the terms of a Related Bond Indenture or Related Loan Document, required by the terms of such Obligations, on the dates, at the times and at the places and in the manner provided in such Obligations, the applicable Supplemental Master Indenture and the Master Indenture, when and as the same become payable, whether at Stated Maturity, upon call for redemption, by acceleration of maturity or otherwise, and (2) such amounts as are otherwise necessary to enable such Obligated Group Member to comply with the provisions described in paragraph (a) above with respect to all other Obligations.

(c) Obligations Absolute and Unconditional. The obligations of each Obligated Group Member under the Master Indenture are absolute and unconditional and will remain in full force and effect until all Obligations are paid or provision is made for such payment. Each Obligated Group Member covenants that it will perform such obligations without notice or demand, and without abatement, deduction, set-off, counterclaim, recoupment, discrimination or defense or any right of termination or cancellation arising from any circumstances whatsoever, whether existing at the time the Master Indenture takes effect or thereafter arising, and regardless of the invalidity of any portion of the Master Indenture, and, to the extent permitted by law, each Obligated Group Member waives the provisions of any statute or other law in effect, at the time the Master Indenture takes effect or thereafter, contrary to any of its obligations, covenants or agreements under the Master Indenture or that releases or purports to release such Obligated Group Member therefrom.

Maintenance of Legal Existence

Each Obligated Group Member covenants that it will, and, to the extent permitted by law, will cause each Designated Member to:

(a) Except as otherwise expressly provided in the Master Indenture, preserve its corporate or other legal existence and all its rights and licenses to the extent necessary or desirable for the operation of its business and affairs and be qualified to do business in each jurisdiction where its ownership of property or the conduct of its business requires such qualifications; provided, however, that nothing in the Master Indenture will obligate it to retain or preserve any of its rights or licenses no longer, in the judgment of its Governing Body, desirable in the conduct of its business, and the loss of which is not disadvantageous in any material respect to the Holders of the Obligations. Such provision will not limit each Obligated Group Member’s right to declare a Designated Member to be no longer designated as a Designated Member.

(b) Cause its business to be carried on and conducted and its property, plant and equipment to be maintained, preserved and kept in reasonably good repair, working order and condition and to make needed and proper repairs, renewals and replacements thereof; provided, however, that nothing in the

C-15

Master Indenture will (1) prevent it from ceasing to operate any portion of its property, plant and equipment if, in its judgment (evidenced, in the case of such a cessation other than in the ordinary course of business, by a Board Resolution of its Governing Body) it is advisable not to operate the same or if it intends to sell or otherwise dispose of the same and within a reasonable time endeavors to effect such sale or other disposition, or (2) obligate it to operate, retain, preserve, repair, renew or replace any property, leases, rights, privileges or licenses no longer used or, in the judgment of its Governing Body, useful in the conduct of its business.

(c) Do all things reasonably necessary to conduct its affairs and carry on its business and operations in such manner as to comply with all applicable laws and observe and conform to all valid orders, regulations or requirements of any governmental authority relative to the conduct of its business and the ownership of its property, plant and equipment; provided that nothing in the Master Indenture will require it to comply with, observe and conform to any such law, order, regulation or requirement so long as the validity thereof or the applicability thereof to it is contested in good faith without material adverse effect upon the revenues of the Combined Group.

(d) Pay promptly all lawful taxes, governmental charges and assessments upon or against it or the Combined Group Property; provided, however, that it will have the right to contest in good faith any such sums and pending such contest may delay or defer payment thereof.

(e) Pay promptly or otherwise satisfy and discharge all of its Indebtedness and all demands and claims against it as and when the same become due and payable, other than any of such (exclusive of the Obligations created and Outstanding under the Master Indenture) whose validity, amount or collectibility is being contested in good faith.

(f) Comply with all terms, covenants and provisions of any Liens existing upon the Combined Group Property or any part thereof or securing any of its Indebtedness.

Liens

Each Obligated Group Member covenants that it will not (and will not permit any of its Designated Members to) grant, create, assume or incur or suffer to be granted, created, assumed or incurred or to exist any Lien on any Combined Group Property, whether owned on the date of the Master Indenture or thereafter acquired, excluding, however, from the operation of the foregoing (collectively, “Permitted Encumbrances”):

(a) Liens for taxes or other governmental charges or levies not delinquent or that are being contested in good faith by any Member of the Combined Group;

(b) covenants, defects, irregularities, encumbrances, easements, including easements for roads and public utilities and similar easements, rights of way, defects of title, clouds on title, mineral conveyances, reservations, restrictions and conditions none of which materially impairs the use of the property affected thereby for its intended purposes by any Member of the Combined Group;

(c) mechanics’, workers’, repairmen’s, architects’, engineers’, surveyors’ or carriers’ Liens or other similar Liens with respect to the construction and equipping of any improvement to the Combined Group Property;

(d) other Liens, charges and encumbrances that do not prevent or materially impair the use of the property affected thereby for its intended purposes by any Member of the Combined Group (and the Master Trustee may rely upon a certificate of a Management Consultant as to whether such liens, charges

C-16

and encumbrances materially impair the use of the property affected thereby for its intended purposes) or value of the property affected;

(e) purchase money security interests and Liens securing purchase money indebtedness;

(f) any Lien arising by reason of deposits with, or the giving of any form of security to, any governmental agency or any body created or approved by law or governmental regulation for any purpose at any time as required by law or governmental regulation as a condition to the transaction of any business or the exercise of any privilege or license, or to enable any Member of the Combined Group to maintain self-insurance or to participate in any funds established to cover any insurance risks or in connection with workers’ compensation, unemployment insurance, pension or profit sharing plans or other social security, or to share in the privileges or benefits required for companies participating in such arrangements;

(g) any judgment Lien against any Member of the Combined Group so long as (1) such judgment is being contested in good faith and execution thereon is stayed, (2) the liability of the Member of the Combined Group under such judgment is adequately covered by insurance, or (3) the liability of the Member of the Combined Group under such judgment (and all similar judgments) does not exceed an amount equal to 3% of the Net Assets of the Combined Group as shown on the Financial Statements for the most recent period for which Financial Statements are available;

(h) any Lien on the Combined Group Property in an amount not exceeding the greater of (i) 20% of the Base Value of property, plant and equipment of the Members of the Combined Group and (ii) 20% of the unrestricted Net Assets of the Members of the Combined Group; provided, however, that the value of any asset not constituting property, plant and equipment in accordance with GAAP will be its fair market value as determined by an Independent Person qualified to value such asset; provided, further, however, that no such Lien may be granted during any period that an Event of Default exists under the Master Indenture;

(i) any Lien on inventory that does not exceed 25% of the book value thereof;

(j) any Lien in favor of a trustee on the proceeds of Indebtedness prior to the application of such proceeds;

(k) Liens on moneys deposited by patients, residents or others with any Member of the Combined Group as security for or as prepayment for the cost of patient care fees for continuing care or other costs or fees of a similar nature;

(l) Liens on property received by any Member of the Combined Group through gifts, grants or bequests, such Liens being due to restrictions on such gifts, grants or bequests of property or the income thereon;

(m) Liens on property due to rights of third party payers for recoupment of amounts paid to any Member of the Combined Group;

(n) rights of the United States of America under Title 42 United States Code Section 291i;

(o) Liens on accounts receivable arising as a result of the sale of such accounts receivable, as permitted under the Master Indenture, with or without recourse, provided that the principal amount of Indebtedness secured by any such Lien does not exceed the aggregate sales price received by the Member of the Combined Group selling such accounts receivable;

C-17

(p) Any Lien securing indebtedness of any Person that is not a Member of the Combined Group that is assumed by a Member of the Combined Group in connection with the purchase or other acquisition of improvements to the Combined Group Property, whether by merger, consolidation or otherwise, which improvements upon consummation of such transaction become a portion of the Combined Group Property; provided, however, that no such indebtedness secured by such Lien may be assumed during any period that an Event of Default exists under the Master Indenture;

(q) Liens or encumbrances upon property or revenues of a Person in existence as of the date such Person becomes a Member of the Combined Group; provided, however, that such Liens or encumbrances may not be extended to secure any other obligations of such Person; and

(r) Liens or encumbrances securing any repayment or reimbursement obligations or indebtedness of any Member of the Combined Group arising pursuant to or in connection with any Credit Facility or Credit Agreement established or executed and delivered to provide credit or liquidity support for any Related Bonds or any Obligation.

Rate Covenant

(a) Each Obligated Group Member covenants that it will, and, to the extent permitted by law, cause each of its Designated Members to, establish, charge and collect rates, fees and charges for goods and services furnished by, and for the use of, its properties which will produce, together with the rates, fees and charges established, charged and collected by the other Combined Group Members, in each Fiscal Year of DUHS, a Coverage Ratio equal to 1.20. In calculating the Coverage Ratio, for any Member of the Combined Group that has a Fiscal Year that ends on a date other than the date on which the Fiscal Year of DUHS ends (“DUHS’s Fiscal Year End”), Income Available for Debt Service and Annual Debt Service Requirement will be determined (A) in the case where such Member’s Fiscal Year ends within three months (before or after) of DUHS’s Fiscal Year End, based on such Member’s Financial Statements, with necessary adjustments to delete intercompany transactions between Members of the Combined Group that are reflected on the financial statements of one Member but not on the financial statements of the other due to the difference in Fiscal Years and (B) in other cases, based on such Member’s unaudited financial statements for the twelve-month period ending on DUHS’s Fiscal Year End, adjusted to reflect any year-end or audit adjustments that are material to any portion of such twelve-month period which is part of the most recent Fiscal Year of such Member for which audited financial statements are available.

(b) If the Coverage Ratio is less than 1.20, the Obligated Group covenants that it will immediately retain a Management Consultant to make recommendations to increase the Coverage Ratio in the following Fiscal Year of DUHS to the level required or, if in the opinion of such Management Consultant the attainment of such level is impracticable, to the highest level attainable. Each Member of the Obligated Group covenants that it will cause its Designated Members to follow the recommendations of the Management Consultant to the extent permitted by law. So long as a Management Consultant is retained and the Members of the Obligated Group follow and cause the Designated Members to follow, the recommendations of the Management Consultant to the extent permitted by law on a timely basis, the Master Indenture will be deemed to have been complied with even if the Coverage Ratio is less than 1.20, unless the Coverage Ratio is less than 1.00 for two consecutive Fiscal Years of DUHS, including the initial year of insufficient coverage.

(c) If a report of a Management Consultant is delivered to the Master Trustee, which report states that governmental restrictions have been imposed that make it impossible for the Coverage Ratio described in paragraph (a) above to be met, then such Coverage Ratio will be reduced to the maximum coverage permitted by such governmental restrictions.

C-18

(d) To the extent permitted by law, each Member of the Obligated Group covenants that it will, and will cause each of its Designated Members to, (1) require the prompt payment of accounts for service rendered by or through its facilities, (2) promptly take whatever action is legally permissible to enforce and collect delinquent charges and to promptly pay all of their obligations (whether or not evidenced by Obligations) and (3) from time to time as often as necessary, revise the rates, fees and charges aforesaid in such manner as may be necessary or proper to produce revenues sufficient to cover the obligations described under this caption and otherwise under the provisions of the Master Indenture.

Financial Statements and Other Information

Each Obligated Group Member covenants that it will keep, and will cause its Designated Members to keep, proper books of record and account, in which full and correct entries will be made of all dealings or transactions of or in relation to the properties, business and affairs of such Obligated Group Member and such Designated Members in accordance with GAAP. DUHS covenants that it will furnish or cause to be furnished to the Master Trustee, as soon as practicable after they are available but in no event more than 180 days after the last day of each Fiscal Year of DUHS, the Audited Financial Statements for such Fiscal Year and, from time to time, such other Financial Statements as are required to perform any calculation under the Master Indenture. Each obligated Group Member covenants that it will cooperate with, and will cause each of its Designated Members to cooperate with, DUHS with respect to the requirements described under this caption.

Each Obligated Group Member covenants that it will at any and all times, upon the written request of the Master Trustee and at the expense of such Obligated Group Member, permit the Master Trustee by its representatives to inspect the properties, books of account, records, reports and other papers of such Obligated Group Member and, to the extent necessary to determine compliance with any of the terms and provisions of the Master Indenture, its Designated Members, except, in any case, donor records, patient records, personnel records, and any other confidential records or documents subject to attorney- client privilege, and to take copies and extracts therefrom, and will afford and procure a reasonable opportunity to make any such inspection, and such Obligated Group Member will furnish to the Master Trustee any and all information as the Master Trustee may reasonably request, with respect to the performance by such Obligated Group Member of its covenants in the Master Indenture.

Statement as to Compliance

The Obligated Group Members covenant that they will deliver to the Master Trustee, within 180 days after the end of each Fiscal Year of DUHS,

(a) an Officer’s Certificate of the Obligated Group Representative stating, as to the signer thereof, that (1) a review of the activities of the Obligated Group Members and Designated Members during such Fiscal Year and of performance under the Master Indenture has been made under his supervision, and (2) to the best of his knowledge, based on such review, the Obligated Group Members and the Designated Members have fulfilled all their obligations under the Master Indenture throughout such Fiscal Year, or, if there has been a default in the fulfillment of any such obligation, specifying each such default known to him and the nature and status thereof, including what action is being taken to cure such non-compliance; and

(b) an Accountant’s Report with respect to the ratio determined as described above under the caption entitled “Rate Covenant” for such Fiscal Year and stating whether, to the best knowledge of the signer of such report, the Combined Group is in non-compliance with any covenant contained in the Master Indenture applicable to it, and, if so, specifying each such incident of non-compliance of which the signer of such report may have knowledge.

C-19

Restrictions on Transactions

So long as any Commission Bonds are outstanding, the Obligated Group Members covenant that they will not undertake, and will not permit any Designated Member to undertake, any Transaction unless (1) (a) the Coverage Ratio for the most recent Fiscal Year of DUHS for which Financial Statements are available was not less than 2.00 for such period; or (b) the Obligated Group Members have delivered to the Commission and the LGC an Officer’s Certificate to the effect that after such Transaction, all Commission Bonds then outstanding would continue to be rated Investment Grade by each Rating Service then maintaining a rating on such Bonds; or (c) the LGC and the Commission have approved the Transaction in writing and (2) after giving effect to such Transaction, no Lien will exist on any Combined Group Property that is not expressly permitted by the provisions of the Master Indenture described above under the caption entitled “Liens.”

Waiver of Certain Covenants

Any Obligated Group Member may omit in any particular instance to comply with any covenant or condition of the Master Indenture described under this caption entitled “General Covenants and Provisions” (other than those described above under the captions “Payment of Obligations” and “Maintenance of Legal Existence”) if before or after the time for such compliance the Holders of a majority in aggregate principal amount of all Obligations Outstanding either waive such compliance in such instance or generally waive compliance with such covenant or condition, but no such waiver will extend to or affect such covenant or condition except to the extent so expressly waived and, until such waiver becomes effective, the obligations of such Obligated Group Member and the duties of the Master Trustee in respect of any such covenant or condition will remain in full force and effect; provided, however, that, if any Commission Bonds are outstanding, the prior written consent of the LGC and the Commission to such waiver will be required.

Termination or Amendment of the Lease

DUHS covenants that it will not consent to the termination of the Lease or the amendment of the term or default provisions thereof without the consent of the Holders, the Commission and the LGC. Notwithstanding the foregoing, DUHS may terminate the Lease in connection with the transfer by the University to DUHS of the University’s right, title and interest in and to all or substantially all of the property subject to the Lease.

CONSOLIDATION, MERGER, CONVEYANCE OR TRANSFER

No Obligated Group Member will consolidate with or merge into any corporation or convey or transfer its properties substantially as an entirety to any Person, unless:

(a) such consolidation, merger or transfer (i) is between Members of the Obligated Group and (ii) the surviving Person is an Obligated Group Member, or

(b) all of the following conditions exist:

(1) the Person formed by such consolidation or into which the Obligated Group Member merges or the Person which acquires substantially all of the properties of the Obligated Group Member as an entirety is a Person organized and existing under the laws of the United States of America or any state or the District of Columbia and expressly assumes, by an instrument executed and delivered to the Master Trustee, the due and punctual payment of the principal of, premium, if any, and interest on the Obligations and the performance and observance

C-20

of every covenant and condition of the Master Indenture on the part of the Obligated Group Member to be performed or observed;

(2) immediately after giving effect to such transaction, no Event of Default under the Master Indenture will have occurred and be continuing;

(3) the Obligated Group Representative has delivered to the Master Trustee an Officer’s Certificate and an Opinion of Counsel, each of which states that such consolidation, merger, conveyance or transfer and such instrument comply with the Master Indenture, and that all conditions precedent provided for in the Master Indenture relating to such transaction have been complied with; and

(4) the Master Trustee receives an Opinion of Bond Counsel to the effect that, if all amounts due or to become due on any Related Bonds that bear interest that is not includable in gross income for federal income tax purposes have not been fully paid to the owners thereof, under then existing law the consummation of such merger, consolidation, transfer or conveyance, would not cause the interest payable on such Related Bonds to become includable in gross income for federal income tax purposes.

REPLACEMENT MASTER INDENTURE

Each Holder of an Obligation is required to surrender such Obligation to the Master Trustee upon presentation to the Holder of all of the following:

(a) an original replacement note or similar obligation (the “Substitute Obligation”) duly authenticated and issued under and pursuant to an existing or new indenture, bond resolution, bond order or other instrument pursuant to which indebtedness is incurred or issued (the “Replacement Master Indenture”) by which the party or parties purported to be obligated thereby (collectively, the “New Obligor”) have agreed to be bound; provided, however, that:

(1) the trustee serving as master trustee under such Replacement Master Indenture (the “New Trustee”) will be an independent corporate trustee (which may be the Master Trustee or a Related Bond Trustee) meeting the eligibility requirements of the Master Trustee as set forth in the Master Indenture; and

(2) so long as any Commission Bonds are outstanding, the Replacement Master Indenture will have been approved by the LGC and the Commission, unless the Replacement Master Indenture is an existing indenture, bond resolution, bond order or other instrument pursuant to which indebtedness is incurred to which the New Obligor is already a party and the issuance of bonds secured thereby has already been authorized or approved, as the case may be, by the Commission and the LGC, in which case the consent of the Commission and the LGC will not be required;

(b) an original executed counterpart or certified copy of the Replacement Master Indenture pursuant to which each party purported to be bound thereby has agreed (1) to become subject to compliance with all provisions of the Replacement Master Indenture and (2) unconditionally and irrevocably (subject to the right of such party to cease its status as a New Obligor pursuant to the terms and conditions of the Replacement Master Indenture) to jointly and severally make payments upon each note and obligation, including the Substitute Obligation, issued under the Replacement Master Indenture at the times and in the amounts provided in each such note or obligation;

C-21

(c) an Opinion of Counsel addressed to the Holder and the Obligated Group Members to the effect that: (1) the Replacement Master Indenture has been duly authorized, executed and delivered or has been duly adopted by each party purported to be bound thereby, the Substitute Obligation has been duly authorized, executed and delivered by the New Obligor, and the Replacement Master Indenture and the Substitute Obligation are each a legal, valid and binding obligation of the New Obligor, enforceable in accordance with their terms, subject in each case to customary exceptions for bankruptcy, insolvency, fraudulent conveyance and other laws affecting enforcement of creditors’ rights generally and application of general principles of equity; (2) all requirements and conditions to the issuance of the Substitute Obligation set forth in the Replacement Master Indenture have been complied with and satisfied; and (3) the registration of the Substitute Obligation under the Securities Act of 1933, as amended, and qualification of the Replacement Master Indenture under the Trust Indenture Act of 1939, as amended, is not required, or, if such registration or qualification is required, that all applicable registration and qualification provisions of said Acts have been complied with;

(d) an Opinion of Bond Counsel to the effect that the surrender of the Obligation and the acceptance by the Holder of the Substitute Obligation will not adversely affect the validity of any Related Bonds or any exemption for the purposes of federal or state income taxation to which interest on any Related Bonds would otherwise be entitled;

(e) evidence that (i) written notice of such substitution, together with a copy of the Replacement Master Indenture, has been given by the New Obligor to each Rating Service then rating the Obligations, if any, or Related Bonds and (ii) the then current rating on such Obligations or Related Bonds will not be withdrawn or reduced below the then current rating category (without regard to any gradations by numerical qualifier or otherwise within such rating category) by any such Rating Service as a result of such substitution; and

(f) such forecasts and other opinions and certificates as the Commission or the LGC may require and such other opinions and certificates as the Holder of an Obligation evidencing and securing Indebtedness other than Related Bonds or the Related Bond Trustee, as the case may be, or the bond insurer or credit facility provider, if any, may reasonably require, together with such reasonable indemnities as the Holder of an Obligation evidencing and securing Indebtedness other than Related Bonds or the Related Bond Trustee, as the case may be, the Commission, the LGC or the bond insurer or credit facility provider, if any, may request.

Notwithstanding such provisions of the Master Indenture, no Substitute Obligation may extend the Stated Maturity of or time for paying interest on any Obligation surrendered to the Master Trustee or reduce the principal amount of or the redemption premium or rate of interest payable on such Obligation without the consent of each Holder of such Obligation evidencing and securing Indebtedness other than Related Bonds or the registered owners of all Related Bonds then outstanding that are secured by such Obligation, as the case may be.

ADMISSION OF OBLIGATED GROUP MEMBERS

A Person may become an Obligated Group Member only if:

(a) the Person proposing to become an Obligated Group Member executes and delivers to the Master Trustee an instrument which evidences the agreement of such Person while such Person is an Obligated Group Member (i) jointly and severally to assume or guarantee, on the terms provided in the Master Indenture as described above under the caption “General Covenants and Provisions--Payment of Obligations,” the obligation to pay all Obligations then Outstanding and thereafter incurred and (ii) to observe and perform the obligations of each Obligated Group Member set forth in the Master Indenture;

C-22

(b) each Member of the Obligated Group has consented to the inclusion of such Person as an Obligated Group Member as evidenced by a Consent;

(c) the Obligated Group Representative has delivered to the Master Trustee an Officer’s Certificate which states that (i) such admission and such instrument comply with the Master Indenture and that all conditions precedent provided in the Master Indenture relating to such transaction have been complied with and (ii) immediately after giving effect to such admission, no Event of Default under the Master Indenture will have occurred and be continuing;

(d) the Obligated Group Representative has delivered to the Master Trustee an Opinion of Counsel which states that such admission and such instrument comply with the Master Indenture, that such instrument constitutes a legal, valid and binding obligation of such Person enforceable in accordance with its respective terms subject to customary exceptions, and that all conditions precedent provided in the Master Indenture relating to such admission have been complied with; and

(e) the Obligated Group Representative has delivered to the Master Trustee an Opinion of Bond Counsel to the effect that, if all amounts due or to become due on any Related Bonds that bear interest that is not includable in gross income for federal income tax purposes have not been fully paid to the owners thereof, under then existing law such admission would not cause the interest payable on such Related Bonds to become includable in gross income for federal income tax purposes.

OBLIGATED GROUP MEMBERS

Upon any Person becoming an Obligated Group Member as provided in the Master Indenture:

(a) the Master Trustee may pursue any remedies consequent upon a default against any Obligated Group Member, or all of them, without notice to, demand upon or joinder of (and without in any way releasing) any of the others, or against any one or more or all of them at the same time or at different times;

(b) any right of contribution or right acquired by subrogation by any Obligated Group Member against any other Obligated Group Member arising out of the payment of Indebtedness is subordinated in time and right to the rights of the Master Trustee and the Holders of Obligations; and

(c) each Obligated Group Member will be deemed to have irrevocably designated the Obligated Group Representative as its attorney in fact with full power of substitution to perform, satisfy and discharge every obligation, covenant, duty or liability to be performed on the part of the Obligated Group Member under the Master Indenture, to exercise any right, privilege or power under the Master Indenture or in respect of any Obligation, and to execute and deliver in the name and on behalf of such Obligated Group Member any instrument required or permitted to be executed by such Obligated Group Member under the Master Indenture.

WITHDRAWAL OF OBLIGATED GROUP MEMBERS

Any Obligated Group Member may, upon 30 days’ prior written notice to the Master Trustee, withdraw as an Obligated Group Member, and the Master Trustee, upon Request of such Obligated Group Member and at such withdrawing Obligated Group Member’s expense, will execute and deliver an appropriate instrument releasing such Obligated Group Member from any liability or obligation under the provisions of the Master Indenture provided that:

C-23

(a) the withdrawing Obligated Group Member has requested such release by Board Resolution;

(b) either the withdrawing Obligated Group Member does not have any Obligations Outstanding, or each remaining Obligated Group Member confirms the obligation of such remaining Obligated Group Member to repay any Obligations of such withdrawing Obligated Group Member Outstanding after such withdrawal;

(c) the Obligated Group Representative has delivered to the Master Trustee an Officer’s Certificate which states that (i) each remaining Obligated Group Member has by Board Resolution consented to such withdrawal, (ii) all conditions precedent provided in the Master Indenture relating to such withdrawal have been complied with and (iii) immediately after giving effect to such withdrawal, no Event of Default under the Master Indenture will have occurred and be continuing;

(d) the Obligated Group Representative has delivered to the Master Trustee an Opinion of Counsel which states that all conditions precedent provided in the Master Indenture relating to such withdrawal have been complied with; and

(e) the Obligated Group Representative has delivered to the Master Trustee an Opinion of Bond Counsel to the effect that, if all amounts due or to become due on any Related Bonds that bear interest that is not includable in gross income for federal income tax purposes have not been fully paid to the owners thereof, under then existing law such withdrawal would not cause the interest payable on such Related Bonds to become includable in gross income for federal income tax purposes.

In addition, the conditions precedent described under the caption “General Covenants and Provisions--Restrictions on Transactions” above relating to the withdrawal of any Member of the Obligated Group from the Combined Group will be complied with to the satisfaction of the Master Trustee.

Any Person that has withdrawn from the Obligated Group may again become a Member of the Obligated Group or a Designated Member in accordance with the provisions of the Master Indenture.

DESIGNATION, CONTROL AND DIRECTION OF DESIGNATED MEMBERS

(a) Any Obligated Group Member may designate a Person as a Designated Member by delivering to the Master Trustee an Officer’s Certificate making such designation and evidencing compliance with the requirements of the Master Indenture described under this caption.

(b) Each Obligated Group Member at all times will ensure that each of its Designated Members is either subject to Required Control (as defined in paragraph (c) below) by such Obligated Group Member or has executed an Obligating Contract (as defined in paragraph (d) below), in each case obligating such Designated Member to comply with the terms and conditions of the Master Indenture applicable to Designated Members.

(c) “Required Control” means the power, directly or indirectly, to direct the management, policies, disposition of assets and actions of such Designated Member which, in the Opinion of Counsel (a copy of which is required to be delivered to the Master Trustee), is sufficient to cause such Designated Member to comply with the terms and conditions of the Master Indenture applicable to it, whether through the ownership of a majority of voting securities or partnership interests or by contract, membership, reserved powers, or the power to appoint members, trustees or directors or otherwise. The

C-24

power to appoint and remove without cause the directors of a non-stock corporation is deemed to be Required Control.

(d) An “Obligating Contract” means a contract that, in the Opinion of Counsel to an Obligated Group Member, requires compliance by its Designated Member with the terms and conditions of the Master Indenture as described in paragraph (b) above. A copy of each Obligating Contract and related Opinion of Counsel is required to be delivered to the Master Trustee.

(e) Upon the occurrence of an Event of Default under the Master Indenture, the Obligated Group Members will follow all directions of and take all actions requested by the Master Trustee, including the giving of directions and the enforcement of contracts, to ensure that all Designated Members make all required payments and take all required action as contemplated by the Master Indenture.

RELEASE OF A DESIGNATED MEMBER

Any Person will be released from its obligations and status as a Designated Member, upon Request of the Obligated Group Member that designated such Person as a Designated Member that such Person no longer be a Designated Member, if the Master Trustee receives an Officer’s Certificate of the Obligated Group Member requesting such release, dated within 10 days of the date of such Request, stating that were such Person released as a Designated Member on the date of such Officer’s Certificate, no Event of Default under the Master Indenture would arise out of such release.

DEFAULTS AND REMEDIES

Events of Default

An Event of Default under the Master Indenture is any of the following events: (a) default in the payment of any interest on any Obligation when such interest becomes due and payable; (b) default in the payment of the principal of or premium, if any, on any Obligation when the same becomes due and payable (whether at maturity, by proceedings for redemption, by acceleration or otherwise); (c) default in the performance, or breach, of any covenant or agreement of any Obligated Group Member contained in the Master Indenture (other than a covenant or agreement a default in the performance or breach of which is specifically described in another clause of this paragraph), and continuance of such default or breach for a period of 60 days after there has been given to the Obligated Group Members by the Master Trustee or to the Obligated Group Members and the Master Trustee by the Holders of not less than 25% in aggregate principal amount of the Obligations Outstanding, a written notice specifying such default or breach and requiring it to be remedied; provided, however, that if such default cannot be fully remedied within such 60-day period, but can reasonably be expected to be fully remedied, such default will not constitute an event of default if the Obligated Group Members immediately upon receipt of such notice commence the curing of such default and thereafter prosecute and complete the same with due diligence and dispatch; (d) an event of default occurs under any Supplemental Master Indenture or a Related Bond Indenture or upon a Related Bond, and any applicable cure period has expired and notice of acceleration of the Related Bonds has been given to any Obligated Group Member and the Master Trustee by the Related Bond Trustee; (e) the entry of a decree or order by a court having jurisdiction in the premises for relief in respect of any Obligated Group Member, or adjudging any Obligated Group Member a bankrupt or insolvent, or approving as properly filed a petition seeking reorganization, adjustment or composition of or in respect of any Obligated Group Member, under the United States Bankruptcy Code or any other applicable federal or state law, or appointing a custodian, receiver, liquidator, assignee, trustee or sequestrator (or other similar official) of or for any Obligated Group Member or any substantial part of its property, or ordering the winding up or liquidation of its affairs, and the continuance of any such decree

C-25

or order unstayed and in effect for a period of 60 consecutive days; and (f) the commencement by any Obligated Group Member of a voluntary case, or the institution by it of proceedings to be adjudicated a bankrupt or insolvent, or the consent by it to the institution of bankruptcy or insolvency proceedings against it, or the filing by it of a petition or answer or consent seeking reorganization, arrangement or relief under the United States Bankruptcy Code or any other applicable federal or state law, or the consent or acquiescence by it to the filing of any such petition or the appointment of or taking possession by a custodian, receiver, liquidator, assignee, trustee, sequestrator (or other similar official) of any Obligated Group Member or any substantial part of its property, or the making by it of an assignment for the benefit of creditors, or the admission by it in writing of its inability or its failure to pay its debts generally as they become due, or the taking of corporate action by any Obligated Group Member in furtherance of any such action.

Acceleration of Maturity; Rescission and Annulment

If an Event of Default occurs and is continuing, then and in every such case the Master Trustee may, and if requested by the Holders of not less than 25% in aggregate principal amount of the Obligations Outstanding will, by written notice to the Obligated Group Representative, declare the principal of all the Obligations and the interest accrued thereon to be due and payable immediately, whereupon such principal and interest will become immediately due and payable.

At any time after such a declaration of acceleration has been made, but before any judgment or decree for payment of money due on any Obligations has been obtained by the Master Trustee, the Holders of not less than 25% in aggregate principal amount of the Obligations Outstanding may, by written notice to the Obligated Group Representative and the Master Trustee, rescind and annul such declaration and its consequences if (a) the Obligated Group has deposited with the Master Trustee a sum sufficient to pay: (1) all overdue installments of interest on all Obligations; (2) the principal of and premium, if any, on any Obligations that have become due otherwise than by such declaration of acceleration and interest thereon at the rate or rates prescribed therefor in such Obligations; (3) interest upon overdue installments of interest at the rate or rates prescribed therefor in the Obligations; and (4) all sums paid or advanced by the Master Trustee under the Master Indenture and the reasonable compensation, expenses, disbursements and advances of the Master Trustee, its agents and counsel; and (b) all Events of Default, other than the non-payment of the principal of Obligations which have become due solely by such declaration of acceleration, have been cured or have been waived as provided in the provisions of the Master Indenture described below under the caption entitled “Waiver of Past Defaults.”

No such rescission and annulment will affect any subsequent default or impair any right consequent thereon.

Exercise of Remedies by the Master Trustee

Upon the occurrence and continuance of any Event of Default under the Master Indenture, unless the same is waived as provided in the Master Indenture, the Master Trustee will have the following rights and remedies, in addition to any other rights and remedies provided under the Master Indenture or by law:

(a) The Master Trustee may pursue any available remedy at law or in equity by suit, action, mandamus or other proceeding to enforce the payment of the principal of, premium, if any, and interest on the Obligations Outstanding, including interest on overdue principal (and premium, if any) and on overdue installments of interest, and any other sums due under the Master Indenture, to realize on or to foreclose any of its interests or liens under the Master Indenture, to enforce and compel the performance of the duties and obligations of the Combined Group as set forth in the Master Indenture and to enforce or

C-26

preserve any other rights or interests of the Master Trustee under the Master Indenture or otherwise existing at law or in equity.

(b) If requested in writing to do so by the Holders of not less than 25% in aggregate principal amount of Obligations Outstanding and if indemnified as provided in the Master Indenture, the Master Trustee is obligated to exercise such one or more of the rights and remedies conferred by the Master Indenture as the Master Trustee deems most expedient in the interests of the Holders of the Obligations.

(c) All rights of action under the Master Indenture or any of the Obligations may be enforced and prosecuted by the Master Trustee without the possession of any of the Obligations or the production thereof in any suit or other proceeding related thereto. Any such suit or proceeding will be brought in the Master Trustee’s own name as trustee of an express trust. Any recovery of judgment will, after provision for the payment of the reasonable compensation, expenses, disbursements and advances of the Master Trustee, its agents and counsel, and, subject to the provisions of the Master Indenture described below under the caption entitled “Application of Moneys Collected”, be for the equal and ratable benefit of the Holders of the Obligations in respect of which such judgment has been recovered.

(d) If the Master Trustee or any Holder has instituted any proceeding to enforce any right or remedy under the Master Indenture by suit, foreclosure, the appointment of a receiver, or otherwise, and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Master Trustee or to such Holders, then and in every case the Obligated Group, the Master Trustee and the Holders will, subject to any determination in such proceedings, be restored to their former positions and rights under the Master Indenture, and thereafter all rights and remedies of the Master Trustee and the Holders will continue as though no such proceeding had been instituted.

Application of Moneys Collected

Any moneys collected by the Master Trustee pursuant to the provisions of the Master Indenture described above under the caption entitled “Defaults and Remedies” (after the deductions for payment of costs and expenses of proceedings resulting in the collection of such moneys and any other fees and expenses due to the Master Trustee), together with any other sums then held by the Master Trustee, will be applied in the following order, at the date or dates fixed by the Master Trustee and, in case of the distribution of such money on account of principal (or premium, if any) or interest, upon presentation of the Obligations and the notation thereon of the payment if only partially paid and upon surrender thereof if fully paid:

(a) if the principal of all Obligations have not become or have not been declared due and payable, all such money will be applied as follows:

FIRST: to the payment to the Persons entitled thereto of all installments of interest on Obligations then due and payable in the order in which such installments became due and payable and, if the amount available is not sufficient to pay in full any particular installment, then to the payment ratably according to the amounts due on such installment, to the Persons entitled thereto, without any discrimination or preference except as to any difference in the respective rates of interest specified in such Obligations;

SECOND: to the payment to the Persons entitled thereto of the unpaid principal of any Obligations that have become due and payable in the order in which such installments became due and payable (other than Obligations deemed

C-27

to have been paid pursuant to the provisions of the Master Indenture described below under the caption “Satisfaction and Discharge”), and, if the amount available is not sufficient to pay in full the principal of Obligations due and payable on any particular date, then to the payment ratably according to the amount of such principal due on such date, to the Persons entitled thereto without any discrimination or preference;

THIRD: to the payment of the interest on and the principal of Obligations, to the purchase and retirement of Obligations and to the redemption of Obligations, all in accordance with the provisions of the Master Indenture; and

FOURTH: to the payment of the remainder, if any, to the Obligated Group or to the Persons lawfully entitled thereto or as a court of competent jurisdiction may direct.

(b) If the principal of all Obligations has become or has been declared due and payable, all such money will be applied to the payment of principal and interest then due upon the Obligations, without preference or priority of principal over interest or of interest over principal, or of any installment of interest over any other installment of interest, or of any Obligation over any other Obligation, ratably, according to the amounts due respectively for principal and interest, to the Persons entitled thereto without any discrimination or privilege.

(c) If the principal of all Obligations has been declared due and payable and if such declaration thereafter is rescinded and annulled under the provisions of the Master Indenture, then, subject to the provisions described in paragraph (b) above in the event that the principal of all Obligations later becomes due and payable or is declared due and payable, the money then remaining in and thereafter accruing will be applied in accordance with the provisions of paragraph (a) above.

Moneys to be applied by the Master Trustee during a continuance of an Event of Default will be applied by it at such times, and from time to time, as the Master Trustee will determine, having due regard for the amount of such moneys available for application and the likelihood of additional moneys becoming available for such application in the future. Whenever the Master Trustee applies such moneys, it will fix the date (which will be an interest payment date unless the Master Trustee deems another date more suitable) upon which such application is to be made and upon such date interest on the amounts of principal to be paid on such date will cease to accrue. The Master Trustee will give such notice as it may deem appropriate of the deposit with it of any such moneys and of the fixing of any such date, and is not required to make payment to the Holder of any unpaid Obligation until such Obligation is presented to the Master Trustee for appropriate endorsement or for cancellation if fully paid.

Limitation on Suits by Holders

No Holder of any Obligation will have any right to institute any proceeding, judicial or otherwise, under or with respect to the Master Indenture, or for the appointment of a receiver or trustee or for any other remedy thereunder, unless:

(a) such Holder has previously given written notice to the Master Trustee of a continuing Event of Default;

C-28

(b) the Holders of not less than 25% in aggregate principal amount of the Obligations Outstanding have made written request to the Master Trustee to institute proceedings in respect of such Event of Default in its own name as Master Trustee;

(c) such Holder or Holders have offered to the Master Trustee indemnity as provided in the Master Indenture against the costs, expenses and liabilities incurred in compliance with such request;

(d) the Master Trustee for 60 days after its receipt of such notice, request and offer of indemnity has failed to institute any such proceeding; and

(e) no direction inconsistent with such written request has been given to the Master Trustee during such 60-day period by the Holders of a majority in aggregate principal amount of the Outstanding Obligations; it being understood and intended that no one or more Holders will have any right in any manner whatever by virtue of, or by availing of, any provision of the Master Indenture to affect, disturb or prejudice the lien of the Master Indenture, if any, or the rights of any other Holders, or to obtain or to seek to obtain priority or preference over any other Holders or to enforce any right under the Master Indenture, except in the manner provided therein and for the equal and ratable benefit of all the Holders of Outstanding Obligations.

Notwithstanding the foregoing or any other provision in the Master Indenture, any Holder will have the right, which is absolute and unconditional, to receive payment of the principal of, premium, if any, and interest on such Obligation on the respective Stated Maturities expressed in such Obligation (or, in the case of redemption, on the redemption date) and nothing contained in the Master Indenture will affect or impair the right of any Holder to institute suit for the enforcement of any such payment.

Control of Proceedings by Holders

The Holders of not less than a majority in aggregate principal amount of the Obligations Outstanding will have the right:

(a) to require the Master Trustee to proceed to enforce the Master Indenture, either by judicial proceedings for the enforcement of the payment of the Obligations and the foreclosure of the Master Indenture, or otherwise; and

(b) to direct the time, method and place of conducting any proceeding for any remedy available to the Master Trustee, or exercising any trust or power conferred upon the Master Trustee, provided that (1) such direction is not in conflict with any rule of law or the Master Indenture, (2) the Master Trustee may take any other action deemed proper by the Master Trustee which is not inconsistent with such direction, and (3) the Master Trustee does not determine that the action so directed would be unjustly prejudicial to the Holders not taking part in such direction.

Waiver of Past Defaults

Before any judgment or decree for payment of money due has been obtained by the Master Trustee, the Holders of not less than a majority in aggregate principal amount of the Obligations Outstanding may, by written notice delivered to the Master Trustee and the Obligated Group Representative, on behalf of the Holders of all of the Obligations, waive any past default under the Master Indenture and its consequences, except a default:

C-29

(a) in the payment of the principal of, or premium, if any, or interest on any Obligation, or

(b) in respect of a covenant or provision of the Master Indenture which under the Master Indenture cannot be modified or amended without the consent of the Holder of each Outstanding Obligation affected.

Upon any such waiver, such default will cease to exist, and any Event of Default arising therefrom will be deemed to have been cured, for every purpose of the Master Indenture; but no such waiver will extend to or affect any subsequent or other default or impair any right or remedy consequent thereon.

MASTER TRUSTEE

Acceptance of Trusts; Certain Duties and Responsibilities

The Master Trustee accepts and agrees to execute the trusts imposed upon it by the Master Indenture, but only upon the terms and conditions set forth in the Master Indenture. If any Event of Default has occurred and is continuing, the Master Trustee will exercise such of the rights and powers vested in it by the Master Indenture, and use the same degree of care and skill in their exercise as a prudent person would exercise or use under the circumstances in the conduct of his own affairs.

Resignation and Removal of the Master Trustee

The Master Trustee may resign on its own motion or may be removed at any time (i) by an instrument or concurrent instruments in writing signed by the Holders of not less than a majority in aggregate principal amount of the Outstanding Obligations, delivered to the Master Trustee and to the Obligated Group Representative or (ii) by an instrument in writing signed by the Obligated Group Representative and delivered to the Master Trustee so long as no Event of Default has occurred and is continuing under the Master Indenture, or no event has occurred or is continuing that, after notice or passage of time or both, would become an Event of Default. The foregoing notwithstanding, the Master Trustee may not be removed by the Obligated Group Representative unless written notice of the delivery of such instrument is given by the Obligated Group Representative pursuant to the Master Indenture, which notice indicates the Master Trustee will be removed and replaced by the successor trustee named in such notice. Such removal and replacement will become effective not less than 60 days from the date of such notice, unless (i) the Holders of not less than 25% in aggregate principal amount of such Obligations Outstanding object in writing to such removal and replacement or (ii) so long as any Commission Bonds are outstanding, the LGC and the Commission have not given written approval to such removal and appointment of successor trustee. In case of any such objection or lack of approval, the instrument delivered by the Obligated Group Representative to the Master Trustee will be null and void.

SUPPLEMENTAL MASTER INDENTURES

Supplemental Master Indentures Without Consent of Holders

Without the consent of the Holders, the Obligated Group Members and the Master Trustee may from time to time enter into one or more Supplemental Master Indentures for any of the following purposes:

(a) To correct or amplify the description of property, if any, at any time subject to the lien of the Master Indenture, or better to assure, convey and confirm unto the Master Trustee property, if any,

C-30

subject or required to be subjected to the lien of the Master Indenture, if any, or to subject any property to the lien of the Master Indenture.

(b) To add to the conditions, limitations and restrictions on the authorized amount, terms or purposes of issue, authentication and delivery of Obligations, as set forth in the Master Indenture, additional conditions, limitations and restrictions thereafter to be observed.

(d) To modify or eliminate any of the terms of the Master Indenture; provided, however, that:

(1) such Supplemental Master Indenture will expressly provide that any such modifications or eliminations will become effective only when there is no Obligation Outstanding created prior to the execution of such Supplemental Master Indenture; and

(2) the Master Trustee may, in its discretion, decline to enter into any such Supplemental Master Indenture that, in its opinion, may not afford adequate protection to the Master Trustee when the same becomes operative.

(e) To evidence the succession of another corporation to any Obligated Group Member and the assumption by any such successor of the covenants of any Obligated Group Member under the Master Indenture and in the Obligations contained.

(f) To add to the covenants of any Obligated Group Member or to the rights, powers and remedies of the Master Trustee for the benefit of the Holders of all Obligations or to surrender any right or power conferred by the Master Indenture upon any Obligated Group Member.

(g) To cure any ambiguity, to correct or supplement any provision of the Master Indenture which may be inconsistent with any other provision in the Master Indenture or to make any other provision, with respect to matters or questions arising under the Master Indenture which is not inconsistent with the provisions of the Master Indenture, provided such action does not affect materially and adversely the interests of the Holders.

(h) To modify, eliminate or add to the provisions of the Master Indenture to such extent as is necessary to effect the qualification of the Master Indenture under the Trust Indenture Act of 1939, as then amended, or under any similar federal statute enacted after the Master Indenture is executed, or to permit the qualification of any Obligations for sale under the securities laws of the United States or any state of the United States.

(i) To make any change that does not materially and adversely affect the Holders and, in the opinion of each Related Bond Trustee, does not materially adversely affect the owners of the Related Bonds, including, without limitation, any modification, amendment or supplement to the Master Indenture or any indenture supplemental thereto in such a manner as to establish or maintain the exclusion of interest on any Related Bonds under a Related Bond Indenture from gross income for federal income tax purposes under applicable provisions of the Code.

(j) To make any changes relating to the application of GAAP or the definition or determination of Income Available for Debt Service, Annual Debt Service Requirement or Long-Term Indebtedness that are necessary to address a change in GAAP that solely in and of itself would cause the Coverage Ratio to decline from a value at or above 2.00 to below 2.00 or from a value at or above 1.20 to below 1.20.

C-31

(k) To make any changes to the provisions of the Master Indenture described under the caption “General Covenants and Provisions--Liens” that are necessary to address a change in GAAP that solely in and of itself would cause any Member of the Obligated Group to be in default of any of the covenants set forth in such provisions.

(l) To amend the provisions of the Master Indenture described under the caption entitled “General Covenants and Provisions-Restrictions on Transactions.”

Notwithstanding the foregoing provisions of the Master Indenture, so long as any Commission Bonds are outstanding, (i) the provisions of the Master Indenture described under the captions entitled “General Covenants and Provisions--Rate Covenant”, “--Financial Statements and Other Information”, “ Statement as to Compliance”, “--Waiver of Certain Covenants”, “--Restrictions on Transactions” or “-- Termination or Amendment of the Lease” or described under the caption entitled “Replacement Master Indenture,” or (ii) the definition of any word or term used thereunder, may not be amended pursuant to the provisions of the Master Indenture described in paragraph (d) above without the consent of the LGC and the Commission. Furthermore, so long as any Commission Bonds are outstanding, no amendment pursuant to the provisions of the Master Indenture described in clause (j) or (k) above may be made without the consent of the LGC and the Commission, and each request for consent to such an amendment must be accompanied by an Officer’s Certificate of DUHS setting forth the reason for such amendment and identifying the relevant change in GAAP and setting forth in detail two calculations of the Coverage Ratio or the relevant Lien exclusion affected by the change in GAAP, as applicable, one prepared in accordance with the provisions of the Master Indenture then in effect and one prepared giving effect to the proposed amendment.

Supplemental Master Indentures with Consent of Holders

With the consent of (i) the LGC and the Commission so long as any Commission Bonds are outstanding and (ii) the Holders of not less than 51% in aggregate principal amount of the Obligations then Outstanding affected by such Supplemental Master Indenture, the Obligated Group Members and the Master Trustee may enter into an indenture or indentures supplemental to the Master Indenture for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of the Master Indenture or of modifying in any manner the rights of the Holders; provided, however, that no such Supplemental Master Indenture may:

(a) change the Stated Maturity of the principal of, or any installment of interest on, any Obligation, or reduce the principal amount thereof or the interest thereon or any premium payable upon the redemption thereof, or change any place of payment where, or the coin or currency in which, any Obligation, or the interest thereon is payable, or impair the right to institute suit for the enforcement of any such payment on or after the Stated Maturity thereof (or, in the case of redemption, on or after the redemption date) without the consent of the Holder of such Obligation; or

(b) reduce the percentage in principal amount of the Outstanding Obligations, the consent of whose Holders is required for any such Supplemental Master Indenture, or the consent of whose Holders is required for any waiver provided for in the Master Indenture of compliance with certain provisions of the Master Indenture or certain defaults thereunder and their consequences without the consent of the Holders of all Obligations Outstanding; or

(c) modify the obligation of the Obligated Group Members to make payment on or provide funds for the payment of any Obligation without the consent of the Holder of such Obligation; or

C-32

(d) modify any of the provisions of the Master Indenture described under this caption entitled “Supplemental Master Indentures with Consent of Holders,” except to increase any percentage provided thereby or to provide that certain other provisions of the Master Indenture cannot be modified or waived without the consent of the Holder of each Obligation affected thereby, without the consent of the Holders of all Obligations Outstanding; or

(e) permit the creation of any lien ranking prior to or on a parity with the lien of the Master Indenture, if any such lien is created after the date of the Master Indenture, with respect to any property subject thereto or terminate the lien of the Master Indenture on any property at any time subject thereto or deprive the Holder of any Obligation of the security afforded by the lien of the Master Indenture, without the consent of the Holders of all Obligations Outstanding; or

(f) so long as any Commission Bonds are outstanding, amend the provisions of the Master Indenture described under the captions entitled “General Covenants and Provisions--Rate Covenant”, “-- Financial Statements and Other Information”, “--Statement as to Compliance”, “--Waiver of Certain Covenants” or “--Restrictions on Transactions” or described under the caption entitled “Replacement Master Indenture”, or the definition of any word or term used thereunder, without the consent of the LGC and the Commission.

The Master Trustee may in its discretion determine whether or not any Obligations would be affected by any Supplemental Master Indenture and any such determination will be conclusive upon the Holders, whether theretofore or thereafter authenticated and delivered under the Master Indenture. The Master Trustee will not be liable for any such determination made in good faith.

It is not necessary for the percentage of Holders required under the provisions of the Master Indenture described under this caption to approve the particular form of any proposed Supplemental Master Indenture, but it is sufficient if such Holders approve the substance thereof.

SATISFACTION AND DISCHARGE

Payment, Discharge and Defeasance of Obligations

An Obligation (subject to the provisions of the Master Indenture described below under the caption entitled “Satisfaction of Related Bonds”) will be deemed to be paid and discharged and no longer Outstanding under the Master Indenture and will cease to be entitled to any lien, benefit or security under the Master Indenture if the Obligated Group has paid or provided for the payment of the entire indebtedness on such Obligation in any one or more of the following ways:

(a) by paying or causing to be paid the principal of (including premium, if any) and interest on such Obligation, as and when the same become due and payable;

(b) by delivering such Obligation to the Master Trustee for cancellation; or

(c) by depositing with the Master Trustee or other Paying Agent, in trust, moneys or Defeasance Obligations or combination of moneys and Defeasance Obligations in an amount, together with the income or increment to accrue thereon, without consideration of any reinvestment thereof, sufficient to pay or redeem (when redeemable) and discharge the indebtedness on such Obligation at or before its Maturity (including the payment of the principal of, premium, if any, and interest payable on such Obligation to the Maturity or redemption date thereof), provided that, if any such Obligation is to be redeemed prior to the Maturity thereof, notice of irrevocable call for redemption is given in accordance

C-33

with the requirements of the Master Indenture or provisions satisfactory to the Master Trustee are made for the giving of such notice.

The foregoing notwithstanding, the liability of the Obligated Group Members in respect of such Obligation will continue, but the Holders thereof will thereafter be entitled to payment only out of the moneys or Defeasance Obligations deposited with the Master Trustee as described above. Moneys so deposited with the Master Trustee pursuant to such provisions of the Master Indenture described under this caption will constitute a separate trust fund for the benefit of the Persons entitled thereto. Such moneys will be applied by the Master Trustee to the payment (either directly or through any Paying Agent, as the Master Trustee may determine) to the Persons entitled thereto, of the principal (and premium, if any) and interest for whose payment such moneys have been deposited with the Master Trustee.

Satisfaction and Discharge of Master Indenture

The Master Indenture and the lien, if any, rights and interests created thereby will cease, determine and become null and void (subject to the provisions of the Master Indenture described below under the caption entitled “Satisfaction of Related Bonds” and except as to any surviving rights of transfer or exchange of Obligations provided for in the Master Indenture) if the following conditions are met:

(a) The principal of, premium, if any, and interest on all Obligations is paid or is deemed to be paid and discharged by meeting the conditions of the Master Indenture described above under the caption entitled “Payment, Discharge and Defeasance of Obligations”; and

(b) The Obligated Group Members have paid or caused to be paid all other sums payable under the Master Indenture by the Obligated Group Members with respect to such Obligations.

Thereupon, upon written request of the Obligated Group, and upon receipt by the Master Trustee of an Officer’s Certificate and an Opinion of Counsel, each to the effect that all conditions precedent to the satisfaction and discharge of the Master Indenture have been complied with, the Master Trustee will execute a proper instrument acknowledging satisfaction and discharge of the Master Indenture and the lien thereof. The satisfaction and discharge of the Master Indenture will be without prejudice to the rights of the Master Trustee to charge and be reimbursed by the Obligated Group for any expenditures which it may thereafter incur in connection therewith.

Any moneys, funds, securities, or other property remaining on deposit under the Master Indenture (other than Defeasance Obligations or other moneys deposited in trust as described above) will, upon the full satisfaction of the Master Indenture, be transferred, paid over and distributed to the Obligated Group.

Satisfaction of Related Bonds

The provisions of the Master Indenture described above under the caption “Satisfaction and Discharge” notwithstanding, any Obligation which secures a Related Bond will not be deemed paid and will continue to be entitled to the lien, if any, benefit and security under the Master Indenture unless and until such Related Bond ceases to be entitled to any lien, benefit or security under the Related Bond Indenture pursuant to the provisions thereof.

C-34

SUMMARY OF THE TRUST AGREEMENT

ESTABLISHMENT OF FUNDS

The Trust Agreement creates the following funds:

(i) The Bond Fund,

(ii) The Redemption Fund, and

(iii) The Cost of Issuance Fund.

The Trust Agreement also creates two separate accounts in the Bond Fund, which accounts are designated the “Interest Account” and the “Principal Account.”

Money in each of these funds and accounts will be held in trust, and will be subject to a lien and charge in favor of the Holders of the 2017 Bonds until paid out or transferred as provided in the Trust Agreement.

COST OF ISSUANCE FUND

Payments from the Cost of Issuance Fund are to be made to pay Issuance Costs.

On or prior to December 1, 2017, any balance in the Cost of Issuance Fund shall be transferred by the Bond Trustee to the Interest Account to pay interest on the 2017 Bonds on December 1, 2017.

TRUSTEE’S APPLICATION OF MONEY RECEIVED

DUHS will pay to the Bond Trustee and the Bond Trustee will deposit all amounts received from DUHS in the following order, subject to credits provided in the Trust Agreement:

(i) into the Interest Account, no later than 12:30 P.M. on each Interest Payment Date, that amount which shall be equal to the interest payable on the 2017 Bonds on such Interest Payment Date;

(ii) into the Principal Account, no later than 12:30 P.M. on June 1, 20__, the amount required to be paid at maturity on such June 1; and

(iii) to the credit of the Interest Account or the Redemption Fund, as applicable, any amount that may from time to time be required to enable the Bond Trustee to pay the interest on and Redemption Price of 2017 Bonds as and when 2017 Bonds are called for redemption.

BOND FUND

Money on deposit in the Interest Account in the Bond Fund will be used to pay the interest on the 2017 Bonds when due.

Money held for the credit of the Principal Account in the Bond Fund will be applied to the retirement of Outstanding 2017 Bonds as follows on June 1, 20__. The Bond Trustee will set aside the amount necessary to pay the principal of all 2017 Bonds maturing on such date.

C-35

REDEMPTION FUND

Money held for the credit of the Redemption Fund will be applied to the purchase or redemption of 2017 Bonds as provided in the Trust Agreement.

INVESTMENTS

Money held by the Bond Trustee for the credit of all funds and accounts created under the Trust Agreement will be continuously invested and reinvested by the Bond Trustee in Investment Obligations to the extent practicable. Any such Investment Obligations will mature not later than the respective dates when the money held for the credit of such funds or accounts will be required for the purposes intended.

No Investment Obligations in any fund or account may mature beyond the latest maturity date of any 2017 Bonds Outstanding at the time such Investment Obligations are deposited.

Investment Obligations credited to any fund or account established under the Trust Agreement will be held by or under the control of the Bond Trustee and while so held will be deemed at all times to be part of such fund or account in which such money was originally held. Interest accruing on such Investment Obligations and any profit or loss resulting upon the disposition or maturity of the same will be credited to or charged against such fund or account. The Bond Trustee will sell at the most advantageous price obtainable with reasonable diligence or reduce to cash a sufficient amount of such Investment Obligations whenever it is necessary to provide moneys to make any payment or transfer of moneys from any such fund or account. The Bond Trustee will not be liable or responsible for any loss resulting from any such investment.

EVENTS OF DEFAULT

Each of the following events is an Event of Default under the Trust Agreement:

(a) payment of any installment of interest on any 2017 Bond shall not be made when the same shall become due and payable; or

(b) payment of the principal or the Redemption Price of any 2017 Bond shall not be made when the same shall become due and payable, whether at maturity or by proceedings for redemption or pursuant to a Sinking Fund Requirement or otherwise; or

(c) default in the due and punctual performance of any other of the covenants, conditions, agreements and provisions contained in the Trust Agreement or any agreement supplemental thereto and such default shall continue for 30 days (or such further time as may be granted in writing by the Bond Trustee) after receipt by DUHS of a written notice from the Bond Trustee specifying such default and requiring the same to be remedied, provided, however, that if such performance requires work to be done, action to be taken, or conditions to be remedied, which by their nature cannot be reasonably done, taken or remedied, as the case may be, within such 30-day period or other period, no Event of Default shall be deemed to have occurred or to exist if, and so long as, DUHS shall commence such performance within such period and shall diligently and continuously prosecute the same to completion; or

(d) the occurrence of an “Event of Default” as defined in the Master Indenture, and such “Event of Default” has not been remedied or waived.

C-36

REMEDIES OF BONDHOLDERS

Upon the happening and continuance of any Event of Default, the Bond Trustee may, and upon the written request of the Holders of not less than 25% in aggregate principal amount of the 2017 Bonds then Outstanding shall, proceed to protect and enforce its rights and the rights of the Holders.

Except as provided in the Trust Agreement, no Holder shall have any right to institute any suit, action or proceeding in equity or at law on any 2017 Bond or for any remedy under the Trust Agreement unless the Holders of not less than 25% in aggregate principal amount of 2017 Bonds then Outstanding previously shall have given to the Bond Trustee written notice of the Event of Default on account of which such suit, action or proceeding is to be instituted, and unless also the Holders shall have made a written request of the Bond Trustee after the right to exercise such powers or right of action as the case may be, shall have accrued, and shall have afforded the Bond Trustee a reasonable opportunity either to proceed to exercise its powers or to institute such action, suit or proceedings in its or their name, and unless, also, there shall have been offered to the Bond Trustee reasonable security and indemnity against the costs, expenses and liabilities to be incurred therein or thereby, and the Bond Trustee shall have refused or neglected to comply with such request within a reasonable time; provided, however, the Holders of not less than 25% of the 2017 Bonds then Outstanding may institute any suit, action or proceeding in their own names for the benefit of all Holders. Except as provided in the Trust Agreement, no Holder will have any right in any manner whatsoever to enforce any right thereunder, and any individual rights given to such Holders by law are restricted by the Trust Agreement to the rights and remedies therein granted.

NOTICE TO BONDHOLDERS

Except as described below, notice of any Event of Default when required by the Trust Agreement will be mailed to all Holders of record. The Bond Trustee shall not be subject to any liability to any Holder by reason of its failure to mail any such notice.

Except upon the happening of an Event of Default with respect to the failure to make any payment of the principal or Redemption Price of and interest on the 2017 Bonds when due, the Bond Trustee may withhold notice of any Event of Default to the Holder, if in its opinion such withholding is in the interest of the Holders.

PAYMENT OF BOND TRUSTEE’S FEES

If the Corporation fails to make required payments to the Bond Trustee for compensation and expenses, the Bond Trustee may make such payment from any money in its possession and will be entitled to a preference therefor over any 2017 Bonds Outstanding.

MODIFICATION OF THE TRUST AGREEMENT

DUHS and the Bond Trustee may from time to time execute supplemental trust agreements without the consent of or notice to any Holder, to effect one or more of the following: (a) cure any ambiguity or defect or omission or correct or supplement any provision in the Trust Agreement or any supplemental trust agreement thereto; (b) grant to or confer upon the Bond Trustee for the benefit of the Holders of the 2017 Bonds any additional rights, remedies, powers, authority or security that may lawfully be granted to or conferred upon the Holders or the Bond Trustee which are not contrary to or inconsistent with the Trust Agreement as then in effect or to subject to the pledge and lien of the Trust Agreement additional revenues, properties or collateral, including Defeasance Obligations; (c) add to the provisions of the Trust Agreement other conditions, limitations and restrictions thereafter to be observed

C-37

which are not contrary to or inconsistent with the Trust Agreement as then in effect; (d) add to the covenants and agreements of DUHS in the Trust Agreement other covenants and agreements thereafter to be observed by DUHS or to surrender any right or power reserved to or conferred upon DUHS which are not contrary to or inconsistent with the Trust Agreement as then in effect; (e) permit the qualification of the Trust Agreement under any federal statute or under any state securities law, and, in connection therewith, if DUHS so determines, to add to the Trust Agreement or any supplemental trust agreement such other terms, conditions and provisions as may be permitted or required by such federal statute or state securities law; (f) make any other change that is determined by the Bond Trustee, who may rely upon an Opinion of Counsel, to be not materially adverse to the interests of the Holders; (g) if all of the 2017 Bonds are Book Entry Bonds, amend, modify, alter or replace the Letter of Representations or other provisions relating to Book Entry Bonds; or (h) facilitate the issuance and delivery of certificated 2017 Bonds to Beneficial Owners if the book-entry system for the 2017 Bonds is discontinued.

The Trust Agreement may be amended in any particular form by the Holders of not less than a majority in aggregate principal amount of the 2017 Bonds Outstanding, provided that nothing contained in the Trust Agreement will permit, without the consent of the Holders of all 2017 Bonds affected thereby, (a) an extension of maturity of principal or interest, (b) a reduction in the principal amount of or the rate of interest on any 2017 Bond, (c) a preference or priority of any 2017 Bond over any other 2017 Bond, or (d) a reduction in the aggregate principal amount of 2017 Bonds required for consent to such supplemental trust agreement.

DEFEASANCE

When, among other things, the principal or Redemption Price of and interest due upon all of the 2017 Bonds is paid or sufficient money or Defeasance Obligations are held by the Bond Trustee for such purpose, then the right, title and interest of the Bond Trustee in the funds and accounts created by the Trust Agreement will cease and the Bond Trustee will release the Trust Agreement.

RECOURSE AGAINST DUHS LIMITED

The trustees, officers and employees of DUHS are not personally liable for any costs, losses, damages or liabilities caused or incurred by DUHS in connection with the Trust Agreement, or for the payment of any sum or for the performance of any obligation under the Trust Agreement.

REPLACEMENT MASTER INDENTURE

In the event that a Substitute Obligation under a Replacement Master Indenture is delivered to the Bond Trustee pursuant to the provisions the Master Indenture, references to the Master Indenture and Obligation No. 46 in the Trust Agreement will be deemed to be references to such Replacement Master Indenture and such Substitute Obligation, references to DUHS and the other Members of the Combined Group in the Trust Agreement will be deemed to be references to the obligated parties under the Replacement Master Indenture, as such are described therein, and references to the Master Trustee in the Trust Agreement will be deemed to be references to the trustee under the Replacement Master Indenture.

C-38

APPENDIX D

BOOK-ENTRY ONLY SYSTEM AND GLOBAL CLEARANCE PROCEDURES

[THIS PAGE INTENTIONALLY LEFT BLANK]

The information set out below is subject to any change in or reinterpretation of the rules, regulations and procedures of DTC, Euroclear Bank S.A./N.V. as operator of the Euroclear System (“Euroclear”) or Clearstream Banking, S.A. (“Clearstream”) (DTC, Euroclear and Clearstream together, the “Clearing Systems”) currently in effect. The information in this section concerning the Clearing Systems has been obtained from sources that we believe to be reliable, but none of us, the Bond Trustee or the underwriters take any responsibility for the accuracy, completeness or adequacy of the information in this section. Investors wishing to use the facilities of any of the Clearing Systems are advised to confirm the continued applicability of the rules, regulations and procedures of the relevant Clearing System. We will not have any responsibility or liability for any aspect of the records relating to, or payments made on account of, beneficial ownership interests in the 2017 Bonds held through the facilities of any Clearing System or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests.

Clearing Systems

DTC Book-Entry Only System. DTC, New York, New York, will act as securities depository for the 2017 Bonds. The 2017 Bonds will be issued as fully registered securities registered in the name of Cede & Co., DTC’s partnership nominee. One fully registered 2017 Bond certificate will be issued for each maturity of the 2017 Bonds, each in the aggregate principal amount of such maturity, and will be deposited with DTC.

DTC, the world’s largest securities depository, is a limited-purpose trust company organized under the New York Banking Law, a “banking organization” within the meaning of the New York Banking Law, a member of the Federal Reserve System, a “clearing corporation” within the meaning of the New York Uniform Commercial Code and a “clearing agency” registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934. DTC holds and provides asset servicing for over 3.6 million issues of U.S. and non-U.S. equity issues, corporate and municipal debt issues and money market instruments (from over 100 countries) that DTC’s participants (which we refer to as “Direct Participants”) deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities through electronic computerized book- entry transfers and pledges between Direct Participants’ accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, clearing corporations and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation (which we refer to as “DTCC”). DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non-U.S. securities brokers and dealers, banks, trust companies and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly (which we refer to as “Indirect Participants”). DTC has a Standard & Poor’s rating of “AA+.” The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at www.dtcc.com.

Purchases of 2017 Bonds under the DTC system must be made by or through Direct Participants, which will receive a credit for the 2017 Bonds on DTC’s records. The ownership interest of each actual owner of a 2017 Bond (which we refer to as a “beneficial owner”) is in turn to be recorded on the Direct and Indirect Participants’ records. Beneficial owners will not receive written confirmation from DTC of their purchase. Beneficial owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the beneficial owner entered into the transaction. Transfers of beneficial ownership interests in the 2017 Bonds are to be accomplished by entries made on the books of Direct and

D-1

Indirect Participants acting on behalf of beneficial owners. Beneficial owners will not receive certificates representing their ownership interests in the 2017 Bonds, except in the event that use of the book entry only system for the 2017 Bonds is discontinued.

To facilitate subsequent transfers, all 2017 Bonds deposited by Direct Participants with DTC are registered in the name of DTC’s partnership nominee, Cede & Co. or such other nominee as requested by an authorized representative of DTC. The deposit of 2017 Bonds with DTC and their registration in the name of Cede & Co. or such other nominee as requested by an authorized representative of DTC effect no change in beneficial ownership. DTC has no knowledge of the actual beneficial owners of the 2017 Bonds. DTC’s records reflect only the identity of the Direct Participants to whose accounts such 2017 Bonds are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers.

Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants and by Direct Participants and Indirect Participants to beneficial owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Beneficial owners of 2017 Bonds may wish to take certain steps to augment transmission to them of notices of significant events with respect to the 2017 Bonds, such as redemptions, defaults and proposed amendments to the security documents.

Redemption notices will be sent to DTC. If less than all of the 2017 Bonds are being redeemed, DTC’s practice is to determine by lot the amount of the interest of each Direct Participant to be redeemed.

Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to 2017 Bonds unless authorized by a Direct Participant in accordance with DTC’s procedures. Under its usual procedures, DTC mails an “Omnibus Proxy” to us as soon as possible after the record date. The “Omnibus Proxy” assigns Cede & Co.’s consenting or voting rights to those Direct Participants to whose accounts the 2017 Bonds are credited on the record date identified in a listing attached to the “Omnibus Proxy.”

Principal, premium and interest payments on the 2017 Bonds will be made to Cede & Co. or such other nominee as requested by an authorized representative of DTC. DTC’s practice is to credit Direct Participants’ accounts upon DTC’s receipt of funds and corresponding detail information from the Bond Trustee or us on each payable date in accordance with their respective holdings shown on DTC’s records. Payments by Direct and Indirect Participants to beneficial owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in “street name,” and will be the responsibility of such Direct and Indirect Participant and not of us, DTC, DUHS or the Bond Trustee, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of principal, premium and interest to Cede & Co. (or such other nominee as requested by an authorized representative of DTC) is the responsibility of the Bond Trustee. Disbursement of such payments to Direct Participants will be the responsibility of DTC and disbursement of such payments to the beneficial owners will be the responsibility of the Direct Participants and Indirect Participants.

DTC may discontinue providing its services as depository with respect to the 2017 Bonds at any time by giving reasonable notice to the Bond Trustee and us. Under such circumstances, in the event that a successor depository is not obtained, 2017 Bond certificates are required to be printed and delivered. We may decide to discontinue use of the system of book-entry-only transfers through DTC (or a successor securities depository). In that event, 2017 Bond certificates will be printed and delivered to DTC.

D-2

Euroclear and Clearstream. Euroclear and Clearstream have advised us as follows:

Euroclear and Clearstream each hold securities for their customers and facilitate the clearance and settlement of securities transactions by electronic book-entry transfer between their respective account holders. Euroclear and Clearstream provide various services including safekeeping, administration, clearance and settlement of internationally traded securities and securities lending and borrowing. Euroclear and Clearstream also deal with domestic securities markets in several countries through established depositary and custodial relationships. Euroclear and Clearstream have established an electronic bridge between their two systems across which their respective participants may settle trades with each other.

Euroclear and Clearstream customers are worldwide financial institutions, including underwriters, securities brokers and dealers, banks, trust companies and clearing corporations. Indirect access to Euroclear and Clearstream is available to other institutions that clear through or maintain a custodial relationship with an account holder of either system, either directly or indirectly.

Clearing and Settlement Procedures

General. The 2017 Bonds sold in offshore transactions will be initially issued to investors through the book-entry facilities of DTC, or Clearstream and Euroclear in Europe if the investors are participants in those systems, or indirectly through organizations that are participants in the systems. For any of such 2017 Bonds, the record holder will be DTC’s nominee. Clearstream and Euroclear will hold omnibus positions on behalf of their participants through customers’ securities accounts in Clearstream’s and Euroclear’s names on the books of their respective depositories.

The depositories, in turn, will hold positions in customers’ securities accounts in the depositories’ names on the books of DTC. Because of time zone differences, the securities account of a Clearstream or Euroclear participant as a result of a transaction with a participant, other than a depository holding on behalf of Clearstream or Euroclear, will be credited during the securities settlement processing day, which must be a business day for Clearstream or Euroclear, as the case may be, immediately following the DTC settlement date. These credits or any transactions in the securities settled during the processing will be reported to the relevant Euroclear participant or Clearstream participant on that business day. Cash received in Clearstream or Euroclear as a result of sales of securities by or through a Clearstream participant or Euroclear participant to a DTC Participant, other than the depository for Clearstream or Euroclear, will be received with value on the DTC settlement date but will be available in the relevant Clearstream or Euroclear cash account only as of the business day following settlement in DTC.

Transfers between participants will occur in accordance with DTC rules. Transfers between Clearstream participants or Euroclear participants will occur in accordance with their respective rules and operating procedures. Cross-market transfers between persons holding directly or indirectly through DTC, on the one hand, and directly or indirectly through Clearstream participants or Euroclear participants, on the other, will be effected in DTC in accordance with DTC rules on behalf of the relevant European international clearing system by the relevant depositories; however, cross-market transactions will require delivery of instructions to the relevant European international clearing system by the counterparty in the system in accordance with its rules and procedures and within its established deadlines in European time. The relevant European international clearing system will, if the transaction meets its settlement requirements, deliver instructions to its depository to take action to effect final settlement on its behalf by delivering or receiving securities in DTC, and making or receiving payment in accordance with normal procedures for same day funds settlement applicable to DTC. Clearstream participants or Euroclear participants may not deliver instructions directly to the depositories.

D-3

We will not impose any fees in respect of holding the 2017 Bonds; however, holders of book- entry interests in the 2017 Bonds may incur fees normally payable in respect of the maintenance and operation of accounts in the Clearing Systems.

Initial Settlement. Interests in the 2017 Bonds will be in uncertified book-entry form. Purchasers electing to hold book-entry interests in the 2017 Bonds through Euroclear and Clearstream accounts will follow the settlement procedures applicable to conventional Eurobonds. Book-entry interests in the 2017 Bonds will be credited to Euroclear and Clearstream participants’ securities clearance accounts on the business day following the date of delivery of the 2017 Bonds against payment (value as on the date of delivery of the 2017 Bonds). DTC participants acting on behalf of purchasers electing to hold book-entry interests in the 2017 Bonds through DTC will follow the delivery practices applicable to securities eligible for DTC’s Same Day Funds Settlement system. DTC participants’ securities accounts will be credited with book-entry interests in the 2017 Bonds following confirmation of receipt of payment to us on the date of delivery of the 2017 Bonds.

Secondary Market Trading. Secondary market trades in the 2017 Bonds will be settled by transfer of title to book-entry interests in the Clearing Systems. Title to such book-entry interests will pass by registration of the transfer within the records of Euroclear, Clearstream or DTC, as the case may be, in accordance with their respective procedures. Book-entry interests in the 2017 Bonds may be transferred within Euroclear and within Clearstream and between Euroclear and Clearstream in accordance with procedures established for these purposes by Euroclear and Clearstream. Book-entry interests in the 2017 Bonds may be transferred within DTC in accordance with procedures established for this purpose by DTC. Transfer of book-entry interests in the 2017 Bonds between Euroclear or Clearstream and DTC may be effected in accordance with procedures established for this purpose by Euroclear, Clearstream and DTC.

Special Timing Considerations. You should be aware that investors will only be able to make and receive deliveries, payments and other communications involving the 2017 Bonds through Euroclear or Clearstream on days when those systems are open for business. In addition, because of time-zone differences, there may be complications with completing transactions involving Clearstream and/or Euroclear on the same business day as in the United States. U.S. investors who wish to transfer their interests in the 2017 Bonds, or to receive or make a payment or delivery of 2017 Bonds, on a particular day, may find that the transactions will not be performed until the next business day in Luxembourg if Clearstream is used, or Brussels if Euroclear is used.

Clearing Information. We expect that the 2017 Bonds will be accepted for clearance through the facilities of Euroclear and Clearstream. The international securities identification numbers, common codes and CUSIP numbers, as applicable, for the 2017 Bonds are set out on the cover of this Offering Memorandum.

General. None of Euroclear, Clearstream or DTC is under any obligation to perform or continue to perform the procedures referred to above, and such procedures may be discontinued at any time.

Neither us nor any of our agents will have any responsibility for the performance by Euroclear, Clearstream or DTC or their respective direct or indirect participants or account holders of their respective obligations under the rules and procedures governing their operations or the arrangements referred to above.

The information in this Appendix D concerning the Clearing Systems has been obtained from sources that the underwriters believe to be reliable, but the underwriters take no responsibility for the accuracy thereof.

D-4

Limitations

For so long as the 2017 Bonds are registered in the name of DTC or its nominee, Cede & Co., we and the Bond Trustee will recognize only DTC or its nominee, Cede & Co., as the registered owner of the 2017 Bonds for all purposes, including payments, notices and voting. So long as Cede & Co. is the registered owner of the 2017 Bonds, references in this offering memorandum to registered owners of the 2017 Bonds shall mean Cede & Co. and shall not mean the beneficial owners of the 2017 Bonds.

Because DTC is treated as the owner of the 2017 Bonds for substantially all purposes under the Trust Agreement, beneficial owners may have a restricted ability to influence in a timely fashion remedial action or the giving or withholding of requested consents or other directions. In addition, because the identity of beneficial owners is unknown to us, the Bond Trustee or DTC, it may be difficult to transmit information of potential interest to beneficial owners in an effective and timely manner. Beneficial owners should make appropriate arrangements with their broker or dealer regarding distribution of information regarding the 2017 Bonds that may be transmitted by or through DTC.

Under the Trust Agreement, payments made by the Bond Trustee to DTC or its nominee shall satisfy the obligations of us and the other members of the Combined Group under Obligation No. 46 to the extent of the payments so made.

Neither we nor the Bond Trustee have any responsibility or obligation with respect to:

• the accuracy of the records of DTC, its nominee or any Direct Participant or Indirect Participant with respect to any beneficial ownership interest in any 2017 Bonds;

• the delivery to any Direct Participant or Indirect Participant or any other person, other than a registered owner as shown in the bond register kept by the Bond Trustee, of any notice with respect to any 2017 Bond including, without limitation, any notice of redemption with respect to any 2017 Bond;

• the payment to any Direct Participant or Indirect Participant or any other person, other than a registered owner as shown in the bond register kept by the Bond Trustee, of any amount with respect to the principal of, premium, if any, or interest on, any 2017 Bond; or

• any consent given by DTC or its nominee as registered owner.

Prior to any discontinuation of the book entry only system hereinabove described, we and the Bond Trustee may treat Cede & Co. (or such other nominee of DTC) as, and deem Cede & Co. (or such other nominee) to be, the absolute registered owner of the 2017 Bonds for all purposes whatsoever, including, without limitation:

• the payment of principal, premium, if any, and interest on the 2017 Bonds;

• giving notices of redemption and other matters with respect to the 2017 Bonds;

• registering transfers with respect to the 2017 Bonds; and

• the selection of 2017 Bonds for redemption.

D-5 [THIS PAGE INTENTIONALLY LEFT BLANK]

Duke University Health System, Inc. • Taxable Bonds, Series 2017