Economic Development Authority of the City of Norfolk Hospital Facilities Revenue Refunding Bonds (Sentara Healthcare), Series 2018

SUPPLEMENT DATED MAY 1, 2018 TO PRELIMINARY OFFICIAL STATEMENT DATED APRIL 25, 2018

$138,530,000* ECONOMIC DEVELOPMENT AUTHORITY OF THE CITY OF NORFOLK HOSPITAL FACILITIES REVENUE REFUNDING BONDS (SENTARA HEALTHCARE), SERIES 2018

______This supplement to Preliminary Official Statement (the “Supplement”) supplements and amends certain information contained in the Preliminary Official Statement, dated April 25, 2018 (the “April 25 Preliminary Official Statement”) prepared with respect to the above-captioned bonds (the “Bonds”). The April 25 Preliminary Official Statement, as supplemented by this Supplement, is referred to herein as the “Preliminary Official Statement.”

Sentara Healthcare (“Sentara”) may elect to request the Economic Development Authority of the City of Norfolk (the “Issuer”) to issue all or a portion of the Bonds in a “Long-Term Interest Rate Period” (as described in the Bond Indenture) (the “Long-Term Series 2018 Bonds”) commencing on the date of issuance of the Bonds and ending on ______, 20__. Such Long-Term Series 2018 Bonds may hereafter be designated as a separate Series of the Bonds. This Supplement describes certain terms of the proposed Long-Term Series 2018 Bonds. All references in this Preliminary Official Statement to “the Bonds” without further delineation shall mean both the Bonds described in the April 25 Preliminary Official Statement being offered at a Fixed Rate as well as the Long- Term Series 2018 Bonds. All capitalized terms used herein without definition shall have the meaning ascribed thereto in the April 25 Preliminary Official Statement.

Certain information in the April 25 Preliminary Official Statement is hereby supplemented or amended as follows:

1. The information on page 3 of the April 25 Preliminary Official Statement under the caption “INTRODUCTION” is hereby supplemented by adding new paragraph as the 12th paragraph of such section which shall read as follows:

The Bonds are not subject to optional tender for purchase by the owners thereof. The Long-Term Series 2018 Bonds are subject to mandatory tender for purchase on ______, 20___ (the “Initial Tender Date”) at a purchase price of par (the “Purchase Price”). Holders of the Long-Term Series 2018 Bonds will not have the option to retain their Long-Term Series 2018 Bonds after the Initial Tender Date. Payment of the Purchase Price of Bonds tendered for purchase on the Initial Tender Date is expected to be made from the proceeds of the remarketing of such Long-Term Series 2018 Bonds. The payment of the purchase price of the Bonds which are tendered for purchase and not remarketed may be made from amounts made available under a liquidity facility or credit facility if any is provided by Sentara as described herein. Sentara has not provided any liquidity facility or credit facility as of the date hereof. Sentara has not appointed a remarketing agent for the Long-Term Series 2018 Bonds, but is obligated to do so prior to the Initial Tender Date. Sentara is obligated to pay the purchase price of Long-Term Series 2018 Bonds tendered on the Initial Tender Date in accordance with the Bond Indenture. In the event that Sentara provides a liquidity facility or credit facility for the Long-Term Series 2018 Bonds, Sentara will be the third source of payment for the purchase price of such Long-Term Series 2018 Bonds, as described under “THE BONDS – Tender and Remarketing of Long-Term Series 2018 Bonds – Sources of Funds for Purchase of Long-Term Series 2018 Bonds.

* Preliminary, subject to change.

2. The information on page 7 of the April 25 Preliminary Official Statement under the caption “THE BONDS – General” is hereby supplemented by adding at the end of the first paragraph under such caption the following:

The Long-Term Series 2018 Bonds will bear interest at the interest rate per annum and mature on November 1 of the years and in the principal amounts set forth on the inside cover of this Official Statement. The Long-Term Series 2018 Bonds are subject to mandatory tender for purchase on ______, 20__ (the “Initial Tender Date”).

3. The information on page 7 of the April 25 Preliminary Official Statement under the sub-heading “THE BONDS – Redemption Provisions – Optional Redemption, - Conversion, and – Mandatory Sinking Fund Redemption” (other than the last two paragraphs under - Mandatory Sinking Fund Redemption) is hereby deleted and shall be replaced with the following:

Optional Redemption. The Long-Term Series 2018 Bonds and the Bonds other than the Long-Term Series 2018 Bonds maturing on or prior to November 1, 20__ are not redeemable at the option of Sentara. The Bonds maturing after November 1, 20__ are subject to redemption at the option of Sentara at any time on or after November 1, 20____. Any such redemption may be in whole or in part on any date on or after November 1, 20__ at a redemption price equal to 100% of the principal amount of the Bonds called for redemption, plus accrued interest to the redemption date.

Conversion. The Bond Indenture permits conversion of the Bonds, or a portion thereof, to a new interest rate mode at any time on or after the first optional redemption date described above, or, in the case of the Long-Term Series 2018 Bonds, on the business day following the end of the initial Long-Term Period, whereupon such Bonds will be subject to mandatory tender. The Bond Indenture provides for a number of different interest rate modes, including a Daily Rate Mode, Two Day Mode, Weekly Interest Rate Mode, Bank Rate Mode, FRN Rate Mode, Short-Term Rate Mode, VRO Rate Mode, Long-Term Interest Rate Mode and Fixed Rate Mode. The Long-Term Series 2018 Bonds are subject to mandatory tender on the Initial Tender Date and may be remarketed to bear interest in a new Long-Term Mode after such Initial Tender Date, or may be converted to another interest rate mode permitted under the Bond Indenture at the option of Sentara and upon satisfaction of the conditions to such conversion under the Bond Indenture, and remarketed in that mode.

Mandatory Sinking Fund Redemption. The Bonds and the Long-Term Series 2018 Bonds maturing on November 1 of the years 20__, 20___ and 20__ are subject to mandatory redemption prior to maturity at a redemption price equal to the principal amount thereof in the years and in the principal amounts shown below:

Bonds Maturing November 1, 20__ Long-Term Series 2018 Bonds Maturing November 1, 20__

Year Year 20__ 20__ 20__ 20__ 20__ 20__ 20__* 20__*

Bonds Maturing November 1, 20__ Long-Term Series 2018 Bonds Maturing November 1, 20__

Year Year 20__ 20__ 20__ 20__ 20__ 20__ 20__* 20__*

Bonds Maturing November 1, 20__ Long-Term Series 2018 Bonds Maturing November 1, 20__

Year Year 20__ 20__ 20__ 20__ 20__ 20__ 20__* 20__*

4. The information on page 9 of the April 25 Preliminary Official Statement under the heading “THE BONDS” is hereby supplemented by adding at the end of the subsection entitled “- Redemption Provisions” a new subsection as follows:

Tender and Remarketing of Long-Term Series 2018 Bonds

Optional Tender. The Long-Term Series 2018 Bonds are not subject to tender at the option of the owners thereof prior to the Initial Tender Date.

Mandatory Tender. The Long-Term Series 2018 Bonds are subject to mandatory tender for purchase on ______, 20__, the Initial Tender Date, at a purchase price of par (the “Purchase Price”). Owners of the Long- Term Series 2018 Bonds will not have the option to retain Long-Term Series 2018 Bonds after the Initial Tender Date. The Bond Trustee shall give Electronic Notice of the mandatory tender of the Long-Term Series 2018 Bonds on the Initial Tender Date as provided in the Bond Indenture which notice shall state: (1) that the Purchase Price of any Long-Term Series 2018 Bond so subject to mandatory tender for purchase shall be payable only upon surrender of such Long-Term Series 2018 Bond to the Bond Trustee at its Principal Office; (2) that all Long-Term Series 2018 Bonds so subject to mandatory tender for purchase shall be purchased on the Mandatory Purchase Date which shall be explicitly stated; and (3) that in the event that any Holder of a Long-Term Series 2018 Bond so subject to mandatory tender for purchase shall not surrender such Long-Term Series 2018 Bond to the Bond Trustee for purchase on such Mandatory Purchase Date, then such Long-Term Series 2018 Bond shall be deemed to be an Undelivered Bond, and that no interest shall accrue thereon on and after such Mandatory Purchase Date and that the Holder thereof shall have no rights under this Bond Indenture other than to receive payment of the Purchase Price thereof.

Undelivered Bonds. If any Holder of a Long-Term Series 2018 Bond subject to mandatory tender for purchase pursuant to the Bond Indenture fails to deliver such Long-Term Series 2018 Bond to the Bond Trustee at the place and on the Purchase Date and at the time specified, or fails to deliver such Long-Term Bond properly endorsed, such Long-Term Series 2018 Bond will constitute an “Undelivered Bond.” If funds in the amount of the Purchase Price of the Undelivered Bond are available for payment to the Holder thereof on the Purchase Date and at the time specified, from and after the Purchase Date and time of that required delivery, (1) such Undelivered Bond will be deemed to be purchased and will no longer be deemed to be Outstanding under the Bond Indenture; (2) interest will no longer accrue thereon; and (3) funds in the amount of the Purchase Price of such Undelivered Bond will be held by the Bond Trustee un-invested for the benefit of the Holder thereof (provided that the Holder will have no right to any investment proceeds derived from such funds), to be paid on delivery (and proper endorsement) of such Undelivered Bond to the Bond Trustee at its Principal Office for delivery of Bonds.

Payment of Tender Price; Refusal to Accept Without Proper Instrument of Transfer. For payment of the Purchase Price of any Long-Term Series 2018 Bond required to be purchased as provided in the Bond Indenture on the Purchase Date specified in the applicable notice, such Long-Term Series 2018 Bond must be delivered on the date specified in such notice, to the Bond Trustee at its principal office for delivery of such Bonds, accompanied by an instrument of transfer thereof, in form satisfactory to the Bond Trustee, executed in blank by the Holder thereof or his duly authorized attorney, with such signature guaranteed by a commercial bank, trust company or member firm of the New York Stock Exchange. The Bond Trustee may refuse to accept delivery of any Long-Term Series 2018 Bond for which a proper instrument of transfer has not been provided; however, such refusal will not affect the validity of the purchase of such Long-Term Series 2018 Bond as described in the Bond Indenture.

Sources of Funds for Purchase of Long-Term Series 2018 Bonds. On the date on which Long-Term Series 2018 Bonds are required to be purchased pursuant to the Bond Indenture (initially, the Initial Tender Date), the Bond Trustee will purchase such Long-Term Series 2018 Bonds from the Holders thereof at the Purchase Price thereof. Funds for the payment of such Purchase Price will be received from the following sources and used in the order of priority indicated:

(a) proceeds of the sale of Long-Term Series 2018 Bonds remarketed by the remarketing agent (either in a new Long-Term Interest Rate Mode or another interest rate mode permitted under the Bond Indenture if the conditions to conversion of the Interest Rate Mode have been satisfied);

(b) moneys received from draws on any liquidity facility or credit facility provided for the Long-Term Series 2018 Bonds; and

AS OF THE DATE OF ISSUANCE OF THE LONG-TERM SERIES 2018 BONDS, SENTARA HAS NOT PROVIDED THE BOND TRUSTEE WITH ANY LIQUIDITY FACILITY OR CREDIT FACILITY RELATED TO THE LONG-TERM SERIES 2018 BONDS, AND SENTARA IS NOT OBLIGATED TO PROVIDE ANY SUCH LIQUIDITY FACILITY OR CREDIT FACILITY.

Remarketing Agent

As indicated above, one of the sources for the payment of the Purchase Price of Long-Term Series 2018 Bonds on the Initial Tender Date is proceeds of the sale of Long-Term Series 2018 Bonds remarketed by the remarketing agent. Payment of the Purchase Price of Long-Term Series 2018 Bonds tendered for purchase on the Initial Tender Date is expected to be made from the proceeds of the remarketing of such Long-Term Series 2018 Bonds. AS OF THE DATE OF ISSUANCE OF THE LONG-TERM SERIES 2018 BONDS, SENTARA HAS NOT APPOINTED A REMARKETING AGENT. The Bond Indenture requires Sentara to appoint a remarketing agent for the Long-Term Series 2018 Bonds prior to the Initial Tender Date.

5. The information on page 17 of the April 25 Preliminary Official Statement is hereby amended and supplemented by adding a new subsection prior to the subsection entitled “- Note Substitution” which shall read as follows:

Risks Relating to the Mandatory Tender and Remarketing of the Long-Term Series 2018 Bonds; Event of Default if Long-Term Series 2018 Bonds are not Purchased on the Initial Tender Date

The Long-Term Series 2018 Bonds are subject to mandatory tender for purchase on the Initial Tender Date. The funds for the purchase of such Long-Term Series 2018 Bonds are described above under “THE BONDS - Sources of Funds for Purchase of Long-Term Series 2018 Bonds.” Sentara has not provided the Bond Trustee with a liquidity facility or credit facility for the mandatory purchase of the Long-Term Series 2018 Bonds on the Initial Tender Date, and is not obligated to do so prior to the Initial Tender Date. Sentara has not, as of the date of issuance of the Long-Term Series 2018 Bonds, appointed a remarketing agent, although the Bond Trustee requires Sentara retain a remarketing agent prior to the Initial Tender Date. In the event the Long-Term Series 2018 Bonds are not remarketed, and there are no proceeds from a liquidity facility or credit facility available for such mandatory tender, the only other sources of funds for the payment of the purchase price of such Long-Term Series 2018 Bonds is funds provided by Sentara. Sentara is obligated to pay the Purchase Price on the Initial Tender Date if the proceeds of the remarketing of such Bonds and moneys from any liquidity facility or credit facility which may be provided to the Bond Trustee are insufficient to pay the Purchase Price. Failure to purchase such Long-Term Series 2018 Bonds on the Initial Tender Date is an event of default under the Bond Indenture. If the funds available for the purchase of the Long-Term Series 2018 Bonds subject to purchase on the Initial Tender Date are insufficient to purchase all of such Bonds on such Initial Tender Date (including Undelivered Bonds), then no purchase of any such Bond shall occur on such Initial Tender Date and, on such Initial Tender Date, the Bond Trustee shall (i) return all of such Bonds that were tendered to the Holders thereof, and (ii) return all moneys received by the Bond Trustee for the purchase of such Bonds to the respective Persons that provided such moneys (in the respective amounts in which such moneys were so provided).

4 This Preliminary Official Statement and the information contained herein are subject to change, completion or amendment without notice. The Bonds may not be sold nor may offers to buy be accepted prior to the time the Official Statement is delivered in final form. Under no circumstances shall this Preliminary Official Statement constitute an offer to sell or a solicitation of an offer to buy, nor shall there be any sale of the Bonds 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. It isexpectedthattheBondswillbe availablefordeliverythroughthefacilitiesofDTCinNewYork, Yorkonorabout______,2018. a Canoles, & Kaufman counsel, its LLP. Spalding & King by counsel, their by Underwriters the for upon passed Group be will matters legal Certain Virginia. Richmond, Obligated Corporation, Professional the for upon passed be will matters legal Certain Virginia. by Norfolk, Issuer LLP, the Black for upon Vandeventer passed be will matters legal Certain Counsel. Bond Virginia, Richmond, Corporation, Professional a Canoles, & Kaufman by PROSPECTIVE PURCHASEROF THEBONDSBYEITHERISSUERORCITY. OF SENTARAORTHEABILITYTOREPAY BONDS, ANDNOREPRESENTATIONSOFANYKINDAREMADETO CREDIT OFTHEUNITEDSTATESAMERICA.NEITHER ISSUERNORTHECITYHASENDORSEDCREDITWORTHINESS THE UNITEDSTATESOFAMERICAORANYAGENCY STATESANDARENOTGUARANTEEDBYTHEFULLFAITH ON THEBONDSOROTHERCOSTSINCIDENTTHERETO. ISSUERHASNOTAXINGPOWER.THEBONDSARENOTADEBTOF INCLUDING THEISSUERANDCITY,ISPLEDGEDTOPAYMENT OFTHEPRINCIPALOF,PREMIUM,IFANY,ANDINTEREST FAITH ANDCREDITNORTHETAXINGPOWEROFCOMMONWEALTH OFVIRGINIA,NORANYITSPOLITICALSUBDIVISIONS, BONDS OROTHERCOSTSINCIDENTTHERETOEXCEPTFROM THEREVENUESANDMONEYSPLEDGEDTHEREFOR.NEITHER POLITICAL SUBDIVISIONS,INCLUDINGTHEISSUERAND CITY,SHALLBEOBLIGATEDTOPAYTHESAMEORINTERESTON ARE PAYABLESOLELYFROMTHEFUNDSPROVIDEDTHEREFOR. NEITHERTHECOMMONWEALTHOFVIRGINIA,NORANYITS ANY POLITICALSUBDIVISIONTHEREOF,INCLUDINGTHECITY OFNORFOLK,VIRGINIA(THE“CITY”)ANDTHEISSUER.BONDS obtain informationessentialtomakinganinformedinvestmentdecision. BONDS.” “THE BONDS”. to theregisteredholdersthereofasof15thday(whetherornotabusinessday)monthimmediatelyprecedingsuchinterestpayment date.See their dateofinitialdeliveryattherespectiveinterestrateshownoninsidecoverpayableeachMay1andNovember1,commencing 1,2018 Book-Entry-Only System.” such payments to the Beneficial Owners of the Bonds is the responsibility of Participants and Indirect Participants (as defined herein). See Cede &Co.solongasistheHolder.ThedisbursementofsuchpaymentstoParticipantsresponsibilityDTC,and of to Trustee Bond the by paid be will thereon any, if premium, and of principal the with together Bonds, the on Interest Bonds. the of Owners Beneficial the Cede & Co. is the registered owner of the Bonds, references herein to the registered owners of Bonds (“Holders”) shall mean Cede & Co., and shall not mean Participants as So long described. through as herein except herein), defined form (as Owners Beneficial the to made book-entry be will Bonds the of in delivery physical no and herein) only defined (as made be may Bonds of Purchases thereof. multiple integral any and $5,000 of denominations in purchased nominee forTheDepositoryTrustCompany,NewYork,York(“DTC”).DTCwillactassecuritiesdepositorytheBonds.Bondsmaybe obligations previouslyissuedtofinanceorrefinancethecostofcertainfacilitiesandequipmentforSentara. the MasterIndenture. pay amountsdueandpayableontheNoteotherObligationsissuedunderMasterIndenture(ii)tocomplywithcertaincovenants in to Group Obligated the to enable monies available other with sufficient amounts such transfer or loan pay, to (i) defined, herein Affiliate, Group Obligated Indenture directlyobligatesonlytheObligatedGroupmembers;however,Masterrequiresthatmemberswill causeeach Trustee”).SentaraistheonlymemberofObligatedGroupunderMasterIndenture.The master trustee(insuchcapacity,the“Master Indenture”), allbyandbetween Sentara andU.S.BankNationalAssociation,Richmond,Virginia,assuccessor by theSupplemental Indenture, the“Master Indenture” Trust “Master supplementing aMasterTrustIndenture,datedasofDecember15,1998,previouslysupplemented(the * Preliminary, subjecttochange. May __,2018 Dated: DateofIssuance to subject described Virginia incometaxation. not is as Bonds the consequences on interest tax Virginia, of income Commonwealth the federal of laws other existing under to Counsel, Bond subject of be opinion the also In may MATTERS.” “TAX interest in such of Recipients 2018. 1, January to prior began that years taxable for income taxable minimum alternative corporate calculating when earnings current adjusted determining in account into taken however, under current law, interest on the Bonds will not be included in gross income of owners of the Bonds for federal income tax purposes. Such interest is, NEW ISSUE—BOOK-ENTRYONLY Sentara totheIssuer. by delivered and herein) (defined Indenture Master the under issued be to under theLoanAgreementwillbeevidencedbyapromissorynote(the“Note”) Agreement”), betweentheIssuerandSentaraasdescribedherein.Thepaymentobligationsof Loan Agreement,datedasofMay1,2018(the“Loan trustee (the“Bond Trustee”), asdescribedherein.TheIssuerwilllendtheproceedsofsaleBondstoSentaraHealthcare( “Sentara”) pursuanttoa provisions ofaBondTrustIndenture,datedasMay1,2018(the“Bond Indenture”), byandbetweentheIssuerU.S.BankNationalAssociation,asbond 2018 (the“Bonds”)arelimitedobligationsoftheEconomicDevelopmentAuthorityCityNorfolk“Issuer”andissuedsecuredunder The Bonds are offered when, as and if issued by the Issuer and received by the Underwriters, subject to prior sale and to the approval of legality of approval the to and sale prior to subject Underwriters, the by received and Issuer the by issued if and as when, offered are Bonds The THE BONDSDONOTCONSTITUTEADEBTORPLEDGEOF FAITHANDCREDITOFTHECOMMONWEALTHVIRGINIAOR This cover contains information for quick reference only. Investors must read the entire Official Statement, including all appendices, to The Bondswillbesubjecttooptionalandmandatoryredemptionpurchaseinlieuofpriormaturityasdescribedherein.See “THE The BondswillmatureonNovember1intheyearsandrespectiveprincipalamountsshowninsidecover.bearinterest from The Bondsareissuableonlyasfullyregisteredbondsand,whenissued,willbeinthenameofCede&Co.,owner and as The proceedsderivedfromthesaleofBondswillbeloanedtoSentaraand,togetherwithcertainotheravailablefunds,usedrefund (the 2018 1, May of as dated 2018-2, No. Indenture Supplemental a under secured and issued being is Note The Assuming compliance with certain covenants and subject to the qualifications as described in “TAX MATTERS,” in the opinion of Bond Counsel, The NoteisadirectobligationofSentaraandfuturememberstheObligatedGroup(definedherein),ifany. The $138,530,000*EconomicDevelopmentAuthorityoftheCityNorfolkHospitalFacilitiesRevenueRefundingBonds(SentaraHealthcare),Series

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ospital D evlopmnt (S entar F acilities H $138,530,000* ealthcare A uthority R evnu ), S R

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Splmna Indenture”), “Supplemental Ratings: See“RATINGS” and, assupplemented “THE BONDS—

MATURITIES, PRINCIPAL AMOUNTS, INTEREST RATES AND PRICES

$138,530,000* ECONOMIC DEVELOPMENT AUTHORITY OF THE CITY OF NORFOLK HOSPITAL FACILITIES REVENUE REFUNDING BONDS (SENTARA HEALTHCARE), SERIES 2018

$______% Term Bonds, Due November 1, 20__, Price ______%; CUSIP No. $______% Term Bonds, Due November 1, 20__, Price ______%; CUSIP No. $______% Term Bonds, Due November 1, 20__, Price ______%; CUSIP No.

______* Preliminary, subject to change.

This Official Statement does not constitute an offer to sell the Bonds or the solicitation of an offer to buy, nor shall there be any sale of the Bonds by any person in any state or other jurisdiction to any person to whom it is unlawful to make such offer, solicitation or sale in such state or jurisdiction. No dealer, broker, salesperson or any other person has been authorized to give any information or to make any representation other than those contained herein in connection with the offering of the Bonds, and, if given or made, such information or representation must not be relied upon.

Barclays Capital Inc. (“Barclays”) and Citigroup Global Markets Inc. (“Citigroup” and, together with Barclays, the “Underwriters”) have provided the following sentence for inclusion in this Official Statement: The Underwriters have reviewed the information in this Official Statement in accordance with and as part of their responsibility to investors 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.

The information relating to DTC and the book-entry system set forth herein under the caption “THE BONDS—General” and “—Book-Entry-Only System” hereto has been furnished by DTC. Such information is believed to be reliable, but is not guaranteed as to accuracy or completeness and is not to be construed as a representation by the Issuer, Sentara or the Underwriter. All other information set forth herein has been obtained from the Issuer and Sentara and other sources (other than the Issuer and Sentara) that are believed to be reliable, but such information is not guaranteed as to accuracy or completeness and is not to be construed as a representation by the Issuer, Sentara or the Underwriters. The information and expressions of opinion herein are subject to change without notice, and neither the delivery of this Official Statement nor any sale of the Bonds made hereunder shall create, under any circumstances, any indication that there has been no change in the affairs of the Issuer, Sentara, or DTC since the date hereof. This Official Statement is submitted in connection with the issuance of securities referred to herein and may not be used, in whole or in part, for any other purpose. ______In connection with the offering of the Bonds, the Underwriters may over allot or effect transactions that stabilize or maintain the market price of the Bonds offered hereby at levels above that which otherwise might prevail in the open market. Such stabilizing, if commenced, may be discontinued at any time. ______CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS IN THIS OFFICIAL STATEMENT

Certain statements included or incorporated by reference in this Official Statement constitute “forward- looking statements.” Such statements generally are identifiable by the terminology used, such as “plan,” “expect,” “estimate,” “budget” or other similar words. Such forward-looking statements are qualified in their entirety by the cautionary statements set forth in this Official Statement.

THE BONDS HAVE NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR WITH ANY STATE SECURITIES COMMISSION. NEITHER THE BOND INDENTURE NOR THE MASTER INDENTURE HAS BEEN QUALIFIED UNDER THE TRUST INDENTURE ACT OF 1939 IN RELIANCE UPON EXEMPTIONS CONTAINED IN SUCH ACT.

The achievement of certain results or other expectations contained in such forward-looking statements involves 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. Neither the Issuer nor Sentara plans to issue any updates or revisions to those forward-looking statements if or when its expectations or events, conditions or circumstances on which such statements are based occur.

Neither the Master Trustee nor the Bond Trustee has reviewed or participated in the preparation of this Official Statement.

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TABLE OF CONTENTS

INTRODUCTION ...... 1 THE ISSUER ...... 3 SENTARA HEALTHCARE ...... 4 Obligated Group Affiliates ...... 4 Obligated Group Affiliates Not Liable ...... 4 Covenants of the Obligated Group ...... 4 PLAN OF REFUNDING ...... 5 ESTIMATED SOURCES AND USES OF FUNDS ...... 5 ANNUAL DEBT SERVICE REQUIREMENTS ...... 6 THE BONDS ...... 7 General ...... 7 Redemption Provisions ...... 7 Registration of Transfer and Exchange ...... 9 Book-Entry-Only System...... 10 SECURITY FOR THE BONDS ...... 12 Limited Obligation ...... 12 Trust Estate ...... 12 The Loan Agreement and the Note ...... 13 The Master Indenture ...... 14 The Funding Agreements ...... 16 BONDHOLDERS’ RISKS ...... 16 Introduction ...... 16 Note Substitution ...... 17 Interest Rate Swap Risk ...... 17 Bankruptcy and Creditors’ Rights; Limits on Claims Against Members and Other Matters Concerning the Financing Documents ...... 17 Concerning Sentara’s Operations ...... 19 Health Care Laws and Regulations ...... 19 Significant Risk Areas Summarized ...... 20 Nonprofit Healthcare Environment ...... 22 Patient Service Revenue ...... 23 Health Care Reform ...... 26 Negative Rankings Based on Clinical Outcomes, Cost, Quality, Patient Satisfaction and Other Performance Measures ...... 30 Government Regulation of Relationships between Hospitals, Physicians and Other Providers and Suppliers ...... 31 Privacy and Security of Health Information ...... 33 Enforcement Activity ...... 35 Business Relationships and Other Business Matters ...... 36 Tax-Exempt Status and Other Tax Matters ...... 41 CONTINUING DISCLOSURE ...... 42 ABSENCE OF MATERIAL LITIGATION ...... 42 Issuer ...... 42 Sentara...... 43 LEGAL MATTERS ...... 43

i TABLE OF CONTENTS (continued)

TAX MATTERS ...... 43 UNDERWRITING ...... 44 RELATIONSHIPS AMONG PARTIES ...... 45 FINANCIAL ADVISOR ...... 45 RATINGS ...... 45 FINANCIAL STATEMENTS ...... 46 MISCELLANEOUS ...... 46

APPENDIX A – INFORMATION CONCERNING SENTARA HEALTHCARE APPENDIX B – CONSOLIDATED FINANCIAL STATEMENTS OF SENTARA HEALTHCARE FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016 APPENDIX C – DEFINITIONS AND SUMMARY OF PRINCIPAL DOCUMENTS APPENDIX D – FORM OF OPINION OF BOND COUNSEL APPENDIX E – FORM OF CONTINUING DISCLOSURE AGREEMENT

OFFICIAL STATEMENT

$138,530,000*

ECONOMIC DEVELOPMENT AUTHORITY OF THE CITY OF NORFOLK HOSPITAL FACILITIES REVENUE REFUNDING BONDS (SENTARA HEALTHCARE), SERIES 2018

INTRODUCTION

The following introductory statement is subject in all respects to the more complete information set forth in this Official Statement. The descriptions and summaries of various documents hereinafter set forth do not purport to be comprehensive or definitive and are qualified in their entirety by reference to each document. All capitalized terms used in this Official Statement and not otherwise defined herein or in APPENDIX C, have the same meaning as in the Bond Indenture, the Loan Agreement or the Master Indenture (each as defined below). See APPENDIX C—“DEFINITIONS AND SUMMARY OF PRINCIPAL DOCUMENTS.”

This Official Statement, including the cover page and the Appendices hereto, is provided to furnish information in connection with the offering of $138,530,000* in aggregate principal amount of Hospital Facilities Revenue Refunding Bonds (Sentara Healthcare), Series 2018 (the “Bonds”) to be issued by the Economic Development Authority of the City of Norfolk (the “Issuer”).

The Bonds are being issued by the Issuer under and pursuant to a Trust Indenture dated as of May 1, 2018 (the “Bond Indenture”), between the Issuer and U.S. Bank National Association, Richmond, Virginia, as bond trustee (the “Bond Trustee”). Pursuant to the Bond Indenture, the Issuer will assign and pledge to the Bond Trustee as security for the Bonds the trust estate, which includes all of its respective right, title and interest in and to the Loan Agreement and the Note (hereinafter defined) and the payments due thereunder, excluding certain rights to payment of expenses, fees and indemnification. See “SECURITY FOR THE BONDS” and APPENDIX C— “DEFINITIONS AND SUMMARY OF PRINCIPAL DOCUMENTS.”

The Issuer will loan the proceeds of the Bonds to Sentara Healthcare (“Sentara”) pursuant to a Loan Agreement, dated as of May 1, 2018 (the “Loan Agreement”), between the Issuer and Sentara, to be applied for the purposes described herein. To evidence its obligation to repay such loan, Sentara will execute and deliver to the Bond Trustee, as assignee of the Issuer, a promissory note, dated the date of issuance of the Bonds (the “Note”). The Note is issued and secured as Sentara Healthcare Note SHOG-2018-2 under Supplemental Indenture No. 2018- 2, dated as of May 1, 2018 (the “Supplemental Indenture”), supplementing a Master Trust Indenture dated as of December 15, 1998, as previously supplemented (the “Master Trust Indenture,” and as supplemented by the Supplemental Indenture, the “Master Indenture”), between Sentara and U.S. Bank National Association, Richmond, Virginia, as successor master trustee (in such capacity, the “Master Trustee”). The Note requires Sentara to make payments to the Bond Trustee sufficient to provide for the full and prompt payment of principal and premium (if any) and interest on the Bonds. See “SECURITY FOR THE BONDS—The Loan Agreement and the Note” and APPENDIX C—“DEFINITIONS AND SUMMARY OF PRINCIPAL DOCUMENTS.”

Under the Master Indenture, the members of the Obligated Group, as it may exist from time to time, jointly and severally guarantee the payment of all obligations secured under the Master Indenture (the “Obligations”), including the Note and any additional Obligations previously or hereafter executed and delivered by any member of the Obligated Group as described herein. The Master Indenture permits other parties to become members of the Obligated Group under certain circumstances, and permits members of the Obligated Group to be released from their obligations under the Master Indenture under certain circumstances. Sentara presently is the only member of the Obligated Group (the “Obligated Group”); however, the Master Indenture requires that the Obligated Group members will cause each Obligated Group Affiliate (hereinafter defined) (i) to pay, loan or transfer such amounts ______* Preliminary, subject to change.

sufficient with other available monies to enable the Obligated Group to pay amounts due and payable on the Note and the other Obligations issued under the Master Indenture and (ii) to comply with certain other covenants in the Master Indenture. See “SECURITY FOR THE BONDS—The Master Indenture.”

The Note is cross-defaulted and secured on parity with any other Obligations presently outstanding or issued in the future under the Master Indenture. See “SECURITY FOR THE BONDS—The Master Indenture.” Further, an Event of Default under the Master Indenture or a Default under the Loan Agreement constitutes an Event of Default under the Bond Indenture. See APPENDIX C—“DEFINITIONS AND SUMMARY OF PRINCIPAL DOCUMENTS—Part I: Summary of Master Indenture and Funding Agreements—Summary of Master Indenture—Events of Default, —Acceleration; Annulment of Acceleration, —Additional Remedies and — Enforcement of Remedies.”

Sentara operates a variety of health care facilities and provides healthcare services in throughout the Commonwealth of Virginia and in Northeastern North Carolina. Sentara Hospitals (“Sentara Hospitals”), Sentara Enterprises (“Sentara Enterprises”), Potomac Hospital Corporation of Prince William (“Potomac Hospital”) (known as Sentara Northern Virginia Medical Center), Sentara RMH Medical Center (formerly known as Rockingham Memorial Hospital) (“Sentara RMH Medical Center”), and Martha Jefferson Hospital (“Martha Jefferson Hospital” and, collectively, the “Obligated Group Affiliates”) are affiliates of Sentara that have been designated as Obligated Group Affiliates pursuant to the Master Indenture. Sentara has numerous affiliates, including but not limited to the Obligated Group Affiliates, that operate several acute care hospital facilities, skilled and intermediate care nursing facilities, numerous diagnostic and rehabilitative programs and clinics, an air ambulance service, neighborhood medical care centers, medical office buildings, a home health program and health maintenance organizations. See APPENDIX A for a more detailed description of Sentara, the Obligated Group Affiliates and certain other affiliates of Sentara.

The proceeds of the Bonds, together with other available funds, will be used by Sentara to refund in a current refunding the outstanding Economic Development Authority of the City of Norfolk Hospital Facilities Revenue Bonds (Sentara Healthcare), Series 2017 which are presently outstanding in the aggregate principal amount of $150,000,000 (the “Refunded Bonds”). See “PLAN OF REFUNDING.”

Contemporaneously with the issuance of the Bonds, the Economic Development Authority of Albemarle County, Virginia expects to issue its $76,920,000 in aggregate principal amount of Hospital Revenue Refunding Bonds (Sentara Martha Jefferson Hospital), Series 2018A (the “Series 2018A Albemarle Bonds”) and its $77,630,000 in aggregate principal amount of Hospital Revenue Refunding Bonds (Sentara Martha Jefferson Hospital), Series 2018B (the “Series 2018B Albemarle Bonds” and, together with the Series 2018A Albemarle Bonds, the “Series 2018 Albemarle Bonds”), for the purpose of refunding the outstanding Economic Development Authority of Albemarle County, Virginia Hospital Revenue Refunding Bonds (Sentara Martha Jefferson Hospital), Series 2013A (the “Series 2013A Albemarle Bonds”), which are presently outstanding in the principal amount of $76,920,000, and the outstanding Economic Development Authority of Albemarle County, Virginia Hospital Revenue Refunding Bonds (Sentara Martha Jefferson Hospital), Series 2013B (the “Series 2013B Albemarle Bonds” and, together with the Series 2013A Albemarle Bonds, the “Refunded Albemarle Bonds”), which are presently outstanding in the principal amount of $77,630,000. In connection with the issuance of the Series 2018 Albemarle Bonds, Sentara will execute and deliver to U.S. Bank National Association, Richmond, Virginia, as bond trustee for the Series 2018 Albemarle Bonds (the “2018 Albemarle Bond Trustee”), as assignee of the Issuer, separate promissory notes which will be cross-defaulted and secured on parity with the Notes, dated the date of issuance of the Series 2018 Albemarle Bonds (the “2018 Albemarle Notes”). The Series 2018 Albemarle Bonds are not being offered pursuant to this Official Statement, and certain references to and descriptions of the Series 2018 Albemarle Bonds contained in this Official Statement are made for the purposes of disclosure only.

Sentara Hospitals and Sentara Enterprises have each entered into an Amended and Restated Funding Agreement with Sentara, each dated May 1, 2004; Sentara RMH Medical Center and Martha Jefferson Hospital have each entered into a Funding Agreement with Sentara, each dated as of November 28, 2011; and Potomac Hospital has entered into a Funding Agreement with Sentara, dated July 2, 2012 (each, a “Funding Agreement,” and collectively, the “Funding Agreements”). The Funding Agreements require each respective Obligated Group Affiliate to transfer assets to the Obligated Group to the extent necessary to pay any or all indebtedness of the Obligated Group issued or incurred under the Master Indenture on behalf of Sentara in furtherance of Sentara’s

goals and objectives. Payment of the Obligated Group Affiliates’ obligations under the Funding Agreements may be demanded by the Bond Trustee, the Master Trustee and the Issuer as third-party beneficiaries. See APPENDIX C—“DEFINITIONS AND SUMMARY OF PRINCIPAL DOCUMENTS—Part I: Summary of Master Indenture and Funding Agreements—Summary of the Funding Agreements.”

Certain information with respect to Sentara and its affiliates is furnished in this Official Statement. See APPENDIX A—“INFORMATION CONCERNING SENTARA HEALTHCARE” and APPENDIX B— “CONSOLIDATED FINANCIAL STATEMENTS OF SENTARA HEALTHCARE FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016.” All information in this Official Statement concerning Sentara and its affiliates has been provided by Sentara and has not been independently verified by the Issuer, and the Issuer makes no representations or warranties, express or implied, as to the accuracy or completeness of such information.

The Bonds will be issued as special, limited obligations of the Issuer and will be payable solely from and secured solely by the trust estate pledged under the Bond Indenture, which is limited to a pledge of the revenues derived by the Issuer from the Loan Agreement (except for certain indemnification payments and certain fees and expenses), the Note (including the payments made thereunder) and from certain other funds pledged under the Bond Indenture. See “SECURITY FOR THE BONDS” and “RELATIONSHIPS AMONG PARTIES.” The Bonds will not be secured by a legal or equitable pledge of, or mortgage upon, any project being financed or any facilities of the Issuer or any other facilities or revenues of Sentara, the Obligated Group Affiliates or any other Sentara affiliates.

There are a number of risks associated with the purchase of the Bonds. See “BONDHOLDERS’ RISKS” herein for a discussion of certain of these risks.

Sentara will enter into a Continuing Disclosure Agreement, dated the date of delivery of the Bonds (the “Continuing Disclosure Agreement”), for the benefit of the holders of the Bonds, pursuant to which it will agree to provide certain information annually and quarterly and to provide notice of certain events to the Municipal Securities Rulemaking Board’s Electronic Municipal Market Access system (“EMMA”). See “CONTINUING DISCLOSURE” herein. A form of the Continuing Disclosure Agreement is set forth in APPENDIX E hereto.

This Official Statement speaks only as of its date, and the information herein is subject to change, completion or amendment without notice. Brief descriptions of the Issuer, the refunding plan, the Bonds and certain other documents relating to the Bonds are included in this Official Statement. Such information and descriptions do not purport to be comprehensive or definitive. All references herein to specified documents are qualified in their entirety by reference to each such document, copies of which are available from Sentara and Barclays during the initial offering period and thereafter from the Bond Trustee, and all references to the Bonds are qualified in their entirety by reference to the definitive forms thereof and the information with respect thereto included in the aforesaid documents. See APPENDIX C—“DEFINITIONS AND SUMMARY OF PRINCIPAL DOCUMENTS.”

The foregoing section “INTRODUCTION” contains only a brief summary of certain information contained in this Official Statement. It is not intended to be complete and is qualified by the more detailed information contained elsewhere in this Official Statement.

THE ISSUER

The Issuer is a political subdivision of the Commonwealth of Virginia and was created pursuant to the Industrial Development and Revenue Bond Act, Chapter 49, Title 15.2, Code of Virginia of 1950, as amended, (collectively, the “Act”). The Issuer is empowered, among other things, to acquire, improve, maintain, equip, furnish, construct and sell medical facilities and to finance or refinance the same by the issuance of revenue bonds. The Bonds will be limited obligations of the Issuer as described under “SECURITY FOR THE BONDS.” The Issuer has not participated in the preparation of this Official Statement and neither has nor will assume any responsibility as to the accuracy or completeness of any information contained herein (other than that under the headings “INTRODUCTION” (to the extent it contains information pertaining to the Issuer), “THE ISSUER” and “ABSENCE OF MATERIAL LITIGATION—Issuer”), all of which information has been furnished by others.

SENTARA HEALTHCARE

Sentara is the sole member of the Obligated Group under the Master Indenture. Other organizations may become members of the Obligated Group, and members may withdraw from the Obligated Group, in accordance with the provisions of the Master Indenture, so long as no remaining member would be in default in the performance or observance of any term of the Master Indenture. Certain information with respect to Sentara and its financial condition, operations and properties is included as APPENDIX A and APPENDIX B to this Official Statement.

Obligated Group Affiliates

The Obligated Group Affiliates are designated pursuant to the Master Indenture (i) by Sentara’s Board of Directors adopting a resolution designating them as such, and Sentara thereafter must maintain corporate control of such affiliates for the duration of their designation as Obligated Group Affiliates, and (ii) by the execution and delivery by each Obligated Group Affiliate of a Funding Agreement, pursuant to which Sentara requires the respective Obligated Group Affiliate to transfer assets to the Obligated Group to the extent necessary to pay any or all indebtedness of the Obligated Group issued or incurred on behalf of the Obligated Group in furtherance of Sentara’s goals and objectives; provided that no Obligated Group Affiliate will be required to make any such transfer if doing so would violate the charitable purposes of such Obligated Group Affiliate or be inconsistent with state law or would cause such Obligated Group Affiliate to breach the terms of any restricted gift or any contractual obligations or other commitments. See APPENDIX C—“DEFINITIONS AND SUMMARY OF PRINCIPAL DOCUMENTS—Part I: Summary of Master Indenture and Funding Agreements—Summary of Funding Agreements.” In the future, Sentara may designate other affiliates as Obligated Group Affiliates and may also designate other organizations with which it will enter into a written funding agreement containing an undertaking similar to that of the Obligated Group Affiliates. Sentara currently has affiliates which are not Obligated Group Affiliates. See APPENDIX A —“OTHER MATERIAL AFFILIATES THAT ARE NOT OBLIGATED GROUP AFFILIATES.”

Sentara may, at any time without satisfying any other financial conditions, declare that an Obligated Group Affiliate shall no longer constitute an Obligated Group Affiliate under the Master Indenture as long as no Event of Default, or an event which, with the passage of time or giving of notice, or both, would constitute an Event of Default, has occurred and is continuing under the Master Indenture or would result from Sentara’s withdrawal of such designation. Accordingly, there can be no assurance that the organizations designated as Obligated Group Affiliates upon the issuance of the Bonds will continue as such or that other organizations will be so designated. However, Sentara will covenant in the Continuing Disclosure Agreement to include a current list of Obligated Group Affiliates in the Annual Report to be prepared by Sentara pursuant to the Continuing Disclosure Agreement.

Obligated Group Affiliates Not Liable

The Note will be a general unsecured obligation of Sentara, and the Obligated Group Affiliates will not be directly obligated to pay any amounts due thereon; however, Sentara has agreed, and future members of the Obligated Group will covenant, to cause their respective Obligated Group Affiliates to pay, loan or otherwise transfer to Sentara or such future members of the Obligated Group, respectively, such amounts as are necessary to enable Sentara or such future members to pay the debt service on the Bonds, subject to the condition that Sentara and any future members of the Obligated Group may not cause their respective Obligated Group Affiliates to transfer such amount to Sentara or such members if compliance would violate the charitable purposes of an Obligated Group Affiliate or be inconsistent with state law or would cause an Obligated Group Affiliate to breach the terms of any restricted gift or any existing contractual obligations or other commitments.

Covenants of the Obligated Group

Certain covenants in the Master Indenture apply only to Sentara and any future members of the Obligated Group. Sentara and any future members of the Obligated Group are obligated not only to comply with certain other covenants, but also to cause their respective Obligated Group Affiliates to comply with certain covenants, subject to the condition that Sentara and any future members of the Obligated Group need not cause their respective Obligated Group Affiliates to comply with such provisions if compliance would violate the charitable purposes of an Obligated Group Affiliate or be inconsistent with state law or cause an Obligated Group Affiliate to breach the terms of any

restricted gift or any existing contractual obligations or other commitments. In addition, Sentara and any future members of the Obligated Group are obligated to use reasonable efforts to cause those of their respective Affiliates which are not Obligated Group Affiliates to comply with such provisions, subject to the same limitations that apply with respect to Obligated Group Affiliates. See “SECURITY FOR THE BONDS.”

PLAN OF REFUNDING

The proceeds of the Bonds, together with other available funds, will be used by Sentara for purpose of refunding the Refunded Bonds in a current refunding transaction. The Refunded Bonds are currently outstanding in an amount equal to the original principal amount of the Bonds. The proceeds of the Bonds are expected to be used to redeem the Refunded Bonds on ______, 2018, at a redemption price of par.

The proceeds of the Refunded Bonds were used by Sentara, together with other funds, for the purpose of financing or refinancing renovations of Sentara Norfolk General Hospital.

The costs of issuance of the Bonds are expected to be paid by Sentara.

ESTIMATED SOURCES AND USES OF FUNDS

The following table sets forth the estimated sources and uses of proceeds of the Bonds:

Sources: Principal Amount of Bonds Net Original Issue [Premium/Discount] Total Sources

Uses: Redemption of Series 2017 Bonds Total Uses

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ANNUAL DEBT SERVICE REQUIREMENTS

The following table sets forth, for each twelve month period ending December 31, the amounts required in such year for the payment of the principal of (whether at maturity or pursuant to mandatory sinking fund redemption) and interest on the Bonds, the Series 2018 Albemarle Bonds and other outstanding long-term debt of the Obligated Group, after giving effect to the current refunding of the Refunded Bonds and the Refunded Albemarle Bonds, as described under “PLAN OF REFUNDING” above.

Series 2018 Year Ending The Bonds Albemarle Other December 31, Principal Interest Bonds1 Debt Service1 Total* 2018 $ 3,073,235 $ 63,384,198 2019 4,470,552 62,667,748 2020 4,507,523 63,173,400 2021 4,549,092 62,566,090 2022 4,598,270 64,996,829 2023 4,644,546 64,761,092 2024 4,695,574 64,641,932 2025 4,750,992 64,793,160 2026 4,808,462 64,704,226 2027 4,862,802 65,035,865 2028 4,926,518 64,853,974 2029 4,989,468 65,006,091 2030 5,058,939 64,982,863 2031 5,129,953 65,161,438 2032 5,199,806 65,237,338 2033 5,278,830 65,276,676 2034 5,358,639 65,380,448 2035 5,444,678 65,456,085 2036 8,808,332 63,234,394 2037 8,992,295 60,433,483 2038 9,188,149 60,436,663 2039 9,391,574 60,438,582 2040 9,604,110 59,259,079 2041 9,827,183 36,155,616 2042 10,065,091 41,936,350 2043 10,309,480 42,095,097 2044 10,566,313 14,900,253 2045 10,838,120 15,157,382 2046 11,117,289 15,418,292 2047 11,416,757 3,529,150 2048 11,721,586 - 2049 - - 2050 - - Total $ $ $218,194,157 $1,635,073,796 $ ______1 Interest on Sentara's Series 2008 Bonds is assumed at 2.00%. The interest rate includes payments on the swap agreement and represents Sentara's net cost of funds on the Series 2008 Bonds. Interest on Sentara's unhedged variable rate debt is assumed at an interest rate of 3.00%. Interest on hedged variable rate debt, including the Series 2018 Albemarle Bonds, is assumed at the applicable fixed payer swap rate and assumes that the variable rate paid is equal to the variable rate received. Interest on Sentara's tax-exempt and taxable commercial paper is assumed at a variable rate of 3.00%. Sentara's commercial paper assumes a 30-year level amortization on drawn amount ($32.8 million of Tax-Exempt CP and $71.0 million of Taxable CP as of December 31, 2017).

THE BONDS

The following is a summary of certain provisions of the Bonds. Reference is made to the Bonds for the complete text thereof and to the Bond Indenture for all of the provisions relating to the Bonds. The discussion herein is qualified by such reference.

General

The Bonds will be dated the date of their issuance and delivery, and will be issued in book-entry only form in denominations of $5,000 and any integral multiple thereof. The Bonds of each maturity will bear interest at the respective interest rate per annum and mature on November 1 of the years and in the principal amounts set forth on the inside cover of this Official Statement.

Interest on the Bonds will be payable on each May 1 and November 1 (each an “Interest Payment Date”), commencing November 1, 2018, to the person in whose name such Bond is registered as of the close of business on the 15th day (whether or not a Business Day) immediately prior to such Interest Payment Date (the “Record Date” as to such Interest Payment Date), except that any interest not so timely paid or duly provided for shall cease to be payable to the person who is the registered owner of such Bond as of the Record Date, and shall be payable to the person who is the registered owner of such Bond at the close of business on a special record date for the payment of such defaulted interest. Such special record date shall be fixed by the Bond Trustee whenever moneys become available for the payment of such defaulted interest, and notice of the special record date shall be given by first class mail by the Bond Trustee to the owners of the Bonds not less than 10 days prior thereto. Interest will be computed on the basis of a 360 day year composed of twelve, 30 day months.

Except as described below while the Bonds are in book-entry only form, interest on the Bonds will be paid by check mailed by first class mail on the Interest Payment Date to the registered owner of the Bonds at the address of such owner as it appears on the Bond Register or at such other address furnished in writing by such registered owner to the Bond Trustee; provided, however, that in the case of any registered owner of not less than $1,000,000 of Bonds who shall have furnished to the respective Bond Trustee wire transfer instructions satisfactory to the Bond Trustee prior to the Record Date for such Interest Payment Date, interest shall be paid in accordance with such instructions. Except as described below while the Bonds are in book-entry only form, principal of and premium, if any, on the Bonds shall be payable upon presentation and surrender thereof at the designated corporate trust office of the Bond Trustee.

Redemption Provisions

Optional Redemption. The Bonds maturing on or prior to November 1, 20__ are not redeemable at the option of Sentara. The Bonds maturing after November __, 20__ are subject to redemption at the option of Sentara at any time on or after November __, 20____. Any such redemption may be in whole or in part on any date on or after November __ 1, 20__ at a redemption price equal to 100% of the principal amount of Bonds called for redemption, plus accrued interest to the redemption date.

Mandatory Sinking Fund Redemption. The Bonds maturing on November 1 of the years 20__, 20___ and 20__ are subject to mandatory redemption prior to maturity at a redemption price equal to the principal amount thereof in the years and in the principal amounts shown below:

Bonds Maturing November 1, 20__

Principal Year Amount 20__ $ 20__ 20__ 20__* ______*Final maturity

Bonds Maturing November 1, 20__

Principal Year Amount 20__ $ 20__ 20__ 20__* ______*Final maturity

Bonds Maturing November 1, 20__

Principal Year Amount 20__ $ 20__ 20__ 20__* ______*Final maturity

On or before the 30th day prior to any sinking fund payment date, the Bond Trustee shall select for redemption (by lot in such manner as such Bond Trustee may determine), from all Bonds of the appropriate maturity an aggregate principal amount of such Bonds equal to the amount required to be on deposit in the Bond Sinking Fund with respect to such Bonds on such sinking fund payment date, and shall call such Bonds or portions thereof in Authorized Denominations for redemption from the sinking fund on such sinking fund payment date and give notice of such call.

At the option of Sentara, to be exercised on or before the 60th day next preceding any sinking fund payment date, it may (i) deliver to the Bond Trustee for cancellation Bonds or portions thereof in Authorized Denominations of the maturity and series relating to such sinking fund payment date in any aggregate principal amount desired by Sentara or (ii) specify a principal amount of outstanding Bonds or portions thereof in Authorized Denominations of the maturity, series and interest rate relating to such sinking fund payment date which prior to such date have been purchased or redeemed (otherwise than through the operation of the Sinking Fund) and cancelled by the Bond Trustee at the request of Sentara and not theretofore applied as a credit against any sinking fund payment. Each such Bond or portion thereof so delivered or previously redeemed shall be credited by the Bond Trustee at 100% of the principal amount thereof against the obligation of the Issuer on such sinking fund payment date. Any excess shall be credited against the next sinking fund payment relating to the Bonds of such maturity.

Purchase in Lieu of Redemption. In lieu of an optional redemption and cancellation of Bonds, Bonds may be purchased by Sentara for its own account. Notice and selection of Bonds being purchased by Sentara shall be given and selected in the same manner as the notice and selection of Bonds called for optional redemption; provided, that such notice shall be modified as necessary to reflect a purchase in lieu of redemption.

Notice of Redemption. Any notice of redemption will be mailed by the Bond Trustee, not less than 20 days nor more than 60 days prior to the redemption date, to the Holders of Bonds called for redemption at their addresses appearing on the bond registration books of the Bond Trustee as of the date of the giving of such notice. The Bond Trustee will also give notice of redemption by overnight mail or courier service to the Remarketing Agent, the Bank and DTC. Each notice of redemption is required to state the date of such notice, the Series designation and date of issue of the Bonds, the redemption date, the redemption price, the place or places of redemption (including the name and appropriate address or addresses of the Bond Trustee), the maturity dates, the CUSIP numbers, if any, and, in the case of Bonds to be redeemed in part only, the respective portions of the principal amount thereof to be redeemed. Each such notice shall also state that, subject to the deposit of sufficient funds with the Bond Trustee on or prior to the redemption date to effect the redemption and to prior rescission (as described below) on that date there will become due and payable on each of the Bonds the Redemption Price thereof or of the specified portion of the principal amount thereof in the case of a Bond to be redeemed in part only, together with interest accrued thereon to the redemption date, and that from and after such redemption date interest thereon shall cease to accrue, and shall require that such Bonds be then surrendered.

Any notice of redemption is required to further state (i) any conditions to such redemption and (ii) that the notice may be rescinded by written notice given to the Bond Trustee by Sentara on or prior to the date specified for redemption, and in either of such cases such notice and redemption shall be of no effect if such moneys are not so deposited or if the notice is rescinded as described herein. Any Bond for which a notice of redemption has been rescinded or for which sufficient funds to pay the redemption price thereof have not been deposited with the Bond Trustee on or prior to the redemption date shall remain outstanding and neither the rescission of the notice nor the failure to fund the redemption price will constitute an Event of Default under the Bond Indenture. The Bond Trustee will give notice of such rescission or failure to fund the redemption price as soon thereafter as practicable in the same manner, and to the same persons, as notice of such redemption was given.

Failure to give notice in the manner described above with respect to any Bond, or any defect in such notice, will not affect the validity of the proceedings for redemption for any Bond with respect to which notice was properly given.

So long as the Bonds are subject to the book-entry only system of registration, such notice shall only be sent to the corresponding securities depository (which shall initially be DTC) and such notice may be sent by means of facsimile or any other means acceptable to the securities depository.

Selection of Bonds to be Redeemed in case of Partial Redemption. The Bond Trustee will select the Bonds to be redeemed, from all Bonds subject to redemption or such given portion thereof not previously called for redemption, as directed in writing by Sentara or in the absence of direction randomly in any manner which the Bond Trustee in its sole discretion deems appropriate and fair.

Effect of Call for Redemption. On the date designated for redemption by notice given as herein provided, assuming any conditions to such redemption have been satisfied, the Bonds so called for redemption will become and be due and payable at the redemption price specified in such notice together with interest accrued thereon to the redemption date, interest on the Bonds so called for redemption shall cease to accrue. Such Bonds (or portions thereof) will cease to be entitled to any benefit or security under the Bond Indenture and the Holders of such Bonds will have no rights in respect thereof except to receive payment of said redemption price and accrued interest to the date fixed for redemption from funds held by the Bond Trustee for such payment.

Registration of Transfer and Exchange

The person in whose name any Bond shall be registered shall be deemed and regarded as the absolute owner thereof for the purpose of receiving payment of or on account of principal thereof and premium, if any, thereon and interest due thereon and for all other purposes, and neither the Issuer nor the Bond Trustee shall be

affected by any notice to the contrary, but such registration may be changed as provided in the Bond Indenture. All such payments shall be valid and effectual to satisfy and discharge the liability upon such Bond to the extent of the sum or sums so paid.

When in book-entry form, the Bonds held by DTC (or its nominee, Cede & Co.) on behalf of the Beneficial Owners thereof may be registered as transferred in the manner described herein under the heading “THE BONDS - Book-Entry Only System.” See “THE BONDS - Book-Entry Only System.”

When not in book-entry form, any Bond may be exchanged for an equal aggregate principal amount of fully registered Bonds of the same series, maturity and interest rate, and in other authorized denominations, upon presentation of such Bond at the designated corporate trust office of the Bond Trustee by the registered owner thereof or his duly authorized attorney. Every Bond presented or surrendered for registration of transfer or exchange must be duly endorsed, or be accompanied by a written instrument of transfer, in form satisfactory to the Bond Trustee duly executed by the registered owner thereof or his or her attorney duly authorized in writing. The Issuer and the Bond Trustee may charge each Bondholder requesting an exchange, change in registration or registration of transfer a sum not exceeding the actual cost of any tax, fee or other governmental charge required to be paid with respect to such exchange, registration or transfer, except in the case of the issuance of a definitive Bond for a temporary Bond and except in the case of the issuance of a Bond or Bonds for the unredeemed portion of a Bond surrendered for redemption.

Book-Entry-Only System

The description that follows of the procedures and recordkeeping with respect to beneficial ownership interests in the Bonds, payments of principal of and premium, if any, and interest on the Bonds to DTC, its nominee, Direct and Indirect Participants (as defined below) or Beneficial Owners, confirmation and transfer of beneficial ownership interests in the Bonds and other bond-related transactions by and between DTC, Direct and Indirect Participants and Beneficial Owners is based solely on information furnished by DTC. None of the Issuer, the Bond Trustee, the Master Trustee, the Obligated Group nor the Underwriters assume any responsibility for the accuracy or adequacy of the information included in such description.

DTC will act as securities depository for the Bonds. The 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 certificate will be issued for each maturity of the Bonds, each in the aggregate principal amount of such maturity, and will be deposited with DTC.

DTC, the world’s largest 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 3.5 million issues of U.S. and non-U.S. equity, corporate and municipal debt issues, and money market instruments from over 100 countries that DTC’s participants (“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 (“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 Direct Participant, either directly or indirectly (“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 and www.dtc.org.

Purchases of Bonds under the DTC system must be made by or through Direct Participants, which will receive a credit for the Bonds on DTC’s records. The ownership interest of each actual purchaser of each Bond (“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 ownership interests in the Bonds are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in the Bonds, except in the event that use of the book-entry system for the Bonds is discontinued.

To facilitate subsequent transfers, all Bonds deposited by Direct Participants with DTC are registered in the name of DTC’s partnership nominee, Cede & Co., or such other name as may be requested by an authorized representative of DTC. The deposit of Bonds with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not cause any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Bonds; DTC’s records reflect only the identity of the Direct Participants to whose accounts such 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 the Bonds may wish to take certain steps to augment transmission to them of notices of significant events with respect to the Bonds, such as redemptions, tenders, defaults and proposed amendments to the financing documents. Beneficial Owners of the Bonds may wish to ascertain that the nominee holding the Bonds for their benefit has agreed to obtain and transmit notices to Beneficial Owners, or in the alternative, Beneficial Owners may wish to provide their names and addresses to the Bond Trustee and request that copies of the notices be provided directly to them.

Redemption notices shall be sent to DTC. If less than all of the Bonds within an issue are being redeemed, DTC’s practice is to determine by lot the amount of the interest of each Direct Participant in such issue to be redeemed.

Neither DTC nor Cede & Co. (nor such other DTC nominee) will consent or vote with respect to the Bonds unless authorized by a Direct Participant in accordance with DTC’s Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the Issuer 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 Bonds are credited on the record date (identified in a listing attached to the Omnibus Proxy).

Principal of and premium, if any, and interest payments on the Bonds will be made to Cede & Co. or such other nominee as may be 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 Issuer or the Bond Trustee, on the 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 Participants and not of DTC (or its nominee), the Bond Trustee or the Issuer subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of principal of, premium, if any, and interest to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the Issuer or the Bond Trustee, disbursement of such payments to Direct Participants shall be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners shall be the responsibility of Direct and Indirect Participants.

DTC may discontinue providing its services as securities depository with respect to the Bonds at any time by giving reasonable notice to the Issuer or the Bond Trustee. Under such circumstances, in the event that a successor securities depository is not obtained, Bond certificates are required to be printed and delivered.

The Issuer may decide to discontinue use of the system of book-entry transfers through DTC (or a successor securities depository). In that event, Bond certificates will be printed and delivered to DTC.

The foregoing information in this section concerning DTC and DTC’s book-entry system has been obtained from DTC and other sources that the Issuer believes to be reliable, but the Issuer takes no responsibility for the accuracy thereof.

None of the Issuer, the Obligated Group, the Master Trustee, the Bond Trustee nor the Underwriters have responsibility or obligation to the Direct or Indirect Participants or the Beneficial Owners with respect to (A) the accuracy of any records maintained by DTC or any Direct or Indirect Participant; (B) the payment by any Direct or Indirect Participant of any amount due to any Beneficial Owner in respect of the principal of and premium, if any, and interest on the Bonds; (C) the delivery or timeliness of delivery by any Direct or Indirect Participant of any notice to any Beneficial Owner which is required or permitted under the terms of the Bond Indenture to be given to Bondholders; or (D) any other action taken by DTC, or its nominee, Cede & Co., as Bondholder, including the effectiveness of any action taken pursuant to an Omnibus Proxy.

So long as Cede & Co. is the registered owner of the Bonds, as nominee of DTC, references in this Official Statement to the Owners of the Bonds shall mean Cede & Co. and shall not mean the Beneficial Owners and Cede & Co. will be treated as the only Bondholder for all purposes under the Bond Indenture.

The Issuer may enter into amendments to the agreement with DTC or successor agreements with a successor securities depository, relating to the book-entry system to be maintained with respect to the Bonds without the consent of Beneficial Owners or Bondholders.

SECURITY FOR THE BONDS

Limited Obligation

The Note is cross-defaulted and secured on parity with all other Obligations under the Master Indenture. See “SECURITY FOR THE BONDS—The Master Indenture.” Further, an “Event of Default” under the Master Indenture or a Default under the Loan Agreement constitutes an Event of Default under the Bond Indenture. See APPENDIX C—“DEFINITIONS AND SUMMARY OF PRINCIPAL DOCUMENTS—Part II: Summary of Other Documents—Summary of the Bond Indenture—Events of Default and Remedies.”

The Bonds are special limited obligations of the Issuer and are payable from and secured solely by the trust estate pledged under the Bond Indenture, which is limited to a pledge of the revenues and receipts derived by the Issuer from the Loan Agreement (except for certain indemnification payments and certain fees and expenses) and the Note (including the payments made thereunder), and by other funds pledged under the Bond Indenture. See “BONDHOLDERS’ RISKS – Introduction.”

Trust Estate

The payment of the principal of and premium, if any, and interest on the Bonds is secured under the Bond Indenture by a pledge to the Bond Trustee of the trust estate, which is limited to (i) all right, title and interest of the Issuer in the Loan Agreement and all amounts payable thereunder (except for certain indemnification payments and certain fees and expenses), (ii) all right, title and interest of the Issuer in the Note and all amounts payable thereunder, and (iii) all amounts from time to time on deposit in certain funds and accounts established under the Bond Indenture, subject to the provisions of the Bond Indenture permitting the application of such amounts thereof for the purposes and on the terms and conditions set forth in the Bond Indenture. See APPENDIX C— “DEFINITIONS AND SUMMARY OF PRINCIPAL DOCUMENTS—Part II: Summary of Other Documents—Summary of the Bond Indenture.”

The Loan Agreement and the Note

The following is a summary of certain provisions of the Loan Agreement and the Note. The following summary does not purport to be complete, and is qualified by reference to the express provisions of the Loan Agreement and the definitive Note, copies of which are available upon request as described herein. The Note is cross-defaulted and secured on parity with any other Obligations under the Master Indenture. See APPENDIX C— “DEFINITIONS AND SUMMARY OF PRINCIPAL DOCUMENTS—Part I: Summary of Master Indenture and Funding Agreements—Summary of Master Indenture—Events of Default, —Acceleration; Annulment of Acceleration and —Additional Remedies and Enforcement of Remedies.” Further, an Event of Default under the Master Indenture or a Default under the Loan Agreement constitutes an Event of Default under the Bond Indenture. See APPENDIX C—“DEFINITIONS AND SUMMARY OF PRINCIPAL DOCUMENTS—Part II: Summary of Other Documents—Summary of the Bond Indenture—Events of Default and Remedies.”

The Note. In order to evidence the loan of the proceeds of the Bonds (the “Loan”) under the Loan Agreement and Sentara’s obligation to repay the Loan, Sentara will, contemporaneously with the execution and delivery of the Loan Agreement, issue the Note in an aggregate principal amount equal to the aggregate principal amount of the Bonds. The Note will be issued and secured under the Master Indenture. Pursuant to the Loan Agreement and the Note, Sentara has agreed to make payments to the Bond Trustee, as assignee and pledgee of and for the account of the Issuer, of amounts which, and at or before times which, shall correspond to the payments in respect of principal of and interest on the Bonds, whenever and in whatever manner the same shall become due, whether at stated maturity, upon redemption, acceleration or otherwise.

The Note may be prepaid at the option of Sentara in connection with an optional redemption or defeasance of the Bonds.

Substitution of the Note. Pursuant to the Bond Indenture, the Bond Trustee is authorized and directed to accept a substitute promissory note in substitution for the Note, which substitute promissory note must provide for the full and timely payment of the Bonds on substantially the same repayment terms of the existing Note and must be executed and delivered to the Bond Trustee by the Obligated Group upon the Bond Trustee’s receipt of: (i) the written request of Sentara, (ii) an opinion of Bond Counsel to the effect that the substitution of the substitute promissory note for the Note complies with the terms of the Bond Indenture and will not cause the interest on the Bonds to become includable in the gross income of the owners thereof for federal tax purposes, and (iii) an opinion of counsel to Sentara to the effect that the substitute promissory note is a valid and binding obligation of the obligor or obligors thereunder, including Sentara.

Other Payment Obligations. Sentara is also obligated under the Loan Agreement to indemnify the Issuer and the Bond Trustee from and against all liabilities, obligations, claims, damages, penalties, fines, losses, costs and expenses (including reasonable fees and costs of attorneys and experts) in any way connected with the Bonds, the Loan Agreement, the Note and the Bond Indenture.

Term of the Loan Agreement. The Loan Agreement shall continue in full force and effect until all amounts required to be paid by Sentara under such Loan Agreement and the Note have been paid in full.

Obligations of Sentara Unconditional. For the term of the Loan Agreement, the obligations of Sentara to make the payments required to be made thereunder and under the Note, and to perform and observe the other agreements on its part contained in the Loan Agreement and the Note, shall be absolute and unconditional, and shall not be subject to diminution by set-off, counterclaim, abatement or otherwise.

Project Fund. Sentara is obligated to use moneys in the Project Fund for costs of the projects that were financed or refinanced with the Refunded Bonds. Sentara will requisition such moneys in accordance with the terms of the Bond Indenture.

Defaults. The Loan Agreement provides that the occurrence of one or more of the following events will constitute a “Default” thereunder:

(a) failure by Sentara to pay when due any payment required to be paid under the Loan Agreement or under the Note on or before the date which such payment is due and payable;

(b) failure by Sentara to perform or observe any other of its covenants, conditions or agreements under the Loan Agreement (other than a failure referred to in (a) above) for a period of 30 days after written notice from the Issuer or the Bond Trustee, unless such period is extended in writing;

(d) an Event of Default shall occur under the Master Indenture.

Remedies. Whenever a Default under the Loan Agreement shall have occurred and be continuing, the Issuer and the Bond Trustee shall, in addition to any other remedies provided in the Loan Agreement or by law, have the right, at its or their option without any further demand or notice, to take either or both of the following remedial steps:

(a) declare all payments due under the Loan Agreement and the Note to be immediately due and payable, and upon written notice to Sentara the same shall become immediately due and payable; or

(b) take whatever other action at law or in equity may appear necessary or desirable to collect the payments then due and thereafter to become due under the Loan Agreement and the Note or to enforce performance or observance of any obligation, agreement or covenant of Sentara under the Loan Agreement.

Any declaration of acceleration of the Note shall be rescinded upon (i) rescission of any declaration of acceleration of the Bonds and (ii) every Event of Default (other than a default in the payment of the principal or other payments then due only because of the acceleration of the Note) having been remedied by Sentara. See APPENDIX C—“DEFINITIONS AND SUMMARY OF PRINCIPAL DOCUMENTS—Part I: Summary of Master Indenture and Funding Agreements—Summary of Master Indenture—Events of Default, — Acceleration; Annulment of Acceleration and —Additional Remedies and Enforcement of Remedies.”

Any amounts collected pursuant to action taken upon the occurrence of an Event of Default under the Loan Agreement shall be paid into the Bond Fund under the Bond Indenture and applied in accordance with the provisions of the Bond Indenture.

The Master Indenture

The following is a summary of certain provisions of the Master Indenture. The following summary does not purport to be complete, and is qualified by express reference to the Master Indenture, copies of which are available upon request as described herein. Certain capitalized terms used in the following summary are defined in APPENDIX C—“DEFINITIONS AND SUMMARY OF PRINCIPAL DOCUMENTS—Part I: Summary of Master Indenture and Funding Agreements—Summary of Master Indenture—Events of Default, — Acceleration; Annulment of Acceleration and —Additional Remedies and Enforcement of Remedies.”

Sentara will issue and deliver to the Bond Trustee, as assignee of the Issuer, the Note in the principal amount equal to the aggregate principal amount of the Bonds. The terms of the Note will require payments by the members of the Obligated Group which, together with other moneys available therefor (and interest earned thereon), will be sufficient to provide for the prompt payment of the principal of, premium, if any, and interest on the Bonds.

Sentara is the only member of the Obligated Group under the Master Indenture. Subject to meeting the requirements of the Master Indenture, other entities may become Obligated Group members or leave the Obligated Group so long as no remaining member would be in default in the performance or observance of any term of the Master Indenture. There can be no assurance that any additional party will become a member of the Obligated Group or that if other members are added to the Obligated Group, such members will not leave the Obligated Group. See APPENDIX C—“DEFINITIONS AND SUMMARY OF PRINCIPAL DOCUMENTS—Part I: Summary

of Master Indenture and Funding Agreements—Summary of Master Indenture—Membership in Obligated Group and —Withdrawal from Obligated Group.”

Payments on the Note are the joint and several obligation of the Obligated Group members. Notwithstanding uncertainties as to the enforceability of the covenant of each Obligated Group member in the Master Indenture to be jointly and severally liable for the Note, and of each Obligated Group member to cause Obligated Group Affiliates to make transfers to the Obligated Group members as required to enable the Obligated Group members to make payments on the Note, and the fact that Obligated Group Affiliates are not directly obligated to make any payments on the Note and may enter into agreements restricting their ability to make payments to the Obligated Group members, the accounts of the Obligated Group members and the Obligated Group Affiliates are combined in determining whether various covenants and tests contained in the Master Indenture are met.

Withdrawal or Release of Obligated Group Members. Any member of the Obligated Group may withdraw from the Obligated Group and be released from further liability or obligation under the provisions of the Master Indenture, provided that prior to such withdrawal the Bond Trustee receives an Officer’s Certificate, as defined in the Master Indenture, to the effect that immediately following the withdrawal of such member, no remaining member would be in default in the performance or observance of any term of the Master Indenture.

Required Debt Service Coverage Ratio. The members of the Obligated Group have agreed in the Master Indenture that the Annual Required Debt Service Coverage Ratio for the members of the Obligated Group and the Obligated Group Affiliates for each year, taken together, will not be less than 1.10 to 1. In the event that the Annual Required Debt Service Coverage Ratio falls below 1.10 to 1 for any year, the members of the Obligated Group have agreed to promptly employ an Independent Consultant to make recommendations with respect to the operations of the Obligated Group in order to increase such ratio to at least 1.10 to 1 in the next succeeding year. Failure of the members of the Obligated Group to maintain the Annual Required Debt Service Coverage Ratio at a level equal to or greater than 1.0 to 1.0 for any year shall constitute an Event of Default under the Master Indenture. See APPENDIX C—“DEFINITIONS AND SUMMARY OF PRINCIPAL DOCUMENTS—Part I: Summary of Master Indenture and Funding Agreements—Summary of Master Indenture—Debt Coverage.”

Ability to Transfer Property. The Master Indenture does not restrict the ability of the members of the Obligated Group or the Obligated Group Affiliates to transfer property, including cash, marketable securities or receivables, to anyone. See APPENDIX C—“DEFINITIONS AND SUMMARY OF PRINCIPAL DOCUMENTS—Part I: Summary of Master Indenture and Funding Agreements—Summary of Master Indenture—Merger, Consolidation, Sale or Conveyance.”

Ability to Issue Additional Notes; Ability to Pledge Collateral. The Master Indenture does not limit Additional Indebtedness including additional notes. Additional notes may be secured by collateral which need not be pledged to secure any other notes (including the Note). The Master Indenture contains only limited restrictions on the ability of Sentara, the other Obligated Group members, if any, and any Obligated Group Affiliate to encumber property. The property subject to such liens could consist in whole or in part of cash, marketable securities or accounts receivable. See APPENDIX C—“DEFINITIONS AND SUMMARY OF PRINCIPAL DOCUMENTS—Part I: Summary of Master Indenture and Funding Agreements—Certain Definitions— Permitted Encumbrances.”

Substitution of Note. In order to permit Sentara the flexibility to join with one or more other entities to create a new credit group under a new master indenture under certain circumstances, the Bond Indenture requires the Bond Trustee to surrender the Note in exchange for a note or notes to be issued under a replacement master indenture.

The execution and delivery of a replacement master indenture could, under certain circumstances, lead to the substitution of different security in the form of a note backed by an obligor that is financially and operationally different from Sentara. Such a new obligor could have substantial debt outstanding which would rank on a parity with any substitute notes issued in exchange for the Note. Such exchange could adversely affect the market price for and marketability of the Bonds.

The Funding Agreements

Each of the Obligated Group Affiliates has entered into an Amended and Restated Funding Agreement or a Funding Agreement which provides as follows:

Funding of Borrower’s Obligations. Sentara’s payment obligations under the Master Indenture are dependent in part upon its receipt of funding from the Obligated Group Affiliates, if required, in an amount sufficient to promptly pay all Required Payments at the place, on the dates and in the manner provided in the Master Indenture. Accordingly, the Obligated Group Affiliates will provide any funds that may be required to promptly pay to Sentara, and, subject to the provisions of the last paragraph of this subsection, solely to Sentara, all Required Payment obligations upon receipt of any demand therefor from Sentara, the Master Trustee, the Related Bond Issuers or the Related Bond Trustees (each as described in the Funding Agreement), as the case may be. The Obligated Group Affiliates agree to pay to Sentara, and, subject to the provisions of the last paragraph of this subsection, solely to Sentara, by 2 p.m. Eastern time on the same business day as demanded the Required Payment obligations; provided, however, that if any such demand is made after 11 a.m. Eastern time on any business day, any such Required Payment to Sentara shall not be required until 10 a.m. Eastern time on the following business day. All payments by the Obligated Group Affiliates shall be paid in lawful money of the United States of America. The obligations of the Obligated Group Affiliates under a Funding Agreement shall be continuing, absolute and unconditional and shall not be impaired, modified, released or limited by any occurrence, defense or condition whatsoever.

The obligations of the Obligated Group Affiliates are agreements to make intercompany transfers only; provided, however, upon the occurrence and continuation of an Event of Default, upon demand of the Master Trustee, the Obligated Group Affiliates will make the payments required by the Funding Agreements directly to the Master Trustee or to the Related Bond Issuers or the Related Bond Trustees designated by the Master Trustee. Sentara assigns and pledges to the Master Trustee all of its right to receive payments to be made by the Obligated Group Affiliates under the Funding Agreements and the proceeds of any such payments.

Notwithstanding the above provisions of this section, the Obligated Group Affiliates will not be required to make any payment under a Funding Agreement if to do so would violate its charitable purposes or be inconsistent with state law or would cause such Obligated Group Affiliates to breach the terms of any restricted gift or any contractual obligations or other commitments.

Third-Party Rights. Payment of the Required Payment obligations to Sentara under the Funding Agreements may be demanded as a third-party beneficiary under the Funding Agreements by (a) each Related Bond Issuer with respect to any Required Payments directly payable to it, including for example, its annual administrative fee, (b) the Related Bond Trustees under the Related Bond Indentures with respect to any Required Payments thereunder and (c) the Master Trustee with respect to any Required Payments under the Master Indenture.

BONDHOLDERS’ RISKS

Introduction

Payment of the Bonds depends directly on the ability of Sentara and any other members of the Obligated Group (if any additional members are added) and the Obligated Group Affiliates collectively to generate revenues sufficient to cover the collective operating expenses of the Obligated Group and debt service on the Bonds and all other indebtedness of the Obligated Group. In the last decade, health care providers, especially hospitals, have faced increasing economic pressures from both governmental health care programs and private purchasers of health care such as insurance companies and health maintenance organizations (collectively “third-party payers”). The dependence of hospitals on governmental programs requires them to handle both limitations on payments and other regulations, restrictions and requirements triggered by participation in such programs. Many governmental and private third-party payors have required health care providers to accept “capitated” or other fixed payments, which have the effect of shifting significant economic risks to health care providers.

Health care, especially at the hospital level, is a highly regulated industry with complicated and frequently changing regulations arising from payment programs. Health care providers are increasingly subject to audits, investigations, fines and litigation that may threaten access to governmental reimbursement programs, require substantial payments, generate adverse publicity and create significant legal and other transaction costs. In addition, because the members of the Obligated Group and the Obligated Group Affiliates are tax-exempt charitable organizations under the Code, they are subject to increasing regulation and restrictions that may have adverse effects on their economic performance or threaten their tax-exempt status and the economic benefits derived from such status. In particular, such regulations and restrictions may require them to provide health care services for which they do not receive payment.

Set forth below is a limited discussion of certain of the risks affecting the members of the Obligated Group and the Obligated Group Affiliates and their ability to make payments to provide for payment of the Bonds. Investors should recognize that the discussion below does not cover all such risks, that payment provisions and regulations and restrictions change frequently and that additional material payment limitations and regulations and restrictions may be created, implemented or expanded while the Bonds are outstanding. The following discussion is not meant to be an exhaustive list of the risks associated with the purchase of any Bonds and does not necessarily reflect the relative importance of the various risks. Potential investors are advised to consider the following special factors along with all other information described elsewhere or incorporated by reference in this Official Statement, including the Appendices hereto, in evaluating the risks of making an investment in the Bonds.

Note Substitution

In order to permit Sentara the flexibility to join with one or more other entities to create a new credit group under a new master indenture under certain circumstances, the Bond Indenture requires the Bond Trustee to surrender the Note in exchange for a note or notes to be issued under a replacement master indenture. The execution and delivery of a replacement master indenture could, under certain circumstances, lead to the substitution of different security in the form of a note backed by an obligor that is financially and operationally different from Sentara. Such replacement note would likely be issued under a master indenture or similar document containing terms and provisions that vary significantly from the terms and provisions of the Master Indenture, and the operations of the obligated entities under such replacement master indenture could vary significantly from the operations of the Obligated Group. Such a new obligor could have substantial debt outstanding which would rank on a parity with any substitute notes issued in exchange for the Note. Such exchange could adversely affect the market price for and marketability of the Bonds. See “SECURITY FOR THE BONDS—The Loan Agreement and the Note—Substitution of the Note.”

Interest Rate Swap Risk

As with most marketable securities, Sentara’s derivative agreements are subject to “mark-to-market” valuations. Such agreements may, at any time, have a negative value to Sentara. The providers of such agreements may terminate the agreements upon nonpayment by Sentara, and upon the occurrence of certain other events of default and termination events. Sentara may generally terminate such agreements at any time or upon the occurrence of certain events. If either a provider or Sentara terminate a swap agreement at a time when such agreement has a negative value, Sentara may be subject to a termination payment to such provider, and such payment may be material. See APPENDIX B “CONSOLIDATED FINANCIAL STATEMENTS OF SENTARA HEALTHCARE FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016—Note (9) Derivative Financial Instruments.”

Bankruptcy and Creditors’ Rights; Limits on Claims Against Members and Other Matters Concerning the Financing Documents

The Bonds are payable by the Issuer solely from the trust estate. Enforcement of remedies under the Bond Indenture, the Master Indenture, the Loan Agreement and the Note may be limited or restricted by laws relating to bankruptcy and rights of creditors and by application of general principles of equity applicable to the availability of specific performance or other equitable relief and may be substantially delayed in the event of litigation or statutory remedy procedures.

While as organizations described in Section 501(c)(3) of the Code (“Exempt Organizations”) Sentara and the Obligated Group Affiliates are not subject to involuntary bankruptcy under 11 U.S.C. § 101 et seq. (the “Bankruptcy Code”), such entities do have the right to file a voluntary petition in bankruptcy. In the future, the Obligated Group may include members of the Obligated Group that not Exempt Organizations and are therefore are subject to involuntary bankruptcy. In any bankruptcy proceedings for Sentara or an Obligated Group Affiliate, payments made by any of them during the 90-day (or one-year, for “insiders” as defined in 11 U.S.C. § 101) period immediately preceding the filing of such bankruptcy petition may be avoidable as preferential transfers to the extent such payments allow the recipients to receive more than they would have received in the event of such debtor’s liquidation. Such a bankruptcy filing would operate as an automatic stay of the commencement or continuation of any judicial or other proceeding against such member or Obligated Group Affiliate and its property and as an automatic stay of any act or proceeding to enforce a lien upon or to otherwise exercise control over its property as well as various other actions to enforce, maintain or enhance the rights of a trustee. If the Bankruptcy Court so ordered, the property of such debtor, including accounts receivable and proceeds thereof, could be used for its financial rehabilitation. The rights of the Bond Trustee or Master Trustee to enforce claims for payment could be delayed during the pendency of the bankruptcy proceeding.

Any member of the Obligated Group or any Obligated Group Affiliate that is the subject of a bankruptcy petition could file a plan of reorganization for the adjustment of its debts in any such proceeding, which plan could include provisions modifying or altering the rights of creditors generally or any class of them, secured or unsecured. Such a plan, when confirmed by a court, binds all creditors who had notice or knowledge of the plan and, with certain exceptions, discharges all claims against the debtor to the extent provided for in the plan. No plan may be confirmed unless certain conditions are met, among which are conditions that the plan be feasible and that it shall have been accepted by each class of claims impaired thereunder. Each class of claims has accepted the plan if the holders of at least two-thirds in dollar amount and more than one-half in number of the class cast votes in its favor. Even if the plan is not so accepted, it may be confirmed if the court finds that the plan is fair and equitable with respect to each class of non-accepting creditors impaired thereunder and does not discriminate unfairly.

In addition, Sentara has affiliates which are not Obligated Group Affiliates and are not subject to funding agreements.

Effects on Enforcement of Bond Documents. In the event of bankruptcy of a member of the Obligated Group, there is no assurance that certain covenants, including, but not limited to, financial and tax covenants, contained in the Bond Indenture, Loan Agreement or other documents would survive. Similarly, in the event of a bankruptcy of an Obligated Group Affiliate, there is no assurance that the covenants and undertakings of such Obligated Group Affiliate under its Funding Agreement would survive. Accordingly, any member of the Obligated Group as a debtor in possession or a bankruptcy trustee appointed by the Bankruptcy Court could take action that might adversely affect the exclusion of interest on the Bonds from gross income for federal income tax purposes. Because the Bonds and the other Obligations of the Obligated Group described herein are not secured by any liens or security interests on property or revenues of the Obligated Group, or the Obligated Group Affiliates, the Holders and Beneficial Owners of the Bonds will not have any claims for special protection in bankruptcy proceedings affecting revenue producing property and will be general creditors of the bankruptcy estate.

The legal right and practical ability of the Bond Trustee and the Master Trustee to enforce rights and remedies may be limited by laws relating to bankruptcy, insolvency, reorganization, fraudulent conveyance or moratorium and by other similar laws affecting creditors’ rights. Enforcement of such rights and remedies will depend upon the exercise of various remedies specified by such documents, which, in many instances, may require judicial actions that are subject to discretion and delay, that otherwise may not be readily available or that may be limited by certain legal or equitable principles.

Limits on Claims. There exists common law and statutory authority for certain courts to terminate the existence of a nonprofit corporation or undertake supervision of its affairs on various grounds, including a finding that such corporation has insufficient assets to carry out its stated charitable purposes. Such court action may arise on the court’s own motion or pursuant to a petition of the Virginia Attorney General or other persons, any of whom might have interests different from those of the general public, pursuant to the common law and statutory power to enforce charitable trusts and to apply their funds to their intended charitable uses.

In addition, the requirement that each member of the Obligated Group and each Obligated Group Affiliate make all payments required to pay debt service on the Bonds and on the other Obligations of the Obligated Group and each Obligated Group Affiliate described herein, and the requirement that parties to the Funding Agreements make the payments required pursuant to such Funding Agreements, regardless of the use of the proceeds thereof, may be limited by broad equitable principles and provisions relating to charitable trusts that may not permit the use of a member’s assets for such payments. The directors of any member of the Obligated Group or any Obligated Group Affiliate or any party to a Funding Agreement may be required to resist use of assets if they believe such use does not promote charitable purposes or threatens the member’s or affiliate’s financial condition. Payments made by a member of the Obligated Group or any Obligated Group Affiliate or party to a Funding Agreement in such case may be recovered or avoided if the member or affiliate received less than “fair consideration” for its promise to pay. This doctrine may effectively limit the obligation of each member of the Obligated Group or Obligated Group Affiliate to pay all amounts due under the Note and other Obligations under the Master Indenture, or under an Obligated Group Affiliate’s Funding Agreement, when such member or affiliate did not receive the proceeds or benefit of such Obligation. Standards for judging such fairness of consideration may be affected by determinations under the Bankruptcy Code and/or state fraudulent transfer or conveyance statutes.

The Note is cross-defaulted and secured on parity with all other Obligations under the Master Indenture. Further, an Event of Default under the Master Indenture or a Default under the Loan Agreement constitutes an Event of Default under the Bond Indenture. See APPENDIX C—“DEFINITIONS AND SUMMARY OF PRINCIPAL DOCUMENTS—Part I: Summary of Master Indenture and Funding Agreements—Summary of Master Indenture—Events of Default, —Acceleration; Annulment of Acceleration, and —Additional Remedies and Enforcement of Remedies.”

Concerning Sentara’s Operations

Future revenues and expenses of the Obligated Group and the Obligated Group Affiliates are subject to, among other things, the demand for services provided by them, the capabilities and continued support of their management, the ability of management to recruit new physicians and other personnel and to maintain the support of the present medical staff and other personnel, economic developments and population trends in the service area, competition, rates, costs, third-party reimbursement programs, the availability of gifts and contributions from donors and of federal and state loans and grants, the effect of changes in accreditation standards or governmental regulations, the availability of adequate malpractice insurance coverage, and the ability of their management to control expenses during periods of inflation and to increase room charges and other fees charged while maintaining the amount and quality of health services delivered. The regulatory and market factors discussed below may have an adverse effect on the financial condition of the Obligated Group and the Obligated Group Affiliates. In particular, the following factors, among others, may have an adverse effect on the financial condition of Sentara and the Obligated Group Affiliates to an extent that cannot be determined at this time.

Health Care Laws and Regulations

Sentara is subject to a wide variety of federal and state regulatory actions and legislative and policy changes by those governmental and private agencies that administer Medicare, Medicaid, and other payors and are subject to actions by, among others, the Joint Commission (a private nonprofit corporation that accredits health care programs and providers in the United States), the Centers for Medicare and Medicaid Services (“CMS”) of the U.S. Department of Health and Human Services (“DHHS”), U.S. Department of Justice (“DOJ ”), the Attorney General of the Commonwealth of Virginia, and other federal, state, and local government agencies. The future financial condition of Sentara could be adversely affected by, among other things, changes in the method and amount of payments to Sentara by governmental and nongovernmental payors, the financial viability of these payors, increased competition from other health care entities, the costs associated with responding to governmental inquiries and investigations, demand for health care, other forms of care or treatment, changes in the methods by which employers purchase health care for employees, capability of management, changes in the structure of how health care is delivered and paid for, future changes in the economy, demographic changes, availability of physicians, nurses, and other health care professionals, and malpractice claims and other litigation. These factors and others may adversely affect the ability of Sentara to make payments required under the Loan Agreement and, consequently, may adversely affect the ability to make payments due on the Bonds. In addition, the tax-exempt status of Sentara and, therefore,

of the Bonds, could be adversely affected by, among other things, an adverse determination by a governmental entity, noncompliance with governmental regulations or legislative changes.

Significant Risk Areas Summarized

Certain of the primary risks associated with the operations of Sentara are briefly summarized in general terms below and are explained in greater detail in subsequent sections. The occurrence of one or more of these risks could have a material adverse effect on the financial conditions and results of operations of Sentara and, in turn, the ability of Sentara to make payments under the Loan Agreement and the Note.

Disruption in the Credit Markets and Economic Factors. Domestic and international financial crises over the past few years have adversely affected the U.S. and international economies, undermined confidence in the financial sector, reduced the availability of credit and contributed to great volatility in the financial markets, reduced business activity and employment, increased business failures and decreases in personal income and increases in the incidence of poverty. There has been a particularly acute impact upon the financial sector causing many banks and other financial institutions to seek additional capital, to merge, and in some cases, to fail.

Sentara has significant holdings in a broad range of investments, and market fluctuations have affected and will continue to affect materially the value of those investments. More stringent credit requirements could adversely affect the ability of Sentara to obtain credit or otherwise access credit markets.

Cybersecurity. Despite the implementation of network security measures by Sentara, its information technology systems may be vulnerable to breaches, hacker attacks, computer viruses, physical or electronic break- ins and other similar events or issues. Such events or issues could lead to the inadvertent disclosure of protected health information or other confidential information or could have an adverse effect on the ability of Sentara to provide health care services. In recent years, a third-party vendor of Sentara’s experienced a cyberattack which resulted in the disclosure of over 5,000 patient records that contained protected health information or other confidential information. See “BONDHOLDERS’ RISK—Privacy and Security of Health Information” herein.

Reliance on Medicare. Inpatient hospitals rely to a high degree on payment from the federal Medicare program, which is undergoing significant changes and payment pressures as a result of government budgetary pressures as well as Health Care Reform. See “BONDHOLDERS’ RISK—Health Care Reform” herein. These changes create uncertainty and could have a material adverse impact on hospitals’ payment stream from Medicare.

Non-Compliance with Conditions of Participation. Sentara’s continued participation in the Medicare and Medicaid programs is dependent upon satisfactory compliance with Conditions of Participation (“COPs”) in the Medicare program. COPs are the standards that a health care provider must meet in order to be accredited by CMS to participate in the Medicare and Medicaid programs. See “BONDHOLDERS’ RISK—Enforcement Activity— Compliance with Conditions of Participation” herein.

Managed Care Exposure. Certain health care markets, including many communities in Virginia, are strongly impacted by managed care. In those areas, managed care companies have significant influence over the rates, utilization and competition of hospitals and other health care providers. Rate pressure imposed by managed care payors may have a material adverse impact on health care providers, particularly if major purchasers or governmental authorities put increasing pressure on payors to restrain rate increases. Business failures by managed care companies also could have a material adverse impact on contracted hospitals and other health care providers in the form of payment shortfalls or delay, or continuing obligations to care for managed care patients without receiving payment. Sentara may be unable to agree with one or more managed care payors or the terms and conditions of participating in the payor’s network. As a result, Sentara may be “out of network” for certain payors which could adversely affect utilization and the ability to collect payments. In addition, disputes with non- contracted payors are increasing and may result in an inability to collect billed charges from these payors.

Capital Needs vs. Capital Capacity. Hospital and other health care operations are capital intensive. Regulation, technology, and physician/patient expectations require constant and often significant capital investment.

Total capital needs may outstrip capital capacity. Furthermore, capital capacity of hospitals and health systems may be reduced as a result of recent credit market dislocations, and it is uncertain how long those conditions may persist.

Government Fraud Enforcement. Fraud in government funded health care programs is a significant concern of DHHS and many states and is one of the federal government’s prime law enforcement priorities. The federal government and, to a lesser degree, state governments impose a wide variety of extraordinarily complex and technical requirements intended to prevent over-utilization based on economic inducements, misallocation of expenses, overcharging and other forms of fraud in the Medicare and Medicaid programs as well as other state and federally-funded health care programs. This body of regulation impacts a broad spectrum of hospital and other health care provider commercial activity, including billing, accounting, recordkeeping, medical staff oversight, physician contracting and recruiting, cost allocation, clinical trials, discounts and other functions and transactions.

Violations and alleged violations may be deliberate, but also frequently occur in circumstances where management is unaware of the conduct in question as a result of mistake, or where the individual participants do not know that their conduct is in violation of law. Violations may occur and be prosecuted in circumstances that are highly technical in nature and do not have the traditional elements of fraud, and enforcement actions may extend to conduct that occurred in the past. The government periodically conducts widespread investigations covering categories of services or certain accounting or billing practices. In addition, as described herein under “BONDHOLDERS’ RISKS—Health Care Reform,” ACA (as defined herein) will result in provider enrollment screening, enhanced oversight periods for new providers and suppliers, and enrollment moratoria in areas identified as being at elevated risk of fraud in all public programs, and by requiring Medicare and Medicaid program providers and suppliers to establish compliance programs.

Violations and Sanctions. The government or private “whistleblowers” often pursue aggressive investigative and enforcement actions. The government has a wide array of civil, criminal and monetary penalties, including withholding essential hospital and other health care provider payments from the Medicare or Medicaid programs, or exclusion from those programs. Aggressive investigation and prosecutorial tactics, negative publicity, and threatened penalties of a catastrophic nature can be, and often are, used to force settlements, payment of fines, and prospective restrictions that may have a materially adverse impact on hospital and other health care provider operations, financial condition and reputation. Multi-million dollar fines and settlements are common. These risks are generally uninsured. Government enforcement and private whistleblower suits may increase in the hospital sector. Most large hospital and other health care provider systems are likely to be adversely impacted.

Shortage of Clinical Professionals. From time to time, a shortage of physicians and nursing and other technical personnel may occur which may have its primary impact on hospitals. Various studies have predicted that physician and nursing shortages will become more acute over time and grow to significant proportions. In addition, shortages of other professional and technical staff such as pharmacists, therapists, laboratory technicians and others may occur or worsen. Hospital operations, patient and physician satisfaction, financial condition and future growth could be negatively affected by physician and nursing and other technical personnel shortages, resulting in material adverse impact to hospitals.

Technical and Clinical Developments. New clinical techniques and technology, as well as new pharmaceutical and genetic developments and products, may alter the course of medical diagnosis and treatment in ways that are currently unanticipated, and that may dramatically change medical and hospital care. These could result in higher hospital costs, reductions in patient populations, lower utilization of hospital service and/or new sources of competition for hospitals.

Costs and Restrictions from Governmental Regulation. Nearly every aspect of hospital operation and health care delivery is regulated, in some cases by multiple agencies of government. The level and complexity of regulation appears to be increasing, bringing with it operational limitations, enforcement and liability risks, and significant and sometimes unanticipated cost increases.

Proliferation of Competition. Hospitals increasingly face competition from specialty providers of care and ambulatory care facilities. This may cause hospitals to lose essential inpatient or outpatient market share. Competition may be focused on services or payor classifications where hospitals realize their highest margins, thus negatively affecting programs that are economically important to hospitals. These new sources of competition may

have a material adverse impact on hospitals, particularly where a group of a hospital’s principal physician admitters may curtail their use of a hospital service in favor of competitive facilities.

Increasing Consumer Choice; Increased Patient Responsibility for Costs. Hospitals and other health care providers face increased pressure to be transparent and provide information about cost and quality of services, which may lead to a loss of business as consumers and others make choices about where to receive health care services based upon cost and quality. In addition, many employers are shifting additional responsibility for costs onto consumers in the form of higher co-insurance obligations and deductibles. This may result in patients delaying or foregoing needed care.

Labor Costs and Disruption. Hospitals are labor intensive. Labor costs, including salary, benefits and other liabilities associated with the workforce, are a significant component of hospital expenses and therefore have significant impact on hospital operations and financial condition. Overall costs of the hospital workforce are high, and turnover is high. Pressure to recruit, train and retain qualified employees is expected to accelerate.

The following factors may materially increase hospital costs of operation:

General Economic Conditions; Bad Debt and Indigent Care. Hospitals and health care providers are economically influenced by the environment in which they are located. To the extent that state, county or city governments are unable to provide a safety net of medical services, pressure is applied to local hospital and providers to increase free care. Economic downturns and lower funding of state Medicaid programs may increase the number of patients treated by hospitals who are uninsured, underinsured or otherwise unable to pay for some or all of their care. These conditions may give rise to increased bad debt and higher indigent care utilization. At the same time, nonoperating revenue from investments may be reduced or eliminated. These factors may have a material adverse impact on hospitals.

Tax-exempt hospitals often treat large numbers of indigent patients who are unable to pay in full for their medical care. General economic conditions that affect the number of employed individuals who have health coverage affects the ability of patients to pay for their care. Similarly, changes in governmental policy, which may result in coverage exclusions under local, state and federal health care programs (including Medicare and Medicaid) may increase the frequency and severity of indigent treatment by such hospitals and other providers. It also is possible that future legislation could require that tax-exempt hospitals and other providers maintain minimum levels of indigent care as a condition to federal income tax exemption or exemption from certain state or local taxes.

Pension and Benefit Funds. As large employers, hospitals may incur significant expenses to fund pension and benefit plans for employees and former employees, and to fund required workers’ compensation benefits. Funding obligations in some cases may be erratic or unanticipated and may require significant commitments of available cash needed for other purposes.

Medical Liability Litigation and Insurance. Medical liability litigation is subject to public policy determinations and legal and procedural rules that may be altered from time to time, with the result that the frequency and cost of such litigation, and resultant liabilities, may increase in the future. Hospitals may be affected by negative financial and liability impacts on physicians. Costs of insurance, including self-insurance, may increase dramatically.

Nonprofit Healthcare Environment

As a nonprofit tax-exempt organization, Sentara is subject to federal, state and local laws, regulations, rulings and court decisions relating to its organization and operation, including its operation for charitable purposes. At the same time, Sentara conducts large-scale complex business transactions and is a major employer in its service area. There can often be a tension between the rules designed to regulate a wide range of charitable organizations and the day-to-day operations of a complex health care organization.

Recently, an increasing number of the operations or practices of health care providers have been challenged or questioned to determine if they are consistent with the regulatory requirements for nonprofit tax-exempt

organizations. These challenges are broader than concerns about compliance with federal and state statutes and regulations, such as Medicare and Medicaid compliance, and instead in many cases are examinations of core business practices of the health care organizations. Areas that have come under examination have included pricing practices, billing and collection practices, charitable care, methods of providing and reporting community benefit, executive compensation, exemption of property from real property taxation, private use of facilities financed with tax-exempt bonds and others. These challenges and questions have come from a variety of sources, including state attorneys general, the Internal Revenue Service (“IRS”), labor unions, Congress, state legislatures and patients, and in a variety of forums, including hearings, audits, and litigation.

Action by Purchasers of Hospital Services and Consumers. Major purchasers of hospital services also could take action to restrain hospital charges or charge increases. Additionally and as a result of increased public scrutiny, it is also possible that the pricing strategies of hospitals may be perceived negatively by consumers, and hospitals may be forced to reduce fees for their services. Decreased utilization could result, and hospitals’ revenues may be negatively impacted. In addition, consumers and groups on behalf of consumers are increasing pressure for hospitals and other health care providers to be transparent and provide information about cost and quality of services that may affect future consumer choices about where to receive health care services.

Challenges to Real Property Tax Exemptions. Recently, the real property tax exemptions afforded to certain nonprofit health care providers by state and local taxing authorities have been challenged on the grounds that the health care providers were not engaged in sufficient charitable activities. These challenges have been based on a variety of grounds, including allegations of aggressive billing and collection practices and excessive financial margins. Sentara has received no notice that any of the real property tax exemptions of Sentara have been placed under review by any state or local authorities.

The foregoing are some examples of the challenges and examinations facing nonprofit health care organizations. They are indicative of a greater scrutiny of the billing, collection and other business practices of these organizations and may indicate an increasingly more difficult operating environment for health care organizations, including Sentara. The challenges and examinations, and any resulting legislation, regulations, judgments, or penalties, could have a material adverse effect on hospitals.

Patient Service Revenue

The Medicare Program. Medicare is a federal program that provides certain health care benefits to beneficiaries who are 65 years of age or older, disabled or qualify for the End Stage Renal Disease program. Medicare Part A covers inpatient services and certain other services, and Medicare Part B covers certain physicians services, medical supplies and durable medical equipment. The Medicare Advantage Program, also known as Medicare Part C and formerly known as Medicare+Choice, enables Medicare beneficiaries who are entitled to Part A and are enrolled in Part B to choose to obtain their benefits through a variety of risk-based plans. Medicare Part D is the prescription drug benefit.

Medicare is administered by CMS, an agency of DHHS, which delegates to the states the process for certifying those organizations to which CMS will make payment. The rule-making authority of DHHS is substantial and the rules are extensive and complex. Substantial deference is given by courts to rules promulgated by DHHS.

Medicare claims are processed by non-government organizations or agencies that contract to serve as the fiscal agent between providers and the federal government to locally process Medicare’s institutional and provider claims. The contractors apply the Medicare coverage rules to determine the appropriateness of claims. CMS selects organizations (generally insurance companies) to act as contractors in various states or regions and enters into a “prime contract” with each. Most Medicare services are paid for on a fee-for-service basis under the reimbursement methods described below. Some Medicare recipients, however, enroll in Medicare Advantage managed care plans which may reimburse providers on a fee for service or capitated basis.

To achieve and maintain Medicare certification, hospitals must meet CMS’s “Conditions of Participation” on an ongoing basis. Compliance is determined by the state and/or an appropriate accrediting organization. The requirements for Medicare certification are subject to change, and, therefore, it may be necessary for hospitals to effect changes from time to time in their facilities, equipment, personnel, billing, policies and services to address

such changing requirements. As the population ages, more people will become eligible for the Medicare program. Current projections indicate that demographic changes and continuation of current cost trends will exert significant and negative forces on the overall federal budget.

Approximately 44.8%, 45.5% and 47.0% of gross patient service revenues of Sentara were derived from the Medicare program for the fiscal years that ended December 31, 2015, 2016 and 2017, respectively. As a consequence, any adverse development or change in Medicare reimbursement could have a material adverse effect on the financial condition and results of operations of Sentara.

Federal Budget Cuts. The Budget Control Act of 2011 (the “BCA”) mandates significant reductions and spending caps on the federal budget for federal fiscal years 2012 through 2021. The spending reductions took effect on March 1, 2013, resulting in a 2% across the board payment cut for all Medicare providers, including hospitals, beginning on April 1, 2013. Without further action by Congress, the spending cuts are scheduled to continue through federal fiscal year 2025. However, because Congress may make changes to the federal budget in the future, it is impossible to predict the impact any spending cuts that are approved may have upon Sentara and its affiliates. Similarly, it is impossible to predict whether any automatic reductions to Medicare may be triggered in lieu of other spending cuts that may be proposed by Congress. These reductions could be implemented disproportionately for hospitals and could have an adverse effect on the financial condition of Sentara.

Hospital Inpatient Reimbursement. Medicare Part A pays acute care hospitals for most inpatient services under a payment system known as the “Prospective Payment System” or “PPS.” Separate PPS payments are made for inpatient operating costs, inpatient capital-related costs and outpatient services.

Acute care hospitals are generally paid a specified amount toward their operating costs for inpatient services provided to Medicare beneficiaries based on established categories of treatments or conditions known as diagnosis related groups (“DRGs”). The amount paid for each DRG is established prospectively by CMS, based on the estimated intensity of hospital resources necessary to furnish care for each principal diagnosis and is not related directly to a hospital’s actual costs. For certain Medicare beneficiaries who have unusually costly hospital stays (“outliers”), CMS will provide additional payments above those specified for the DRG. Outlier payments cease to be available upon the exhaustion of such patient’s Medicare benefits or a determination that acute care is no longer necessary, whichever occurs first. There is no assurance that any of these payments will cover the actual costs incurred by a hospital. In addition, recent revisions to the outlier regulations, implemented in order to curb outlier payment abuse, may adversely affect hospitals’ ability to receive such subsidies. In addition to outlier payments, DRG payments are adjusted for area wage differentials on a yearly basis.

DRG payments are also adjusted each federal fiscal year (which begins October 1) based on the hospital “market basket” index, or the cost of providing health care services. For nearly every year since 1983, Congress has modified the increases and given substantially less than the increase in the “market basket” index. These changes in the payments received for all services, including specialty services, could have an adverse effect on Sentara.

The Secretary of DHHS is required to review annually the DRG categories to take into account any new procedures and reclassify DRGs and recalibrate the DRG relative weights that reflect the relative hospital resources used by hospitals with respect to discharges classified within a given DRG category. There is no assurance that Sentara and its affiliates will be paid amounts that will reflect adequately changes in the cost of providing health care or in the cost of health care technology being made available to patients. CMS may only adjust DRG weights on a budget-neutral basis.

Reimbursement of Hospital Capital Costs. Hospitals are reimbursed on a fully prospective basis for capital costs (including depreciation and interest) related to the provision of inpatient services to Medicare beneficiaries. Thus, capital costs are reimbursed exclusively on the basis of a standard federal rate (based on average national costs of capital), subject to certain adjustments (such as for disproportionate share, and outlier cases) specific to each hospital. Hospitals are reimbursed at 100% of the standard federal rate for all capital costs. This applies to the standard federal rate before the application of the adjustment factors for outliers, exceptions and budget neutrality.

There can be no assurance that future capital-related payments will be sufficient to cover the actual capital- related costs of Sentara allocable to Medicare patient stays or to provide adequate flexibility in meeting the future capital needs of Sentara and any future members of the Obligated Group.

Hospital Outpatient Reimbursement. Hospital outpatient services, including hospital operating and capital costs, are reimbursed on a PPS basis. Several Part B services are specifically excluded from this rule, including certain physician and non-physician practitioner services, ambulance, clinical diagnostic laboratory services and non-implantable orthotics and prosthetics, physical and occupational therapy, and speech language pathology services.

Under the hospital outpatient PPS (“OPPS”), predetermined amounts are paid for designated services furnished to Medicare beneficiaries. CMS classifies outpatient services and procedures that are comparable clinically and in terms of resource use into ambulatory payment classification (“APC”) groups. Using hospital outpatient claims data from the most recent available hospital cost reports, CMS determines the median costs for the services and procedures in each APC group. Subsequently, a payment rate is established for each APC. Depending on the services provided, a hospital may be paid for more than one APC for a patient visit.

OPPS rates are adjusted annually based on the hospital inpatient market basket percentage increase. There can be no assurance that the hospital OPPS rate, which bases payment on APC groups rather than on individual services, will be sufficient to cover the actual costs of Sentara and its affiliates allocable to Medicare patient care. Hospitals that fail to report data related to seven required quality measures will have their market basket percentage increase reduced by two percentage points.

In addition to the APC rate, there is a predetermined beneficiary coinsurance amount for each APC group. There can be no assurance that the beneficiary will pay this amount.

Medicare Payment for Preventable Medical Errors. The Deficit Reduction Act of 2005 (the “DRA”) required the Secretary of DHHS to select at least two conditions that are: (1) high cost, high volume or both; (2) identified through coding as a complicating condition or major complicating condition that, when present as a secondary diagnosis at discharge, results in payment at a higher MS-DRG; and (3) reasonably preventable through application of evidence-based guidelines. Such conditions are referred to as “hospital acquired conditions.” The DRA further required hospitals to begin reporting on claims for discharges, beginning October 1, 2007, whether the selected conditions were present on admission. In its 2008 IPPS Rule, CMS selected eight conditions in furtherance of this mandate. These included seven conditions identified by the National Quality Forum as “never events.” In the 2009 Inpatient Prospective Payment System final rule (the “2009 IPPS Final Rule”), CMS finalized several more conditions, within three categories. All of the conditions have payment implications when acquired during an inpatient stay for discharges on or after October 1, 2008. In December 2008, the OIG issued three reports relating to adverse events in hospitals and the need to improve patient safety. The incidence of adverse events and their payment implications continues to be an area of focus for regulators.

Medicare Audits and Withholdings. Hospitals participating in Medicare and Medicaid are subject to audits and retroactive audit adjustments with respect to reimbursement claimed under those programs, and the representations upon which such reimbursements are claimed. There can be no assurance any such future adjustments will not be material or that Sentara’s reserves for such purpose will be adequate to cover any such adjustments. Both Medicare and Medicaid regulations also provide for withholding payments in certain circumstances. Any such withholding with respect to Sentara could have a material adverse effect on the financial condition and results of operations of Sentara. In addition, contracts between hospitals and third-party payors often have contractual audit, setoff and withhold provisions that may cause substantial, retroactive adjustments. Such contractual adjustments also could have a material adverse effect on the financial condition and results of operations of Sentara. No assurance can be given that in the future a Medicare payment or other payment will not be withheld that would materially and adversely affect the financial condition or results of operations of Sentara.

The Medicare Prescription Drug, Improvement and Modernization Act of 2003 established the Medicare Recovery Audit Contract (“RAC”) program initially as a demonstration program to identify improper Medicare payments. RACs are paid on a contingency fee basis, receiving a percentage of the improper overpayments and underpayments they collect from providers. RACs can review the last four years of provider claims for the

following types of services: hospital inpatient and outpatient, skilled nursing facility, physician, ambulance and laboratory, as well as durable medical equipment. The RACs use automated software programs to identify potential payment errors in such areas as duplicate payments, fiscal intermediaries’ mistakes, medical necessity and coding, and identified significant overpayments for collection in the demonstration states. The Tax Relief and Healthcare Act of 2006 expanded the RAC program to all 50 states. The Health Care Reform bill extended RACs to Medicaid.

In light of the complexity of the regulations relating to the Medicare program, and the nature of ongoing audits and compliance activities as described above, there can be no assurance that Sentara will not be the subject of any such activities.

Health Plans and Managed Care. Most private health insurance coverage is provided by various types of “managed care” plans, including health maintenance organizations (“HMOs”) and preferred provider organizations (“PPOs”) that generally use discounts and other economic incentives to reduce or limit the cost and utilization of health care services. To control costs, managed care plans typically contract with hospitals and other providers for discounted prices, review medical services for medical necessity, require members to pay copayments and deductibles, and channel patients to contracted providers of health care services. Medicare and Medicaid also purchase hospital care using managed care options. Payments to hospitals from managed care plans typically are lower than those received from traditional indemnity or commercial insurers.

Managed care plans have replaced indemnity insurance as the prime source of nongovernmental payment for hospital services, and hospitals must be capable of attracting and maintaining managed care business, often on a regional basis. Regional coverage and aggressive pricing may be required. However, it is also essential that contracting hospitals be able to provide the contracted services without significant operating losses, which may require multiple forms of cost containment.

Many HMOs and PPOs currently pay providers on a negotiated fee-for-service basis or, for institutional care, on a fixed rate per day of care, which, in each case, usually is discounted from the usual and customary charges for the care provided. Currently, Sentara has no managed care capitated contracts for its facilities (inpatient and outpatient services).

Often, managed care contracts are enforceable for a stated term, regardless of hospital losses and may require hospitals to care for enrollees for a certain time period, regardless of whether the HMO is able to pay the hospital. Hospitals from time to time have disputes with managed care payors concerning payment and contract interpretation issues.

Failure to maintain contracts could have the effect of reducing Sentara’s market share and net patient service revenue. Conversely, participation may result in lower net income if participating hospitals are unable to adequately contain their costs. Thus, managed care poses one of the most significant business risks (and opportunities) the hospitals face.

For the fiscal years ended December 31, 2015, 2016 and 2017 Sentara received approximately 11.3%, 11.0% and 10.7%, respectively, of gross patient service revenues from managed care plans (excluding Medicare and Medicaid managed care plans).

Health Care Reform

Federal Health Care Reform. On March 23, 2010, the U.S. Patient Protection and Affordable Care Act (“ACA”) was enacted. Some of the provisions of ACA took effect immediately or within a few months of final approval, while others have been and will continue to be phased in over time, ranging from one year to ten years. Because of the complexity of ACA generally, additional legislation is likely to be considered and enacted over time. ACA also requires the promulgation of substantial regulations with significant effects on the health care industry. The federal government and individual state governments must also interpret and implement the new regulatory requirements, many of which have yet to be considered and/or finalized. Additionally, ACA remains subject to significant legislative debate, including possible repeal and/or amendment, and substantial legal challenges to various aspects of ACA that have been made on multiple grounds. Thus, the health care industry will

be subjected to significant new statutory and regulatory requirements and consequently to structural and operational changes, challenges and uncertainty for a substantial period of time.

Management of Sentara will continue to analyze ACA in order to assess the effects of the legislation on current and projected operations, financial performance and financial condition. However, management cannot predict with any reasonable degree of certainty or reliability any interim or ultimate effects of the legislation.

A significant component of ACA is reformation of the sources and methods by which consumers will pay for health care for themselves and their families and by which employers will procure health insurance for their employees and dependents and, as a consequence, expansion of the base of consumers of health care services. One of the primary objectives of ACA is to provide or make available, or subsidize the premium costs of, health care insurance for some of the millions of currently uninsured (or underinsured) consumers who fall below certain income levels. Certain changes have been made to key ACA provisions recently. As amended, ACA seeks to accomplish that objective through various provisions, summarized as follows: (i) the creation of active markets (referred to as exchanges) in which individuals and small employers can purchase health care insurance for themselves and their families or their employees and dependents, (ii) providing subsidies for premium costs to individuals and families based upon their income relative to federal poverty levels, (iii) mandating that certain employers provide a minimum level of health care insurance, and providing for penalties or taxes and employers that do not comply with these mandates, (iv) establishment of insurance reforms that expand coverage generally through such provisions as prohibitions on denials of coverage for pre-existing conditions and elimination of lifetime or annual cost caps, and (v) expansion of existing public programs, including Medicaid, for certain individuals and families in states electing to expand eligibility. To date, Virginia has not elected to expand its Medicaid program. To the extent all or any of those provisions produce the intended result, an increase in utilization of health care services by those who are currently avoiding or rationing their health care can be expected and bad debt expenses may be reduced. Associated with increased utilization will be increased variable and fixed costs of providing health care services, which may or may not be offset by increased revenues.

Some of the specific provisions of ACA that may affect hospital operations, financial performance or the financial condition are described below. This listing is not, is not intended to be, nor should be considered by the reader as, comprehensive. ACA is complex and comprehensive, and includes myriad new programs and initiatives and changes to existing programs, policies, practices and laws.

• With varying effective dates, the annual Medicare market basket updates for many providers, including hospitals, would be reduced, and adjustments to payment for expected productivity gains would be implemented.

• Commencing October 1, 2010 through June 30, 2019, payments under the “Medicare Advantage” programs (Medicare managed care) will be reduced, which may result in increased premiums or out-of-pocket costs to Medicare beneficiaries enrolled in Medicare Advantage plans. Those beneficiaries may terminate their participation in those plans and opt for the traditional Medicare fee-for-service program. Offerors of Medicare Advantage plans may discontinue such plans in certain markets, disrupting beneficiary access to care and terminating contracts with Sentara or its affiliates. The reduction in payments to Medicare Advantage programs may also lead to decreased payments to providers by managed care companies operating Medicare Advantage programs. All or any of these outcomes will have a disproportionately negative effect upon those providers with relatively high dependence upon Medicare managed care revenues.

• As of October 1, 2011, health care insurers were required to include quality improvement covenants in their contracts with hospital providers, and will be required to report their progress on such actions to the Secretary of DHHS. Commencing January 1, 2015, health care insurers participating in the health insurance exchanges will be allowed to contract only with hospitals that have implemented programs designed to ensure patient safety and enhance quality of care. The effect of these provisions upon the process of negotiating contracts with insurers or the costs of implementing such programs cannot be predicted.

• Commencing in federal fiscal year 2014, Medicare disproportionate share hospital (DSH) payments were reduced initially by 75% and increased thereafter to account for the national rate of consumers who do not have health care insurance and are provided uncompensated care, though the provision has been delayed by legislative action multiple times.

• Commencing in federal fiscal year 2015, Medicare payments to certain hospitals for hospital- acquired conditions were reduced by 1%. Commencing in federal fiscal year 2011, federal payments to states for Medicaid services related to health care-acquired conditions were prohibited.

• Effective in 2012, a value-based purchasing program was established under the Medicare program designed to pay hospitals based on performance on quality measures.

• The ACA contains amendments to existing criminal, civil and administrative anti-fraud statutes and increases in funding for enforcement and efforts to recoup prior federal health care payments to providers. Under the ACA, a broad range of providers, suppliers and physicians are required to adopt a compliance and ethics program. While the government has already increased its enforcement efforts, failure to implement certain core compliance program features provide new opportunities for regulatory and enforcement scrutiny, as well as potential liability if an organization fails to prevent or identify improper federal health care program claims and payments.

• Effective for tax years commencing immediately after approval, additional requirements for tax- exemption will be imposed upon 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.

The Supreme Court held that States could not be required to expand Medicaid as envisioned by ACA. Rather, each state has the option to expand Medicaid. To date, Virginia has not elected to expand Medicaid. However, on April 17, 2018, the Virginia House of Delegates passed a budget bill that provides for Medicaid expansion coupled with authorization for the Virginia Department of Medical Assistance Services to apply for a Section 1115 waiver to authorize non-standard provisions in connection with accessing federal Medicaid expansion dollars, including work requirements for enrollees who are able-bodied, working age adults, as well as assessments on private acute care hospitals in amounts calculated to cover part of the non-federal share of the cost of Medicaid expansion. It is currently unclear whether the Virginia Senate will adopt provisions for Medicaid expansion in its version of the budget bill. Should Virginia elect to expand Medicaid, after an initial phase in period, the amount of state contribution to the funding of the expansion would significantly increase the amount required to fund Medicaid from the Virginia General Fund Budget, further exacerbating the State’s ability to fund Medicaid. This legislation also imposes numerous operating and reporting requirements on health care providers. Implementation of the various ACA initiatives will take several years and will require extensive time and expense. Implementation has been and continues to be uncertain. It is expected that governments will continue to consider various reform proposals in the health care industry. If adopted, such proposals may subject health care providers to increased compliance requirements, reduced reimbursement for services, increased costs, or a combination of such results.

ACA also provides for the implementation of various demonstration programs and pilot projects to test, evaluate, encourage and expand new payment structures and methodologies to reduce health care expenditures while maintaining or improving quality of care, including bundled payments under Medicare and Medicaid, and comparative effectiveness research programs that compare the clinical effectiveness of medical treatments and develop recommendations concerning practice guidelines and coverage determinations. Other provisions encourage the creation of new health care delivery programs, such as accountable care organizations, or combinations of provider organizations, that voluntarily meet quality thresholds to share in the cost savings they achieve for the

Medicare program. The outcomes of these projects and programs, including their effect on payments to providers and financial performance, cannot be predicted.

The ACA institutes multiple mechanisms for reducing the costs of the Medicare program.

Hospital Excess Readmission Penalties. Under the ACA, Congress established the “Hospital Readmissions Reduction Program” (HRRP). Under this Program, effective on and after October 1, 2012, hospitals will receive penalties, in the form of reduced Medicare reimbursement, if they are determined to have had excess readmissions based on comparisons of hospitals’ 30-day risk-adjusted readmission rates for Medicare patients with Acute Myocardial Infarction (AMI), Heart Failure (HF), and Pneumonia (PN) based on readmission data between 2008 and 2011. In the federal fiscal year 2014 IPPS Final Rule, CMS adopted the application of an algorithm to account for planned readmissions to the readmissions measures for AMI, HF and PN. In the federal fiscal year 2015 IPPS Final Rule, CMS finalized the addition of two conditions for purposes of calculating excess readmissions: (1) acute exacerbation of chronic obstructive pulmonary disease (COPD); and (2) elective total hip arthroplasty (THA) and total knee arthroplasty (TKA). CMS further has announced that for federal fiscal year 2017, it will expand the conditions and procedures used to measure hospital readmissions coronary artery bypass graft (CABG) surgery. It is possible that additional conditions will be added in future years, increasing the risks of penalties to hospitals based on excess readmissions. However, by statute, the penalties cannot exceed a 3% reduction in Medicare reimbursement as calculated pursuant to the formulas established under the HRRP.

The Medicaid Program. Medicaid is a program for medical assistance, funded jointly by the federal government and the states, for certain needy individuals and their dependents. Under Medicaid, the federal government provides limited funding to states that have medical assistance programs that meet federal standards. Sentara depends to a significant degree on federal and state government payments from Medicaid and the Children’s Health Insurance Program (also known as “CHIP”). Pursuant to broad federal guidelines, each state establishes its own eligibility standards; determines the type, amount, duration and scope of services; sets the payment rates for services; and administers its own programs. Payments made to health care providers under the Medicaid program are subject to change as a result of federal or state legislative and administrative actions, including changes in the methods for calculating payments, the amount of payments that will be made for covered services and the types of services that will be covered under the program. Such changes have occurred in the past and may be expected to occur in the future, particularly in response to federal and state budgetary constraints. Any future reduction in the level of Medicaid spending by the federal government is likely to have an adverse impact on the revenues of Sentara derived from the Medicaid program.

The ACA makes changes to Medicaid funding with a goal of substantially increasing the potential number of Medicaid beneficiaries in the United States. Because increased Medicaid funding generally brings more patients to most hospital providers, certain outcomes, such as a state refusing to expand Medicaid coverage, while Medicaid payment cuts are implemented, could put hospital providers at greater risk. Presently, Virginia has not elected to expand its Medicaid program. While management cannot predict the effect of changes to the Medicaid program on the operations, results from operations or financial condition of Sentara and its affiliates, historically Medicaid has reimbursed at rates below the cost of care. Therefore, increases in the overall proportion of Medicaid patients pose a risk. It is uncertain to what extent this risk may be mitigated if the increased Medicaid utilization population replaces previously uncompensated patients.

For the fiscal years ended December 31, 2015, 2016 and 2017, Sentara and its affiliates received approximately 10.2%, 9.8% and 9.6%, respectively, of gross patient service revenues from Medicaid.

Changes in qualification criteria, covered benefits, and reimbursement amounts could have a material effect on Sentara’s net revenue and operating margin. With increased benefit limitations and more restrictive payments for services, reductions in reimbursement could be materially greater than current estimates and could result in more uninsured patients. Accordingly, there can be no assurance that Medicaid payments are or will continue to be adequate.

Medicaid in Virginia. As is the case in many other states, providing the state portion of the funding for the Virginia Medicaid program is a continual challenge. Acute care hospitals must comply with standards called “Conditions of Participation” in order to be eligible for Medicaid reimbursement. CMS is the federal agency

responsible for ensuring that health care facilities meet the regulatory Conditions of Participation. Generally, hospitals accredited by The Joint Commission and other CMS approved accreditation bodies are deemed to meet the Conditions of Participation. The hospitals of Sentara and its affiliates located in Virginia are currently accredited by DNV GL Healthcare USA, Inc., but there is no guarantee that such facilities will continue to be accredited or will meet the Conditions of Participation in the future. Failure to maintain accreditation or to otherwise comply with the Conditions of Participation could have a materially adverse effect on the continued participation in the program and, ultimately, on the revenues of Sentara.

Payments made to health care providers under the Medicaid program are subject to changes as a result of federal or State legislative and administrative actions, including further changes in the methods for calculating payments, the amount of payments that will be made for covered services and the types of services that will be covered under the program. Such changes have occurred in the past and may continue to occur in the future, particularly in response to federal and state budgetary constraints coupled with increased costs for covered services.

The Commonwealth of Virginia uses government bodies and contractors, including the Medicaid Fraud Control Unit and Medicaid Integrity Contractors, in order to identify overpayments to providers under the Medicaid program. Health care providers regularly receive and identify overpayments that must be refunded to various payors, including Medicaid. The amounts of any overpayments that Sentara will identify and be responsible for refunding is unknown and cannot be reasonably estimated. Medicaid Payment for Preventable Medical Errors. On June 6, 2011, CMS published a final rule implementing Provider Preventable Conditions (PPCs) as authorized by section 2702 of the ACA. The final rule became effective July 1, 2011. The provisions of this rule prohibit federal payments to states under section 1903 of the Social Security Act for any amounts expended for providing medical assistance for health care-acquired conditions.

Medicare and Medicaid Audits. Under the ACA, recovery audits were expanded to include Medicaid by requiring states to contract with RACs to conduct such audits. In addition, CMS has instituted a Medicaid Integrity Program, modeled on the Medicare Integrity Program. Medicaid Integrity Program contractors assist state Medicaid agencies by analyzing Medicaid claims data to identify high-risk areas and potential vulnerabilities and conducting post-payment field audits and desk review audits of Medicaid provider payments.

Medicare and Medicaid audits may result in reduced reimbursement or repayment obligations related to past alleged overpayments and may also delay Medicare and Medicaid payments to providers pending resolution of the appeals process. The ACA explicitly gives DHHS the authority to suspend Medicare and Medicaid payments to a provider or supplier during a pending investigation of fraud. The ACA also amended certain provisions of the FCA (as defined herein) to include retention of overpayments as a violation. It also added provisions respecting the timing of the obligation to identify, report and reimburse overpayments. The effect of these changes on existing programs and systems of Sentara and its affiliates cannot be predicted.

Disproportionate Share Payments. Medicare and Medicaid programs provide additional payment for hospitals that serve a disproportionate share of certain low income patients (“Medicaid DSH”). Sentara qualifies for disproportionate share payments through Medicaid, receiving a total of approximately $40.889 million relating to the year 2013, $37.115 million relating to the year 2014, and approximately $33.953 million relating to year 2015. The ACA substantially reduces Medicare and Medicaid disproportionate share payments beginning October 1, 2013 and through at least 2020. Further, under a September 2013 final rule issued by CMS, the methodology to allocate the ACA-mandated reduction in Medicaid DSH payments to the states was finalized. There can be no assurance that Sentara will continue to qualify for disproportionate share status in the future or continue to receive distributions at current levels. There also can be no assurance that disproportionate share payments will not be further decreased or eliminated in the future. Please note that subsequent to the required ACA Medicaid DSH reductions, several pieces of legislation were passed into law that delayed the scheduled ACA Medicaid DSH cuts.

Negative Rankings Based on Clinical Outcomes, Cost, Quality, Patient Satisfaction and Other Performance Measures

Health plans, Medicare, Medicaid, employers, trade groups and other purchasers of health services, private standard-setting organizations and accrediting agencies increasingly are using statistical and other measures in efforts to characterize, publicize, compare, rank and change the quality, safety and cost of health care services

provided by hospitals and providers. The ACA shifts payments from paying for volume to paying for value, based on various health outcome measures. Published rankings such as “score cards,” “pay for performance” and other financial and non-financial incentive programs are being introduced to affect the reputation and revenue of hospitals, the members of their medical staffs and other providers and to influence the behavior of consumers and providers such as the Obligated Group. Currently prevalent are measures of quality based on clinical outcomes of patient care, reduction in costs, patient satisfaction, and investment in health information technology. Measures of performance set by others that characterize a hospital or provider negatively may adversely affect its reputation and financial condition.

Government Regulation of Relationships between Hospitals, Physicians and Other Providers and Suppliers

Health care “fraud and abuse” laws have been enacted at the federal and state levels to broadly regulate the provision of services to government program beneficiaries and the methods and requirements for submitting claims for services rendered to the beneficiaries. Under these laws, hospitals and other health care providers can be penalized for a wide variety of conduct, including submitting claims for services that are not provided, billing in a manner that does not comply with government requirements or including inaccurate billing information, billing for services deemed to be medically unnecessary, or billings accompanied by an illegal inducement to utilize or refrain from utilizing a service or product.

Federal and state governments have a broad range of criminal, civil and administrative sanctions available to penalize and remediate health care fraud, including the exclusion of a hospital or other health care provider from participation in the Medicare and Medicaid programs, civil monetary penalties, and suspension of Medicare and Medicaid payments. Fraud and abuse cases may be prosecuted by one or more government entities and/or private individuals, and more than one of the available sanctions may be, and often are, imposed for each violation.

Laws governing fraud and abuse may apply to hospitals and other health care providers, and to nearly all individuals and entities with which a hospital or other health care provider does business. Fraud investigations, settlements, prosecutions and related publicity can have a material adverse effect on hospitals and other health care providers. See “Enforcement Activity” herein. Major elements of these often highly technical laws and regulations are generally summarized below.

False Claims Act. The federal False Claims Act (“FCA”) makes it illegal to submit or present a false, fictitious or fraudulent claim for payment or approval for payment for which the federal government provides, or reimburses at least some portion of the requested money or property to the federal government, and may include claims that are simply erroneous. The ACA amends the FCA by expanding the numbers of activities that are subject to civil monetary penalties to include, among other things, failure to report and return known overpayments within statutory limits. Because the term “knowingly” is defined broadly under the law to include not only actual knowledge but also deliberate ignorance or reckless disregard of the facts, the FCA can be used to punish a wide range of conduct. FCA investigations and cases have become common in the health care field and may cover a range of activity from intentionally inflated billings, to highly technical billing infractions, to allegations of inadequate care. Violation or alleged violation of the FCA can result in settlements that require multi-million dollar payments and compliance agreements. The FCA also permits individuals to initiate civil actions on behalf of the government in lawsuits called “qui tam” actions. Qui tam plaintiffs, or “whistleblowers,” can share in the damages recovered by the government or recover independently if the government does not participate. The FCA has become one of the government’s primary weapons against health care fraud. FCA violations or alleged violations could lead to settlements, fines, exclusion or reputation damage that could have a material adverse impact on a hospital or other health care provider.

Federal legislation creates financial incentives for states to enact analogous false claims acts. The legislation also imposes financial penalties on any state that does not require health care providers receiving more than $5 million in annual Medicaid revenues to adopt policies and train employees on the federal and state false claims acts.

On May 20, 2009, the Fraud Enforcement Recovery Act of 2009 (the “FERA”) was signed into law, which modified and clarifies certain provisions of the False Claims Act. In part, the FERA amends the False Claims Act such that the False Claims Act penalties may now apply to any person, including an organization that does not

contract directly with the government, who knowingly makes, uses or causes to be made or used, a false record or statement material to a false or fraudulent claim paid in part by the federal government. As discussed above under “BONDHOLDERS’ RISKS—Health Care Reform,” ACA will result in increased regulation and enforcement of fraud and abuse. ACA expands the scope of the False Claims Act, and therefore may lead to an increase in False Claims Act lawsuits.

In addition to prohibiting “traditional” false claims based on improper claim amounts or claims for services that were not provided properly or at all, the FCA also is being used increasingly to enforce other fraud and abuse laws, based on so-called “certification” theories. In a certification case, an FCA action is based on the premise that when submitting government program claims, health care providers expressly or impliedly certify compliance with all applicable laws and regulations, such that failure to comply with any such laws or regulations transforms an otherwise valid claim into a false claim. Certification approaches have been used successfully to support FCA actions based on alleged violations of, among other laws, the federal “Anti-Kickback Law” (as described below) and the federal Ethics in Patient Referrals Act, (the “Stark Law”) and the ACA codified this theory. The FCA has become one of the government’s primary weapons against health care fraud. FCA violations or alleged violations could lead to multi-million dollar settlements, government program exclusion and reputation damage that could have a material adverse impact on a hospital or other health care provider.

Federal Fraud and Abuse Provisions. The Anti-Kickback Law is a felony criminal statute that prohibits anyone from knowingly and willfully soliciting, receiving, offering or paying any remuneration, directly or indirectly, overtly or covertly, in cash or in kind, in return for, among other things, a referral (or to induce a referral) for any item or service that may be paid by any federal or state health care program. The Anti-Kickback Law potentially may apply to many common health care transactions between persons and entities with which a hospital or health care system does business, including hospital-physician joint ventures, hospital-physician integration vehicles (such as a medical foundation), accountable care organizations, medical director agreements, physician recruitment agreements, physician office leases, purchases from vendors, and other transactions. As noted in “BONDHOLDERS’ RISKS—Health Care Reform,” ACA contains provisions intended to increase regulation and enforcement of fraud and abuse. Included in ACA is a requirement that a Medicare self-referral disclosure protocol (“SRDP”) is established, which will require providers to self-report potential violations of the Anti- Kickback Law.

The Anti-Kickback Law can be prosecuted either criminally or civilly. Each criminal violation is subject to a fine of up to $25,000 for each act (which may be each item or each bill sent to a federal program), imprisonment for up to five years and/or exclusion from the Medicare and Medicaid programs. In addition, civil monetary penalties of $10,000 per item or service in noncompliance (which may be each item or each bill sent to a federal program) or an “assessment” of three times the amount claimed may be imposed. Violation or alleged violation of the Anti-Kickback Law can result in settlements that require multi-million dollar payments and compliance agreements and potentially also exclusion from participation in federal or state health care programs.

Restrictions on Self-Referrals. The Stark Law prohibits the referral by a physician of Medicare/Medicaid patients for certain designated health services (including inpatient and outpatient hospital services, clinical laboratory services, and various diagnostic imaging services) to entities with which the referring physician has a financial relationship, unless the relationship fits within a stated statutory or regulatory exception. It also prohibits a hospital or other health care provider furnishing the designated services from billing Medicare, or any other payor or individual, for services performed pursuant to a prohibited referral. The government does not need to prove that the entity knew that the referral was prohibited to establish a Stark Law violation. If certain substantive and technical requirements are not met, many ordinary business practices and economically desirable arrangements between hospitals and physicians will likely constitute “financial relationships” within the meaning of the Stark Law, thus triggering the prohibition on referrals and billing. Most providers of the designated health services with physician relationships have some exposure to liability under the Stark Law. Recent changes to the regulations issued under the Stark Law have rendered illegal a number of common arrangements under which physician-owned entities provide services and/or equipment to hospitals and may increase risk of violation due to lack of clarity of the technical requirements.

Medicare may deny payment for all services related to a prohibited referral and a hospital or other health care provider that has billed for prohibited services is obligated to notify and refund the amounts collected from the

Medicare program. For example, if an office lease between a hospital and a large group of heart surgeons is found to violate the Stark Law, a hospital could be obligated to repay CMS for the payments received from Medicare for all of the heart surgeries performed by all of the physicians in the group for the duration of the lease, a potentially significant amount. The government may also seek substantial civil monetary penalties, and in some cases, a hospital or other health care provider may be liable for fines up to three times the amount of any monetary penalty, and/or be excluded from the Medicare and Medicaid programs. Potential repayments to CMS, settlements, fines or exclusion for a Stark Law violation or alleged violation could have a material adverse impact on a hospital or other health care provider. Increasingly, the federal government is prosecuting violations of the Stark Law under the FCA, based on the argument that claims resulting from an illegal referral arrangement are also false claims for FCA purposes. See the discussion under the subheading “False Claims Act” above.

The Stark Law is very detailed and complex. In addition, CMS has been very active in recent years in revising existing regulations and promulgating new regulations to close perceived loopholes and otherwise to impose new restrictions that have caused hospitals and other health care providers to completely revise the nature of certain common transactions with physicians. Government enforcement authorities have become increasingly active in bringing Stark Law enforcement actions. In addition, given its complexity and potential to generate very large financial damages and penalties, whistleblowers are bringing Stark Law-based FCA actions with increasing frequency. Potential repayments to CMS, settlements, fines or exclusion for a Stark Law violation or alleged violation could have a material adverse impact on a hospital or other health care provider.

Several recent cases have demonstrated the government’s ability to use the Stark Law, together with the FCA, to extract very large penalties for noncompliance.

Privacy and Security of Health Information

HIPAA; Privacy Requirements. The Health Insurance Portability and Accountability Act of 1996, or HIPAA, includes additional criminal sanctions for health care fraud and applies to all health care benefit programs, whether public or private. HIPAA also provides for punishment of a health care provider for knowingly and willfully embezzling, stealing, converting or intentionally misapplying any money, funds or other assets of a health care benefit program. A health care provider convicted of health care fraud could be excluded from Medicare or Medicaid.

HIPAA also addresses the confidentiality of individuals’ health information. Disclosure of certain broadly defined protected health information is prohibited unless expressly permitted under the provisions of the HIPAA statute and regulations or authorized by the patient. HIPAA’s confidentiality provisions extend not only to patient medical records, but also to a wide variety of health care clinical and financial settings where patient privacy restrictions often impose new communication, operational, accounting and billing restrictions. These add costs and create potentially unanticipated sources of legal liability.

HIPAA imposes civil monetary penalties for violations and criminal penalties for obtaining or using individually identifiable health information in violation of HIPAA restrictions. Such penalties range from $100 to a maximum $50,000 per violation and/or imprisonment, depending on the violator’s degree of intent and the extent of the harm resulting from the violation. The maximum penalty for violations of the same HIPAA provision in a calendar year range is $1,500,000.

HIPAA’s administrative simplification provisions are enforced by the Office for Civil Rights of DHHS (“OCR”). Violation of HIPAA can result in settlements that require multi-million dollar payments and resolution agreements. Beginning in 2011, OCR began sending strong messages to the health care industry that, regardless of size, covered entities must take action and will be held accountable for safeguarding their patients’ health information. Due to the highly technical nature of the HIPAA regulations and the enhanced enforcement activities of OCR, the risk of an infraction and financial penalty is elevated.

In February 2009, the American Recovery and Reinvestment Act of 2009 (the “Recovery Act”) was enacted. The Recovery Act includes broad, sweeping changes to the HIPAA provisions regarding confidentiality of patient medical records. In general, the Recovery Act increases penalties for violations of patient medical record confidentiality and strengthens enforcement and oversight. The Recovery Act and resulting regulations also

established a framework for the implementation of a nationally-based health information technology program. For more information regarding this program, see “The HITECH Act” below.

Additionally, other federal laws and state laws address the confidentiality of individuals’ health information. Disclosure of certain broadly defined protected health information is prohibited unless expressly permitted under the provisions of relevant federal and state statutes and regulations or authorized by the patient. These add costs and create potentially unanticipated sources of legal liability.

The HITECH Act. Provisions in the Health Information Technology for Economic and Clinical Health Act (the “HITECH Act”), enacted as part of the Recovery Act, increase the maximum civil monetary penalties for violations of HIPAA and grant enforcement authority of HIPAA to state attorneys general. The HITECH Act also (i) extends the reach of HIPAA beyond “covered entities,” (ii) imposes a breach notification requirement on HIPAA covered entities, (iii) limits certain uses and disclosures of individually identifiable health information, and (iv) restricts covered entities’ marketing communications.

The HITECH Act also established programs under Medicare and Medicaid to provide incentive payments for the “meaningful use” of certified electronic health record (“EHR”) technology. Beginning in 2011, the Medicare and Medicaid EHR incentive programs began providing incentive payments to eligible professionals and eligible hospitals for demonstrating meaningful use of certified EHR technology. Health care providers demonstrate their meaningful use of EHR technology by meeting objectives specified by CMS for using health information technology and by reporting on specified clinical quality measures. Beginning in 2015, hospitals and physicians who have not satisfied the performance and reporting criteria for demonstrating meaningful use will have their Medicare payments significantly reduced. Management does not anticipate that compliance with the HITECH Act will have a material adverse effect on the operations of Sentara and its affiliates.

Security Breaches and Unauthorized Releases of Personal Information. Federal, State and local authorities are increasingly focused on the importance of protecting the confidentiality of individuals’ personal information, including patient health information. Many states have enacted laws requiring businesses to notify individuals of security breaches that result in the unauthorized release of personal information. In some states, notification requirements may be triggered even where information has not been used or disclosed, but rather has been inappropriately accessed. State consumer protection laws may also provide the basis for legal action for privacy and security breaches and frequently, unlike HIPAA, authorize a private right of action. In particular, the public nature of security breaches exposes health 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 robust 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 health care provider’s reputation and materially adversely affect business operations.

In recent years, a third-party vendor of Sentara’s experienced a cyberattack which resulted in the disclosure of over 5,000 Sentara patient records that contained protected health information or other confidential information. While Sentara has established programs and procedures to comply with HIPAA and the HITECH Act, there can be no assurance that such violation has not occurred or will not occur, and if found that any sanction would not have a material adverse effect on the operation or the financial condition or the results of operations of Sentara.

Red Flags Rule. On November 9, 2007, six federal agencies, including the Federal Trade Commission (“FTC”), published what has come to be known as the “Red Flags Rule.” This rule, promulgated pursuant to the Fair and Accurate Credit Transactions Act of 2003, requires financial institutions and creditors to develop and implement written identity theft prevention programs. The programs must be developed for the identification, detection and response to patterns, practices, or specific activities – known as “red flags” – that could indicate identity theft. The FTC has interpreted the definition of “creditors” to include health care providers. However, The Red Flag Program Clarification Act of 2010, Public Law 111-319, that was signed into law on December 18, 2010, amends the definition of the term “creditor” and may exclude certain service providers, including hospitals, from the requirements of the Red Flags Rule, based on how a service provider uses credit reporting agencies. It is not known whether Sentara or any of its affiliates are subject to the Red Flags Rule as amended. Failure to comply with the rule could result in penalties of $2,500 per violation under the Fair Credit Reporting Act. Enforcement of the rule

commenced on December 31, 2010. Management of Sentara is not aware of any pending or threatened claim of violation of the Fair Credit Reporting Act.

Enforcement Activity

Enforcement activity against health care providers has increased, and enforcement authorities have adopted aggressive approaches. In the current regulatory climate, it is anticipated that many hospitals and physician groups will be subject to an audit, investigation, or other enforcement action regarding the health care fraud laws mentioned above. In addition, enforcement agencies increasingly pursue sanctions for violations of health care fraud and abuse laws through administrative actions. Administrative regulations may require less proof of a violation than do criminal laws, and, thus, health care providers may have a higher risk of imposition of monetary penalties as a result of administrative enforcement actions.

Enforcement authorities are often in a position to compel settlements by providers charged with or being investigated for false claims violations by withholding or threatening to withhold Medicare, Medicaid and/or similar payments and/or by instituting criminal action. Judicial resolution of a dispute with the government may be unavailable as a practical matter because a hospital may not want to run the risk of an adverse result which could jeopardize the continued viability of the organization. The cost of defending such an action, the time and management attention consumed, and the facts of a case may dictate settlement. For these reasons an additional risk is that a hospital is subject to new and untested interpretations of applicable law and regulations of the enforcement authorities for which redress by judicial process may not be available as a practical matter. Therefore, regardless of the merits of a particular case, a hospital could experience materially adverse settlement costs, as well as materially adverse costs associated with implementation of any settlement agreement. Prolonged and publicized investigations could be damaging to the reputation and business of a hospital, regardless of outcome.

Certain acts or transactions may result in violation or alleged violation of a number of the federal health care fraud laws described above, and therefore penalties or settlement amounts often are compounded. Generally these risks are not covered by insurance. Enforcement actions may involve multiple hospitals in a health system, as the government often extends enforcement actions regarding health care fraud to other hospitals in the same organization. Therefore, Medicare fraud related risks identified as being materially adverse as to a hospital could have materially adverse consequences to a health system taken as a whole.

Exclusions from Medicare or Medicaid Participation. The government may exclude a hospital from Medicare/Medicaid program participation that is convicted of a criminal offense relating to the delivery of any item or service reimbursed under Medicare or a state health care program, any criminal offense relating to patient neglect or abuse in connection with the delivery of health care, fraud against any federal, state or locally financed health care program or an offense relating to the illegal manufacture, distribution, prescription, or dispensing of a controlled substance. The government also may exclude individuals or entities under certain other circumstances, such as an unrelated conviction of fraud, or other financial misconduct relating either to the delivery of health care in general or to participation in a federal, state or local government program. Exclusion from the Medicare/Medicaid program means that a hospital would be terminated from participation and no program payments can be made. Any hospital exclusion could be a materially adverse event. In addition, exclusion of hospital employees may be another source of potential liability for hospitals or health systems.

Compliance with Conditions of Participation. CMS, in its role of monitoring participating providers’ compliance with conditions of participation in the Medicare program, may determine that a provider is not in compliance with its conditions of participation. In that event, a notice of termination of participation may be issued or other sanctions potentially could be imposed.

Increased Enforcement Affecting Research. In addition to increasing enforcement of laws governing payment and reimbursement, the federal government has also stepped up enforcement of laws and regulations governing the conduct of clinical trials at hospitals. DHHS elevated and strengthened its Office of Human Research Protection, one of the agencies with responsibility for monitoring federally funded research. In addition, the National Institutes of Health significantly increased the number of facility inspections that these agencies perform. The Food and Drug Administration (“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. Moreover, the Office of Inspector General of DHHS, in its “Work Plans,” has included several enforcement initiatives related to reimbursement for experimental drugs and devices (including kickback concerns). The United States Department of Justice may also become involved in enforcement actions relating to the use of federal funds or submission of information to federal agencies. There have been a number of recent government investigations and settlements involving hospital use of federal grant funding in connection with clinical trials and also a settlement involving the submission of claims to Medicare for services provided in a clinical trial. 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 of the Medicare or Medicaid programs for care provided to patients enrolled in clinical trials that is not eligible for Medicare reimbursement can subject Sentara and its affiliates to sanctions as well as repayment obligations.

EMTALA. The Emergency Medical Treatment and Active Labor Act (“EMTALA”) is a federal civil statute that requires hospitals to treat or conduct a medical screening for emergency conditions and to stabilize a patient’s emergency medical condition before releasing, discharging or transferring the patient, regardless of citizenship, legal status, or ability to pay. A hospital that violates EMTALA is subject to civil penalties of up to $50,000 per offense and exclusion from the Medicare and Medicaid programs. In addition, a hospital may be liable for any claim by an individual who has suffered harm as a result of a violation of EMTALA.

Licensing, Surveys, Investigations and Audits. Health facilities are subject to numerous legal, regulatory, professional and private licensing, certification and accreditation requirements. These include, but are not limited to, requirements of state licensing agencies and accrediting bodies such as the Joint Commission. Renewal and continuation of certain of these licenses, certifications and accreditations are based on inspections or other reviews generally conducted in the normal course of business of health facilities. Loss of, or limitations imposed on, hospital licenses or accreditations could reduce hospital utilization or revenues, or a hospital’s ability to operate all or a portion of its facilities.

Environmental Laws and Regulations. Hospitals are subject to a wide variety of federal, state and local environmental and occupational health and safety laws and regulations. These include but are not limited to: air and water quality control requirements; waste management requirements; specific regulatory requirements applicable to asbestos and radioactive substances; requirements for providing notice to employees and members of the public about hazardous materials handled by or located at the hospital; and requirements for training employees in the proper handling and management of hazardous materials and wastes.

Hospitals may be subject to requirements related to investigating and remedying hazardous substances located on their property, including such substances that may have migrated off the property. Typical hospital operations include the handling, use, storage, transportation, disposal and/or discharge of hazardous, infectious, toxic, radioactive, flammable and other hazardous materials, wastes, pollutants and contaminants. As such, hospital operations are particularly susceptible to the practical, financial and legal risks associated with the environmental laws and regulations. Such risks may result in damage to individuals, property or the environment; may interrupt operations and/or increase their cost; may result in legal liability, damages, injunctions or fines; may result in investigations, administrative proceedings, civil litigation, criminal prosecution, penalties or other governmental agency actions; and may not be covered by insurance.

Business Relationships and Other Business Matters

Integrated Physician Groups. Hospitals and health care systems often own, control or have affiliations with relatively large physician groups. Generally, the sponsoring hospital or health care system is the primary capital and funding source for such alliances and may have an ongoing financial commitment to provide growth capital and support operating deficits. These types of alliances are generally designed to respond to trends in the delivery of medicine to better integrate hospital and physician care, to increase physician availability to the community and/or to enhance the managed care capability of the affiliated hospitals and physicians. These goals may not be achieved, however, and an unsuccessful alliance may be costly and counterproductive to all of the above-stated goals.

These types of alliances are likely to become increasingly important to the success of hospitals in the future as a result of changes to the health care delivery and reimbursement systems that are intended to restrain the rate of

increases of health care costs, encourage coordinated care, promote collective provider accountability and improve clinical outcomes. The ACA authorizes several alternative payment programs for Medicare that promote, reward or necessitate integration among hospitals, physicians and other providers.

Whether these programs will achieve their objectives and be expanded or mandated as conditions of Medicare participation cannot be predicted. However, Congress and CMS have clearly emphasized continuing the trend away from the fee-for-service reimbursement model, which began in the 1980s, with the introduction of the prospective payment system for inpatient care, and toward an episode-based payment model that rewards use of evidence-based protocols, quality and satisfaction in patient outcomes, efficiency in using resources, and the ability to measure and report clinical performance. This shift is likely to favor integrated delivery systems, which may be better able than stand-alone providers to realize efficiencies, coordinate services across the continuum of patient care, track performance and monitor and control patient outcomes. Changes to the reimbursement methods and payment requirements of Medicare, which is the dominant purchaser of medical services, are likely to prompt equivalent changes in the commercial sector, because commercial payors frequently follow Medicare’s lead in adopting payment policies.

While payment trends may stimulate the growth of integrated delivery systems, these systems carry with them the potential for legal or regulatory risks. Many of the risks discussed herein regarding the current regulatory environment may be heightened in an integrated delivery system. Existing laws and regulations were not designed to accommodate coordinated action among hospitals, physicians and other health care providers to set standards, reduce costs and share savings, among other things. Although CMS and the agencies that enforce these laws are expected to institute new regulatory exceptions, safe harbors or waivers that will enable providers to participate in payment reform programs, there can be no assurance that such regulations will be forthcoming or that any regulations or guidance issued will sufficiently clarify the scope of permissible activity. State law prohibitions, such as the bar on the corporate practice of medicine, or state law requirements, such as insurance laws regarding licensure and minimum financial reserve holdings of risk-bearing organizations, may also introduce complexity, risk and additional costs in organizing and operating integrated delivery systems. Tax-exempt hospitals also face the risk in affiliating with for-profit entities that the IRS will determine that compensation practices or business arrangements result in private benefit or private use or generate unrelated business income for the hospitals.

In addition, integrated delivery systems present business challenges and risks. Inability to attract or retain participating physicians may negatively affect managed care, contracting and utilization. The technological and administrative infrastructure necessary both to develop and operate integrated delivery systems and to implement new payment arrangements in response to changes in Medicare and other payor reimbursement is costly. Hospitals may not achieve savings sufficient to offset the substantial costs of creating and maintaining this infrastructure.

The ability of hospitals or health care systems to conduct integrated physician operations may be altered or eliminated in the future by legal or regulatory interpretation or changes, or by health care fraud enforcement. In addition, participating physicians may seek their independence for a variety of reasons, thus putting a hospital or health care system’s investment at risk, and potentially reducing its managed care leverage and/or overall utilization.

Hospital Pricing. Inflation in hospital costs may evoke action by legislatures, payors or consumers. It is possible that legislative action at the state or national level may be taken with regard to the pricing of health care services, which in turn could adversely affect Sentara’s patient service revenues.

Physician Medical Staff. The primary relationship between a hospital and physicians who practice in it is through the hospital’s organized medical staff. Medical staff bylaws, rules and policies establish the criteria and procedures by which a physician may have his or her privileges or membership curtailed, denied or revoked. Physicians who are denied medical staff membership or certain clinical privileges or who have such membership or privileges curtailed or revoked often file legal actions against hospitals and medical staffs. Such actions may include a wide variety of claims, some of which could result in substantial uninsured damages to a hospital. In addition, failure of the hospital governing body to adequately oversee the conduct of its medical staff may result in hospital liability to third-parties.

Physician Supply. Sufficient community-based physician supply is important to hospitals and other health care providers. CMS annually reviews overall physician reimbursement formulas for Medicare and Medicaid.

Changes to such physician reimbursement formulas by CMS could lead to physicians ceasing to accept Medicare and/or Medicaid patients. Regional differences in reimbursement by commercial and governmental payors, along with variations in the costs of living, may cause physicians to avoid locating their practices in communities with low reimbursement or high living costs. Hospitals and health systems may be required to invest additional resources in recruiting and retaining physicians, or may be required to increase the percentage of employed physicians in order to continue serving the growing population base and maintain market share.

Competition Among Health Care Providers. Increased competition from a wide variety of sources, including but not limited to other hospitals and health care systems, inpatient and outpatient health care facilities, long-term care and skilled nursing services facilities, clinics, joint venture arrangements with physicians and others, may adversely affect the utilization and revenues of hospitals. Existing and potential competitors may not be subject to various restrictions applicable to hospitals, and competition, in the future, may arise from new sources. The risk of greater competition is enhanced by the possibility of legislation to remove or reform Virginia’s COPN (as defined herein) law. See “Legislation to Remove Certificate of Public Need Requirements,” herein.

Competition may be focused on services or payor classifications where hospitals realize their highest margins, thus negatively affecting programs that are economically important to hospitals. These new sources of competition may have a material adverse impact on hospitals, particularly where a group of a hospital’s principal physician admitters may curtail their use of a hospital service in favor of competitive facilities. Commercial outpatient services, currently among the most profitable for hospitals, may be lost to competitors who can provide these services in an alternative, less costly setting. Freestanding ambulatory surgery centers, for example, may divert significant commercial outpatient volumes traditionally performed at full-service hospitals, which rely upon the revenues generated from commercial outpatient services to fund other less profitable services, and thus the decline of such business may result in the significant reduction of profitable income to the hospital. For example, a large hospital may rely heavily on its outpatient orthopedic surgery programs to generate a revenue stream that may cover certain fixed overhead costs. If a significant number of such a hospital’s orthopedic surgeons develop their own specialty surgery center and take with them their patient base, a hospital could experience a rapid and dramatic decline in net revenues that is not proportionate to the number of patient admissions or patient days lost. It is also possible that the competing specialty entity would not be subject to any regulatory requirements to accept indigent patients or beneficiaries of other payor and government programs, leaving low-pay patient populations in the full- service hospital. In certain cases, such an event could be materially adverse to a hospital.

Additionally, scientific and technological advances, new procedures, drugs and devices, preventive medicine and outpatient health care delivery may reduce both inpatient and outpatient utilization and revenues of a hospital in the future or otherwise lead the way to new avenues of competition. In some cases, hospital investment in facilities and equipment for capital-intensive services may be lost as a result of rapid changes in diagnosis, treatment or clinical practice brought about by new technology or new pharmacology.

Alternative and Integrated Delivery Systems. Sentara faces increased competition from other hospital facilities and integrated health care delivery systems in its service areas, from HMOs and from other entities providing health care services to the population which Sentara presently serves. Sentara does, and in the future will, face increased competition from other hospitals and skilled nursing facilities and from other health care providers that offer comparable health care services to the population which each of the members presently serves. This competition could include the establishment, construction or renovation of hospitals, skilled nursing facilities, HMOs, ambulatory surgical centers, private laboratories and radiological services.

Increased competition also has resulted from: (i) the development of alternative health care delivery systems (such as HMOs and PPOs) in the service areas of Sentara and its affiliates, competition with other hospitals to provide health care services to enrollees of HMOs and PPOs, and competition for patients with delivery systems of HMOs and PPOs providing services at their own or other facilities; (ii) competition for enrollees between traditional insurers, whose patients generally have a free choice of hospitals, and HMOs and PPOs, which may own their own hospitals or substantially restrict the hospitals and physicians from which their enrollees can receive services; (iii) competition for patients between physicians, who generally use hospitals, and non-physician practitioners such as nurse-midwives, nurse practitioners, chiropractors, physical and occupational therapists and others, who may not generally use hospitals; and (iv) competition from nursing homes, home health agencies,

ambulatory care facilities, ambulatory surgical centers, rehabilitation and therapy centers, physician group practices, and other nonhospital providers which provide services for which patients currently rely on hospitals.

Health Care Worker Classification. Health care providers, like all businesses, are required to withhold income taxes from amounts paid to employees. If the employer fails to withhold the tax, the employer becomes liable for payment of the tax imposed on the employee. On the other hand, businesses are not required to withhold federal taxes from amounts paid to a worker classified as an independent contractor. The IRS has established criteria for determining whether a worker is an employee or an independent contractor for tax purposes. If the IRS were to reclassify a significant number of hospital independent contractors (e.g., physician medical directors) as employees, back taxes and penalties could be material.

Staffing. From time to time, the health care industry has suffered from a scarcity of nursing personnel, respiratory therapists, pharmacists and other trained health care technicians. In addition, aging medical staffs and difficulties in recruiting physicians are leading to physician shortages. A significant factor underlying this trend includes a decrease in the number of persons entering such professions. This is expected to intensify in the future, aggravating the general shortage and increasing the likelihood of hospital-specific shortages. Competition for physicians and employees, coupled with increased recruiting and retention costs will increase hospital operating costs, possibly significantly. This trend could have a material adverse impact on hospitals.

Professional Liability Claims and General Liability Insurance. In recent years, the number of professional and general liability suits and the dollar amounts of damage recoveries have increased in health care nationwide, resulting in substantial increases in malpractice insurance premiums, higher deductibles and generally less coverage. Professional liability and other actions alleging wrongful conduct and seeking punitive damages are often filed against health care providers. Insurance does not provide coverage for judgments for punitive damages.

Litigation also arises from the corporate and business activities of hospitals, from a hospital’s status as an employer or as a result of medical staff or provider network peer review or the denial of medical staff or provider network privileges. As with professional liability, many of these risks are covered by insurance, but some are not. For example, some antitrust claims or business disputes are not covered by insurance or other sources and may, in whole or in part, be a liability of Sentara or its affiliates if determined or settled adversely.

There is no assurance that hospitals will be able to maintain coverage amounts currently in place in the future, that the coverage will be sufficient to cover malpractice judgments rendered against a hospital or that such coverage will be available at a reasonable cost in the future.

Other Class Actions. Hospitals have long been subject to a wide variety of litigation risks, including liability for care outcomes, employer liability, property and premises liability, and peer review litigation with physicians, among others. In recent years, consumer class action litigation has emerged as a potentially significant source of litigation liability for hospitals and health systems. These class action suits have most recently focused on hospital billing and collections practices, and they may be used for a variety of currently unanticipated causes of action. Since the subject matter of class action suits may involve uninsured risks, and since such actions often involve alleged large classes of plaintiffs, they may have material adverse consequences on hospitals and health systems in the future.

Information Systems. The ability to adequately price and bill health care services and to accurately report financial results depends on the integrity of the data stored within information systems, as well as the operability of such systems. An ongoing commitment of significant resources is required to maintain, protect and enhance existing information systems and develop new systems to keep pace with continuing changes in information processing technology, evolving systems and regulatory standards. There can be no assurance that efforts to upgrade and expand information systems capabilities, protect and enhance these systems, and develop new systems to keep pace with continuing changes in information processing technology will be successful or that additional systems issues will not arise in the future.

Electronic media are also increasingly being used in clinical operations, including the conversion from paper to electronic medical records, computerization of order entry functions and the implementation of clinical decision-support software. The reliance on information technology for these purposes imposes new expectations on

physicians and other workforce members to be adept in using and managing electronic systems. It also introduces risks related to patient safety, and to the privacy, accessibility and preservation of health information. See “BONDHOLDERS’ RISK—Privacy and Security of Health Information” above. Technology malfunctions or failure to understand and use information systems properly could result in the dissemination of or reliance on inaccurate information, as well as in disputes with patients, physicians and other health care professionals. Health information systems may also be subject to different or higher standards or greater regulation than other information technology or the paper-based systems previously used by health care providers, which may increase the cost, complexity and risks of operations. All of these risks may have adverse consequences on hospitals and other health care providers.

Antitrust. Enforcement of the antitrust laws against healthcare providers is becoming more common, and antitrust liability may arise in a wide variety of circumstances including medical staff privilege disputes, third-party contracting, physician relations, and joint venture, merger, affiliation and acquisition activities. In some respects, the application of the federal and state antitrust laws to healthcare providers is still evolving, and enforcement activity by federal and state agencies appears to be increasing. At various times, healthcare providers may be subject to an investigation by a governmental agency charged with the enforcement of the antitrust laws, or may be subject to administrative or judicial action by a federal or state agency or a private party. Violation of the antitrust laws could be subject to criminal and civil enforcement by federal and state agencies, as well as by private litigants.

From time to time, Sentara may be involved in a variety of activities that could receive scrutiny under the antitrust laws, and it cannot be predicted when or to what extent liability may arise. With respect to payor contracting, Sentara may, from time to time, be involved in joint contracting activity with hospitals or their providers. The precise degree to which joint contracting activities may expose the participants to antitrust risk from governmental or private sources is dependent on a number of factual matters which may change from time to time.

Hospitals, including those operated by Sentara, regularly have disputes regarding credentialing and peer review, and may be subject to liability in this area. In addition, hospitals occasionally indemnify medical staff members who are involved in such credentialing or peer review activities, and may also be liable with respect to such indemnity.

Court decisions have also established private causes of action against hospitals that use their local market power to promote ancillary healthcare businesses in which they have an interest. Such activities may result in monetary liability for the participating hospitals under certain circumstances where a competitor suffers business damage.

The ability to consummate mergers, acquisitions or affiliations may also be impaired by the antitrust laws resulting in the inability of Sentara to fulfill its strategic plans. Liability in any of these or other antitrust areas of liability may be substantial, depending on the facts and circumstances of each case.

Certificate of Public Need Programs. The National Health Planning and Resources Development Act of 1974, as amended (the “Planning Act”), required states to establish a “Certificate of Need” program. The regulations promulgated under the Planning Act set standards for the review and determination by the appropriate state agencies in respect to the need for the acquisition of certain equipment, the undertaking of certain expenditures, and the offering of certain institutional services. The Planning Act was repealed in 1986, but the state regulatory requirements established by the Planning Act remain in effect in many states. Sentara operates primarily in Virginia, which maintains a certificate of need program known as the Medical Care Facilities Certificate of Public Need (“COPN”) statute. The COPN statute provides, in part, that a person shall not acquire an existing or begin operation of a new “health facility,” make a “change in bed capacity” of a “health facility,” initiate, replace or expand a “covered clinical service,” or acquire “covered medical equipment,” and a “health facility” shall not make a “covered capital expenditure,” with certain exceptions, without first obtaining from the appropriate governmental reviewing agency a COPN that documents a demonstrated need and grants permission for the proposed project. The capital expenditure threshold has been substantially increased for certain covered projects, thereby subjecting fewer proposed projects to COPN review. The capital expenditure thresholds, depending on the type of projects, are adjusted from time to time. If a provider fails to obtain required approvals, such provider will be subject to penalties that may include civil fines, the obligation to refund amounts paid by patients or third-party payors, injunctions to restrain or prevent violations of the COPN law and a loss of license, among other sanctions. As a result of these

sanctions, Medicare and Medicaid certification also may be affected. In addition, a COPN may be subject to revocation by the appropriate governmental reviewing agency in the event utilization levels specified in a COPN approval are not achieved or maintained.

Sentara operates Albemarle Medical Center in North Carolina, which has a certificate of public need statute that regulates various types of activities and expenditures made by or on behalf of healthcare facilities, including hospitals in the State of North Carolina.

Legislation to Remove Certificate of Public Need Requirements. Legislation to remove or reform all or part of the existing COPN statute has repeatedly been introduced and considered in the Virginia General Assembly. To date, only minor reform proposals have been adopted; however, bills to repeal significant portions of the COPN statute are introduced on an annual basis, all of which in recent years have been tabled or continued to future sessions. There have also been unsuccessful efforts in the North Carolina General Assembly to limit the scope of North Carolina’s certificate of public need laws. Future elimination of, or reforms to, these certificate of public need statutes could lessen barriers to entry for competitors who may not be subject to all of the other restrictions that apply to Sentara and its affiliates, and the resulting increased competition for health care services could adversely affect Sentara’s financial performance.

Tax-Exempt Status and Other Tax Matters

Maintenance of Tax-Exempt Status of Interest on the Bonds. The Internal Revenue Code imposes a number of requirements that must be satisfied for interest on state and local obligations, such as the Bonds, to be excludable from gross income for federal income tax purposes. These requirements include limitations on the use of bond proceeds, limitations on the investment earnings of bond proceeds prior to expenditure, a requirement that certain investment earnings on bond proceeds be paid periodically to the United States Treasury, and a requirement that the Issuer file an information report with the IRS. The Issuer has covenanted in the Bond Indenture, and Sentara has covenanted in the Loan Agreement, that it will comply with such requirements. Future failure by the Issuer or by Sentara to comply with the requirements stated in the Code and related regulations, rulings and policies may result in the treatment of interest on the Bonds as taxable, retroactively to the date of issuance. The Issuer has covenanted in the Bond Indenture, and Sentara has covenanted in the Loan Agreement, that it will not take any action or refrain from taking any action that would cause interest on the Bonds to be included in gross income for federal income tax purposes.

IRS officials have recently indicated that more resources will be invested in audits of tax-exempt bonds, including the use of bond proceeds, in the charitable organization sector, with specific review of private use. In addition, under its compliance check program initiated in 2007, the IRS has from time to time sent post-issuance compliance questionnaires to several hundred nonprofit corporations that have borrowed on a tax-exempt basis regarding their post-issuance compliance with various requirements for maintaining the federal tax exemption of interest on their bonds. The questionnaire includes questions relating to the borrower’s (i) record retention, which the IRS has particularly emphasized, (ii) qualified use of bond-financed property, (iii) arbitrage yield restriction and rebate requirements, (iv) debt management policies, and (v) voluntary compliance and education. IRS representatives indicate that more questionnaires will be sent to additional nonprofit organizations.

In 2007 the IRS released a redesigned Form 990. The Form 990 is the annual information return filed by tax-exempt organizations, including nonprofit exempt health care organizations. The new Form 990 applies to tax years beginning on or after January 1, 2008. As a result of this new Form 990, health care organizations now have significantly increased compliance and reporting obligations, particularly relating to community benefit, executive, physician and officer compensation, joint ventures, collection and billing practices and charity care. According to the IRS, the redesign of Form 990 was based on three guiding principles: (1) enhancing transparency to provide the IRS and the public with a realistic picture of the organization; (2) promoting compliance by accurately reflecting the organization’s operations so the IRS may efficiently assess the risk of noncompliance; and (3) minimizing the burden on filing organizations

The hospital-specific reporting obligations generally are set forth in a schedule to the Form 990 (Schedule H) and apply for tax years beginning on or after January 1, 2009. On Schedule H, hospitals and health systems must report how they provide community benefit, community building activities, specify certain billing and collection

practices, identify charity care and bad debt practices, describe certain joint venture activities, including percentage ownership and/or control by the tax-exempt entity, certain interested persons and physicians and provide a description of affiliated operated health care facilities. Schedule K requires detailed information related to all outstanding bond issues of tax-exempt borrowers, including information regarding operating, management and research contracts as well as private use compliance. Tax-exempt organizations must also complete Schedule J, which requires reporting of compensation information for the organizations’ officers, directors, trustees, key employees, and other highly compensated employees.

There is no assurance that an IRS review relating to the charitable activities of Sentara and its affiliates would not adversely affect the market value of the Bonds or of other outstanding tax exempt indebtedness of Sentara. Additionally, the Bonds or other tax-exempt obligations issued for the benefit of Sentara may be, from time to time, subject to examinations or audits by the IRS.

Sentara believes that the Bonds properly comply with the tax laws. In addition, on the date of issuance of the Bonds, Bond Counsel will render an opinion with respect to the tax-exempt status of the Bonds, as described under the caption “TAX MATTERS.” No ruling with respect to the Bonds has been or will be sought from the IRS, however, and opinions of counsel are not binding on the IRS or the courts. There can be no assurance that an examination of the Bonds will not adversely affect the Bonds or the market value of the Bonds. See “TAX MATTERS” herein.

Limitations on Contractual and Other Arrangements Imposed by the Internal Revenue Code. As a tax- exempt organization, Sentara is limited with respect to its use of practice income guarantees, reduced rent on medical office space, low interest loans, joint venture programs and other means of recruiting and retaining physicians. Uncertainty in this area has been reduced somewhat by the issuance by the IRS of guidelines on permissible physician recruitment practices. The IRS scrutinizes a broad variety of contractual relationships commonly entered into by hospitals and has issued a detailed audit guide suggesting that field agents scrutinize numerous activities of hospitals in an effort to determine whether any action should be taken with respect to limitations on or revocation of their tax-exempt status or assessment of additional tax. Any suspension, limitation, or revocation of Sentara’s tax-exempt status or assessment of significant tax liability would have a materially adverse effect on Sentara and might lead to loss of tax exemption of interest on the Bonds.

CONTINUING DISCLOSURE

Pursuant to the Continuing Disclosure Agreement, the Obligated Group has agreed to provide certain quarterly and annual financial information and notification of material events to Beneficial Owners of the Bonds. The form of the Continuing Disclosure Agreement containing the covenants made by Sentara thereunder for the benefit of the Beneficial Owners of the Bonds is attached in APPENDIX E—“FORM OF CONTINUING DISCLOSURE AGREEMENT.” In accordance with Rule 15c2-12 of the Securities and Exchange Commission (the “Rule”), there have been no instances in the previous five years in which Sentara failed to comply in any material respect with the requirements of any of its previous continuing disclosure undertakings under the Rule.

Failure by Sentara to comply with the Continuing Disclosure Agreement will not constitute an event of default under the Master Indenture, the Loan Agreement or the Bond Indenture. The holders of the Bonds are limited to the remedies described in the Continuing Disclosure Agreement. Failure by Sentara to comply with the Continuing Disclosure Agreement must be reported in accordance with the Rule and must be considered by any broker, dealer or municipal securities dealer before recommending the purchase or sale of the Bonds in the secondary market. Consequently, any such failure may adversely affect the transferability and liquidity of the Bonds and their market price.

ABSENCE OF MATERIAL LITIGATION

Issuer

There is no controversy or litigation of any nature now pending or, to the knowledge of its officers, threatened against the Issuer restraining or enjoining the execution, sale or delivery of the Bonds or in any way

contesting or affecting the validity of the Bonds, any proceedings of the Issuer taken concerning the execution, sale or delivery thereof, the pledge or application of any moneys or security provided for the payment of the Bonds, or the existence or powers of the Issuer relating to the execution or delivery of the Bonds.

Sentara

Although Sentara is involved in litigation arising in the ordinary course of business, there is no action, suit, proceeding, inquiry or investigation at law or before or by any court, public board or body known to Sentara to be pending, or threatened, against Sentara or any Obligated Group Affiliate nor, to its knowledge, is there any basis therefor, wherein an unfavorable decision, ruling or finding would adversely affect the validity of the Bonds, the Loan Agreement, the Note, the Master Indenture or the Bond Indenture. For more information, see APPENDIX A— “LITIGATION AND INSURANCE – Litigation.”

LEGAL MATTERS

Legal matters incident to the authorization and issuance of the Bonds are subject to the approving opinion of Kaufman & Canoles, a Professional Corporation, Richmond, Virginia, Bond Counsel. Certain legal matters will be passed upon for the Issuer by its counsel, Vandeventer Black LLP, Norfolk, Virginia, for the Obligated Group by its counsel, Kaufman & Canoles, a Professional Corporation, Richmond, Virginia, and for Barclays by its counsel, King & Spalding LLP.

These law firms undertake no responsibility for the accuracy, completeness or fairness of this Official Statement, except as otherwise stated in their respective opinions delivered upon the delivery of the Bonds, and none of such opinions is addressed to or may be relied upon by purchasers of the Bonds.

TAX MATTERS

The Code establishes certain requirements which must be met concurrently with, and subsequent to, the issuance of the Bonds, in order that the interest on the Bonds be and remain excluded from the gross income of the recipients thereof for federal income tax purposes. At the time of issuance and delivery of the Bonds, the Issuer, Sentara and the Bond Trustee will make certain representations, certifications and covenants which are intended to assure compliance with such requirements. In the event of the inaccuracy of such representations and certifications, or the non-compliance with such covenants, interest on the Bonds may be required to be included in the gross income of the recipients thereof, retroactively to the date of issuance of the Bonds under certain circumstances.

On the date of issuance and delivery of the Bonds, Kaufman & Canoles, a Professional Corporation, Richmond, Virginia, Bond Counsel, will deliver its opinion, in the form of APPENDIX D—“FORM OF BOND COUNSEL OPINION” attached hereto, to the effect that the interest on the Bonds, under existing statutes, regulations and rulings, is excluded from the gross income of the owners of the Bonds for federal income tax purposes. Such interest is taken into account in determining adjusted current earnings for purposes of computing the alternative minimum tax imposed on corporations for taxable years that began prior to January 1, 2018. No opinion will be expressed with respect to any other federal tax consequences of the receipt or accrual of interest on the Bonds. The opinion of Bond Counsel will state that it assumes the accuracy of the findings and certifications of the Issuer, the representations and certifications of Sentara and the Bond Trustee, and the continued compliance with the covenants related to the exclusion of interest on the Bonds from gross income.

Prospective purchasers of the Bonds should be aware that the ownership of tax-exempt obligations may result in other federal income tax consequences to certain taxpayers, including, but not limited to, financial institutions, property and casualty insurance companies, individual recipients of Social Security or Railroad Retirement Benefits, foreign corporations engaged in a trade or business in the United States, certain “S” Corporations, and taxpayers who may be deemed to have incurred or continued indebtedness to purchase or carry tax-exempt obligations. Prospective purchasers, including any of those falling within such categories, should consult their own tax advisors.

The opinion of Bond Counsel will also state that interest on the Bonds is exempt from all present Commonwealth of Virginia income taxes. Interest on the Bonds, however, may or may not be subject to state or local income taxation in other jurisdictions under applicable state or local tax laws. Each purchaser of the Bonds should consult his or her own tax advisor regarding the taxable status of the Bonds in a particular state or local jurisdiction.

Information reporting requirements will apply to interest paid on tax-exempt obligations, including the Bonds. In general, such requirements are satisfied if the interest recipient completes, and provides the payor with, a Form W-9, “Request for Taxpayer Identification Number and Certification,” or unless the recipient is one of a limited class of exempt recipients, including corporations. A recipient not otherwise exempt from information reporting who fails to satisfy the information reporting requirements will be subject to “backup withholding,” which means that the payor is required to deduct and withhold a tax from the interest payment, calculated in the manner set forth in the Code. For the foregoing purpose, a “payor” generally refers to the person or entity from whom a recipient receives its payments of interest or who collect such payments on behalf of the recipient.

If an owner purchasing Bonds through a brokerage account has executed a Form W-9 in connection with the establishment of such account, as generally can be expected, no backup withholding should occur. In any event, backup withholding does not affect the excludability of the interest on the Bonds from gross income for federal income tax purposes. Any amounts withheld pursuant to backup withholding would be allowed as a refund or a credit against the owner’s federal income tax once the required information is furnished to the IRS.

There are many events that could affect the value and liquidity or marketability of the Bonds after their issuance, including but not limited to public knowledge of an audit of the Bonds by the IRS, a general change in interest rates for comparable securities, a change in federal or state income tax rates, legislative or regulatory proposals affecting state and local government securities and changes in judicial interpretation of existing law. Legislation affecting tax-exempt obligations is regularly considered by the U.S. Congress and various state legislatures. Such legislation may effect changes in federal or state income tax rates and the application of federal or state income tax laws (including the substitution of another type of tax), or may repeal or reduce the benefit of the excludability of interest on the tax-exempt obligations from gross income for federal or state income tax purposes. For example, the tax reform bill that was enacted by the U.S. Congress in December, 2017, and signed into law by the President on December 22, 2017, and effective after December 31, 2017, changes both corporate and individual tax rates and eliminates advance refunding bonds. The U.S. Treasury Department and the IRS are continuously drafting regulations to interpret and apply the provisions of the Code and court proceedings may be filed the outcome of which could modify the federal or state tax treatment of tax-exempt obligations. There can be no assurance that legislation proposed or enacted after the date of issue of the Bonds, regulatory interpretation of the Code or actions by a court involving either the Bonds or other tax-exempt obligations will not have an adverse effect on the Bonds' federal or state tax status, marketability or market price or on the economic value of the tax-exempt status of the interest on the Bonds. Neither the opinion of Bond Counsel nor this Official Statement purports to address the likelihood or effect of any such future events or legislative and regulatory actions, and purchasers of the Bonds should seek advice concerning such matters as they deem prudent in connection with their purchase of the Bonds.

UNDERWRITING

The Bonds are being purchased by the Underwriters, for whom Barclays is acting as representative, pursuant to a Purchase Contract, among the Issuer, Sentara and the Underwriters (the “Purchase Contract”) at an aggregate purchase price of $138,530,000.00* (which represents the par amount of the Bonds). The Underwriters will be paid a fee of $______by Sentara in connection with the purchase of the Bonds. The Purchase Contract provides that the Underwriters will be obligated to purchase all of the Bonds, if any are purchased, the obligation to make such purchase being subject to certain terms and conditions to be satisfied by the Issuer and Sentara. The Purchase Contract contains the agreement of Sentara to indemnify the Underwriters and the Issuer against certain liabilities to the extent permitted by law. The Underwriters may offer and sell the Bonds to certain dealers and others at prices lower than the offering prices stated on the inside cover page. The offering prices may be changed from time to time by the Underwriters.

The Underwriters and their affiliates are full-service financial institutions engaged in various activities, which may include securities trading, commercial and investment banking, financial advisory, investment management, principal investment, hedging, financing and brokerage activities. The Underwriters and their affiliates may in the future perform, various investment banking services for the Issuer or Sentara, for which they may receive customary fees and expenses. In addition, affiliates of some of the Underwriters are lenders to Sentara under a credit facility, and in some cases agents or managers for the lenders.

In the ordinary course of their various business activities, the Underwriters and their affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (which may include bank loans and/or credit default swaps) for their own account and for the accounts of their customers and may at any time hold long and short positions in such securities and instruments. Such investment and securities activities may involve securities and instruments of the Issuer.

RELATIONSHIPS AMONG PARTIES

Kaufman & Canoles, a Professional Corporation, is serving as Bond Counsel and counsel to the Obligated Group. Lawrence G. Cumming, a partner of Kaufman & Canoles, a Professional Corporation, serves on Sentara’s Board of Directors. Kaufman & Canoles, a Professional Corporation, is engaged from time to time to provide legal services on unrelated matters to the Master Trustee and the Bond Trustee. Kaufman & Canoles also serves as general counsel to the Issuer on matters unrelated to the Bonds.

Vandeventer Black LLP is serving as counsel to the Issuer in connection with the issuance and sale of the Bonds. Vandeventer Black LLP is engaged from time to time to provide legal services on unrelated matters to Sentara, the Master Trustee and the Bond Trustee.

Robert E. Garris, Jr., the chairman of the board of the Issuer, is an employee of Sentara Medical Group. Mr. Garris abstained after full disclosure from voting on the issuance of the Bonds.

FINANCIAL ADVISOR

Ponder & Co. has served as financial advisor to Sentara for purposes of assisting with the development and implementation of a bond structure in connection with the sale and issuance of the Bonds. Ponder & Co. is not obligated to undertake, and has not undertaken, an independent verification or to assume responsibility for the accuracy, completeness, or fairness of the information contained in this Official Statement. Ponder & Co. is an independent advisory firm and is not engaged in the business of underwriting or distributing municipal securities or other public securities.

RATINGS

The Bonds have received ratings of “Aa2” and “AA” by Moody’s Investors Service (“Moody’s”) and by S&P Global Ratings, a division of Standard & Poor’s Financial Services, LLC (“S&P”), respectively.

A securities rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time. The ratings reflect only the views of the respective ratings agency, and any explanation of the significance of such ratings should be obtained from Moody’s at 7 World Trade Center, New York, NY 10007, (212) 553-0300, and S&P at 55 Water Street, New York, NY 10041, (212) 208-8000. In order to obtain such ratings, Sentara furnished to the rating agencies certain information and materials, some of which has not been included in this Official Statement. Generally, rating agencies base their ratings on such information and materials and their own investigation, studies and assumptions. There is no assurance that the ratings will be maintained for any given period of time or that they will not be revised downward or withdrawn entirely by a rating agency, if, in its judgment, circumstances so warrant. Sentara undertakes no responsibility to oppose any such revision or withdrawal. Any such downward revision or withdrawal of the ratings obtained may have an adverse effect on the market price of the Bonds.

Sentara expects to furnish to each rating agency such information and materials as it may request. Sentara, however, assumes no obligation to furnish requested information and materials, and may issue debt for which a rating in not requested. The failure to furnish requested information and materials, or the issuance of debt for which a rating is not requested, may result in the suspension or withdrawal of a rating.

FINANCIAL STATEMENTS

The Consolidated Financial Statements of Sentara as of and for the years ended December 31, 2017 and 2016 in APPENDIX B to this Official Statement have been audited by KPMG, LLP, independent auditors, as stated in their report thereon, which appears in APPENDIX B hereto.

MISCELLANEOUS

The attached Appendices are integral parts of this Official Statement and should be read together with the balance of this Official Statement. All estimates and other statements in this Official Statement involving matters of opinion, whether or not expressly so stated, are intended as such and not as representations of fact. This Official Statement is not to be construed as a contract or agreement between the Issuer and the purchasers or Holders of any Bonds.

The Issuer has authorized the execution and delivery of, and Sentara has approved, this Official Statement. The Bond Trustee has neither reviewed nor participated in the preparation of this Official Statement. This Preliminary Official Statement is in a form deemed final as of its date within the meaning of the Rule, except for the omission of certain pricing and other information permitted to be omitted by the Rule.

ECONOMIC DEVELOPMENT AUTHORITY OF THE CITY OF NORFOLK

By: Vice Chairman

APPROVED:

SENTARA HEALTHCARE

By: Senior Vice President and Chief Financial Officer

47 [THIS PAGE INTENTIONALLY LEFT BLANK]

APPENDIX A

INFORMATION CONCERNING SENTARA HEALTHCARE

TABLE OF CONTENTS

Page

MAP OF SENTARA SERVICE AREAS ...... A-1 SENTARA HEALTHCARE ...... A-2 ORGANIZATION CHART ...... A-3 OBLIGATED GROUP AND OBLIGATED GROUP AFFILIATES ...... A-4 Sentara Hospitals ...... A-4 Sentara RMH Medical Center ...... A-5 Sentara Martha Jefferson Hospital ...... A-5 Sentara Northern Virginia Medical Center ...... A-5 Sentara Enterprises ...... A-5 OTHER MATERIAL AFFILIATES THAT ARE NOT OBLIGATED GROUP AFFILIATES ...... A-6 Sentara Halifax Regional Hospital ...... A-6 Sentara Medical Groups ...... A-6 Sentara Long Term Care and Senior Services ...... A-6 Sentara Holdings, Inc...... A-6 Optima Health Plan ...... A-7 Bay Primex Insurance Company, LTD ...... A-7 BED COMPLEMENT OF ALL SENTARA FACILITIES ...... A-8 RECENT DEVELOPMENTS ...... A-9 CURRENT AND FUTURE CAPITAL PROJECTS ...... A-9 GOVERNANCE, EXECUTIVE MANAGEMENT AND MEDICAL STAFF ...... A-10 Governance ...... A-10 Executive Management ...... A-10 Medical Staff ...... A-12 SERVICE AREAS, ECONOMIC CHARACTERISTICS, AND COMPETING HOSPITALS ...... A-14 Hampton Roads Service Area ...... A-15 Blue Ridge Service Area ...... A-18 SELECTED UTILIZATION DATA ...... A-21 THIRD-PARTY REIMBURSEMENT AND OTHER REVENUE SOURCES ...... A-23 SELECTED FINANCIAL AND OPERATING INFORMATION ...... A-23 Summary of Revenues and Expenses ...... A-23 Historical Debt Service Coverage ...... A-25 Self-Liquidity Report ...... A-26 MANAGEMENT’S DISCUSSION OF RESULTS OF OPERATIONS ...... A-27 Year Ended December 31, 2017 ...... A-27 Year Ended December 31, 2016 ...... A-27 Year Ended December 31, 2015 ...... A-27 LITIGATION AND INSURANCE ...... A-28 Litigation ...... A-28 Insurance ...... A-28 MAJOR ACCREDITATIONS, AFFILIATIONS, APPROVALS AND MEMBERSHIPS...... A-29 MEDICAL EDUCATION ...... A-29 Medical Students ...... A-29 School of Nursing ...... A-30 School of Cardiovascular Technology ...... A-30 School of Surgical Technology ...... A-30 Patient Care Technician Course ...... A-30 Monitor Surveillance Technician Course ...... A-30

Map of Sentara Service Areas*

* The Hampton Roads Service Area is Sentara Healthcare’s primary service area. The Blue Ridge Service Area is its secondary service area. Sentara Healthcare’s other service areas include: (i) the Sentara Northern Virginia Medical Center (SNVMC) Service Area, together with the Greater Fredericksburg area, where Sentara controls certain physician groups, (ii) the Sentara Halifax Regional Hospital (SHRH) Service Area, and (iii) the Sentara Albemarle Medical Center (SAMC) Service Area. Sentara Healthcare’s primary and secondary service areas comprise over 87% of net patient service revenue of hospitals in the Sentara Healthcare system.

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SENTARA HEALTHCARE

Sentara Healthcare (“Sentara”) is the controlling entity of an integrated healthcare delivery system that provides a comprehensive array of healthcare services in (a) its primary service area of Hampton Roads, an approximately 1,600 square mile area in southeastern Virginia where Sentara controls seven hospitals, (b) its secondary service area known as the Blue Ridge Service Area, where Sentara controls the Sentara RMH Medical Center (formerly known as Rockingham Memorial Hospital) in Harrisonburg, Virginia, and Martha Jefferson Hospital in Charlottesville, Virginia, and (c) several additional service areas surrounding (i) Potomac Hospital Corporation of Prince William (known as “Sentara Northern Virginia Medical Center” or “SNVMC”) in Woodbridge, Virginia, together with an area surrounding Fredericksburg, Virginia (the “Greater Fredericksburg Area”), where Sentara controls certain physician groups, (ii) Halifax Regional Hospital in South Boston, Virginia (known as “Sentara Halifax Regional Hospital” or “SHRH”), and (iii) Albemarle Medical Center in Elizabeth City, North Carolina (known as “Sentara Albemarle Medical Center” or “SAMC”). See the section herein entitled “SERVICE AREAS, ECONOMIC CHARACTERISTICS, AND COMPETING HOSPITALS.” Through its subsidiaries and affiliated companies, Sentara operates a total of 12 hospitals, as well as skilled and intermediate nursing and assisted living facilities, numerous diagnostic and rehabilitative programs, physician offices and clinics, neighborhood medical centers, home health services and two health maintenance organizations. Sentara is responsible for the long-range strategic planning, fiscal planning, marketing and coordination of overall operations of its majority-owned affiliates. Sentara also directs quality assurance and re-engineering initiatives; determines financing for various entities which are part of Sentara; coordinates fund-raising activities; determines and directs transfers of assets among various entities which are part of Sentara; and approves major personnel actions such as the appointment of the respective chief executive officers of certain affiliates of Sentara. Sentara also administers a pooled investment program for its cash reserves. Sentara is the sole member or stockholder of 12 entities: Sentara Hospitals, Potomac Hospital Corporation of Prince William, Sentara Enterprises, Sentara Medical Group, Halifax Regional Hospital, Inc., Sentara Life Care Corporation, Sentara Holdings, Inc., Optima Health Plan, Sentara Healthcare Carolina, Sentara Quality Care Network, LLC, Optima Health Plan of North Carolina, LLC and Bay Primex Insurance Company, Ltd. All such first tier subsidiaries, with the exception of Sentara Holdings, Inc. and Bay Primex Insurance Company, Ltd., are corporations described in Section 501(c)(3) of the Internal Revenue Code of 1986, as amended (the “Code”). Sentara is also the controlling member of Sentara RMH Medical Center and Martha Jefferson Hospital, which are both corporations described in Section 501(c)(3) of the Code. SAMC and the seven Sentara hospitals in the Hampton Roads Service Area are controlled by Sentara Hospitals. Sentara Hospitals, Sentara Enterprises, Sentara RMH Medical Center, Martha Jefferson Hospital and Potomac Hospital Corporation of Prince William are Obligated Group Affiliates under Sentara’s Master Indenture. See the sections herein entitled “ORGANIZATION CHART” and “OBLIGATED GROUP AND OBLIGATED GROUP AFFILIATES.” Sentara and its affiliates have received many national recognitions and awards over the years. The following are some of the recent awards received:

• U.S. News & World Report: Sentara Norfolk General Hospital was ranked in the top 50 nationally for cardiology and heart surgery (ranked #24) and diabetes and endocrinology (ranked #43). • Leapfrog Hospital Safety Score: Nine Sentara hospitals earned the highest grade of “A” for delivering safe care for patients. • Becker’s Hospital Review: Sentara Healthcare was named among the 52 Great Health Systems to Know. Sentara Halifax Regional Hospital was ranked in the Top 100 Rural and Community Hospitals in 2017. Sentara Leigh Hospital was recognized in Top 100 Orthopedic Programs List. • Truven Health Analytics and Modern Healthcare: Sentara Leigh Hospital was named as one of Truven Top 100 Hospitals. • Aetna Institutes of Quality®: Sentara Obici Hospital, Sentara RMH Medical Center and Sentara Martha Jefferson Hospital each were designated as IOQ Total Joint Replacement Programs. • National Accrediting Agency for Clinical Laboratory Science: Sentara RMH School of Medical Laboratory Science receives 10-Year Accreditation. • Healogics: The Sentara Williamsburg Regional Medical Center Wound Healing Center was named 2017 Center of the Year. • IBM Watson Health Top 100 Hospitals: Sentara Leigh Hospital and Sentara Williamsburg Regional Medical Center each were named to the list of Top 100 Hospitals, making this Sentara Leigh’s fourth time to be included in the list and Sentara Williamsburg Regional Medical Center’s second time. • Sentara Leigh Hospital was recognized as an Everest Award winner which honors hospitals that have achieved both the highest current performance and the fastest long-term improvement over five years. • Seven Sentara hospitals have received the prestigious Magnet Recognition Program designation from the American Nurses Credentialing Center. A-2

ORGANIZATION CHART

The following organization chart shows Sentara, the Obligated Group Affiliates and other material affiliates of Sentara. Certain indirectly controlled entities, including, but not limited to, entities controlled by Sentara RMH Medical Center, Martha Jefferson Hospital, Potomac Hospital Corporation of Prince William, Sentara Medical Group, and Sentara Holdings, Inc. (e.g., Sentara Healthcare Carolina, Sentara Quality Care Network, LLC, Optima Health Plan of North Carolina, LLC, and others), are not shown.

Sentara Obligated Group: Healthcare

Sentara Potomac Sentara Martha Sentara Obligated Group RMH Hospital Hospitals Jefferson Enterprises Affiliates: Medical Corporation Hospital Center of Prince

William

Other Material Halifax Sentara Sentara Life Sentara Optima Bay Affiliates: Regional Medical Care Holdings, Health Primex Hospital, Group Corporation Inc. Plan Insurance Inc. Company, Ltd

Sentara Health Plans, Inc.

Optima Optima Optima Health Behavioral Health Health Group Insurance Co.

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OBLIGATED GROUP AND OBLIGATED GROUP AFFILIATES

Sentara is the only member of the Obligated Group under its Master Indenture. The Obligated Group Affiliates include Sentara Hospitals, Sentara RMH Medical Center, Martha Jefferson Hospital, Potomac Hospital Corporation of Prince William and Sentara Enterprises, each of which is described in this section. For a description of the responsibilities of Obligated Group Affiliates under Sentara’s Master Trust Indenture, see the sections of the Official Statement entitled “SECURITY FOR THE BONDS – The Master Indenture,” and “SECURITY FOR THE BONDS – The Funding Agreements.”

Sentara Hospitals

Sentara Hospitals is a Virginia non-stock corporation that operates eight hospitals, which are as follows:

Sentara Norfolk General Hospital, a 525-bed quaternary care facility and the Hampton Roads area’s only Level I Trauma Center, is a quality leader among Hampton Roads consumers and has earned national recognition in U.S. News & World Report’s ranking of America’s Best Hospitals for its cardiology and heart surgery and diabetes and endocrinology programs. The hospital is the region’s first Magnet hospital and houses Sentara Cancer Institute, the Hampton Roads region’s only comprehensive organ transplant center, a specialized Level II nursery, and is the home of the Sentara Heart Hospital.

Sentara Leigh Hospital, located in Norfolk, Virginia, is a 250-bed facility specializing in orthopedic, cardiac, advanced imaging, general surgical, gynecological, obstetrical and comprehensive breast care services. Sentara Leigh Hospital also offers a hyperbaric oxygen therapy unit. A major campus upgrade, including two five-story bed tower replacements, was completed in March, 2016. Sentara Leigh Hospital was named by Truven Health as one of the Nation’s 100 Top Hospitals.

Sentara CarePlex Hospital is a technologically advanced acute care hospital and Certified Primary Stroke Center located in Hampton, Virginia. The 224-bed hospital offers an eICU® to monitor patients even more closely with state-of-the-art equipment and computer software. Sentara CarePlex Hospital provides care through advanced surgical programs, emergency cardiac intervention fellowship-trained physicians, and the newly-opened Family Maternity Center. It is also certified as a Bariatric Surgery Center of Excellence, and is home to the Orthopaedic Hospital at Sentara CarePlex Hospital, the area’s first dedicated orthopedic hospital, taking specialized orthopedic care to a new level.

Sentara Virginia Beach General Hospital is a 276-bed acute care facility specializing in orthopedics, neurosurgery, comprehensive cardiac care, thoracic and colorectal surgery and sleep disorders. It houses the Hampton Roads region’s only Level III Trauma Center and is designated as a Center of Excellence in both robotic surgery as well as minimally-invasive gynecology by the Surgical Review Corporation. The hospital is one of the region’s accredited stroke centers and offers inpatient behavioral health.

Sentara Williamsburg Regional Medical Center, a 145-bed hospital located in York County, Virginia, near Williamsburg, features advanced healthcare technologies and is positioned as an ultra-modern medical center for the region. The hospital offers a full range of medical care from emergency heart catheterization to all-inclusive obstetrics care where patients are able to stay in one room throughout their course of treatment. The hospital also provides advanced imaging and “smart” operating rooms. Sentara Williamsburg Regional Medical Center has also achieved Magnet® recognition, the nation's highest honor for excellence in nursing, and was named by Truven Health as one of the Nation’s 100 Top Hospitals.

Sentara Louise Obici Memorial Hospital, which operates as Sentara Obici Hospital, is a state-of-the-art 178-bed facility located in Suffolk, Virginia. The current facility opened in 2002 to replace the original hospital established by Planter’s Peanuts founder Amedeo Obici as Louise Obici Memorial Hospital in 1951. Obici merged with Sentara in April 2006. The hospital offers a wide range of inpatient and outpatient care and treatment services, and specializes in orthopedic, cardiac, advanced imaging, gynecological and comprehensive breast care services. A three-story wing opened in 2010 serving orthopedic, medical and surgical patients.

Sentara Princess Anne Hospital, which opened in August 2011, is a 160-bed acute care facility located in southern Virginia Beach, Virginia. Sentara Princess Anne is a joint venture with Bon Secours Health System, of which Sentara Hospitals holds a 70% interest and Bon Secours holds a 30% interest. The hospital specializes in orthopedic, cardiac, advanced imaging, gynecological and comprehensive breast care services.

Sentara Albemarle Medical Center, located in Elizabeth City, North Carolina, is a 182-bed, full service facility offering a wide range of services, including: inpatient and critical care, a full array of surgical services, sophisticated diagnostic imaging technology, comprehensive women’s care, cardiology, cancer treatment, rehabilitation services and more. SAMC has a medical staff of more than 100 physicians, representing nearly 30 specialties, and a caring staff of almost 1,000 employees. A-4

Sentara RMH Medical Center

Sentara RMH Medical Center is a Virginia non-stock corporation that operates a 238-bed acute care facility serving residents of Rockingham County, Virginia, the City of Harrisonburg, Virginia, and surrounding counties in western Virginia. Sentara obtained corporate control of the entity on May 2, 2011, and the Sentara RMH Medical Center became an Obligated Group Affiliate on November 28, 2011. Founded in 1912, Rockingham Memorial Hospital opened a replacement facility in June 2010 on an approximately 254-acre site in Rockingham County, just south of Harrisonburg. Sentara RMH Medical Center provides emergency, surgical, cancer center, heart and vascular center, hospice and palliative care, imaging, orthopedics and rehabilitation services, and a center for sleep medicine.

Sentara Martha Jefferson Hospital

Martha Jefferson Hospital is a Virginia non-stock corporation that operates Sentara Martha Jefferson Hospital, a 176-bed acute care facility serving residents of Albemarle County, Virginia, the City of Charlottesville, Virginia and surrounding counties in central Virginia, which was originally founded in 1904. Sentara obtained corporate control of the entity on June 1, 2011, and Martha Jefferson Hospital became an Obligated Group Affiliate on November 28, 2011. In 2011, Martha Jefferson Hospital opened a state- of-the-art replacement hospital on Pantops Mountain in Albemarle County just east of Charlottesville. Sentara Martha Jefferson Hospital is the only Magnet hospital in the Charlottesville area and provides cancer care, cardiac care, emergency care, maternity, neurology, orthopedics and surgery.

Sentara Northern Virginia Medical Center

Potomac Hospital Corporation of Prince William is a Virginia non-stock corporation that operates Sentara Northern Virginia Medical Center, a 183-bed facility located in Woodbridge, Virginia, which serves residents of eastern Prince William, southern Fairfax and north Stafford Counties in northern and central Virginia. Its predecessor, Potomac Hospital, opened in 1972 and, in 2006, a patient care building replaced the original Medical/Surgical Units and Intensive Care Unit with all private rooms. Sentara obtained corporate control of Potomac Hospital Corporation of Prince William on December 1, 2009, and the entity became an Obligated Group Affiliate on July 2, 2012. Sentara Northern Virginia Medical Center’s clinical services include advanced imaging, cancer services, cardiovascular care, emergency care, orthopedics and weight loss services. Recently, the hospital completed construction on enhanced healthcare facilities which allow the hospital to serve additional patients as the Northern Virginia community continues to grow.

Sentara Enterprises

Sentara Enterprises, a Virginia non-stock corporation, operates five divisions as follows:

Home Care Services provides in-home skilled medical services that include nursing, physical therapy, occupational therapy, home health aide, social work, and speech therapy services.

Medical Transport LLC operates a fleet of 75 ambulances equipped for basic, advanced and critical care life support.

Sentara Pharmacy & Infusion Therapy Services provides in-home infusion therapy, with pharmacists and nursing staff available 24-hours-a-day, seven days a week to administer intravenous medications for patients with acute and chronic illnesses.

Proprium Pharmacy, a specialty pharmacy, carries high-cost medications for complex health conditions, offering personalized service to patients. Proprium maintains a pharmacist on call 24 hours a day, seven days a week.

Hospice is a service for patients with life-limiting illnesses and can help the patient and family better handle the transition. In addition to hospice services, this division also operates Sentara Hospice House, a 12 bed inpatient hospice facility for respite and end-of-life care.

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OTHER MATERIAL AFFILIATES THAT ARE NOT OBLIGATED GROUP AFFILIATES

Sentara Halifax Regional Hospital

Halifax Regional Hospital, Inc. is a Virginia non-stock corporation of which Sentara is the sole member that operates Sentara Halifax Regional Hospital, a 192-bed facility serving residents of Halifax County, Virginia, Charlotte County, Virginia, and Mecklenburg County, Virginia, and surrounding communities. The hospital provides a wide range of services including cardiovascular services, emergency services, family birthing center, hospitalist program, imaging/radiology services, laboratory services, nephrology services, orthopedic services, rehabilitation services and medical/surgical services. In addition, SHRH offers long-term care, dementia care, home health, hospice, behavioral health services and a multitude of outpatient services through Halifax Home Health and Halifax Regional Hospice. Other affiliates include four family practice offices, five specialty practices, one pediatric practice and a dental clinic.

Sentara Medical Groups

Sentara Medical Group, a Virginia non-stock corporation of which Sentara is the sole member, is a physician multi-specialty group practicing at locations throughout Hampton Roads, Northern Virginia, and Northeast North Carolina, including locations in Norfolk, Virginia Beach, Chesapeake, Hampton, Williamsburg, Woodbridge, Virginia and Elizabeth City, North Carolina. As of December 31, 2017, Sentara Medical Group employed a total of 551 physicians.

Sentara RMH Medical Group, Sentara Martha Jefferson Medical Group, and Sentara Dominion Medical Associates Medical Group, which are separate entities, employed a combined total of 233 physicians as of December 31, 2017. See the section herein entitled “GOVERNANCE, EXECUTIVE MANAGEMENT AND MEDICAL STAFF – Medical Staff.”

Sentara Long Term Care and Senior Services

Sentara Life Care Corporation, a Virginia non-stock corporation, provides health related services for the elderly and chronically ill. It is one of the long-term care affiliates of Sentara. As of December 31, 2017, this non-profit affiliate operates 909 long-term care beds in eight facilities, including seven nursing centers and one assisted living community. Sentara Life Care Corporation also operates two Program of All-Inclusive Care for the Elderly (“PACE”) sites, and two Mobile Meals programs.

Sentara Life Care Corporation has facility locations in the Cities of Norfolk, Virginia Beach, Chesapeake, Portsmouth and Hampton, Virginia, and in Currituck County, North Carolina.

Sentara Halifax Regional Hospital operates 384 long-term care beds in two nursing center facilities located in Clarksville and South Boston, Virginia.

Sentara Holdings, Inc.

Sentara Holdings, Inc., a Virginia stock corporation of which Sentara is the sole member, houses some of the taxable activities of Sentara and owns 100% of the outstanding common stock of Sentara Health Plans, Inc. Sentara Health Plans, Inc. is a Virginia stock corporation which markets and administers prepaid health services plans utilizing Sentara affiliates and other healthcare institutions that are providers of healthcare services.

The subsidiaries of Sentara Health Plans, Inc. are as follows:

Optima Health Insurance Co. Sentara Health Plans, Inc. owns 100% of the outstanding stock of Optima Health Insurance Co., a Virginia stock corporation, which is licensed by the Commonwealth of Virginia to sell health insurance.

Optima Health Group, Inc. Sentara Health Plans, Inc. owns 100% of the outstanding stock of Optima Health Group, Inc., a Virginia stock corporation, which is licensed by the Commonwealth of Virginia as a Health Maintenance Organization (“HMO”) but currently has no operating business and no plan members.

Optima Behavioral Health. Sentara Health Plans, Inc. owns 100% of the outstanding stock of Optima Behavioral Health, a Virginia stock corporation, which provides managed mental health programs to employers. As of December 31, 2017, it had 801,983 subscribers including all members of the Optima Health Plan (described below).

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Sentara Holdings also wholly and directly owns Sentara Health Plans of North Carolina, Inc. (“SHPNC”), Sentara Health Insurance Company of North Carolina (“SHICNC”), and Sentara Health Plans of Ohio, Inc. (“SHPO”). SHPNC and SHICNC are both domiciled in North Carolina and are currently in a dormant status. SHPNC is licensed by the North Carolina Department of Insurance (“NCDOI”) as a third party administrator (“TPA”). SHICNC is licensed by the NCDOI as an accident and sickness insurer. SHPO is domiciled in Ohio and licensed as a TPA by the Ohio Department of Insurance. SHPO is currently operating as a TPA for a large self-funded group in Ohio with 36,636 members.

Optima Health Plan

Optima Health Plan (“OHP”), a Virginia non-stock corporation which is wholly and directly owned by Sentara Healthcare, operates an HMO in Virginia and had 304,249 plan members as of December 31, 2017. The plan members consist of commercial members, federal employees and Virginia Medicaid members.

OHP formed Sentara AdvantEdge, a company that establishes strategic health plan partnerships outside of Virginia. On January 1, 2015, Sentara AdvantEdge began serving as the TPA for about 36,636 OhioHealth employees.

The Virginia Department of Medical Assistance Services (DMAS) instituted a new long term services and support program in 2017. Optima Health Plan was selected to participate and named the program Optima Health Community Care. The program began in August 2017 and OHP had 17,893 members as of December 31, 2017.

Bay Primex Insurance Company, LTD

Bay Primex is a captive insurance company, which reinsures professional and general liability risks for Sentara.

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BED COMPLEMENT OF ALL SENTARA FACILITIES

The total acute care licensed bed complement of Sentara as of December 31, 2017, is 2,737, of which 2,486 beds are being utilized. Table I below shows the distribution of the bed complement for Sentara’s 12 affiliated hospitals as of December 31, 2017.

TABLE I

SENTARA HEALTHCARE Bed Complement Distribution* (as of December 31, 2017)

Sentara Sentara Sentara Sentara Virginia Williamsburg Sentara Northern Sentara Sentara Sentara Sentara Norfolk Sentara Beach Sentara Regional Sentara Princess Virginia Rockingham Martha Halifax Albemarle General Leigh General CarePlex Medical Obici Anne Medical Memorial Jefferson Regional Medical Hospital Hospital Hospital Hospital Center Hospital Hospital Center Hospital Hospital Hospital Center Totals

Medical/Surgical 350 200 199 138 106 130 120 146 168 114 82 81 1,834 Adult Intensive Care 85 20 26 24 16 12 16 8 16 12 12 10 257 Obstetric 32 30 N/A 7 17 16 24 27 22 24 18 24 241 Pediatric N/A N/A N/A N/A N/A N/A N/A N/A 12 N/A N/A N/A 12 Psychiatric 34 N/A 24 N/A N/A 20 N/A N/A 20 N/A N/A N/A 98 Rehabilitation 22 N/A 8 N/A 6 0 N/A N/A N/A N/A N/A N/A 44 Total Operating Beds 523 250 257 169 145 178 160 181 238 150 112 115 2,486 Total Licensed Beds 525 250 276 224 145 178 160 183 238 176 192 182 2,737

______* Source: Sentara Records

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RECENT DEVELOPMENTS

Between December 31, 2017 and April 18, 2018, the number of members of the health insurance plans operated by the Optima Health Plan division of Sentara Healthcare grew from approximately 455,000 to approximately 511,000 members. This increase is mainly attributed to growth in the individual health insurance exchange business which has grown by about 51,000 members since December 31, 2017 due to the exit of certain markets by competitors.

CURRENT AND FUTURE CAPITAL PROJECTS

Sentara and its affiliates have received Certificate of Public Need (“COPN”) approvals and have completed COPN project registrations for several projects of a material size and dollar value that are expected to be completed over the next three years, including the following:

• Sentara Obici Hospital. In March 2016, Sentara Obici Hospital, in Suffolk, Virginia, was awarded a COPN to establish an ambulatory surgery center with two operating rooms at its BelleHarbour outpatient campus in Suffolk. The total authorized capital cost of the project is $9,109,648. The project is scheduled to be completed by August 2018. • Sentara Princess Anne Hospital. In November 2016, Sentara Princess Anne Hospital, in Virginia Beach, Virginia, was awarded a COPN to add 14 medical/surgical beds through the reallocation of three beds from Sentara Virginia Beach General Hospital, three beds from Sentara Leigh Hospital, three beds from Sentara Obici Hospital, and five beds from Bon Secours DePaul Medical Center. The total authorized capital cost of the project is $11,880,356. The project is scheduled to become operational in September 2018. • Sentara Virginia Beach General Hospital. Sentara Virginia Beach General Hospital (“SVBGH”), in Virginia Beach, Virginia, has commenced a project to address infrastructure deterioration, space deficiencies in operating rooms, inefficiencies and fragmentation associated with operating three separate intensive care units, and support of future volume growth. Updates and renovations will occur in the central utility plant, the surgical service space and the intensive care units. Updates to the central utility plant include a 10,850 square foot expansion and updates to electrical breakers, switchgear, emergency generators and the HVAC system. The surgical services expansion and renovation will address overall operating room capacity, flexibility, and flow for patients, staff and materials. Its project scope will also include expansion of the post- anesthesia care unit to meet code requirements and improve patient flow, as well as renovation of central sterile processing and surgery support service. Two new patient elevators will be added to connect the operating rooms with the new second floor consolidated intensive care units. SVBGH’s licensed bed complement will remain unchanged at 276 beds. The total authorized capital cost of the project is $49,000,000 and the project is scheduled to be completed in 2019. • Sentara Leigh Hospital. In March 2018, work commenced on building a comprehensive Cancer Center on the campus of Sentara Leigh Hospital, in Norfolk, Virginia. The Sentara Cancer Center will bring together care teams from Sentara Medical Group, Eastern Virginia Medical School, Virginia Oncology Associates, and other community physicians to provide outpatient oncology services in one centralized location. The expected project cost is $94 million and completion is anticipated for mid-2020. • Sentara Norfolk General Hospital. In 2016, Sentara Norfolk General Hospital, in Norfolk, Virginia, commenced a major expansion and renovation project affecting numerous parts of the hospital. The project includes adding floors to the Kaufman Wing and the River Pavilion, modernizing and expanding the operating rooms, creating a state-of-the-art neonatal intensive care unit and consolidating multiple intensive care units. The project will co-locate all critical care beds into one ICU tower and increase ICU capacity; move all acute care beds out of the old A/B wings and eliminate “mixed level of care” units; renovate operating rooms so they are larger and more technologically advanced; expand emergency department capacity by 30% and enable a dedicated outpatient observation unit adjacent to the emergency department; increase the Women’s Health space and adjust the Special Care Nursery space; and expand Interventional Radiology and Vascular Services to position for future growth in minimally invasive procedures. The project is also designed to provide larger patient rooms that will include functional clinical, patient and family spaces; to separate public and private corridors to achieve an on-stage, off-stage model; to improve and simplify access and wayfinding for patients, families and visitors; and to reduce and simplify travel distances between parking and the point-of-care. The licensed bed capacity will remain at 525 licensed beds. The expected project cost is $199.4 million and the anticipated completion date is December 2020.

Pending COPN applications at this time include: the addition of Stereotactic Radiosurgery and Stereotactic Radiotherapy at Sentara CarePlex Hospital in Hampton, Virginia; and the addition of mobile PET/CT services at Sentara Northern Virginia Medical Center in Woodbridge, Virginia. Except for proceeds of the Refunded Bonds allocated to Sentara Norfolk General Hospital, Sentara has not incurred, and does not intend to incur, any indebtedness in connection with these projects.

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GOVERNANCE, EXECUTIVE MANAGEMENT AND MEDICAL STAFF

Governance

Board of Directors. Sentara Healthcare is governed by a Board of Directors (the “Board”) currently comprised of 19 members. The Bylaws of Sentara Healthcare provide that no member of the Board (a “Director”) shall be eligible or elected to serve for more than three consecutive terms of three years, plus the initial term of a Director if such term was in connection with an initial regular term of one or two years, if filling a vacancy (other than at an annual meeting), or if an interim election, except that, notwithstanding the foregoing, the term of an individual serving as Sentara Healthcare’s Board Chair or Vice Chair, or Chair of Sentara Healthcare’s Governance Committee, shall extend for the term of service as Sentara Healthcare’s Board Chair, Vice Chair or Chair of the Governance Committee, as the case may be, provided such term of service commences while the individual was a Director (the “Maximum Term End”). Directors who reach the Maximum Term End may be reelected after a one year absence from the Board. The Bylaws of Sentara Healthcare authorize no less than 13 and no more than 21 Directors, including the Chief Executive Officer of Sentara Healthcare who shall be an ex-officio Director with voting power. In addition to electing the Board, the Directors oversee management of the property, business and affairs of Sentara Healthcare. The Board maintains the following standing committees with board-delegated powers: Finance, Audit and Compliance, Compensation, Governance, and Medical Affairs Committees. The Board maintains a conflict of interest policy and other policies customarily maintained by 501(c)(3) healthcare organizations. The corporate and administrative offices of Sentara Healthcare are located at 6015 Poplar Hall Drive in Norfolk, Virginia.

Control and direction over Sentara Healthcare’s subsidiary corporations is exercised through the authority of each subsidiary corporation’s sole member, shareholder or Board of Directors (as applicable, depending on how the governing documents are drafted) to approve significant expenditures, transactions and amendments to the applicable subsidiary corporation’s articles and bylaws.

Listed below are the members of Sentara’s Board:

Name Occupation Member Since Term Expires Howard P. Kern President & CEO, Sentara Ex officio Ex officio Bill Achenbach Principal, Signature Financial Group June 2011 November 2019 John Agola, MD Interventional Neuro Radiologist September 2014 November 2018 Gilbert Bland Chairman, GilJoy Group November 2016 November 2019 Peter Brooks Managing Director, CornerStone Partners, LLC October 2017 November 2020 Dian Calderone President, Hunt, Calderone & Abbott, P.C. March 2014 November 2020 Frederick Coble CFO, Baker’s Crust October 2011 November 2020 Robert C. Fort Retired Corporate Officer, Norfolk Southern Co. October 2004 November 2019 Edward George, MD Semi-Retired, Board Certified Oncologist October 2017 November 2020 J. Les Hall President, Allfirst LLC November 2015 November 2018 Henry U. Harris, III Principal, Palladium Investment Advisors, LLC October 2009 November 2018 Ann Homan Businesswoman / Insurance Counselor May 2011 November 2019 Charles Lovell, MD Internal Medicine Physician October 2008 November 2019 Allan Parrott President, Tidewater Fleet Supply December 2015 November 2018 Whitney Saunders Attorney, Saunders & Ojeda, P.C. May 2017 November 2020 Jeffery Smith, EdD Superintendent, Hampton City Schools November 2016 November 2019 Michael Smith Executive V.P., Huntington Ingalls Industries November 2017 November 2020 Carol Thomas Retired, Halifax Regional Hospital MD Services May 2015 November 2020 Marion M. Wall CEO, Potomac Wall Insurance Agency December 2009 November 2018

Executive Management

The operational and administrative management of Sentara is vested in its Chief Executive Officer who is appointed by the Board of Directors of Sentara and is required under its Bylaws to be a Director of Sentara. Other officers of Sentara are appointed by

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the Board. The principal management personnel who provide the governance of and services to Sentara and its affiliated corporations are described below. The Chief Medical Officer position is currently vacant and is being recruited.

Howard P. Kern, President and Chief Executive Officer (Age 61)

Howard Kern is President and Chief Executive Officer of Sentara Healthcare, a not-for-profit integrated healthcare organization with revenues of approximately $5.3 billion. Mr. Kern’s executive management experience includes 36 years in hospital, health insurance, ambulatory services, and healthcare finance. Mr. Kern is a Fellow in the American College of Healthcare Executives and serves on multiple professional and corporate boards. He obtained his Masters in Health Administration from the Medical College of Virginia, and is on the faculty as a lecturer in the School of Health Administration. He also completed the CEO Program for Health Care Leadership at the Leonard Davis Institute for Health Economics at the Wharton School, University of Pennsylvania. Mr. Kern serves on numerous corporate and community boards including HealthEast, a not-for-profit integrated delivery system in St. Paul, MN. He served as Chairman of the Board of Westminster Canterbury Chesapeake Bay, a Continuing Care Retirement Community in Virginia Beach, VA until January, 2016. He also serves as a board member of Future Hampton Roads, Hampton Roads Economic Development Alliance, MDLive, ReInvent Hampton Roads (Executive Committee), Town Point Club, Virginia Biosciences Health Research Corporation, Virginia Business Higher Education Council, the Virginia Symphony Orchestra, and Virginia Wesleyan College.

Michael V. Gentry, Senior Corporate Vice President and Chief Operating Officer (Age 52)

Mike Gentry is a Senior Corporate Vice President and the Chief Operating Officer for Sentara Healthcare. Appointed to the position in October 2015, Mr. Gentry is responsible for the overall operations of Sentara provider divisions, including 12 hospitals, Sentara Life Care Corporation, and Sentara Enterprises. He has been in executive management positions with Sentara Healthcare since 2008. Before joining Sentara, Mr. Gentry served for eight years as President and Chief Executive Officer of the Florida Hospital Memorial Medical Center System. Prior to that, he spent 10 years with Park Ridge Hospital in Hendersonville, North Carolina, the last five of which he served as the President and Chief Executive Officer. Mr. Gentry’s current Professional Affiliations include American College of Healthcare Executives (Fellow), and Virginia Hospital and Healthcare Association (Board Chair).

Robert A. Broermann, Senior Vice President and Chief Financial Officer (Age 57)

Robert Broermann is a Senior Vice President and the Chief Financial Officer of Sentara Healthcare. Appointed to the position in 2001, Mr. Broermann is responsible for all aspects of the organization’s financial management. His staff includes the financial personnel of all 12 Sentara operating divisions in addition to all centralized finance employees including the Revenue Cycle and Treasury functions. In 2006, Mr. Broermann was awarded “CFO of the Year” by Virginia Business in the large private company category. Mr. Broermann joined Sentara in 1998 through the merger with Tidewater Health Care, where he had served as Chief Financial Officer since 1993. Prior to joining Tidewater Health Care, Mr. Broermann was a Senior Audit Manager with Coopers & Lybrand. Mr. Broermann earned his Bachelor of Science in Accounting and his MBA from Old Dominion University. His current Professional Affiliations include American Institute of CPAs, Healthcare Financial Management Association (Fellow), Virginia Beach Education Foundation (Board Member), United Way of South Hampton Roads (Board Member), and Samaritan House (Board Member).

Dennis Matheis, President and CEO of Optima Health and Senior Vice President of Sentara Healthcare (Age 57)

Dennis Matheis is the President of Optima Health and a Senior Vice President of Sentara Healthcare. The Optima Health Plan division of Sentara Healthcare serves over 455,000 members and consists of over 24,000 providers and 106 hospitals. Mr. Matheis has spent the past 27 years in various senior leadership roles in health insurance and healthcare. Most recently he served as President of Anthem’s BCBS Central Region encompassing 6 states and $12 billion in annual revenue. His prior leadership roles have included management of large physician practices and integrated delivery systems. He earned his B.S. in Accounting from the University of Kentucky and was a practicing Certified Public Accountant.

Vicky G. Gray, Senior Vice President for System Development (Age 62)

Vicky Gray is the Senior Corporate Vice President of System Development for Sentara Healthcare. She is responsible for brand management, strategic planning, marketing and sales, market assessment, and corporate communications. Ms. Gray served as Interim Administrator of Sentara Leigh Hospital, a 250-bed facility, in 2001, during which time the Radiology and Surgery programs were accelerated through capital investment and product redesign. In 2004, she held dual roles as Interim Vice President for Sales at Optima Health Plans. Prior to joining Sentara in 1998, she was a strategist for an integrated health system in Virginia Beach, Virginia,

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directing the systems’ planning and marketing initiatives. This position was enriched by concurrent operations experience, including hospital administration, home healthcare, ambulatory services and developing and managing a primary care physician group. Ms. Gray is a fellow in the American College of Health Care Executives. She is a member of Society for Healthcare Strategy and Market Development, Virginia Hospital and Healthcare Association, and the Healthcare Strategy Institute. Ms. Gray is a former Chair of the Board of Directors for the United Way of South Hampton Roads.

Michael J. Reagin, Senior Vice President and Chief Information Officer (Age 48)

Mr. Reagin heads innovation and information technology strategy at Sentara Healthcare. He is leading the digital transformation to consumer centricity enabled by development of a consumer focused mobile app. Additionally, he has led the implementation of a best in class population health system for more than 2,200 providers. Mr. Reagin is a nationally recognized leader in Cyber Security and is cofounder of the first Information Sharing and Analysis organization for Healthcare Cyber Security. He has over 20 years’ experience in Healthcare Information Technology leadership and extensive experience managing Global teams in North America, Europe and Asia. Prior to joining Sentara Healthcare, Mr. Reagin served as CIO with the Cleveland Clinic in Abu Dhabi, United Arab Emirates (UAE). Previous to that, he was the Chief Technology and Strategy Officer at Providence Health and Services in Oregon. Under Mr. Reagin’s leadership the Information Technology division has received numerous national awards including the Most Wired, Top 100 Innovations, Best Employer in Information Technology, HIMSS Analytics Stage 7, and the Davies Award.

Mary L. Blunt, Senior Vice President for Strategic and Operational Oversight of the Hampton Roads Region (Age 62)

Mary Blunt, P.T., M.H.A., FACHE is a Senior Corporate Vice President for Sentara Healthcare responsible for the Strategic and Operational oversight of the Hampton Roads region to include, Sentara CarePlex Hospital, Sentara Williamsburg Regional Medical Center, Sentara Obici Hospital, Sentara Leigh Hospital, Sentara Virginia Beach General Hospital, Sentara Princess Anne Hospital and Sentara Albemarle Medical Center. In addition, she has responsibility for Sentara Hampton Roads Post-Acute service including seven nursing homes, two assisted living facilities and PACE programs. Her current responsibilities also include supply management for the system. Prior to assuming this role she served as the Corporate Vice President for the Peninsula region and President of Sentara Norfolk General Hospital (the regions only level one trauma center). Before joining Sentara in 1987, Ms. Blunt served as a Physical Therapist for 10 years at several locations throughout the Chicago area. During her tenure with Sentara she has severed in various roles including Vice President of Operations at several hospitals, President of Sentara Life Care (post-acute division) and President of Sentara Norfolk General Hospital (the region’s only level one trauma center). She earned her Masters of Health Administration from Washington University School of Medicine in St. Louis and her B.S. in Physical Therapy from the University of Illinois Medical Center in Chicago. Ms. Blunt is a Fellow of the American College of Healthcare Executives and has served on numerous boards within the American Hospital Association including the post-acute council and three years on the Board of the American Hospital Association. Currently she serves on Peninsula Community Foundation, American Hospital Association Committee on Nominations, and MSN Board of Directors.

Becky Sawyer, Senior Vice President of Human Resources (Age 49)

Becky Sawyer is Senior Vice President and Chief Human Resources Officer for Sentara Healthcare. She is responsible for HR administration for 28,000 employees across Sentara Healthcare’s 12 hospitals and fully integrated clinical and health plan operations system. Prior to her promotion to a senior corporate position, Ms. Sawyer was Vice President of HR responsible for nine hospitals, plus Sentara Medical Group, Sentara Enterprises, Sentara Life Care and the Sentara-owned health plan, Optima Health. In 26 years with Sentara, Ms. Sawyer has held increasingly responsible HR leadership positions across multiple divisions. Ms. Sawyer co-led system implementation of an innovative ‘HR Solutions’ model, which concentrates expertise and streamlines delivery of HR services across a diverse, multi-regional enterprise. Ms. Sawyer supports a strategic HR program to maintain a positive, diverse, multigenerational workplace where members of the team develop their full potential and contribute to the Sentara mission to improve health every day. Ms. Sawyer has a bachelor’s degree in business administration from Troy University and a master’s in public administration from Arkansas State University. She is a member of the Society of Human Resources Management (SHRM), the American Society for Healthcare Human Resources Administration (ASHHRA) and the American College of Healthcare Executives (ACHE).

Medical Staff

Physicians in active practice in the Sentara system are categorized under one of four medical groups. Physicians practicing in the Hampton Roads hospitals, Sentara Northern Virginia and Sentara Albemarle Medical Center are categorized as practicing under Sentara Medical Group. Other active practices include RMH Medical Group, Martha Jefferson Medical Group, and Dominion Health Medical Associates (practicing at Sentara Halifax Regional Hospital). Sentara has 3,884 physicians in the System, with 769 employed A-12

within the Medical Groups. The statistics provided in Table II below include physicians employed by such Medical Groups, and physicians that practice with such Medical Groups but are not employees.

As of December 31, 2017, over 5,881 nursing full time equivalents were on staff in the Sentara system including RN and LPN positions. Sentara recruits nurses through the Sentara website, nursing schools, nursing image campaigns and job fairs. Sentara utilizes various methods to maximize the retention of its nursing staff, including flexible scheduling, competitive pay and benefits, educational opportunities and career advancement. There is no labor union activity among Sentara’s medical staff.

Sentara Medical Group. As of December 31, 2017, 2,982 physicians, averaging 49 years of age, were in practice with Sentara Medical Group. Ninety-eight and one half percent (98.5%) of such physicians were board certified.

RMH Medical Group. As of December 31, 2017, 332 physicians, averaging 49 years of age, were in active practice with RMH Medical Group. Ninety-four percent (94.0%) of such physicians were board certified.

Martha Jefferson Medical Group. As of December 31, 2017, 478 physicians, averaging 49 years of age, were in active practice with Martha Jefferson Medical Group. Ninety-six percent (96.0%) of such physicians were board certified.

Dominion Health Medical Associates. As of December 31, 2017, 92 physicians, averaging 51 years of age, were in active practice with Dominion Health Group. Eighty-eight percent (88.0%) of such physicians were board certified.

An analysis of key characteristics of physicians practicing with each of the referenced Medical Groups as of December 31, 2017, is provided in Table II below:

TABLE II

SENTARA HEALTHCARE MEDICAL STAFF Analysis of Active Physicians as of December 31, 2017*

Martha Dominion Sentara RMH Jefferson Health Medical Medical Medical Medical Category Group Group Group Associates

Total Medical Staff Members (Physicians only) 2,982 332 478 92

Total Employed Physicians (FTEs) 551 84 111 23

Percent of Board Certified Active Physicians 98.5% 94.0% 96.0% 88.0% (Active/Provisional/Courtesy)

Approximate Average Ages (years) of Active 49 49 49 51 Physicians (Active/Professional/Courtesy)

Percent of Active Physicians over age 60 18.9% 5.4% 15.0% 24.7% (Active/Provisional/Courtesy) ______* Source: Sentara Records

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SERVICE AREAS, ECONOMIC CHARACTERISTICS, AND COMPETING HOSPITALS

Sentara has five service areas. The primary service area for Sentara encompasses the approximately 3,800-square mile area in southeastern Virginia known as Hampton Roads, centered in the City of Norfolk, Virginia, which is Sentara’s historical service area. As a result of acquisitions, Sentara’s service areas also include portions of northern Virginia, western Virginia, central Virginia, and northeast North Carolina. Such additional service areas are the result of the acquisition of Potomac Hospital in Woodbridge, Virginia, on December 1, 2009, the acquisition of Rockingham Memorial Hospital in Harrisonburg, Virginia, on May 2, 2011, the acquisition of Martha Jefferson Hospital in Charlottesville, Virginia, on June 1, 2011, the acquisition of Halifax Regional Hospital in South Boston, Virginia on July 1, 2013, and the acquisition of Albemarle Hospital in Elizabeth City, North Carolina on February 28, 2014.

Sentara’s primary service area of Hampton Roads, together with its secondary Blue Ridge service area encompassing Sentara RMH Medical Center and Sentara Martha Jefferson Hospital, comprise over 87% of net patient service revenue of hospitals in Sentara’s healthcare system, as shown in Table III below.

TABLE III

SENTARA HEALTHCARE Net Patient Service Revenue by Service Area*

Twelve Months Ending December 31 2017 2016 2015

Hampton Roads 67% 66% 67% Blue Ridge 20 20 19

Primary and Secondary Service Areas 87% 86% 86%

Greater Fredericksburg Area 6% 7% 7% South Boston 4 4 4 Elizabeth City (NC) 3 3 3

Total Other Service Areas 13% 14% 14%

TOTAL 100% 100% 100% ______* Source: Sentara Records

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Hampton Roads Service Area

Sentara’s primary service area, the Hampton Roads region of Virginia, includes the cities of Norfolk, Virginia Beach, Chesapeake, Suffolk, Portsmouth, Hampton, Newport News, Poquoson, Williamsburg and Franklin, the counties of Southampton, Isle of Wight, York, James City, Gloucester and Charles City, and portions of the counties of Surry, Sussex, New Kent, King William, King and Queen, and Middlesex.

Table IV below shows the patient origin analysis for Sentara’s Hampton Roads hospitals for the years 2014 through June 2017. Approximately 92% of the Hampton Roads hospital discharges are for Hampton Roads residents. The remaining discharges are for residents who live outside of Hampton Roads.

TABLE IV

SENTARA HEALTHCARE Hampton Roads Hospitals Patient Origin Analysis*

January-June Twelve Months Ending December 31 2017 2016 2015 2014

Chesapeake 8.1% 8.3% 7.7% 7.5% Norfolk 17.0 17.1 17.8 17.7 Portsmouth 3.7 3.4 3.4 3.4 Smithfield/Isle of Wight 2.2 2.2 2.3 2.3 Suffolk 6.7 6.7 6.8 6.7 Other Western Tidewater 2.1 2.3 2.0 2.1 Virginia Beach 34.9 34.2 35.0 34.8 Peninsula 17.5 17.7 17.5 18.3

Total Hampton Roads Service Area 92.4% 91.9% 92.5% 92.7%

Northeastern North Carolina 4.4 4.5 4.0 3.7 Other Virginia 1.7 1.8 1.7 1.8 All Other Areas 1.5% 1.8% 1.8% 1.8%

TOTAL(1) 100.0% 100.0% 100.0% 100.0% ______* Source: Sentara Records (excludes normal newborns) (1) Percentages may not total due to rounding to the nearest tenth.

Population. The 2017 population of the Hampton Roads service area was 1,770,187. Over the next five years, it is projected to grow by 3.4% to 1,830,241. In 2017, 14.0% of the population was age 65 or over, and the median household income was $62,132. (Source for all population data: Nielsen Claritas, Inc., via Thompson Reuter Market Expert data.)

Military Activity. Hampton Roads has one of the largest concentrations of military installations in the United States, including the Norfolk Naval Base, NATO’s Supreme Allied Atlantic Command, Headquarters of the Atlantic Fleet, Headquarters of the Army’s training command, an Air Force base, Naval Air Station Oceana, two other Army bases and several other major naval commands. Military spending is a significant factor in the region’s economy. Newport News Shipbuilding, owned by Huntington Ingalls Industries, Inc. (the “Shipyard”), is the region’s largest private employer. The Shipyard specializes in the construction of nuclear aircraft carriers and submarines for the United States Navy.

Port Activity. The James, Elizabeth and Nansemond Rivers converge to form Hampton Roads, one of the world’s largest deep water harbors, which is home to the Port of Virginia (the “Port”). The Port is a significant driver of the economic health of the Hampton Roads region. The Virginia Port Authority, an agency of the Commonwealth of Virginia, owns or leases the Port’s four marine terminals at Hampton Roads: Norfolk International Terminals (NIT), Portsmouth Marine Terminal (PMT) Newport News Marine Terminal (NNMT) and Virginia International Gateway (VIG).

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Employment. According to the Virginia Employment Commission, December 2017 civilian employment for the Hampton Roads region totaled 780,382. According to the Center for Economic Analysis and Policy at Old Dominion University, military employment in the Hampton Roads region includes approximately 85,900 active duty military. The Hampton Roads region has experienced unemployment rates below the national average. According to statistics published by the Virginia Employment Commission, as of December 2017, Hampton Roads’ unemployment rate was 3.9% as compared to a national unemployment rate of 4.1%. The ten largest employers in the Hampton Roads market, as of January 2018, are described in Table V below.

TABLE V

Ten Largest Civilian Employers in Hampton Roads*

Number of Civilian Employees Employer Name (Estimate) Industry

Huntington Ingalls Industries, Inc. (Newport News Shipbuilding) 20,000+ Manufacturing Sentara Healthcare 20,000+ Services Riverside Health System 6,000-10,000+ Services Norfolk City Public Schools 6,000-10,000+ Government/Military Norfolk Naval Shipyard 6,000-10,000+ Government/Military Virginia Beach City Public Schools 6,000-10,000+ Government/Military Virginia Beach City 6,000-10,000+ Government/Military Portsmouth City Public Schools 3,001-5,000+ Government/Military Chesapeake City Public Schools 3,001-5,000+ Government/Military NASA Langley Research Center 3,001-5,000+ Government/Military ______* Source: Hampton Roads Economic Development Alliance (Excludes Retail), as of January, 2018. The above chart excludes military employment, which exceeds 85,000.

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Competing Hospitals. There are thirteen adult and one children’s acute care, short-stay providers and two federal government hospitals in Sentara’s Hampton Roads primary service area. Sentara Norfolk General Hospital is the largest hospital in the service area.

As shown in Table VI below, for the fiscal year ending December 31, 2016, which is the most recent period for which service area discharge distribution data is available in this format, Sentara achieved a 57.2% share of discharge days and a 56.3% share of discharges in its Hampton Roads service area. This compares to 57.8% and 58.3% of discharge days and 56.2% and 56.7% of discharges for fiscal years 2015 and 2014, respectively.

TABLE VI

SENTARA HEALTHCARE Distribution of Patient Days, Beds and Discharges - Sentara Hampton Roads Service Area Hospitals* For the Twelve Months Fiscal Year Ending 2016(1)(2)

% of Area # of % of % Discharge Discharge Licensed Licensed # of % of Hospitals Occupancy(3) ALOS(4) Days Days Beds Beds Discharges Discharges

Sentara Norfolk General 90.1% 6.1 172,770 20.4% 525 14.9% 28,169 15.7% Sentara Virginia Beach General 71.2 5.3 71,555 8.5 276 7.8 13,571 7.6 Sentara Leigh 76.2 4.0 70,089 8.3 250 7.1 17,674 9.9 Sentara CarePlex Hospital 48.4 4.7 39,163 4.6 224 6.3 8,356 4.7 Sentara Obici Hospital 66.2 3.9 41,461 4.9 168 4.8 10,648 5.9 Sentara Williamsburg Reg Med Ctr 56.3 3.7 30,343 3.6 145 4.1 8,259 4.6 Sentara Princess Anne Hospital 97.5 4.1 58,712 6.9 160 4.5 14,273 8.0

Total Sentara Healthcare Hospitals 75.4% 4.8 484,093 57.2% 1,748 49.5% 100,950 56.4%

Bon Secours Maryview 45.9% 4.5 55,896 6.6 346 9.8 12,285 6.9 Bon Secours Mary Immaculate 62.3 3.0 27,531 3.3 123 3.5 9,309 5.2 Bon Secours DePaul 44.2 3.7 28,332 3.3 180 5.1 7,705 4.3

Total Bon Secours Hospitals 48.6% 3.8 111,759 13.2% 649 18.4% 29,299 16.4%

Chesapeake Regional 62.0% 4.0 77,056 9.1% 310 8.8% 19,349 10.8% Riverside Regional 55.8 5.1 116,947 13.8 577 16.3 22,717 12.7 Riverside Doctors’ Hosp-Wmsburg 31.4 3.0 4,576 0.5 40 1.1 1,511 0.8 Children’s Hosp/King’s Daughters 67.0 9.4 51,312 6.1 206 5.8 5,452 3.0

TOTAL AREA HOSPITALS(5) 65.1% 4.7 845,743 100.0% 3,530 100.0% 179,278 100.0%

* Source: EPICS 2016 (1) Sentara Hospitals, Riverside Regional and Riverside Doctors’ Hospital Fiscal Year ending 12/31/16; Bon Secours Hospitals Fiscal Year ending 8/31/16; Chesapeake Regional and Children’s Hospital of The King’s Daughters Fiscal Year ending 6/30/16 (2) Excludes nursery patients (classification “infant-intermediate,” “infant-specialty” and “infant-subspecialty”). (3) Based on Licensed Beds as Reported in EPICS for 2016. (4) “ALOS” means Average Length of Stays (in days). (5) Percentages may not total due to rounding to the nearest tenth.

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Blue Ridge Service Area

Sentara’s secondary service area, known as the Blue Ridge service area, consists of the Counties of Albemarle, Augusta, Fluvanna, Greene, Louisa, Madison, Nelson, Orange, Page and Shenandoah, as well as the cities of Charlottesville and Harrisonburg, all in Virginia. During January through June 2017, 90.6% of the Blue Ridge patients resided in its defined service area.

Table VII below shows the patient origin analysis for the Blue Ridge service area for the years 2014 through June 2017. Through June of 2017, 8.3% of Blue Ridge patients resided in the secondary service area and 1.0% resided outside the identified Blue Ridge service area.

TABLE VII

SENTARA HEALTHCARE Blue Ridge Patient Origin Analysis*

January-June Twelve Months Ending December 31 2017 2016 2015 2014

Albemarle 12.8% 12.5% 13.7% 14.3% Augusta 2.7 2.5 2.6 2.7 Charlottesville City 5.8 5.7 5.7 6.2 Fluvanna 4.5 4.0 4.3 4.2 Greene 4.2 4.0 3.9 4.3 Harrisonburg City 19.6 20.3 20.6 19.8 Louisa 5.3 5.0 5.0 5.0 Madison 1.2 1.3 1.3 1.3 Nelson 1.7 1.6 1.9 1.9 Orange 1.7 1.6 1.4 1.5 Page 4.6 5.0 4.8 4.7 Rockingham 22.2 22.7 21.0 20.8 Shenandoah 4.3 4.2 4.2 4.0

Total Blue Ridge Service Area 90.6% 90.3% 90.4% 90.7%

Other Virginia 5.5 5.5 5.6 5.6 West Virginia 2.8 3.0 2.9 2.7 All Other Areas 1.0% 1.1% 1.1% 1.1%

TOTAL(1) 100.0% 100.0% 100.0% 100.0% ______* Source: Sentara Records (excludes normal newborns) (1) Percentages may not total due to rounding to the nearest tenth.

Population. The 2017 population of the Blue Ridge service area was 504,803. Over the next five years, population for this area is projected to grow by 4.0% to 525,187. In 2017, 17.3% of the population was age 65 or over and the median household income was $56,696. (Source for all population data: Truven Market Expert data.)

Employment. According to the Virginia Employment Commission, as of December 2017, civilian employment for the Blue Ridge region totaled 249,332. According to statistics published by the Bureau of Labor Statistics, as of December 2017, the unemployment rate for the same area was 3.2% against a national unemployment rate of 4.1%.

The largest employers in the combined counties making up the Blue Ridge service area, as of third quarter 2017, are shown in Table VIII below:

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TABLE VIII

Largest Employers in Blue Ridge Service Area*

Employer Name Industry

University of Virginia/Blue Ridge Hospital Higher Education/Healthcare University of Virginia Medical Center Higher Education/Healthcare James Madison University Higher Education Rockingham County School Board Local Government/Education Cargill Meat Solutions Agricultural Products Wal-Mart Retail City of Harrisonburg Local Government County of Albemarle Local Government Harrisonburg City of Public Schools Education Sentara Healthcare Healthcare

______* Sources: Economic Profile for Rockingham County, Harrisonburg City and Thomas Jefferson PDC, 3rd Quarter 2017

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Competing Hospitals. There are three adult acute care, short-stay providers, one academic medical center and one adult critical access hospital in the Blue Ridge service area. University of Virginia Medical Center, a tertiary state teaching hospital, is the largest hospital in the area. As shown in Table IX below, for the fiscal year ending December 31, 2016, which is the most recent period for which service area discharge distribution data is available in this format, Sentara achieved a 29.9% share of discharge days and a 38.0% share of discharges in its Blue Ridge service area. This compares to 29.7% and 30.6% of discharge days and 38.3% and 37.6% of discharges for fiscal years 2015 and 2014, respectively.

TABLE IX

SENTARA HEALTHCARE Distribution of Patient Days, Beds and Discharges – Blue Ridge Service Area* For the Twelve Months Fiscal Year Ending 2016(1)(2)

% of Area # of % of % Discharge Discharge Licensed Licensed # of % of Hospitals Occupancy(3) ALOS(4) Days Days Beds Beds Discharges Discharges

Sentara Sentara RMH Medical Center 62.6% 3.6 54,567 17.7% 238 18.5% 15,029 22.4% Sentara Martha Jefferson Hospital 58.7 3.6 37,376 12.1 176 13.7 10,444 15.6

Total Sentara Healthcare Hospitals 61.0% 3.6 91,943 29.8% 414 32.1% 25,473 38.0%

Page Memorial 44.1% 5.8 4,026 1.3% 25 1.9% 690 1.0%

Augusta Health 47.4 3.5 41,184 13.4 238 18.5 11,853 17.7

University of Virginia Medical Center 77.0 5.9 170,496 55.4 612 47.5 29,101 43.4

TOTAL AREA HOSPITALS(5)(6) 65.8% 4.6 307,649 100.0% 1,289 100.0% 67,117 100.0%

______* Source: EPICS 2016 (1) University of Virginia Medical Center Fiscal Year ending 6/30/16. (2) Excludes nursery patients (classification “infant-intermediate,” “infant-specialty” and “infant-subspecialty”). (3) Based on Licensed Beds as Reported in EPICS for 2016. (4) “ALOS” means Average Length of Stays (in days). (5) Does not include out-of-area hospitals that have significant market share from service area residents. (6) Percentages may not total due to rounding to the nearest tenth.

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SELECTED UTILIZATION DATA

Table X below summarizes certain utilization statistics for Sentara for the three years ended December 31, 2015, through 2017.

TABLE X

SENTARA HEALTHCARE Utilization Statistics (Years Ended December 31)

2017 2016 2015

Adult Admissions 137,645 133,801 131,965 Adult Patient Days 626,266 606,310 599,167 Adult Average Length of Stay 4.5 4.5 4.5 Adult Occupancy Available Beds % 77.3% 74.1% 73.4% Emergency Department Visits 771,720 790,223 787,415 Outpatient Surgeries 62,213 62,870 63,323 Open Heart Surgery 2,312 2,267 2,232 Invasive Cardiac Procedures 17,682 17,565 16,635 ______Source: Sentara Records

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Table XI below summarizes selected utilization statistics for other clinical and healthcare activities of Sentara for the three years ended December 31, 2015, through 2017.

TABLE XI

OTHER SENTARA HEALTHCARE Clinical and Healthcare Activities Statistics (Years Ended December 31)

2017 2016 2015

Physician Visits (3) 2,912,322 2,876,326 2,671,179

Sentara Life Care Corp. Occupancy % 79.5% 88.9% 90.2% Care Days 278,393 310,238 313,714

Sentara Health Plans Inc. Commercial HMO/PPO Members 102,623 118,983 123,160 Medicaid HMO Members 180,378 177,793 174,251 Medicaid CCC+ Members 18,028 0 0 POS Members 7,180 5,132 5,041 Medicare Members 2,611 2,037 1,636 Direct Contracting Members 144,557 140,097 141,202 Subtotal 455,377 444,042 445,290

Optima Behavioral Health 176,349 166,594 163,389 Total 631,726 610,636 608,679

Sentara Enterprises, Home Care Services Home Care Visits 397,546 402,924 409,857 MTI Ambulance Runs 45,021 64,372 99,642

______Source: Sentara Internal Financial Statements

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THIRD-PARTY REIMBURSEMENT AND OTHER REVENUE SOURCES

Payments on behalf of certain patients are made to Sentara’s healthcare providers by the Federal government under the Medicare Program, by the Commonwealth of Virginia under the Medicaid and the State and Local Hospitalization Programs, by Anthem Blue Cross/Blue Shield, by other commercial insurance carriers, by managed care organizations, including health maintenance organizations, preferred provider organizations and other organizations through contractual arrangements, and by individuals. Table XII below summarizes percentages of Sentara’s gross inpatient and outpatient revenue by payor category for the years 2015 through 2017.

TABLE XII

SENTARA HEALTHCARE—HOSPITALS Inpatient and Outpatient Revenue by Payor Category (Years Ended December 31)

2017 2016 2015 Medicare 47.0% 45.5% 44.8% Medicaid 9.6 9.8 10.3 Anthem/Blue Cross Blue Shield 15.6 16.1 16.2 Tricare – Active Duty 3.9 3.9 3.9 Commercial Insurance and Other 9.7 9.9 10.4 Optima Health Plan 6.5 7.0 6.6 Self-Pay 7.7 7.8 7.8 Total: 100.0% 100.0% 100.0% ______Source: Sentara Records

SELECTED FINANCIAL AND OPERATING INFORMATION

Summary of Revenues and Expenses

Set forth in Table XIII on the following page is a historical, comparative summary of the consolidated revenues and expenses of Sentara for the years 2015 through 2017. The information in Table XIII has been derived from the audited consolidated financial statements of Sentara for those years. Although the information was derived from the audited consolidated financial statements, no representation is made that the information is comparable from year to year or that the information shown, taken by itself, presents fairly the consolidated revenues and expenses of Sentara. For more complete information, reference is made to the consolidated financial statements for the years ended December 31, 2017 and 2016, from which this information was derived, a copy of which is included in Appendix B hereto, together with the consolidated financial statements for the years ended December 31, 2016 and 2015, a copy of which can be accessed on the Electronic Municipal Market Access System maintained by the Municipal Securities Rulemaking Board at http://emma.msrb.org (“EMMA”), using CUSIP No. 65588TAP4. Such financial statements are hereby incorporated by reference.

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TABLE XIII

SENTARA HEALTHCARE AND SUBSIDIARIES Consolidated Statements of Operations (Years Ended December 31) (In thousands) 2017 2016 2015 Operating revenues, gains and other support: Net patient service revenue $ 4,026,073 $ 3,807,059 $ 3,507,937 Provision for bad debts (430,869) (343,411) (245,283) Net patient service revenue less provision for bad debts 3,595,204 3,463,648 3,262,654 Premium and capitation revenue 1,571,261 1,479,174 1,434,038 Other operating revenue 119,593 132,947 128,339 Net assets released from restrictions for operations 11,803 7,640 8,881 Total operating revenues, gains and other support 5,297,861 5,083,409 4,833,912 Operating costs and expenses: Salaries, wages and benefits 2,055,511 1,993,855 1,957,547 Medical claims expense 1,064,541 1,078,759 924,895 Other operating expenses 1,689,856 1,526,651 1,451,390 Interest expense 37,672 40,136 41,071 Depreciation and amortization 206,149 210,196 196,230 Total operating costs and expenses 5,053,729 4,849,597 4,571,133 Net operating income 244,132 233,812 262,779 Non-operating income, net Investment income 26,569 18,143 42,821 Realized gains (losses) on investments 21,083 (16,533) 89,098 Unrealized gains (losses) on investments 274,748 106,376 (172,101) Equity in earnings of limited investment companies 57,550 52,055 4,202 Change in market value of derivative instruments 5,428 3,950 (142) Gain (loss) on refunding of debt 0 (24,417) 0 Other non-operating income (3,509) (3,828) (6,576) Nonoperating gains, net 381,869 135,746 (42,698) Excess of revenues over expenses before noncontrolling interest 626,001 369,558 220,081 Noncontrolling interest (9,714) (10,574) (8,561) Net assets released from restricted funds for capital purchases 3,580 3,335 1,537 Change in funded status of retirement obligations (39,543) (32,825) (73,806)

Increase in unrestricted net assets $ 580,324 $329,494 $ 139,251 ______Source: Sentara’s audited consolidated financial statements for the years indicated

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Historical Debt Service Coverage

Table XIV below sets forth, for the years ended December 31, 2015, through 2017, the extent to which Income Available for Debt Service of Sentara provided coverage for maximum annual debt service on direct Sentara indebtedness.

TABLE XIV

SENTARA HEALTHCARE AND SUBSIDIARIES Historical Annual Debt Service Coverage Ratios Years Ended December 31 (Thousands Omitted, Except Coverage Ratios)

2017 2016 2015

Excess of Revenues over Expenses $ 616,287 $ 358,984 $ 211,520

Add: Depreciation, Amortization and Interest $ 243,821 $ 250,332 $ 237,301 Unrealized Losses (Gains) on Investments, Net (274,748) (106,376) 172,101 Unrealized Losses (Gains) on Derivatives (5,428) (3,950) 142

Income Available for Debt Service $ 579,932 $ 498,990 $ 621,064

Maximum Annual Debt Service Requirement $ 68,939 $ 67,486 $ 72,137

Historical Annual Debt Service Coverage Ratios 8.41x 7.39x 8.60x

______Source: Sentara’s audited consolidated financial statements for the years indicated

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Self-Liquidity Report

Table XV below represents a Self-Liquidity Report that Sentara provides quarterly as part of the filing on EMMA. This report excludes funds that are not available for debt service for Sentara Healthcare; therefore, the amounts exclude Optima Health Plan, insurance captive, and restricted funds.

TABLE XV

SENTARA HEALTHCARE AND SUBSIDIARIES Self-Liquidity Report As of December 31 (In thousands) (Unaudited) ASSETS(1) 2017 2016 DAILY LIQUIDITY(2) Checking and deposit accounts $ 506,079 $ 526,083 Subtotal $ 506,079 $ 526,083

WEEKLY LIQUIDITY(3) Fixed Income: Publicly Traded Fixed Income Securities rated at least Aa3 $ 24,937 $ 24,659 Fixed Income: Publicly Traded Fixed Income Securities rated below Aa3 32,982 32,524 Fixed Income: Bond Funds 783,543 682,303 Equities: Equity Funds 1,547,292 1,253,758 Other 287,152 453,105 Subtotal $2,675,906 $2,446,349

LONGER TERM LIQUIDITY Funds, vehicles, investments with one month or greater notice for withdrawals $ 717,783 $ 456,669 Subtotal $ 717,783 $ 456,669

TOTAL LIQUIDITY $3,899,768 $3,429,101

______Source: Sentara Records (1) Excludes Optima Health Plan, insurance captive, and restricted funds. (2) Includes investments which can be liquidated on a same day basis; does not include securities held by third party LP or LLCs. (3) Does not include securities held by third party LP or LLCs.

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MANAGEMENT’S DISCUSSION OF RESULTS OF OPERATIONS

Year Ended December 31, 2017

For the year ended December 31, 2017, net operating income was $244.1 million, or 4.6%, of total operating revenues versus $233.8 million, or 4.6%, for the same period in 2016.

Total operating revenues for the System increased by $214.5 million, or 4.2%, to $5.3 billion for the year ended December 31, 2017 as compared to the year ended December 31, 2016. The Sentara hospitals contributed $143.6 million to the increased operating revenues in 2017, while operating revenues of the health plans increased by $69.0 million in 2017 as compared to 2016.

Net patient service revenue increased by $131.6 million, or 3.8%, for the year ended December 31, 2017 as compared to the same period in the prior year. The increase is due primarily to increased volumes for the year ended December 31, 2017 as compared to the year ended December 31, 2016. Admissions, inpatient surgeries, and outpatient imaging volumes increased by 2.9%, 3.9% and 1.2%, respectively.

The Health Plans experienced an increase in premium and capitation revenue of $92.1 million for the year ended December 31, 2017 as compared to 2016. This increase was primarily driven by the launch of the Commonwealth Coordinated Care Plus product, coupled with membership and rate increases in the Medicaid and commercial products. These increases were partially offset by a reduction in the individual product membership.

Operating expenses increased by approximately $204.1 million, or 4.2%, to $5.1 billion for the year ended December 31, 2017 as compared to the year ended December 31, 2016. Salaries, wages and benefits increased by $61.7 million, or 3.1%, primarily due to an increase in full-time equivalents, coupled with annual merit increases. Other operating expenses increased by $163.2 million, or 10.7%, due to increased pharmaceutical supply expenses related to the opening of a specialty pharmacy in late 2016, combined with increases in medical supplies, professional fees and repairs and maintenance.

Year Ended December 31, 2016

For the year ended December 31, 2016, net operating income was $233.8 million, or 4.6%, of total operating revenues versus $262.8 million, or 5.4%, for the same period in 2015.

Total operating revenues for the System increased by $249.5 million, or 5.2%, to $5.1 billion for the year ended December 31, 2016 as compared to the year ended December 31, 2015. The Sentara hospitals contributed $148.6 million to the increased operating revenues in 2016, while operating revenues of the health plans increased by $47.5 million in 2016 as compared to 2015.

Net patient service revenue increased by $201.0 million, or 6.2%, for the year ended December 31, 2016 as compared to the same period in the prior year. The increase is primarily attributed to increased volumes for the year ended December 31, 2016 as compared to the year ended December 31, 2015. Outpatient imaging volumes, cardiac catheterizations and inpatient surgeries increased by 6.0%, 5.6% and 2.3%, respectively.

The Health Plans experienced an increase in premium and capitation revenue of $45.1 million for the year ended December 31, 2016 as compared to 2015. This increase was primarily driven by a favorable premium rate increase in the Medicaid product coupled with the relaunch of the Optima Health Plan Federal product. These increases were partially offset by a reduction in the HMO Group membership.

Operating expenses increased by approximately $278.5 million, or 6.1%, to $4.8 billion for the year ended December 31, 2016 as compared to the year ended December 31, 2015. Salaries, wages and benefits increased by $36.3 million, or 1.9%, primarily due to an increase in full-time equivalents, coupled with annual merit increases. Other operating expenses increased by $75.3 million, or 5.2%, due to overall increases in medical supplies, purchased labor, and professional fees.

Year Ended December 31, 2015

For the year ended December 31, 2015, net operating income was $262.8 million, or 5.4%, of total operating revenues versus $273.4 million, or 5.8%, for the same period in 2014.

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Total operating revenues increased by 3.0% to $4.8 billion for the year ended December 31, 2015, as compared to the year ended December 31, 2014. The Sentara hospitals contributed $175.9 million to the increased operating revenues in 2015, while operating revenues of the health plans decreased by $74.8 million in 2015 as compared to 2014.

Net patient service revenue increased by $207.4 million, or 6.8%, for the year ended December 31, 2015, as compared to the same period in the prior year. The increase is primarily attributed to increased volumes for the year ended December 31, 2015, as compared to the year ended December 31, 2014. Cardiac surgeries, admissions and outpatient imaging volumes increased by 5.8%, 3.2% and 5.2%, respectively.

The Health Plans experienced a decrease in premium and capitation revenue of $78.0 million for the year ended December 31, 2015, as compared to 2014. This decrease was primarily driven by the exit of the Optima Health Plan Federal product, effective January 1, 2015, coupled with reduced market share in the small group product. These membership decreases were partially offset by membership increases in the Medicaid, Medicare and individual products. The corresponding medical claims expense decreased by approximately $40.9 million primarily as a result of the overall decrease in membership noted above.

Operating expenses increased by approximately $150.1 million, or 3.4%, to $4.6 billion for the year ended December 31, 2015, as compared to the year ended December 31, 2014. Salaries and wages increased by $61.9 million, or 4.1%, primarily due to an increase in full-time equivalents, coupled with annual merit increases. Other operating expenses increased by $99.8 million, or 7.4%, due to overall increases in medical supplies, contribution expense, repairs and maintenance, and purchased labor.

LITIGATION AND INSURANCE

Litigation

Sentara is involved in litigation arising in the ordinary course of business. After consultation with legal counsel, management estimates that these matters will be resolved without material adverse effect on Sentara’s future financial position or results from operations.

Laws and regulations governing Medicare and Medicaid programs are complex and subject to interpretation. Sentara believes that it is in compliance with all applicable laws and regulations and, except as described below, is not aware of any pending or threatened investigations involving allegations of potential wrongdoing that would have a material effect on Sentara’s consolidated financial statements. Compliance with such laws and regulations can be subject to future government review and interpretation as well as significant regulatory action, including fines, penalties and exclusion from the Medicare and Medicaid programs.

Sentara Enterprises’ subsidiary, Medical Transport, LLC, was the subject of an investigation by the United States Attorney’s Office for the Eastern District of Virginia (USAO), addressing allegations that Medical Transport, LLC may have billed government payors for medically unnecessary ambulance transports, billed for higher levels of ambulance transport service than were provided, or billed for services not provided. Sentara Enterprises reached a settlement with the USAO on March 27, 2018. The settlement liability has been recorded and is not material to Sentara Healthcare.

Insurance

Sentara insures its professional, general and managed care liability risks through a comprehensive insurance policy issued by Lexington Insurance Company. The professional and managed care liability risks are insured on a claims-made basis and the general liability risks are insured on an occurrence basis through separate insuring agreements within the policy. Under the Lexington Insurance policy, the policy limits are $2.3 million per occurrence and $23.0 million in the aggregate per year for professional and managed care liability and $1,000,000 per occurrence for general liability. The Lexington policy is reinsured by Sentara’s wholly owned captive insurance company, Bay Primex Insurance Company, Ltd. The sole activity of Bay Primex Insurance Company, Ltd. is reinsurance, on a facultative basis, of the claims-made professional and managed care liability insurance policy and the occurrence- based general liability policy issued by Lexington Insurance Company.

All Sentara affiliates are covered by excess liability policies through four independent carriers with total annual coverage limits of $80 million per occurrence and $80 million in the aggregate for amounts exceeding the primary coverage limits.

The professional liability policies are on a claims-made basis and must be renewed or replaced with equivalent insurance if claims incurred during their term but asserted after their expiration are to be insured. In the opinion of management, adequate reserves for claims incurred but not reported have been established. A-28

All Sentara affiliates are self-insured for their employee health insurance. Under the plan, Sentara pays the claims for each of the participants in the plan.

MAJOR ACCREDITATIONS, AFFILIATIONS, APPROVALS AND MEMBERSHIPS

All Sentara hospitals are certified by the Center for Medicare and Medicaid Services, licensed by the Commonwealth of Virginia. All hospitals have received accreditation from DNV GL Healthcare (“DNV”) on the basis of their most recent surveys.

All Sentara hospitals are certified by DNV GL Healthcare as Primary Stroke Centers, except for Sentara Halifax Regional Hospital and Sentara Albemarle Medical Center.

The American Medical Association, American Association of Blood Banks (“AABB”), College of American Pathologists (“CAP”), and National League of Nursing (School of Nursing only) also accredit Sentara hospitals. All Sentara hospitals are CAP accredited and only Sentara Rockingham Memorial Hospital Medical Center and Sentara Halifax Regional Hospital are without the AABB accreditation.

Sentara has affiliations with the Eastern Virginia Medical School, Medical College of Virginia/Virginia Commonwealth University, Old Dominion University, Norfolk State University, Hampton University, College of the Albemarle, and Tidewater Community College.

Sentara has been approved by Medicare (Title XVIII), Medicaid (Commonwealth of Virginia Department of Medical Assistance Services), TRICARE-U.S. Armed Forces Retirees & Servicemen’s Dependents Insurance Plan, and the Veterans’ Administration.

Sentara has memberships in the Council of Teaching Hospitals of the American Association of Medical Colleges, American Hospital Association, Virginia Hospital and Healthcare Association, National League of Nursing, Commission on Collegiate Nursing Education, Accrediting Council of Independent Colleges and Schools, Council for Higher Education Accreditation, Commission on Accreditation on Allied Health Education Programs, and Association for Hospital Medical Education. Sentara is a shareholder in and a founding member of Voluntary Hospitals of America, Inc. (“VHA”), a cooperative consisting of voluntary nonprofit hospitals having locations in most states. VHA, which is headquartered in Dallas, Texas, provides its members with various programs designed to achieve scale and systems advantages through regional and national cooperative efforts, while maintaining local initiatives and direction, to contain costs and increase operational efficiencies. Programs and services sponsored and provided by VHA include group purchasing for general supplies, pharmaceuticals and radiology equipment, clinical improvement services, reimbursement consultation, tax deferred annuities, financial management programs, various consulting resources, and assistance in the development of multi-hospital systems. Sentara’s hospitals participate in a number of cooperative agreements with VHA.

Sentara Martha Jefferson Hospital, Sentara Norfolk General Hospital, Sentara RMH, Sentara Williamsburg Regional Medical Center, Sentara Leigh Hospital, Sentara Princess Anne Hospital and Sentara CarePlex Hospital all have achieved Magnet® recognition through the American Nurses Credentialing Center.

MEDICAL EDUCATION

Sentara provides comprehensive graduate medical education. Graduate medical education at Sentara is accomplished primarily at Sentara Norfolk General Hospital, in coordination with the Eastern Virginia Medical School, and is supported by approximately 436 Active and Affiliate Medical Staff members with faculty appointments, 1,051 full-time clinical faculty members and a variety of voluntary, hospital-based attending physicians. All residency and fellowship programs are accredited and under the direction of full-time faculty members.

Medical Students

Sentara Norfolk General Hospital is the primary teaching hospital for the Eastern Virginia Medical School, a community- based medical school enrolling 577 medical students and 350 residents and fellows. Residents rotate through the hospitals offering their specialties. Sentara funds 168 residency positions annually, consisting of 48% of the residencies available through the Eastern Virginia Medical School. Sentara’s medical residencies include programs in family practice, internal medicine, obstetrics/gynecology, pathology, diagnostic radiology, surgery, physical medicine and rehabilitation, psychiatry, urology, otolaryngology, podiatry, radiation oncology, emergency medicine, ophthalmology, pediatrics and combined internal/family medicine. A-29

School of Nursing

Sentara operates a School of Nursing, which is based in Chesapeake, Virginia, and is housed at the Sentara College of Health Sciences. The school has graduated over 5,600 nurses in its 125-year history and currently has an enrollment of over 270 students. The school’s graduates serve as a source of nurses for Sentara. The two and one-half years of nursing school follows one and one-half years of general education courses taken at any accredited college of choice. The program consists of five semesters of nursing courses, which leads to a bachelor’s degree in nursing and eligibility to sit for the state board exam as a registered nurse. The school is approved by the Virginia State Board of Nursing, is programmatically accredited by the Commission on Collegiate Nursing Education, and is institutionally accredited by the Accreditation Bureau of Health Education Schools (ABHES).

School of Cardiovascular Technology

The School of Cardiovascular Technology (CVT) is based in Chesapeake, Virginia, and is housed at the Sentara College of Health Sciences. Students select a subspecialty in one of four areas: (i) Invasive Cardiovascular Technology, (ii) Adult Echocardiography, (iii) Non-invasive Vascular Study, or (iv) Cardiac Electrophysiology. Graduates are awarded an associate of science degree. Clinical experience is supervised within Sentara Norfolk General Hospital, Sentara Leigh Memorial Hospital, Sentara Independence Hospital, Sentara CarePlex Hospital, Sentara Virginia Beach General Hospital, Sentara Williamsburg Regional Medical Center, and Children’s Hospital of the King’s Daughters. The 18-month program enrolls up to 40 students per year and has graduated approximately 450 students since the first class in 1984. The CVT program is programmatically accredited by CAAHEP and institutionally accredited by the Accreditation Bureau of Health Education Schools (ABHES).

School of Surgical Technology

The School of Surgical Technology (ST), a two-year program, is based in Chesapeake, Virginia, and is housed at the Sentara College of Health Sciences. The school enrolls 15-20 students once per year, and students receive clinical experience in all of the major hospitals in the Sentara Healthcare System. The ST program is programmatically accredited by CAAHEP and is institutionally and programmatically accredited by the Accreditation Bureau of Health Education Schools (ABHES).

Patient Care Technician Course

The Patient Care Technician course is a 16-week course. The course is based in Chesapeake, Virginia, and is housed at the Sentara College of Health Sciences. Students are trained to assist patients with activities of daily living and are trained in advance nursing assistive skills such as phlebotomy, sterile dressing changes, and EKGs. Clinical experience is supervised within Sentara Norfolk General Hospital, Sentara Leigh Memorial Hospital, Sentara Princess Anne Hospital, and Sentara Virginia Beach General Hospital. Annual class size averages 100 students, depending on system-wide needs.

Monitor Surveillance Technician Course

The Monitor Surveillance Technician course is a 14-week course. The course is based in Chesapeake, Virginia, and is housed at the Sentara College of Health Sciences. Students are trained to monitor cardiac rhythms in various acute care settings. Clinical experience is supervised within Sentara Norfolk General Hospital, Sentara Leigh Memorial Hospital, Sentara Princess Anne Hospital, and Sentara Virginia Beach General Hospital. Annual class size ranges from 20 to 40 students, depending on system-wide needs.

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APPENDIX B

CONSOLIDATED FINANCIAL STATEMENTS OF SENTARA HEALTHCARE FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016

[THIS PAGE INTENTIONALLY LEFT BLANK] SENTARA HEALTHCARE AND SUBSIDIARIES Consolidated Financial Statements and Supplementary Schedules December 31, 2017 and 2016 (With Independent Auditors’ Report Thereon) SENTARA HEALTHCARE AND SUBSIDIARIES

Table of Contents

Page(s)

Independent Auditors’ Report 1–2

Consolidated Financial Statements:

Consolidated Balance Sheets 3

Consolidated Statements of Operations 4

Consolidated Statements of Changes in Net Assets 5

Consolidated Statements of Cash Flows 6

Notes to Consolidated Financial Statements 7–34

Supplementary Schedules 1 Sentara Healthcare and Subsidiaries Consolidating Schedule – Balance Sheet Information, December 31, 2017 35

2 Sentara Hospitals Consolidating Schedule – Balance Sheet Information, December 31, 2017 36

3 Sentara Holdings, Inc. Consolidating Schedule – Balance Sheet Information, December 31, 2017 37

4–8 Consolidating Schedules – Operations Information, year ended December 31, 2017 38–43

9–10 Consolidating Schedules – Fully Allocated Overhead Operations Information, year ended December 31, 2017 44–45 KPMG LLP Suite 1900 440 Monticello Avenue Norfolk, VA 23510

Independent Auditors’ Report

The Board of Directors Sentara Healthcare:

We have audited the accompanying consolidated financial statements of Sentara Healthcare and subsidiaries, which comprise the consolidated balance sheets as of December 31, 2017 and 2016, 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 entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Sentara Healthcare and subsidiaries as of December 31, 2017 and 2016, and the results of their operations and their cash flows for the years then ended, in accordance with U.S. generally accepted accounting principles.

KPMG LLP is a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Other Matters Our audits were performed for the purpose of forming an opinion on the basic consolidated financial statements as a whole. The supplementary information included in schedules 1 through 10 is presented for 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, this information is fairly stated, in all material respects, in relation to the consolidated financial statements as a whole.

Norfolk, Virginia March 30, 2018

2 SENTARA HEALTHCARE AND SUBSIDIARIES Consolidated Balance Sheets December 31, 2017 and 2016 (In thousands)

Assets 2017 2016 Current assets: Cash and cash equivalents $ 704,621 642,786 Receivables, net 666,596 652,827 Investments and assets whose use is limited 718,622 407,635 Inventories 87,972 73,670 Prepaid expenses and other current assets 45,794 38,197 Total current assets 2,223,605 1,815,115 Investments and assets whose use is limited 3,081,033 2,837,229 Property, plant, and equipment, net 1,980,944 1,883,820 Land held for future use, at cost 34,941 24,568 Other assets, net 112,500 96,811 Total assets $ 7,433,023 6,657,543

Liabilities and Net Assets Current liabilities: Accounts payable and accrued expenses $ 137,184 125,108 Employee compensation and benefits 203,086 193,195 Medical claims accrued and payable 114,522 86,326 Current installments of long-term debt 327,006 23,397 Long-term debt subject to current remarketing provisions 297,410 303,650 Estimated third-party payor settlements 15,474 21,042 Other current liabilities 196,603 151,249 Total current liabilities 1,291,285 903,967 Long-term debt, excluding current installments 793,487 988,415 Retirement obligations 246,493 251,161 Other long-term liabilities 301,447 303,879 Total liabilities 2,632,712 2,447,422 Net assets: Unrestricted 4,671,688 4,091,364 Temporarily restricted 74,879 68,577 Permanently restricted 22,681 20,711 Total net assets attributable to Sentara Healthcare 4,769,248 4,180,652 Noncontrolling interest 31,063 29,469 Total net assets 4,800,311 4,210,121 Total liabilities and net assets $ 7,433,023 6,657,543

See accompanying notes to consolidated financial statements.

3 SENTARA HEALTHCARE AND SUBSIDIARIES Consolidated Statements of Operations Years ended December 31, 2017 and 2016 (In thousands)

2017 2016 Operating revenue, gains, and other support: Net patient service revenue (net of contractual allowances and discounts) $ 4,026,073 3,807,059 Provision for bad debts (430,869) (343,411) Net patient service revenue less provision for bad debts 3,595,204 3,463,648 Premium and capitation revenue 1,571,261 1,479,174 Other operating revenue 119,593 132,947 Net assets released from restrictions for operations 11,803 7,640 Total operating revenue, gains, and other support 5,297,861 5,083,409 Operating costs and expenses: Salaries, wages, and benefits 2,055,511 1,993,855 Medical claims 1,064,541 1,078,759 Other operating 1,689,856 1,526,651 Interest 37,672 40,136 Depreciation and amortization 206,149 210,196 Total operating costs and expenses 5,053,729 4,849,597 Net operating income 244,132 233,812 Nonoperating gains, net 381,869 135,746 Excess of revenue over expenses before noncontrolling interest 626,001 369,558 Noncontrolling interest (9,714) (10,574) Excess of revenue over expenses attributable to Sentara Healthcare 616,287 358,984 Net assets released from restricted funds for capital purchases 3,580 3,335 Change in funded status of retirement obligations (39,543) (32,825) Increase in unrestricted net assets $ 580,324 329,494

See accompanying notes to consolidated financial statements.

4 SENTARA HEALTHCARE AND SUBSIDIARIES Consolidated Statements of Changes in Net Assets Years ended December 31, 2017 and 2016 (In thousands)

Temporarily Permanently Noncontrolling Unrestricted restricted restricted interest Total Balance at December 31, 2015 $ 3,761,870 67,335 19,911 30,150 3,879,266 Excess of revenue over expenses 358,984 — — 10,574 369,558 Net assets released from restricted funds for capital purchases 3,335 (3,417) — 82 — Change in funded status of pension liability (32,825) — — — (32,825) Distribution to noncontrolling interest — — — (11,337) (11,337) Restricted contributions — 9,331 513 — 9,844 Net assets released from restrictions — (7,640) — — (7,640) Restricted investment earnings, net — 2,968 287 — 3,255 Change in net assets 329,494 1,242 800 (681) 330,855 Balance at December 31, 2016 4,091,364 68,577 20,711 29,469 4,210,121 Excess of revenue over expenses 616,287 — — 9,714 626,001 Net assets released from restricted funds for capital purchases 3,580 (3,583) — 3 — Change in funded status of pension liability (39,543) — — — (39,543) Distribution to noncontrolling interest — — — (8,123) (8,123) Restricted contributions — 15,440 1,095 — 16,535 Net assets released from restrictions — (11,803) — — (11,803) Restricted investment earnings, net — 6,248 875 — 7,123 Change in net assets 580,324 6,302 1,970 1,594 590,190 Balance at December 31, 2017 $ 4,671,688 74,879 22,681 31,063 4,800,311

See accompanying notes to consolidated financial statements.

5 SENTARA HEALTHCARE AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended December 31, 2017 and 2016 (In thousands)

2017 2016 Cash flows from operating activities: Change in net assets $ 590,190 330,855 Adjustments to reconcile change in net assets to net cash provided by operating activities: Distribution to noncontrolling interest 8,123 11,337 Provision for bad debts 430,869 343,411 Depreciation and amortization 206,149 210,196 Loss on refunding of debt — 24,417 Net realized and unrealized gains on investments (295,831) (89,843) Loss (gain) on disposal of property, plant, and equipment 291 (120) Amortization of bond premium, net (581) (162) Change in funded status of pension liability 39,543 32,825 Change in fair value of derivative instruments (5,428) (3,950) Equity in earnings of limited investment companies (57,550) (52,055) Equity in earnings of joint ventures (5,203) (6,383) Restricted contributions received (16,535) (9,844) Gain on sale of business line — (84) Changes in operating assets and liabilities: Receivables, net (439,199) (416,701) Inventories (14,302) (2,429) Prepaid expenses and other current assets (7,597) (5,652) Accounts payable and accrued expenses 12,076 (32,389) Employee compensation and benefits 9,891 21,639 Medical claims accrued and payable 28,196 7,763 Estimated third-party payor settlements (5,568) 179 Retirement obligations (44,211) (63,515) Other liabilities 42,911 (20,588) Net cash provided by operating activities 476,234 278,907 Cash flows from investing activities: Capital expenditures (303,598) (245,888) Purchases of land held for future use (10,373) — Purchases of investments, net (201,410) (117,333) Net changes in other assets (10,486) 9,910 Proceeds from the sale of business line — 5,190 Proceeds from the disposal of property, plant, and equipment 755 3,145 Net cash used in investing activities (525,112) (344,976) Cash flows from financing activities: Restricted contributions received 16,535 9,844 Distribution to noncontrolling interest (8,123) (11,337) Proceeds from issuance of long-term debt 150,000 474,184 Repayments on long-term debt (47,346) (505,026) Payments on capital lease obligations (353) (343) Net cash provided by (used in) financing activities 110,713 (32,678) Net increase (decrease) in cash and cash equivalents 61,835 (98,747) Cash and cash equivalents at beginning of year 642,786 741,533 Cash and cash equivalents at end of year $ 704,621 642,786

Supplemental disclosures of cash flow information: Cash paid during the year for interest $ 37,755 43,466 Cash paid during the year for income taxes 51 1,052

See accompanying notes to consolidated financial statements.

6 SENTARA HEALTHCARE AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2017 and 2016 (In thousands)

(1) Description of Organization (a) Corporate Organization and Mission Sentara Healthcare (Sentara) is a nonstock, nonprofit, 501(c)(3) tax-exempt Virginia Corporation formed to coordinate, promote, and plan for the provision of health services, medical education, and the economic development of Virginia and North Carolina.

The mission of Sentara is “We improve health every day.” Sentara recognizes that the public trust in its hospitals and services represents both a privilege and a commitment. As the region’s not-for-profit health partner, Sentara is recognized as a leader in providing high quality healthcare regardless of a patient’s ability to pay.

(b) Principles of Consolidation Sentara is affiliated with its subsidiaries through the legal relationship of sole “member” or sole “stockholder.” As sole member/stockholder, Sentara has those rights and powers prescribed by law and provided in the subsidiaries’ Articles of Incorporation and Bylaws. All significant intercompany balances and transactions have been eliminated in consolidation. Noncontrolling interests have been recorded to recognize the portion of the net assets and operating results of affiliates not wholly owned by Sentara.

The consolidated financial statements include the subsidiaries of Sentara organized into the following lines of business:

Sentara Healthcare Corporate (SHC) provides overall administration for all Sentara subsidiaries and includes Bay Primex Insurance Company, Ltd. (Bay Primex), a captive insurance company, which insures professional and general liability risks, and Medical Practice Buildings (MPB), which operates medical office buildings. Sentara Hospitals (Hospitals), located in the Hampton Roads, Northern Virginia, Blue Ridge, and South Boston areas of Virginia, as well as the Elizabeth City area of North Carolina, provides acute care hospital services and operates Sentara Norfolk General Hospital (SNGH), Sentara Virginia Beach General Hospital (SVBGH), Sentara Leigh Hospital (SLH), Sentara CarePlex Hospital (SCPH), Sentara Williamsburg Regional Medical Center (SWRMC), Sentara Obici Hospital (SOH), Sentara Princess Anne Hospital (SPAH), Sentara Northern Virginia Medical Center (SNVMC), Sentara RMH Medical Center (SRMH), Sentara Martha Jefferson Hospital (SMJH), Sentara Halifax Regional Hospital (SHRH), and Sentara Albemarle Regional Medical Center (SAMC). Sentara Enterprises (SE) administers various outpatient healthcare programs, including home health services and patient transportation. Sentara Life Care Corporation (SLCC) provides geriatric care services and operates long-term care and assisted living facilities. Optima Health Plan (OHP) is a health maintenance organization.

7 (Continued) SENTARA HEALTHCARE AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2017 and 2016 (In thousands)

Sentara Holdings, Inc. (SHI) includes the subsidiaries Sentara Health Plans, Inc. (SHP), Sentara Ventures, Inc. (SVI), Sentara Health Insurance Company of North Carolina, Inc. (SHIC NC), Sentara Health Plans of Ohio, Inc. (SHP OH), and Obici Professional Center (OPC). SHP provides and administers medical services to subscribers and includes Optima Health Group (OHG), a health maintenance organization, Optima Behavioral Health Services (OBHS), a mental health services company, and Optima Health Insurance Company (OHIC), a health insurance company. SVI has been organized to carry on taxable healthcare activities. SHIC NC is licensed to provide health insurance in the state of North Carolina. OPC operates medical office buildings and includes Obici Medical Management Services (OMMS), which owns and operates physician practices and urgent care centers. Sentara Medical Group (SMG) owns and operates physician practices and urgent care centers. SMG Innovations (SMGI) is a subsidiary of SMG and owns and operates specialized physician practices.

(2) Joint Venture SPAH is a 160-bed acute care hospital that serves southern Virginia Beach, as well as neighboring Chesapeake and northeastern North Carolina communities. SPAH commenced operations in August 2011 as a joint venture between Sentara and Bon Secours Health System, Inc. (Bon Secours) (collectively, the Members). Pursuant to the joint venture agreement, Sentara and Bon Secours hold ownership interests in SPAH of 70% and 30%, respectively. Distributions to the Members occur in accordance with the respective membership interests based on an accumulation of days cash on hand above certain thresholds.

The financial position and results of operations of SPAH are included in the consolidated financial statements of Sentara. Bon Secours’ interest is reflected as a noncontrolling interest in the consolidated financial statements. An excess of revenue over expenses related to SPAH of $22,666 and $9,714 was attributable to Sentara and to the noncontrolling interest, respectively, for the year ended December 31, 2017. An excess of revenue over expenses related to SPAH of $24,674 and $10,574 was attributable to Sentara and to the noncontrolling interest, respectively, for the year ended December 31, 2016.

(3) Summary of Significant Accounting Policies (a) Cash and Cash Equivalents Cash and cash equivalents include highly liquid investments with original maturities of three months or less, excluding amounts held in investments.

At December 31, 2017 and 2016, unrestricted cash and cash equivalents totaling $121,846 and $47,438, respectively, and unrestricted investments totaling $202,613 and $177,551, respectively, were held by Sentara’s insurance subsidiaries, OHP, OHIC, and OHG. Transfers of funds by these entities to other Sentara affiliates are subject to approval by the Virginia State Corporation Commission Bureau of Insurance.

8 (Continued) SENTARA HEALTHCARE AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2017 and 2016 (In thousands)

(b) Investments and Assets Whose Use is Limited Investments in readily marketable debt and equity securities are carried at fair value. All investments, except for the portion required for payment of current liabilities, are classified as noncurrent assets. Readily marketable investments are deemed to be trading securities; therefore, investment income or loss (including realized and unrealized gains and losses) is included in nonoperating gains (losses), net, in the accompanying consolidated statements of operations unless restricted as to use by donor or law.

Sentara invests in alternative investments in the form of limited liability companies or partnerships. Alternative investments are accounted for at net asset value (NAV) per share as a practical expedient based on Sentara’s interest in their underlying net assets. Alternative investments are typically not readily marketable and, accordingly, their fair value may be different from NAV and that difference could be material. Sentara’s share of alternative investment gains and losses is included in nonoperating gains, net in the accompanying consolidated statements of operations. Alternative investments are included in investments and assets whose use is limited in the accompanying consolidated balance sheets.

Sentara’s investments are exposed to several risks, including interest rate, currency, market, and credit risks. It is at least reasonably possible that changes in the values of investment securities will occur in the near term due to these risks and such changes could materially affect the amounts reported in the consolidated financial statements.

Sentara has invested in a number of joint ventures, limited liability corporations, and other nonpublic entities that provide specialty healthcare services or engage in other activities. Investments where Sentara has between a 20% and up to a 50% ownership interest are accounted for using the equity method. Sentara’s equity in their earnings, which totaled $5,203 and $6,383 for the years ended December 31, 2017 and 2016, respectively, is included in other operating revenue in the accompanying consolidated statements of operations. These investments are included in other assets, net, in the accompanying consolidated balance sheets and totaled $48,588 and $39,820 at December 31, 2017 and 2016, respectively.

Assets limited as to use include assets held by trustees under debt agreements, malpractice funding arrangements, derivative financial instrument agreements, or internally designated as endowment funds.

(c) Inventories Inventories consist primarily of pharmaceutical and medical supplies and are carried at the lower of cost (first-in, first-out basis) or market.

(d) Property, Plant, and Equipment Property, plant, and equipment are recorded at cost at the date of acquisition or fair value at the date of donation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the life of the lease, or the useful life of the asset, whichever is shorter. Estimated useful lives range from 3 to 25 years for land improvements; 10 to

9 (Continued) SENTARA HEALTHCARE AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2017 and 2016 (In thousands)

50 years for buildings, fixed equipment, and leasehold improvements; and 3 to 20 years for major movable equipment. Interest cost incurred on borrowed funds during the period of construction of capital assets is capitalized as a component of the cost of acquiring those assets. Gains or losses on disposal of property, plant, and equipment are included in net operating income. Repairs and maintenance costs are expensed as incurred.

(e) Impairment of Long-Lived Assets Sentara assesses long-lived assets for impairment by determining whether their carrying values can be recovered through the undiscounted future operating cash flows generated by the 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 or projected discounted future operating cash flows using a discount rate reflecting Sentara’s weighted average cost of capital.

(f) Goodwill Goodwill represents the excess of the purchase price over the fair value of the net assets of acquired companies. In accordance with Accounting Standards Update (ASU) 2010-07, Not-for-Profit Entities: Mergers and Acquisitions, Sentara no longer amortizes goodwill, but rather tests the carrying value of goodwill annually for impairment. Total goodwill recognized on acquisitions, less accumulated amortization, was $35,867 as of each period ended December 31, 2017 and 2016, and is included in other assets, net in the accompanying consolidated balance sheets.

(g) Medical Claims Accrued and Payable Claims unpaid by Sentara’s insurance subsidiaries include amounts billed and not paid and an estimate of costs incurred for unbilled services provided. The estimated liability for unbilled services is based principally on historical payment patterns using actuarial techniques. Unpaid claims adjustment expenses are accrued based on an estimate of the costs necessary to process unpaid claims. Claims unpaid are reviewed and adjusted periodically and, as adjustments are made, differences are included in current operations.

(h) Derivative Financial Instruments Sentara recognizes the fair value of derivative financial instruments, currently consisting of interest rate swap agreements in the accompanying consolidated balance sheets. Sentara has elected not to use hedge accounting with respect to any of its derivative financial instruments. Accordingly, the change in fair value of these instruments is included in nonoperating gains, net. Net cash settlement amounts are included in interest expense.

(i) Temporarily and Permanently Restricted Net Assets Net assets and their related changes are classified based on the existence or absence of donor-imposed restrictions. Temporarily restricted net assets have been limited by donors to a specific time period or purpose. Permanently restricted net assets have been restricted by donors to be maintained in perpetuity as endowments. Related income on endowment assets is classified as temporarily restricted until appropriated for expenditure. Temporarily restricted net assets have been restricted primarily for the provision of various healthcare services.

10 (Continued) SENTARA HEALTHCARE AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2017 and 2016 (In thousands)

(j) Nonoperating Gains, Net and Excess of Revenue over Expenses Activities that result in gains or losses unrelated to the provision of healthcare services are considered to be nonoperating.

The consolidated statements of operations include excess of revenue over expenses. Changes in unrestricted net assets, which are excluded from excess of revenue over expenses, consistent with industry practice, include changes in the funded status of defined-benefit pension plans, contributions of long-lived assets (including assets acquired using donor-restricted contributions), and capital contributions from noncontrolling interests.

(k) Net Patient Service Revenue Net patient service revenue is reported at the estimated net realizable amounts, including estimated retroactive adjustments under reimbursement agreements with third-party payors. Retroactive adjustments are accrued on an estimated basis in the period the related services are rendered and adjusted in future periods as changes to estimates become known and tentative and final settlement adjustments are determined.

(l) Charity Care Sentara provides care to patients that meet certain criteria under its charity care policy without charge or at amounts less than its established rates. Because Sentara does not pursue collection of amounts determined to qualify as charity care, related charges are not reported as revenue or included in receivables.

(m) Premium and Capitation Revenue Premium and capitation payments are recognized as revenue during the coverage period during which Sentara’s insurance subsidiaries are obligated to provide healthcare services. Premium billings are billed in the month preceding the coverage period and are recorded as unearned revenue until earned. Payments received by the Hospitals from SHP are eliminated in consolidation.

Certain insurance subsidiaries participate in the risk adjustment, reinsurance, and risk corridor programs, established by the Affordable Care Act (ACA). The overall goal of these programs is to provide certainty and protect against adverse insurance plan selection while stabilizing premiums as exchanges launched in 2014. Premium revenue and a corresponding receivable of $52,757 and $71,326 were estimated and recorded related to these programs for the years ended December 31, 2017 and 2016, respectively. The reinsurance and risk adjustment programs ended in 2016. The laws and regulations governing these programs are complex and subject to interpretation. As a result, there is a reasonable possibility that recorded estimates may change in the near term.

(n) Medical Claims Expense Medical claims expense for Sentara’s insurance subsidiaries is recognized as services are provided, including estimated amounts for claims incurred but not yet reported. These expenses are reported net of subscriber copay and deductible amounts and net of reimbursement from coordination of benefits.

11 (Continued) SENTARA HEALTHCARE AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2017 and 2016 (In thousands)

Reinsurance premiums, net of recoveries, are included in medical claims expense in the accompanying consolidated statements of operations.

(o) Income Taxes Sentara and its not-for-profit subsidiaries have been recognized by the Internal Revenue Service as tax-exempt pursuant to Section 501(c)(3) of the Internal Revenue Code, and therefore, related income is generally not subject to federal and or state income taxes.

SHI, its incorporated subsidiaries, and SMGI account for income taxes in accordance with Financial Accounting Standards Board (FASB), Accounting Standards Codification (ASC) Topic 740, Income Taxes, whereby income taxes are accounted for under the asset-and-liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. Any changes to the valuation allowance on the deferred tax asset are reflected in the year of the change.

Sentara accounts for uncertain tax positions in accordance with ASC Topic 740.

(p) Use of Estimates The preparation of consolidated 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 at the date of the consolidated financial statements. Estimates also affect the reported amounts of revenue and expenses during the reporting period. Significant items subject to such estimates and assumptions include valuation allowances for receivables, recoverability of long-lived assets and goodwill, medical claims liabilities, derivatives, alternative investments, ACA receivables, self-insurance accruals, third-party payor settlements, and retirement obligations. Actual results could differ from those estimates.

(q) Fair Value of Financial Instruments The fair value of a financial instrument is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. FASB ASC Topic 820, Fair Value Measurement, establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The fair value hierarchy gives the highest priority to quoted market prices in active markets for identical assets (Level 1) and the lowest priority to unobservable inputs (Level 3).

The carrying amounts of cash and cash equivalents, receivables, accounts payable and accrued expenses, accrued employee compensation and benefits, estimated third-party payor settlements, and other liabilities reported in the accompanying consolidated balance sheets approximate fair value

12 (Continued) SENTARA HEALTHCARE AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2017 and 2016 (In thousands)

(classified as Level 1), in all significant respects, at December 31, 2017 and 2016. See note 6 for fair value disclosures related to investments and assets whose use is limited.

(r) Recently Adopted Accounting Pronouncements In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Liabilities. This ASU, among other provisions, removes the requirement to disclose the fair value of financial instruments that are measured at amortized cost. Sentara adopted this provision of ASU 2016-01 in 2016.

In May 2015, the FASB issued ASU 2015-07, Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent). This ASU removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share as a practical expedient. Sentara adopted ASU 2015-07 in 2016 and removed these investments from the summary of levels within the fair value hierarchy note disclosure from note 6.

In April 2015, the FASB issued ASU 2015-03, Interest-Imputation of Interest (Subtopic 835-30) Simplifying the Presentation of Debt Issuance Costs. This ASU requires 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 the debt liability, consistent with debt discounts. Sentara adopted ASU 2015-03 in 2016.

(s) Reclassifications Certain 2016 amounts have been reclassified to conform to the 2017 presentation. The reclassifications had no effect on net operating income, excess of revenues over expenses or net assets as of and for the year ended December 31, 2016.

(t) Subsequent Events Sentara has evaluated subsequent events for recognition and disclosure through March 30, 2018, the date the consolidated financial statements were issued.

(4) Net Patient Service Revenue Sentara has agreements with third-party payors that provide for payments at amounts different from its established rates. A summary of payment arrangements with major third-party payors is as follows:

Medicare: Under the Medicare program, Sentara receives reimbursement under a prospective payment system (PPS) for inpatient services. Under the hospital inpatient PPS, fixed payment amounts per inpatient discharge are established based on the patient’s assigned diagnosis related group (DRG). When the estimated cost of treatment for certain patients is significantly higher than the average, providers typically will receive additional “outlier” payments. SRMH and SAMC are considered sole-community service providers by Medicare and its prospective payment rates may be adjusted for inpatient operating costs. The majority of outpatient services provided to Medicare beneficiaries are prospectively reimbursed based on service groups called ambulatory payment classifications (APCs). The remainder of outpatient services are paid on a cost basis or based on a fee schedule. Educational

13 (Continued) SENTARA HEALTHCARE AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2017 and 2016 (In thousands)

costs are reimbursed by the Medicare program on a reasonable cost basis. The Hospitals are paid for cost reimbursable items at a tentative rate with final settlement determined after submission of annual cost reports and audits thereof by the Medicare fiscal intermediary. The Hospitals have final settled with the Medicare program through the 2014-cost report year, with the exception of SNGH, SRMH, and SHRH, which have all settled through the 2013-cost report year, and SAMC, which has settled through the 2012-cost report year.

Medicaid: The Medicaid program is administered by the Department of Medical Assistance Services (DMAS) of the Commonwealth of Virginia, pursuant to federal and state laws and regulations. DMAS receives funding for program expenditures from both the federal government and the Commonwealth of Virginia. Federal or state law or regulations may affect limits on Medicaid payment. The majority of Medicaid recipients in Sentara’s primary service area are enrolled in health maintenance organizations (HMOs). These HMOs contract with the Medicaid program to provide primary and acute care services to enrolled Medicaid recipients. The Hospitals are paid for substantially all services rendered to Medicaid HMO beneficiaries on a prospective payment basis. There are certain Medicaid patients excluded from the HMO program for which the Hospitals are reimbursed based on a DRG-based PPS, which is subject to certain limitations and possible retroactive adjustment. All Hospitals have final settled with the Medicaid program through the 2016-cost report year, with the exception of SAMC and SHRH. SAMC has settled through the 2014-cost report year, while SHRH has settled through the 2013-cost report year.

In addition to Medicare and Medicaid discussed above, Sentara also provides services to beneficiaries of numerous other third-party payors. These payors pay based on negotiated contractual rates, which include prospectively determined rates per discharge, discounts from established charges, and prospectively determined daily rates.

Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation. As a result, there is a reasonable possibility that recorded estimates will change by a material amount in the near term. During 2017 and 2016, the effect of these settlement adjustments was to increase net patient service revenue by approximately $2,959 and $5,395, respectively, related to activity from previous periods.

Due to the nature of the governmental cost report settlement process, the complexities of governmental and nongovernmental patient billing and other financial statement exposures that are inherent in the provision of healthcare services, Sentara has established financial accounting and reporting policies that formally govern the establishment of associated liability estimates beyond those related to specifically identifiable events containing a high level of uncertainty. The establishment of related liabilities is based on a number of factors, including net patient service revenue volumes. Sentara believes that such policy properly provides for Sentara’s routine and nonroutine exposures. These estimated liabilities are included in other long-term liabilities in the accompanying consolidated balance sheets in the amounts of $76,620 and $94,536 as of December 31, 2017 and 2016, respectively. During 2017 and 2016, the effect of the change in these estimates was to increase net patient service revenue by approximately $16,837 and $10,430, respectively, related to activity from previous periods.

14 (Continued) SENTARA HEALTHCARE AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2017 and 2016 (In thousands)

(5) Receivables, Net Receivables, net, are summarized as follows at December 31:

2017 2016 Patient accounts receivable $ 1,667,757 1,539,723 Less: Contractual allowances for third-party payors 913,591 835,359 Allowance for bad debts 302,713 263,022 Patient accounts receivable, net 451,453 441,342 Premium and capitation receivables, net 111,157 81,338 Estimated third-party payor settlements 10,015 16,981 ACA receivables 52,757 71,326 Other receivables 41,214 41,840 Receivables, net $ 666,596 652,827

Patient accounts receivable are reduced by an allowance for bad debts. In evaluating the collectibility of accounts receivable, Sentara analyzes historical collections and write-offs and identifies trends for each of its major payor sources of revenue to estimate the appropriate allowance for bad debts and provision for bad debts. Management regularly reviews data about these major payor sources of revenue in evaluating the sufficiency of the allowance for bad debts. For receivables associated with services provided to patients who have third-party coverage, Sentara 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 third-party coverage, Sentara records a provision for bad debts in the period of service on the basis of its historical collections, which indicates that many patients are unwilling or unable to pay the portion of their bill for which they are financially responsible. The 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 is summarized as follows for the years ended December 31:

2017 2016 Beginning balance as of January 1 $ 263,022 242,564 Provision for bad debts 430,869 343,411 Less write-offs, net of recoveries (391,178) (322,953) Ending balance as of December 31 $ 302,713 263,022

15 (Continued) SENTARA HEALTHCARE AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2017 and 2016 (In thousands)

The change in the allowance for bad debts during 2017 is attributable to increased self-pay patient volumes and trends experienced in the collection of the related patient receivables.

(6) Investments and Assets Whose Use is Limited Investments and assets whose use is limited at December 31 at estimated fair value and NAV comprise the following:

2017 2016 Unrestricted investments $ 3,596,215 3,079,123 Donor-restricted investments 67,147 68,251 Assets whose use is limited under indenture, self-insurance funding arrangement, and derivative financial instrument agreements held by trustee 117,444 76,074 Assets internally designated as endowment fund 18,849 21,416 3,799,655 3,244,864 Less portion required to pay current liabilities 718,622 407,635 $ 3,081,033 2,837,229

The three levels of the fair value hierarchy are as follows:

Level 1 – Quoted prices for identical assets or liabilities in active markets

Level 2 – Quoted prices for similar instruments in active markets; for identical instruments in markets that are not active; and model-driven valuations whose inputs are observable either indirectly or directly

Level 3 – Unobservable inputs that are significant to the fair value of the assets or liabilities

Certain investments that are measured at fair value using the net asset value (NAV) per share (or its equivalent) practical expedient have not been categorized in the fair value hierarchy. The fair value amounts presented in the table below are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the accompanying consolidated balance sheets.

16 (Continued) SENTARA HEALTHCARE AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2017 and 2016 (In thousands)

The following tables present Sentara’s fair value hierarchy for those assets measured at estimated fair value on a recurring basis as of December 31, 2017 and 2016, respectively:

2017 Investments reported at Total Level 1 Level 2 NAV Investments and assets whose use is limited: Fixed maturities $ 859,884 114,304 745,580 — Equity securities 1,621,567 74,275 1,547,292 — Multi-asset funds 63,122 63,122 — — Alternative investments: Hedge funds 646,057 — 272,152 373,905 Private equity 82,100 — — 82,100 Real estate 261,779 — — 261,779 Short-term investments 265,146 265,146 — — Total $ 3,799,655 516,847 2,565,024 717,784

2016 Investments reported at Total Level 1 Level 2 NAV

Investments and assets whose use is limited: Fixed maturities $ 749,241 82,689 666,552 — Equity securities 1,315,705 61,947 1,253,758 — Multi-asset funds 58,150 58,150 — — Alternative investments: Hedge funds 563,967 — 231,641 332,326 Private equity 79,650 — — 79,650 Real estate 248,258 — — 248,258 Short-term investments 229,893 229,893 — — Total $ 3,244,864 432,679 2,151,951 660,234

Short-term investments comprise cash equivalents and short-term fixed-income securities. Because of the nature of these assets, carrying amounts approximate fair values, which have been determined from public quotations, when available.

Fair values for Sentara’s fixed maturity securities are based on prices provided by its investment managers and its custodian bank, which use a variety of pricing sources to determine market valuations.

17 (Continued) SENTARA HEALTHCARE AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2017 and 2016 (In thousands)

Fair values of equity securities and multi-asset funds have been determined by Sentara from observable market quotations, when available. Equity securities and multi-asset funds where a public quotation is not available are valued by using broker quotes.

Sentara generally uses NAV per share as provided by external investment managers without further adjustment as a practical expedient estimate of the fair value of its alternative investments and limited investment companies consistent with the provisions of ASU 2009-12, Fair Value Measurements and Disclosures (Topic 820): Investments in Certain Entities that Calculate Net Asset Value per Share (or its Equivalent). Accordingly, such values may differ from values that would have been used had an active market for the investments existed.

Sentara’s limited investment companies include redemption restrictions. Hedge fund investments may require a 65- to 105-day written notice of intent to withdraw and may be subject to a 12- to 36-month lockup period. Private equity investments do not include provisions for redemption, and are distributed by the fund on a discretionary basis as restrictions are met and capital permits. Real estate investments require written notice of intent to withdraw and are subject to the capital requirements of the fund manager.

Sentara has remaining capital commitments of $46,610 at December 31, 2017 for certain limited investment companies.

(7) Property, Plant, and Equipment The components of property, plant, and equipment, at cost, and the related accumulated depreciation at December 31 are summarized as follows:

2017 2016

Land $ 152,802 150,700 Land improvements 137,431 129,730 Buildings 1,395,981 1,342,276 Fixed equipment 695,431 679,458 Major moveable equipment 1,856,966 1,785,180 Leasehold improvements 61,920 60,746 4,300,531 4,148,090 Less accumulated depreciation and amortization 2,571,956 2,391,745 1,728,575 1,756,345 Construction in progress 252,369 127,475 Total $ 1,980,944 1,883,820

Depreciation and amortization related to property, plant, and equipment totaled $205,428 and $209,641 for the years ended December 31, 2017 and 2016, respectively.

18 (Continued) SENTARA HEALTHCARE AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2017 and 2016 (In thousands)

Significant construction projects in progress at December 31, 2017 are expected to have remaining project costs of approximately $171,733 through 2020. The commitments include the costs to complete a vertical expansion at SNGH, an expansion at SVBGH, the implementation of EPIC billing and registration modules, and other projects.

(8) Long-Term Debt Long-term debt and capital lease obligations at December 31 are summarized as follows:

2017 2016 Sentara Healthcare Obligated Group Revenue and Refunding Bonds: Series 2017, payable in installments ranging from $23,430 to $41,490 through 2048, with interest at a variable rate determined upon SIFMA plus 0.225% (actual interest rate at December 31, 2017 was 1.94%) $ 150,000 — Series 2016A, payable in installments ranging from $1,010 to $8,550 through 2034, with interest at a variable rate determined upon remarketing every seven days (actual interest rate at December 31, 2017 was 1.80%) 96,805 97,925 Series 2016B, payable in installments ranging from $1,010 to $8,550 through 2034, with interest at a variable rate determined upon remarketing every seven days (actual interest rate at December 31, 2017 was 1.74%) 96,805 97,925 Series 2016C, payable in installments ranging from $695 to $6,350 through 2046, with interest at a variable rate of 67% of one-month LIBOR plus 0.40% (actual interest rate at December 31, 2017 was 1.45%) 99,310 100,000 Series 2016D, payable in installments ranging from $580 to $5,300 through 2046, with interest at a variable rate of 67% of one-month LIBOR plus 0.36% (actual interest rate at December 31, 2017 was 1.41%) 82,960 83,535 Series 2016E, payable in installments of $1,200 through 2039, with interest at a variable rate of 67% of one-month LIBOR plus 0.35% (actual interest rate at December 31, 2017 was 1.40%) 26,400 27,600 Series 2016F, payable in installments of $2,724 through 2040, with interest at a variable rate of 67% of one-month LIBOR plus 0.40% (actual interest rate at December 31, 2017 was 1.45%) 62,655 65,379

19 (Continued) SENTARA HEALTHCARE AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2017 and 2016 (In thousands)

2017 2016 Series 2013A-B, payable in installments ranging from $1,435 to $11,535 through 2048, with interest at a variable rate of 67% of one-month LIBOR plus 0.40% (actual interest rate at December 31, 2017 was 1.45%) $ 154,550 155,920 Series 2012B, payable in installments ranging from $2,490 to $26,110 through 2043, with fixed interest rates ranging from 3.00% to 5.00% (average interest rate at December 31, 2017 was 4.69%) 135,590 137,875 Series 2010, payable in installments ranging from $1,600 to $37,160 through 2040, with fixed interest rates ranging from 4.00% to 5.00% (average interest rate for 2017 was 4.74%) 223,480 231,150 Series 2008, payable in installments ranging from $1,765 to $26,860 through 2035, with a fixed interest rate of 5.75% 149,635 151,400 City of Suffolk 1998, payable in annual installments of $667 through 2017, with a fixed interest rate of 4.71% — 667 Isle of Wight 1998, payable in annual installments of $667 through 2017, with a fixed interest rate of 4.76% — 667 Series 1993, payable in installments ranging from $3,585 to $3,775 through 2018, with a fixed interest rate of 5.13% 3,775 7,360 SHRH Revenue Bonds – Series 2007, payable in installments ranging from $505 to $1,320 through 2037, with fixed interest rates ranging from 4.38% to 5.04% (average interest rate for 2017 was 4.93%) — 17,800 Notes payable: Sentara Healthcare Commercial Paper Note program: $130,000 authorized tax-exempt issue, weighted average maturity and interest rate at December 31, 2017 was 81 days and 1.08%, respectively 32,800 36,800 $125,000 authorized taxable issue, weighted average maturity and interest rate at December 31, 2017 was 101 days and 1.43%, respectively 71,000 71,000

20 (Continued) SENTARA HEALTHCARE AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2017 and 2016 (In thousands)

2017 2016

Note payable due 2017 with a fixed rate of Prime, adjusted every five years $ — 108 Capital lease obligations 21,691 22,044

1,407,456 1,305,155

Unamortized bond premium (discount), net 14,796 15,377 Unamortized bond issuance costs, net (4,349) (5,070) Less amount classified as current (624,416) (327,047) $ 793,487 988,415

(a) Obligated Group Revenue and Refunding Bonds The Sentara Healthcare Obligated Group Revenue and Refunding Bonds were issued under various sales agreements between Sentara and the Industrial Development Authority (IDA) of the Cities of Norfolk, Suffolk, Virginia Beach and Harrisonburg and the County of Isle of Wight (the Authorities), pursuant to which the Authorities will sell certain improvements back to Sentara for aggregate installment payments sufficient to enable the Authorities to pay the principal and interest on the bonds when due. Under the terms of the sales agreements, Sentara delivered to the Authorities promissory notes, pursuant to a Master Trust Indenture, between Sentara and U.S. Bank, NA, as trustee.

In December 2017, Sentara issued $150,000 in variable rate Hospital Facilities Revenue Bonds (Series 2017). The proceeds of the bonds were used to partially fund a vertical expansion and other ongoing and planned major infrastructure renovations and replacements at SNGH.

In May 2016, Sentara issued $197,670 in variable rate Hospital Facilities Revenue and Refunding Bonds (Series 2016A and 2016B). The proceeds of the bonds were used to fully refund the Series 2010B-C and 2012A Bonds. A loss of $1,053 was recognized on the refunding and is included in nonoperating gains, net in the accompanying 2016 consolidated statement of operations.

In August 2016, Sentara issued $183,535 in variable rate Hospital Facilities Revenue and Refunding Bonds (Series 2016C and 2016D). The proceeds of the bonds were used to fully refund the RMH Series 2006 Bonds. A loss of $23,364 was recognized on the refunding and is included in nonoperating gains, net in the accompanying 2016 consolidated statement of operations.

In October 2016, Sentara issued $27,600 in variable rate Hospital Facilities Revenue and Refunding Bonds (Series 2016E). The proceeds of the bonds were used to fully refund the RMH Series 2011A-C Bonds.

In November 2016, Sentara issued $65,379 in variable rate Hospital Facilities Revenue and Refunding Bonds (Series 2016F). The proceeds of the bonds were used to fully refund the RMH Series 2010A-C Bonds.

21 (Continued) SENTARA HEALTHCARE AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2017 and 2016 (In thousands)

Sentara maintains a balance of short-term investments equal to the Series’ 2016A and 2016B Bonds, the commercial paper issuances (note 8(b)) and the Series' 2013A-B and 2017 Bonds that include put options due back to Sentara in 2018, which are not covered by a letter of credit (self-liquidity). Current installments of long-term debt and long-term debt subject to current remarketing provisions and covered by self-liquidity totaled $601,960 and $303,650 as of December 31, 2017 and 2016, respectively, and are classified as a current liabilities in the accompanying consolidated balance sheets.

(b) Commercial Paper Revenue Notes Issuance of the tax-exempt Sentara Healthcare Commercial Paper Revenue Notes (the Notes) was authorized during 1998 under agreements between Sentara and the IDA of the City of Norfolk (the Authority). The Notes will be issued from time to time by the Authority as part of a pooled financing program to provide loans to Sentara to finance the cost of certain capital improvements, to refinance outstanding revenue, and refunding bonds and to pay costs associated with the issuance of the Notes. The outstanding principal amount of all Notes must be repaid by 2027. Each Note will mature between 1 and 270 days after its date of issuance. The maximum aggregate principal amount of the Notes outstanding at any one time shall not exceed $130,000.

During 2012, Sentara entered into an agreement with a commercial finance company that authorizes the issuance of up to $125,000 of taxable commercial paper (the Commercial Paper). The Commercial Paper will be issued from time to time for general corporate purposes and to refund a portion of certain Notes previously issued. The outstanding principal amount of all the Commercial Paper must be repaid by 2042. Each Commercial Paper will mature between 1 and 270 days after its date of issuance.

(c) Other The Revenue and Refunding Bonds are not secured by any security interest in or lien on any revenue or real property. The Master Trust Indenture places certain restrictions on Sentara relative to operating ratios and incurrence of additional indebtedness.

Estimated maturities and sinking fund requirements of all long-term indebtedness, including a portion of long-term debt subject to current remarketing provisions, at December 31, 2017 are as follows:

2018 $ 24,468 2019 24,635 2020 26,098 2021 26,551 2022 29,995 Thereafter 971,159 $ 1,102,906

Also included in current installments of long-term debt are the Series 2013A-B in the amount of $154,550 and the Series 2017 in the amount of $150,000, which include put options due back to Sentara in 2018 and will be refinanced.

22 (Continued) SENTARA HEALTHCARE AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2017 and 2016 (In thousands)

(9) Derivative Financial Instruments Sentara uses interest rate swaps as a part of its risk management strategy to manage exposure to fluctuations in interest rates and to manage the overall cost of its debt. The interest rate swaps are not used for speculative purposes and are measured at fair value in the accompanying consolidated balance sheets.

The following table provides details regarding the fair value of Sentara’s derivative instruments currently classified as other long-term liabilities in the accompanying consolidated balance sheets at December 31, 2017 and 2016, none of which are designated as cash flow hedging instruments:

2017 Notional Ave r age r ate amount received in Interest rate sw ap Fair value outstanding Rate paid Rate received 2017 Counterparty Term

Wells Fargo (75%) 2004 $ (34,697) 192,429 3.51 % 67% of one month (1M) LIBOR 0.75 % & Goldman Sachs 25% 30 years 2008 463 149,635 SIFMA + 0.16% 5.75 % 5.75 Citigroup 10 years Sussex 1998 (492) 9,895 3.33 % 59% of 1M LIBOR + 0.35% 1.01 Bank of America 18 years MJH 2013 (Basis Sw ap) 782 76,325 SIFMA 67% of 1M LIBOR + 0.41% 1.20 Barclays 20 years MJH 2013 (Fixed Sw ap) (6,406) 154,550 1.94 % 67% of 3M LIBOR 0.85 Barclays 35 years Barclays (54%) & RMH 2015 160 182,275 1.61 % 67% of 1M LIBOR 0.75 Goldman Sachs (46%) 30 years

2016 Notional Ave r age r ate amount received in Interest rate sw ap Fair value outstanding Rate paid Rate received 2016 Counterparty Term

Wells Fargo (75%) 2004 $ (39,036) 194,528 3.51 % 67% of one month (1M) LIBOR 0.33 % & Goldman Sachs 25% 30 years 2008 439 151,400 SIFMA + 0.16% 5.75 % 5.75 Citigroup 10 years Sussex 1998 (752) 9,895 3.33 % 59% of 1M LIBOR + 0.35% 0.64 Bank of America 18 years MJH 2013 (Basis Sw ap) 88 76,325 SIFMA 67% of 1M LIBOR + 0.41% 0.74 Barclays 20 years MJH 2013 (Fixed Sw ap) (6,340) 155,920 1.94 % 67% of 3M LIBOR 0.50 Barclays 35 years Barclays (54%) & RMH 2015 (17) 183,535 1.61 % 67% of 1M LIBOR 0.39 Goldman Sachs (46%) 30 years

In order to manage the credit risk of the swap agreements, Sentara and the counterparties are required to provide collateral in the event that the combined fair value of the swap agreements exceeds a predetermined threshold amount. The collateral posting requirements are based upon the rating classification of Sentara’s long-term, unsecured, and unsubordinated debt securities as assigned by a relevant rating agency. Sentara posted $10,733 and $10,640 in collateral with the counterparties as of December 31, 2017 and 2016, respectively, which is included in current assets whose use is limited in the accompanying consolidated balance sheets.

The fair value of the interest rate swap agreements is the estimated amount that Sentara would receive or pay to terminate the swap agreements at the reporting date, taking into account current interest rates and the current creditworthiness of the swap counterparties. The swap agreements are valued based on readily observable market parameters for all substantial terms of the contracts and are, therefore, categorized as Level 2 financial instruments. The change in the fair value of the interest rate swap agreements for the years ended December 31, 2017 and 2016 was $5,428 and $3,950, respectively, and is included in nonoperating gains, net in the accompanying consolidated statements of operations. Sentara is exposed to

23 (Continued) SENTARA HEALTHCARE AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2017 and 2016 (In thousands)

credit loss in the event of nonperformance by the swap counterparties. Sentara manages this risk through the monitoring of the credit standing of its counterparties.

(10) Retirement Obligations Sentara maintains a noncontributory defined-benefit pension plan that covers substantially all employees of Sentara Healthcare and its subsidiaries (the Plan). The Plan conforms to the requirements of the Employee Retirement Income Security Act of 1974 (ERISA). Sentara’s funding policy is to contribute amounts to the Plan sufficient to meet the minimum funding requirements under ERISA. The Plan uses a December 31 measurement date.

In 2016, Sentara changed the method used to estimate the service and interest components of net periodic benefit cost for pension and other postretirement benefits. Historically, Sentara estimated these service and interest cost components utilizing a single weighted average discount rate derived from the yield curve used to measure the benefit obligation at the beginning of the period. Sentara elected to utilize a full yield curve approach in the estimation of these components by applying the specific spot rates along the yield curve used in the determination of the benefit obligation to the relevant projected cash flows. This change was made in order to provide a more precise measurement of service and interest costs by improving the correlation between projected benefit cash flows to the corresponding spot yield curve rates. This change does not affect the measurement of the total benefit obligations or the annual net periodic benefit cost as the change in the service and interest costs is completely offset in the actuarial loss reported. Sentara has accounted for this change as a change in accounting estimate that is inseparable from a change in accounting principle and accordingly has accounted for it prospectively.

The following table sets forth amounts recognized in the accompanying consolidated financial statements of Sentara as of and for the years ended December 31, 2017 and 2016 related to the Plan:

2017 2016

Accumulated benefit obligation at measurement date $ 2,012,600 1,787,754 Change in projected benefit obligations: Benefit obligation at previous measurement date $ 1,991,807 1,876,804 Service cost 90,045 85,002 Interest cost 65,111 62,385 Actuarial loss 206,154 55,496 Benefit payments (92,506) (87,880) Projected benefit obligation at measurement date $ 2,260,611 1,991,807

24 (Continued) SENTARA HEALTHCARE AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2017 and 2016 (In thousands)

2017 2016 Change in assets: Fair value of assets at previous measurement date $ 1,740,646 1,594,953 Actual return on assets 245,978 103,573 Employer contributions 120,000 130,000 Benefit payments (92,506) (87,880) Fair value of assets at measurement date $ 2,014,118 1,740,646

Amounts recognized in the consolidated balance sheets at December 31: Long-term liabilities $ (246,493) (251,161)

Amounts recognized in unrestricted net assets at December 31: Net actuarial loss $ (668,448) (628,690) Prior service credit (799) (1,014)

Components of net periodic pension cost: Service cost $ 90,045 85,002 Interest cost 65,111 62,385 Expected return on plan assets (121,002) (114,284) Prior service cost recognized 215 215 Amortization of actuarial loss 41,420 33,167 Net periodic pension cost $ 75,789 66,485

For the years ended December 31, 2017 and 2016, Sentara recognized a change in unrestricted net assets of $(39,543) and $(32,825), respectively, related to nonperiodic changes in the Plan’s assets and benefit obligations.

The estimated actuarial net loss and prior service cost for the Plan that will be amortized from accumulated unrestricted net assets into net periodic cost over the next year are $50,370 and $215, respectively.

The assumptions used to determine benefit obligations for the Plan at December 31, 2017 and 2016 are as follows:

2017 2016 Discount rate 3.56 % 4.08 % Rate of compensation increase 4.00 4.00

25 (Continued) SENTARA HEALTHCARE AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2017 and 2016 (In thousands)

Weighted average assumptions used to determine net periodic benefit cost for the Plan for 2017 and 2016 are as follows:

2017 2016 Discount rate in effect for determining service cost 4.30 % 4.46 % Discount rate in effect for determining interest cost 3.35 3.44 Expected long-term return on plan assets 6.85 6.85 Rate of compensation increase 4.00 4.00

In developing the expected long-term rate of return on assets assumption, Sentara considered the current level of expected returns on risk-free investments (primarily, government bonds), the historical level of the risk premium associated with the other asset classes in which the portfolio is invested, and the expectations for future returns of each asset class. The expected return for each asset class was then weighted based on the target allocation to develop the expected long-term rate of return on assets assumption for the portfolio. This resulted in the selections listed above for the years ended December 31, 2017 and 2016.

(a) Investment Policy and Strategy The overall financial objectives for the Plan’s assets are (1) to provide funds for the timely payment of the Plan’s obligations and (2) to produce an investment rate of return that improves the overall funding status of the Plan consistent with the first objective. The investment objective of the Plan seeks to strike a balance between higher returns and controlling funding status volatility. To achieve its objectives, the Plan’s assets are allocated based on a target allocation established by the Sentara Finance Committee and approved by the Sentara board of directors. A registered investment manager has been approved by the Finance Committee of the Sentara board of directors and reviews fund performance at each quarterly meeting. The Plan’s targeted asset allocation by asset category is as follows:

Target allocation Asset category percentage Equity securities 0%–65% Debt securities 20%–50% Alternative investments 0%–25% Cash 0%–10%

The allocation to fixed-income investments is structured to match the expected stream of future benefit payments in order to minimize funding volatility risk. Other investments are also diversified within asset classes (e.g., within equities by economic sector, industry, quality, and size) in order to provide assurance that no single security or class of securities will have a disproportionate impact on the Plan.

26 (Continued) SENTARA HEALTHCARE AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2017 and 2016 (In thousands)

The following tables present the Plan’s assets measured at estimated fair value aggregated by the level in the fair value hierarchy within which those measurements fall as of December 31, 2017 and 2016, respectively:

Fair value measurements at December 31, 2017 using Investments reported at Total Level 1 Level 2 NAV Investments: Fixed maturities $ 405,885 168,783 237,102 — Equity securities 1,008,979 — 1,008,979 — Multi-asset funds 77,027 77,027 — — Short-term investments 44,507 44,507 — — Alternative investments 477,720 — 142,968 334,752 Total $ 2,014,118 290,317 1,389,049 334,752

Fair value measurements at December 31, 2016 using Investments reported at Total Level 1 Level 2 NAV Investments: Fixed maturities $ 358,313 149,965 208,348 — Equity securities 847,348 — 847,348 — Multi-asset funds 71,103 71,103 — — Short-term investments 32,906 32,906 — — Alternative investments 430,976 — 118,428 312,548 Total $ 1,740,646 253,974 1,174,124 312,548

Sentara has remaining capital commitments of $28,064 at December 31, 2017 for certain limited investment companies.

(b) Contributions Sentara expects to contribute $120,000 to the Plan during the year ending December 31, 2018.

27 (Continued) SENTARA HEALTHCARE AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2017 and 2016 (In thousands)

(c) Estimated Future Benefit Payments The following benefit payments, which reflect expected future employee service, as appropriate, are expected to be paid by the Plan in the following years ending December 31:

2018 $ 143,570 2019 133,831 2020 140,890 2021 145,848 2022 151,818 2023–2027 786,939

The expected benefits to be paid are based on the same assumptions used to measure the Plan’s benefit obligations at December 31, 2017.

(d) Supplemental Executive Retirement Plan Sentara maintains a supplemental executive retirement plan for certain executives. Compensation expense under the plan was $3,270 and $3,156 for the years ended December 31, 2017 and 2016, respectively. Accrued benefit liabilities under this plan totaled $22,451 and $19,234 as of December 31, 2017 and 2016, respectively, and are included in other long-term liabilities in the accompanying consolidated balance sheets.

(e) Defined-Contribution Retirement Plans Substantially all of the employees of Sentara participate in defined-contribution retirement plans under Sections 403(b) and 401(k) of the Internal Revenue Code. Sentara matches a percentage of contributions made by the employees. Sentara’s contribution expense related to these plans for the years ended December 31, 2017 and 2016 was $35,256 and $33,525, respectively, and is included in salaries, wages, and benefits expense in the accompanying consolidated statements of operations.

(11) Charity Care and Other Community Benefits (a) Charity Sentara is committed to providing quality healthcare to all, regardless of their ability to pay. Patients who meet the criteria of Sentara’s charity care policy receive services without charge or at amounts less than its established rates. The criterion for charity care considers the patient’s household income in relation to the federal poverty guidelines and the equity value of real property and/or other assets. Sentara provides services without charge for patients with adjusted gross income equal to or less than 200% of the federal poverty guidelines. For uninsured patients with adjusted gross income greater than 200% of the federal poverty guidelines, a sliding scale discount is applied. Income and asset information obtained from patient and credit reporting data are used to determine patients’ ability to pay. Sentara maintains records to identify and monitor the level of charity care it furnishes under its charity care policy.

28 (Continued) SENTARA HEALTHCARE AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2017 and 2016 (In thousands)

Due to the complexity of the eligibility process, Sentara provides eligibility services to patients free of charge to assist in the qualification process. These eligibility services include, but are not limited to, the following:

Financial assistance brochures and other information are posted at each point of service. When patients have questions or concerns, they are encouraged to call a toll-free number to reach customer service representatives during the business day. Financial assistance programs are also published on the Sentara Web site and included on the statements provided to patients. Sentara employs financial counselors who are available to help patients complete applications for Medicaid or other government payment assistance programs, or apply for care under Sentara’s charity care policy, if applicable. Sentara also employs an external firm to assist in the eligibility process. Any patient, whether covered by insurance or not, may meet with a Sentara representative and receive financial counseling from Sentara’s dedicated financial assistance unit.

Sentara recognizes that a large number of uninsured and insured patients meet the charity care guidelines but do not respond to Sentara’s attempts to obtain necessary financial information. In these instances, Sentara uses credit reporting data to properly classify these unpaid balances as charity care as opposed to bad debt expense. Utilization of income and asset information and credit reporting data indicate the majority of amounts reported as provision for bad debts represent amounts due from patients who would otherwise qualify for charity benefits but do not respond to Sentara’s attempts to obtain the necessary financial information. In these cases, reasonable collection efforts are pursued, but generally yield few collections. Finally, management believes that the net loss associated with providing care to Medicaid patients is a component of providing charity care.

Costs incurred relative to charity care are estimated based on the cost-to-charge ratio for each hospital and applied to charity care charges. Since Sentara does not pursue collections of amounts determined to meet the criterion under the charity care policy, such amounts are not reported as net patient service revenue. The amounts reported as charity care represent the cost of rendering such services. The following information measures the level of charity and uncompensated care costs provided for the years ended December 31:

2017 2016 Components of estimated cost of charity and other uncompensated care: Charity care $ 163,587 185,085 Medicaid 48,849 33,629 Bad debt 112,760 91,409 Total estimated cost $ 325,196 310,123

29 (Continued) SENTARA HEALTHCARE AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2017 and 2016 (In thousands)

(b) Medical Education and Other Community Benefits In addition to charity and uncompensated care, Sentara provides other community benefits. These benefits include, among other items, educational activities, health services, and donations sponsored by Sentara in the communities served.

Sentara provides support to other charitable organizations through direct contributions and sponsorships as well as free community health screenings and health education throughout the Hampton Roads community. Expenses for community health programs represent Sentara’s dedicated Community Health and Prevention Department. Additional costs for similar activities carried out across the Sentara system are not specifically accumulated and include salaries and other operating expenses.

Sentara also underwrites much of the cost of training allied health professionals, physicians, and residents in its emergency rooms, clinics, and inpatient facilities. Sentara maintains a dynamic partnership with Eastern Virginia Medical School to support medical education. The Sentara College of Health Sciences, in continuous operation since 1892, educates nurses, surgical, and cardiovascular technicians needed to provide the community with vital health services.

The following is a summary of Sentara’s community commitment as measured by charity care and community benefit costs:

2017 2016 Nonreimbursed cost of charity and uncompensated care $ 325,196 310,123 Medical education 21,418 18,923 Direct contributions and sponsorships 15,591 9,398 Community health programs 2,750 2,701 Total community benefits, at cost $ 364,955 341,145

Sentara also recognizes its responsibility to provide other healthcare services and programs for the benefit of the community, at reduced rates or free of charge. This includes the Ambulatory Care Center, a clinic designed to offer primary and specialized outpatient services to members of the Norfolk community who are either uninsured or under insured. Sentara also operates an emergency medical helicopter service and both Level 1 and Level 3 Trauma Centers.

(12) Concentration of Credit Risk Patient receivables and patient service revenue consist of amounts earned for patient care. Payments are made either directly by patients or by third-party payors, including the federal (Medicare) and state (Medicaid) governments and private insurance carriers. Services are generally provided without requiring collateral from patients or third-party payors.

30 (Continued) SENTARA HEALTHCARE AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2017 and 2016 (In thousands)

A breakdown of net patient receivables by significant payor type is as follows:

2017 2016 Medicare 27 % 28 % Medicaid 7 7 Anthem (Blue Cross) 25 24 SHP – HMO/PPO 10 7 All others (none individually more than 10%) 31 34 Total 100 % 100 %

Premium and capitation receivables consist primarily of amounts earned by OHP and SHP for providing benefits to subscribers. OHP and SHP have concentrations of credit risk with the U.S. Government’s Office of Personnel Management (OPM) for subscriber benefits provided under the Federal Employee Health Benefits Program (FEHBP), and with the Virginia DMAS for benefits to Medicaid recipients.

A breakdown of premium and capitation receivables by significant customers is as follows:

2017 2016 DMAS 92 % 90 % OPM 13 Other 77 Total 100 % 100 %

(13) Functional Expenses Sentara provides various healthcare services to patients within its geographic region. Expenses related to providing these services presented on a functional basis are as follows:

2017 2016 Healthcare services $ 3,987,591 3,783,263 General and administrative 1,066,138 1,066,334 Total operating costs and expenses $ 5,053,729 4,849,597

(14) Commitments and Contingent Liabilities (a) General Liability and Malpractice Insurance Sentara insures its professional, general, and managed care liability risks through insurance policies issued by Lexington Insurance Company. Professional and managed care liability risks are primarily insured on a claims-made basis and general liability risks are insured on a claims-incurred basis.

31 (Continued) SENTARA HEALTHCARE AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2017 and 2016 (In thousands)

Lexington policy limits are $2,300 per occurrence and $23,000 in the aggregate per year for professional and managed care liability and $1,000 per occurrence for general liability.

Accrued professional liability costs on an undiscounted basis as of December 31, 2017 and 2016 totaled $98,336 and $90,791, respectively, and are included in other current liabilities and other long-term liabilities in the accompanying consolidated balance sheets. Cash and investments totaling $72,480 and $64,047 as of December 31, 2017 and 2016, respectively, have been designated by Sentara to settle these claims and are included in assets whose use is limited in the accompanying consolidated balance sheets. Included in accrued professional liability costs are estimated claims incurred but not reported in the amounts of $17,908 and $18,347 as of December 31, 2017 and 2016, respectively.

The Lexington policies are fully reinsured by Bay Primex. The sole activity of Bay Primex is reinsurance, on a facultative basis, of the claims-made professional and managed care liability insurance policies, and the occurrence based general liability policy issued by Lexington Insurance Company to Sentara and its related entities.

All Sentara entities are covered by the same excess liability policies through four independent carriers with total annual coverage limits of $80,000 per occurrence and $80,000 in the aggregate for amounts exceeding the primary coverage limits.

Professional liability policies entered into on a claims-made basis must be renewed or replaced with equivalent insurance if claims incurred during their term but asserted after their expiration are to be insured. The estimated liability for professional and 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 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 the related risk.

(b) Stop-Loss Coverage OHP and OHIC carry a stop-loss coverage policy for medical claims expense through Reinsurance Group of America, Incorporated (RGA). The deductible under the policy is $1,500 per member per policy year. Once the deductible is met in a policy year, RGA will reimburse 90% of eligible medical expenses up to a maximum of $5,000 per member per policy year. This stop-loss coverage does not relieve OHP and OHIC of its primary obligation to its members. Stop-loss expense related to the policy was $2,696 and $2,332 for the years ended December 31, 2017 and 2016, respectively.

(c) Employee Health Benefits Sentara is self-insured for employee health benefits. The liabilities associated with these claims totaled $26,795 and $14,729 at December 31, 2017 and 2016, respectively, which are included in other current liabilities in the accompanying consolidated balance sheets.

32 (Continued) SENTARA HEALTHCARE AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2017 and 2016 (In thousands)

(d) Workers’ Compensation Insurance Sentara is self-insured for workers’ compensation insurance. The net liability associated with these claims totaled $15,510 and $14,310 at December 31, 2017 and 2016, respectively, which is included in other current liabilities and other long-term liabilities in the accompanying consolidated balance sheets.

(e) Lease Commitments Certain Sentara subsidiaries are parties to operating leases for property and equipment. Rental expense incurred during the years ended December 31, 2017 and 2016 was $81,214 and $74,723, respectively. Future minimum lease payments under the aforementioned operating leases at December 31, 2017 are as follows:

2018 $ 32,336 2019 28,334 2020 22,842 2021 17,966 2022 11,677 Thereafter 16,562

Total future minimum lease payments $ 129,717

(f) Litigation Sentara is subject to various legal proceedings and claims that are inherent to the provision of healthcare services. After consultation with legal counsel, management estimates that these matters will be resolved without material adverse effect on Sentara’s consolidated financial position.

Laws and regulations governing Medicare and Medicaid programs are complex and subject to interpretation. Sentara, through its compliance program, seeks to ensure compliance with such laws and regulations and to rectify instances of noncompliance. Compliance with such laws and regulations is subject to future government review and interpretation as well as significant regulatory action, which can include fines, penalties, and exclusion from the Medicare and Medicaid programs.

Sentara identified potential compliance violations during due diligence on recent acquisitions and has self-disclosed these potential violations to relevant regulatory authorities. Sentara is working collaboratively with these authorities to determine what, if any, fines and penalties might be appropriate. Although it is probable that some payments from Sentara subsidiaries to relevant regulatory authorities will be required, management believes, based on the information available to date, that the ultimate outcome to these matters will not have a material effect on Sentara’s consolidated financial position or results of operations. Sentara is not aware of any ongoing violations, and policies and procedures have been put in effect, which are intended to ensure future compliance at these subsidiaries.

33 (Continued) SENTARA HEALTHCARE AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2017 and 2016 (In thousands)

(15) Nonoperating Gains, Net Nonoperating gains, net are summarized as follows:

2017 2016 Investment income $ 26,569 18,143 Realized losses on investments, net 21,083 (16,533) Unrealized gains on investments, net 274,748 106,376 Equity in earnings of limited investment companies 57,550 52,055 Change in fair value of derivative instruments 5,428 3,950 Loss on refunding of debt — (24,417) Other (3,509) (3,828) Nonoperating gains, net $ 381,869 135,746

(16) Other Operating Expenses Other operating expenses are summarized as follows:

2017 2016 Supplies $ 924,817 779,312 Professional fees 155,509 141,237 Purchased and contracted services 203,440 215,516 Repairs and maintenance 151,495 139,182 Rent 81,214 74,723 Insurance 25,519 23,316 Marketing 29,066 29,140 Utilities 40,917 37,072 Contributions 5,086 4,129 Telecommunications 14,174 13,294 Taxes and licenses 14,129 15,677 Other 44,490 54,053 Other operating expenses $ 1,689,856 1,526,651

34 Schedule 1 SENTARA HEALTHCARE AND SUBSIDIARIES Consolidating Schedule – Balance Sheet Information December 31, 2017 (In thousands)

Sentara Sentara Optima Sentara Healthcare Sentara Sentara Life Care Health Sentara Medical Assets Corporate Hospitals Enterprises Corporation Plan Holdings, Inc. Group Eliminations Consolidated Current assets: Cash and cash equivalents $ 442,004 129,043 407 449 112,184 18,949 1,585 — 704,621 Receivables, net 21,575 475,619 37,061 13,006 163,792 13,352 14,812 (72,621) 666,596 Receivables from affiliated organizations 69,168 13,114 172 4 4,876 25,115 2,337 (114,786) — Investments and assets whose use is limited 718,622 — — — — — — — 718,622 Inventories — 74,119 12,930 923 — — — — 87,972 Prepaid expenses and other current assets 5,377 27,157 35 142 6,975 3,043 3,065 — 45,794 Total current assets 1,256,746 719,052 50,605 14,524 287,827 60,459 21,799 (187,407) 2,223,605 Notes receivable from affiliated organizations 122,574 — — — — — — (122,574) — Investments and assets whose use is limited 2,807,263 70,256 — — 188,401 15,113 — — 3,081,033 Property, plant, and equipment, net 213,240 1,678,726 13,497 44,193 3,077 10,030 18,651 (470) 1,980,944 Land held for future use, at cost 8,800 25,543 — — — 598 — — 34,941 Other assets, net 12,138 62,786 2,590 577 — 30,518 3,891 — 112,500 Total assets $ 4,420,761 2,556,363 66,692 59,294 479,305 116,718 44,341 (310,451) 7,433,023

Liabilities and Net Assets Current liabilities: Accounts payable and accrued expenses $ 39,242 88,272 2,654 1,354 421 457 4,784 — 137,184 Employee compensation and benefits 186,525 5,491 618 — — 10,452 — — 203,086 Medical claims accrued and payable — — — 790 171,218 7,021 — (64,507) 114,522 Current installments of long-term debt 322,857 9,563 — — — — — (5,414) 327,006 Long-term debt subject to current remarketing provisions 297,410 — — — — — — — 297,410 Payables to affiliated organizations 6,125 76,398 105 17 23,864 7,950 328 (114,787) — Estimated third-party payor settlements — 13,347 281 1,846 — — — — 15,474 Other current liabilities 67,138 51,052 15,287 2,233 34,697 26,386 2,510 (2,700) 196,603 Total current liabilities 919,297 244,123 18,945 6,240 230,200 52,266 7,622 (187,408) 1,291,285 Long-term debt, excluding current installments 772,179 143,882 — — — — — (122,574) 793,487 Retirement obligations 246,493 — — — — — — — 246,493 Other long-term liabilities 212,619 81,848 1,570 1,809 2,090 — 1,511 — 301,447 Total liabilities 2,150,588 469,853 20,515 8,049 232,290 52,266 9,133 (309,982) 2,632,712 Net assets: Unrestricted 2,266,530 1,961,979 46,031 51,205 247,015 64,452 34,945 (469) 4,671,688 Temporarily restricted 3,643 70,797 146 30 — — 263 — 74,879 Permanently restricted — 22,671 — 10 — — — — 22,681 Total net assets attributable to Sentara Healthcare 2,270,173 2,055,447 46,177 51,245 247,015 64,452 35,208 (469) 4,769,248 Noncontrolling interest — 31,063 — — — — — — 31,063 Total net assets 2,270,173 2,086,510 46,177 51,245 247,015 64,452 35,208 (469) 4,800,311 Total liabilities and net assets $ 4,420,761 2,556,363 66,692 59,294 479,305 116,718 44,341 (310,451) 7,433,023

See accompanying independent auditors’ report.

35 Schedule 2 SENTARA HOSPITALS Consolidating Schedule – Balance Sheet Information December 31, 2017 (In thousands)

Sentara Sentara Sentara Sentara Sentara Virginia Williamsburg Sentara Northern Sentara Sentara Halifax Sentara Norfolk Sentara Sentara Beach Regional Sentara Princess Virginia Rockingham Martha Regional Albemarle General Leigh CarePlex General Medical Obici Anne Medical Memorial Jefferson Health Medical Assets Hospital Hospital Hospital Hospital Center Hospital Hospital Center Hospital Hospital System Center Eliminations Total Current assets: Cash and cash equivalents (bank overdraft) $ (380) (120) (88) (123) (58) (76) 76,893 6,489 6,865 7,393 14,943 17,305 — 129,043 Receivables, net 120,869 40,806 27,878 40,199 19,014 23,444 31,612 32,620 51,720 34,281 12,488 16,319 — 451,250 Other receivables 5,245 1,874 1,138 1,386 671 3,189 1,656 940 3,227 2,551 253 2,239 — 24,369 Receivables from affiliated organizations 3,710 1,168 858 1,202 565 745 109 1,855 (6) (30) 3,017 (79) — 13,114 Inventories 24,922 4,682 6,070 6,931 3,189 4,528 4,175 4,968 6,071 4,133 2,719 1,731 — 74,119 Prepaid expenses and other current assets 11,210 1,161 1,610 3,810 1,171 3,648 200 735 480 1,176 1,261 695 — 27,157 Total current assets 165,576 49,571 37,466 53,405 24,552 35,478 114,645 47,607 68,357 49,504 34,681 38,210 — 719,052 Investments 1,485 — — 159 — 22 — — 34,143 34,447 — — — 70,256 Property, plant, and equipment, net 359,393 181,257 93,987 85,717 91,063 97,606 151,303 167,556 145,114 170,726 80,756 57,295 (3,047) 1,678,726 Land held for future use, at cost 2,657 — — 2,491 819 — — 8,882 — 10,694 — — — 25,543 Other assets, net 2,016 — 12,640 29,823 59,720 57,447 — 12,927 2,099 2,582 532 3,536 (120,536) 62,786 Total assets $ 531,127 230,828 144,093 171,595 176,154 190,553 265,948 236,972 249,713 267,953 115,969 99,041 (123,583) 2,556,363

Liabilities and Net Assets Current liabilities: Accounts payable and accrued expenses $ 32,108 9,515 5,381 5,136 5,485 5,248 5,795 3,276 5,795 5,846 2,279 2,408 — 88,272 Employee compensation and benefits — — — — — — — — 2,549 — 1,105 1,837 — 5,491 Current installments of long-term debt — — — 3,775 — — 5,414 — — — — 374 — 9,563 Payables to affiliated organizations 738 180 118 335 125 120 19,392 2,355 15 86 30,162 22,772 — 76,398 Estimated third-party payor settlements 690 460 8 1,084 587 255 538 545 1,037 1,975 226 5,942 — 13,347 Other current liabilities 16,288 2,958 2,388 2,965 1,942 2,184 5,133 3,572 4,927 4,425 1,124 3,146 — 51,052 Total current liabilities 49,824 13,113 7,895 13,295 8,139 7,807 36,272 9,748 14,323 12,332 34,896 36,479 — 244,123 Long-term debt, excluding current installments — — — 1 — — 122,574 — — — — 21,307 — 143,882 Other long-term liabilities 13,705 5,060 3,428 4,794 2,716 3,272 3,532 10,304 20,543 4,298 6,016 4,180 — 81,848 Total liabilities 63,529 18,173 11,323 18,090 10,855 11,079 162,378 20,052 34,866 16,630 40,912 61,966 — 469,853 Net assets: Unrestricted 459,755 212,644 132,550 153,015 165,085 177,641 72,481 214,253 178,317 209,416 73,433 36,972 (123,583) 1,961,979 Temporarily restricted 5,822 11 220 490 214 1,788 26 2,000 19,864 38,635 1,624 103 — 70,797 Permanently restricted 2,021 — — — — 45 — 667 16,666 3,272 — — — 22,671 Total net assets attributable to Sentara Healthcare 467,598 212,655 132,770 153,505 165,299 179,474 72,507 216,920 214,847 251,323 75,057 37,075 (123,583) 2,055,447 Noncontrolling interest — — — — — — 31,063 — — — — — — 31,063 Total net assets 467,598 212,655 132,770 153,505 165,299 179,474 103,570 216,920 214,847 251,323 75,057 37,075 (123,583) 2,086,510 Total liabilities and net assets $ 531,127 230,828 144,093 171,595 176,154 190,553 265,948 236,972 249,713 267,953 115,969 99,041 (123,583) 2,556,363

See accompanying independent auditors’ report.

36 Schedule 3 SENTARA HOLDINGS, INC. Consolidating Schedule – Balance Sheet Information December 31, 2017 (In thousands)

Optima Optima Optima Health Sentara Obici Sentara Behavioral Optima Health Insurance Health Professional Sentara Health Health Health Insurance Company of Plan of Sentara Center and Assets Holdings, Inc. Plans, Inc. Services Group Company North Carolina Ohio, Inc. Ventures, Inc. Subsidiary Eliminations Total Current assets: Cash and cash equivalents $ 4 3,216 1,415 2,122 7,540 1,617 1,357 1,678 — — 18,949 Receivables, net 216 3,218 (29) — 7,712 — 42 2,157 36 — 13,352 Receivables from affiliated organizations 19 33,814 475 — 90 — 827 438 251 (10,799) 25,115 Prepaid expenses and other current assets — 2,807 — 3 141 — — 92 — — 3,043 Total current assets 239 43,055 1,861 2,125 15,483 1,617 2,226 4,365 287 (10,799) 60,459 Investments — — — 433 13,779 901 — — — — 15,113 Property, plant, and equipment, net — 9,069 — — 170 — 40 751 — — 10,030 Land held for future use, at cost — — — — — — — 598 — — 598 Other assets, net 2,501 20,983 — — — — — 30,460 — (23,426) 30,518 Total assets $ 2,740 73,107 1,861 2,558 29,432 2,518 2,266 36,174 287 (34,225) 116,718

Liabilities and Net Assets Current liabilities: Accounts payable and accrued expenses $ — 448 (11) — — — — 20 — — 457 Employee compensation and benefits — 10,452 — — — — — — — — 10,452 Medical claims accrued and payable — — 195 — 6,826 — — — — — 7,021 Payables to (from) affiliated organizations 166 11,517 5,050 4 719 7 1,509 (318) 95 (10,799) 7,950 Other current liabilities (1) 17,664 17 — 5,301 — 1,541 1,864 — — 26,386 Total current liabilities 165 40,081 5,251 4 12,846 7 3,050 1,566 95 (10,799) 52,266 Net assets: Unrestricted 2,575 33,026 (3,390) 2,554 16,586 2,511 (784) 34,608 192 (23,426) 64,452 Total liabilities and net assets $ 2,740 73,107 1,861 2,558 29,432 2,518 2,266 36,174 287 (34,225) 116,718

See accompanying independent auditors’ report.

37 Schedule 4 SENTARA HEALTHCARE AND SUBSIDIARIES Consolidating Schedule – Operations Information Year ended December 31, 2017 (In thousands)

Sentara Sentara Optima Sentara Healthcare Sentara Sentara Life Care Health Sentara Medical Corporate Hospitals Enterprises Corporation Plan Holdings, Inc. Group Eliminations Consolidated Operating revenue, gains, and other support: Net patient service revenue $ 3,348 3,901,174 233,627 66,036 — — 281,307 (459,419) 4,026,073 Provision for bad debts, net 704 (400,467) (237) (1,919) (8,083) (1,036) (19,831) — (430,869) Net patient service revenue less provision for bad debts 4,052 3,500,707 233,390 64,117 (8,083) (1,036) 261,476 (459,419) 3,595,204 Premium and capitation revenue 696 4,695 — 21,097 1,494,238 50,829 5,533 (5,827) 1,571,261 Other operating revenue 43,538 38,361 2,783 446 11,050 68,321 10,309 (55,215) 119,593 Net assets released from restrictions 682 10,413 69 4 — — 635 — 11,803 Total operating revenue, gains, and other support 48,968 3,554,176 236,242 85,664 1,497,205 118,114 277,953 (520,461) 5,297,861 Operating costs and expenses: Salaries, wages, and benefits 90,858 1,576,139 70,920 51,242 59,366 27,779 290,332 (111,125) 2,055,511 Medical claims expense — — — 4,481 1,356,013 52,434 — (348,387) 1,064,541 Other operating expenses (income) 64,691 1,442,003 153,902 25,528 59,226 31,274 (32,410) (54,358) 1,689,856 Interest expense 10,124 33,376 441 — 194 128 — (6,591) 37,672 Depreciation and amortization 11,191 183,440 2,521 3,576 976 452 3,993 — 206,149 Sentara Healthcare services (102,821) 60,818 7,636 6,442 9,559 2,328 16,038 — — Total operating costs and expenses 74,043 3,295,776 235,420 91,269 1,485,334 114,395 277,953 (520,461) 5,053,729 Net operating (loss) income (25,075) 258,400 822 (5,605) 11,871 3,719 — — 244,132 Nonoperating gains, net 368,269 6,057 — — 6,933 610 — — 381,869 Excess (deficiency) of revenue over (under) expenses before noncontrolling interest 343,194 264,457 822 (5,605) 18,804 4,329 — — 626,001 Noncontrolling interest — (9,714) — — — — — — (9,714) Excess (deficiency) of revenue over (under) expenses attributable to Sentara Healthcare $ 343,194 254,743 822 (5,605) 18,804 4,329 — — 616,287

See accompanying independent auditors’ report.

38 Schedule 5 SENTARA HOSPITALS Consolidating Schedule – Operations Information Year ended December 31, 2017 (In thousands)

Sentara Sentara Sentara Sentara Sentara Virginia Williamsburg Sentara Northern Sentara Sentara Halifax Sentara Norfolk Sentara Sentara Beach Regional Sentara Sentara Princess Virginia Rockingham Martha Regional Albemarle General Leigh CarePlex General Medical Obici Hospitals Anne Medical Memorial Jefferson Health Medical Hospital Hospital Hospital Hospital Center Hospital Corporate Hospital Center Hospital Hospital System Center Eliminations Total Operating revenue, gains, and other support: Net patient service revenue $ 958,000 376,739 256,314 346,563 179,767 231,012 — 273,942 271,627 446,969 301,134 128,173 130,934 — 3,901,174 Provision for bad debt, net (95,459) (38,772) (38,413) (44,738) (17,110) (28,432) — (28,177) (48,037) (23,630) (15,965) (9,914) (11,820) — (400,467) Net patient service revenue less provision for bad debts 862,541 337,967 217,901 301,825 162,657 202,580 — 245,765 223,590 423,339 285,169 118,259 119,114 — 3,500,707 Premium and capitation revenue 3,185 74 61 56 30 33 — 67 — 455 717 — 17 — 4,695 Other operating revenue 9,577 410 3,669 3,339 207 3,002 12,351 1,808 3,886 4,981 3,284 2,627 402 (11,182) 38,361 Net assets released from restrictions 2,517 58 164 166 27 61 — 16 56 2,644 4,203 311 190 — 10,413 Total operating revenue, gains, and other support 877,820 338,509 221,795 305,386 162,921 205,676 12,351 247,656 227,532 431,419 293,373 121,197 119,723 (11,182) 3,554,176 Operating costs and expenses: Salaries, wages, and benefits 259,666 111,602 84,649 110,783 62,307 78,500 231,224 90,519 86,645 184,219 145,063 68,368 62,594 — 1,576,139 Other operating expenses 408,477 117,087 87,649 103,448 61,395 72,849 68,137 82,262 100,233 148,645 95,985 45,867 49,969 — 1,442,003 Interest expense 4,603 2,923 660 1,639 3,413 1,490 — 6,591 1,708 3,939 4,842 585 983 — 33,376 Depreciation and amortization 26,843 16,418 10,930 10,107 7,402 9,484 36,202 9,567 15,823 17,043 11,667 6,822 5,592 (460) 183,440 Sentara Healthcare services 115,122 35,136 26,047 32,008 19,054 22,993 (333,934) 26,762 27,466 37,807 27,622 12,138 12,597 — 60,818 Total operating costs and expenses 814,711 283,166 209,935 257,985 153,571 185,316 1,629 215,701 231,875 391,653 285,179 133,780 131,735 (460) 3,295,776 Net operating income (loss) 63,109 55,343 11,860 47,401 9,350 20,360 10,722 31,955 (4,343) 39,766 8,194 (12,583) (12,012) (10,722) 258,400 Nonoperating gains (losses), net (18) — — 1 — 260 214 425 118 11 466 4,580 — — 6,057 Excess (deficiency) of revenue over (under) expenses before non controlling interest 63,091 55,343 11,860 47,402 9,350 20,620 10,936 32,380 (4,225) 39,777 8,660 (8,003) (12,012) (10,722) 264,457 Noncontrolling interest — — — — — — — (9,714) — — — — — — (9,714) Excess of revenue over (under) expenses attributable to Sentara Healthcare $ 63,091 55,343 11,860 47,402 9,350 20,620 10,936 22,666 (4,225) 39,777 8,660 (8,003) (12,012) (10,722) 254,743

See accompanying independent auditors’ report.

39 Schedule 6 SENTARA ENTERPRISES Consolidating Schedule – Operations Information Year ended December 31, 2017 (In thousands)

Home Care Medical Specialty Divisional Services DME Transport, LLC Pharmacy Support Eliminations Total Operating revenue, gains, and other support: Net patient service revenue $ 107,257 (1) 13,325 113,004 42 — 233,627 Provision for bad debts, net (185) 57 (109) — — — (237) Net patient service revenue less provision for bad debts 107,072 56 13,216 113,004 42 — 233,390 Other operating revenue 278 — 1,504 — 753 248 2,783 Net assets released from restrictions — — — — 69 — 69 Total operating revenue, gains, and other support 107,350 56 14,720 113,004 864 248 236,242 Operating costs and expenses: Salaries, wages, and benefits 47,048 14 12,334 2,495 9,029 — 70,920 Other operating expenses (income) 48,447 60 3,344 110,337 (8,180) (106) 153,902 Interest expense — — 441 — 310 (310) 441 Depreciation and amortization 551 — 868 266 836 — 2,521 Sentara Healthcare services — — 370 — 7,266 — 7,636 Total operating costs and expenses 96,046 74 17,357 113,098 9,261 (416) 235,420 Net operating income (loss) 11,304 (18) (2,637) (94) (8,397) 664 822 Nonoperating gains, net — — — — 310 (310) — Excess (deficiency) of revenue over (under) expenses $ 11,304 (18) (2,637) (94) (8,087) 354 822

See accompanying independent auditors’ report.

40 Schedule 7 SENTARA LIFE CARE CORPORATION Consolidating Schedule – Operations Information Year ended December 31, 2017 (In thousands)

Sentara Sentara Sentara Sentara Sentara Sentara Nursing Sentara Nursing Nursing Nursing Nursing Nursing Center Life Care Center Center Center Center Center Virginia Sentara Administration Chesapeake Norfolk Portsmouth Currituck Hampton Beach Windermere Operating revenue, gains, and other support: Net patient service revenue (expense) $ — 9,353 14,375 7,125 6,221 7,906 8,148 8,163 Provision for bad debt, net (256) (491) (392) (88) (274) (73) (262) Net patient service revenue less provision for bad debts — 9,097 13,884 6,733 6,133 7,632 8,075 7,901 Premium and capitation revenue — — — — — — — — Other operating revenue — 19 5 61 3 5 104 8 Net assets released from restrictions — — — — — — — — Total operating revenue, gains, and other support — 9,116 13,889 6,794 6,136 7,637 8,179 7,909 Operating costs and expenses: Salaries, wages, and benefits 1,519 6,209 9,284 5,113 4,603 5,254 6,086 5,317 Medical claims expense — — — — — Other operating expenses 754 2,222 4,093 2,244 1,598 2,084 1,823 2,100 Depreciation and amortization 101 958 356 241 250 286 283 288 Sentara Healthcare services — 664 971 537 456 539 578 544 Total operating costs and expenses 2,374 10,053 14,704 8,135 6,907 8,163 8,770 8,249 Net operating (loss) income (2,374) (937) (815) (1,341) (771) (526) (591) (340) (Deficiency) excess of revenue over (under) expenses $ (2,374) (937) (815) (1,341) (771) (526) (591) (340)

See accompanying independent auditors’ report.

41 (Continued) Schedule 7 SENTARA LIFE CARE CORPORATION Consolidating Schedule – Operations Information Year ended December 31, 2017 (In thousands)

Sentara Sentara Sentara Sentara Sentara Village Senior Senior Village VillageVirginia Community Community Pharmacy Chesapeake Norfolk Beach Care I Care II Rx Eliminations Total Operating revenue, gains, and other support: Net patient service revenue (expense) $ — 1,209 2,342 (214) (101) 10,169 (8,660) 66,036 Provision for bad debt, net — (9) (46) (26) (2) — — (1,919) Net patient service revenue less provision for bad debts — 1,200 2,296 (240) (103) 10,169 (8,660) 64,117 Premium and capitation revenue — — — 13,289 7,808 — — 21,097 Other operating revenue — 115 93 3 30 — — 446 Net assets released from restrictions — 4 — — — — — 4 Total operating revenue, gains, and other support — 1,319 2,389 13,052 7,735 10,169 (8,660) 85,664 Operating costs and expenses: Salaries, wages, and benefits — 1,335 1,373 2,854 2,295 — — 51,242 Medical claims expense — — — 5,194 3,861 — (4,574) 4,481 Other operating expenses 9 449 442 1,422 1,089 9,285 (4,086) 25,528 Depreciation and amortization — 149 167 278 183 36 — 3,576 Sentara Healthcare services — 137 142 689 525 660 — 6,442 Total operating costs and expenses 9 2,070 2,124 10,437 7,953 9,981 (8,660) 91,269 Net operating (loss) income (9) (751) 265 2,615 (218) 188 — (5,605) (Deficiency) excess of revenue over (under) expenses $ (9) (751) 265 2,615 (218) 188 — (5,605)

See accompanying independent auditors’ report.

42 Schedule 8 SENTARA HOLDINGS, INC. Consolidating Schedule – Operations Information Year ended December 31, 2017 (In thousands)

Optima Optima Optima Health Sentara Obici Sentara Behavioral Health Insurance Health Professional Sentara Health Health Insurance Company of Plan of Sentara Center and Holdings, Inc. Plans, Inc. Services Company North Carolina Ohio, Inc. Ventures, Inc. Subsidiary Eliminations Total Operating revenue, gains, and other support: Provision for bad debt, net $ — (231) (1) (4) — (800) — — — (1,036) Net patient service revenue less provision for bad debts — (231) (1) (4) — (800) — — — (1,036) Premium and capitation revenue — — 4,273 46,609 — — — — (53) 50,829 Other operating revenue — 29,903 1,631 7,978 — 6,400 25,403 46 (3,040) 68,321 Total operating revenue, gains, and other support — 29,672 5,903 54,583 — 5,600 25,403 46 (3,093) 118,114 Operating costs and expenses: Salaries, wages, and benefits — 17,944 3,314 2,553 — 3,968 — — — 27,779 Medical claims expense — 397 1,118 50,825 — 147 — — (53) 52,434 Other operating expense (income) — 8,125 1,772 3,468 6 1,984 16,520 (2) (599) 31,274 Interest expense — — — 14 — — 109 5 — 128 Depreciation and amortization — 368 20 54 — 10 — — — 452 Sentara Healthcare services — 1,493 410 222 — 203 — — — 2,328 Total operating costs and expenses — 28,327 6,634 57,136 6 6,312 16,629 3 (652) 114,395 Net operating income (loss) — 1,345 (731) (2,553) (6) (712) 8,774 43 (2,441) 3,719 Nonoperating gains (losses), net — 66 2 535 15 (8) — — 610 Excess (deficiency) of revenue over (under) expenses $ — 1,411 (729) (2,018) 9 (720) 8,774 43 (2,441) 4,329

See accompanying independent auditors’ report.

43 Schedule 9 SENTARA HEALTHCARE AND SUBSIDIARIES Consolidating Schedule – Fully Allocated Overhead Operations Information Year ended December 31, 2017 (In thousands)

Sentara Sentara Optima Sentara Healthcare Sentara Sentara Life Care Health Sentara Medical Corporate Hospitals Enterprises Corporation Plan Holdings, Inc. Group Eliminations Consolidated Operating revenue, gains, and other support: Net patient service revenue $ 3,348 3,901,174 233,627 66,036 — — 281,307 (459,419) 4,026,073 Provision for bad debt, net 704 (400,467) (237) (1,919) (8,083) (1,036) (19,831) — (430,869) Net patient service revenue less provision for bad debts 4,052 3,500,707 233,390 64,117 (8,083) (1,036) 261,476 (459,419) 3,595,204 Premium and capitation revenue 696 4,695 — 21,097 1,494,238 50,829 5,533 (5,827) 1,571,261 Other operating revenue 43,538 38,361 2,783 446 11,050 68,321 10,309 (55,215) 119,593 Net assets released from restrictions 682 10,413 69 4 — — 635 — 11,803 Total operating revenue, gains, and other support 48,968 3,554,176 236,242 85,664 1,497,205 118,114 277,953 (520,461) 5,297,861 Operating costs and expenses: Salaries, wages, and benefits 90,858 1,576,139 70,920 51,242 59,366 27,779 290,332 (111,125) 2,055,511 Medical claims expense — — — 4,481 1,356,013 52,434 — (348,387) 1,064,541 Other operating expenses (income) 64,691 1,442,003 153,902 25,528 59,226 31,274 (32,410) (54,358) 1,689,856 Interest expense 10,124 33,376 441 — 194 128 — (6,591) 37,672 Depreciation and amortization 11,191 183,440 2,521 3,576 976 452 3,993 — 206,149 Sentara Healthcare services (127,896) 75,650 9,498 8,013 11,890 2,896 19,949 — — Total operating costs and expenses 48,968 3,310,608 237,282 92,840 1,487,665 114,963 281,864 (520,461) 5,053,729 Net operating income (loss) — 243,568 (1,040) (7,176) 9,540 3,151 (3,911) — 244,132 Nonoperating gains, net 368,269 6,057 — — 6,933 610 — — 381,869 Excess (deficiency) of revenue over (under) expenses before noncontrolling interest 368,269 249,625 (1,040) (7,176) 16,473 3,761 (3,911) — 626,001 Noncontrolling interest — (9,714) — — — — — — (9,714) Excess (deficiency) of revenue over (under) expenses attributable to Sentara Healthcare $ 368,269 239,911 (1,040) (7,176) 16,473 3,761 (3,911) — 616,287

See accompanying independent auditors’ report.

44 Schedule 10 SENTARA HOSPITALS Consolidating Schedule – Fully Allocated Overhead Operations Information Year ended December 31, 2017 (In thousands)

Sentara Sentara Sentara Sentara Sentara Sentara Sentara Sentara Halifax Sentara Norfolk Sentara Sentara Virginia Williamsburg Sentara Princess Northern Rockingham Martha Regional Albemarle General Leigh CarePlex Beach Regional Obici Anne Virginia Memorial Jefferson Health Medical Hospital Hospital Hospital General Medical Center Hospital Hospital Hospital Hospital Hospital System Center Eliminations Total Operating revenue, gains, and other support: Net patient service revenue $ 958,000 376,739 256,314 346,563 179,767 231,012 273,942 271,627 446,969 301,134 128,173 130,934 — 3,901,174 Provision for bad debt, net (95,459) (38,772) (38,413) (44,738) (17,110) (28,432) (28,177) (48,037) (23,630) (15,965) (9,914) (11,820) — (400,467) Net patient service revenue less provision for bad debts 862,541 337,967 217,901 301,825 162,657 202,580 245,765 223,590 423,339 285,169 118,259 119,114 — 3,500,707 Premium and capitation revenue 3,185 74 61 56 30 33 67 — 455 717 — 17 — 4,695 Other operating revenue 15,432 661 5,913 5,380 334 4,835 1,808 3,886 4,981 3,284 2,627 402 (11,182) 38,361 Net assets released from restrictions 2,517 58 164 166 27 61 16 56 2,644 4,203 311 190 — 10,413 Total operating revenue, gains, and other support 883,675 338,760 224,039 307,427 163,048 207,509 247,656 227,532 431,419 293,373 121,197 119,723 (11,182) 3,554,176 Operating costs and expenses: Salaries, wages, and benefits 344,518 148,082 112,315 146,994 82,665 104,157 90,519 86,645 184,219 145,063 68,368 62,594 — 1,576,139 Other operating expenses 441,186 126,463 94,668 111,732 66,311 78,682 82,262 100,233 148,645 95,985 45,867 49,969 — 1,442,003 Interest expense 4,603 2,923 660 1,639 3,413 1,490 6,591 1,708 3,939 4,842 585 983 — 33,376 Depreciation and amortization 38,814 23,739 15,804 14,613 10,703 13,713 9,567 15,823 17,043 11,667 6,822 5,592 (460) 183,440 Sentara Healthcare services (31,609) (9,647) (7,152) (8,789) (5,232) (6,313) 26,762 27,466 37,807 27,622 12,138 12,597 — 75,650 Total operating costs and expenses 797,512 291,560 216,295 266,189 157,860 191,729 215,701 231,875 391,653 285,179 133,780 131,735 (460) 3,310,608 Net operating income (loss) 86,163 47,200 7,744 41,238 5,188 15,780 31,955 (4,343) 39,766 8,194 (12,583) (12,012) (10,722) 243,568 Nonoperating gains, net 79 29 23 29 17 280 425 118 11 466 4,580 — — 6,057 Excess (deficiency) of revenue over (under) expenses before noncontrolling interest 86,242 47,229 7,767 41,267 5,205 16,060 32,380 (4,225) 39,777 8,660 (8,003) (12,012) (10,722) 249,625 Noncontrolling interest — — — — — — (9,714) — — — — — — (9,714) Excess of revenue over (under) expenses attributable to Sentara Healthcare $ 86,242 47,229 7,767 41,267 5,205 16,060 22,666 (4,225) 39,777 8,660 (8,003) (12,012) (10,722) 239,911

See accompanying independent auditors’ report.

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APPENDIX C

DEFINITIONS AND SUMMARY OF PRINCIPAL DOCUMENTS

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PART I: SUMMARY OF MASTER INDENTURE AND FUNDING AGREEMENTS

The following statements are summaries of certain provisions of the Master Indenture, as supplemented, and the Funding Agreements. These summaries do not purport to be complete and are subject to all of the terms and conditions of the Master Indenture and the Funding Agreements, to which reference is hereby made, the form of which is available for examination at the offices of Sentara and the Master Trustee.

MASTER INDENTURE DEFINITIONS

The terms defined below are among those used in the Summary of Master Indenture and the Funding Agreements in this Official Statement:

“Accountant” means any firm of independent certified public accountants selected by the Obligated Group Representative.

“Annual Debt Service” means for each Fiscal Year the sum (without duplication) of (1) the aggregate amount of principal and interest becoming due and payable in such Fiscal Year on all Long-Term Indebtedness then Outstanding and (2) the aggregate amount of Obligation Payments becoming due and payable in such Fiscal Year, (in either case by scheduled maturity, acceleration, mandatory redemption or otherwise, but not including optional prepayments), less any amounts of such principal, interest or Obligation Payments to be paid during such Fiscal Year from (a) the proceeds of Indebtedness, (b) moneys or Governmental Obligations deposited in trust for the purpose of paying such principal, interest or Obligation Payments, or (c) in the case of principal of Balloon Indebtedness, moneys not constituting Income Available for Debt Service for such Fiscal Year; provided that if a Financial Products Agreement has been entered into by any Member or Obligated Group Affiliate with respect to Long-Term Indebtedness, interest on such Long-Term Indebtedness shall be included in the calculation of Annual Debt Service by including for each Fiscal Year an amount equal to the amount of interest payable on such Long- Term Indebtedness in such Fiscal Year at the rate or rates stated in such Long-Term Indebtedness plus any Financial Payments payable in such Fiscal Year minus any Financial Receipts receivable in such Fiscal Year; provided that in no event shall any calculation made pursuant to this clause result in a number less than zero being included in the calculation of Annual Debt Service.

“Annual Required Debt Service Coverage Ratio” means, for any Fiscal Year, the ratio determined by dividing Income Available for Debt Service by Annual Debt Service for such Fiscal Year.

“Audited Financial Statements” means the consolidated financial statements of the Company and such other Persons includable therein, prepared in accordance with generally accepted accounting principles, which have been audited and reported upon by independent certified public accountants selected by the Company. To the extent required, Audited Financial Statements shall also include, or be accompanied by, the Financial Statements.

“Authorized Representative” means with respect to each Member, the chairman of its Governing Body, its chief executive officer, its chief financial officer, its chief operations officer or any other person designated as an Authorized Representative of such Member by a Certificate of such Member, signed by the chairman of its Governing Body, its chief executive officer, its chief financial officer or its chief operations officer and filed with the Master Trustee.

“Balloon Indebtedness” means Indebtedness seventy-five percent (75%) or more of the original principal amount of which comes due in the same Fiscal Year, which portion of such principal amount is not required by the documents governing such Indebtedness to be amortized by redemption prior to such period.

“Book Value” means, when used in connection with Property, Plant and Equipment or other Property of any Member or Obligated Group Affiliate, the value of such Property, net of accumulated depreciation, as it is carried on the books of such Member or Obligated Group Affiliate and in conformity with generally accepted accounting principles, and when used in connection with Property, Plant and Equipment or other Property of the Obligated Group, means the aggregate of the values so determined with respect to such Property of each Member

C-1 and Obligated Group Affiliate determined in such a way that no portion of such value of Property of any Member or Obligated Group Affiliate is included more than once.

“Certificate”, “Statement”, “Request”, “Consent” or “Order” of any Member or of the Master Trustee means, respectively, a written certificate, statement, request, consent or order signed in the name of such Member by its Authorized Representative or in the name of the Master Trustee by its Responsible Officer. Any such instrument and supporting opinions or certificates, if any, may, but need not, be combined in a single instrument with any other instrument, opinion or certificate and the two or more so combined shall be read and construed as a single instrument.

“Company” means Sentara Healthcare, a Virginia nonprofit, nonstock corporation, or any corporation that is the surviving, resulting or transferee corporation in any merger, consolidation or transfer of assets permitted under the Master Indenture.

“Controlling Member” means the Member designated by the Obligated Group Representative to establish and maintain control over an Obligated Group Affiliate, initially, the Company.

“Corporate Trust Office” means the office of the Master Trustee at which its principal corporate trust business is conducted, which at the date hereof is located at Richmond, Virginia.

“Event of Default” means any of the events specified in the Section entitled “Summary of Master Indenture – Events of Default” within this Appendix C.

“Fair Market Value,” when used in connection with Property, means the fair market value of such Property as determined by either: (1) an appraisal of the portion of such Property which is real property made within five years of the date of determination by a “Member of the Appraisal Institute” and by an appraisal of the portion of such Property which is not real property made within five years of the date of determination by any expert, provided that any such appraisal shall be performed by a person or firm which (a) is in fact independent, (b) does not have any direct financial interest or any material indirect financial interest in any Member or Obligated Group Affiliate and (c) is not connected with any Member or Obligated Group Affiliate as an officer, employee, promoter, trustee, partner, director or person performing similar functions, adjusted for the period, not in excess of five years, from the date of the last such appraisal for changes in the implicit price deflator for the gross national product as reported by the United States Department of Commerce or its successor agency, or if such index is no longer published, such other index certified to be comparable and appropriate in an Officer’s Certificate delivered to the Master Trustee; or (2) a bona fide offer for the purchase of such Property made on an arm’s-length basis within six months of the date of determination, as established by an Officer’s Certificate.

“Financial Products Agreement” means an interest rate swap, cap, collar, option, floor, forward or other hedging agreement, arrangement or security, however denominated, identified to the Master Trustee in a Certificate of the Obligated Group Representative as having been entered into by a Member or an Obligated Group Affiliate with a Qualified Provider not for investment purposes but with respect to Indebtedness (which Indebtedness shall be specifically identified in the Certificate of the Obligated Group Representative) for the purpose of (1) reducing or otherwise managing the Member’s or Obligated Group Affiliate’s risk of interest rate changes or (2) effectively converting the Member’s or Obligated Group Affiliate’s interest rate exposure, in whole or in part, from a fixed rate exposure to a variable rate exposure, or from a variable rate exposure to a fixed rate exposure.

“Financial Product Payments” means payments periodically required to be paid to a counterparty by a Member or an Obligated Group Affiliate pursuant to a Financial Products Agreement.

“Financial Product Receipts” means amounts periodically required to be paid to a Member or an Obligated Group Affiliate by a counterparty pursuant to a Financial Products Agreement.

“Financial Statements” means the unaudited combined financial statements of the Obligated Group and the Obligated Group Affiliates derived from the Audited Financial Statements and prepared by the Company, and which are included as an additional information section in the Audited Financial Statements, or which accompany the Audited Financial Statements, and which cover the same Fiscal Year as the Audited Financial Statements, from

C-2 which the revenues, assets, liabilities and expenses of any Person that is not a Member or an Obligated Group Affiliate have been eliminated and to which the revenues, assets, liabilities and expenses of any Member or Obligated Group Affiliate that is not included in the Audited Financial Statements have been added; provided, however, that for purposes of adding the revenues, assets, liabilities and expenses of a Member or an Obligated Group Affiliate that is not included in the Audited Financial Statements, the balances thereof shall be extracted from audited financial statements of such Member or Obligated Group Affiliate and its affiliates, if any (determined in the same manner as in the case of the Company). Notwithstanding the foregoing, if the amount of net revenues and total assets of any Person that would be eliminated or added pursuant to the immediately preceding sentence is not greater than five percent (5%) of the amount of net revenues and total assets as shown on the Audited Financial Statements for the Fiscal Year which would be covered by the Financial Statements, then the Members and the Obligated Group Affiliates shall substitute the Audited Financial Statements in lieu of the Financial Statements for the period covered by the Audited Financial Statements for all purposes of the Master Indenture; provided, however, that in such event the Audited Financial Statements shall disclose by supplement or other appropriate means the aggregate amount of net revenues and total assets that would otherwise be excluded from or added to such Audited Financial Statements; and provided, further, that such amounts to be excluded shall not in the aggregate exceed ten percent (10%) of the net revenues and total assets as shown on the Audited Financial Statements for such Fiscal Year.

“Fiscal Year” means the period beginning on May 1 of each year and ending on the next succeeding April 30, or any other twelve-month period hereafter designated by the Obligated Group Representative as the fiscal year of the Obligated Group.

“Governing Body” means, when used with respect to any Member or Obligated Group Affiliate, its board of directors, board of trustees or other board or group of individuals in which all of the powers of such Member or Obligated Group Affiliate are vested, except for those powers reserved to the corporate membership of such Member or Obligated Group Affiliate by the articles of incorporation or bylaws of such Member or Obligated Group Affiliate.

“Government Issuer” means any municipal corporation, political subdivision, state, territory or possession of the United States, or any constituted authority or agency or instrumentality of any of the foregoing empowered to issue obligations on behalf thereof, which obligations would constitute Related Bonds under the Master Indenture.

“Government Obligations” means: (1) direct obligations of the United States of America (including obligations issued or held in book-entry form on the books of the Department of the Treasury of the United States of America) or obligations the timely payment of the principal of and interest on which are fully guaranteed by the United States of America; (2) obligations issued or guaranteed by any agency, department or instrumentality of the United States of America if the obligations issued or guaranteed by such entity are rated in one of the two highest rating categories of a Rating Agency (without regard to any gradation of such rating category); (3) certificates which evidence ownership of the right to the payment of the principal of and interest on obligations described in clauses (1) and/or (2), provided that such obligations are held in the custody of a bank or trust company in a special account separate from the general assets of such custodian; and (4) obligations the interest on which is excluded from gross income for purposes of federal income taxation pursuant to Section 103 of the Internal Revenue Code of 1986, and the timely payment of the principal of and interest on which is fully provided for by the deposit in trust of cash and/or obligations described in clauses (1), (2) and/or (3).

“Guaranty” means all loan commitments and all obligations of any Member or Obligated Group Affiliate guaranteeing in any manner whatever, whether directly or indirectly, any obligation of any other Person which would, if such other Person were a Member or an Obligated Group Affiliate, constitute Indebtedness.

“Holder” means the registered owner of any Obligation in registered form or the bearer of any Obligation in coupon form which is not registered or is registered to bearer.

“Income Available for Debt Service” means, with respect to the Obligated Group and the Obligated Group Affiliates, as to any period of time, the excess of revenues over expenses (or, in the case of for-profit Members or for-profit Obligated Group Affiliates, net income after taxes) of the Obligated Group and the Obligated Group Affiliates for such period, to which shall be added depreciation, amortization and interest (and Obligation Payments

C-3 to the extent that such Obligation Payments are treated as an expense during such period of time in accordance with generally accepted accounting principles), provided that no such determination shall include (1) any gain or loss resulting from (a) the extinguishment of Indebtedness, (b) any disposition of capital assets not made in the ordinary course of business, (c) any discontinued operations or (d) adjustments to the value of assets or liabilities resulting from changes in generally accepted accounting principles, (2) unrealized gains on marketable securities held by a Member or an Obligated Group Affiliate as of the last date of such period of time, (3) unrealized losses on marketable securities held by a Member or an Obligated Group Affiliate as of the last date of such period of time unless such losses represent a permanent decline in value of such securities in accordance with generally accepted accounting principles, (4) any nonrecurring items of an extraordinary nature which do not involve the receipt, expenditure or transfer of assets, (5) impairment losses related to long-lived assets, identifiable intangibles and goodwill, or (6) expenses accrued for employee benefits related to employees agreeing to take part in an early retirement program.

“Indebtedness” means any Guaranty (other than any Guaranty by any Member or Obligated Group Affiliate of Indebtedness of any other Member or Obligated Group Affiliate) and any obligation of any Member or Obligated Group Affiliate (1) for borrowed money, (2) with respect to leases which are considered capital leases or (3) under installment sale agreements, in each case as determined in accordance with generally accepted accounting principles; provided, however, that if more than one Member or Obligated Group Affiliate shall have incurred or assumed a Guaranty of a Person other than a Member or an Obligated Group Affiliate, or if more than one Member or Obligated Group Affiliate shall be obligated to pay any obligation, for purposes of any computations or calculations under the Master Indenture such Guaranty or obligation shall be included only one time.

“Independent Consultant” means a firm (but not an individual) which (1) is in fact independent, (2) does not have any direct financial interest or any material indirect financial interest in any Member or any Obligated Group Affiliate, (3) is not connected with any Member or any Obligated Group Affiliate as an officer, employee, promoter, trustee, partner, director or person performing similar functions, (4) is a certified public accounting firm, a nationally recognized investment banker or a nationally recognized professional management consultant, and (5) is designated by the Obligated Group Representative as qualified to pass upon questions relating to the financial affairs or facilities of the type or types operated by the Obligated Group and having the skill and experience necessary to render the particular opinion or report required by the provision hereof in which such requirement appears.

“Industry Restrictions” means federal, state or other applicable governmental laws or regulations or general industry standards or general industry conditions placing restrictions and limitations on the rates, fees and charges to be fixed, charged and collected by the Members or Obligated Group Affiliates.

“Lien” means any mortgage or pledge of, or security interest in, or lien or encumbrance on, any Property, excluding Liens applicable to Property in which any Member or Obligated Group Affiliate has only a leasehold interest, unless the Lien is with respect to such leasehold interest.

“Long-Term Indebtedness” means Indebtedness having an original maturity greater than one year or renewable at the option of a Member or an Obligated Group Affiliate for a period greater than one year from the date of original incurrence or issuance thereof unless, by the terms of such Indebtedness, no Indebtedness is permitted to be outstanding thereunder for a period of at least thirty (30) consecutive days during each calendar year.

“Master Indenture” means the Master Indenture, as originally executed and as it may from time to time be supplemented, modified or amended in accordance with the terms hereof.

“Master Trustee”1 means SunTrust Bank, a banking corporation duly organized and existing under the laws of the State of Georgia, and, subject to the limitations contained in the section of the Master Indenture entitled “Separate or Co-Master Trustee”, any other corporation or association that may be co-trustee with the Master Trustee, and any successor or successors to said trustee or co-trustee in the trusts created under the Master Indenture.

“Member” means the Company and each other Person which is obligated under the Master Indenture to the extent and in accordance with the provisions of the sections entitled “Summary of Master Indenture – Merger,

1 U.S. Bank National Association has replaced SunTrust Bank as Master Trustee.

C-4 Consolidation, Sale or Conveyance,” and “Summary of Master Indenture - Membership in Obligated Group” within this Appendix C, from and after the date upon which such Person joins the Obligated Group, but excluding any Person which withdraws from the Obligated Group to the extent and in accordance with the provisions of the section entitled “Summary of Master Indenture – Withdrawal from Obligated Group”, from and after the date of such withdrawal.

“Obligated Group” means all Members.

“Obligated Group Affiliate” means any Person which has been so designated by the Obligated Group Representative in accordance with the section entitled “Summary of Master Indenture – Designation of Obligated Group Affiliate,” within this Appendix C so long as such Person has not been further designated by the Obligated Group Representative as no longer being an Obligated Group Affiliate in accordance with the section entitled “Summary of Master Indenture – Designation of Obligated Group Affiliate,” within this Appendix C.

“Obligated Group Affiliates” means Sentara Hospitals and Sentara Enterprises.

“Obligated Group Representative” means the Company or such other Member (or Members acting jointly) as may have been designated pursuant to written notice to the Master Trustee executed by all of the Members.

“Obligation” means any obligation of the Obligated Group issued pursuant to the Master Indenture, as a joint and several obligation of each Member, which may be in any form set forth in a Related Supplement, including, but not limited to, bonds, notes, obligations, debentures, reimbursement agreements, loan agreements or leases. Reference to a “Series of Obligations” or to “Obligations of a Series” means Obligations or a series of Obligations issued pursuant to a single Related Supplement.

“Obligation Payments” means payments (however designated) required under any Obligation then Outstanding which does not constitute Indebtedness.

“Officer’s Certificate” means a certificate signed by an Authorized Representative of the Obligated Group Representative.

“Opinion of Bond Counsel” means a written opinion signed by an attorney or firm of attorneys experienced in the field of public finance whose opinions are generally accepted by purchasers of bonds issued by or on behalf of a Government Issuer.

“Opinion of Counsel” means a written opinion signed by a reputable and qualified attorney or firm of attorneys who may be counsel for the Obligated Group Representative.

“Outstanding,” when used with reference to Indebtedness or Obligations, means, as of any date of determination, all Indebtedness or Obligations theretofore issued or incurred and not paid and discharged other than (1) Obligations theretofore cancelled by the Master Trustee or delivered to the Master Trustee for cancellation, (2) Obligations in lieu of which other Obligations have been authenticated and delivered or which have been paid pursuant to the provisions of a Related Supplement regarding mutilated, destroyed, lost or stolen Obligations unless proof satisfactory to the Master Trustee has been received that any such Obligation is held by a bona fide purchaser, (3) any Obligation held by any Member of the Obligated Group and (4) Indebtedness deemed paid and no longer outstanding pursuant to the terms thereof; provided, however, that if two or more obligations which constitute Indebtedness represent the same underlying obligation (as when an Obligation secures an issue of Related Bonds and another Obligation secures repayment obligations to a bank under a letter of credit or liquidity facility which secures such Related Bonds) for purposes of the various financial covenants contained herein, but only for such purposes, only one of such Obligations shall be deemed Outstanding and the Obligation so deemed to be Outstanding shall be that Obligation which produces the greatest amount of Annual Debt Service to be included in the calculation of such covenants.

C-5 “Permitted Encumbrances” means and includes:

(1) Any judgment lien or notice of pending action against any Member or Obligated Group Affiliate so long as (a) such judgment or pending action is being contested and execution thereon is stayed or while the period for responsive pleading has not lapsed or (b) the judgment has been paid or (c) the judgment is covered by insurance;

(2) (a) Rights reserved to or vested in any municipality or public Issuer by the terms of any right, power, franchise, grant, license, permit or provision of law affecting any Property to (i) terminate such right, power, franchise, grant, license or permit (provided that the exercise of such a right would not materially and adversely affect the value thereof) or (ii) purchase, condemn, appropriate or recapture, or designate a purchaser of, such Property; (b) any liens on any Property for taxes, assessments, levies, fees, water and sewer charges and other governmental and similar charges, and any liens of mechanics, materialmen, laborers, suppliers or vendors for work or services performed or materials furnished in connection with such Property, which are not due and payable or which are not delinquent or which, or the amount or validity of which, are being contested and execution thereon is stayed or, with respect to liens of mechanics, materialmen and laborers, have been due for less than sixty (60) days; (c) easements, rights-of- way, servitudes, restrictions and other minor defects, encumbrances and irregularities in the title to any Property which do not materially impair the use of such Property or materially and adversely affect the value thereof; (d) rights reserved to or vested in any municipality or public Issuer to control or regulate any Property or to use such Property in any manner, which rights do not materially impair the use of such Property in any manner, or materially and adversely affect the value thereof; and (e) to the extent that it affects title to any Property, the Master Indenture;

(3) Any Lien in favor of the Master Trustee securing all Outstanding Obligations on a parity basis (provided that any such Lien may be released only in the manner set forth in the Related Supplement providing for such Lien);

(4) Liens arising by reason of good faith deposits with any Member or Obligated Group Affiliate in connection with leases of real estate, bids or contracts (other than contracts for the payment of money), deposits by any Member or Obligated Group Affiliate to secure public or statutory obligations, or to secure, or in lieu of, surety, stay or appeal bonds, and deposits as security for the payment of taxes or assessments or other similar charges;

(5) 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 or Obligated Group Affiliate 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 similar social security plans, or to share in the privileges or benefits required for companies participating in such arrangements, and any Lien in the nature of a banker’s lien or right of setoff with respect to deposits which any Member or Obligated Group Affiliate is not required to maintain with the bank in question;

(6) Any Lien arising by reason of any escrow established to pay debt service with respect to Indebtedness;

(7) Any Lien in favor of a trustee on the proceeds of Indebtedness prior to the application of such proceeds;

(8) Liens on moneys deposited by patients or others with any Member or Obligated Group Affiliate as security for or as prepayment for the cost of patient care, and any rights of residents of life care, elderly housing or similar facilities to entrance fees, endowment or similar funds deposited by or on behalf of such residents;

C-6 (9) Liens on Property received by any Member or Obligated Group Affiliate through gifts, grants or bequests; provided, that no such Lien (or the amount of Indebtedness secured thereby) may be increased or modified so as to apply to any Property of any Member or Obligated Group Affiliate not previously subject to such Lien unless such Lien following such increase or modification otherwise qualifies as a Permitted Encumbrance under the Master Indenture;

(10) Statutory rights of the United States of America by reason of federal funds made available under 42 U.S.C. Section 291 et seq. and similar rights under other federal and state statutes;

(11) Liens on funds established pursuant to the terms of any Related Supplement, Related Bond Indenture or related document in favor of the Master Trustee, a Related Bond Trustee or the registered owner of the Indebtedness issued pursuant to such related Supplement, Related Bond Indenture or related document;

(12) Liens on supplies and inventory;

(13) Liens constituting reservations contained in patents granted by the United States of America or any state thereof;

(14) Liens constituting rights of third-party payors to recoup excess reimbursement to any Member or Obligated Group Affiliate;

(15) Liens granted to insurance companies on the proceeds of insurance policies (provided that such Lien shall secure an amount not exceeding the premium owed to any such insurance company by a Member or an Obligated Group Affiliate);

(16) Liens required by any federal, state or local government as a condition to its making a grant or loan (except loans made solely from the proceeds derived from the sale of Related Bonds) to, or its guaranteeing or insuring part or all of Indebtedness of, a Member or an Obligated Group Affiliate, but only if such Lien is limited to Property the acquisition of which has not been financed, directly or indirectly, with proceeds of Obligations or Related Bonds;

(17) Statutory rights of landlords with respect to the personal property of Members or Obligated Group Affiliates that are their tenants;

(18) Liens junior to Liens in favor of the Master Trustee in accordance with clause (3) of the definition hereof;

(19) Liens which are existing on the date of execution hereof or existing on the date any Person becomes a Member of the Obligated Group or an Obligated Group Affiliate, provided that no such Lien (or the amount of Indebtedness secured thereby) may be increased or modified to apply to any Property of any Member or Obligated Group Affiliate not subject to such Lien on such date, unless such Lien following such increase or modification otherwise qualifies as a Permitted Encumbrance under the Master Indenture;

(20) Liens on Property of a Person at the time such Person engages in a merger, consolidation, sale or conveyance pursuant to the section entitled “Summary of Master Indenture – Merger, Consolidation, Sale or Conveyance” within this Appendix C; provided that no such Lien (or the amount of Indebtedness secured thereby) may be increased or modified to apply to any Property of any Member or Obligated Group Affiliate not subject to such Lien on such date, unless such Lien following such increase or modification otherwise qualifies as a Permitted Encumbrance under the Master Indenture; and provided further, that no such Lien shall have been incurred in anticipation of such merger, consolidation, sale or conveyance;

C-7 (21) Liens granted by a Member or Obligated Group Affiliate to another Member or Obligated Group Affiliate, for so long as such Member or Obligated Group Affiliate remains a Member or Obligated Group Affiliate; and

(22) Any other Lien, provided that the aggregate Value of Property subject to Liens created or permitted to exist pursuant to this clause (22) shall not exceed twenty percent (20%) of the Property of the Obligated Group and the Obligated Group Affiliates (as shown on the Audited Financial Statements of the Obligated Group for the most recent Fiscal Year for which Audited Financial Statements are available immediately preceding the date that such Lien is created).

“Person” means an individual, corporation, firm, association, partnership, trust or other legal entity or group of entities, including a governmental entity or any agency or political subdivision thereof.

“Principal Amount” means, when used with respect to Obligations, the principal amount of such Obligation, or, in the case of a Financial Products Agreement, the notional amount, or, in the case of any other Obligation which does not represent or secure Indebtedness, the aggregate amount payable by the Obligated Group pursuant to such Obligation.

“Property” means the total assets of the Members of the Obligated Group and the Obligated Group Affiliates, including any and all rights, titles and interests in and to any and all property of any Member or any Obligated Group Affiliate, whether real or personal, tangible or intangible and wherever situated.

“Property, Plant and Equipment” means all Property of any Member or any Obligated Group Affiliate which is considered property, plant and equipment under generally accepted accounting principles.

“Qualified Provider” means any financial institution or insurance company which is a party to a Financial Products Agreement if the unsecured long-term debt obligations of such financial institution or insurance company (or of the parent or a subsidiary of such financial institution or insurance company if such parent or subsidiary guarantees the performance of such financial institution or insurance company under such Financial Products Agreement), or obligations secured or supported by a letter of credit, contract, guarantee, agreement, insurance policy or surety bond issued by such financial institution or insurance company (or such guarantor parent or subsidiary), are rated in one of the three highest rating categories of a national rating agency (without regard to any gradation or such rating category) at the time of the execution and delivery of the Financial Products Agreement.

“Rating Agency” means Fitch Ratings, Inc., Moody’s Investors Service, Inc., S&P Global Ratings, a division of Standard & Poor’s Financial Services, LLC, and any other national rating agency then rating Obligations or Related Bonds.

“Related Bond Indenture” means any indenture, bond resolution or other comparable instrument pursuant to which a series of Related Bonds is issued.

“Related Bond Issuer” means the Government Issuer of any issue of Related Bonds.

“Related Bond Trustee” means the trustee and its successors in the trusts created under any Related Bond Indenture, and if there is no such trustee, means the Related Bond Issuer.

“Related Bonds” means the revenue bonds or other obligations issued by any Government Issuer, the proceeds of which are loaned or otherwise made available to a Member or an Obligated Group Affiliate in consideration of the execution, authentication and delivery of an Obligation or Obligations to or for the order of such Government Issuer.

“Related Supplement” means an indenture supplemental to, and authorized and executed pursuant to the terms of, the Master Indenture.

“Required Payment” means any payment, whether at maturity, by acceleration, upon proceeding for redemption or otherwise, including the purchase price of Related Bonds tendered or deemed tendered for purchase

C-8 pursuant to the terms of a Related Bond Indenture, required to be made by any Member under the Master Indenture, any Related Supplement or any Obligation.

“Responsible Officer” means, with respect to the Master Trustee, any vice president, any assistant vice president, any assistant secretary, any assistant treasurer, any trust officer, any assistant trust officer or any other officer of the Master Trustee customarily performing functions similar to those performed by the persons above- designated or to whom any corporate trust matter is referred because of such person’s knowledge of and familiarity with the particular subject.

“Value,” when used with respect to Property, means the aggregate value of all such Property, with each component of such Property valued, at the option of the Obligated Group Representative, at either its Fair Market Value or its Book Value.

SUMMARY OF MASTER INDENTURE

Authorization of Obligations. Each Member authorizes to be issued from time to time Obligations or Series of Obligations, without limitation as to amount, except as provided in the Master Indenture or as may be limited by law, and subject to the terms, conditions and limitations established in the Master Indenture and in any Related Supplement.

Appointment of Obligated Group Representative. Each Member, by becoming a Member, irrevocably appoints the Obligated Group Representative as its agent and attorney-in-fact and grants full power to the Obligated Group Representative to execute Related Supplements.

Conditions to the Issuance of Obligations. The issuance, authentication and delivery of any Obligation or Series of Obligations shall be subject to the following specific conditions:

(a) The Obligated Group Representative and the Master Trustee shall have entered into a Related Supplement providing for the terms and conditions of such Obligations and the repayment thereof, and

(b) The Master Trustee receives an Officer’s Certificate, dated as of the date of authentication and delivery of the Obligation, to the effect that:

(1) each Member is in full compliance with all warranties, covenants and agreements set forth in the Master Indenture and in any Related Supplement; and

(2) no Event of Default has occurred or would occur upon issuance of such Obligations and is continuing under the Master Indenture or any Related Supplement; and

(3) all requirements and conditions, if any, to the issuance of such Obligations set forth in the Related Supplement have been satisfied; and

(c) The Obligated Group Representative shall have delivered or caused to be delivered to the Master Trustee such opinions, certificates, proceedings, instruments and other documents as the Master Trustee may reasonably request.

Payment of Required Payments. Each Member jointly and severally and unconditionally covenants to pay or cause to be paid promptly all Required Payments at the place, on the dates and in the manner provided in the Master Indenture, or in any Related Supplement or Obligation, and faithfully to observe and perform all of the conditions, covenants and requirements of the Master Indenture, any Related Supplement and any Obligation. Each Member acknowledges that the time of such payment and performance is of the essence of the Obligations issued under the Master Indenture.

Transfers from Obligated Group Affiliates. Each Controlling Member covenants and agrees that it shall cause each of its Obligated Group Affiliates to pay, loan or otherwise transfer to the Obligated Group Representative

C-9 such amounts as are necessary to enable the Members to comply with the provisions of the Master Indenture including without limitation the payment provisions thereunder. Each Controlling Member covenants and agrees that it will not permit any of its Obligated Group Affiliates to limit the ability of such Obligated Group Affiliate to make such payments, loans or transfers to such Controlling Member.

Designation of Obligated Group Affiliate.

(a) The Obligated Group Representative by resolution of its Governing Body may from time to time designate Persons as Obligated Group Affiliates in addition to the current Obligated Group Affiliates. In connection with such designation, the Obligated Group Representative shall designate for each Obligated Group Affiliate a Member to serve as the Controlling Member for such Obligated Group Affiliate. The Company shall be the initial Controlling Member for each of the Obligated Group Affiliates. The Obligated Group Representative shall at all times maintain an accurate and complete list of all Persons designated as Obligated Group Affiliates (and of the Controlling Members for such Obligated Group Affiliates) and file such list with the Master Trustee annually with the Audited Financial Statements required to be provided to the Master Trustee.

(b) Each Controlling Member shall cause each of its Obligated Group Affiliates to provide to the Obligated Group Representative a resolution of its Governing Body accepting such Person’s designation as an Obligated Group Affiliate and acknowledging the provisions of the Master Indenture which affect the Obligated Group Affiliates. So long as such Person is designated as an Obligated Group Affiliate, the Controlling Member of such Obligated Group Affiliate shall either (i) maintain, directly or indirectly, control of such Obligated Group Affiliate, including the power to direct management, policies, disposition of assets and other actions of the Obligated Group Affiliate to the extent necessary to cause such Obligated Group Affiliate to comply with the terms of the Master Indenture, whether through the ownership of voting securities, by contract, corporate membership, reserved powers or the power to appoint corporate members, trustees or directors, or otherwise or (ii) execute and have in effect such contracts or other agreements which the Obligated Group Representative and the Controlling Member, in the judgment of their respective Governing Bodies, deem sufficient for the Controlling Member to cause such Obligated Group Affiliate to comply with the terms of the Master Indenture.

(c) Each Controlling Member covenants and agrees that it will cause each of its Obligated Group Affiliates to comply with any and all directives of the Controlling Member given pursuant to the provisions of the Master Indenture.

(d) Any Person shall cease to be an Obligated Group Affiliate (and thus not subject to the terms of the Master Indenture) upon adoption of a resolution of the Governing Body of the Obligated Group Representative declaring such Person no longer an Obligated Group Affiliate and delivery to the Master Trustee of an Officer’s Certificate to the effect that, immediately following such declaration, no Member would be in default in the performance or observance of any term of the Master Indenture.

Maintenance of Property, etc. Each Member covenants to, and each Controlling Member covenants to cause each of its Obligated Group Affiliates to:

(a) maintain its Property, Plant and Equipment in accordance with all valid and applicable governmental laws, ordinances, approvals and regulations including, without limitation, such zoning, sanitary, pollution and safety ordinances and laws and such rules and regulations thereunder as may be binding upon it; provided, however, that no Member or Obligated Group Affiliate shall be required to comply with any law, ordinance, approval or regulation as long as it shall in good faith contest the validity thereof;

(b) maintain and operate its Property, Plant and Equipment in reasonably good working condition, and from time to time make or cause to be made all needful and proper replacements, repairs and improvements so that the operations of such Member or Obligated Group Affiliate will not be materially impaired;

(c) pay and discharge all applicable taxes, assessments, governmental charges of any kind whatsoever, water rates, meter charges and other utility charges which may be or have been assessed or which may have become Liens upon the Property, Plant and Equipment, and will make such payments or cause such payments to be made in due time to prevent any delinquency thereon or any forfeiture or sale of any part of the Property, Plant

C-10 and Equipment, and, upon request, will furnish to the Master Trustee receipts for all such payments, or other evidences satisfactory to the Master Trustee; provided, however, that no Member or Obligated Group Affiliate shall be required to pay any tax, assessment, rate or charge as long as it shall in good faith contest the validity thereof, and as long as it shall have set aside reserves with respect thereto that, in the opinion of the Governing Body of the Obligated Group Representative, are adequate;

(d) pay or otherwise satisfy and discharge all of its obligations and indebtedness and all demands and claims against it as and when the same become due and payable, other than any thereof (exclusive of the Obligations issued and Outstanding under the Master Indenture) the validity, amount or collectibility of which is being contested in good faith;

(e) at all times comply with all terms, covenants and provisions of any Liens at such time existing upon its Property or any part thereof or securing any of its indebtedness noncompliance with which would have a material adverse effect on the operations of the Obligated Group or its Property; and

(f) use its best efforts (as long as it is in its best interests and will not materially adversely affect the interests of the Holders) to maintain all permits, licenses and other governmental approvals necessary for the operation of its Property.

Nothing set forth above shall be construed to require a Member or Obligated Group Affiliate to maintain any permit, license or other governmental approval, or to continue to operate or maintain any Property, Plant or Equipment, if, in the reasonable good faith judgment of the Member or Obligated Group Affiliate, such permit, license, governmental approval or Property, Plant or Equipment is, or within the next succeeding twenty-four (24) calendar months is reasonably expected to become, inadequate, obsolete, unsuitable, undesirable or unnecessary for the business of the Obligated Group and failure to maintain or operate such permit, license, governmental approval, Property, Plant or Equipment will not materially adversely impair the operation of the Obligated Group and the Obligated Group Affiliates.

Encumbrances. Each Member covenants that it will not, and each Controlling Member covenants that it will not permit any of its Obligated Group Affiliates to, create, assume or suffer to exist any Lien upon the Property of the Obligated Group or the Obligated Group Affiliates, except for Permitted Encumbrances. Each Member further covenants that if such a Lien is created or assumed by any Member or Obligated Group Affiliate, it will make or cause to be made effective a provision whereby all Obligations will be secured prior to any Indebtedness secured by such Lien.

Debt Coverage.

(a) Within one hundred eighty (180) days after the end of each Fiscal Year the Obligated Group Representative shall compute the Annual Required Debt Service Coverage Ratio for the Members and the Obligated Group Affiliates for such Fiscal Year and furnish to the Master Trustee an Officer’ s Certificate setting forth the results of such computation. The Obligated Group Representative covenants that if at the end of such Fiscal Year the Annual Required Debt Service Coverage Ratio shall have been less than 1.10:1.0, it will promptly employ an Independent Consultant to make recommendations as to a revision of the rates, fees and charges of the Members and the Obligated Group Affiliates or the methods of operation of the Members and the Obligated Group Affiliates to increase the Annual Debt Service Coverage Ratio to at least 1.10:1.0 for subsequent Fiscal Years (or, if in the opinion of the Independent Consultant, the attainment of such level is impracticable, to the highest practicable level). Copies of the recommendations of the Independent Consultant shall be filed with the Master Trustee. Each Member shall, and each Controlling Member shall cause each of its Obligated Group Affiliates to, promptly upon its receipt of such recommendations, subject to applicable requirements or restrictions imposed by law, revise its rates, fees and charges or its methods of operation or collections and shall take such other action as shall be in conformity with such recommendations.

If the Members and the Obligated Group Affiliates comply in all material respects with the reasonable recommendations of the Independent Consultant with respect to their rates, fees, charges and methods of operation or collection, the Members and the Obligated Group Affiliates will be deemed to have complied with the covenants set forth in this Section entitled “Debt Coverage” for such Fiscal Year, notwithstanding that the Annual Required

C-11 Debt Service Coverage Ratio shall be less than 1.10:1.0; provided, however, that an Event of Default shall exist if the Annual Required Debt Service Coverage Ratio is less than 1.0:1.0 for any Fiscal Year. Nevertheless, neither the Members nor the Obligated Group Affiliates shall be excused from taking any action or performing any duty required under the Master Indenture and no other Event of Default shall be waived by the operation of the provisions of this subsection (a).

(b) Notwithstanding the foregoing, Members and Obligated Group Affiliates may permit the rendering of services or the use of their Property without charge or at reduced charges, at the discretion of the Governing Body of such Member or Obligated Group Affiliate, to the extent necessary for maintaining its tax- exempt status and its eligibility for grants, loans, subsidies or payments from governmental entities, or in compliance with any recommendation for free services that may be made by an Independent Consultant.

Merger, Consolidation, Sale or Conveyance. Each Member covenants that it will not, and each Controlling Member covenants that it will not permit its Obligated Group Affiliates to, merge or consolidate with any other Person that is not a Member or an Obligated Group Affiliate or sell or convey all or substantially all of its assets to any Person that is not a Member or an Obligated Group Affiliate unless:

(a) After giving effect to the merger, consolidation, sale or conveyance,

(1) the successor or surviving corporation (hereinafter, the “Surviving Corporation”) is a Member or an Obligated Group Affiliate, or

(2) the Surviving Corporation shall

(A) be a corporation organized and existing under the laws of the United States of America or any State thereof, and

(B) become a Member pursuant to the Master Indenture or an Obligated Group Affiliate pursuant to the Master Indenture and, pursuant to the Related Supplement required by the Master Indenture, expressly assume in writing the due and punctual payment of all Required Payments of the disappearing Member under the Master Indenture; and

(b) The Master Trustee receives an Officer’s Certificate to the effect that no Member, immediately after the date of the proposed merger, consolidation, sale or conveyance, would be in default in the performance or observance of any covenant or condition of the Master Indenture or any Obligation issued under the Master Indenture; and

(c) So long as any Related Bonds are Outstanding, the Master Trustee receives an Opinion of Bond Counsel, in form and substance satisfactory to the Master Trustee, to the effect that, under then existing law, the consummation of such merger, consolidation, sale or conveyance, in and of itself, would not result in the inclusion of interest on such Related Bonds in gross income for purposes of federal income taxation and that such merger, consolidation, sale or conveyance complies with the provisions of the Master Indenture; and

(d) The Master Trustee receives an opinion of Counsel, in form and substance satisfactory to the Master Trustee, to the effect that (i) all conditions in the Master Indenture relating to such merger, consolidation, sale or conveyance have been complied with and it is proper for the Master Trustee to join in the execution of any instrument required to be executed and delivered; (ii) the Surviving Corporation meets the conditions set forth in the Master Indenture and is liable on all Obligations then Outstanding; and (iii), under then existing law, such merger, consolidation, sale or conveyance will not subject any Obligations to the registration provisions of the Securities Act of 1933, as amended (or that such Obligations have been so registered if registration is required); and

(e) The Surviving Corporation shall be substituted for its predecessor in interest in all Obligations and agreements then in effect which affect or relate to any Obligation, and the Surviving Corporation shall execute and deliver to the Master Trustee appropriate documents in order to effect the substitution.

C-12 From and after the effective date of such substitution (as set forth in the above-mentioned documents), the Surviving Corporation shall be treated as though it were a Member or an Obligated Group Affiliate, as the case may be, as of the date of the execution of the Master Indenture and shall thereafter have the right to participate in transactions under the Maser Indenture relating to Obligations to the same extent as the other Members and Obligated Group Affiliates. All Obligations issued under the Master Indenture on behalf of a Surviving Corporation shall have the same legal rank and benefit under the Master Indenture as Obligations issued on behalf of any other Member.

Prior to (i) any merger or consolidation of any Member with an Obligated Group Affiliate, after which the surviving corporation is the Obligated Group Affiliate, and (ii) any sale or conveyance of all or substantially all of the assets of a Member to an Obligated Group Affiliate, the Master Trustee shall have received an Officer’s Certificate to the effect that immediately following such merger, consolidation, sale or conveyance, no Member would be in default in the performance or observance of any term of the Master Indenture. Except as provided in the immediately preceding sentence or as may be expressly provided in any Related Supplement, the ability of any Member or Obligated Group Affiliate to merge or consolidate with any Person that is a Member or Obligated Group Affiliate after such merger or consolidation or to sell or convey all or substantially all of its assets to any Person that is a Member or Obligated Group Affiliate after such sale or conveyance is not limited by the provisions of the Master Indenture.

Membership in Obligated Group. Additional Members may be added to the Obligated Group from time to time, provided that prior to such addition the Master Trustee receives:

(a) a certified copy of a resolution of the Governing Body of the proposed new Member which authorizes the execution and delivery of a Related Supplement and compliance with the terms of the Master Indenture; and

(b) a Related Supplement executed by the Obligated Group Representative, the new Member and the Master Trustee pursuant to which the proposed new Member

(1) agrees to become a Member, and

(2) agrees to be bound by the terms of the Master Indenture, the Related Supplements and the Obligations, and

(3) irrevocably appoints the Obligated Group Representative as its agent and attorney-in-fact and grants to the Obligated Group Representative full power to execute Related Supplements authorizing the issuance of Obligations or Series of Obligations; and

(c) an Opinion of Counsel to the proposed new Member to the effect that the proposed new Member has taken all necessary action to become a Member, and upon execution of the Related Supplement, such proposed new Member will be bound by the terms of the Master Indenture; and

(d) an Officer’s Certificate to the effect that immediately after the addition of the proposed new Member, no Member would be in default in the performance or observance of any term of the Master Indenture; and

(e) an Opinion of Bond Counsel to the effect that the addition of the proposed new Member:

(1) will not, in and of itself, result in the inclusion of interest on any Related Bonds in gross income for purposes of federal income taxation; and

(2) will not cause the Master Indenture or any Obligations to be subject to registration under federal or state securities laws or the Trust Indenture Act of 1939, as amended (or, that any such registration, if required, has occurred).

C-13 Withdrawal from Obligated Group. Any Member may withdraw from the Obligated Group and be released from further liability or obligation under the provisions of the Master Indenture, provided that prior to such withdrawal the Master Trustee receives an Officer’s Certificate to the effect that immediately following the withdrawal of such Member, no remaining Member would be in default in the performance or observance of any term of the Master Indenture.

Preparation and Filing of Financial Statements, Reports and Other Information.

(a) Each Member covenants that it will keep, and each Controlling Member covenants that it will cause its Obligated Group Affiliates to keep, adequate records and books of accounts, each separate from the other and from all other records and accounts, in which complete and correct entries shall be made. Said books shall be subject to the inspection of the Master Trustee during regular business hours after reasonable notice.

(b) The Obligated Group Representative covenants that it will furnish to the Master Trustee:

(1) As soon as practicable, but in no event more than one hundred eighty (180) days after the last day of each Fiscal Year, the Audited Financial Statements for such Fiscal Year.

(2) At the time of the delivery of the Audited Financial Statements, a certificate of the chief financial officer of the Obligated Group Representative, stating that the Obligated Group Representative has made a review of the activities of each Member and Obligated Group Affiliate during the preceding Fiscal Year for the purpose of determining whether or not the Members have complied with all of the terms, provisions and conditions of the Master Indenture and that each Member has kept, observed, performed and fulfilled each and every covenant, provision and condition of the Master Indenture on its part to be performed and is not in default in the performance or observance of any of the terms, covenants, provisions or conditions, or if any Member shall be in default such certificate shall specify all such defaults and the nature thereof.

Insurance. Each Member covenants that it will keep, and each Controlling Member covenants that it will cause its Obligated Group Affiliates to keep, its Property, Plant and Equipment and all of its operations adequately insured at all times and carry and maintain such insurance, or a combination of insurance and a reasonable program of self-insurance, in amounts which are customarily carried, subject to customary deductibles, and against such risks as are customarily insured against by other Persons in connection with the ownership and operation of facilities of similar character and size.

Events of Default. Each of the following events shall be an Event of Default under the Master Indenture:

(a) Failure on the part of the Obligated Group to make due and punctual payment of the principal of, redemption premium, if any, or interest on any Obligation.

(b) The Annual Required Debt Service Coverage Ratio is less than 1.0:1.0 for any Fiscal Year.

(c) Any Member shall fail to observe or perform any other covenant or agreement under the Master Indenture (including covenants or agreements contained in any Related Supplement or Obligation) for a period of thirty (30) days after the date on which written notice of such failure, requiring the failure to be remedied, shall have been given to the Obligated Group Representative by the Master Trustee or to the Obligated Group Representative and the Master Trustee by the Holders of twenty-five percent (25%) in aggregate Principal Amount of Outstanding Obligations (provided that if such failure can be remedied but not within such thirty (30) day period, such failure shall not become an Event of Default for so long as the Obligated Group Representative shall diligently proceed to remedy the failure in accordance with and subject to any directions or limitations of time established by the Master Trustee).

(d) Any Member shall default in the payment of Indebtedness (other than Indebtedness secured by an Obligation) in an aggregate outstanding principal amount equal to the greater of one million dollars ($1,000,000) or one percent (1%) of the aggregate principal amount of all Long-Term Indebtedness of the Obligated

C-14 Group then Outstanding, and any grace period for such payment shall have expired, or an event of default as defined in any mortgage, indenture or instrument under which any such Indebtedness is secured or evidenced, shall occur; provided, however, that such default shall not constitute an Event of Default if, within thirty (30) days or within the time allowed for service of a responsive pleading if any proceeding to enforce payment of the Indebtedness is commenced, (1) any Member in good faith commences proceedings to contest the existence or payment of such Indebtedness, and (2) sufficient moneys are deposited in escrow with a bank or trust company or a bond acceptable to the Master Trustee is posted for the payment of such Indebtedness.

(e) A court having jurisdiction shall enter a decree or order for relief in respect of any Member in an involuntary case under any applicable federal or state bankruptcy, insolvency or other similar law, or appointing a receiver, liquidator, assignee, custodian, trustee, sequestrator (or similar official) of any Member or for any substantial part of the Property of any Member, or ordering the winding up or liquidation of its affairs, and such decree or order shall remain unstayed and in effect for a period of sixty (60) consecutive days.

(f) Any Member shall commence a voluntary case under any applicable federal or state bankruptcy, insolvency or other similar law, or shall consent to the entry of an order for relief in an involuntary case under any such law, or shall consent to the appointment of or taking possession by a receiver, liquidator, assignee, trustee, custodian, sequestrator (or similar official) of any Member or for any substantial part of its Property, or shall make any general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due or shall take any corporate action in furtherance of the foregoing.

(g) An event of default shall exist under any Related Bond Indenture.

The Obligated Group Representative agrees that, as soon as practicable, and in any event within ten (10) days after such event, the Obligated Group Representative shall notify the Master Trustee of any event which is an Event of Default which has occurred and is continuing, which notice shall state the nature of such event and the action which the Members of the Obligated Group propose to take with respect thereto.

Acceleration; Annulment of Acceleration.

(a) Upon the occurrence and during the continuation of an Event of Default, the Master Trustee may, and upon the written request of the Holders of not less than twenty-five percent (25%) in aggregate Principal Amount of Outstanding Obligations, or of any Holder if there has occurred a failure by the Obligated Group to make due and punctual payment of the principal of, redemption premium, if any, or interest on any Obligation, and upon indemnification of the Master Trustee in accordance with the Master Indenture, shall, by notice to the Obligated Group Representative, declare all Outstanding Obligations immediately due and payable. Upon such declaration of acceleration, all Outstanding Obligations shall be immediately due and payable. If the terms of any Related Supplement give a Person the right to consent to acceleration of the Obligations issued pursuant to such Related Supplement, the Obligations issued pursuant to such Related Supplement may not be accelerated by the Master Trustee unless such consent is properly obtained pursuant to the terms of such Related Supplement. In the event of acceleration, an amount equal to the aggregate Principal Amount of all Outstanding Obligations, plus all interest accrued thereon and, to the extent permitted by applicable law, which accrues on such principal and interest to the date of payment, shall be due and payable on the Obligations.

(b) At any time after the Obligations have been declared to be due and payable, and before the entry of a final judgment or decree in any proceeding instituted with respect to the Event of Default that resulted in the declaration of acceleration, the Master Trustee may annul such declaration and its consequences if:

(1) the Obligated Group has paid (or caused to be paid or deposited with the Master Trustee moneys sufficient to pay) all payments then due on all Outstanding Obligations (other than payments then due only because of such declaration); and

(2) the Obligated Group has paid (or caused to be paid or deposited with the Master Trustee moneys sufficient to pay) all fees and expenses of the Master Trustee then due; and

C-15 (3) the Obligated Group has paid (or caused to be paid or deposited with the Master Trustee moneys sufficient to pay) all other amounts then payable by the Obligated Group, and

(4) every Event of Default (other than a default in the payment of the principal or other payments of such Obligations then due only because of such declaration) has been remedied.

No such annulment shall extend to or affect any subsequent Event of Default or impair any right with respect to any subsequent Event of Default.

Additional Remedies and Enforcement of Remedies.

(a) Upon the occurrence and continuance of any Event of Default, the Master Trustee may, and upon the written request of the Holders of not less than fifty percent (50%) in aggregate Principal Amount of the Outstanding Obligations or of any Holder if an Event of Default in the payment of an Obligation has occurred (and upon indemnification of the Master Trustee to its satisfaction for any such request), shall, proceed to protect and enforce its rights and the fights of the Holders under the Master Indenture by such proceedings as the Master Trustee may deem expedient, including but not limited to:

(1) Enforcement of the right of the Holders to collect amounts due or becoming due under the Obligations;

(2) Civil action upon all or any part of the Obligations;

(3) Civil action to require any Person holding moneys, documents or other property pledged to secure payment of amounts due or to become due on the Obligations to account as if it were the trustee of an express trust for the Holders of Obligations;

(4) Civil action to enjoin any acts which may be unlawful or in violation of the rights of the Holders of Obligations; and

(5) Enforcement of any other right or remedy of the Holders conferred by law or by the Master Indenture.

(b) Regardless of the occurrence of an Event of Default, if requested in writing by the Holders of not less than fifty percent (50%) in aggregate Principal Amount of the Outstanding Obligations (and upon indemnification of the Master Trustee to its satisfaction for such request), the Master Trustee shall institute and maintain such proceedings as it may be advised shall be necessary or expedient (1) to prevent any impairment of the security under the Master Indenture by any acts which may be unlawful or in violation hereof, or (2) to preserve or protect the interests of the Holders. However, the Master Trustee shall not comply with any such request or institute and maintain any such proceeding that is in conflict with any applicable law or the provisions of the Master Indenture or (in the sole judgment of the Master Trustee) is unduly prejudicial to the interests of the Holders not making such request.

Application of Moneys After Default. During the continuance of an Event of Default, all moneys received by the Master Trustee pursuant to any right given or action taken under the provisions of the Master Indenture (after payment of the costs of the proceedings resulting in the collection of such moneys and payment of all fees, expenses and other amounts owed to the Master Trustee) shall be applied as follows:

(a) Unless all Outstanding Obligations have become or have been declared due and payable (or if any such declaration is annulled in accordance with the terms of the Master Indenture):

First: To the payment of all installments of interest then due on the Obligations in the order of their due dates, and, if the amount available is not sufficient to pay in full all

C-16 installments due on the same date, then to the payment thereof ratably, according to the amounts of interest due on such date, without any discrimination or preference; and

Second: To the payment of all installments of principal then due on the Obligations (whether at maturity or by call for redemption) in the order of their due dates, and, if the amount available is not sufficient to pay in full all installments due on the same date, then to the payment thereof ratably, according to the amounts of principal due on such date, without any discrimination or preference.

(b) If all Outstanding Obligations have become or have been declared due and payable (and such declaration has not been annulled), to the payment of the principal and interest then due and unpaid on the Obligations, and, if the amount available is not sufficient to pay in full the whole amount then due and unpaid, then to the payment thereof ratably, without preference or priority of principal over interest, of interest over principal, of any installment over any other installment or of any Obligation over any other Obligation, according to the amounts due respectively for principal and interest, without any discrimination or preference.

Such moneys shall be applied at such times as the Master Trustee shall determine, having due regard for the amount of moneys available and the likelihood of additional moneys becoming available in the future. Upon any date fixed by the Master Trustee for the application of such moneys to the payment of principal, interest on the amounts of principal to be paid on such date shall cease to accrue. The Master Trustee shall give such notices as it may deem appropriate of the deposit with it of such moneys or of the fixing of such dates. The Master Trustee shall not be required to make payment to the Holder of any unpaid Obligation until such Obligation (and all unmatured interest coupons, if any) is presented to the Master Trustee for appropriate endorsement of any partial payment or for cancellation if fully paid.

Remedies Not Exclusive. No remedy granted by the terms of the Master Indenture is intended to be exclusive of any other remedy. Each remedy shall be cumulative and shall be in addition to every other remedy given under the Master Indenture or existing at law or in equity.

Remedies Vested in the Master Trustee. All rights of action (including the right to file proof of claims) under the Master Indenture or under any of the Obligations may be enforced by the Master Trustee without the possession of any of the Obligations or the production thereof in any proceeding relating thereto. Any proceeding instituted by the Master Trustee may be brought in its name as the Master Trustee without the necessity of joining any Holders as plaintiffs or defendants.

Master Trustee to Represent Holders. The Master Trustee is trustee and attorney-in-fact for the Holders for the purpose of exercising on their behalf the rights and remedies available to the Holders under the provisions of the Master Indenture, the Obligations, any Related Supplement and applicable provisions of law. The Holders, by taking and holding the Obligations, shall be conclusively deemed to have appointed the Master Trustee as such trustee and attorney-in-fact.

Holders Control of Proceedings. If an Event of Default has occurred and is continuing, notwithstanding anything in the Master Indenture to the contrary, the Holders of at least a majority in aggregate Principal Amount of Outstanding Obligations shall have the right (upon the indemnification of the Master Trustee to its satisfaction) to direct the method and/or place of conducting any proceeding to be taken in connection with the enforcement of the terms of the Master Indenture. Such direction must be in writing, signed by such Holders and delivered to the Master Trustee. However, the Master Trustee shall not follow any such direction that is in conflict with any applicable law or the provisions of the Master Indenture or (in the sole judgment of the Master Trustee) is unduly prejudicial to the interests of the Holders not joining in such direction. The right of the Master Trustee to take any other action authorized by the Master Indenture which it may deem proper and which is not inconsistent with any direction by Holders shall not be impaired.

Termination of Proceedings. In case any proceeding instituted by the Master Trustee with respect to any Event of Default is discontinued or abandoned for any reason or is determined adversely to the Master Trustee or the Holders, then the Members, the Master Trustee and the Holders shall be restored to their former positions and rights

C-17 under the Master Indenture. All rights, remedies and powers of the Master Trustee and the Holders shall continue as if no such proceeding had been taken.

Waiver of Event of Default.

(a) No delay or omission of the Master Trustee or of any Holder to exercise any right with respect to any Event of Default shall impair such right or shall be construed to be a waiver of or acquiescence to such Event of Default. Every right and remedy given to the Master Trustee and the Holders may be exercised from time to time and as often as may be deemed expedient by them.

(b) The Master Trustee may waive any Event of Default which in its opinion has been remedied before the entry of a final judgment or decree in any proceeding instituted by it under the provisions hereof, or before the completion of the enforcement of any other remedy under the Master Indenture.

(c) Upon the written request of the Holders of at least a majority in aggregate Principal Amount of Outstanding Obligations, the Master Trustee shall waive any Event of Default or any event which would become an Event of Default with the passage of time or the giving of notice or both and its consequences; provided, however, that, except under the circumstances in which the Master Trustee may annul acceleration, the failure to pay the principal of, premium, if any, or interest on any Obligation when due may not be waived without the written consent of the Holders of all Outstanding Obligations.

(d) In case of any waiver by the Master Trustee of an Event of Default, the Members, the Master Trustee and the Holders shall be restored to their former positions and rights. No waiver shall extend to, or impair any right with respect to, any other Event of Default.

Appointment of Receiver. Upon the occurrence and continuance of any Event of Default, the Master Trustee shall be entitled (a) without declaring the Obligations to be due and payable, (b) after declaring the Obligations to be due and payable, or (c) upon the commencement of any proceeding to enforce any right of the Master Trustee or the Holders, to the appointment of a receiver or receivers of any or all of the Property of the Members (without the necessity of notice to any Member of the Obligated Group or any other Person), with such powers as the court making such appointment shall confer. Each Member consents, and will if requested by the Master Trustee, consent at the time of application by the Master Trustee for appointment of a receiver, to the appointment of such receiver and agrees that such receiver may be given the right, to the extent the right may lawfully be given, to take possession of, operate and deal with such Property and the revenues, profits and proceeds therefrom, with the same effect as the Member could, and to borrow money and issue evidences of indebtedness as such receiver.

Notice of Default. Within ten (10) days after the Master Trustee has actual knowledge or has received written notice of the occurrence of an Event of Default, the Master Trustee shall mail notice of such Event of Default to all Holders, unless such Event of Default has been cured before the giving of such notice (the term “Event of Default” for the purposes of this Section entitled “Notice of Default” being limited to the events specified in subparagraphs (a)-(g) above under “Events of Default”), not including any periods of grace provided for in subparagraphs (c), (d) and (e), and regardless of the giving of written notice specified in subparagraph (c) of above under “Events of Default”). Except in the case of default in the payment of the principal of or premium, if any, or interest on any of the Obligations and the Events of Default specified in subsections (b), (e) and (f) above under “Events of Default”, the Master Trustee shall be protected in withholding such notice if and so long as the Master Trustee in good faith determines that the withholding of such notice is in the best interest of the Holders.

Supplements Not Requiring Consent of Holders. The Obligated Group Representative (acting for itself and as agent for each Member) and the Master Trustee may, without the consent of or notice to any of the Holders, enter into one or more Related Supplements for any of the following purposes:

(a) To correct any ambiguity or formal defect or omission in the Master Indenture which does not materially and adversely affect the interests of the Holders;

C-18 (b) To correct or supplement any provision which may be inconsistent with any other provision, or to make any other provision with respect to matters or questions arising under the Master Indenture and which does not materially and adversely affect the interests of the Holders;

(c) To grant or confer ratably upon all of the Holders any additional rights, remedies, powers or Issuer, or to add to the covenants of and restrictions on the Members;

(d) To qualify the Master Indenture under the Trust Indenture Act of 1939, as amended, or corresponding provisions of federal law from time to time in effect;

(e) To create and provide for the issuance of an Obligation or Series of Obligations as permitted under the Master Indenture;

(f) To obligate a successor to any Member; or

(g) To add a new Member.

Supplements Requiring Consent of Holders.

(a) Other than Related Supplements referred to above, Holders of not less than a majority in aggregate Principal Amount of the Outstanding Obligations shall have the right to consent to and approve the execution by the Obligated Group Representative (acting for itself and as agent for each Member) and the Master Trustee of such Related Supplements as shall be deemed necessary or desirable for the purpose of modifying, altering, amending, adding to or rescinding any of the terms contained in the Master Indenture; provided, however, that nothing shall permit or be construed as permitting a Related Supplement which would:

(1) Extend the stated maturity of or time for paying interest on any Obligation or reduce the Principal Amount of or the redemption premium or rate of interest or method of calculating interest payable on any Obligation without the consent of the Holder of such Obligation;

(2) Modify, alter, amend, add to or rescind any of the terms or provisions contained in the Event of Default provisions of the Master Indenture so as to affect the right of the Holders of any Obligations in default as to payment to compel the Master Trustee to declare the principal of all Obligations to be due and payable, without the consent of the Holders of all Outstanding Obligations; or

(3) Reduce the aggregate Principal Amount of Outstanding Obligations the consent of the Holders of which is required to authorize such Related Supplement without the consent of the Holders of all Obligations then Outstanding.

(b) The Master Trustee may execute a Related Supplement (in substantially the form delivered to it as described below) without liability or responsibility to any Holder (whether or not such Holder has consented to the execution of such Related Supplement) if the Master Trustee receives:

(1) a Request of the Obligated Group Representative to enter into such Related Supplement; and

(2) a certified copy of the resolution of the Governing Body of the Obligated Group Representative approving the execution of such Related Supplement; and

(3) the proposed Related Supplement; and

(4) an instrument or instruments executed by, or such other evidence satisfactory to the Master Trustee of the consent of, the Holders of not less than the aggregate Principal Amount or number of Obligations specified in subparagraph (a) above for the Related

C-19 Supplement in question which instrument or instruments shall refer to the proposed Related Supplement and shall specifically consent to and approve the execution thereof in substantially the form of the copy thereof as on file with the Master Trustee.

(c) Any such consent shall be binding upon the Holder of the Obligation giving such consent and upon any subsequent Holder of such Obligation and of any Obligation issued in exchange therefor (whether or not such subsequent Holder thereof has notice thereof), unless such consent is revoked in writing by the Holder of such Obligation giving such consent or by a subsequent Holder thereof by filing with the Master Trustee, prior to the execution by the Master Trustee of such Related Supplement, such revocation and, if such Obligation or Obligations are transferable by delivery, proof that such Obligations are held by the signer of such revocation. At any time after the Holders of the required Principal Amount or number of Obligations shall have filed their consents to the Related Supplement, the Master Trustee shall file a written statement to that effect with the Obligated Group Representative. Such written statement shall be conclusive evidence that such consents have been so filed.

(d) If the Holders of the required Principal Amount or number of the Outstanding Obligations have consented to the execution of such Related Supplement, no Holder shall have any right to object to the execution thereof, to object to any of the terms and provisions contained therein or the operation thereof, to question the propriety of the execution thereof or to enjoin or restrain the Master Trustee or the Obligated Group Representative from executing such Related Supplement or from taking any action pursuant to the provisions thereof.

Satisfaction and Discharge of Master Indenture. The Master Indenture shall cease to be of further effect if:

(a) all Obligations previously authenticated (other than any Obligations which have been mutilated, destroyed, lost or stolen and which have been replaced or paid as provided in any Related Supplement) and not cancelled are delivered to the Master Trustee for cancellation; or

(b) all Obligations not previously cancelled or delivered to the Master Trustee for cancellation are paid; or

(c) a deposit is made in trust with the Master Trustee (or with a bank or trust company acceptable to the Master Trustee pursuant to an agreement between a Member and such bank or trust company in form acceptable to the Master Trustee) in cash or Government Obligations or both, sufficient to pay at maturity or upon redemption all Obligations not previously cancelled or delivered to the Master Trustee for cancellation, including principal and interest due or to become due to such date of maturity or redemption date, as the case may be; and all other sums payable under the Master Indenture by the Members are also paid. The Master Trustee, on demand of the Members or any thereof and at the cost and expense of the Members, shall execute proper instruments acknowledging satisfaction of and discharging the Master Indenture. The Members shall cause a report to be prepared by a firm nationally recognized for providing verification services regarding the sufficiency of funds for such discharge and satisfaction provided pursuant to clause (c) above, upon which report the Master Trustee may rely.

The Members shall pay and indemnify the Master Trustee against any tax, fee or other charge imposed on or assessed against the Government Obligations deposited to discharge the Master Indenture or the principal and interest received in respect thereof other than any such tax, fee or other charge which by law is for the account of the Holders of Outstanding Obligations.

Payment of Obligations After Discharge of Lien. Notwithstanding the discharge of the lien of the Master Indenture, the Master Trustee shall retain such rights, powers and duties as may be necessary and convenient for the payment of amounts due or to become due on the Obligations and for the registration, transfer, exchange and replacement of Obligations. Any moneys held by the Master Trustee for the payment of the principal of, premium, if any or interest on any Obligation remaining unclaimed for one year after the principal of all Obligations has become due and payable, whether at maturity, upon proceedings for redemption or by declaration as provided herein, shall then be paid to the Obligated Group Representative. The Holders of any Obligations or coupons not previously presented for payment shall thereafter be entitled to look only to the Members for payment thereof as unsecured creditors and all liability of the Master Trustee with respect to such moneys shall thereupon cease.

C-20

SUMMARY OF FUNDING AGREEMENTS

Funding Agreements have been executed by Sentara Hospitals, Sentara Enterprises, Martha Jefferson Hospital, Sentara RMH Medical Center, and Potomac Hospital Corporation of Prince William (collectively, the Obligated Group Affiliates). Each Funding Agreement provides as follows:

Funding of Company’s Obligations. The Company’s payment obligations under the Master Indenture are dependent in part upon its receipt of funding from the Obligated Group Affiliates, if required, in an amount sufficient to promptly pay its Required Payments at the place, on the dates and in the manner provided in the Master Indenture. Accordingly, the Obligated Group Affiliates will provide any funds that may be required to promptly pay to the Company, but, subject to the limitations stated below, solely to the Company, all Required Payments upon receipt of any demand therefor from the Company, the Master Trustee, the Related Bond Issuers or the Related Bond Trustees (each as described in the Funding Agreement), as the case may be. The Obligated Group Affiliates agree to pay to the Company, but, subject to the limitations stated below, solely to the Company, by 2 p.m. Eastern time on the same business day as demanded the Required Payments; provided, however, that if any such demand is made after 11 a.m. Eastern time on any business day, any such Required Payment to the Company shall not be required until 10 a.m. Eastern time on the following business day. All payments by the Obligated Group Affiliates shall be paid in lawful money of the United States of America. The obligations of the Obligated Group Affiliates under the Funding Agreement shall be continuing, absolute and unconditional and shall not be impaired, modified, released or limited by any occurrence, defense or condition whatsoever.

The obligations of Obligated Group Affiliates are agreements to make intercompany transfers only; provided, however, upon the occurrence and continuation of an Event of Default, upon demand of the Master Trustee, the Obligated Group Affiliates will make the payments required above directly to the Master Trustee or to the Related Bond Issuers or the Related Bond Trustees designated by the Master Trustee. The Company assigns and pledges to the Master Trustee all of its right to receive payments to be made by the Obligated Group Affiliates under the Funding Agreement and the proceeds of any such payments.

Notwithstanding the above provisions, the Obligated Group Affiliates will not be required to make any payment under the Funding Agreement if to do so would violate their respective charitable purposes or be inconsistent with state law or would cause the Obligated Group Affiliates to breach the terms of any restricted gift or any contractual obligations or other commitments.

Third-Party Rights. Payment of the Required Payments to the Company under the Funding Agreements may be demanded as a third-party beneficiary under the Funding Agreements by (a) each Related Bond Issuer with respect to any Required Payments directly payable to it, including for example, its annual administrative fee, (b) the Related Bond Trustees under the Related Bond Indentures with respect to any Required Payments thereunder and (c) the Master Trustee with respect to any Required Payments under the Master Indenture.

C-21 PART II: SUMMARY OF BOND INDENTURE, LOAN AGREEMENT AND NOTE

The following statements are summaries of certain provisions of the Bond Indenture, the Loan Agreement and the Promissory Note that are not otherwise summarized in the front portion of the Official Statement. These summaries do not purport to be complete and are subject to all of the terms and conditions of the Bond Indenture, the Loan Agreement and the Promissory Note, to which reference is hereby made, the form of which is available for examination at the offices of the Bond Trustee.

BOND INDENTURE DEFINITIONS

“Act” means the Industrial Development and Revenue Bond Act, Chapter 49, Title 15.2, Code of Virginia of 1950, as from time to time amended, until such time as it may be repealed, and from and after any such repeal, any successor act thereto.

“Authority” means the Economic Development Authority of the City of Norfolk, a body politic and corporate and political subdivision of the Commonwealth of Virginia, and its successors and assigns.

“Authorized Representative” means, (a) with respect to the Borrower, its President, Chief Financial Officer, Treasurer or any Executive Vice President, Senior Vice President or Vice President of the Borrower, or any other person designated as an Authorized Representative of the Borrower in a Certificate of the Borrower signed by any two of its President, Senior Vice President, Vice President, Secretary or Assistant Secretary and filed with the Bond Trustee; and (b) with respect to the Authority, the Chairperson or Vice Chairperson of the Authority or any other person authorized or designated by an applicable written resolution, bylaw or policy of the Authority.

“Bond Counsel” means any nationally recognized municipal bond counsel designated by the Borrower and not objected to by the Authority.

“Bond Indenture” means the Bond Indenture, as originally executed or as it may from time to time be supplemented, modified or amended by any Supplemental Bond Indenture.

“Bond Purchase Fund” means the fund by that name established pursuant to the Bond Indenture.

“Bond Sinking Fund” means the fund by that name established pursuant to the Bond Indenture.

“Bond Trustee” means U.S. Bank National Association, a national banking association organized and existing under and by virtue of the laws of the United States, or its successor, as Bond Trustee under the Bond Indenture.

“Bonds” means the Authority’s Hospital Facilities Revenue Refunding Bonds (Sentara Healthcare), Series 2018, authorized by and issued pursuant to the Bond Indenture in the original aggregate principal amount of $138,530,000.2

“Borrower” means Sentara Healthcare, a not-for-profit Virginia nonstock corporation, and its successors and assigns and any surviving, resulting or transferee corporation.

“Borrower Purchase Account” means the account by that name in the Bond Purchase Fund established pursuant to the Bond Indenture.

“Business Day” means any day on which banks located in New York, New York, or the city in which the Principal Office of the Bond Trustee is located, are not required or authorized to be closed and on which The New York Stock Exchange is open.

2 Preliminary, subject to change.

C-22 “Certificate,” “Statement,” “Request” and “Requisition” of the Authority or the Borrower means, respectively, a written certificate, statement, request or requisition signed in the name of the Authority or the Borrower by an Authorized Representative. Any such instrument and supporting opinions or representations, if any, may, but need not, be combined in a single instrument with any other instrument, opinion or representation, and the two or more so combined shall be read and construed as a single instrument.

“Code” means the Internal Revenue Code of 1986, as amended or replaced from time to time as the same may be applicable to the Bonds. Each reference to a section of the Code herein shall be deemed to include the United States Treasury Regulations, including temporary and proposed regulations, relating to such section which are applicable to a Series of Bonds or the use of the proceeds thereof.

“Conversion” means a conversion of all or a portion of the Bonds from one Interest Rate Mode to one or more other Interest Rate Modes in accordance with the terms and provisions of the Bond Indenture.

“Conversion Date” means the effective date of a Conversion of the Bonds or a portion of the Bonds to a new Interest Rate Period.

“Daily Mode” means any Interest Rate Mode during which the Bonds bear interest at the Daily Rate.

“Daily Rate” means the interest rate per annum on Bonds in a Daily Mode determined on a daily basis pursuant to the Bond Indenture.

“Date of Issuance” means May __, 2018.

“Direct Purchase Mode” means any Interest Rate Mode during which the Bonds bear interest at a Direct Purchase Rate.

“Direct Purchase Rate” means the interest rate per annum on Bonds in a Direct Purchase Mode, determined on a periodic basis pursuant to the Bond Indenture and by agreement with a Direct Purchaser.

“Direct Purchaser” means the Holder of the Bonds during a Direct Purchase Period.

“DTC” means The Depository Trust Company, New York, New York.

“Electronic Notice” means a notice transmitted through email, portable data format (.pdf), facsimile or other similar electronic means of communication providing evidence of transmission, including a telephone communication confirmed by any other method set forth in this definition, to the notice address supplied by or on behalf of the addressee.

“Event of Default” means any of the events specified as such in the Bond Indenture.

“Favorable Opinion of Bond Counsel” means an opinion of Bond Counsel to the effect that the action proposed to be taken is authorized or permitted or not prohibited by or in contravention of the Bond Indenture and will not, in and of itself, adversely affect the exclusion of interest on the Bonds from the gross income of the Holders thereof for federal income tax purposes.

“Final Bond Resolution” means the “Resolution of the Economic Development Authority of the City of Norfolk Approving a Bond Reoffering Plan for the Benefit of Sentara Healthcare and its Affiliates,” adopted by the members of the Authority on April 4, 2018, authorizing the issuance, delivery and sale of the Bonds.

“Final Maturity Date” means November 1, 2048.

“Fixed Bonds” means Bonds that bear interest at Fixed Rates.

C-23 “Fixed Mode” means the Interest Rate Mode during which the Bonds bear interest at a Fixed Rate or Fixed Rates.

“Fixed Period” means the period during which Bonds constitute Fixed Bonds during which Fixed Rates are in effect.

“Fixed Rate” means the fixed interest rate or interest rates per annum on Fixed Bonds to their maturity date(s), determined (i) during the Initial Fixed Period, on or before the Date of Issuance as set forth in the Purchase Contract therefor, and (b) during any other Fixed Period, prior to the Conversion of the Bonds to the Fixed Mode as provided in the Bond Indenture.

“Flexible Mode” means any Interest Rate Mode during which the Bonds bear interest at the Flexible Rate.

“Flexible Rate” means the per annum interest rate on a Bond in a Flexible Mode determined on a periodic basis pursuant to the Bond Indenture.

“FRN Mode” means any Interest Rate Mode during which the Bonds bear interest at the FRN Rate.

“FRN Rate” means the interest rate per annum on Bonds in a FRN Mode determined pursuant to the Bond Indenture.

“Government Obligations” means (a) noncallable United States Government Obligations or (b) evidences of a direct ownership in future interest or principal payments on noncallable United States Government Obligations, which United States Government Obligations are held in a custodial account by a custodian on behalf of the Bond Trustee pursuant to the terms of a custody agreement; provided, however, that if such Government Obligations consist of obligations for which the principal and interest payments have been “stripped” into separate securities, such custodian shall be a Federal Reserve Bank.

“Holder” or “Bondholder,” whenever used herein with respect to a Bond, means the Person in whose name such Bond is registered; provided, however, that any time the Bonds are held in a book entry system, “Holder” or “Bondholder” shall mean Beneficial Owner of the Bonds.

“Initial Fixed Period” means the Fixed Period commencing on and include the Date of Issuance and shall end on the Final Maturity Date, subject to earlier Conversion subject to earlier Conversion on or after the Initial Redemption Date.

“Initial Redemption Date” means, during the Initial Fixed Period, November 1, 20__.

“Interest Fund” means the fund by that name established pursuant to the Bond Indenture.

“Interest Payment Date” means each May 1 and November 1, so long as the Bonds are in a Fixed Rate Period.

“Interest Rate Mode” means a Daily Mode, a Two-Day Mode, a Weekly Mode, a Short-Term Mode, a Long-Term Mode, an FRN Mode, a VRO Mode, a Window Mode, a Flexible Mode, a Direct Purchase Mode or a Fixed Mode.

“Interest Rate Period” means a period during which Bonds bear interest at a Daily Rate, a Two-Day Rate, a Weekly Rate, a Short-Term Rate, a Long-Term Rate, an FRN Rate, a VRO Rate, a Window Rate, a Direct Purchase Rate or a Fixed Rate.

“Issuer” is defined in the Bond Indenture and the Loan Agreement as the Authority (defined above).

C-24 “Loan Agreement” means the Loan Agreement dated as of May 1, 2018, between the Authority and the Borrower, as it may from time to time be amended, initially providing for the loan to the Borrower of the proceeds of the Bonds.

“Long-Term Mode” means any Interest Rate Mode during which the Bonds bear interest at the Long-Term Rate.

“Long-Term Rate” means the non-variable interest rate per annum on Bonds in a Long-Term Mode determined pursuant to the Bond Indenture.

“Mandatory Purchase Date” means any Purchase Date on which Bonds are subject to mandatory purchase pursuant to the Bond Indenture.

“Master Indenture” means the Master Trust Indenture dated as of December 15, 1998, between the Borrower and the Master Trustee, together with all supplements thereto.

“Master Trustee” means U.S. Bank National Association, as successor master trustee under the Master Indenture, and its successors and assigns.

“Optional Redemption Fund” means the account by that name established pursuant to the Bond Indenture.

“Outstanding” when used as of any particular time with reference to Bonds, means (subject to the provisions of the Bond Indenture) all Bonds theretofore, or thereupon being, authenticated and delivered by the Bond Trustee under the Bond Indenture except (1) Bonds theretofore canceled by the Bond Trustee or surrendered to the Bond Trustee for cancellation; (2) Bonds with respect to which all liability of the Authority shall have been discharged in accordance with the Bond Indenture; and (3) Bonds for the transfer or exchange of or in lieu of or in substitution for which other Bonds shall have been authenticated and delivered by the Bond Trustee pursuant to the Bond Indenture.

“Principal Office” of the Bond Trustee means the designated corporate trust office of the Bond Trustee, which as of the date hereof is located at 1021 East Cary Street, Suite 1850, Richmond, Virginia 23219.

“Prior Bonds” means the Authority’s $150,000,000 Hospital Facilities Revenue Bonds (Sentara Healthcare), Series 2017.

“Project Fund” means the fund by that name established pursuant to the Bond Indenture.

“Promissory Note” means the promissory note of the Borrower dated the date of issuance of the Series 2018 Bonds, delivered by the Borrower, or any other obligated Person, pursuant to the Master Indenture to evidence the Borrower’s payment obligations upon the Series 2018 Bonds and the Loan Agreement.

“Project” means all property of the Borrower originally financed with the proceeds of the Prior Bonds.

“Purchase Contract” means the contract for purchase of the Bonds among the Authority, the Borrower and the purchasers named therein.

“Purchase Date” means each date on which Bonds are subject to purchase pursuant to the Bond Indenture, and shall include each Mandatory Purchase Date.

“Purchase Price” means, with respect to a Bond subject to purchase on a Purchase Date, an amount equal to the principal amount thereof plus accrued interest to, but not including, the Purchase Date.

C-25 “Qualified Investments” means investments in any of the following:

(a) Government Obligations;

(b) Direct obligations of any agency or instrumentality of the United States of America and obligations on which the timely payment of principal and interest is fully guaranteed by any such agency or instrumentality;

(c) Certificates of deposit, time deposits or other direct, unsecured debt obligations of any bank (including, without limitation, the Bond Trustee and its affiliates), trust company or savings and loan association if all of the direct, unsecured debt obligations of such institution at the time of purchase of such certificates of deposit, time deposits or obligations, which are rated by a Rating Agency are rated by such Rating Agency in one of the three highest rating categories assigned by such Rating Agency (without regard to any refinement or gradation of rating category by numerical modifier or otherwise), or which certificates of deposit, time deposits or obligations are fully secured by a security interest in obligations described in clauses (a) or (b) of this definition; provided, however, that if such certificates of deposit, time deposits or obligations are so secured (1) the Bond Trustee shall have a perfected first security interest in the obligations securing such certificates of deposit, time deposits or other obligations, (2) the Bond Trustee shall hold or shall have the option to appoint an intermediary bank, trust company or savings and loan association as its agent to hold the obligations securing such certificates of deposit, time deposits or other obligations, and (3) the Bond Trustee or its appointed agent shall hold such obligations free and clear of the liens or claims of third parties;

(d) Certificates of deposit or time deposits of any bank (including the Bond Trustee and its affiliates), trust company or savings and loan association which certificates of deposit or time deposits are fully insured by a federally sponsored deposit insurance program;

(e) Securities of the type described in clauses (a) or (b) above purchased under agreements to resell such securities to any registered broker dealer subject to the Securities Investors Protection Corporation jurisdiction or any commercial bank, if such broker dealer’s or bank’s uninsured, unsecured and unguaranteed obligations which are rated by a Rating Agency are rated by such Rating Agency in one of the three highest rating categories assigned by such Rating Agency (without regard to any refinement or gradation of rating category by numerical modifier or otherwise), provided: (i) a master repurchase agreement or specific written repurchase agreement governs the transaction; (ii) the repurchase agreement has a term of 30 days or less, or the Bond Trustee or a third party custodian as described below is required thereunder to value the collateral securities no less frequently than monthly and to liquidate or cause the custodian to liquidate the collateral securities if any deficiency in the required collateral percentage is not restored within two Business Days of such valuation; (iii) the fair market value of the securities in relation to the amount of the repurchase obligation, including principal and interest, is equal to at least 100%; and either (iv)(A) the securities are held by the Bond Trustee free and clear of any lien or claims of a third party, or (iv)(B)(w) the securities are held by an independent third party acting solely as agent for the Bond Trustee free and clear of any lien or claims of a third party (other than as agent hereinafter described), (x) such agent is a Federal Reserve Bank, or a bank which is a member of the Federal Deposit Insurance Corporation and which bank has combined capital, surplus and undivided profits of not less than $50,000,000, (y) the Bond Trustee shall have received written confirmation from such agent that it holds such securities, free and clear of any lien or claim, as agent for the Bond Trustee and (z) a perfected first security interest under the Uniform Commercial Code, or book entry procedures prescribed at 31 CFR 306.0 et seq., 31 CFR 357.0 et seq. or any other regulations analogous to the preceding regulations governing any other automated book entry system operated by the United States federal reserve banks in which securities issued by government sponsored enterprises are issued, recorded, transferred and maintained in book entry form (including without limitation the regulations set forth in 24 CFR Part 81, Subpart H) in such securities is created for the benefit of the Bond Trustee;

(f) Investment agreements with banks which meet the rating criteria set forth in (c) above or investment agreements with non-bank financial institutions (i) all of the unsecured, direct long term debt of such non-bank financial institution which is rated by a Rating Agency is rated by such Rating Agency in one of the three highest rating categories (without regard to any refinement or gradation of rating category by numerical modifier or otherwise) assigned by such Rating Agency for obligations of that nature, (ii) if such non-bank financial institutions have no such outstanding long term debt which is rated, all of the short term debt of which is rated by a Rating

C-26 Agency is rated by such Rating Agency in the highest rating category (without regard to any refinement or gradation of rating category by numerical modifier or otherwise) assigned to short term indebtedness by such Rating Agency, or (iii) the obligations of such non-bank financial institutions are guaranteed by an entity whose claims paying ability is rated by a Rating Agency in one of the three highest rating categories (without regard to any refinement or gradation of rating category by numerical modifier or otherwise), all of which agreements referred to this subsection (f) provide that if such banks’ or non-bank financial institutions’ debt no longer satisfies such rating criteria such bank or institution will secure such agreements as soon as reasonably practicable to the extent and in the manner provided in subsection (c) above;

(g) Shares of a fund registered under the Investment Company Act of 1940, as amended, whose shares are registered under the Securities Act of 1933, as amended, (including those funds for which the Bond Trustee or an affiliate performs services for a fee, whether as a custodian, transfer agent, investment advisor or otherwise) having assets of at least $100,000,000, whose investment assets are obligations which constitute Qualified Investments;

(h) Commercial paper which, at the time of purchase, is rated by a Rating Agency in one of the two highest rating categories (incorporating refinements or gradation of rating category by numerical modifier or otherwise) assigned by such Rating Agency for obligations of that nature;

(i) Obligations of, or obligations fully guaranteed by, any state of the United States of America or any political subdivision thereof which obligations, at the time of purchase, are rated by a Rating Agency in one of the three highest rating categories (without regard to any refinement or gradation of rating category by numerical modifier or otherwise) assigned by such Rating Agency to obligations of that nature;

(j) Senior debt obligations of any corporation or trust organized under the laws of any state of the United States of America which securities, at the time of purchase, are rated by a Rating Agency in one of the three highest rating categories (without regard to any refinements or gradation of rating category by numerical modifier or otherwise) assigned by such Rating Agency for obligations of that nature;

(k) Obligations which are rated in the highest rating category by a Rating Agency and are issued or incurred by any state, commonwealth or territory of the United States of America or any political subdivision, public instrumentality or public authority of any state, commonwealth or territory of the United States of America, which obligations are fully secured by and payable solely from an escrow fund consisting of cash or direct obligations of, or obligations the timely payment of principal and interest on which are fully guaranteed by, the United States of America, which fund is held by a corporate fiduciary pursuant to an escrow agreement; and

(l) Bankers acceptances of any bank, including the Bond Trustee and its affiliates, if all of the direct, unsecured debt obligations of such institution at the time of purchase of such acceptances which are rated by a Rating Agency are rated by such Rating Agency in one of the three highest rating categories (without regard to any refinement or gradation of rating category by numerical modifier or otherwise) by such Rating Agency.

Ratings of Qualified Investments referred to herein shall be determined at the time of purchase of such Qualified Investments and without regard to ratings subcategories. The Bond Trustee shall have no responsibility to monitor the ratings of Qualified Investments after the initial purchase of such Qualified Investments, including at the time of reinvestment of earnings thereof.

“Rating Agency” means S&P Global Ratings, a division of Standard & Poor’s Financial Services, LLC, Moody’s Investors Service, Inc., and/or Fitch Ratings, Inc., as applicable and as the context requires.

“Rebate Fund” means the fund by that name established pursuant to the Bond Indenture.

“Redemption Price” means, with respect to any Bond (or portion thereof), the principal amount of such Bond (or portion) plus the applicable premium, if any, payable upon redemption thereof pursuant to the provisions of such Bond and the Bond Indenture, or payable as the purchase price pursuant to the Bond Indenture.

“Refunding Fund” means the fund by that name established pursuant to the Bond Indenture.

C-27 “Remarketing Agent” means such financial institution or institutions as may be designated by the Borrower as the Remarketing Agent when required by the Bond Indenture.

“Remarketing Agreement” means any agreement between the Borrower and a Remarketing Agent whereby the Remarketing Agent undertakes to perform the duties of the Remarketing Agent under the Bond Indenture.

“Remarketing Proceeds Account” means the account by that name within the Bond Purchase Fund established pursuant to the Bond Indenture.

“Request of the Authority” means a written request signed in the name of the Authority or the Borrower by an Authorized Representative.

“Revenue Fund” means the fund by that name established pursuant to the Bond Indenture.

“Series,” when used with respect to the Bonds, means all the Bonds designated as being of the same Series, whether upon initial issuance thereof or upon any Conversion of a portion of a Series and re-designation thereof, authenticated and delivered in a simultaneous transaction, and any Bonds thereafter authenticated and delivered upon a transfer or exchange or in lieu of or in substitution for such Bonds of such Series, or upon a Conversion of a portion of any Series of the Bonds. In the event that the Bonds or a portion of the Bonds have been so designated as being in more than a single Series, references in the Bond Indenture and in the Loan Agreement to the Bonds shall, as the context may require, refer to only the Bonds of the particular Series in question.

“Short-Term Mode” means any Interest Rate Mode during which the Bonds bear interest at the Short-Term Rate.”

“Short-Term Rate” means the interest rate per annum on Bonds in a Short-Term Mode determined on a periodic basis pursuant to the Bond Indenture.

“Sinking Fund Installment” means the amount required by the Bond Indenture to be paid by the Authority on any single date for the retirement of Bonds of a Series.

“State” means the Commonwealth of Virginia.

“Supplemental Bond Indenture” means any indenture hereafter duly authorized and entered into between the Authority and the Bond Trustee, supplementing, modifying or amending the Bond Indenture; but only if and to the extent that such Supplemental Bond Indenture is specifically authorized by the Bond Indenture.

“Tax Certificate” means the Non-Arbitrage and Tax Matters Certificate dated the Closing Date, executed by the Authority and the Borrower.

“Two-Day Mode” means any Interest Rate Mode during which the Bonds bear interest at the Two-Day Rate.

“Two-Day Rate” means the interest rate per annum on Bonds in a Two-Day Mode determined on a two-day basis pursuant to the Bond Indenture.

“Unassigned Rights” means the rights of the Authority under the Loan Agreement (i) to payment of certain costs and expenses, (ii) to release and indemnification, (iii) to access to the Project, and (iv) to receive notices, reports, opinions, financial statements and the like, to inspect requisitions made under the Indenture and, where granted to the Authority, to approve and withhold approval or consent of matters requiring the approval or consent of the Authority.

“United States Government Obligations” means noncallable direct obligations of, or obligations the timely payment of the principal of and interest on which is fully guaranteed by, the United States of America.

C-28 “VRO Mode” means any Interest Rate Mode during which the Bonds bear interest at the VRO Rate.

“VRO Rate” means the interest rate per annum on Bonds in a VRO Mode determined on a periodic basis pursuant to the Bond Indenture.

“Weekly Mode” means any Interest Rate Mode during which the Bonds bear interest at the Weekly Rate.

“Weekly Rate” means the interest rate per annum on Bonds in a Weekly Mode determined on a weekly basis pursuant to the Bond Indenture.

“Window Mode” means any Interest Rate Mode during which the Bonds bear interest at the Window Rate.

“Window Rate” means the interest rate per annum on Bonds in a Window Mode determined on a periodic basis pursuant to the Bond Indenture.

“Written Request” means with reference to the Authority, a request in writing signed by an Authorized Representative of the Authority and, with reference to the Borrower, means a request in writing signed by an Authorized Representative of the Borrower, or any other officers designated by the Authority or the Borrower, as the case may be.

SUMMARY OF THE BOND INDENTURE

Granting Clauses

The Authority, to secure the payment of the principal of, premium, if any, and interest on the Bonds and the performance and observance of all of the covenants and conditions contained in the Bond Indenture, has conveyed, granted, assigned, transferred, pledged, set over and confirmed and granted a security interest in the “trust estate” described in the Bond Indenture, including (i) all right, title and interest of the Authority in and to the funds created under the Bond Indenture and all accounts held therein, including investment earnings (other than the Rebate Fund), (ii) all right, title and interest of the Authority in and to the Loan Agreement and the Promissory Note and the amounts payable to the Authority thereunder (excluding Unassigned Rights), and (iii) any and all other property of every kind and nature from time to time conveyed, pledged, assigned or transferred as and for additional security under the Bond Indenture by the Authority, the Borrower or by anyone on their behalf to the Bond Trustee, including, without limitation, funds of the Borrower held by the Bond Trustee as security for the Bonds.

The Bonds

Initial and Subsequent Interest Rates. The Bonds shall initially be issued in the Fixed Mode, and the Initial Fixed Period therefor shall commence on and include the Date of Issuance and shall end on the Final Maturity Date, subject to earlier Conversion (on or after the Initial Redemption Date) to different Interest Rate Modes, including a Daily Mode, a Two-Day Mode, a Weekly Mode, a Short-Term Mode, a Long-Term Mode, a Flexible Mode, an FRN Mode, a VRO Mode, a Window Mode, a Direct Purchase Mode or a Fixed Mode, to the extent permitted by the Bond Indenture.

If the Bonds are converted to a different Interest Rate Mode, the term of the Bonds in each Interest Rate Mode may, with a Favorable Opinion of Bond Counsel, be divided into consecutive Interest Rate Periods during each of which such Bonds shall bear interest at a Daily Rate, a Two-Day Rate, a Weekly Rate, a Short-Term Rate, a Long-Term Rate, a Flexible Rate, an FRN Rate, a VRO Rate, a Window Rate, or a Direct Purchase Rate, as may be applicable for the specific Interest Rate Mode.

All Bonds shall be in the same Interest Rate Mode and operate in the same Interest Rate Period, subject to future designations as separate Series.

Fixed Rate. During the Initial Fixed Period, the Fixed Rate shall commence on and include the Date of Issuance and shall end on the Final Maturity Date, subject to earlier Conversion on or after the Initial Redemption

C-29 Date. Any subsequent Fixed Period established upon such Conversion shall commence to accrue on the applicable Conversion Date and extend to the Final Maturity Date, subject to the right to convert such Bonds on or after any subsequent Initial Redemption Date established pursuant to the Bond Indenture. The Bonds shall be subject to mandatory tender for purchase by the Bond Trustee on any such Conversion Date.

Conversions. In the event that the Borrower shall elect to convert the interest rate on the Bonds (or a portion of the Bonds) to another Interest Rate Mode, then the written Conversion direction furnished by the Borrower shall be made by Electronic Notice. Notwithstanding anything in the Bond Indenture to the contrary, any such Conversion may be with respect to all or a portion of the Bonds. Any Bonds to be converted in part shall be selected randomly, and the portion of the Bonds to be converted shall be re-designated as a new Series to distinguish such portion from the portion of such Series not to be converted.

No Conversion from one Interest Rate Mode to another shall take effect under the Bond Indenture unless (i) the Bond Trustee shall have received a Favorable Opinion of Bond Counsel with respect to such Conversion, (ii) the remarketing proceeds and funds in the Borrower Purchase Account and available on the Conversion Date shall not be less than the amount required to purchase all of the Bonds to be converted at the applicable Purchase Price, (iii) prior to the Conversion Date (except in the case of any Conversion to a Direct Purchase Mode) the Borrower shall have appointed a Remarketing Agent and there shall have been executed and delivered a Remarketing Agreement, and (iv) if such Conversion is with respect to less than all of the Bonds, the Bonds shall be designated as separate Series.

Limited Obligation; No Liability of State

The Bonds, together with all principal and interest thereon and premium, if any, with respect thereto, are special, limited obligations of the Authority secured by the Loan Agreement and the Promissory Note and shall always be payable solely from the revenues and income derived from the Loan Agreement and the Promissory Note (except to the extent paid out of moneys attributable to proceeds of the Bonds, the income from the temporary investment thereof or payments made pursuant to or derived from a mortgage or assignment of leases and rents or credit enhancement device), are and shall always be a valid claim of the owner thereof only against the revenues and income derived from the Loan Agreement and the Promissory Note, which revenues and income shall be used for no other purpose than to pay the principal installments of, premium, if any, and interest on the Bonds, except as may be otherwise expressly authorized in the Bond Indenture or the Final Bond Resolution and in the Loan Agreement.

The Bonds and the obligation to pay principal and interest thereon and any premium with respect thereto do not now and shall never constitute a debt or a pledge of the faith and credit of the State or any political subdivision thereof, including the City and the Authority, and shall be payable solely from the revenues and income derived from the Loan Agreement and the Promissory Note. All of the Bonds shall contain on the face thereof a statement to the effect that neither the State, nor any political subdivision thereof, including the City and the Authority, shall be obligated to pay the same or the interest thereon or other costs incident thereto except from the revenues and moneys pledged therefor and that neither the faith and credit nor the taxing power of the State, or any political subdivision thereof, is pledged to the payment of any principal installment of, redemption premium, if any, or interest on the Bonds or other costs incident thereto. The Authority does not have the power to levy taxes for any purposes whatsoever.

Deposit of Funds; Establishment and Application of the Refunding Fund

On the Date of Issue, the Authority, for and on behalf of the Borrower, shall deposit with the Bond Trustee all of the net proceeds loaned to the Borrower from the sale of the Bonds, and the Bond Trustee shall deposit all such proceeds in the Refunding Fund established pursuant to the Bond Indenture. Under the Bond Indenture, the Authority establishes such Refunding Fund as a separate account with the Bond Trustee. The moneys in the Refunding Fund shall be held in trust by the Bond Trustee, shall be applied to the payment of the costs of the refunding of the Prior Bonds on their earliest optional redemption date, not to exceed ninety (90) days from the Date of Issuance and, pending such application, shall be held as trust funds under the Bond Indenture in favor of the holders of the outstanding Bonds and for the further security of such holders. Moneys held in or deposited to the Refunding Fund after the expiration of ninety (90) days from the Date of Issuance shall be transferred to the Interest Fund to the extent necessary to make the next interest payments therefrom; provided, however, that if the Borrower

C-30 and the Bond Trustee receive a Favorable Opinion of Bond Counsel to the effect that such moneys may be retained or deposited in a manner not in accordance with the foregoing provisions, such moneys may be retained or deposited in accordance with written directions of the Borrower consistent with such Favorable Opinion of Bond Counsel.

Establishment and Application of the Project Fund

The Bond Indenture establishes with the Bond Trustee a separate account to be known as the Project Fund. An initial deposit to the credit of the Project Fund shall be made in accordance with a Letter of Instruction sent by the Borrower to the bond trustee for the Prior Bonds. The moneys in the Project Fund shall be held in trust by the Bond Trustee, shall be applied to the payment of the costs of the Project and, pending such application, shall be held as trust funds under the Bond Indenture in favor of the holders of the outstanding Bonds and for the further security of such holders until paid out or transferred as provided in the Bond Indenture.

If there shall remain any moneys in the Project Fund on December 1, 2020, the Bond Trustee shall transfer such moneys to the Interest Fund to the extent necessary to make the next interest payments therefrom; provided, however, that if the Borrower and the Bond Trustee receive a Favorable Opinion of Bond Counsel to the effect that such moneys may be retained in the Project Fund or deposited in a manner not in accordance with the foregoing provisions, such moneys may be retained in the Project Fund or, if such Opinion is received by the Bond Trustee in sufficient time to permit the Bond Trustee to follow any directions contained therein, deposited as set forth in such Opinion.

Mandatory Tender for Purchase of Bonds

Bonds shall be subject to mandatory tender for purchase by the Bond Trustee at the Purchase Price with funds deposited with the Trustee for such purposes on any Conversion Date for the Bonds.

Bonds to be purchased, if the Bonds are then held under the book entry system, shall be delivered by the Holders thereof in accordance with the applicable DTC procedures, and if in physical form, shall be delivered by the Holders thereof to the Bond Trustee (together with necessary assignments and endorsements) at or prior to 1:00 p.m., New York City time, on the applicable Purchase Date.

Any Bonds to be purchased by the Bond Trustee that are not delivered for purchase on or prior to the Mandatory Purchase Date, for which there has been irrevocably deposited in trust with the Bond Trustee an amount sufficient to pay the Purchase Price of such Bonds, shall be deemed to have been tendered to the Bond Trustee for purchase, and the Holders of such Bonds shall not be entitled to any payment (including any interest to accrue on or after the Mandatory Purchase Date) other than the respective Purchase Prices of such Bonds, and such Bonds shall not be entitled to any benefits of the Bond Indenture, except for payment of such Purchase Price.

Creation of Bond Purchase Fund. The Bond Indenture establishes with the Bond Trustee a fund to be designated the “Bond Purchase Fund” to be held in trust only for the benefit of the Holders of tendered Bonds who shall thereafter be restricted exclusively to the moneys held in such fund for the satisfaction of any claim for the Purchase Price of such tendered Bonds. Moneys paid to the Bond Trustee for the purchase of tendered or deemed tendered Bonds received from the Remarketing Agent shall be deposited in the Remarketing Proceeds Account established within the Bond Purchase Fund. Moneys paid to the Bond Trustee for the purchase of tendered or deemed tendered Bonds received from the Borrower (but only when and if the Borrower is obligated to provide such funds or otherwise elects to provide such funds) shall be deposited in the Borrower Purchase Account established within the Bond Purchase Fund.

Remarketing of Bonds. Upon a mandatory tender for purchase of Bonds, the Remarketing Agent shall offer for sale and use its best efforts to sell such Bonds in the newly-designated Interest Rate Mode, any such sale to be made on the date of such purchase in accordance with the Bond Indenture at a price equal to the principal amount thereof plus accrued interest, if any, thereon to the Purchase Date. In connection with any remarketing of Bonds upon a mandatory tender thereof, such remarketing may be, with respect to such Bonds, in whole or with respect to a portion thereof, as directed by the Borrower.

C-31 If moneys deposited in the Remarketing Proceeds Account of the Bond Purchase Fund with respect to the Bonds (representing the proceeds of the remarketing by the Remarketing Agent with respect to the Bonds) are insufficient, moneys, if any, deposited in the Borrower Purchase Account of the Bond Purchase Fund with respect to the Bonds (representing amounts paid by the Borrower to the Bond Trustee for the purchase of such Bonds) shall be used to pay the Purchase Price of the Bonds when subject to mandatory purchase.

Insufficient Funds for the Payment of Purchase Price. If the funds available for are insufficient for the purchase of Bonds when subject to mandatory purchase, then no purchase of any Bond shall occur and the Bond Trustee shall (i) return all of such Bonds that were tendered to the Holders thereof, and (ii) return all moneys received by the Bond Trustee for the purchase of such Bonds to the respective Persons that provided such moneys (in the respective amounts in which such moneys were so provided). The failure to purchase Bonds on such date shall constitute an Event of Default.

Funds and Accounts

Revenue Fund. The Bond Indenture establishes with the Bond Trustee to maintain so long as any of the Bonds are outstanding a separate account known as the “Revenue Fund.” All payments under the Loan Agreement and Promissory Note (other than payments made in connection with the Unassigned Rights), as and when received by the Bond Trustee, shall be deposited in the Revenue Fund and shall be held therein until disbursed as provided by the Bond Indenture.

Interest Fund. The Bond Indenture establishes with the Bond Trustee to maintain so long as any of the Bonds are outstanding a separate account to be known as the “Interest Fund.” On each Interest Payment Date, the Bond Trustee shall deposit in the Interest Fund from the Revenue Fund moneys in an amount which, together with the amounts already on deposit therein and available to make such payment, is not less than the interest becoming due on the Bonds on such date.

Rebate Fund. There shall be created and established with the Trustee as necessary a separate account to be known as the “Rebate Fund.” Any rebate payments required under the Bond Indenture or under the Loan Agreement or Tax Certificate shall be deposited in the Rebate Fund. The Rebate Fund shall not be subject to the lien or encumbrance of this Indenture, but shall be held in trust, for the benefit of the United States of America, and shall be subject to the claim of no other person including the Bondholders. Any moneys deposited therein in accordance with the provisions of the Bond Indenture or the Loan Agreement or Tax Certificate shall be used for no other purpose than payments to the United States Treasury, at the time and in the manner and amount specified by an Authorized Representative of the Borrower.

Bond Sinking Fund. The Bond Indenture establishes with the Bond Trustee to maintain so long as any of the Bonds are outstanding a separate account to be known as the “Bond Sinking Fund.” On each Sinking Fund Installment date established pursuant to the Bond Indenture, after making the deposit required to the Interest Fund, the Bond Trustee shall deposit in the Bond Sinking Fund from the Revenue Fund moneys in an amount which, together with any moneys already on deposit in the Bond Sinking Fund and available to make such payment, is not less than the principal becoming due on the Bonds on such dates.

Optional Redemption Fund. The Bond Indenture establishes with the Bond Trustee to maintain so long as any of the Bonds are outstanding a separate account to be known as the “Optional Redemption Fund.” In the event of (i) prepayment by or on behalf of the Borrower of amounts payable under the Loan Agreement and Promissory Note, or (ii) deposit with the Bond Trustee by the Borrower or the Authority of moneys from any other source for redeeming Bonds or purchasing Bonds for cancellation, such moneys shall, except as otherwise provided in the Bond Indenture, be deposited in the Optional Redemption Fund. Moneys on deposit in the Optional Redemption Fund shall be used, first, to make up any deficiencies existing in the Interest Fund and the Bond Sinking Fund (in the order listed) and, second, for the redemption or purchase of Bonds in accordance with the provisions of the Bond Indenture.

Investment of Funds. Upon a Written Request of the Borrower to the Bond Trustee, moneys in the Revenue Fund, Interest Fund, Bond Sinking Fund, Refunding Fund, Project Fund or Optional Redemption Fund shall be invested in Qualified Investments specified by the Borrower. The Bond Trustee may conclusively rely upon

C-32 the Borrower’s written instructions as to both the suitability and legality of the directed investments. The Bond Trustee may make any and all such investments through its own investment department or that of its affiliates or subsidiaries, and may charge its ordinary and customary fees for such trades, including cash sweep account fees. In the absence of investment instructions from the Borrower, the Bond Trustee shall not be responsible or liable for keeping the moneys held by it under the Bond Indenture fully invested in Qualified Investments. Investments shall be made so as to mature on or prior to the date or dates that moneys therefrom are anticipated to be required.

Events of Default and Remedies

The following shall be “Events of Default” under the Bond Indenture when the Bonds are in Fixed Mode:

(a) default in the due and punctual payment of the principal or Redemption Price of any Bond when and as the same shall become due and payable, whether at maturity as therein expressed, by proceedings for redemption, by acceleration or otherwise, or default in the redemption of any Bonds from Sinking Fund Installments in the amount and at the times provided therefor;

(b) default in the due and punctual payment of any installment of interest on any Bond when and as such interest installment shall become due and payable;

(d) any event of default as defined in the Loan Agreement shall occur and be continuing from and after the date the Authority is entitled under the Loan Agreement to declare the Loan thereunder to be immediately due and payable, or such event of default shall be continuing from and after the date on which the Authority is entitled under the Loan Agreement to declare the Loan thereunder immediately due and payable; or

(e) an “Event of Default” shall occur under Section 4.01 of the Master Indenture.

Acceleration. Upon the occurrence and during the continuation of an Event of Default, the Bond Trustee shall, upon the written request of the Holders of not less than twenty five percent (25%) in aggregate principal amount of the Bonds Outstanding, declare all Outstanding Bonds immediately due and payable, anything in the Bonds or the Bond Indenture to the contrary notwithstanding. The Bond Trustee shall give written notice of such acceleration to each Holder of a Bond, the Authority and the Borrower.

Additional Remedies and Enforcement of Remedies. Upon the occurrence and continuance of any Event of Default, the Bond Trustee shall, upon the written request of the Holders of a majority in principal amount of the Bonds Outstanding, having been provided with indemnification to its satisfaction therefor, proceed forthwith to protect and enforce its rights and the rights of the Bondholders under the Bond Indenture and under the Act and the Bonds by such suits, actions or proceedings as the Bond Trustee shall be directed or, if no such direction is provided, as it shall deem expedient, being advised by counsel, including but not limited to:

(i) civil action to recover money or damages due and owing;

(ii) civil action to enjoin any acts or things, which may be unlawful or in violation of the rights of the Holders of Bonds;

(iii) enforcement of any other right of the Authority and the Bondholders conferred by law or by the Bond Indenture; and

(iv) enforcement of any other right conferred by the Loan Agreement, the Promissory Note or the Master Indenture.

Regardless of the happening of an Event of Default, the Bond Trustee, if requested in writing by the Holders of a majority in principal amount of the Bonds then Outstanding, shall, upon being indemnified to its

C-33 satisfaction therefor, institute and maintain such suits and proceedings as it may be advised shall be necessary or expedient (i) to prevent any impairment of the security under the Bond Indenture by any acts which may be unlawful or in violation of the Bond Indenture, or (ii) to preserve or protect the interests of the Holders, provided that such request is in accordance with law and the provisions of the Bond Indenture.

Application of Revenues and Other Funds After Default. If an Event of Default shall occur and be continuing, all moneys received by the Bond Trustee pursuant to any right given or action taken under the provisions of the Bond Indenture, after payment of the cost and expenses of the proceedings resulting in the collection of such moneys and of the outstanding fees, expenses, liabilities and advances incurred or made by the Bond Trustee shall be applied by the Bond Trustee as follows and in the following order:

(a) To the payment of any expenses necessary to protect the interests of the Holders of the Bonds and payment of reasonable fees and expenses of the Bond Trustee (including reasonable fees and disbursements of its counsel) incurred in and about the performance of its powers and duties under the Bond Indenture; and

(b) To the payment of the principal or Redemption Price of and interest then due on the Bonds (upon presentation of the Bonds to be paid, and stamping thereon of the payment if only partially paid, or surrender thereof if fully paid) subject to the provisions of the Bond Indenture, as follows:

(i) Unless the principal of all of the Bonds shall have become or have been declared due and payable,

FIRST: To the payment to the Persons entitled thereto of all installments of interest then due in the order of the maturity of such installments, and, if the amount available shall not be sufficient to pay in full any installment or installments maturing on the same date, then to the payment thereof ratably, according to the amounts due thereon, to the Persons entitled thereto, without any discrimination or preference; and

SECOND: To the payment to the Persons entitled thereto of the unpaid principal (including Sinking Fund Installments) or Purchase Price or Redemption Price of any Bonds which shall have become due, whether at maturity or by call for redemption or purchase, in the order of their due dates, with interest on the overdue principal at the rate borne by the respective Bonds, and, if the amount available shall not be sufficient to pay in full all the Bonds due on any date, together with such interest, then to the payment thereof ratably, according to the amounts of principal or Redemption Price due on such date to the Persons entitled thereto, without any discrimination or preference.

(ii) If the principal of all of the Bonds shall have become or have been declared due and payable, to the payment of the principal and interest then due and unpaid upon the Bonds, with interest on the overdue principal at the rate borne by the respective Bonds, and, if the amount available shall not be sufficient to pay in full the whole amount so due and unpaid, then to the payment thereof ratably, 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 Bond over any other Bond, according to the amounts due respectively for principal and interest, to the Persons entitled thereto without any discrimination or preference.

Bondholders’ Control of Proceedings. If an Event of Default shall have occurred and be continuing, the Holders of a majority in principal amount of all Bonds then Outstanding shall have the right, at any time, by an instrument or instruments in writing executed and delivered to the Bond Trustee, to direct the method and place of conducting any proceeding to be taken in connection with the enforcement of the terms and conditions of the Bond Indenture, provided that such direction is in accordance with law and the provisions of the Bond Indenture (including indemnity to the Bond Trustee as provided therein). Nothing in the Bond Indenture shall impair the right of the Bond Trustee in its discretion to take any other action under the Bond Indenture which it may deem proper and which is not inconsistent with such direction by Bondholders.

C-34 Individual Bondholder Action Restricted. Holder of any Bond shall have any right to institute any suit, action or proceeding in equity or at law for the enforcement of the Bond Indenture or for the execution of any trust thereunder or for any remedy thereunder except upon the occurrence of all of the following events: (i) the Holders of at least a majority in principal amount of Bonds Outstanding shall have made written request to the Bond Trustee to proceed to exercise the powers granted in the Bond Indenture; (ii) such Bondholders shall have offered the Bond Trustee indemnity as provided in the Bond Indenture; (iii) the Bond Trustee shall have failed or refused to exercise the duties or powers in the Bond Indenture granted for a period of 60 days after receipt by it of such request and offer of indemnity; and (iv) during such 60 day period no direction inconsistent with such written request has been delivered to the Bond Trustee by the Holders of a majority in principal amount of Bonds then Outstanding. No one or more Holders of Bonds shall have any right in any manner whatsoever to affect, disturb or prejudice the security of the Bond Indenture or to enforce any right thereunder except in the manner therein provided and for the equal benefit of the Holders of all Bonds Outstanding.

Nothing contained in the Bond Indenture shall affect or impair, or be construed to affect or impair, the right of the Holder of any Bond (i) to receive payment of the principal of or interest on such Bond, as the case may be, on or after the due date thereof or (ii) to institute suit for the enforcement of any such payment on or after such due date; provided, however, no Holder of any Bond may institute or prosecute any such suit or enter judgment therein if, and to the extent that, the judgment therein would, under applicable law, result in the surrender, impairment, waiver or loss of the lien of the Bond Indenture on the money, funds and properties pledged under the Bond Indenture for the equal and ratable benefit of all Holders of Bonds.

Waivers of Event of Default. No delay or omission of the Bond Trustee or of any Holder of the Bonds to exercise any right or power accruing upon any Event of Default shall impair any such right or power or shall be construed to be a waiver of any such Event of Default or in acquiescence therein. Every power and remedy given by the Bond Indenture may be exercised from time to time and as often as may be deemed expedient. The Bond Trustee, upon the written request of the Holders of a majority in principal amount of the Bonds then Outstanding, shall waive any Event of Default under the Bond Indenture and its consequences; provided, however, that, a default in the payment of the principal of, premium, if any, or interest on any Bond, when the same shall become due and payable by the terms thereof or upon call for redemption, shall not be waived without the written consent of the Holders of all the Bonds at the time Outstanding. In case of any waiver by the Bond Trustee of an Event of Default under the Bond Indenture, the Authority, the Bond Trustee and the Bondholders shall be restored to their former positions and rights thereunder, respectively, but no such waiver shall extend to any subsequent or other Event of Default or impair any right consequent thereon. The Bond Trustee shall not be responsible to anyone for waiving or refraining from waiving any Event of Default in accordance with the Bond Indenture.

Substitution Promissory Note

The Trustee is authorized and directed to accept a substitute promissory note (“Substitute Promissory Note”) in substitution for the Promissory Note, which Substitute Promissory Note must provide for the full and timely repayment of the related Bonds on substantially the same repayment terms of the existing Promissory Note and must be executed and delivered to the Trustee by an entity or a group of entities of which the Borrower is a part, upon receipt of

(i) the Written Request of the Borrower;

(ii) a Favorable Opinion of Bond Counsel; and

(iii) an opinion of counsel to the Borrower to the effect that the Substitute Promissory Note is a valid and binding obligation of the obligor or obligors thereunder, including the Borrower.

The Bond Trustee

Acceptance of the Trusts. Under the Bond Indenture the Bond Trustee accepts and agrees to execute the trusts imposed upon it thereby, but only upon the terms and conditions set forth therein. The Bond Trustee, prior to the occurrence of an Event of Default and after the curing of all Events of Default which may have occurred,

C-35 undertakes to perform such duties and only such duties as are specifically set forth in the Bond Indenture; the Bond Trustee shall not be liable in connection with the performance of such duties except for its own gross negligence and willful misconduct, and no implied covenants or obligations should be read into the Bond Indenture against the Bond Trustee. If any Event of Default under the Bond Indenture shall have occurred and be continuing, the Bond Trustee shall exercise such of the rights and powers vested in it by the Bond Indenture and shall use the same degree of care as a prudent person would exercise or use in the circumstances in the conduct of such prudent person’s own affairs. The Bond Trustee agrees to perform such trusts only upon and subject to the expressed terms and conditions listed in the Bond Indenture.

Successor Bond Trustee. Any corporation or association into which the Bond Trustee may be converted or merged, or with which it may be consolidated, or to which it may sell or transfer its municipal corporate trust business and assets as a whole or substantially as a whole, or any corporation or association resulting from any such conversion, sale, merger, consolidation or transfer to which it is a party, provided such corporation or association is otherwise eligible to serve as Bond Trustee under the Bond Indenture, shall be and become successor Bond Trustee thereunder and vested with all of the title to the whole property or trust estate and all the trusts, powers, discretions, immunities, privileges and all other matters as was its predecessor, without the execution or filing of any instrument or any further act, deed or conveyance on the part of any of the parties to the Bond Indenture.

Bond Trustee Required; Eligibility. There shall at all times be a Bond Trustee under the Bond Indenture which shall be a trust company or bank organized and in good standing under the laws of the United States of America, the State or any other state or the District of Columbia and have a combined capital and surplus of not less than $50,000,000 as set forth in its most recent published annual report of condition, or alternatively, a liability policy having the type of coverage and in an amount acceptable to the Authority and the Borrower.

Resignation by the Bond Trustee. The Bond Trustee and any successor Bond Trustee may at any time resign from the trusts created by the Bond Indenture by giving written notice to the Authority and the Borrower and by first class mail, postage prepaid to each registered owner of Bonds then outstanding.

Removal of the Bond Trustee. Subject to being indemnified for all fees, costs, expenses, liabilities, obligations, claims, damages, losses, penalties and fines as contemplated by the Loan Agreement, the Bond Trustee may be removed at any time, by an instrument or concurrent instruments in writing delivered to the Bond Trustee, the Borrower and the Authority and signed by the owners of a majority in aggregate principal amount of Bonds then outstanding. So long as no Event of Default has occurred and is continuing under the Bond Indenture or the Loan Agreement, the Bond Trustee may be removed for any reason at any time by the Borrower or by the Authority by an instrument or concurrent instruments in writing delivered to the Bond Trustee. If any Event of Default has occurred or is continuing under the Bond Indenture or the Loan Agreement, the Bond Trustee may be removed for cause (including but not limited to maintaining non-competitive fees) at any time by the Borrower or the Authority by an instrument or concurrent instruments in writing and delivered to the Bond Trustee. The foregoing notwithstanding, the Bond Trustee may not be removed by the Borrower unless written notice of the delivery of such instrument or instruments signed by the Authority is mailed to the owners of all Bonds outstanding under the Bond Indenture, which notice indicates the Bond Trustee will be removed and replaced by the successor trustee named in such notice, such removal and replacement to become effective on the 30th day next succeeding the date of such notice, unless the owners of not less than ten percent (10%) in aggregate principal amount of Bonds then outstanding under the Bond Indenture shall object in writing to such removal and replacement.

Appointment of Successor Bond Trustee by the Bondholders; Temporary Bond Trustee. In the event that the Bond Trustee shall give notice of resignation or be removed, or be dissolved, or shall be in the course of dissolution or liquidation, or otherwise becomes incapable of acting under the Bond Indenture, or in case it shall be taken under the control of any public office or offices, or of a receiver appointed by a court, the Borrower may (to the extent that no “Event of Default” shall have occurred and be continuing under the Loan Agreement), with the prior written consent of the Authority, appoint a successor Bond Trustee and shall confirm such appointment in writing delivered personally or sent by first class mail, postage prepaid, to the Authority, the retiring Bond Trustee and the successor Bond Trustee.

Pending such appointment by the Borrower or the Bondholders, the Authority may, with the consent of the Borrower (to the extent that no Event of Default shall have occurred and be continuing under the Loan Agreement),

C-36 appoint a temporary successor Bond Trustee by an instrument in writing signed by an authorized officer of the Authority, a copy of which shall be delivered personally or sent by first class mail, postage prepaid, to the retiring Bond Trustee, the successor Bond Trustee and the Borrower. If no permanent successor Bond Trustee shall have been appointed by the Borrower or the Bondholders within the six calendar months next succeeding the month during which the Authority appoints such a temporary Bond Trustee, such temporary Bond Trustee shall without further action on the part of the Authority or the Bondholders become the permanent successor Bond Trustee.

If the Borrower, the registered owners or the Authority fail to so appoint a successor Bond Trustee (whether permanent or temporary) under the Bond Indenture within forty-five (45) days after the Bond Trustee has given notice of its resignation, has been removed, has been dissolved, has otherwise become incapable of acting under the Bond Indenture or has been taken under control by a public officer or receiver, the Bond Trustee shall have the right to petition a court of competent jurisdiction to appoint a successor.

Modifications to the Bond Indenture

With Holder Consent. The Bond Indenture and the rights and obligations of the Authority and of the Holders of the Bonds and of the Bond Trustee may be modified or amended from time to time and at any time by an indenture or indentures supplemental thereto, which the Authority and the Bond Trustee shall enter into when the written consent of the Holders of a majority in aggregate principal amount of the Bonds then Outstanding and the Borrower shall have been filed with the Bond Trustee. No such modification or amendment shall (1) extend the maturity date of any Bond, or reduce the amount of principal thereof, or extend the time of payment or change the method of computing the rate of interest thereon, or extend the time of payment of interest thereon, or reduce any premium payable upon the redemption thereof, without the consent of the Holder of each Bond so affected, or (2) reduce the aforesaid percentage of Bonds, the consent of the Holders of which is required to effect any such modification or amendment, or permit the creation of any lien prior to or on a parity with the lien created by the Bond Indenture, or deprive the Holders of the Bonds of the lien created by the Bond Indenture (except as expressly provided in the Bond Indenture), without the consent of the Holders of all Bonds then Outstanding. It shall not be necessary for the consent of the Bondholders to approve the particular form of any Supplemental Bond Indenture, but it shall be sufficient if such consent shall approve the substance thereof.

Without Holder Consent. The Bond Indenture and the rights and obligations of the Authority, of the Bond Trustee and of the Holders of the Bonds may also be modified or amended from time to time and at any time by an indenture or indentures supplemental thereto, which the Authority and the Bond Trustee shall enter into with the prior written consent of the Borrower, but without the necessity of obtaining the consent of any other Bondholders, only to the extent permitted by law and only for any one or more of the following purposes:

(i) to add to the covenants and agreements of the Authority contained in the Bond Indenture other covenants and agreements thereafter to be observed, to pledge or assign additional security for the Bonds (or any portion thereof), or to surrender any right or power reserved to or conferred upon the Authority;

(ii) to make such provisions for the purpose of curing any ambiguity, inconsistency or omission, or of curing or correcting any defective provision, contained in the Bond Indenture, or in regard to matters or questions arising under the Bond Indenture, including but not limited to reflecting the creation of separate Series or sub Series for the Bonds, or reflecting any new serialization of the Bonds upon their Conversion to a subsequent Fixed Mode;

(iii) to modify, amend or supplement the Bond Indenture in such manner as to permit the qualification of the Bond Indenture under the Trust Indenture Act of 1939, as amended, or any similar federal statute hereafter in effect, and to add such other terms, conditions and provisions as may be permitted by said act or similar federal statute, and which shall not materially adversely affect the interests of the Holders of the Bonds;

(iv) to facilitate and implement any book entry system (or any termination of a book entry system) with respect to the Bonds in accordance with the terms of the Bond Indenture;

(v) to maintain the exclusion from gross income of interest payable with respect to the Bonds;

C-37 (vi) to make any modification or amendment to the Bond Indenture which will be effective upon the Conversion and/or remarketing of Bonds following the mandatory tender of the Bonds;

(vii) to provide for the appointment of a successor bond trustee or co-trustee pursuant to the terms of the Bond Indenture; or

(viii) to make any change in the Bond Indenture (other than a change requiring unanimous consent of the Holders) provided that a Favorable Opinion of Bond Counsel is delivered to the Bond Trustee.

Satisfaction of the Bond Indenture

Discharge of Bond Indenture. Bonds may be paid by the Authority in any of the following ways, provided that the Authority also pays or causes to be paid any other sums payable under the Bond Indenture by the Authority and related to such Bonds:

(a) by paying or causing to be paid the principal or Redemption Price of and interest on Outstanding Bonds, as and when the same become due and payable;

(b) by depositing with the Bond Trustee, in trust, at or before maturity, money or United States Government Obligations in the amount necessary to pay or redeem all Bonds Outstanding; or

If the Authority, the Borrower or the Bond Trustee shall also pay or cause to be paid all other sums payable under the Bond Indenture by the Authority, and if the Borrower shall have paid all expenses payable to the Authority, and any indemnification owed to the Authority and the Bond Trustee, then and in that case, at the election of the Authority (evidenced by a Certificate of the Authority, filed with the Bond Trustee, signifying the intention of the Authority to discharge all such indebtedness and the Bond Indenture), the Bond Indenture and the pledge of the trust estate and other assets made under the Bond Indenture and all covenants, agreements and other obligations of the Authority under the Bond Indenture shall cease, terminate, and be completely discharged and satisfied (except with respect to the transfer or exchange of Bonds provided for therein, the payment of principal of and interest on the Bonds when due, the redemption of Bonds provided for in the Bond Indenture and the payment of or the provision for any Rebate Payments then due and payable to the United States Treasury). In such event, upon Written Request of the Authority, the Bond Trustee shall cause an accounting for such period or periods as may be requested by the Authority to be prepared and filed with the Authority and shall execute and deliver to the Authority all such instruments as may be necessary or desirable to evidence such discharge and satisfaction, and the Bond Trustee shall pay over, transfer, assign or deliver to the Borrower all moneys or securities or other property held by it pursuant to the Bond Indenture which are not required for the payment or redemption of Bonds not theretofore surrendered for such payment or redemption; provided that all expenses and any indemnification owed to the Authority shall have been paid. The release of the obligations of the Authority under the Bond Indenture shall be without prejudice to the right of the Bond Trustee to be paid reasonable compensation for all services rendered under the Bond Indenture by it and all reasonable expenses, charges and other disbursements (from any money in its possession under the provisions of the Bond Indenture, subject only to the prior lien of the Bonds for the payment of the principal thereof and the interest thereon) incurred on or about the administration of the trust created by the Bond Indenture and the performance of its duties thereunder, nor its right to indemnification under the Bond Indenture and under the Loan Agreement.

Effect of Defeasance. Upon the deposit with the Bond Trustee, in trust, at or before maturity, of money or securities in the amount necessary to pay or redeem any Outstanding Bond (whether upon or prior to its maturity or the redemption date of such Bond), provided that, if such Bond is to be redeemed prior to maturity, notice of such redemption shall have been given as provided in the Bond Indenture or provision satisfactory to the Bond Trustee shall have been made for the giving of such notice, the Bond Indenture may be released and discharged in accordance with the provisions of the Bond Indenture, but the liability of the Authority in respect of such Bonds shall continue, provided that thereafter the Holder thereof shall be entitled only to payment out of such money or securities deposited with the Bond Trustee as aforesaid for their payment.

C-38 SUMMARY OF LOAN AGREEMENT AND NOTE

Issuance of Bonds

Agreement to Issue Bonds Application of Proceeds. The Loan Agreement provides that the Authority will issue, sell and cause to be delivered to the Bond Trustee for authentication and delivery by the Bond Trustee the Series 2018 Bonds and thereupon make a loan of the proceeds of the Series 2018 Bonds received from such sale to the Borrower by applying such proceeds to the payment of the principal of the Prior Bonds. The Borrower shall cause the Prior Bonds to be completely paid and redeemed within ninety (90) days after the date of issuance of the Series 2018 Bonds.

Tax Covenants. The Borrower shall take no action, and shall not approve any action that would cause the Series 2018 Bonds to be “arbitrage bonds” within the meaning of Section 148 of the Code and the regulations thereunder as such may be applicable to the Series 2018 Bonds at the time of such action. The Borrower will not take any action which will, or fail to take any action which failure will, cause interest on the Series 2018 Bonds to become includable in the gross income of the Bondholders for federal income tax purposes pursuant to the provisions of the Code and regulations promulgated thereunder. The Borrower agrees to perform the other tax covenants set forth in the Loan Agreement.

Payment Provisions

Amounts Payable. The Loan Agreement provides that the Borrower shall pay to the Bond Trustee for the account of the Authority all amounts payable under the Loan Agreement, the Note and the Bond Indenture in installments, in the amounts, and at the times set forth in the Series 2018 Bonds, or on any other date that payments are required to be made to the Bond Trustee pursuant to the Bond Indenture in order to effect payment on the date fixed for redemption or maturity of the Series 2018 Bonds pursuant to the Bond Indenture in order for the Authority to cause payment to be made to the Bondholders of the principal of and premium, if any, and interest on the Series 2018 Bonds, whether at maturity, upon redemption or otherwise; provided that any amount credited under the Bond Indenture against any payment required to be made to the Authority thereunder shall be credited against the corresponding payment to be made by the Borrower under the Loan Agreement. The Borrower covenants in the Loan Agreement that it will, on the Business Day prior to any scheduled principal or interest payment date for the Series 2018 Bonds, make payments necessary to allow the Bond Trustee to make all scheduled payments of principal and interest on the Series 2018 Bonds, and in all events the Borrower covenants that it will unconditionally make, without setoff or counterclaim, such payments at such times and in such amounts to assure that the payment of all principal of and premium, if any, and all interest on the Series 2018 Bonds shall be made when due, whether upon a scheduled due date, or upon redemption or acceleration in accordance with the Bond Indenture.

The Loan Agreement also provides that the Borrower shall pay the costs and expenses of the Authority and the Bond Trustee incurred in connection with the Loan Agreement, the Bond Indenture and the Series 2018 Bonds.

Obligations Unconditional. Before payment of the principal of, premium, if any, and interest on the Series 2018 Bonds, the obligations of the Borrower under the Loan Agreement and the Note shall be absolute and unconditional and shall not be subject to diminution by set-off, counterclaim, abatement or otherwise.

Events of Default and Remedies

Events of Default Defined. Events of Default are defined in the Loan Agreement to include (a) failure of the Borrower to make any payments thereunder as the same becomes due and payable, (b) failure of the Borrower to observe and perform any covenant, condition or agreement on its part to be observed or performed, and, except for failure to make payments, such failure continues for a period of thirty (30) days (or such longer period of time granted by the Bond Trustee and the Authority, not to exceed one hundred twenty (120) days), after the date on which written notice of such failure shall have been given to the Borrower by the Authority or the Bond Trustee, or (c) an Event of Default existing under the Bond Indenture or the Master Indenture.

Remedies on Default. Upon the occurrence and continuation of an Event of Default under the Loan Agreement, the Authority, or the Bond Trustee in the place and stead of the Authority, subject to the provisions of

C-39 the Bond Indenture, may declare all payments under the Loan Agreement and the Note to be immediately due and payable and take whatever action at law or in equity necessary or desirable to collect such payments then due or to enforce performance, observance or compliance by the Borrower with any covenant, condition or agreement by the Borrower under the Loan Agreement.

Prepayment

Option to Prepay. The Borrower has the option to prepay its obligations under the Note on the same terms and conditions and upon the same notice stated in the optional redemption provisions of the Bond Indenture.

The Borrower shall have the obligation to prepay its obligations under the Loan Agreement on the same terms and conditions and upon the same notice stated in the mandatory sinking fund redemption provisions of the Bond Indenture.

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APPENDIX D

FORM OF OPINION OF BOND COUNSEL

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APPENDIX D

FORM OF OPINION OF BOND COUNSEL

May __, 2018

Economic Development Authority of the City of Norfolk Norfolk, Virginia

$138,530,0001 Economic Development Authority of the City of Norfolk Hospital Facilities Revenue Refunding Bonds (Sentara Healthcare) Series 2018

Ladies and Gentlemen:

We have examined the Industrial Development and Revenue Bond Act, Chapter 49, Title 15.2, Code of Virginia of 1950, as amended (the “Act”), certified copies of the proceedings of the Economic Development Authority of the City of Norfolk (the “Issuer”) approving the sale of its $138,530,0001 Hospital Facilities Revenue Refunding Bonds (Sentara Healthcare), Series 2018 (the “Bonds”), and other proofs submitted relative to the issuance and sale of the Bonds.

The Bonds are issued under and pursuant to a Bond Trust Indenture dated as of May 1, 2018 (the “Bond Indenture”), between U.S. Bank National Association, as trustee, and the Issuer (the “Bond Indenture”) and a Loan Agreement dated as of May 1, 2018 (the “Loan Agreement”), between the Issuer and Sentara Healthcare (“Sentara”). Capitalized terms used but not otherwise defined herein shall have the meanings given such terms in the Bond Indenture or the Loan Agreement.

The Bonds shall mature on the dates and in the amounts, and bear interest at the respective rates per annum payable on the respective dates, all as set forth in the Bond Indenture.

The Bonds are issuable as registered bonds without coupons and will be initially registered in the name of Cede & Co., as nominee of The Depository Trust Company, New York, New York, which will act as securities depository for the Bonds.

The Bonds are subject to redemption prior to their maturities in the events and at the times set forth in the Bond Indenture.

1 Preliminary, subject to change.

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The proceeds of the Bonds will be used, together with other available funds, to currently refund the entire principal amount of the Issuer’s $150,000,000 Hospital Facilities Revenue Bonds (Sentara Healthcare), Series 2017.

We have examined and relied on certifications of representatives of Sentara and the Issuer as to questions of certain facts material to this opinion. Failure by Sentara or the Issuer to comply, subsequent to the issuance of the Bonds, with certain requirements of the Internal Revenue Code of 1986, as amended (the “Code”), regarding the use, expenditure and investment of bond proceeds, the use of the facilities refinanced with the proceeds of the Bonds and the timely payment of certain investment earnings of bond proceeds or penalties to the Treasury of the United States, may cause interest on the Bonds to become includable in gross income for federal income tax purposes retroactive to their date of issue. Sentara and the Issuer have covenanted to take all action necessary under the Code to ensure that interest on the Bonds will retain its status as not includable in gross income for federal income tax purposes under current tax law and to refrain from taking any action adverse to such status.

We have examined a specimen copy of the Bonds.

Based on the foregoing, we are of the opinion that:

1. The Issuer is duly organized and existing as a body politic and corporate and a political subdivision of the Commonwealth of Virginia, having the powers and authority set forth in the Act.

2. The Bonds have been duly authorized, executed, delivered, issued and sold, and are valid and binding limited obligations of the Issuer payable in accordance with their terms.

3. The Bond Indenture and the Loan Agreement have been duly authorized, executed and delivered by the Issuer and constitute valid and binding obligations of the Issuer enforceable in accordance with their respective terms. The Issuer’s obligations under the Bond Indenture and the Loan Agreement are subject to bankruptcy, insolvency and other laws affecting creditors’ rights generally, now or hereafter in effect, and usual equity principles.

4. The Bonds are not a debt of the Commonwealth of Virginia or any political subdivision thereof, including the City of Norfolk and the Issuer, but shall be payable solely from the sources provided therefor as provided in the Bond Indenture, and neither the Commonwealth of Virginia, nor any political subdivision thereof, including the City of Norfolk and the Issuer, shall be obligated to pay the Bonds or the interest thereon or other costs incident thereto except from such sources. Neither the faith and credit nor the taxing power of the Commonwealth of Virginia, or any political subdivision thereof, including the City of Norfolk and the Issuer, is pledged to the payment of the principal of or interest on the Bonds or other costs incident thereto. The Issuer has no taxing power.

5. Under existing statutes, regulations and rulings, interest on the Bonds is not included in gross income of owners of the Bonds for federal income tax purposes. Such interest is, however, taken into account in determining adjusted current earnings for purposes of

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computing the alternative minimum tax imposed on corporations for taxable years that began prior to January 1, 2018. No opinion is expressed with respect to any other federal tax consequences of the receipt or accrual of interest on the Bonds.

6. Under existing statutes, interest on the Bonds is exempt from all income taxation by the Commonwealth of Virginia and any political subdivision thereof.

Very truly yours,

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APPENDIX E

FORM OF CONTINUING DISCLOSURE AGREEMENT

[THIS PAGE INTENTIONALLY LEFT BLANK] APPENDIX E

FORM OF CONTINUING DISCLOSURE AGREEMENT

This Continuing Disclosure Agreement (the “Disclosure Agreement”), dated May __, 2018, is executed by Sentara Healthcare (“Sentara”) in connection with the issuance by the Economic Development Authority of the City of Norfolk (the “Authority”) of its Hospital Facilities Revenue Refunding Bonds (Sentara Healthcare), Series 2018 (the “Bonds”), in the aggregate principal amount of $______. Sentara covenants and agrees as follows:

SECTION 1. Purpose of Disclosure Agreement. This Disclosure Agreement is being executed and delivered by Sentara for the benefit of the Underwriters, the Bond Trustee and the holders. Sentara acknowledges that it is undertaking primary responsibility for any reports, notices or disclosures that may be required under this Disclosure Agreement.

SECTION 2. Definitions. The following capitalized terms shall have the following meanings:

“Annual Report” shall mean any Annual Report provided by Sentara pursuant to, and as described in, Sections 3 and 4 of this Disclosure Agreement.

“Bond Trustee” shall mean U.S. Bank National Association, and any successor trustee serving in such capacity under that certain Bond Trust Indenture, dated as of May 1, 2018, by and between the Authority and U.S. Bank National Association.

“Dissemination Agent” shall mean Sentara, acting in its capacity as Dissemination Agent hereunder, or any successor Dissemination Agent designated in writing by Sentara and which has filed with Sentara a written acceptance of such designation.

“EMMA” shall mean the Electronic Municipal Market Access system as described in Securities Exchange Act of 1934 Release No. 59062 and maintained by the MSRB for purposes of the Rule and any other system designated by the MSRB or SEC for purposes of the Rule.

“Fiscal Year” shall mean the twelve-month period at the end of which the financial position of Sentara and its affiliates and results of their operations for such period are determined. Currently, Sentara’s Fiscal Year begins January 1 and continues through December 31.

“Holder” shall mean, for purposes of this Disclosure Agreement, any person who is a record owner or beneficial owner of a Bond.

“Listed Events” shall mean any of the events listed in subsection (b)(5)(i)(C) of the Rule, which as of the date hereof include the following:

a) Principal and interest payment delinquencies;

b) Nonpayment related defaults, if material;

c) Unscheduled draws on debt service reserves reflecting financial difficulties;

E-1 d) Unscheduled draws on credit enhancements reflecting financial difficulties;

e) Substitution of credit or liquidity providers, or their failure to perform;

f) Adverse tax opinions, the issuance by the Internal Revenue Service of proposed or final determinations of taxability, Notices of Proposed Issue (IRS Form 5071-TEB) or other material notices or determinations with respect to the tax status of the Bonds, or other material events affecting the tax status of the Bonds;

g) Modifications to rights of the holders of the Bonds, if material;

h) Bond calls, if material, and tender offers;

i) Defeasances;

j) Release, substitution or sale of property securing repayment of the Bonds, if material;

k) Rating changes;

l) Bankruptcy, insolvency, receivership or similar event of Sentara, including any of the following: the appointment of a receiver, fiscal agent or similar officer for Sentara in a proceeding under the U.S. Bankruptcy Code or in any other proceeding under state or federal law in which a court or government authority has assumed jurisdiction over substantially all of the assets or business of Sentara, or if such jurisdiction has been assumed by leaving the existing governing body and officials or officers in possession but subject to the supervision and orders of a court or governmental authority, or the entry of an order confirming a plan of reorganization, arrangement or liquidation by a court or governmental authority having supervision or jurisdiction over substantially all of the assets or business of Sentara;

m) The consummation of a merger, consolidation, or acquisition involving Sentara or the sale of all or substantially all of the assets of Sentara, other than in the ordinary course of business, or the entry into a definitive agreement relating to any such actions, other than pursuant to its terms, if material;

n) Appointment of a successor or additional Bond Trustee or the change of name of Bond Trustee, if material.

“Loan Agreement” shall mean the Loan Agreement, dated as of May 1, 2018, between the Authority and Sentara, related to the financing evidenced by the Bonds.

“MSRB” shall mean the Municipal Securities Rulemaking Board.

E-2 “Official Statement” shall mean the Official Statement, dated May __, 2018, containing information, data and statistics concerning the Authority and Sentara and its affiliates in connection with the offering of the Bonds.

“Rule” shall mean Rule 15c2-12 adopted by the SEC under the Securities Exchange Act of 1934, as the same may be amended from time to time.

“SEC” shall mean the Securities and Exchange Commission.

“Underwriters” shall mean Barclays Capital Inc. and Citigroup Global Markets Inc.

SECTION 3. Provision of Annual Reports; Audited Financial Statements.

(a) Not later than 150 days following the end of each Fiscal Year of Sentara, commencing with the Fiscal Year ending December 31, 2018, Sentara shall, or shall cause the Dissemination Agent (if different from Sentara) to, provide to EMMA (subject to Sections 12 and 13) an Annual Report which is consistent with the requirements of Section 4 of this Disclosure Agreement. Not later than 10 days prior to said date, Sentara shall provide the Annual Report to the Dissemination Agent (if applicable). In each case, the Annual Report (i) may be submitted as a single document or as separate documents comprising a package, (ii) may cross-reference other information as provided in Section 4 of this Disclosure Agreement, and (iii) shall include such financial statements as may be required by the Rule.

(b) The annual financial statements of Sentara shall be prepared on the basis of generally accepted accounting principles, shall be audited and may be presented as consolidated statements. Copies of the audited financial statements, which may be filed separately from the Annual Report, will be filed with EMMA on or before the filing of the Annual Report.

(c) If Sentara fails to provide an Annual Report to EMMA by the date required in subsection (a) hereof or to file its audited annual financial statements with EMMA by the date required in subsection (b) hereof, Sentara shall send an appropriate notice of such failure to EMMA.

SECTION 4. Content of Annual Reports. Each Annual Report required to be filed hereunder shall include, at a minimum, the information referred to in the section of the Official Statement entitled “Annual Debt Service Requirements” and the operating data and financial information contained in the Tables designated X through XV, inclusive, in Appendix A to the Official Statement as it relates to Sentara and its affiliates, all with a view toward assisting the Underwriters in complying with the Rule. Any or all such information may be incorporated by reference from other documents, including offering documents containing information with respect to Sentara, which have been filed with EMMA or the SEC. If the document incorporated by reference is a final Official Statement, it must be available from the MSRB. Sentara shall clearly identify each such other documents so incorporated by reference. Sentara covenants to

E-3

include in each Annual Report a current list of Obligated Group Affiliates, as that term is defined in the Official Statement.

SECTION 5. Additional Disclosure. In addition, Sentara shall file in the manner required of the annual disclosure required under Section 3, the following quarterly operating information with such information in reasonable detail and filed no later than 45 days after the end of each fiscal quarter (other than the end of the fiscal quarter which corresponds with the end of Sentara’s fiscal year), as set forth below:

(a) unaudited financial statements, including balance sheets, statement of operations, and cash flows, of Sentara for the preceding fiscal quarter; and

(b) an abbreviated narrative of the operating and financial environment of Sentara for such fiscal quarter.

SECTION 6. Reporting of Listed Events. Sentara shall give, or cause to be given, notice to EMMA of the occurrence of any Listed Event with respect to the Bonds within ten business days of the occurrence of the event.

SECTION 7. Termination of Reporting Obligation. The obligations of Sentara under this Disclosure Agreement shall terminate upon the earlier to occur of the legal defeasance or final retirement of the Bonds.

SECTION 8. Dissemination Agent. Sentara may, from time to time, appoint or engage a Dissemination Agent to assist it in carrying out its obligations under this Disclosure Agreement and may remove any such Dissemination Agent for any reason or no reason, with or without appointing a replacement Dissemination Agent. If at any time there is no designated Dissemination Agent, Sentara shall undertake the obligations of the Dissemination Agent.

SECTION 9. Amendment. Notwithstanding any other provision of this Disclosure Agreement, Sentara may amend this Disclosure Agreement, if such amendment is supported by an opinion of independent counsel with expertise in federal securities laws to the effect that such amendment is required by, or is permitted by or not in conflict with, the Rule.

SECTION 10. Additional Information. Nothing in this Disclosure Agreement shall be deemed to prevent Sentara from disseminating any other information, using the means of dissemination set forth in this Disclosure Agreement or any other means of communication, or including any other information in any Annual Report or notice of occurrence of a Listed Event, in addition to that which is required by this Disclosure Agreement. If Sentara chooses to include any information in any Annual Report or notice of occurrence of a Listed Event, in addition to that which is specifically required by this Disclosure Agreement, Sentara shall have no obligation under this Disclosure Agreement to update such information or include it in any future Annual Report or notice of occurrence of a Listed Event unless otherwise required by the Rule or other federal or state securities laws.

SECTION 11. Default. Any person referred to in Section 12 may take such action as may be permitted by law against Sentara to secure compliance with the obligations of Sentara to file its Annual Report or to give notice of a Listed Event. In addition, holders of not less than a

E-4 majority in aggregate principal amount of Bonds outstanding may take such actions as may be permitted by law to challenge the adequacy of any information provided pursuant to this Disclosure Agreement, or to enforce any other obligation of Sentara hereunder. A default under this Disclosure Agreement shall not be an event of default under the Loan Agreement, and the sole remedy under this Disclosure Agreement in the event of any failure of Sentara to comply herewith shall be an action of compel performance. Nothing in this provision shall be deemed to restrict the rights or remedies of any holder pursuant to the Securities Exchange Act of 1934, the rules and regulations promulgated thereunder, or other applicable laws.

SECTION 12. Beneficiaries. This Disclosure Agreement shall inure to the benefit of the Underwriters, the Bond Trustee and holders from time to time of the Bonds, and shall create no rights in any other person or entity.

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SENTARA HEALTHCARE

By: Robert A Broermann, Senior Vice President and Chief Financial Officer

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Economic Development Authority of the City of Norfolk • Hospital Facilities Revenue Refunding Bonds (Sentara Healthcare), Series 2018