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TENET HEALTHCARE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

Dollars in Millions, Except Per-Share Amounts

(Unaudited)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2014		2013		2014		2013
Net operating revenues:
Net operating revenues before provision for doubtful accounts	$	4,428	$	2,618	$	13,096	$	7,841
Less: Provision for doubtful accounts		249		210		949		624
Net operating revenues		4,179		2,408		12,147		7,217
Operating expenses:
Salaries, wages and benefits		2,028		1,172		5,905		3,499
Supplies		665		387		1,942		1,158
Other operating expenses, net		1,032		575		3,066		1,710
Electronic health record incentives		(5)		(14)		(72)		(48)
Depreciation and amortization		207		119		609		354
Impairment and restructuring charges, and acquisition-related costs		37		20		90		45
Litigation and investigation costs		4		1		19		3
Operating income		211		148		588		496
Interest expense		(186)		(91)		(558)		(292)
Loss from early extinguishment of debt		(24)		—		(24)		(348)
Investment earnings		—		—		—		1
Net income (loss) from continuing operations, before income taxes		1		57		6		(143)
Income tax benefit (expense)		18		(16)		11		57
Net income (loss) from continuing operations, before discontinued operations		19		41		17		(86)
Discontinued operations:
Loss from operations		(2)		(8)		(17)		(5)
Litigation and investigation costs		—		(2)		(18)		(2)
Income tax benefit		1		5		13		3
Net loss from discontinued operations		(1)		(5)		(22)		(4)
Net income (loss)		18		36		(5)		(90)
Less: Net income attributable to noncontrolling interests		9		8		44		20
Net income (loss) attributable to Tenet Healthcare Corporation common shareholders	$	9	$	28	$	(49)	$	(110)
Amounts attributable to Tenet Healthcare Corporation common shareholders
Net income (loss) from continuing operations, net of tax	$	10	$	33	$	(27)	$	(106)
Net loss from discontinued operations, net of tax		(1)		(5)		(22)		(4)
Net income (loss) attributable to Tenet Healthcare Corporation common shareholders	$	9	$	28	$	(49)	$	(110)
Earnings (loss) per share attributable to Tenet Healthcare Corporation common shareholders:
Basic
Continuing operations	$	0.10	$	0.33	$	(0.27)	$	(1.03)
Discontinued operations		(0.01)		(0.05)		(0.23)		(0.04)
	$	0.09	$	0.28	$	(0.50)	$	(1.07)
Diluted
Continuing operations	$	0.10	$	0.32	$	(0.27)	$	(1.03)
Discontinued operations		(0.01)		(0.05)		(0.23)		(0.04)
	$	0.09	$	0.27	$	(0.50)	$	(1.07)
Weighted average shares and dilutive securities outstanding (in thousands):
Basic		98,036		100,894		97,625		102,669
Diluted		100,926		103,098		97,625		102,669

See accompanying Notes to Condensed Consolidated Financial Statements.

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TENET HEALTHCARE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME

Dollars in Millions

(Unaudited)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2014		2013		2014		2013
Net income (loss)	$	18	$	36	$	(5)	$	(90)
Other comprehensive income:
Amortization of prior-year service costs included in net periodic benefit costs		1		—		4		—
Unrealized gains (losses) on securities held as available-for-sale		(1)		—		2		—
Other comprehensive income before income taxes		—		—		6		—
Income tax expense related to items of other comprehensive income		—		—		(2)		—
Total other comprehensive income, net of tax		—		—		4		—
Comprehensive net income (loss)		18		36		(1)		(90)
Less: Comprehensive income attributable to noncontrolling interests		9		8		44		20
Comprehensive net income (loss) attributable to Tenet Healthcare Corporation common shareholders	$	9	$	28	$	(45)	$	(110)

See accompanying Notes to Condensed Consolidated Financial Statements.

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TENET HEALTHCARE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Dollars in Millions

(Unaudited)


	Nine Months Ended
	September 30,
	2014		2013
Net loss	$	(5)	$	(90)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		609		354
Provision for doubtful accounts		949		624
Deferred income tax benefit		(22)		(60)
Stock-based compensation expense		41		26
Impairment and restructuring charges, and acquisition-related costs		90		45
Litigation and investigation costs		19		3
Loss from early extinguishment of debt		24		348
Amortization of debt discount and debt issuance costs		21		12
Pre-tax loss from discontinued operations		35		7
Other items, net		(16)		(19)
Changes in cash from operating assets and liabilities:
Accounts receivable		(1,309)		(662)
Inventories and other current assets		12		(159)
Income taxes		(7)		(5)
Accounts payable, accrued expenses and other current liabilities		120		(44)
Other long-term liabilities		38		(5)
Payments for restructuring charges, acquisition-related costs, and litigation costs and settlements		(115)		(36)
Net cash used in operating activities from discontinued operations, excluding income taxes		(16)		(5)
Net cash provided by operating activities		468		334
Cash flows from investing activities:
Purchases of property and equipment — continuing operations		(734)		(398)
Purchases of businesses or joint venture interests, net of cash acquired		(185)		(142)
Proceeds from sales of facilities and other assets — discontinued operations		4		11
Proceeds from sales of marketable securities, long-term investments and other assets		2		6
Other long-term assets		(4)		11
Other items, net		3		3
Net cash used in investing activities		(914)		(509)
Cash flows from financing activities:
Repayments of borrowings under credit facility		(1,965)		(1,001)
Proceeds from borrowings under credit facility		1,560		1,211
Repayments of other borrowings		(655)		(1,987)
Proceeds from other borrowings		1,608		1,907
Repurchases of common stock		—		(300)
Deferred debt issuance costs		(26)		(31)
Distributions paid to noncontrolling interests		(30)		(18)
Contributions from noncontrolling interests		15		98
Proceeds from exercise of stock options		23		22
Other items, net		3		(8)
Net cash provided by (used in) financing activities		533		(107)
Net increase (decrease) in cash and cash equivalents		87		(282)
Cash and cash equivalents at beginning of period		113		364
Cash and cash equivalents at end of period	$	200	$	82
Supplemental disclosures:
Interest paid, net of capitalized interest	$	(487)	$	(295)
Income tax payments, net	$	(5)	$	(5)

See accompanying Notes to Condensed Consolidated Financial Statements.

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TENET HEALTHCARE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. BASIS OF PRESENTATION

Description of Business and Basis of Presentation

Tenet Healthcare Corporation (together with our subsidiaries, referred to herein as “Tenet,” “we” or “us”) is a national, diversified healthcare services company. As of September 30, 2014, we operated 80 hospitals, 198 outpatient centers, six health plans and Conifer Health Solutions, LLC (“Conifer”), which provides healthcare business process services in the areas of revenue cycle management, value-based care and patient communications.

Effective October 1, 2013, we acquired the common stock of Vanguard Health Systems, Inc. (“Vanguard”) for $21 per share in an all cash transaction. Vanguard owned and operated 28 hospitals (plus one more under construction, which was recently completed), 39 outpatient centers and five health plans with approximately 140,000 members, serving communities in Arizona, California, Illinois, Massachusetts, Michigan and Texas. We paid approximately $4.3 billion to acquire Vanguard, including the assumption of $2.5 billion of Vanguard’s net debt.

This quarterly report supplements our Annual Report on Form 10-K for the year ended December 31, 2013 (“Annual Report”). As permitted by the Securities and Exchange Commission for interim reporting, we have omitted certain notes and disclosures that substantially duplicate those in our Annual Report. For further information, refer to the audited Consolidated Financial Statements and notes included in our Annual Report. Unless otherwise indicated, all financial and statistical data included in these notes to our Condensed Consolidated Financial Statements relate to our continuing operations, with dollar amounts expressed in millions (except per-share amounts). The accompanying Condensed Consolidated Balance Sheet as of December 31, 2013 was derived from the audited consolidated financial statements included in our Annual Report, but has been revised to reflect the impact of completing the purchase price allocation for the acquisition of Vanguard, as described in Note 14. Additionally, certain prior-year amounts have been adjusted to conform to the current-year presentation, including $73 million of Medicaid supplemental payments receivable that are now presented as other current assets rather than accounts receivable.

Although the Condensed Consolidated Financial Statements and related notes within this document are unaudited, we believe all adjustments considered necessary for a fair presentation have been included and are of a normal recurring nature. In preparing our financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”), we must use estimates and assumptions that affect the amounts reported in our Condensed Consolidated Financial Statements and these accompanying notes. We regularly evaluate the accounting policies and estimates we use. In general, we base the estimates on historical experience and on assumptions that we believe to be reasonable given the particular circumstances in which we operate. Actual results may vary from those estimates. Financial and statistical information we report to other regulatory agencies may be prepared on a basis other than GAAP or using different assumptions or reporting periods and, therefore, may vary from amounts presented herein. Although we make every effort to ensure that the information we report to those agencies is accurate, complete and consistent with applicable reporting guidelines, we cannot be responsible for the accuracy of the information they make available to the public.

Operating results for the three and nine months ended September 30, 2014 are not necessarily indicative of the results that may be expected for the full year. Reasons for this include, but are not limited to: overall revenue and cost trends, particularly the timing and magnitude of price changes; fluctuations in contractual allowances and cost report settlements and valuation allowances; managed care contract negotiations, settlements or terminations and payer consolidations; changes in Medicare and Medicaid regulations; Medicaid and other supplemental funding levels set by the states in which we operate; the timing of approval by the Centers for Medicare and Medicaid Services of Medicaid provider fee revenue programs; trends in patient accounts receivable collectability and associated provisions for doubtful accounts; fluctuations in interest rates; levels of malpractice insurance expense and settlement trends; the number of covered lives managed by our health plans and the plans’ ability to effectively manage medical costs; the timing of when we meet the criteria to recognize electronic health record incentives; impairment of long-lived assets and goodwill; restructuring charges; losses, costs and insurance recoveries related to natural disasters; litigation and investigation costs; acquisitions and dispositions of facilities and other assets; income tax rates and deferred tax asset valuation allowance activity; changes in estimates of accruals for annual incentive compensation; the timing and amounts of stock option and

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restricted stock unit grants to employees and directors; gains or losses from early extinguishment of debt; and changes in occupancy levels and patient volumes. Factors that affect patient volumes and, thereby, the results of operations at our hospitals and related healthcare facilities include, but are not limited to: the business environment, economic conditions and demographics of local communities in which we operate; the number of uninsured and underinsured individuals in local communities treated at our hospitals; seasonal cycles of illness; climate and weather conditions; physician recruitment, retention and attrition; advances in technology and treatments that reduce length of stay; local healthcare competitors; managed care contract negotiations or terminations; any unfavorable publicity about us, which impacts our relationships with physicians and patients; changes in healthcare regulations and the participation of individual states in federal programs; and the timing of elective procedures. These considerations apply to year-to-year comparisons as well.

Net Operating Revenues Before Provision for Doubtful Accounts

We recognize net operating revenues before provision for doubtful accounts in the period in which our services are performed. Net operating revenues before provision for doubtful accounts primarily consist of net patient service revenues that are recorded based on established billing rates (i.e., gross charges), less estimated discounts for contractual and other allowances, principally for patients covered by Medicare, Medicaid, managed care and other health plans, as well as certain uninsured patients under our Compact with Uninsured Patients (“Compact”) and other uninsured discount and charity programs.

The table below shows the sources of net operating revenues before provision for doubtful accounts:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2014		2013		2014		2013
General Hospitals:
Medicare	$	838	$	501	$	2,560	$	1,543
Medicaid		340		206		1,012		630
Managed care		2,369		1,378		6,787		4,126
Indemnity, self-pay and other		357		262		1,172		783
Acute care hospitals — other revenue		8		14		45		53
Other:
Other operations		516		257		1,520		706
Net operating revenues before provision for doubtful accounts	$	4,428	$	2,618	$	13,096	$	7,841

Cash and Cash Equivalents

We treat highly liquid investments with original maturities of three months or less as cash equivalents. Cash and cash equivalents were approximately $200 million and $113 million at September 30, 2014 and December 31, 2013, respectively. As of September 30, 2014 and December 31, 2013, our book overdrafts were approximately $194 million and $245 million, respectively, which were classified as accounts payable.

At September 30, 2014 and December 31, 2013, approximately $98 million and $62 million, respectively, of total cash and cash equivalents in the accompanying Condensed Consolidated Balance Sheets were intended for the operations of our captive insurance subsidiaries.

Also at September 30, 2014 and December 31, 2013, we had $113 million and $193 million, respectively, of property and equipment purchases accrued for items received but not yet paid. Of these amounts, $62 million and $138 million, respectively, were included in accounts payable.

During the nine months ended September 30, 2014 and 2013, we entered into non-cancellable capital leases of approximately $112 million and $99 million, respectively, primarily for buildings and equipment.

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Other Intangible Assets

The following tables provide information regarding other intangible assets, which are included in the accompanying Condensed Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013:


	Gross
	Carrying		Accumulated		Net Book
	Amount		Amortization		Value
As of September 30, 2014:
Capitalized software costs	$	1,326	$	(552)	$	774
Long-term debt issuance costs		245		(42)		203
Trade names		106		—		106
Contracts		57		(5)		52
Other		80		(24)		56
Total	$	1,814	$	(623)	$	1,191


	Gross
	Carrying		Accumulated		Net Book
	Amount		Amortization		Value
As of December 31, 2013:
Capitalized software costs	$	1,148	$	(468)	$	680
Long-term debt issuance costs		230		(31)		199
Trade names		106		—		106
Contracts		57		(2)		55
Other		80		(15)		65
Total	$	1,621	$	(516)	$	1,105

Estimated future amortization of intangibles with finite useful lives as of September 30, 2014 is as follows:


			Years Ending December 31,
	Total		2014		2015		2016		2017		2018		Later Years
Amortization of intangible assets	$	1,077	$	54	$	190	$	163	$	134	$	130	$	406

NOTE 2. ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS

The principal components of accounts receivable are shown in the table below:


	September 30,		December 31,
	2014		2013
Continuing operations:
Patient accounts receivable	$	2,978	$	2,459
Allowance for doubtful accounts		(772)		(589)
Estimated future recoveries from accounts assigned to our Conifer subsidiary		122		92
Net cost reports and settlements payable and valuation allowances		(92)		(75)
		2,236		1,887
Discontinued operations		2		3
Accounts receivable, net	$	2,238	$	1,890

As of September 30, 2014 and December 31, 2013, our allowance for doubtful accounts was 25.9% and 24.0%, respectively, of our patient accounts receivable. Accounts that are pursued for collection through Conifer’s regional business offices are maintained on our hospitals’ books and reflected in patient accounts receivable with an allowance for doubtful accounts established to reduce the carrying value of such receivables to their estimated net realizable value. Generally, we estimate this allowance based on the aging of our accounts receivable by hospital, our historical collection experience by hospital and for each type of payer, and other relevant factors. As of September 30, 2014 and December 31, 2013, our allowance for doubtful accounts for self-pay was 79.5% and 75.9%, respectively, of our self-pay

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patient accounts receivable, including co-pays and deductibles owed by patients with insurance. As of September 30, 2014 and December 31, 2013, our allowance for doubtful accounts for managed care was 6.2% and 5.9%, respectively, of our managed care patient accounts receivable.

The estimated costs (based on selected operating expenses, which include salaries, wages and benefits, supplies and other operating expenses) of caring for our self-pay patients for the three months ended September 30, 2014 and 2013 were approximately $135 million and $116 million, respectively, and for the nine months ended September 30, 2014 and 2013 were approximately $488 million and $342 million, respectively. Our estimated costs (based on the selected operating expenses described above) of caring for charity care patients for the three months ended September 30, 2014 and 2013 were approximately $42 million and $32 million, respectively, and for the nine months ended September 30, 2014 and 2013 were approximately $137 million and $95 million, respectively. Most states include an estimate of the cost of charity care in the determination of a hospital’s eligibility for Medicaid disproportionate share hospital (“DSH”) payments. Revenues attributable to DSH payments and other state-funded subsidy payments for the three months ended September 30, 2014 and 2013 were approximately $178 million and $72 million, respectively, and for the nine months ended September 30, 2014 and 2013 were approximately $493 million and $257 million, respectively. These payments are intended to mitigate our cost of uncompensated care, as well as reduced Medicaid funding levels.

NOTE 3. DISCONTINUED OPERATIONS

Net operating revenues and loss before income taxes reported in discontinued operations are as follows:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2014		2013		2014		2013
Net operating revenues	$	1	$	3	$	2	$	6
Net loss before income taxes		(2)		(10)		(35)		(7)

Net loss before income taxes from discontinued operations in the nine months ended September 30, 2014 included approximately $18 million of expense recorded in litigation and investigation costs allocable to one of our previously divested hospitals related to a class action lawsuit discussed in Note 10. In the nine months ended September 30, 2013, we recognized a $7 million gain in discontinued operations related to the sale of land.

Should we dispose of additional hospitals or other assets in the future, we may incur asset impairment and restructuring charges in future periods.

NOTE 4. IMPAIRMENT AND RESTRUCTURING CHARGES, AND ACQUISITION-RELATED COSTS

During the nine months ended September 30, 2014, we recorded impairment and restructuring charges and acquisition-related costs of $90 million, consisting of $14 million of employee severance costs, $6 million of contract and lease termination fees, $19 million of restructuring costs, and $51 million in acquisition-related costs, which include $7 million of transaction costs and $44 million of acquisition integration charges.

During the nine months ended September 30, 2013, we recorded impairment and restructuring charges and acquisition-related costs of $45 million, consisting of $2 million relating to the impairment of property, $10 million of restructuring costs, $9 million of employee severance costs, $1 million in lease termination fees, and $23 million in acquisition-related costs.

Our impairment tests presume stable, improving or, in some cases, declining operating results in our hospitals, which are based on programs and initiatives being implemented that are designed to achieve the hospital’s most recent projections. If these projections are not met, or if in the future negative trends occur that impact our future outlook, impairments of long-lived assets and goodwill may occur, and we may incur additional restructuring charges, which could be material.

As of September 30, 2014, our continuing operations consisted of two operating segments, our hospital and other operations and our Conifer subsidiary. During the three months ended March 31, 2014, we combined our

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California region and our Phoenix market to form our Western region. Our hospital and other operations are currently structured as follows:

Our Central region includes all of our hospitals and other operations in Missouri, New Mexico, Tennessee and Texas, except for those in the Resolute Health, San Antonio and South Texas markets;

Our Florida region includes all of our hospitals and other operations in Florida;

Our Northeast region includes all of our hospitals and other operations in Illinois, Massachusetts and Pennsylvania;

Our Southern region includes all of our hospitals and other operations in Alabama, Georgia, North Carolina and South Carolina;

Our Western region includes all of our hospitals and other operations in Arizona and California;

Our Detroit market includes all of our hospitals and other operations in the Detroit, Michigan area;

Our Resolute Health market includes our hospital and other operations in the New Braunfels, Texas area;

Our San Antonio market includes all of our hospitals and other operations in the San Antonio, Texas area; and

Our South Texas market includes all of our hospitals and other operations in the Brownsville and Harlingen, Texas areas.

These regions and markets are reporting units used to perform our goodwill impairment analysis and are one level below our hospital operations reportable business segment level.

We periodically incur costs to implement restructuring efforts for specific operations, which are recorded in our statement of operations as they are incurred. Our restructuring plans focus on various aspects of operations, including aligning our operations in the most strategic and cost-effective structure. Certain restructuring and acquisition-related costs are based on estimates. Changes in estimates are recognized as they occur.

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NOTE 5. LONG-TERM DEBT AND LEASE OBLIGATIONS

The table below shows our long-term debt as of September 30, 2014 and December 31, 2013:



	September 30,		December 31,
	2014		2013
Senior notes:
97/8%, due 2014	$	—	$	60
91/4%, due 2015		—		474
5%, due 2019		1,100		—
51/%, due 2019		500		—
63/4%, due 2020		300		300
8%, due 2020		750		750
81_/8%, due 2022		2,800		2,800
67/8%, due 2031		430		430
Senior secured notes:
61/4%, due 2018		1,041		1,041
43/4%, due 2020		500		500
6%, due 2020		1,800		1,800
41/2%, due 2021		850		850
43/8%, due 2021		1,050		1,050
Credit facility due 2016		—		405
Capital leases and mortgage notes		453		417
Unamortized note discounts and premium		(21)		(28)
Total long-term debt		11,553		10,849
Less current portion		98		153
Long-term debt, net of current portion	$	11,455	$	10,696

Credit Agreement

We have a senior secured revolving credit facility (as amended, “Credit Agreement”) that provides, subject to borrowing availability, for revolving loans in an aggregate principal amount of up to $1 billion, with a $300 million subfacility for standby letters of credit. The Credit Agreement, which has a scheduled maturity date of November 29, 2016, is collateralized by patient accounts receivable of all of our wholly owned acute care and specialty hospitals. In addition, borrowings under the Credit Agreement are guaranteed by our wholly owned hospital subsidiaries. Outstanding revolving loans accrue interest at a base rate plus a margin ranging from 1.00% to 1.50% or the London Interbank Offered Rate plus a margin ranging from 2.00% to 2.50% per annum based on available credit. An unused commitment fee payable on the undrawn portion of the revolving loans ranges from 0.375% to 0.500% per annum based on available credit. Our borrowing availability is based on a specified percentage of eligible accounts receivable, including self-pay accounts. At September 30, 2014, we had no cash borrowings outstanding under the revolving credit facility; however, we had approximately $6 million of standby letters of credit outstanding. Based on our eligible receivables, approximately $994 million was available for borrowing under the revolving credit facility at September 30, 2014.

Letter of Credit Facility

On March 7, 2014, we entered into a new letter of credit facility agreement (“LC Facility”) that provides for the issuance of standby and documentary letters of credit (including certain letters of credit issued under our existing Credit Agreement, which we transferred to the LC Facility (the “Existing Letters of Credit”)), from time to time, in an aggregate principal amount of up to $180 million (subject to increase to up to $200 million). The LC Facility has a scheduled maturity date of March 7, 2017, and obligations thereunder are guaranteed by and secured by a first priority pledge of the capital stock and other ownership interests of certain of our hospital subsidiaries on an equal ranking basis with our existing senior secured notes.

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Drawings under any letter of credit issued under the LC Facility (including the Existing Letters of Credit) that we have not reimbursed within three business days after notice thereof will accrue interest at a base rate plus a margin equal to 0.875% per annum. An unused commitment fee is payable at an initial rate of 0.50% per annum with a step down to 0.375% per annum based on the secured debt to EBITDA ratio of 3.00 to 1.00. A per annum fee on the aggregate outstanding amount of issued but undrawn letters of credit (including Existing Letters of Credit) will accrue at a rate of 1.875% per annum. An issuance fee equal to 0.125% per annum of the aggregate face amount of each outstanding letter of credit is payable to the account of the issuer of the related letter of credit. At September 30, 2014, we had approximately $115 million of standby letters of credit outstanding under the LC Facility.

Senior Notes

In September 2014, we sold $500 million aggregate principal amount of 51/₂% senior notes, which will mature on March 1, 2019. We will pay interest on the notes semi-annually in arrears on March 1 and September 1 of each year, commencing on March 1, 2015. The proceeds from the sale of the notes were used for general corporate purposes, including the repayment of indebtedness and drawings under our Credit Agreement, related transaction fees and expenses, and acquisitions.

In June and March 2014, we sold $500 million and $600 million aggregate principal amount, respectively, of 5% senior notes, which will mature on March 1, 2019. We will pay interest on the notes semi-annually in arrears on March 1 and September 1 of each year, which payments commenced on September 1, 2014. The net proceeds from the sale of the notes in June 2014 were used to redeem our 91/4% senior notes due 2015 in July 2014. In connection with the redemption, we recorded a loss from early extinguishment of debt of approximately $24 million, primarily related to the difference between the redemption price and the par value of the notes, as well as the write-off of associated unamortized note discounts and issuance costs. The net proceeds from the sale of the notes in March 2014 were used for general corporate purposes, including the repayment of borrowings under our Credit Agreement.

All of our senior notes are general unsecured senior debt obligations that rank equally in right of payment with all of our other unsecured senior indebtedness, but are effectively subordinated to our senior secured notes described in our Annual Report, the obligations of our subsidiaries, and any obligations under our Credit Agreement and the LC Facility to the extent of the collateral. Our Annual Report also describes the covenants and conditions, as well as other provisions, including our redemption rights, set forth in the indentures governing our senior notes.

NOTE 6. GUARANTEES

At September 30, 2014, the maximum potential amount of future payments under our income guarantees to certain physicians who agree to relocate and revenue collection guarantees to hospital-based physician groups providing certain services at our hospitals was $92 million. We had a liability of $69 million recorded for these guarantees included in other current liabilities at September 30, 2014.

NOTE 7. EMPLOYEE BENEFIT PLANS

At September 30, 2014, approximately 5.2 million shares of common stock were available under our 2008 Stock Incentive Plan for future stock option grants and other incentive awards, including restricted stock units. Options have an exercise price equal to the fair market value of the shares on the date of grant and generally expire 10 years from the date of grant. A restricted stock unit is a contractual right to receive one share of our common stock or the equivalent value in cash in the future. Options and restricted stock units typically vest one-third on each of the first three anniversary dates of the grant; however, from time to time, we grant (i) options and restricted stock units with different time-based vesting terms, and (ii) performance-based options and restricted stock units that vest subject to the achievement of specified performance goals within a specified timeframe.

Our income from continuing operations for the nine months ended September 30, 2014 and 2013 includes $38 million and $29 million, respectively, of pre-tax compensation costs related to our stock-based compensation arrangements recorded in salaries, wages and benefits in the accompanying Condensed Consolidated Statements of Operations.

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Stock Options

The following table summarizes stock option activity during the nine months ended September 30, 2014:


		Weighted Average
		Exercise Price		Aggregate		Weighted Average
	Options	Per Share		Intrinsic Value		Remaining Life
					(In Millions)
Outstanding as of December 31, 2013	3,308,111	$	30.79
Granted	—
Exercised	(691,050)		33.72
Forfeited/Expired	(624,052)		47.97
Outstanding as of September 30, 2014	1,993,009	$	24.40	$	70	3.9	years
Vested and expected to vest at September 30, 2014	1,984,562	$	24.31	$	70	3.9	years
Exercisable as of September 30, 2014	1,587,878	$	21.90	$	60	3.7	years

There were 691,050 stock options exercised during the nine months ended September 30, 2014 with a $13 million aggregate intrinsic value, and 913,369 stock options exercised during the same period in 2013 with a $17 million aggregate intrinsic value.

As of September 30, 2014, there were $2 million of total unrecognized compensation costs related to stock options. These costs are expected to be recognized over a weighted average period of 1.1 years.

There were no stock options granted in the nine months ended September 30, 2014. In the nine months ended September 30, 2013, we granted an aggregate of 295,639 stock options under our 2008 Stock Incentive Plan to certain of our senior officers. These stock options will all vest on the third anniversary of the grant date, subject to the terms of the Plan, and will expire on the fifth anniversary of the grant date.

The weighted average estimated fair value of stock options we granted in the nine months ended September 30, 2013 was $14.46 per share. This fair value was calculated based on the grant date, using a binomial lattice model with the following assumptions:


		Nine Months Ended September 30, 2013
Expected volatility		50%
Expected dividend yield		0%
Expected life		3.6 years
Expected forfeiture rate		6%
Risk-free interest rate		0.48%
Early exercise threshold		100% gain
Early exercise rate		50% per year

The expected volatility used in the binomial lattice model incorporated historical and implied share-price volatility and was based on an analysis of historical prices of our stock and open-market exchanged options. The expected volatility reflects the historical volatility for a duration consistent with the contractual life of the options, and the volatility implied by the trading of options to purchase our stock on open-market exchanges. The historical share-price volatility excludes the movements in our stock price on two dates (one in 2010 and one in 2011) with unusual volatility due to an unsolicited acquisition proposal. The expected life of options granted is derived from the output of the binomial lattice model and represents the period of time that the options are expected to be outstanding. This model incorporates an early exercise assumption in the event of a significant increase in stock price. The risk-free interest rates are based on zero-coupon United States Treasury yields in effect at the date of grant consistent with the expected exercise timeframes.

Table of Contents

The following table summarizes information about our outstanding stock options at September 30, 2014:


	Options Outstanding					Options Exercisable
		Weighted Average
	Number of	Remaining		Weighted Average		Number of	Weighted Average
Range of Exercise Prices	Options	Contractual Life		Exercise Price		Options	Exercise Price
$0.00 to $4.569	242,753	4.4	years	$	4.56	242,753	$	4.56
$4.57 to $25.089	957,583	5.2	years		20.96	830,903		20.67
$25.09 to $32.569	402,816	1.9	years		29.32	402,816		29.32
$32.57 to $42.089	389,857	2.5	years		40.10	111,406		42.08
	1,993,009	3.9	years	$	24.40	1,587,878	$	21.90

Restricted Stock Units

The following table summarizes restricted stock unit activity during the nine months ended September 30, 2014:


	Restricted Stock	Weighted Average Grant
	Units	Date Fair Value Per Unit
Unvested as of December 31, 2013	2,707,222	$	33.34
Granted	1,768,508		48.41
Vested	(900,763)		36.51
Forfeited	(140,468)		35.23
Unvested as of September 30, 2014	3,434,499	$	41.85

In the nine months ended September 30, 2014, we granted 1,045,750 restricted stock units subject to time-vesting of which 944,249 will vest and be settled ratably over a three-year period from the date of the grant, 23,435 will vest 100% on the tenth anniversary of the grant date, 63,623 will vest 100% on the fifth anniversary of the grant date and 14,443 will vest 100% on the third anniversary of the grant date. In addition, we granted 271,815 performance-based restricted stock units to certain of our senior officers; the vesting of these restricted stock units is contingent on our achievement of a specified one-year performance goal for the year ending December 31, 2014. Provided the goal is achieved, the performance-based restricted stock units will vest ratably over a three-year period from the grant date. If the performance goal is not achieved, the restricted stock units will be forfeited. The actual number of performance-based restricted stock units that could vest will range from 0% to 200% of the 271,815 units granted, depending on our level of achievement with respect to the performance goal. We also granted 450,943 special retention restricted stock units to a select group of officers; two-thirds of the award will vest contingent on our achievement of a performance goal of which one-half will vest based on performance over a one-year period ending in December 2015 and the remaining one-half will vest based on performance over a four-year period ending in December 2018. The remaining one-third of this special retention award will vest in full on the fifth anniversary of the grant date.

In the nine months ended September 30, 2013, we granted 815,262 restricted stock units subject to time-vesting, of which 735,129 will vest and be settled ratably over a three-year period from the grant date and 80,133 will vest 100% on the fifth anniversary of the grant date. In addition, we granted 206,058 performance-based restricted stock units to certain of our senior officers. Because the performance goal for the year ended December 31, 2013 was met at the target level, 100% of the performance-based restricted stock units will vest and be settled ratably over a three-year period from the grant date. We also awarded a grant of 212,180 restricted stock units to our chief executive officer, of which 106,090 are subject to time-vesting and 106,090 are performance-based. If target conditions are met, 50% of this grant will vest three years from the grant date and the remaining 50% will vest six years from the grant date. The award also allows for an additional 106,090 shares to be issued if higher performance criteria are met.

As of September 30, 2014, there were $107 million of total unrecognized compensation costs related to restricted stock units. These costs are expected to be recognized over a weighted average period of 3.0 years.

Table of Contents

NOTE 8. EQUITY

Changes in Shareholders’ Equity

The following table shows the changes in consolidated equity during the nine months ended September 30, 2014 and 2013 (dollars in millions, share amounts in thousands):

Tenet Healthcare Corporation Shareholders’ Equity

Common Stock

Accumulated

Additional

Other

Issued Par

Paid-in

Comprehensive

Accumulated

Treasury

Noncontrolling

Outstanding

Amount

Capital

Loss

Deficit

Stock

Interests

Total Equity

Balances at December 31, 2013

96,860

4,572

(24)


Large accelerated filer ☒	Accelerated filer ☐	Non-accelerated filer ☐	Smaller reporting company ☐


		Page
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)

	Condensed Consolidated Financial Statements	1

	Notes to Condensed Consolidated Financial Statements	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	59

Item 4.	Controls and Procedures	60

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	61

Item 1A.	Risk Factors	61

Item 6.	Exhibits	62


	September 30,		December 31,
	2014		2013
ASSETS
Current assets:
Cash and cash equivalents	$	200	$	113
Accounts receivable, less allowance for doubtful accounts ($773 at September 30, 2014 and $589 at December 31, 2013)		2,238		1,890
Inventories of supplies, at cost		270		260
Income tax receivable		22		—
Current portion of deferred income taxes		725		692
Other current assets		746		737
Total current assets		4,201		3,692
Investments and other assets		366		357
Deferred income taxes, net of current portion		100		148
Property and equipment, at cost, less accumulated depreciation and amortization ($4,347 at September 30, 2014 and $3,907 at December 31, 2013)		7,749		7,582
Goodwill		3,705		3,566
Other intangible assets, at cost, less accumulated amortization ($623 at September 30, 2014 and $516 at December 31, 2013)		1,191		1,105
Total assets	$	17,312	$	16,450

LIABILITIES AND EQUITY
Current liabilities:
Current portion of long-term debt	$	98	$	153
Accounts payable		1,068		1,085
Accrued compensation and benefits		735		622
Professional and general liability reserves		175		156
Accrued interest payable		265		198
Other current liabilities		804		879
Total current liabilities		3,145		3,093
Long-term debt, net of current portion		11,455		10,696
Professional and general liability reserves		525		555
Defined benefit plan obligations		381		398
Other long-term liabilities		544		490
Total liabilities		16,050		15,232
Commitments and contingencies
Redeemable noncontrolling interests in equity of consolidated subsidiaries		396		340
Equity:
Shareholders’ equity:
Common stock, $0.05 par value; authorized 262,500,000 shares; 145,421,213 shares issued at September 30, 2014 and 144,057,351 shares issued at December 31, 2013		7		7
Additional paid-in capital		4,597		4,572
Accumulated other comprehensive loss		(20)		(24)
Accumulated deficit		(1,471)		(1,422)
Common stock in treasury, at cost, 47,196,935 shares at September 30, 2014 and 47,197,722 shares at December 31, 2013		(2,378)		(2,378)
Total shareholders’ equity		735		755
Noncontrolling interests		131		123
Total equity		866		878
Total liabilities and equity	$	17,312	$	16,450


☒	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 2014


☐	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from to