Centene Corp (CNC) 2009 Q4 法說會逐字稿

Good morning.

My name is Al and I'll be your conference operator today.

At this time I'd like to welcome everyone to the Centene fourth quarter 2009 earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer session.

(Operator Instructions) Thank you.

Mr Ed Kroll, you may begin your conference.

Thank you and good morning everyone.

I'm Ed Kroll, Senior Vice President Finance and Investor Relations at Centene Corporation.

Thank you for joining our fourth quarter 2009 earnings call.

Michael Neidorff, Centene's Chairman and Chief Executive Officer, and Bill Scheffel, Executive Vice President and Chief Financial Officer of Centene will host this morning's call.

The call is expected to last about 45 minutes and may also be accessed through our website at centene.com.

A replay will be available shortly after the call's completion also on our website at centene.com or by dialing 800-642-1687 in the US and Canada, or outside those countries, 706-645-9291, the access code 51681793.

Any remarks that Centene may make about future expectations, plans and prospects constitute forward-looking statements for purposes of the Safe Harbor provision under the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from those indicated by these forward-looking statements, as a result of various important factors including those discussed in Centene's most recently filed Form 10-Q dated October 27, 2009, as well as other public SEC filings.

Centene anticipates that subsequent events and developments will cause its estimates to change.

While the Company may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so.

With that, I'd like to turn the call over to our Chairman and CEO, Michael Neidorff.

Michael?

Thank you, Ed.

Good morning everyone and thank you for joining Centene's fourth quarter and full year 2009 earnings call.

Before commenting on what was another solid quarter and full year performance, I would like to make some overview comments regarding the economy, our recent follow-on stock offering and federal health reform.

I will then briefly review some of the highlights of the fourth quarter and the year, and turn the call over to Bill who will walk you through the financial details.

It was this time last year when I first spoke about a global financial realignment taking place as a result of the 2008 economic crisis.

A new era ensued in which states began facing high unemployment rates, severe budget deficits, and an expanding Medicaid eligible population.

Consequently, Centene's cost effective and quality programs have become even more important to our existing and potential state customers.

We need to help states stretch budget dollars further while enhancing access to care for vulnerable populations.

It is also important for us to be a strong and reliable financial partner for our state customers, with a focus on liquidity and capital adequacy.

So we must be prudent balance sheet managers.

Consistent with this philosophy, we made an already strong balance sheet even stronger, by raising $104.5 million in a follow-on equity offering in January 2010.

These proceeds allow us to reduce our debt to cap ratio to the low, mid 20s from the low 30s and to reload our $300 million revolver to where the full amount is available.

It is generally recognized in our industry that a strong balance sheet enhances the ability to pursue M&A opportunities and new state contracts.

We are always selective in choosing our growth opportunities, but this offering gives us additional flexibility to move quickly to take advantage of those targets that meet our strict accretion and return criteria.

We look forward to reporting to you in the future on the effective deployment of this capital and know fully we will be judged on how we use it.

The reset that began in 2008 is not complete.

It is an ongoing process and as I said on our 2010 earnings guidance call last month, 2010 will be a realignment year for our industry, with even tighter state budgets and uncertainties surrounding levels of federal stimulus relief.

On the latter point, the recent budget proposal for fiscal year 2011 from President Obama was somewhat encouraging.

It included $25 billion to extend increased FMAP payments through June of 2011.

The outcome for federal health reform remains uncertain.

We are closely watching developments with a careful eye on what is meeting real needs and what is politics at work or a combination of both.

However, we are well-prepared and continue to believe that the diversity of our multi-line strategy has positioned us to operate more effectively in whatever post reform environment ensues.

Regardless of federal health reform outcomes, states will continue to have a need for our products and services and maybe more so, and we would expect to continue to meet their needs as well as those of new states.

Now, switching gears, I would like to mention some of the highlights of the past year.

Our team has done a tremendous job demonstrating its ability to successfully manage this business during very difficult and uncertain economic times.

In full year 2009, premium and service revenues grew more than 18%, with at risk membership growing across all states.

We grew EPS slightly more than 15% compared to the 2008 run rate, despite absorbing significantly greater flu costs in 2009.

Programs focusing on the state's uninsured population through our Celtic subsidiary were part of what we did.

We are the only national MCO with this valuable experience.

We were chosen as one of two coordinated care organizations to participate in the new managed Medicaid contract in Mississippi that commences later this year.

The inclusion of foster care into Mississippi contract demonstrates the success and effectiveness of this innovative product first launched by us in Texas in 2008.

We anticipate our experience in both Texas and Mississippi will be beneficial to launching these products in other states.

We began converting non-risk managed care membership in Florida from Access Health to Sunshine State Health Plan on an at-risk basis on February 1, 2009.

At December 31, 2009, we served 102,600 members on an at-risk basis, while Access served 59,700 members on a non-risk basis.

We rolled out a new medical management system capability to improve health outcomes while reducing cost.

This real-time intelligence and analytics tool include a desktop executive dashboard that provides early warning of adverse trends, claims drill down for quick analysis of clinical information, financial or operating issues.

As well as predictive modeling.

We believe these largely proprietary tools were at least partially responsible for our successful management of high flu costs in the year, where others became victims.

Now, on to fourth quarter results.

Fourth quarter revenues increased 19.6%.

This solid revenue growth was derived from diverse sources, including entrance into new states, expansion in existing states and the introduction of new products.

Our consolidated fourth quarter HBR increased 160 basis points year-over-year, and 20 basis points sequentially.

Please note that a significant improvement in our ABD markets, 170 basis points, particularly in Ohio and South Carolina, was more than offset by reserving for higher rates in new markets, Florida and Massachusetts, 160 basis points, a rate decrease for our CHIP/Perinate product in Texas, 60 basis points, and additional flu cost of 80 basis points.

I would remind you that Q1 of 2009 was an exceptionally mild flu season and that we remain vigilant in Q1 of this year, recognizing there is both H1N1 and additional strains with which we must contend.

Turning to general and administrative expenses, the G&A ratio for the fourth quarter of 2009 was 12.7%, compared to 13.8% in the fourth quarter of 2008.

The 110 basis point improvement reflects our continued focus on G&A leverage, as well as the impact of additional revenues from new business.

We expect to further reduce G&A ratio in 2010 by at least an additional 50 basis points, despite the offsetting impact of Mississippi start-up costs.

Further G&A reduction beyond 2010 remains a top priority and our ongoing systems investments should enable us to accomplish this goal.

Now a comment on the rate environment.

As we have noted on our 2010 earnings guidance call in January, our early 2010 rate changes came in lower than historically experienced.

Through our margin protection program, we have identified initial cost offsets to mitigate these factors and are in the process of identifying additional offsets.

We currently have known rates representing approximately 70% of our projected member months for 2010.

We continue to forecast low single digit rate increases for the states which adjust rates in the second half of 2010.

Overall, we expect full year rates in 2010 to increase 1% to 2%.

Centene is an agile and resilient Company with a business model that is built to grow in both good and bad economic times.

We remain committed to our state partners and to maintaining a prudent and selective approach to both current and new business endeavors.

As we look into the future, we see a long runway ahead of us with an abundance of growth opportunities.

We thank you for your interest and support.

Before I turn the call over to Bill, I would like to invite institutional investors and sell side analysts to join us in New York City for a brief medical management systems update on February 22nd.

We want to provide you with a demonstration of our new executive dashboard tools that I mentioned earlier in my remarks.

The equivalent of what you could see on a tour of our office.

We think these are a real differentiator for Centene in medical management and having visibility on trends.

Please mark your calendars for February 22nd for a two hour meeting, starting at noon.

Please watch for a press release later this week for further details.

Now I'll turn the call over to Bill for the financial discussion.

Bill?

Thank you, Michael and good morning everyone.

First I will give an update on our New Jersey transaction.

As previously announced, we anticipate closing on the sale of assets related to our New Jersey health plan later this quarter.

We have classified New Jersey as a discontinued operation since last year-end, and throughout 2009.

Accordingly, the financial results discussed throughout this call will be in the context of continuing operations and, therefore, exclude our New Jersey health plan.

For the fourth quarter of 2009, premium and service revenues grew to $1.05 billion, an increase of 19.6% compared to the fourth quarter of 2008.

Our revenue increase was driven by membership growth in all of our states, premium rate increases including recording the Georgia rate increase related to July 1st, 2009 through December 31st, 2009, all in the fourth quarter, commencement of operations in Massachusetts to manage healthcare services for members under the state Commonwealth Bridge and Commonwealth Care programs, the acquisition of certain assets in South Carolina last March 1st, and in Florida, the conversion of non-risk managed care membership from Access Health Solutions to Sunshine State Health Plan on an an at-risk basis.

For the year ended December 31st, 2009, premium and service revenues grew to $3.878 billion, an increase of 18.4%, compared to the year ended December 31st, 2008.

The full year 2009 revenue increase was driven by the items I just discussed and in addition, having a full year of Celtics operations and Acute Care Services in Yavapai County, Arizona.

Our consolidated health benefits ratio or HBR was 83.9% for the fourth quarter of 2009, compared to 82.3% in the fourth quarter of 2008, and 83.7% in the third quarter of 2009.

The 160 basis point year-over-year increase and 20 basis point sequential increase are detailed in the reconciliation of the changes in our health benefits ratio in the press release.

The portion of the year-over-year increase related to new markets was driven by the expansion in the Florida market.

We have seen higher than anticipated medical costs, particularly for those members that converted in the third quarter of 2009.

Our medical cost experience to date is higher than the Access Health experience for the same population.

We are working aggressively to manage these costs to match expectations.

With respect to flu costs, we estimate that we incurred $9.6 million of flu costs in the fourth quarter of 2009, compared to $1.3 million in last year's fourth quarter, and $5.9 million in the third quarter of 2009.

Flu costs peaked in October and decreased significantly by December.

These costs, however, should not be taken in isolation, since at the same time we have experienced lower than forecasted costs in the inpatient and pharmacy areas.

The full year HBR of 83.5% increased 100 basis points year-over-year from 82.5% in 2008.

60 basis points of the increase is due to the effect in 2008 of recording the benefit of the Georgia premium rate increase for the period from July 1st, 2007 to December 31st, 2007, in the first quarter of 2008.

Flu costs for all of 2009 totaled approximately $22 million, versus $6 million in 2008.

This increase represents approximately 50 basis points of our total HBR for the year.

Our general and administrative expenses ratio for the fourth quarter of 2009 was 12.7%, compared to 13.8% in the fourth quarter of 2008.

The 110 basis point year-over-year reduction in the G&A ratio reflects improved leveraging of costs over a higher revenue base, and our continued efforts to lower our operating costs.

The G&A ratio for all of 2009 was 13.3%, a 30 basis point decline year-over-year, which also reflects the leveraging of our expenses over higher revenues, but offset by the effect of the Celtic acquisition, our business expansion costs in Florida, and the consolidation of Access.

Our fourth quarter investment in other income was $3.9 million, a $2.1 million decline year-over-year.

And our full year 2009 investment in other income was $15.7 million, a $6 million decline year-over-year.

Both the fourth quarter and full year 2009 declines were a result of lower average interest rates in 2009, and the consolidation of Access, which was previously reported under the equity method and our portion of their income was reported as other income in the income statement.

We have received a distribution from the reserved primary fund in January of $5.4 million, which represents a $3 million gain.

Our current plan is to fund contributions of $3 million to our foundations with this money.

Our fourth quarter effective tax rate was 36.7%, and our 2009 full year effective tax rate was 35.5%.

Excluding the effect of noncontrolling interest, our effective tax rate would have been 36.2% for all of 2009, compared to 38.4% for all of 2008.

The year-over-year decrease is primarily due to lower state taxes in 2009, and a charge in 2008 of $1 million related to a write-down for a state net operating loss carry-forward.

With respect to our year-end balance sheet, cash investments held by our unregulated subsidiaries totaled $36.2 million, while regulated cash investments in restricted deposits stood at $949.9 million.

We have estimated our risk-based capital percentage to be approximately 350% of the authorized control level.

Our total debt was $307.7 million, and our debt to capital ratio was 33.2%.

On a pro forma basis, our debt to capital ratio is reduced to 23.6%, as of December 31st, 2009, as a result of our recently completed stock offering of 5.7 million shares.

Our medical claims liabilities totaled $470.9 million, representing 50.1 days in claims payable, which is higher than normal, reflecting the holiday schedule during the last two weeks of December this year.

As a reminder, we are now including the pharmacy payables in the days in claims payable calculations, and have reclassified prior periods to reflect this for comparative purposes.

The 1.2 increase over the third quarter reflects the timing of medical claims processing and a slight increase in pharmacy claims.

We expect the DCP number to decline in 2010, but still stay within our range of 45 to 50 days.

For the quarter, cash flows generated from operating activities was $71.3 million or three times net earnings.

For the year, total operating cash flows were $248.2 million or 2.88 times net earnings.

Cash flow in the fourth quarter included the receipt of premiums for January 2010 for three states, and we recorded 13 payments in 2009 from one of our states.

As a result, we expect to only receive two payments from this state in the first quarter of 2010.

This will likely cause our cash flow from operations to be negative in the first quarter, if the state stays with their announced payment schedule.

I would like to update the 2010 full year financial guidance we provided in January.

We continue to expect premium and service revenues in the range of $4.35 billion to $4.45 billion, consolidated HBR of 84% to 86%, and a consolidated G&A ratio in the range of 12.4% to 12.9%.

We issued 5.75 million new common shares as part of a January 2010 follow-on equity offering.

Our estimated shares outstanding for 2010 is now 50.5 million shares.

After reflecting the issuance of shares from the offering, we are adjusting our earnings per diluted share to be in the range of $1.70 to $1.80 for 2010.

Operator, we can now open the line to questions.

(Operator Instructions) We'll just pause for a moment to compile a Q&A roster.

And at this time, there are no questions in queue.

Okay.

Then we thank everybody for calling in.

Just hold a minute.

Want to hold for one minute?

In the past we've had some problems.

They weren't registering.

That's right.

That's also true.

No intent to cut the the call off.

No, of course not.

I have a question coming in from Gregg Genova from Deutsche Bank.

Your line is open.

Hi, good morning.

Can you remind us of your acquisition criteria, specifically around the timing of EPS accretion and then also discuss if you would branch out into new business segments and funding arrangements or if you think you'd stick to your historical types of deals?

I think first we -- it has to be accretive in the first 12 months after the acquisition.

We also use -- while we look at ROIs and other criteria, a driver is the IRR net cash flow after tax and we use a terminal discount value, has to be the same as the entry value, unless somebody can show why it's really different, too easy to make things look good by adjusting discount.

But on the health plan side, it's 20% to 25% hurdle rate, and on the specialty companies, 15% to 20%.

Relative to -- we obviously will be looking at multiple areas of growth strategy, is first in existing markets, we look at service area expansions, we look at the various new products, adding products, specialty cross-selling, all of which at times can increase the need for statutory reserves.

But good in-market accretive businesses.

We're looking at new market developments which we follow our approach in the IRRs, but there are some new markets and the regulatory and political environment currently I think are going to create some new opportunities.

And then I guess your last part of the question, Gregg, we will diversify business lines.

We have a whole series, [overall] health, we look at the behavioral health, life and health management.

We looked at some of the things we have done and there's other companies.

I can't get too specific, because that would only serve to increase the cost to us or the value somebody perceives in those products.

But we will continue to look at the government services sector and products related to that and we see a lot sector and products related to that and we see a lot of opportunities.

Okay.

Thanks.

On the legislative front, what are your thoughts on the FMAP expiration and when they might tackle that and how they'll tackle that?

I think as they're working through, we'll have to wait and see what they do.

The jobs bill they're trying to work on now and how they start to attach things to that or what they do with it.

I think they recognize they have this issue and nobody has a crystal ball to know, are they going to try and do that as a separate interim step or attach it to a jobs bill or will they make it part of the broader healthcare reform that they still want to try to come back to which we believe will probably be a scaled down budget.

The most recent budget proposal does have, what I referred to in my earlier comments, that $25 billion to extend it through June of 2011.

And I think we'll find them constantly being incremental in how they look at it, to try and drive the states to using their own resources and working with people like us to find ways to drive down the cost.

Great.

Last question on the flu.

So you spoke to an incremental $16 million that you booked this year versus 2008.

And you talked about your guidance being conservative for 2010.

So that's roughly like $0.25 a share that you took this year.

So is it safe to say you have a similar amount baked in or -- ?

I would say as we look at -- you had two flus last year.

You had H1N1 and then we still have the seasonal that we saw.

H1N1 has not gone away.

Now, we're still -- we're looking at our predictive modeling, we're using all the new tools we have in prevention, other things we talked a lot about, to try and determine is there increased immunity people develop the immunological system, but those things are yet to be seen.

Is there any change in the strains?

Do they change in any way?

You still have your various seasonal flus.

So we're saying as we look at -- we've seen various reports from CDC and others who say so far in Q1, but we also know that the opportunity as this is still only early February, that late February, early March, can have a very significant flu season and we're planning on that as we think about it and building that into the thought.

So we want to be sure that because Q1 of last year had such a mild flu season, that people do not presume that's going to be -- we're not saying it couldn't happen, but will not happen again this year.

Okay.

Thanks.

And your next question is coming from the line of Brian White from Collins Stewart.

Your line is open.

Thanks.

Good morning.

Can you tell me how many Access Health lives are still ASO at this point?

Jesse?

Michael referred in his comments, it's about 60,000.

About 60,000.

Okay.

Could you tell us what the February enrollment is for the Commonwealth Bridge and the Commonwealth Care?

Well, we typically -- go ahead, Jesse.

We generally don't give month to month enrollment across the plan.

Okay.

There are other sources you could potentially look to to find that information.

Okay.

Historic enrollment at the end of the quarter, Brian, as opposed to saying this is what we see.

Because every state does it a little bit differently, got your preliminary numbers, then you got reconciliation.

So we want to keep it simple.

Okay.

Has there been a major change?

No, we have not seen a major change.

Okay.

And then lastly, on the foster care in Mississippi, how many lives is that?

It's a small piece of the overall puzzle, so we're continuing to work through the contract discussions with the state, which includes the total expectations for the population.

Foster care's a relatively small piece of the puzzle.

And that was in the numbers that were already projected by the state?

Yes.

Okay.

Thank you.

Thank you.

Your next question is coming from the line of Kevin Fischbeck from Banc of America.

I want to get a little more clarity on the exposure, the MLR increased 110 basis points sequentially due to new markets.

I'm going through the math of it.

Even if we assume Massachusetts has like a $400 PMPP, in order to get a 110 basis point sequential MLR increase on 5% sequential increase in enrollment, it looks like the new MLR is something in the high 90s.

Is that right?

I'll have Jesse add to it and Mary and others in the room can jump in, but I -- Florida in particular, we are experiencing in the at-risk membership some incremental cost that we're drilling down on, taking a look at now.

Jesse, anything you want to add to that?

I would just say, when you're looking at the sequential increase from new markets, in terms of the attribution between Massachusetts and Florida, I would say Florida's a bigger contributor to the increase than Massachusetts.

Is directionally the high 90s numbers the right way to think about it then?

For Massachusetts?

For the entire new enrollment.

Yes, with a skewing towards Florida, higher end.

Sounds like this is something that you saw, particularly the Q3 new enrollment.

Was this something that was already factored into your outlook when you talked about the HBRs, or is this something that makes you feel more comfortable about the high end of the range now than the low end of the range?

Well, with respect to the HBR, we knew Florida HBR was running higher and we factored that into our numbers and our guidance.

We indicated earlier, we're working on, just as we did in Ohio a couple years ago, making sure that we do the appropriate the things to get the HBR in line with our normal expectations.

And that usually takes a couple of quarters.

Okay.

So your guidance assumes that for a couple quarters it stays elevated, but eventually comes back down to historical?

Correct.

Okay.

If you look at it over the -- every time we've entered a new market, that's a pattern that's very clear.

You can see that.

Any color on why you're seeing a higher cost trend than Access Health?

Is it just new networks, et cetera, that it takes a little getting used to or what's the main difference between what you're seeing and what Access Health was seeing?

I think there's some new networks.

We're looking with the state at their rating and how they looked at the risk scores there.

Things of that nature.

It's just kind of an evolution and learning period.

Anything you want to add, Jesse?

I think that's covers it.

We're looking at the general items that you would expect.

So we're looking at utilization, unit cost, and then kind of the corresponding revenue that's attributed to the members.

We're very focused on that at this point and as Bill said, we are doing all the things that we need to do to get the experience in line with expectations.

If you think about it, from the standpoint of the size and the growth we've had there, we have critical mass in memberships.

It says that if there's a particular issue that raises the cost, it gets exasperated.

But it also says as you bring it in line, it comes down just as well.

This is nothing that we have not seen before.

And I'm just pleased that we could actually drill down the name, rank and serial number of doctor now with the new dashboard.

So it gives us a chance.

Doesn't mean it happens instantly but, as always, our concern is that we do it in a way that is sustainable.

So we don't look at it on the short-term.

So your comment then about things like risk scores, so there's a revenue component to this as well as a cost component to this?

I would say we're looking at everything at this point.

I'm just trying to say we look at every aspect.

Okay.

And then maybe just a follow-up on Brian's question.

So maybe not to get current enrollment, but could you break out the quarter-end Massachusetts enrollment between Commonwealth Bridge versus Commonwealth Care, how much is Commonwealth Bridge?

Just kind of order of magnitude, Bridge represents the majority of the population, between the -- in Massachusetts.

Okay.

And then one last question.

As far as the continued conversion of Access Health, is there a way to be thinking about that?

Should it be kind of consistent throughout the year or is there a quarter where more of that enrollment will convert?

I think it's a function of us getting approval from the state on a county by county basis.

Our expectations are that they come in at various points throughout the year, so I don't think we're in a position to be much more specific than that at this point.

Okay.

Great.

Thanks.

And your next question is coming from the line of Daryn Miller from Goldman Sachs.

Your line is open.

Good morning, thank you.

Good morning.

Just following up on the Florida medical cost, that program's been growing pretty quickly.

Do you have a decent amount of claims visibility at this point to be talking to a higher trend level or is the claims still fairly undeveloped.

Claims developed, we get good visibility of our claims that are in there as you know and have a certain confidence level in that.

But Bill, you may want to add.

We have literally four months of claims experience at this point at the end of 2009 for some of these counties that converted in the third quarter.

So that's a little bit of experience, it's not a lot of experience, in terms of having good data to work from.

So again, as Jesse indicated, we're looking at all aspects of it and we'll continue to drill down on the claims, typically by provider, by area, by type of cost and review all of these things and that's part of our normal process that we would go through in a new market as we try to make sure that the actual HBR matches our expectations when we went into the market at the beginning.

In talking about it this much, I think what we -- the message we're trying to convey is we're aware of it early.

We're using all the tools that we have now to work on it and fix it, deal with it, in a normal, rational, sustainable basis, and that's different than being a victim that says this is what happened last quarter.

So we're trying to give you that insight as we see this, we know it's there, and we're working on it.

That's great.

So just to be clear, this is kind of the typical higher level expense you see when you enter a new market?

Yes.

Great.

Question on the services revenue line.

There's been some volatility, variability in that line over the last two quarters.

How do we see that trending forward, b?

And then b, can you just talk a little about what's driving the changes over the last two quarters?

I think one of the things is that we consolidate Access Health Solutions, which they're on a non-risk basis, so their income comes in on the service line level.

So as that income, as we start to convert those members to at-risk, there's obviously less membership at Access Health Solutions, so, therefore, they don't have that service income so you see shifts that come down in terms of service income as a result of that.

And what drove the increase in the third quarter?

In the third quarter, Access was still growing.

I mean, at times.

They were adding membership during the course of the year.

They grew membership quite a bit since we originally invested in them a year ago or more.

So the sequential change between the second and third quarter of 2009 was the $5 million increase was Access Health growing?

I think that's a big piece of it.

That's a very big piece of it.

Sometimes there's reconciliation income for -- because they -- under their model, they receive savings, a portion of the savings, and that's done on a 12 month lag basis, so they'll be recorded -- estimating that and then trueing that up to actual, so you might have a little additional income in any one period of time from the results going back 12 months ago.

Okay.

That's helpful.

And one last question.

Florida's talking about the Medipass Program, any opportunities for you there, if they change that program?

I think there's a lot of talk in Florida and other states about various avenues to address improving quality and reducing cost, including moving from fee for service into managed care, we're intimately involved in those discussions and we would expect to be well-positioned in the event that they go that direction.

I think with Celtic and all the things we have in our tool chest now, all the various products, systems, capabilities, there is no barrier other than how they structure the program to us being able to enter it.

Great.

Thank you.

Your next question question is coming from the line of Melissa Jaffe from CJI Market.

Your line is open.

Hi, how you doing?

Good morning.

I'm just trying to get a sense of some of the sources and uses of capital this year and I guess into next year.

Have you quantified whether you'll have -- how much you'll have to contribute to subsidiaries this year?

No, we haven't.

The only thing we talked about to any extent is, for example, our estimate is Mississippi.

About $20 million, statutory reserves, I think is the number we estimated there.

After that it's -- it may be some additional capital need as we enter new markets and have new products within existing markets and we have a sense of that, but a lot of it will be M&A as well and on that line I just have to say stay tuned.

Can't give you any more specifics than that.

Generally we have increases in a lot of states where we have growth, we have to fund the statutory capital increases for that and in new states which are totally different.

A lot of the statutory needs in existing states is really generated through the cash flow we generate in those states.

Right, right.

So it's not like it's all coming from the outside sources.

Right.

Okay.

If my math is right, you -- you're still looking at probably holding, what, about $200 million in debt?

Pardon me?

You said you're going to get your debt to cap between the low 20s and the low 30s?

So you're still -- you're going to replace -- you're going to replace most of the revolver; right?

The revolver's been paid down.

Bill can take you through it, we have the more permanent debt with the bonds.

With respect to the offering, we used the proceeds of the offering when we received the cash to pay our revolver down to zero and then we put that additional cash, because I think the revolver was only in the mid-80s at that time, the additional cash increases in free cash.

And so what we end up with from a capital structure is we have $175 million senior notes outstanding, and then we've got some debt that's on our balance sheet with respect to our construction activity, that's about $32 million at the end of the year, and then a little bit of debt on this building we're in for corporate headquarters and then $300 million revolver is available now for general business purposes.

Okay.

All right.

Great.

Thanks.

And your next question is coming from the line of Tom Carroll from Stifel Nicholas.

Your line is now open.

Could you do the -- mention to us the three states where timing issues were a problem?

I think the states that gave us the money before the end of the year, so they have a larger increase in unearned revenue this year on the face of our balance sheet and so each state's a little different and I'm not even sure --

I'm sorry.

Did you get my whole question?

I understand there might have been a problem with my --

I don't think so.

The question again was the cash flow, you said there was three timing issues from three markets.

Can you hear me now okay?

Yes.

I guess what were those three states and how much should be sourced from first quarter 2010 as opposed to fourth quarter?

I think there was three states that paid us before the end of the year.

Right.

And one state that has paid us the 13 payments was actually Ohio and so their scheduled payment pattern right now is to only pay two in the first quarter in terms of the calendar days, and so if they stay to that schedule, then we won't -- we'll probably end with a negative cash flow for the quarter.

So how much from fourth quarter really should be in first quarter?

They would pay us maybe up to $50 million a month just from one state.

Okay.

Thank you.

I'll figure that out.

And we have no more questions in queue at this time.

We'll give it another 15, 30 seconds, just to make sure we don't have any more problems with it.

We thank everybody and look forward to talking to you again in April.

Thanks.

This concludes today's conference call.

You may now disconnect.