CoreCivic Inc (CXW) 2009 Q3 法說會逐字稿

Good morning, everyone and welcome to the Corrections Corporation of America's third quarter 2009 earnings conference call. If you need a copy of our press release or supplemental financial data, those documents are available on the Investor page of our website at www.correctionscorp.com.

Before we begin, let me remind today's listeners that this call contains forward-looking statements pursuant to the Safe Harbor provisions of the Securities and Litigation Reform Act. These statements are subject to risks and uncertainties that could cause actual results to differ materially from statements made today. We are also recording this conference.

Factors that could cause operating and financial results to differ are described in the press release as well as our Form 10-K and other documents filed with the SEC. This call may include discussion of non-GAAP measures. The reconciliation of the most comparable GAAP measurement is provided in our corresponding earnings release and included in the supplemental financial data on our website. We are under no obligation to update or revise any forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrences of anticipated events. Participating on today's call will be our Chairman of the Board John Ferguson; President and CEO Damon Hininger; and Chief Financial Officer Todd Mullenger.

I would now like to turn the call over to Mr. Ferguson. Please proceed.

Thank you, operator, and welcome everyone to our third quarter call. As she mentioned, you will be hearing from Todd and Damon. Joining us in the room are David Garfinkle our Vice President of Finance and Controller; and Bill Andrews, one of our Board members. So to get us started, I would like for some comments from Todd Mullenger.

Thank you, John, and good morning everyone. Moving straight to a discussion of our financial results, in the third quarter of 2009, excluding the $7 million of unusual income tax benefits, we generated $0.33 of EPS compared to $0.30 per share in Q3 2008, which represents a 10% increase. Total revenue for the third quarter was up 5.5% over last year, reflecting a 4.5% increase in our average daily compensated populations. The primary drivers of our year-over-year revenue and earnings growth include increased populations in the states of California and Arizona as well as commencement of our new Bureau of Prisons contract at our Adams County facility.

Revenues per compensated man day increased 1.3% in Q3 2009 versus Q3 2008. Per diem performance has been consistent with what we had anticipated and discussed on our last earnings call. We have seen year-over-year increases on average from both federal and state customer categories. Although per diem increases are lower than historical averages for the past several years, keep in mind that many of our annual per diem increases are significantly influenced by the rate of inflation, which has been very modest over the past 12 months. Average compensated occupancy for the quarter declined from 95.4% to 91.3%, which taken by itself appears negative. However, keep in mind our average daily compensated populations actually increased 4.5%, with the decline in occupancy percentage coming as a result of placing 8,000 new beds into service during the last 12 months.

We continue to be pleased with operating expense performance. Operating expenses per man day in Q3 2009 were $40.69 compared to $40.35 a year ago, which represents an increase of less than 1%. The modest increase in cost per man day reflect favorable market conditions and favorable pricing from our vendors, contract modifications with our customers, and the impact of our company-wide initiative focused on improving operating efficiencies. Comparing cost per man day to the previous quarter, Q2 2009, we saw an increase of about 0.7%, resulting primarily from $2 million of seasonally higher utilities costs and $1 million increase in legal settlements. While we incurred approximately $2 million in start-up costs in Q3 2009 related to the activation of our North Georgia facility, and we also incurred a like amount in Q3 2008 related to the ramp-up of La Palma facility. Costs per man day were equally impacted by startup costs in both Q3 of 2009 and 2008. As a result of the increase in heads and beds, and increase in average per diems combined with modest increases in operating cost per man day, we were able to deliver a 2.3% increase in operating margins per man day in Q3 2009 over Q3 2008.

Adjusted free cash flow for the quarter totaled $68 million or $0.59 per share, which is misleading as the $8.9 million of cash taxes we paid in Q3 was very low due to timing and other differences. We are forecasting total cash tax payments for the full year of approximately $65 million, which is much lower than the $80 million to $85 million originally estimated at the beginning of the year, due to the successful implementation of certain tax planning strategies. Although we will work diligently to minimize our cash taxes going forward, it is likely the cash taxes in future years will be more in line with the 38% GAAP income tax rate. If we assumed a higher quarterly tax cash payment in Q3 equal to a 38% GAAP tax rate, that results in a pro forma free cash flow per share around $0.46 for Q3 2009 versus the $0.59 per share actual. And the $0.46 per share pro forma is a better way to look at adjusted free cash flow for the quarter, as tax planning strategies may not be available in the future.

General and administrative expenses for the quarter include a $1.5 million accrual for the contractual severance benefit associated with John Ferguson stepping down from the CEO position and approximately $500,000 of additional consulting fees incurred in relation to the company-wide initiative to improve operating efficiencies. As discussed last quarter, we utilized outside consultants to supplement our internal staff to assist us in improving operational efficiencies and to ensure we accelerated that process as much as possible. Additional consulting fees could be incurred in the fourth quarter of 2009 or in 2010. However, at this point we believe any additional fees would be relatively modest in any individual quarter, probably $200,000 or less per quarter.

With regards to our share repurchase program announced November last year, we did not repurchase any shares during the third quarter, so the number of shares repurchased to date still totals approximately 10.7 million at a total cost of $125 million at an average cost per share of $11.72. We have $25 million left remaining under the original $150 million authorized in total by the Board of Directors with the plan expiring December 31st, 2009. So our authority to repurchase stock expires at the end of this year.

Moving next to a discussion of our guidance. As indicated in the press release, we have updated full year guidance to a range of $1.24 to $1.26, excluding the refinancing charge incurred in Q2 and the unusual tax benefits realized in Q3. Guidance for Q4 is in a range of $0.33 to $0.35. The EPS guidance is driven by the continuing ramp-up of Adams County, which will generate EBITDA increases in Q4, offset by reductions in Alaska revenue as [Zera Mater] transferred out of our Red Rock facility, as well as further declines in our state of Washington populations. The ramp-up at North Georgia is expected to be slow given the holidays and we will not see significant EBITDA improvement in Q4. The new contract award from the state of California is not expected to generate incremental EBITDA in Q4 2009 and may actually create a bit of a drag related to ramp-up costs as we expect to begin receiving additional California inmates in Q1 2010, and we'll need to hire and train additional staff to house the inmates going to our Norfolk facility as early as Q4 2009, as that facility is only operating at about 50% of capacity and all the necessary staff are not in place.

Turning next to a discussion of our liquidity. As of September 30th, our liquidity is provided by approximately $189 million of availability under our new bank credit facility plus approximately $54 million of cash on hand. We have no warrants for IOUs outstanding from the state of California or any other customer, as all IOUs previously outstanding have been paid in full. Obviously uncertainty remains related to the general economy which in turn creates uncertainty around state budgets. This is the primary uncertainty and risk we face for the balance of 2009 and into 2010. In developing our EPS guidance, we have incorporated our best estimate of the range of potential outcomes related to risks associated with those state budget uncertainties and other variables including the risk of population declines, and the potential for pricing pressure. However, we believe the long-term growth prospects for our business remain very attractive as a result of the continuation of the supply and demand imbalance that should benefit the private corrections industry.

I'll now turn it over to Damon for specifics on our new business prospects and bed development.

Thank you, Todd and thank you so much, callers, for participating in our conference today. While we face like all companies in corporate America a very challenging economy in the third quarter, I couldn't be more proud than the 17,000 men and women of Corrections Corporation of America and the job they have done in these very difficult circumstances.

I would like to break my comments this morning into two topics. First, our short and long-term focus for the business and second, market observations and opportunities. As it relates to our short-term focus, our priorities remain as follows. First is to fill vacant capacity. We continue to have staff all over the organization actively engaged in existing and prospective customers to utilize our excess capacity. We think we've had good success again this past quarter, so let me give you the highlights. Of course we're excited about increasing our relationship with California by [2,336] beds and housing additional inmates at our North Fork, Oklahoma and Red Rock, Arizona facilities. Second, we have continued to see good increases incrementally throughout the system with our United States Marshal Service populations. We have seen a growth of nearly 1,300 prisoners since January 1st into our system. Third, you're aware of the award earlier this year by the Bureau of Prisons for the placement of inmates at our Adams County facility. At the end of the third quarter, we had 619 inmates in Adams from the BOP. We have also started to receive detainees at our North Georgia facility in early October. And finally, we have seen Idaho ramp up their population by nearly 400 inmates in our newly expanded Boise facility. Second item to mention is that high on our short-term priority list is the continued emphasis on controlling operating costs. I think our results show good progress on this front, and as Todd reported, we continue to see some encouraging signs from our company-wide initiative.

Now for our long-term focus. One of our key business strategies continues to be thoughtful disciplined building of capacity in front of demand. I think the recent award from California again reaffirms our strategy as being a sound one. And with our current customers forecasting significant incremental demand over the next five years, we continue to believe that in the current environment and for the foreseeable future, there will be ample opportunity for us to deploy capital for the development of new beds, to produce compelling returns for our shareholders. But with that, we continue to hold off on any new bricks and mortar construction of speculative beds. As mentioned in our press release, CCA has nearly 8,800 beds available in inventory. As of today, with the beds spoken for at our Adams, North Georgia, Red Rock, and North Fork facilities, we have about 5,900 beds left available in inventory. Obviously we will monitor closely the needs and timing of new bed development, but clearly would like to see continued and meaningful utilization of remaining capacity and better visibility from our customers before we add any additional capacity. Finally, we will also continue to aggressively pursue build to suit opportunities, and with the Georgia award this summer, we have had good success with these type of procurements.

Now let me move to the market and industry observations and opportunities, and first a couple of comments on state budgets. As Todd mentioned, our state customers are still living through a very challenging fiscal environment. All of our 19 state customers have passed their 2010 budgets, which would have begun on July of this year. As I mentioned last quarter, the ability to forecast accurate projections has been extremely difficult at the state level, so budget revisions are possible as we go through this year into the 2011 fiscal year. And as I mentioned last quarter also, we were approached by about half a dozen states last fiscal year and conducted different levels of negotiations with our customers as they tried to lower compensation to us by reducing per diems or limiting our increases. On the whole, we were successful on narrowing our scope of services to our customers to offset any reduction to compensation. Establishing this precedent of tying service reductions with compensation decreases this past fiscal year we think gives us a good basis for reductions that may be likely this fiscal year.

So although there is still continued uncertainty as relates to our state budgets, let me point to a couple of positive things that we see with the states. I mentioned last quarter the new Oklahoma legislation that gives us greater flexibility for housing out-of-state inmates within our facilities. With this new legislation, we could now house a larger variety of inmates from all custody levels, much like the flexibility we have at Arizona facilities and our facilities in Oklahoma. This legislative change made these beds much for attractive and marketable to existing and new customers, and since July 1 we have contracted with Oklahoma and California to utilize another 1,600 beds in our Oklahoma facilities. Another item to note is that a significant portion of our state business is in owned and managed facilities versus managed only. This continues to give us flexibility to use and offer this capacity to many different customers. The recent California award with the use of beds in our facilities in Arizona and Oklahoma is another good example of the value of this flexibility. And my final point here that I have said before, but I think is worth repeating. In the face of an extremely challenging fiscal environment, we were successful this year with contract awards from Arizona, California, and Georgia for nearly 4,500 new beds. This shows again that pressure can only be held back for so long, and we think this is indicative of what other states are going to have to do to relieve pressure within their respective systems long-term.

Let me now switch gears and talk about some significant pending procurements, and we've got a good amount of activity both on the state and on the federal side, the first of which is the Georgia RFP for 1,000 beds in state. This is still pending, and as a reminder, this is a procurement that allows for both existing construction or new construction. At this time, we believe this procurement could be awarded later this year.

Let me now talk about CAR 10 and CAR 11. As a reminder, these procurements are for the rebid of our soon to expire BOP contracts at our Cal City, California and Cibola, New Mexico facilities. CAR 10 and CAR 11 were companion solicitations for the same requirement. CAR 10 only considered existing facilities and CAR 11 only considered new construction. As reported last quarter, CAR 11 was cancelled, so only existing facilities submitted under CAR 10 will be considered for this procurement. We think this obviously narrows the competition dramatically for this requirement and we still believe an award on CAR 10 could be later this year.

I'll make a quick comment about an ICE procurement that may be coming down later this year. This is for 2,200 beds in the local area of Los Angeles, California and like I said a minute ago, we think this will come out maybe as early as December. Also a note about a potential BOP procurement for 3,000 beds. We submitted a response to an RFI or request for information earlier this year. This opportunity as we understand it would be for a contractor owned and operated facility for the housing of 3,000 short-term sentence inmates. We are preparing as if an RP would be issued in early 2010.

Let me also talk about Arizona activity on a couple fronts -- let me actually talk about two items of note. One is the concession agreements. The intent of recent legislation as we understand it is to allow a private vendor to operate one or more of Arizona's prison complexes in turn for an upfront payment. It is unclear to us at this point how viable a prospect this is for the industry. As for a more traditional opportunity for the industry, we expect the RFP for 5,000 in state beds to be out later this year.

Let me now make some specific comments on our four largest individual customers, and first the United States Marshall Service. Just a quick comment about our Nevada southern facility. Construction is well underway on this facility and we're still looking at third quarter 2010 for this facility to be activated. Also, a comment about the federal budget. As you may remember, I gave details in August at the President's request for all of our three federal customers. As of now, both the United States Marshal Service and the Bureau of Prisons are operating under a continued resolution until December 18th. So a new budget for them may not come out until late this year or early next year.

Let me also now talk about Immigration and Customs Enforcement, and let me first highlight the point that the fiscal year 2010 appropriation bill for DHS and ICE finally passed the House and Senate in October and was signed into law by the President on October 29th. Highlights of the bill include ICE receiving a total of $5.4 billion, which is almost $0.5 billion more than the FY 2009 level. Of this total, $2.5 billion is for detention and removal operations, which includes $1.5 billion for identifying and removing from the United States criminal aliens who are either at large or already incarcerated in prisons or jails once an immigration judge has ordered them deported. It also includes $200 million for the secure communities program that allows local law enforcement to check fingerprints of people booked on criminal charges for immigration and criminal records. As for detention capacity, funding for detention beds should be near the same level as it was in fiscal year 2009 and there was no CapEx funding for any new government operated beds.

One other thing to highlight with ICE, and that is last Friday they conducted an industry day to communicate their vision for detention reform and solicit feedback from the industry. Several points were conveyed during the meeting which were, one, consolidation of populations from small regional jails to help gain efficiencies and standardization, also ensuring all detainees are housed in facilities that use and enforce ICE detention standards with increased federal oversight and appropriate custodial conditions. Three, the housing of criminal aliens through the secured communities program and also the housing of noncriminal, nonviolent illegal aliens in appropriate facilities. And finally, contractors like CCA are going to continue to be part of the solution for ICE. So with this vision being communicated, we continue to believe that ICE will be a meaningful opportunity for our industry.

Let me now talk about the federal Bureau of Prisons. In our August call, I mentioned that the 2010 budget request for the BOP was for a total budget of $6.1 billion, and that compares to 2009 number of $5.9 billion. In mid-June, the House passed its version of the fiscal year 2010 appropriation bill for BOP, which was similar to the President's request. The House version of the bill also includes the following report language that we think is noteworthy, which says between 2010 and 2014, BOP estimates that it will experience a net growth of 22,500 prisoners, while planning to add only additional 13,000 beds in new prisons during the same time period. With the BOP prisoner population currently exceeding the rate of capacity of BOP facilities by 37%, the federal prison system is on an unsustainable path. What is also interesting about the BOP -- they were projecting an incremental prison population growth of approximately 4,500 inmates in fiscal year 2009. Actual growth was approximately 7,000 inmates, almost 2,500 more than expected. So again, this growth has exacerbated the overcrowding for a system that is already operating at more than 137% of capacity. With this projected increase in population and this proposed funding request, we continue to believe the BOP will be a meaningful opportunity for the industry.

Let me wrap up this section and talk about California, and let me mention again the recent award with the state of California. We are very proud of the relationship with the state and CDCR and the confidence they have in our company. As mentioned in the press release, we intend to begin the intake of inmates in the first quarter of 2010, with the gradual ramp estimated to be completed in first quarter of 2011.

Now, let me give an update on the latest with the three judge panel. As mentioned in August, the three judge panel issued 184 page final ruling which proposed a cap to California's inmate population at 137% of designed capacity of their prisons, which would require the reduction and/or release of approximately 40,000 inmates over the next two years. The court did not order that any specific process be followed to effect the release and gave the state 45 days to craft a plan. Now, the state responded with a plan to reduce the inmate population by 20,000 over three years, which part of this was increasing the out-of-state program by 2,500 beds. The state also submitted that the reduction could be 32,000 over three years, if the legislature enacted several reforms, including extending the 2011 sunset for the out-of-state program and expanding it by 5,000 beds. So on October 21st, the three judge panel issued a ruling rejecting the state's plan and ordering the state to come one a new plan within 21 days, which is due November 12th. So more to come out of California and CDCR over the coming weeks as they develop a plan of action that they must submit to the court. But based on the recent expansion of the out-of-state bed program and the action by the court, it appears that the out-of-state program could possibly expand even further to help them achieve part of the solution for reducing overcrowding within their system.

So let me bring to a close my comments and make these final points. We are very pleased with our third quarter earnings. We achieved positive EPS, revenue, and EBITDA growth, and we think this is very significant in today's challenging economic environment. We believe the CAR 8 and state of Arizona awards, along with the new contract with California, reaffirms our business strategy to build capacity in front of demand. Our competitive advantage continued to be a strong balance sheet, good liquidity to fund new capacity development, limited managed only operations, focused operations in a largely unpenetrated US market. Based on our projected cash flows over the next two years, we can fund anywhere from 8,000 to 10,000 additional beds. We believe the supply/demand imbalance continues and insufficient public sector capital investment ensures the shortage of beds will continue. And finally, one of our priorities continues to be in the short-term is to fill excess capacity in the system. If we are successful in filling the nearly 8,800 beds I mentioned earlier that we have in our system, that would translate into nearly $74 million in incremental EBITDA.

So that concludes my prepared comments. Thank you again for calling in today's conference. And let me now turn it over to the operator for Q&A.

Thank you. (Operator Instructions). Your first question comes from Todd Van Fleet from First Analysis.

Hi, guys. Nice quarter. I'd like to dig in to the Adams County facility a little bit and the BOP contract there, if I could. That contract started ramping in Q3, correct? And I was wondering if you could tell me if we're beyond the activation period for that contract or are we still in the activation period? You mentioned that 619 inmates were there at the end of Q3. I'm reconciling that with what you have in your supplemental and getting some interesting numbers there. But I'm just wondering what's the expectation regarding the ramp of that contract and the inmates in that facility in Q4?

Sure. Adams County is continuing to ramp up under the 50% guarantee in Q4, but will not begin operating under the 90% guarantee until maybe as late as early December.

Okay.

To operate under the 90% guarantee, the actual populations at the facility, the actual heads and beds at the facility need to go over 50%. And that may take as long as early December before we hit that number. And then once we go 50% plus one inmate, we operate under the 90% guarantee.

Okay. Okay. That's helpful. So thinking about the other moving parts and pieces, and obviously you got Alaska and that was 750 beds, right, 750 inmates and they're going to clear out pretty quickly.

Let me go down the list of the moving parts. We just talked about Adams County. On Alaska, we had around 800 inmates at the end of September. We expect to begin transferring them out beginning this month and be completed before the end of the year. That could change, could happen sooner, could happen later. Washington, we had around 225 Washington inmates left at the end of September. We expect to lose all of those by the end of this year. Minnesota was at about 250 heads and beds at the end of September and Minnesota is expected to remain at that level through the end of the year.

And then on California, we housed around 7,900 currently. As I mentioned in my prepared remarks, we don't expect to receive inmates under the recent contract expansion until Q1 2010, and this may actually negatively impact Q4, as we will need to hire and train additional staff at North Fork in advance of receiving those inmates. So we could see somewhere around maybe call it $0.5 million of incremental costs incurred in Q4 before we receive additional inmates in Q1 2010. And that's a bit of a moving target as well.

North Georgia, North Georgia houses a little more than 100 today. That ramp-up continues. The ramp-up is expected to be at a slow pace given the holidays. So we're really expecting little incremental improvement in EBITDA in Q4 over Q3. So there are a fair number of moving parts in Q4, the timing of which could result in us coming in toward the lower end of the guidance range or toward the higher end of the guidance range, again around timing. So if we have a slow ramp at Adams and it's -- we don't hit that 90% guarantee until later in the year or slower than anticipated ramp in North Georgia, quicker than anticipated ramp down of Alaska inmates, and staffing costs at Norfolk for California, those are the key moving parts. But in the case of California, BOP at Adams and North Georgia, we've got the contracts in place, which is all good. It's just a question around the timing of the ramp.

And on that 50% threshold, I think the bed count for Adams County was -- the contract was 2,567. Are you talking 50% of that 2,567? Is that the threshold there for the 50%?

50% of the base, 2,232.

Oh, 2,232.

They were allowed to go to 115%, so it's 50% of 2232.

So you're talking about an incremental 500 inmates potentially then on that contract in the fourth quarter then, hopefully more? Because if you're at -- you said you're at 619 now. You've got to get to 1,100, thereabouts, so you're talking incremental 500 there. Alaska and Washington combined are another 1,000 takeaway, talking a net negative movement of maybe 500 to 600 inmates in the quarter. Does that sound fair?

Right.

Depending on what happens in north Georgia, I guess.

Right.

Okay. All right. Let me digest and circle back. Thanks.

The next question comes from Kevin Campbell from Avondale Partners.

Thanks. Thanks for taking my questions. I wanted to follow up real quick on Todd with Adams County. Is there any impact you think from the BOP operating under a continuing resolution on their willingness to ramp? Do you think they may be slower because of that or is that really all funded in last year's budget anyway?

Kevin, this is Damon. Good morning. No, I don't think there's anything tied to that relative to continuing resolution in the ramp. The ramp has been going smoothly so far and we assume it will continue at the same pace.

Around the holidays.

Okay. And moving on, I wanted to ask a question, you mentioned, Damon, I think in your comments about the beds in Oklahoma. You said you signed a contract with California and Oklahoma to take up to 1,600. California obviously you talked about in your release. How much of that 1,600 may be incremental inmates coming from Oklahoma and what's the expectation there?

Just under 300, so we had North Fork obviously was part of that contract with Red Rock, and so about 1,300 in North Fork and then we got incrementally about another 300 with Oklahoma.

Okay. Great. And also wanted to ask about -- the press release, you mentioned favorable reductions in operating expenses from pricing concessions relating to market conditions. Maybe you could give a little more color on what exactly that means?

Sure. Couple components there. In terms of the goods and services we purchase from vendors, we've seen very favorable pricing as a result of the economic downturn and targeted negotiations. So a lot of our vendors are hungry for business, looking to hold on to the existing business they have or to grow incremental business. So that's created a very favorable pricing environment for us on the goods and services we purchase. As we talked about previously, we also negotiated contract modifications with certain of our customers to take costs out of the contract to help offset revenue reductions coming from the customers' request for assistance in managing their budgets tighter.

How much -- I think you mentioned too that you think -- given that you were able to do that this year and the renegotiations that gave you confidence for the future. But at what point do you get to where there's nothing left to cut and how far away are you from that?

Well, we've had some situations where we've maybe temporarily pulled back services for a period of time for just a certain period, that's a couple things we did last fiscal year. So it may be the case where we had a temporary reduction of services, but we resumed them with the new fiscal year. So we're going to have some situations like that. Part of it is also driven by some of our increases that we're expecting, maybe narrowed somewhat, as part of the negotiation. And then another part of it is looking at is there an opportunity to maybe increase the quantity for a certain contract to lower the cost per day or lower the per diem per day. It's all those different factors we'll consider as we approach these negotiations.

Okay. And I had two last quick questions. I missed the start-up expenses at North Georgia that you expected. I think, Todd, you mentioned in your prepared script. What were those?

We had $2 million in Q3.

Okay. And then lastly, DSO, I'm sorry, yes, DSO ticked up about 4 to 5 days. Was there anything there?

No, nothing there. There was several customers that were a couple days behind in making their payments from previous quarters and you do see that. It's just timing. They've gotten caught back up, so no additional IOUs or warrants, no communications from customers indicating that's coming down the road.

Great. I'll jump back in the queue.

Next question comes from T.C. Robillard from Signal Hill Capital Group. Your line is open.

Great. Thank you, good morning, everyone.

Good morning.

I just wanted to get a sense a little bit more around California, as much as can you communicate with us with the new contract. As we're looking out over the next several quarters, if you just take the -- just assuming it's a four quarter ramp, take the numbers, you're looking at roughly $200 a month. If I remember correctly, historically the last contract you had with California was roughly around $400 a month. I'm just trying to get a sense of how much more could you do with California? Meaning if they do come back and upsize that contract with a new plan that they're going to respond to the three judge panel, would you guys be able to handle more or has something changed within the CDC or with respect to their ability to send inmates out?

Well, I guess a couple answers, this is Damon. As we look into 2011, obviously we've got additional capacity. So to answer part of your question, if it did come back and part of their plan submitted to the courts on November 12th was to increase the out-of-state program more quickly, then obviously we've got capacity that we think would be competitive and attractive to them. As it relates to the ramp, I think we've learned a lot, and obviously they've learned a lot with the previous ramp of the current contract. So I think here in the coming days and weeks, we'll continue to sit down with them and make sure that both they and us are comfortable on ramping up in a way that is thoughtful and achieves everybody's expectations. More to come on that front. I think with this contract being fairly new in the last seven days, the guidance we give is to say we're going to take time in the next 30 days to understand the potential ramp and what it looks like. Based on our negotiations, we felt this was a reasonable estimate of the CAR projection.

But nothing's changed internal in California. If they wanted to ramp up at a larger number per month, they could.

Okay. Perfect. No, that's great context around that. Thank you. And just Todd, with respect to start-up costs in California, as we're looking forward, should we assume fourth quarter is going to be the largest amount of start-up cost, because then as you get into 2010, you do have some of the revenue to offset this? Would fourth quarter be the largest drag, if you will, for lack of a better word?

Most likely, yes. And then as you ramp up, there will be some operating inefficiencies until the facility reaches normalized occupancy. But in terms of pure startup costs where we've got incremental costs without any incremental revenues whatsoever, we would expect fourth quarter to be the high point there. That could change if the anticipated ramp changes significantly, but right now that's our best guess.

Understood. That's great. Just with respect to how this relates to the three judge panel, is there -- not to be doom and gloom, but just trying to balance this out. What if the three judge panel comes back and rejects any and all California proposals? Is this contract -- and actually all your contracts is helpful -- do those come at risk or is that just too much of an unclear to really give any commentary to?

Well, part of it would be speculating, but I guess I would say this, that we're housing nearly 8,000 inmates in a facility out of state, and facilities that are at or just below rate of capacity versus their facilities in their state being way over capacity. So we're operating at a very comfortable, safe operating level compared to any facilities they've got in state. That would be part of the challenge is that they're trying to get more aggressive, and if the three judge panel releasing inmates in their system, the 8,000 we're holding in our facilities are in constitutionally compliant facilities. So I guess another way to say it is that if they try to bring these inmates in state, that obviously adds to the burden of potentially more release.

Got you. And then just last one, I'll jump back in the queue. Damon, you made the comments about your construction plans and understanding the environment that we're in. But at 5,900 beds in inventory, adjusting for the contracts that you guys have in place for some of those 8,800 beds -- 5,900 beds, where do you get to a level that you feel you need to start adding some beds into your inventory? Its not hard for you guys with what's out there in RFPs and just taking just a gander at your market share -- it's not hard for you guys to take those beds down pretty quickly, at least contractually. So I'm just trying to get a sense with how you guys are balancing -- I guess a short way to ask is where is the sweet spot for your beds in inventory in this environment?

It's a great question. It's something we talk about every day. Part of the commentary we've given in the past is that basically about 4,000 to 6,000 beds would be the sweet spot for having an inventory on any given day in normal times. And so that's part of the challenge, obviously. We're not in normal times. So try to understand not only what the marketplace looks like in potential incremental demand, but also some of the irrational behaviors that our state customers may have to undertake here in the short to midterm. So it's a decision that obviously we take very seriously, and it's a discussion we take up on a regular basis. But since we're living in a very extraordinary time, it's something that we'll just evaluate based on what we see in the market and also what we think the volatility looks like for our existing customers and make those decisions at the appropriate time.

Got you. I guess it would be fair to say that under 4,000 would be probably -- even in this environment, may seem to be a little too tight for how you guys run your model?

That's probably right.

Okay. Fair enough. All right. Thanks, guys.

Your next question comes from Clinton Fendley from Davenport.

Good morning, guys. This is Drew Peterson for Clint this morning. I had a question on the renegotiations with states for lower services. I'm wondering if that has a net impact on operating margins -- that is, when services are reduced, are operating expenses reduced at a greater rate?

Well, our goal is in those negotiations is to keep margins intact. So margin dollars per man day. So you could in a situation find yourself where maybe the margins have increased potentially, but I'd say on balance the margin rates are probably close to where they were before. A lot of moving parts. But the ultimate objective is to keep the margins per man day intact in those negotiations so you could see a situation where on an individual contract margin rate goes up.

Okay. Got you. Thank you for that clarity. And then just wanted to ask you one other question on the state of Colorado, if you've seen any impact on the occupancy levels in those facilities and maybe the outlook there? Thank you.

This is Damon. We report it enough, it's been well reported in the press what their plan is out there with the accelerated release program. And I don't know if you saw in the last -- probably the last two weeks, the Denver Post has reported a couple articles about some of the challenges of that program. So right now it's something we're monitoring very closely, but right now incrementally haven't seen that much of an impact. It's been well-reported some of the challenges they've had, and also the parole board has had on considering any accelerated release of any inmates.

All right. Great.

We'll monitor closely.

All right. Thank you very much.

Thank you.

(Operator Instructions). We'll go next to Manav Patnaik. Your line is open.

Good morning, everybody.

Good morning.

Hey. Congratulations on a good quarter and thank you for all the detail you guys have given so far. Just a quick follow-up on the inventory question. I guess we know how you guys are looking at it in terms of keeping a close track before building more bed space, but what is your read on how the customers are viewing this? And I'm referring particularly to the Feds. Because typically I guess when they look for bed space and contracts, they want the facility dedicated just to themselves, so more than likely given your inventory you would need to build a new facility to meet their needs. So is there any back and forth discussions with them where, given the enormous needs that they have, it would be fair that you could -- the so-called spec build to try to meet the anticipated federal demand coming up ahead?

Oh, yes. I think we've obviously -- our Adams County facility is a great example of that. Yes, that's a discussion of dialogue we have on a daily basis with our three federal customers to try to understand what their demand is. If it's a case where there need a completely exclusive facility for a large population or just some incremental demand in a certain location where we've already got some real estate, that's something we talk about on a regular basis and determine when's the right time to make those investments.

Okay. And I guess in terms of -- you mentioned about potentially offering up California more bed space, should they execute on the additional 5,000 beds per their second plan. I was just curious, of the roughly 5,900 available beds that you have now, how much of that can you offer -- like what's the feasible amount of beds that you could offer to California?

If we did some customer mix changes, but we also got some dedicated inventory, probably a couple thousand.

Final big picture question is, on the per diems, obviously we saw the nice increases relative to how you guys were guiding. Could you give a little more color in terms of maybe what the state average pricing increases were, and I guess on the Fed side too, is that something you can break down for us?

It's something we would prefer not to parse and provide specifics on, but we have seen increases in both the federal and state customer categories. And I think as a general rule, a lot of those increases in this environment are more closely tied -- more reflective of the inflation rate we're seeing, which is call it 2% or less. But it does vary from customer to customer.

Thank you, guys.

Next question comes from Todd Van Fleet from First Analysis.

Todd, how much do you expect in the way of start-up in Q4?

Well, in terms of our definition of start-up costs, we only capture really the net operating losses. So once we start generating revenues and start generating net profit at the facility, we stop counting start-up costs. We could have some continuation of net operating losses at North Georgia as that facility continues to ramp up very slowly and then -- so that would really be the only facility that meets our definition of start-up costs. And then we could have the incremental costs at North Fork. North Fork is profitable at its current level so we wouldn't capture that under our definition of start-up costs. But you could see $1 million to $1.5 million of continued operating losses at North Georgia before it becomes profitable.

Okay. And trying to dig into the revenue per compensated man day here in terms of expectations, or at least our outlook anyway. I noticed that the transportation revenue in the quarter, the September quarter, was down. Is there anything going on in the way of transportation, or why has transportation bounced around so much, I guess?

As I think as we've mentioned in the past, we've gotten out of the third party extradition business and our transportation subsidiary, TransCor. So the bulk of their business now, bulk of their operations is focused on serving the needs of CCA's internal customers. So as we've gotten out of the third party extradition, you're going to see those revenues come down, and then their expenses are reflected in our transportation expense line item. So it's really become more of a cost [center] than a revenue generator.

Okay. Okay. So then thinking about per diems on a sequential basis here, is there anything apart from mix, revenue mix, customer mix, that should impact where the revenue per compensated man day goes from Q3 that maybe we should be thinking about?

Yes. One of the reasons you saw a sequential decline in the owned and managed per diems from Q2 to Q3, that reflects the renegotiation of our T. Don Hutto facility, where we replaced family detainees with adult females, which are much less expensive to house. Imagine housing young children in a family environment, much more expensive, greater risk. So that resulted in a much lower per diem effective September 1st, and this per diem reduction will impact our average per diem next quarter. So per diems are coming down, but again, the adult females are much less costly to supervise and manage than the adult family.

Right. Okay. That was -- That was effective September 1st then.

September 1st. But then you'll see a full quarter's impact in Q4, so you'll see some noise around the average per diem in Q4 as a result of that.

Right. But you're losing some state business and you're replacing it with federal business essentially, if you add North Georgia and Adams County. Should there be a -- does the mix, positive -- what I would think would be a positive mix issue, should that offset what's happened in T. Don Hutto?

Not completely. And then you've got some contracts where we have tiered per diems, where the per diem once the population level gets above a certain number, the per diem drops, and we build that into our overall pricing model. So you end up with a higher per diem on the front end a lower per diem on the back end, but on average you're hitting your IRR targets. So you've got some issues with that. With 65 to 100 contracts, there can be a lot of mix changes from customer to customer that impact that as well.

If I heard you right, on the consulting fees, and thanks for the detail on that, you said that $0.5 million was included in Q3 and -- but we should look for maybe more than $200,000 per quarter when we [model]?

We're going to probably stop talking about it. Just becomes de minimis. We have other consulting fees we incur from quarter-to-quarter in various areas, just becomes another normal operating issue that's not outside the realm of what's normal. Couple hundred thousand dollars maybe in an individual quarter. We may not incur that every quarter.

Okay. Very good. Thank you.

Your next question comes from Kevin Campbell from Avondale Partners.

Thanks again for taking some additional questions. I wanted to get -- to take another look at T. Don Hutto, actually, and with the change there in not customer, but type of detainee. Was the actual dollar level of EBITDA negatively affected by that change as well? Should we assume that two incremental months this quarter will be negatively affected from that, or is the -- this is not margins, but just total EBITDA going to stay the same or go down under the new contract?

Well, as you know, we don't disclose EBITDA by facility. But it's obviously reflected, the impact's reflected in Q3 and any impact's reflected in our Q4 guidance.

Okay. And I noticed in the supplemental, I think you still had 100% guarantee or you still had the 512 detainees at 100%, so I'm assuming that that guarantee rolls into the new contract as well. Or does that -- do you want to talk about it?

[Sector one] does have a guarantee. We're right at 500. Probably wouldn't be appropriate to talk about the negotiations for the new agreement, but that's -- the interim agreement has that feature in place.

And the populations are there anyway. Okay. Could you talk to -- about California, at what point does it become too big of a customer for you? Are you concerned? Would you want to limit it to 15% of revenues or some percentage of EBITDA simply because you don't want to have too much risk? Is that -- maybe give us some thoughts there?

That is something obviously we'll have to keep an eye on, and obviously have to continue to assess what the environment looks like in California as it relates to budgets, as it relates to their in-state build, as it relates to the [sunsets]. All those things will factor into any decision we make to be in a relationship with California.

Do you worry about it becoming too big a customer for you? I think right now you're at 8,000 inmates out of roughly 80,000. So 10% or so. Do you not want to take that above 15% or above 20%, or are you completely comfortable with taking it up as high as California's willing to go?

Let me just follow on, add on to Damon's comments. I think where we maybe become more circumspect would be around building additional capacity essentially for California. As long ago we have beds available in our system, I think we're comfortable selling those beds to California.

That's a good point. Okay. And two quick questions. Capitalized interest in the fourth quarter, presumably that will continue to trend up until North Georgia and Nevada are completed. Is that how we should look at cap I for this year and into next?

Yes, although you can see the level of our investment in new construction CapEx isn't as large as it was previously. So you might see some increase, but it's not going to be significant. And then some of the investment in CapEx we're forecasting is in the investment of new sites, requiring new land. We can't capitalize the interest.

Okay. And can you give us some sense of the remaining CapEx on those -- the two Georgia facilities and Nevada? Not just for this year but also in 2010, or just what's total left to be spent?

We have $54 million left on southern Nevada, and on the two Coffee and Wheeler expansions, around $58 million left to complete. And that's spread probably ratably over the next four quarters.

Thank you very much.

The next question comes from T.C. Robillard from Signal Hill Capital Group.

Great. Thank you. Just two quick questions. Todd, you had really good SG&A leverage, particularly when you look at incremental revenues year on year versus the incremental G&A costs. Is this a reflection of actions that you guys were taking with respect to these -- the consultants that were coming in? Are we starting to see some of this stuff bear fruit?

Not so much on the G&A side, no.

Okay. And then so what was -- I guess what was the difference? Just a function of lower consultant spending? I know that was quarter-to-quarter but what -- if I looked at it, I want to say you guys were up less than $1 million year on year, but you pulled another $22 million to $23 million in revenue. What was -- is that just typical G&A leverage, or what was going on there that allowed you to keep those G&A costs low?

It's a pretty scalable on the G&A side. A lot of those costs are semi-fixed. Even though we're at additional heads and beds, you don't have to add additional accounts payable or payroll staff or some of the other support staff in G&A. Some of that is just normal leverage on G&A. Our target -- I think looking forward into 2010, we're targeting G&A, trying to keep that at around 5% of revenue.

Okay. Okay. So that's just normal leverage then. And can you give us quickly cash from ops and total CapEx for 3Q?

Cash from ops, $217 million for the nine months. All I have right now is the nine months.

That's fine.

So $217 million for the nine months on cash from operating activities. And then expenditures for facility development and expansion, $52 million. And CapEx -- or maintenance CapEx of $32 million.

Okay. Perfect. Thank you.

You're welcome.

And at this time it appears there are no further questions.

Okay. Thanks, operator, and thanks everyone for participating and we look forward to visiting with you in sometime I guess February. We'll give you the specifics. And I guess before we sign off, I want to send a congratulations on behalf of all the shareholders to our new Chief Executive Officer, Damon Hininger. Thank you everyone, and have a good day.

This does conclude today's conference. We thank you for your participation.