CoreCivic Inc (CXW) 2012 Q3 法說會逐字稿

Today's call is being recorded. Good morning, everyone, and welcome to CCA's third-quarter 2012 earnings conference call. If you need a copy of our press release or supplemental financial data, both documents are available on the Investor page of our website at www.cca.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 statement are subject to risks and uncertainties that could cause actual results to differ materially from statements made today. 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 unanticipated events.

Participating on today's call will be our President and CEO, Damon Hininger and Chief Financial Officer, Todd Mullenger. I'd now like to turn the call over to Mr. Hininger. Please go ahead, sir.

Thank you, Melissa, and good morning, everyone. And thank you so much for joining our call today. Joining me is our Chairman of the Board John Ferguson; Todd Mullenger, our CFO; our VP of Finance, David Garfinkle. We also have joining us this morning our General Counsel, Steve Groom; our Chief Corrections Officer, Harley Lappin; and Board Member, Bill Andrews.

I want to just take a minute initially to give you a couple highlights of the quarter. Then I'll turn it over to Todd to discuss the quarter in more detail and also give a review of guidance for the full year. Let me just talk a little bit about the quarter. And the first thing obviously is we're very excited about our new contract with the state of Arizona which we announced earlier this year. This award, as many of you know, will be utilizing capacity at our current Red Rock facility that is currently being utilized by the state of California.

Also we're very pleased with our performance. Cash flow for the quarter was very strong with FFO performing at nearly 10% or $79 million. And we reported also $0.43 in EPS adjusted, which is up over 15% quarter over quarter.

We're also very pleased with the performance of growth that we've seen with existing state partners, most notably Idaho. Which they have ramped up into their new contract to about 250 beds. And then also we've expanded our relationship with the state of Oklahoma where we now have 340 additional inmates with the state in our facilities in Davis and also in Cimarron.

We're overall very pleased with the Q3 performance for CCA. I'm extremely, extremely appreciative of our CCA management team, our wardens out in the field, and the entire CCA team of professionals for their work this quarter and also during the course of 2012. With that, let me turn it over to Todd to review the quarter and talk a little bit about the guidance for the rest of the year.

Thank you, Damon, and good morning, everyone. In the third quarter 2012 we generated $0.43 of adjusted EPS compared to $0.37 in the prior year, a 16% increase. Funds from operations, or FFO, increased 10% to $0.79 per share. While adjusted funds from operations, or AFFO, increased 15% to $0.68 per share.

Our third-quarter financial performance exceeded our forecast, due primarily to favorable operating cost performance driven by lower than average employee medical and inmate medical expenses. We also benefited from a lower than forecasted income tax rate in the quarter. These favorable items were partially offset by lower than anticipated US Marshal populations. These three items net, added approximately $0.02 to our EPS for Q3. Which we do not expect to be replicated in Q4, so we really need to think about Q3 as a $0.41 quarter on a normalized basis.

Year-over-year in the quarter we saw revenues increase by $13 million, driven largely by increases in per diems, the assumption of operations in our Lake Erie, Ohio facility, activation of the Jenkins County, Georgia facility, Puerto Rico inmates at Cimarron, partially offset by declines in populations from the US Marshals -- Colorado, California and District of Columbia.

Moving next to discussion of our guidance. As indicated in the press release, full year EPS guidance is in range of $1.53 to $1.55. Guidance for Q4 is in the range of $0.39 to $0.41. Full-year FFO guidance per share is in the range of $2.89 to $2.93, while AFFO guidance for the full year is in the range of $2.37 to $2.45. Earnings guidance excludes all expenses related to the REIT feasibility project and debt refinancings.

Our US Marshal populations are a key flex point in our guidance. We have seen these populations decline from their highs during the first half of the year, and they are forecasted to remain at their current levels for the balance of the year. However, a small movement up or down from the range of populations assumed could have a meaningful impact on our actual earnings as these populations are largely at facilities that are operating at full capacity, where the incremental margins are very high.

Finally on Tuesday the Company declared a $0.20 per share dividend to be paid on Friday, December 14 to shareholders of record as of November 30. I'll now turn it over to Damon.

Thanks so much, Todd. Now I'd like to give a market assessment and also an update on our Project REIT. Let me just first make a couple global comments. And most notably is all of you on the phone are looking at the economic environment.

We're all reading the same headlines that you are, obviously have concerns in the near term with the economic environment here nationally and internationally. And also uncertainty we've got in Washington, DC, in the coming months. So we continue to be very cautious in the near term but continue to be optimistic about the mid- to long-term prospects for the Company and for the industry.

But I can't tell you how many times I've heard here in the last couple months, from our partners at development team when we talk about new business opportunity. Or maybe decisions on pending projects, the common refrain from our team, internally, is that most of our partners, if not all of them, are waiting for a significant milestone either the election or maybe the first of the year.

And so that's been a common answer internally when we're talking about either new business prospects or maybe timing on new contract awards, within the business and within the industry. And appears right now we're seeing a lot of decision makers basically sitting on their hands, right now, to see a little additional clarity either from the election. Or from maybe some of the issues that Congress is going to have to deal with after the first of the year

But specifically let me just give you a few observations in the book of business, first on the state side and then also a comment or two on the federal side. On the state book of business, just to reiterate our excitement about the new contract with state of Arizona. Obviously this has been a long process, about two and a half years. The state of Arizona has gone through, in putting its procurement and requirement together. So we are excited to receive the award and also having the award going into a facility that's currently utilized by the state of California.

So in the coming weeks and months we'll get more clarity, on the ramp and the timing of Arizona, which is right now anticipated to be an early '14. But we'll continue obviously to give updates in 2013 as relates to this new contract and the impact to state of California.

I'd also reiterate a point that we've made here in the last couple years, that this current fiscal year that we're in on the state side which is July 1, we're seeing no new meaningful (inaudible) capacity being developed from our states. A little bit going on in Arizona and California, but really outside of that very minimal investment in new capacity being developed. And this is really the third consecutive year that we've seen on the state side, where states are not building capacity to deal with the growth and/or overcrowding within the respective states.

We also monitor very closely the growth in our existing portfolio on the state side. And right now over the last 12 months we've seen 10 of our state partners grow by a combined total of about 5,500 inmates. And this has manifested itself into a couple near-term opportunities that we've executed on, the one of which I mentioned earlier, which is Idaho. Idaho has grown by about 500 inmates this past year and obviously they did a procurement and we were successful in that procurement in awarding about 250 inmates at our Kit Carson facility.

Another opportunity that's manifested itself, and that's the state of Oklahoma. As I mentioned earlier, we've grown by about 340 inmates here recently with the state of Oklahoma, with our capacity in Cimarron and in Davis. And just to give you a sense, Oklahoma, their total population has grown by about 800 inmates in the past year. So we've been well-situated. As some of our state partners grow, we can provide capacity just in time to help them deal with that growth.

Now looking forward on the state side, 10 of our state customers where we provide, own, and manage solutions -- and this is outside of state of California, those states are forecasting a growth of about 10,000 inmates over the next 5 years. So again, we feel we're well-suited to deal with that growth as it manifests itself with those existing state partners. But we're also pursuing many potential new state partners and eight of them, most notably, that we're pursuing -- we're pursuing them in anticipation that they are either overcrowded or looking to grow by about 15,000 inmates over the next five years.

Now I know there will be some interest on getting an update on state of California and I'll do that towards the end of my remarks, but let me just make a global comment about state budgets. We monitor these, obviously, very closely and it looks like most state economies continue to improve, but they are still not above the pre-recessionary levels that they had a couple years ago. So budgets really continue to be really very tight at the state level.

But we're also watching states dealing with potential impact from the federal government and the federal budget situation and how that potentially has impact on state budgets. So we continue to monitor very closely. And in the near term it appears to be a very tight fiscal situation within the state budget. And as we get into the spring and obviously a lot of legislatures come back in session we'll be able to give obviously a better update on what the next fiscal year looks like for our state partners.

Now just to a couple comments on the federal book of business. Most notably is that many of you know that Congress and the president passed a continued resolution earlier this fall that funds the federal government through March of next year. So now with that in place and then also with the election behind us, we do think we'll obviously get some clarity here in the coming days and weeks as it relates to the current budget. But also sequestration and then also the looming fiscal cliff that's coming up in the first of the year.

Just to mention sequestration, we are watching that closely it. It is creating clearly a lot of uncertainty with the federal government. There's many people that have reported in the media and other forms that there's a belief there's going to be some type of compromise and that they are either going to stop or delay sequestration in advance of January. Again, with the election behind us I think in the coming days and weeks we'll get more clarity on that. But the bottom line is, obviously, we'll continue to monitor very closely.

Now just let me talk about a couple pending procurements and give you a couple updates. The first of which is New Hampshire, and this is the requirement for 1,500 beds in the state of New Hampshire for a new design, build, own, and manage facility. Proposals were due back in February and our best estimate right now is there's probably not going to be action on it until the first quarter of next year. If it did award first of next year, we think the actual facility would be built and in operation probably in early 2015.

The next procurement is with the Federal Bureau of Prisons, and this is the requirement for 1,600 beds in existing capacity here within the US. Proposals were due back in September and our estimate right now is that they'll probably act on an award probably first quarter of next year. And just a reminder that the requirement of this procurement to whoever is awarded the contract, I should say, has to have the facility ready for operation and ramp-up on September 1 of next year. So again it's only targeting existing capacity.

The final update I wanted to give on the new business opportunities is Harris County. And this is a reminder, this is the opportunity to take over the entire jail system within Harris County. This is metropolitan Houston. This would be an opportunity to take over a system that has about 9,000 prisoners on any given day. We submitted our best and final for this requirement back in August of this year. And again, we think probably later this year, probably early next year is when the county will make a decision on this requirement.

Let me now give you a specific update on California. And there's a couple topics I want to cover here. But before I do that, let me just give you a quick reminder of what's happened in the spring with the state of California. You may remember that the state released in April a plan -- what they call The Future of California Corrections. And this was a plan to really talk about their future over the next five years and steps that they are taking to deal with their population within the state and also meet the court requirements as set forth in the recent court case.

A couple things in this plan, as a reminder. The first of which is that putting forth the realignment plan -- making sure not only the realignment plan is in place with counties and cities taking some of this population that used to be in state facilities. But also making sure there's funding there long term to support the counties and cities with this new obligation.

The second component is to fund some additional capacity within the state of California to deal with overcrowding and/or any potential growth within the state. But the last thing, which is probably the most notable, was the state's efforts to convince the federal court to raise the cap that's currently set at 137.5%, raising that to 145%. And this is within their 33 public facilities that they currently operate within the state.

Now as it relates to the last part of their plan, which is the population cap, there's a couple things to report. Through August of this year, through September, the state and the plaintiffs have litigated several parts of this request to the three-judge panel, and this whole discussion about potentially raising the cap to 145%.

A couple things that's happened here recently. The first of which is in about mid-August the state filed to the court a comment to say that if the court insists that the final benchmark cannot be modified -- this is again raising it to 145% -- that the only way that the state could achieve success in reaching the 137%, assuming they wouldn't be able to release inmates or get additional legislative action to reduce sentencing, would be to maintain the current out-of-state program they've got in place with us. That was indicated by the state to the courts back in August.

In early September, the court rejected the state's request for a higher population cap. The court indicated that it would consider a six month extension of the deadline, which is right now set for June of 2013. So they would consider an extension to December of 2013, but indicated that they would not entertain any raising of the cap. Again, this was in early September that the court made this point and they also did not automatically give the extension but said they would entertain a request from the state.

In early October, just last month, the court did order the state to come up with plans on achieving a population reduction down to 137.5% and they actually said they'd like to see a plan for two dates, either go ahead and moving forward with the reduction in June of next year, but they also wanted to see a plan how the state would achieve that if they got the extension through December of next year. And they have to submit those plans -- the state has to submit those plans back to the court in January of next year. So here in a couple months.

Because the state has also expressed, through this blueprint that they put out in the spring, their preference to return about 5,000 inmates in the out-of-state program by December of next year, the court also directed that the state provide detail on how they plan to return some or all of that population while still meeting the cap by those two alternative dates.

And then just a couple days later, in its monthly status update to the court, the state did acknowledge uncertainty whether it would be able to meet the December 2012 benchmark, which is 145% on time, indicating that it was reassessing its population projections. So let me make a comment also on that last point, which is their population projections.

The inmate population reductions due to realignment have slowed in recent weeks. We've been monitoring their populations on a weekly basis and, in fact, CDCR's inmate population has grown in the last four weeks by about 400 inmates. CDCR also indicated this past week that through releasing a revised population projection, they now forecast more inmates in their system than anticipated just six months ago.

In the spring they were projecting that their 2017 total inmate population would be just under 124,000 total, but now they're projecting it's going to be closer to 130,000. So obviously, we'll be monitoring these developments closely and stand ready to serve the state as they consider alternatives to reach the court-ordered population levels.

Finally, let me also provide an observation about the successful passage this past Tuesday of Prop 30 in California. I know many of you have been tracking this initiative and know that it's primarily focused on helping the state fix some of the funding gaps in several parts of their budget, most notably in public education. Now part of this funding will also provide certainty to cities and counties for the costs they are incurring for realignment.

So our view is that the passage of Prop 30 is really a net neutral, maybe slightly positive for CCA. Because while we do provide California with budget savings, our larger value for the state is our ability to address their capacity concerns and also provide constitutional level of care in compliance with court mandates. And then obviously, the state's ability to pay that level of service is paramount.

Let me switch gears again and now give an update on Project REIT. And this is our ongoing analysis of the feasibility and potential benefits of converting to a real estate investment trust, or REIT. Now as you may recall in our last earnings call back in August, we announced that the management team, with support of the Board, submitted a request to IRS for a private letter ruling back in July.

Now, while there has been much done and much more work to be done, both in working with the Internal Revenue Service and also in fully analyzing the business issues, our continued belief is that a conversion to a real estate investment trust or REIT using a TRS, or Taxable REIT Subsidiary, for the provision of services will provide numerous benefits to CCA, and assuming it could be properly implemented.

As we said on our last call, we believe a conversion to a REIT has the potential to lower cost of capital, draw in a larger base of potential shareholders, enhance our ability to return value to shareholders, provide greater flexibility to pursue growth opportunities post-conversion, and create a more efficient operating structure.

Importantly, under the structure, we would not need to divide a company into an independent REIT and an independent operating company. This would allow us -- enable us I should say, to maintain strategic alignment of our key operating divisions. Accordingly we don't -- we believe that this structure would not adversely impact or affect our business or our vital relationships with our government customers.

Now it's important to note that our business involves providing intensive real estate components, our correctional facilities, and also performing essential services for our government customers and as always, we will take every step to ensure we satisfy those responsibilities in a professional and efficient manner. Since our last call, our advisors have had numerous discussions with representatives of the Internal Revenue Service to discuss our proposed REIT structure and our pending request. Those discussions have been informative and ongoing.

While we believe there is sound legal basis for the IRS to grant the ruling we have requested, there can be no assurances that the IRS will issue a favorable ruling. There is no specific schedule for the IRS to respond to requests for a private letter ruling.

Now, we have also been working on a parallel path on our internal analysis and our work to date led to us provide the new disclosures in our earnings release estimating the E&P payment, conversion costs, and the like. While we have not completed our assessment and continue to evaluate a number of issues associated with the REIT conversion, we wanted to give our investors a sense as to the possible range of distribution and costs associated with electing REIT status.

Now, as mentioned in our press release, a REIT election applies on an annual basis and cannot be made for a portion of a taxable year. And for CCA that means that any reelection would need to be effective January 1. We intend to work with the IRS and continue our own analysis of the benefits of REIT conversion as quickly as we can. And we believe that if everything lines up and the IRS responds to our proposed request and structure as submitted, an election to become a REIT for the 2013 calendar year remains a possibility, even if the IRS responds after January 1 of 2013.

However, this is a complex process and the precise timing and outcome of the process are still uncertain. Now I know you may have some questions about the potential re-conversion, but let me just say that we have made a lot of progress and we have more steps in this journey. So beyond what I've stated, I will be limited on what I can say on this subject during Q&A and this will be especially true regarding the ongoing dialogue we are having with the IRS.

Finally, let me mention again that we have assembled a strong team of advisers for this project, including Latham Watkins, Ernst & Young, JPMorgan, as well as our corporate counsel, Bass, Berry. CCA's Board has met a couple times recently and has received comprehensive presentations from the management team and our financial legal advisers on the possible conversion of the Company into a REIT.

With that, I want to assure you that we, the Board and the management team, are and have been, proceeding as quickly as possible to try to reach a favorable conclusion. We expect that our next update on this important initiative will be on our first quarter earnings call.

So with that let me bring close to my prepared remarks and make these final points. First of which is that we still have got some very meaningful business opportunities that hopefully later this year, early next year, will be acted on by either existing or new partners. But also we're seeing very favorable global dynamics being with our business, both on the federal side and the state side, where we're seeing both levels of government making very limited investments in new capacity to deal with either growth and/or overcrowding.

And also a step to move forward and create more shareholder value we obviously now have a dividend program firmly in place for the Company and for our shareholders. And also we have made meaningful progress on another opportunity to create shareholder value, and that is what we reported earlier with Project REIT. So at this point that is the conclusion of my prepared remarks. Thanks again for calling in for the call today and let me now turn it over to the operator for questions and answers.

Thank you.

(Operator Instructions)

And our first question will come from Kevin Campbell from Avondale Partners

Good morning. Thanks for taking my question. Damon, wanted to follow up on one of the comments you made about being able to convert even if the IRS responds after January 1 of '13. Can you just explain how that process could work?

Yes. So we obviously have still got 53 days left in this year, so the IRS could rule this year, but there is also a possibility that if they rule the -- after the first of next year that we could still convert to REIT. So again we are only three months into the process. We've got two months left in this year. But if they did rule after the first of the year, there is still a possibility where we could convert for the full year.

Is there a certain time frame that you'd have to hear back from them by in 2013, by January 31 or March 1 or something like that or --?

Yes, good question, Kevin. There's really no drop-dead date or no magical date. We obviously, said what we said in our prepared remarks, my prepared remarks and also the press release, but based on our disclosure we're obviously doing all the work analysis we can to get ourself for a potential conversion 2013, but there's no magical date or no drop-dead date.

Okay. Just to be clear even, if it pushes in a month or two or what have you into 2013, it could still be made retroactive to the first of next year?

Yes. It's really the IRS is just making -- they're making a ruling, if we would be able to convert to a REIT. So we can behave and operate like a REIT as of the first of the year even though we get the letter maybe a few days or few week after the first of the year.

Okay. That's helpful. Just as we think about your -- the Arizona contract (technical difficulties) and Red Rock and obviously we've got California inmates there currently, so how should we think about that? Are you going to have both California and Arizona at that facility at the same time? Will you be moving California elsewhere? Can you give us some color on how that might work?

Yes. Another good question. Really don't have any clarity today, so right now the way the procurement is structured -- that was awarded to us, Arizona is anticipating a ramp in that facility sometime after the first of 2014. So, we obviously have got 14 months away from that milestone. So, we really have just started to kind of dialogue with Arizona on timing and kind of the physical plants enhancements we'd have to make to facilities. So I think we'd get a lot more clarity probably the first of the year. So, too early to tell on both timing on that, and also the potential impact with the state of California and timing of that.

Okay, great. And your Idaho contract, I know, called for 250 initially and update 100 eventually. Any thoughts on when -- if and when they might use those additional 550 plus beds.

They ramped up the 250 pretty quickly and by all indications from our team and their team, everybody has been real satisfied with that solution. So we don't have any estimate on timing on additional population, but they obviously did give themselves that flexibility with what they advertised in the procurement. So my assessment, would be probably early next year before we get any kind of feeling if they're going to use additional beds. But we're obviously well-suited to do that and the contract gives them that flexibility.

Okay, great. Last question. I wanted to ask about Ohio. I'm sure you've seen some of the media reports about some of the concerns about the facility after it was transferred over to CCA. Maybe you could just talk about that facility and what you guys are doing there from a quality perspective.

Yes. Let me just first say we're very excited about our partnership in the state of Ohio. We're strongly committed to working with them, not only just in the near term with some of the operational issues that they've raised, but also long term being strong partner for them in the state of Ohio. They have had -- obviously, raised some concerns since the recent audits and we've taken those very seriously. We've deployed a lot of resources toward the facility and here in national, to help support the facility to address some of those issues. So I'm confident we'll address all those issues timely and work through all those various issues. So I think, having a new relationship with a new state customer, this is first time working with the state of Ohio, you're only be on going to have a period where you're going to kind of learn from each other. And make sure clearer expectation relative to policies and training and operational requirements. That we're going through that a little bit, but we're committed to working through all these issues that Ohio has raised.

Okay, great. Thank you very much.

Thanks, Kevin.

And our next question will come from Tobey Sommer from SunTrust.

Thank you. I guess you already addressed in your prepared remarks my most important question which was the timing of an IRS response. To what extent have you had a back and forth dialogue about your submission, and had kind of regular communications with the IRS?

Yes. So we've had -- we've had conversations with IRS since our submittal. As I indicated in my prepared remarks, we basically put a fence on kind of delving into kind of the discussion back and forth, but we've had ongoing dialogue with them since our submittal.

Shifting to fundamentals for a second, could you describe -- give us a little bit more color on Harris County. I kind of had thought that perhaps something might have -- a decision might have been made in the Fall and wondering what, if anything, may have changed there.

Yes. Good question. I would kind of relate it back to my earlier comment. We just have gotten a sense from our, either existing partners or new partners, that either opportunities, pending procurements, maybe decisions where they need to move forward on a requirement, a lot of those are just being deferred either past the election or past first of the year. There was obviously a lot of -- everybody in the country was most focused on the national election, but there was a lot of elections going on at the state and local level. And so our sense is that, we just had a period of time where a lot of decision makers were sitting on their hands. So I would say Harris is probably in that category. We think we've put forth a very compelling and comprehensive and competitive proposal for them. But our sense is probably now that we're on the other side of the election, either later this year, early next year we'll see an action being taken by them.

And Damon, I apologize I missed part of the call. Did you give any update on the customers or potential customers that you're having conversations with that aren't part of formalized RFPs and could you just update us on those discussions?

Yes. We -- I mentioned that we're pursuing eight state partners that are currently not doing business with CCA. And I just gave an indication of their overcrowding projection which is over the next five years. That would be somewhere near 15,000 inmates. So those would be potential new state partners. One of those partners that was in kind of in that category, say 12 months ago, was Puerto Rico. So Puerto Rico was one of those that I didn't mention by name, but just said that we were monitoring, we're pursuing and saw an opportunity to provide not only value, but also relief in overcrowding and overgrowth. So that's kind of the typical profile we're looking at for an opportunity on the state side.

Are those eight customers and potential 15,000 beds, larger or smaller than the last time we got an update from you?

I think it's been pretty consistent. It's been pretty consistent. I think maybe a little higher, maybe a little lower, but I'd say probably no more than probably 2,000 bed variance.

Thank you very much.

Thanks, Tobey.

And now we go to Todd Van Fleet from First Analysis.

Hey, good morning, guys.

Morning, Todd.

Damon, on that back and forth that you've had with the IRS, have they asked for estimates, either historical or projected regarding federal taxes under one scenario versus the other that is, the conversion versus non-conversion?

Yes, Todd. I would say that's in the category of providing detail on kind of our conversations with them. So I really can't go down that path. The only thing I would share is that we've had several conversations with them since our submittal, but really don't want to get into any detail on the topics and what was discussed.

Okay. So outside the context of any conversations that you've had with the IRS, I assume you guys have worked the numbers with respect to federal taxes that would be paid under either a path, either conversion or non-conversion. Can you tell us what those figures have shown?

Yes. Obviously we're working on that analysis, but not prepared to disclose anything to the market today.

Okay. I think that's it. Thanks, guys.

Thanks, Todd.

And now we'll go to Manav Patnaik from Barclays.

Hi. Good morning, gentlemen. Thank you for all the details on the REIT stuff. Two, just follow-up questions on the REIT stuff. One, it seems like it sounds like that the PLR approval is not necessarily a sort of block in term of converting on Jan 1, but could there be any other items per se, that could force you to make the decision not to convert on Jan 1? Like whether it be Board approvals, shareholder approval, any other items in there that we should think about in terms of not being able to do it Jan 1?

Well, so yes. If you put everything, I guess, with the PLR request and the timing on that, you put that aside, I think it's, based on our press release, the disclosure we've made and our comments obviously we're working towards being prepared for a conversion in 2013. So, we've obviously been keeping the Board up to date along the way, giving them presentations, getting feedback from them and then obviously continuing to work with our external advisors on the analysis. But yes, we're taking all the steps internally to get ourselves prepared and then obviously again it will be in the hands of the IRS on the timing of the ruling.

Okay. Fair enough. And then, you obviously gave a good amount of detail in terms of the E&P, and the costs, et cetera. I guess when -- I guess around what time frame, or how do you guys think about, when you guys will give us a sense of what the dividends kind of look like?

It would be later. It would be -- if we convert obviously in '13 then we'd be talking about it sooner rather than later, but it would be later.

Okay. Fair enough. Now moving to, I guess as a follow-up somewhat, to the eight state customers that you referenced to, maybe new state customers rather -- maybe it's one of those eight or maybe it's completely different, but I was hoping you could give us an update on if you're seeing any traction in terms of other states being interested in selling their facilities like Ohio did?

We are. We have and we are. We have seen other states express interest. And so, yes, we continue to see -- think that is a great solution, especially in tough fiscal environment to where a state can get a -- do a transaction, maybe help them fund a budget deficit or maybe a hole they've got in their upcoming budget. So we continue to pursue that as a solution for state partners and think there's a couple states that may be close on exploring that type of solution.

And I guess, would those decisions also fall under, how you characterized at the beginning of the call, just them waiting for stuff like the election or the beginning of the fiscal year those kind of issues to first sort itself out?

Yes. I think that's exactly right. I think with the election, again, all of us have been most focused on the national election, but there was a lot of gubernatorial races around the country. There was a lot of legislative races. There was a lot of local races. So I think anything that government may consider that would have any tinge of controversy, I think most folks either in existing state portfolio -- existing portfolio or maybe new portfolio opportunities, new potential opportunities I should say, just saw an opportunity maybe to defer any activity till after the election and get the outcome of those various elections.

Okay. Fair enough. And my last question is around, you mentioned you guys obviously closely monitoring sequestration and the fiscal cliff and those issues. I was -- can you maybe give us a little more detail in terms of what exactly it is there that you're monitoring which maybe we can do as well. And also, what's the feel -- like what's the worst case that happens and how it might hit you guys?

I don't know if I have any better assessment than what's been reported in the media. Like I said, probably reading the same things you are, Manav, that the kind of a general feel is that it's a worry. People are concerned about it, but there's a general belief that Congress and the president will come together and work out a plan, either to defer it, or work out some type of compromise as part of a bigger deal as it relates to taxes or the fiscal cliff. So I don't know if I have any additional clarity there, but I do know it's a worry.

I mean, I would say if on kind of rewind maybe three, four months ago and talked to many of our federal partners, most of them would have said I know it's there, I know it's a potential risk. I've done some tabletop exercises on what I would do, if this materialized but nothing more than that. Whereas here in the last month or two we're just hearing a little more of people know it's obviously coming up very soon, first of next year, so about 60s days away. Everybody is monitoring very closely. But I would say, you talk to our federal partners they kind of have the same assessment. They think that it is some type of deal or compromise or deferral will be worked out.

All right. Fair enough. Thanks a lot, guys.

Thanks, Manav.

The next question will come from Kevin McVeigh from Macquarie.

Great. Thank you. Hey, not to kind of belabor the timing on this, but if we were to get an update -- Damon, it sounded like you said the next update will be on the Q1 call. If for some reason you were to get the private letter ruling prior to that, I'd imagine you'd update us at that point, correct?

Yes. If we had a material update obviously we would do that out to the marketplace.

And then the timing on it, as you think about a potential kind of response, do the holidays come into play at some point in terms of, should we expect something before you get kind of into December or it's just too tough to call?

I'd say the latter, too tough to call.

Okay. Fair enough.

This is obviously our first time doing this, but I couldn't give you any clarity on that.

Okay. Then, just any sense of how the states have reacted to kind of your petition for the REIT? And the federal government as you think about it -- kind of conversations on renewals? Has there been any impact there?

Oh, yes, absolutely no impact. We, as I mentioned in my remarks, I mean we see this as a non-issue for our customers. And so we're moving forward with the plan and obviously proposed a conversion, assuming that it's a non-event for our customers, so no concern there.

Okay. Thank you.

And we'll now go to Clint Fendley from Davenport.

Thank you. Good morning, guys. On the REIT, another question here. I'm wondering how would the E&P distribution work if you guys didn't hear from the IRS until sometime in January? Is there not an incentive to pay that, at the 2012 tax rate prior to the end of the year?

Yes. So I guess a couple points there, the typical, as I understand it, kind of distribution is, kind of the first conversion year -- you have to do it before the end of the first conversion year. So in that case if we converted January of '13, we'd have to do it by end of next year. But yes, you know sitting here today we don't have -- obviously, don't have any response from the IRS and being 53 days away from first of the year makes us -- makes it challenging for to us think about any type of distribution. The other thing I would note, is that we have, and we mentioned this in the press release, we've got restrictions in our debt agreement about how much we can pay out. So obviously we still have that constrain for the Company, even if we wanted to do something, which would be very hard to do.

Okay. Understood. Thank you. And I wondered have you guys had any additional sit down meetings with the IRS since your initial meeting earlier this Summer?

You guys are very persistent today. So we've had numerous discussions with the IRS. I'll leave it at that.

Okay. Okay. Thank you. And I guess the last question, then. On just the eight new state opportunities that you guys are pursuing, are any of these states considering asset sales as part of their alternatives?

The states that I am -- that we're looking at, I would say the first opportunity as we see it and really it's the first play in our play book, when we sit down with a potential prospect is using existing capacity. And so I'd say the majority of the states that we're looking at that I mentioned earlier, we're looking at proposing solutions and utilizing existing capacity within the CCA system. And again I would liken a Puerto Rico to that type of profile that we're looking at. Where you've got Puerto Rico going back 12 months ago, dealing with some issues within their system, growing and we provide compelling value with them very quickly from a cost perspective but also providing capacity very quickly. So I'd say it's more kind of that profile.

Okay. Got it. Thank you.

Thank you.

Our next question comes from Barry Klein from Macquarie.

Hey, just wanted to be -- following on Kevin's question, I'm not sure I fully understand the response. Basically you mentioned in the release that you'd be required to distribute the accumulated E&P by the end of the calendar year preceding the REIT effective date. However, you also said on the call that you could make a retroactive decision after January 1, 2013 for January 1, 2013. So does this mean that you could distribute the E&P prior to the PLR on the decision? So if you feel that you're going to be making that retroactive decision in 2013, you'd really have to decide on paying out the E&P by December 31 this year. Is that correct or am I missing something?

Yes. The E&P, it is very, very likely E&P would be distributed this year. Just because I said we're 53 days away from the first of the year and we're still in a period, obviously waiting for response from the IRS. And again, we've got debt on the books that have restrictions on how much we can pay out, so we still have those restrictions in place. So those would have to be not in place if we were going to do something preemptively from E&P. So hopefully that gives you more clarity.

Does that then prevent you from REIT conversion, because in the release it says tax rules applicable to REIT conversions require you to distribute the E&P before the end of the calendar year?

If I could provide some clarification, this is Todd. The amount you have to distribute is calculated through the end of the preceding year. You have through the end of the year, in which you make the REIT election to make that distribution.

Oh, got you. So you just have to make the payment during 2013, not before the end of 2012.

And you calculate amount through the end of the preceding year.

Got you.

And to the last part of your question, I think we say this in the press release. We say one, that we would obviously have to potentially have additional debt to fund the estimated cash component of E&P distribution, but also with that, we would also have to refinance to allow us to have the flexibility to not only do the payment, but also do the amount of dividend payments we would have to do post-conversion. We would have those debt restrictions in place.

Okay. The 80% common stock, what is that? Does that impact shareholders at all? I understand the 20% cash, but does that just -- that doesn't really impact -- is that just a book accounting type thing? That doesn't really give us anything, right?

No. There's actual shares distributed to the shareholders. So think of it as a stock dividend or split.

Okay. Got you.

It is taxable. It is taxable to the shareholders.

Okay, all right. Sounds good. Thanks a lot.

Thank you.

And we do have a follow-up from Kevin Campbell from Avondale Partners.

All right, thanks. I just wanted to ask if there were any sort of shareholder votes that are required either prior to conversion or post-conversion? And what sort of timing would be on that for getting a proxy out there and having a shareholder meeting, et cetera?

Yes. So there would be -- as we mentioned in the press release, we would have to have approval to have provisions to the kind of REIT-related ownership restrictions that would have to be incorporated in the Company's charter.

There's no approval of the REIT conversion required by the shareholders. That would be done by the Board.

So you could get that approval, what you need from the shareholders, after the fact as well?

Yes. Yes. After we get the ruling, yes.

Okay, great. And then just so I understand, again with this whole retroactive thing, it sounds like you would effectively convert January 1, 2013, without the ruling, hope to get the ruling and then if it comes back positively you just sort of move forward. Is that right?

Yes, that's exactly right. Again like we've got a couple months until the first of the year, but if it did go into the early next year then we'd have that flexibility.

And if you get back a negative ruling from the IRS then you just unwind it at that point?

Yes. We would kind of go back to operating as a C Corp.

Okay. And would you have to have the shareholder -- not shareholder vote, I'm sorry, but the Board would have to approve before January 1, 2013, that actual conversion?

No. I think, yes -- If we get the ruling after the first of the year and then obviously have it in hand, then the Board could take the action and then we could make an election for 2013 conversion.

But you don't have to do anything December 31 or effective January 1, 2013? You can wait until that ruling -- you hear back from the IRS?

Yes. I'd characterize the actions we need to take as administrative and some corporate entity reorganization. It all happens internally and -- but as a general rule, if we had to unwind them later, there's really no consequence, material consequence, having to unwind them or any consequence to our implementing them in the first place if we don't openly get that favorable PLR.

Okay. So essentially by January 1, you would have all that administrative stuff set up and you would be operating as if you had the conversion and then get the ruling and if it's positive, great (inaudible) and if it's negative you can unwind it without any real consequences.

Yes, that's correct.

That's what we're preparing ourselves to do.

Okay. Thank you very much.

And we do have another follow-up from Todd Van Fleet from First Analysis.

Hey, on California with Prop 36 and I understand maybe they're looking to try and reclassify -- make other reclassification's, I guess, within their inmate populations, have you guys -- do you have an understanding or do you have a guess as to how many inmates the state thinks it can reclassify and find some room for using that approach?

Yes. Our assessment, and I would say it's more of a guess to your kind of last comment, our guess is that's probably going to affect probably about 2,000, maybe 2,500 inmates, and it wouldn't be effective immediately. So you wouldn't necessarily have a mass release today or whenever it was put in place. These inmates would be eligible for resentencing. So this would be a period of time where they'd have to go back and maybe I guess, probably a judge or a court, to be resentenced. And so the assessment is that it would affect about 2,000, 2,500 inmates and if all of them were resentenced and this would be over maybe a two, three, four year period.

And that's with respect to Prop 36 you're referring, Damon?

That's correct, yes.

Okay. And is that -- are there additional reclassification efforts underway in the state?

I don't believe so. We're not aware of. I do know that they had another proposition on the books for getting rid of, or abolishing a death penalty, but I'm not aware of any other additional initiatives.

Okay. Thank you.

Thanks, Todd.

And at this time we have no further questions in the queue. I'd like to turn the call back over to Mr. Hininger for any additional or closing remarks.

All right, Melissa, thank you so much. And thank you for everyone participating today and for your time and all your great questions. We're extremely appreciative of your investment in CCA, and so your management team is continuing to be focused on opportunities for, not only creating more shareholder value like Project REIT, but also executing on another good quarter and a strong end to the fiscal year. So thanks again for participating today and look forward to talking to you early next year.

And that does conclude our conference for today. Thank you for your participation.