Feb 10, 2010
Corrections Corporation of America (NYSE
CXW):
Q4 2009 Earnings Call
Executives
John D. Ferguson - Chairman of the Board Damon T.
Hininger - President, Chief Executive Officer, Director Todd J. Mullenger - Chief Financial Officer, Executive Vice President William F.
Andrews - Director David Garfinkle - Vice President, Finance and Controller.
Analysts
Jamie Sullivan - RBC Capital Markets Todd Van Fleet - First Analysis T.C. Robillard - Signal Hill Group Toby Summer - SunTrust Robinson Humphrey Kevin Campbell - Avondale Partners Manav Patnaik - Barclays Capital Chuck Ruff - Insight Management
Operator
Good morning everyone and welcome to CCA's Fourth Quarter 2009 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.correctionscorp.com.
Good morning everyone and welcome to Corrections Corporation of America's First Quarter 2009 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.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 the 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 discussions of the 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 Chairman of the Board, John Ferguson; President and CEO, Damon Hininger; and Chief Financial Officer, Todd Mullenger.
I'd now like to turn the call over to Mr. Ferguson.
Please go ahead, sir.
John Ferguson
Welcome everyone to CCA’s Fourth Quarter 2009 Earnings Call as well as a discussion about our 2010 forward-looking guidance. In addition to the three that were mentioned, in the room with us is Bill Andrews, one of our directors and David Garfinkle, our Vice President - Finance and Controller.
So with that I will turn it over to Todd Mullenger.
Todd Mullenger
Thank you John, and good morning everyone. Moving straight to discussions of our financial results.
In the fourth quarter of 2009, we generated $0.36 of EPS compared to $0.32 per share in Q4 2008, which represents a 13% increase. Full year EPS normalized for unusual items totalled $1.28 representing a 7% increase over a $1.20 in 2008.
Total revenues for the fourth quarter were up 4% over the last year reflecting a 5% increase in average daily-compensated populations. The primary drivers of our year-over-year revenue and earnings grow include increased compensated man-days from the states of California and Arizona as well as commencement of our new BOP contract at our Adams County facility.
Combined with year-over-year increases in U.S. Marshall populations under a contract that provides for a lower tiered per diem above a certain population level.
Excluding these impacts per diems increased by approximately 1% year-over-year in the quarter. Average compensated occupancy for the quarter was 91.5% compared to 92.8%.
We're continued to be pleased with operating expense performance, operating expenses per man-day in Q4 2009 were $39.97 compared to $40.22 a year ago, which represents a decrease of approximately 1%. The decrease in cost per man-day reflect contract modifications from our customers and the impact of our company wide initiative focussed on improving operating efficiencies.
In addition during Q4 2009, we've recognized a significant improvement in our workers compensation expense, as a results of adjustments coming from an updated actual estimates. These improvements in operating cost were offset by operating inefficiencies as several of our facilities including North Georgia, which operated at 20% of capacity.
Our Red Rock facility due to the ramps down of the Alaska populations, and our Prairie facility resulting from Minnesota and Washington populations ramping down. As a result of the operating inefficiencies in North Georgia, Prairie and Red Rock, operating margins per man-day declined slightly from $18.32 in Q4 2008, $18.19 in Q4 2009 with operating margins range remaining flat year-over-year.
Adjusted free cash flow for the quarter totalled $64 million or $0.55 per share and $240 million or $2.04 per share for the full year. Cash tax payments for the full year totalled approximately $64 million or approximately 27% of pre-tax income which is much lower than our 34% GAAP tax rate reflected in the 2009 income statement.
The lower cash tax rate was accomplished due to certain tax planning strategies. Although, we'll work diligently to minimize our cash taxes going forward, cash taxes are expected to be approximately 31% in 2010 versus 27% in 2009 and as compared to 38.5% GAAP tax rate reflected in EPS guidance for 2010.
With regards to our share repurchase program announced in November of 2008, we did not repurchase any shares during the fourth quarter. Though the number of shares we repurchased today it's still close to approximately $10.7 million at a total cost of $125 million.
That plan expired effective December 31, 2009. Moving next to discussion of our guidance, as indicated in the press release full year guidance is in the range of $1.16 to $1.26.
Guidance for EPS, guidance for Q1 is in the range of $0.28 to $0.30. We are also initiating guidance on free cash flow per share.
However we are only providing full year guidance giving the significant volatility in quarterly cash taxes. As we have commented on previously, unlike other industries our depreciation expense is not reflective of the ongoing maintenance CapEx that we will incur to maintain our facilities.
For example, depreciation and amortization expense totaled $101 million in 2009, versus maintenance CapEx for the year less than half that amount at only $49 million. So as we have discussed previously we believe adjusted free cash flow per share is in many ways a better measure than EPS, other returns we are delivering to our shareholders.
Full year guidance for free cash flow per share is in the range of $1.83 to $1.99. A complete reconciliation of forecasted adjusted free cash flow per share can be found in the supplemental financial information section of our press release.
Both EPS and free cash flow per share guidance were developed under the assumption that no share repurchases are made during the year. In comparing Q1 guidance of $0.28 to $0.30 to Q4 2009 actual of $0.36, a couple of items to note, first going back to fourth quarter EPS of $0.36 as we just discussed was an usually large favorable one time expense range impacting Q4 earnings related to workers comp expense.
Second you will recall from prior years, that Q1 is always seasonally weaker compared to Q4 due to the payment of unemployment taxes. Generally speaking, we pay unemployment taxes on the first $7000 of wages per employee, so those taxes are heavily weighted towards Q1 and this year we are seeing significant increases in those unemployment tax rates compared to prior years.
Unemployment insurance is a self-funding program, so as unemployment claims increase, the tax rates are increased to fund the increases in claims. Finally Q1 two (inaudible) in Q4, so these three items combine to account for nearly $0.04 of deterioration in EPS from Q4 to Q1.
Next our guidance for Q1 and the full year is impacted by number of key factors which I will spend a few minutes outlining. First guidance reflects nearly a full year of EBIT impact from the BOP contract at Adam's county, which began ramping in August in the last year and is now operating under the 90% occupancy guarantee.
Also included are increases in inmate populations under our State of California contract. Our California house averaged 8000 for Q4 2009 with a ramp up of additional inmates beginning in Q1 of this year.
Total increase is expected from the ramp up for approximately 300 during Q1, 600 during Q2, 600 during Q3, and 500 Q4 for a total increase of 2000 by year-end. Next our North Georgia ICE facility, we currently house approximately 150 ICE detainees, projected to grow to 450 by May.
As a result we will incur a loss on this facility in Q1 of approximately $2 million due to the low occupancy percentage and startup cost. Regarding Georgia, we expect ramp ups of the 1500 beds of expansions under the State of Georgia contract and our Coffee and Wheeler facilities, where we expect to receive 600 inmates per month combined between the two facilities beginning in July.
So that by September, we have received a total of 1500 incremental inmates to fill the expansion beds. Next we expect to activate our new 1000 bed Nevada Southern facility for the U.S.
Marshals during Q4 of 2010 with a gradual ramp up beginning in October. However for the year, we expect the facility to generate a net loss as a result of start-up cost.
Nevada Southern will generate approximately $3 million of start-up cost in Q3. These increases are offset by a number of items first the full year impact of the loss of all Alaska inmates from our Red Rock, Arizona facility.
Alaska has approximately 800 inmates at Red Rock at the end of September 2009 with the transfer of essentially all inmates occurring during the month of December last year. The Alaska population average approximately 600 during Q4 2009.
Next we’re anticipating loss of all 700 State of Arizona inmates at our Huerfano Colorado facility, all to be removed during the month of March. We also expect a loss of all 2100 Arizona inmates Diamondback Oklahoma facility, all to be removed during the month of May.
In addition, we’re experiencing slight reductions in ICE populations at several of our facilities, and we've realized reductions in EBITDA at our T. Don Hutto facility related to change in mission from housing families to adult females.
Next, we have announced the loss of the BOP to California City, where we expect removal of 2600 BOP inmates to begin in July and to be completed by the end of September of this year.
As we mentioned previously, the cash operating carrying cost of vacant bed is approximately $1000 per bed per year total on a 1000 vacant beds the cash operating carrying cost of those 1000 vacant beds will be $1 million per year. With regards to adjusted free cash flow per share, adjusted free cash flow per share guidance of $1.83 to $1.99 for 2010 is lower versus 2009 of $2.04 due to the projected increase and the cash tax rate from 27% in 2009 to 31% in 2010 and a $4 to $9 million increase in maintenance CapEx in 2010 versus 2009.
The cash tax rate is increasing due to one-time tax credits and deductions taken in 2009 that will not be available in 2010. The increase in maintenance CapEx reflects the larger number of beds we have in our portfolio.
So just to recap taxes assume a 38.5% GAAP tax rate in computing EPS but a 31% cash tax rate in computing adjusted free cash flow per share in 2010. Now for a long return projections we believe our cash tax rates will continue to increase towards a 38.5% GAAP tax rate.
With regards to our new share repurchases program, we had been authorized by the Board of Directors to repurchases up to $250 million from our common stock. That authorization remains in effect until the earlier of June 30, 2011 or the repurchases of a total of $250 million of our stock.
We consider the share repurchase program another capital allocation alternative with the decision to repurchase shares based upon a return on investment analysis. In other words, if repurchasing shares delivers an exceptional ROI and that ROI is equal to or higher than the other capital allocation alternatives such as building new beds, everything else being equal, we would likely choose to allocate the capital towards a stock repurchase.
Obviously, the share repurchase price is an important component of that ROI analysis. It is also important to note here that our decisions around the deployment of any capital will be made under the over arching objective of maintaining sufficient liquidity.
Turning next to discussion of our liquidity as of December 31, 2009, our liquidity is provided by approximately $236 million of the availability under our bank credit facility plus approximately $46 million of cash on hand. Our total debt leverage ratio is 2.6 times with interest and fixed charge coverage ratios at around six times.
There's the risk that the State of California issues warrants for our use later this year, a step they took last year which resulted in a delay in payment on about $40 million of accounts receivable. Debt along with the risks that other customers delay payments are issues we will continue to monitor in relation to our liquidity.
Obviously, uncertainty remains related to the general economy and around government budget deficits. This is the primary uncertainty in risk we face for 2010.
In developing our guidance, we've incorporated our best estimate at the range of potential outcomes related to the risks and opportunities associated with those government budget uncertainties, including the risk of population declines and the potential for price and pressure as well as the opportunities to secure new contracts. However we believe the long-term prospects for growing EPS and free cash flow per share remain attractive.
I’ll now turn it over to Damon for specifics on our new business prospects and bed development.
Damon Hininger
Thank you, Todd and thank you so much callers for participating in our conference today. While we continue to face like all companies in corporate America a very challenging economy in the fourth quarter, I continue to be very proud of the 17,000 men and women of CCA and the job they have done in these very difficult circumstances.
I would like to break my comments this morning into three topics. First of which is since we are giving our 2010 guidance today, I wanted to give some commentary around the state of the industry.
Second is to share our short-term and long-term focus for the business and finally market observations and opportunities. So our observations on the state of the industry, let me first say that as we have often discussed during the course of 2009, the pressure our customers feel because of budget constraints is yet to subside as we enter 2010.
Since late 2008, many of CCA’s customers have had to make difficult and controversial decisions that have affected their operations as well as our operations. At the beginning of this fiscal year, at least 17 of CCA’s state customers had a combined budget gap to fill of $72 billion.
Seven months into this fiscal year, those same state customers have had another $17 billion budget gap open up that they will need to close by June. So it is clear that states are grappling on getting a good hand on their forecast.
As mentioned by Todd, state budgets will continue to be a concern this year going into 2011. But on the positive side, of our state customers, this is probably the first time in 25 plus years where we have seen so little if any dollars has been appropriated for new prison beds or new constructions.
We again feel that having inventory as we come out of this recession is going to be extremely attractive and give us a significant competitive advantage and we still fell that the U.S. marketplace continues to look very favorable for the company and the industry and with that we don’t believe we have seen any shifts in policy long-term as it relates to use of the private sector.
Recent actions like Arizona, with their pulling of inmates back in state are completely budgetary driven and not a sign of softening of acceptance or operational concerns. Arizona is running at a 113% of capacity and this action of pulling back their out of state capacity will exasperate that situation.
Let me also share a couple of metrics that we have included in our shareholder presentation last year that I believe shows a long-term opportunities for the company. We shared last year that of the U.S.
corrections marketplace only approximately 7/8% is managed by the private sector. Based on reasonable reports for 2008, that has grown to 8.35%, so its still a largely un-penetrated market here in the U.S.
We also shared last year that of the incremental inmate growth in 2007 among all correctional agencies, about 49% of that growth was captured and housed in private facilities. Based on recent reports that percent grew to 72% for 2008, so again I think that shows a great track record for both the company industry and the acceptance within the state and federal level of use to private sector but also the constraints that many public agencies are felling on building new capacity.
Now as it relates to our short-term focus, our priorities remain as follows. First it's quiet simply to fill vacant capacity.
We continue to have staff all over the organization actively engaged in exiting and perspective customers to utilize our excess capacity. Second item is to mention that high on our short-term priority list is a continued emphasis on controlling operating cost.
I think our results show good progress on keeping a lid on escalation of cost 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 a thoughtful disciplined building of capacity in front of demand. I think the award in November from California again reaffirms our strategy as being a sound one.
But with that we continue to hold up our new bricks and mortar constructions with respect to the beds.
Additionally as announced in our earnings release, we have new share repurchase program. We think that based that based on the current level of inventory in our system, it would be appropriate to repurchase shares at prices that would be equal or exceed the ROI available from investing in new beds.
We think we've had great success with the last program and think this is a great alternative to deploying capital during this tough economic environment. Finally, we will continue to pursue build-to-suit opportunities and with the Georgia Award last summer, we've had good success with these types of procurements.
However, I think it is fair to say that in the short term with the uncertainty in the marketplace and also limited visibility from our customers as it relates to their budgets, the company's ROI hurdle on new construction will be higher. Now for the market industry observations and opportunities, and first a couple of more additional comments on state budgets.
As mentioned earlier, our state customers are still living through a very challenging fiscal environment. As mentioned last quarter, the ability to forecast actual projections has been extremely difficult at the state level, so budgetary revisions are likely as we go to the last half of this fiscal year and to the 2011 fiscal year.
So although there is continued uncertainty as it relates to our states budgets let me point to a couple of positive things that we see with the states. First of which is, I mentioned last year the new Oklahoma Legislation, it gives a greater flexibility for housing of out-of-state inmates within our facilities in Oklahoma.
With this new legislation, we can now house a larger variety of inmates from occupancy levels much like the flexibility we have in our Arizona facilities in our facilities in Oklahoma. We think this is what made the remaining beds in North Fork attractive to California.
And if it is the case that Arizona does not extend their contract to Diamondback, this legislation will also make these beds extremely attractive we believe to several states. Second is to report that we have people on the ground in half a dozen states that currently are not doing business with CCA.
We estimates that these states are approximately 14000 inmates over capacity, and like the last recession we think we could see several states use the private sector after this recession that don’t have the capacity to deal with over crowding and/or growth.
This proposal is due on February 23rd; interestingly Arizona stills want the $100 million upfront payment for an operating concession. So it is unclear to us at this point how viable prospect this will be for the company.
Therefore, more traditional opportunity for the industry, we expect the RFP for 5000 beds instate to be out shortly.
Now a comment about Florida, Florida Department of Management Services has issued ITN for the operation and management at four correctional facilities. These are the rebid of the management only contract that are currently held by CCA and GEO.
We have two contracts our Bay and Gadsden while GEO operates the other two facilities. Proposals are due March 1st and we anticipate award around April 12th.
Now a comment about CAR 10, we reported several weeks ago on the outcome of this procurement and as it relates to Cal City as Todd mentioned, we understand the BOP it is ramp down their population by October 1st. CCA has already engaged the other AMCs on their interest of the facility and obviously we think it could be of interest to the State of California.
Now a comment about CAR 12, this procurement is for the rebid of our BOP contract that our McRae, Georgia facility which expires in December of 2012. The BOP anticipates this requirement will be fulfilled through a single award.
A proposed facility may either be an existing facility, a newly constructed facility or an existing facility with expansion or renovation. We believe that procurement could be issued later this month.
Now another comment about the ICE procurement about the 2200 beds. Item 10 is to issue a solicitation for a contractor owned and operated detention facility capable of housing and managing 2200 detainees in the Los Angeles area.
We anticipate the RFP should be released later this quarter. I’ll now comment about procure or an RFI I should say from the Office of the Federal Detention Trustee.
OFDT is in search of an existing secured facility, which has to be located within 35 miles of Atlanta, California with a capacity of 650 bed to house prisoners in custody of both for the United States Marshal Service, Bureau of Prisons and JPATS. Responses are due February 11, 2010 and our Cal City facility would be eligible for this requirement.
I’ll now comment about the BOP procurement for 3000 beds. As a reminder we submitted our response to this RFI last year.
This opportunity as we understand it would be for a contractor own and operated facility for the housing of 3000 short-term city’s inmates. We anticipate the RFP will be issued later this year.
So really a good amount of activity within the industry, if you pull out the beds currently managed by the industry that are up 3 bed, we have nearly 15,000 to 16,000 new beds coming out for bid this year. Let me now make some specific comments on our four largest individual customers and the first of which is the United States Marshal Service.
First comment is to say our Vegas facility is still under construction as Todd mentioned late third quarter, early fourth quarter this facility will be activated. Now let me also mention that President’s fiscal year 2011 budget requires for the Office of Federal Detention Trustee is $1.5 billion, which is about a $95 million increase over the fiscal year 2010 enacted level.
Just as a reminder the OFDT has the budget authority for the United States Marshal Service for the housing of Marshal Service prisoners. The budget proposal is almost $95 million in program enhancements including $92 million for the housing of marshal prisoners and $3 million for transportation cost associated with the anticipated increase in their prisoner population.
Now for ICE, the Presidents 2011 budget request for ICE is $5.4 billion which an increase of $97 million from the estimated fiscal year 2010 level. Like last year no new funding has been provided for the acquisition, construction, and maintenance of ICE faculties.
One other note on ICE, we have seen a softening of their demand system wide as we understand that ICE is dealing fiscal constraints, nearly a $140 million short fall during this fiscal year. ICE was targeting a system wide funded population number of 33,400 this fiscal year but with their fiscal limitations, we understand that they are running 2000 to 3000 short of that target.
Now for the Federal Bureau of Prisons, with the BOP, the President's fiscal year 2011 budget request for the BOP was $6.8 billion, which is a $618 million increase above the fiscal year 2010 enacted level. This appropriation supports an average daily population of 219,000 inmates and assumes our system wide population will be close to 222,000 by the end of the 2011 fiscal year.
As of February 4th, the BOP had 208,000 inmates in their system, there was funding for only one new facility and that was for the Thompson's facility in Illinois. Also the BOP has continued their policy to not ask for funding for construction of new low security beds and completely rely on the private sector for that population.
Now as it relates to the population we reported last year that the BOP was at a 137% of their capacity. Based on their funding for activation of new beds and projected growth for 2011, we’re estimating that their system wide occupancy could creep up to almost a 140% and have an unmet bed demand of nearly 4000.
With this projected increase in populations and also the proposed funding request, we continue to believe that the BOP will be a meaningful opportunity for our industry. Let me now talk about California, and let me first mention that we have started the ramp under our new contract last November.
California has sent two movements; one in January and one last week as part of their planned ramp into our North Fork and Red Rock facilities. As mentioned in our announcement, the intake of inmates starts this quarter with a gradual ramp estimated to be completed in the first quarter of 2011.
Let me now give an update on the latest with the three-judged panel. As mentioned in August, the three-judged panel issued a 184 page final ruling, which proposed a cap to California's inmate population of 147% of design 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's first plan was rejected by the three-judged panel on October and they ordered the state to come up with a new plan within 21 days, which was due on November 12.
So the state submitted a revised plan on November 12, and it projected a reduction of the occupancy percentage by over 60% or 53,000 beds. This would be accomplished by parole reforms, new CDCR construction, fencing reforms, probation reforms, and expanded use of the private sector, specifically their proposal assumes 2400 new beds out of state, which is in essence our new contract from last November with the State of California.
Additionally they proposed another 3600 beds out of state by 2013, elimination of the sunset and also the private sector will design, build and manage 5000 beds in state. Finally, in talking about the out of state program, the state called the program “tremendously successful to date”.
But, it is important to know that even though they submitted this plan, the state is appealing the ruling to the Supreme Court. So, more to come out of California and CDCR to come in weeks and months as they develop a plan to reduce overcrowding.
But, based on the recent expansion in out of state program and the actions taken by the court, it appears that the out of state program could possibly be expanded even further to help them achieve part of the solution for reducing overcrowding within their system. So, let me bring my comments to a close and make the final points.
We are obviously very pleased with our fourth quarter earnings. We achieved positive EPS, revenue and EBITDA growth and we think this is very significant in today’s challenging economic environment.
Our competitive advantages continue to be, strong balance sheet, good liquidity to fund new capacity development and our new share repurchase program, limited manage only operations and focused operations in a largely unpenetrated U.S market. We believe the supply demand imbalance will continue long-term and insufficient public sector capital investment assures a shortage of beds for both existing and potential new customers.
We are seeing healthy activity in the market for new business opportunities with nearly 16 to 15000 new incremental beds coming up for bid this year, but also half a dozen states considering to use CCA to deal with their overcrowding and/or growth. As mentioned earlier, the combined total of the overcrowding by these states is over 14000 inmates.
And like the last recession, in the early part of the last decade, we still have an inventory, as we come out of this recession it’s going to be extremely attractive and give us a significant competitive advantage with new business. And finally, if we’re successful in filling the nearly 12000 beds I missed earlier that we have in our system along with the beds in North Georgia, Nevada that would translate in nearly $98 million an incremental EBITDA.
That concludes my prepared comments thank you again for calling today’s conference and let me now turn it over to the operator for Q&A.
Operator
Thank you (Operator Instructions). Your first question comes from Jamie Sullivan - RBC Capital Markets.
Jamie Sullivan - RBC Capital Markets
I’m wondering just on the state market side if you could just comment on where you see some movement on population increases and decreases and whether, where we stand this year versus last year. What seems to be more of a concern or a risk whether it would be the policy changes or the budget kind of per diem side of the equation?
Damon Hininger
Jamie this is Damon let me -- a couple of points you’ve asked there, so let me, I guess mentioned the policy, as I mentioned earlier you’ve seen some states and we talked a little bit about this during the course of 2009 where they have done a little tinkering around the edges. But wholesale changes in policy we haven’t seen a lot activity, especially if you look like State of California whether they are severely overcrowded, not a lot of the interest or doing changes in the policy although they are part of the overcrowding and playing back to the three judge panel they are trying to do something with parole and probation, but not a lot of activity, but that is always potentially would be a risk and something we’ll monitor in the short-term.
As it relates to populations we are seeing some state still projecting increases in population, Georgia, Arizona, come to mind is some of the bigger one is Florida. We're seeing some states that are trying to take some short-term steps to deal with their populations and that comes to Colorado, for example, where they were trying to do accelerated releases to trying to somewhat affect their short-term population as they're dealing with this physical constraints.
And then that the risk on pressure or per diems obviously that was an issue that we had in 2009 I think we reported that we had about a half a dozen of state where we sat down with them and looked a way to narrow our services to deal with their reduction per diem and so that's always a potential risk that we have in 2010 even going on 2011. I think that is most of the points in your question.
Jamie Sullivan - RBC Capital Markets
Is it too early to know how many of your stake customers are going to enter in those discussions with you. Again, you mentioned half a dozen last years will it be incremental new ones, the same ones any color you can provide there?]
Damon Hininger
Yes, that the short answer is don't know as you know obviously we're five weeks, six weeks into the New Year. Well, a lot of legislators coming back into session and so just now kind of rolling up your sleeves and determine how they're going to deal with some of these budget shortfalls that I mentioned earlier, so too early to tell which and how many.
Jamie Sullivan - RBC Capital Markets
You mentioned Colorado noticed that there were some population declines in three of your facilities there. Wondering, is that representative of some of their short-term fixes and policy changes or is that normal seasonality?
Damon Hininger
Bottom line right now is that that continues to be a risk, but the ability to execute on that on behalf of the City of Colorado has been a challenge for them. So we have seen some different populations.
But it’s not consistent what I think they had envisioned last summer.
Jamie Sullivan - RBC Capital Markets
Just curios, is the guidance, what does that contemplate in terms of few of the contracts that are out for re-compete this year, I know those Colorado facilities are and couple others. Just curious what you are assuming there?
Damon Hininger
Well, I’ll tell you the general rule, I’d assume we keep all the contracts coming up for renewal.
Operator
Your next question comes from Todd Van Fleet - First Analysis.
Todd Van Fleet - First Analysis
Just want to ask on startup, Todd was there any startup in Q4 and then what are the assumptions regarding startup expense in each of quarters in 2010 and then Todd I’ll ask you to comment also on G&A, I apologize if you provided some commentary but I didn’t get a sense as to an outlook for G&A levels for 2010?
Todd Mullenger
With regards to startup, it’s about $2 million in Q4, $2 million in Q1 and probably $3 million in Q3, 2010. And with regards to G&A, G&A you can forecast flat to perhaps slightly down.
Operator
Your next question comes from T.C. Robillard - Signal Hill Group.
T.C. Robillard - Signal Hill Group
Just a follow up right on the heels of Todd's question there, when you said slightly down, are you talking in terms of sequentially and was that in absolute or in percentage terms for G&A?
Todd Mullenger
Absolute full year.
T.C. Robillard - Signal Hill Group
Just wanted to, in first thanks for the great level of details that you guys put through in your prepared remarks and I just wanted to explore a little bit more in terms of the revenue per man-day and clearly don’t want to make a bigger issue out of this because I know it’s a multifaceted calculation. But I'm just trying to get my head around the drivers here and you said that some of it was due to the replacement within Hutto and then others was around increases in population under a certain marshal contract.
I'm just trying to reconcile that it just seems that those population numbers seem small relative to the impact to the overall kind of calculation if you will and I'm just wondering if I can get some more granularity there or if you can help me flush that out.
Todd Mullenger
We can track you to it, T. Don Hutto are migrating form a population of families which includes small children not juveniles but small children, much riskier population with families, greater staffing levels, much greater staffing levels and operating expense even given the small population just given the magnitude of the rest.
When you are housing small children with adults, significant risk so the staffing pattern is going to be much higher and need to be much higher to protect against that risk. And then on the U.S.
Marshal contract, it wasn't a small contract; it's a large contract where we renegotiated higher population levels overall but in return for tier per diem on the backend.
T.C. Robillard - Signal Hill Group
Okay, and then I guess this dovetails my next question, which is, as you're looking at the guidance, you had mentioned that (inaudible) take to kind of variety of scenarios particularly around populations and pricing. And so how should we thinking about revenue per man-day as we go through the first couple of quarters of 2010 particularly as it relates to this large Marshal contract.
I mean should we be expecting kind of similar levels of change on year-over-year basis?
Todd Mullenger
A lot of it is going to be dependant upon the actions the states take, right?
T.C. Robillard - Signal Hill Group
Yes.
Todd Mullenger
So there’s certain amount of uncertainty there. But if we're fortunate enough to hold the line like we did last year, you’re going to be looking at flat to slightly down on the per diems.
Our ultimate goal will be to hold the line on margin per man-day, which we did a pretty effective job this year. So even though we saw some anemic per diem growth, through a combination of internal cost containment, contract modifications from our customers and some other changes, we’re able to hold the line on margins per man-day, that would be our goal for this year.
However given the uncertainty around the state budgets it's hard to pin that down exactly but I'd say, anemic per diem growth somewhat to last year with flattish margins.
T.C. Robillard - Signal Hill Group
Okay, in terms of the margin side, I know there’s still a lot of un-answered because the states are in the early parts of scrubbing through their own budgets, but what are your initial thoughts around the ability to hold margins flat? I mean there’s a thought process out there, that last year was all of the low hanging fruit in terms of contract modifications.
And therefore, is there enough left for you to continue to modify? I’m just trying to balance that with kind of an apple (inaudible) meaning, states that you already did some modification versus states that hadn’t and again, how this all wraps into the blended number that you guys report?
Simply asking, how comfortable are you that you guys can hold the margins flat with going into year-2 here of a real challenging budget environment?
Todd Mullenger
To reinforce what Todd said, is that overall in 2009 we were overall successful with the six customers that came back to us. Your question about is there initial low hanging fruit, it really depends state by state, what their pressure and how far they want to go on narrowing the services that we provide in our facility.
Part of it is also the state’s security questions that we’ve obviously got a good (couple) with a day off or two. So, it’s really going to be kind of a case by case on looking at what their constraints are, how much pressure they’re feeling from the governor and the legislature.
We have seen some states being somewhat successful on getting some supplemental funding from the legislature because the DOCs have made a good case saying that they’ve done all they can on reducing their operating expenses. So, we (inaudible) 2009, obviously we’re going to use a lot of same playbook as we go into 2010 and even 2011.
Operator
Your next question comes from Toby Summer - SunTrust Robinson Humphrey
Toby Summer - SunTrust Robinson Humphrey
I wanted to get a sense for what kind of outcomes could lead towards the lower end of guidance and what kind of outcomes it might lead towards the higher end of guidance if you could give us a little bit of color on your thoughts there?
Todd Mullenger
Sure, I think it would be less pricing pressure and less population pressure from the states as a result of their budgetary pressures could lead us towards the higher end of the guidance maybe combined with some flex points around the ramp ups of some of our facilities. So a slower ramp up on the California populations, lead us towards the lower end of the guidance range, a quicker ramp up towards the higher.
Similarly, on some of the other contracts, Nevada Southern, if that were to ramp up more quickly or more slowly or the ramp ups of some of our expansions in Georgia, in Coffee and Wheeler. They ramp up more slowly were towards a lower end more quickly towards the higher end.
Toby Summer - SunTrust Robinson Humphrey
One follow up question California, you gave some good color there on opportunities. And, I just wanted to get your sense of what the customer is thinking.
You are already a very big provider to the State of California and I wanted to see if you thought that at some point, the customers themselves may want to have an additional provider in the mix or whether you feel like you can continue to take advantage of all the opportunities that California has to offer you?
Todd Mullenger
Well, we’re very proud of the fact, I said in my prepared remarks, the revised plans I gave to three judge panel, they called the out of state program (inaudible) to be in the exclusive provider right now to the State of California. We take great pride that they felt good about the program.
Really, to answer to your question, I really can’t speak on behalf of the state and what are they thinking about the expanded use of beds out of state and as I mentioned, they do the RFI in December that will be available to everybody in the industry to provide proposal. So really probably it would be appropriate for me to comment or speculate on what they're thinking about, how they want to agree the program versus one vendor versus several vendors.
Toby Summer - SunTrust Robinson Humphrey
I think in your prepared remarks you talked about OFDT facility and that your Cal City facility may kind of fit the criteria there. Are there any other existing facilities that fit that criteria or is that a fairly limited pool of facilities that match the criteria?
Todd Mullenger
I think RFI just came out last week or so, so I think we're still getting our hands around a little bit. I know it's due in the next day or two.
So I don't know exactly what would else be in that location I guess if you just think globally about State of California (inaudible) think especially on local side there on limited capacity if any excess capacity.
Operator
Your next question comes from Kevin Campbell - Avondale Partners.
Kevin Campbell - Avondale Partners
Damon, I was hoping maybe I missed your comments about the RFI in California, is there any additional detail you can provide about it or it just that they issued one in December and you responded on 28?
Damon Hininger
That’s yes, its about it, so if you think back Kevin I guess the last RFI I think our sense is that kind of the fit in fuel of the actual document and what they were requesting were very similar so came out in December we submitted response on 28th of December and then obviously I think we've got some pretty attractive options that would be worthy of consideration.
Kevin Campbell - Avondale Partners
Was there anything specific in the RFI in terms of maybe numbers of beds or the types of beds they were looking for cell versus dorm that some of your facilities would be better suited for or anything like that.
Damon Hininger
I don’t think there was a number or quantity on the document and I think that’s consistent with the last four or five that they did. I can find out, I don’t know Kevin on some of the details relative to dorm and cell and them maybe some security features.
I think it’s pretty consistent to the previous one.
Kevin Campbell - Avondale Partners
A different definition, we have been getting quite a few questions over the last three or four months obviously about you guys potentially converting during the Opco/Propco sort of situation where you do sell lease back. Is that something that you guys would consider in the near term and if not what sort of, what have to happen for that to be of interest to you?
Damon Hininger
Well, I guess before I address your question, I guess let me I guess a couple of observations. First our Board and the management team continually review our capital structure and try to deploy our available resources to create the best powerful value for shareholders.
I think hopefully we have demonstrated and I think it’s great evidence again that we reported in our earnings release last night that we take a look at our allocated capital over the last year and a half and determine is it appropriate to use that for new bed development or share repurchase. So, the share repurchase we again also announced a new program last night I think is another great example of that decision making process that we are always doing on a regular basis with management and the Board of Directors.
I guess, the other way Kevin I’d say is that, kind of a general observation is that, there is a real element of truth to the idea that our real estate assets are very viable and we believe an example of this is that lives that we expect to utilize our assets is significantly a longer are going to exceed the (perceived) lives. So I guess with all of that being said, the idea of splitting the company into an operating company and a read proposes some real significant, what we think challenges, some of those are financial like the potential significant tax like just the time of establishing a structure like that.
But I think a more critical issue with respect to our business and one that which might not be really apparent to the extent of forming a structure like that, might be the case where this may require some type of customer approval or some type of consent from our customers if we had to move the contract or sign a contract to another entity. And that requirement would pose its own risk whether it’s a particular customer that might not prove the proposed transaction or might result in price renegotiation or it may even require them putting the contract down for a bid.
So there are some other issues with respect to formal read which gives us (inaudible) also, unlike the old days an affiliated read or inter-locking read really didn’t work. So that would also cause us some concern about the control of these sensitive assets.
And then also once the read is up and running, it could serve as an essence of financing vehicle for our operating company's competitors and that’s in advance obviously we don’t necessarily going to construct for them. So again, finally we like - we said this I think several times in 2009, we liked the flexibility that’s inherent in (inaudible) liquidity and cash flows in terms of best return for new bed development or share repurchases.
And a structure which mandates a regular payout whether it’s a read or a current corporate structure I guess would set another way also would diminish out flexibility. So we still believe that pouring capital and having the right capital structure are some of the most important decisions we make both from the management team and board of directors especially given the capital-intensive nature of our business?
But as always, the board of directors and the management team will continue to focus on what’s the right level of deployment for those type of opportunities and always take the best course of action on delivering additional value to shareholders.
Kevin Campbell - Avondale Partners
One more question, can you comment the facilities that you have in Arizona that house out-of-state inmates from Hawaii and California? What is the likelihood that those customers would allow you to - or would transfer their inmates in those facilities to help fill some of your other inventory and then allow you to make those Arizona beds available for the 5000 beds RFP that’s moving forward there?
Do you see that as likely? Have you talked to the other states about that at this point and what’s the push back you maybe getting?
Damon Hininger
I think that what we've demonstrated in the last few years as we think about those new opportunities is that that is definitely part of analysis and discussion and our strategy for those new business opportunities. So probably it wouldn't be appropriate for me to talk about what potentially customers in Arizona would or wouldn't be willing to do in moving out of those beds, but again I think if you see some of our actions we did in 2009 and further back, it's clear that's going to be part of our discussion and our strategy as we think about these new business opportunities.
Kevin Campbell - Avondale Partners
And then one last question, your inventory, I think you guys said would be 7300 at the end of - with the new construction being taken by Georgia and the US Marshals, after you factor in Arizona and the withdrawal of their inmates and with the CAR 10 as well, what does that take you to, roughly? Is it - I’m getting a little bit above 12000, is that right?
Damon Hininger
That’s right. So, Cal City, Huerfano and Diamondback, those three - obviously we’ve gotten the notice on Huerfano, we have not got the notice on Arizona at Diamondback or - obviously the time in on the BOP at Cal City, but those three facilities combine at 5200 beds.
So, it would be obviously north of that, if it’s the case where we’re not successful in finding a customer for one or all three of those facilities.
Operator
Your next question comes from Manav Patnaik - Barclays Capital.
Manav Patnaik - Barclays Capital
I just have a few questions. The first one is, just trying to figure out as a follow up to one of the questions before, if you take for example, the six state customers that approached you guys last year in terms of introductions, and you had mentioned that you managed to work with them in terms of cutting costs as well and keeping margins relatively the same.
Specific to those customers, if they come back again looking for (inaudible), how much more room is there for you guys to work with them in terms of keeping your margins roughly the same?
Damon Hininger
That’s a good, clear question. The short answer is, don’t know.
It’s going to be really a case by case by customer. And, as I mentioned earlier, we have seen some states, especially the heads of corrections convey back to the executive or to the legislature that they have made some cuts, that potentially they’ve done their system and also maybe in our contracts and there is a point where they can't go any further.
And, like I said, we have seen some activity, a little bit, where some states have been successful in getting some supplemental funding just because they can’t do anymore. So it’s really going to be a case-by-case where we are going to -- if we get approached, sit down with them, look at the contract again, see what the opportunities are relative to the services.
And also, there is always a potential chance where you’ve got a situation where a state is severely overcrowded and so they’re trying to maybe get a little relief in their system. And so maybe we can offset a little bit of a reduction with a higher quantity.
Those are always options that we’ve been somewhat successful in broaching with different states. And then, there have also been a few states, and probably Georgia is most noticeable one, where there also is an opportunity maybe to close some of their smaller less efficient facilities and so see the savings that way.
So it’s not always it’s going to be just near in services it could be a case where we could either look at the additional quantity or them moving the population out of costly inefficient facilities.
Manav Patnaik - Barclays Capital
And then, just on your comment on obviously, given the existing inventory that you guys have, the ROI that you would look at on new bills that would obviously be higher. I was wondering if you could provide, maybe a little more color, obviously you guys have stated in your presentations, the 13% to 15% pre tax returns that you look generally speaking.
Like how much higher do your raise the ROI in the new bills given your extends of inventory right now?
Damon Hininger
It would be somewhere North of 13% or 15%, obviously. And it really would be case of the customer, some of the issues surrounding the customer for their short-term and long-term, not operational needs, but physical environment.
So it won’t be a stock answer for all of our customers, it’s really going to be a case-by-case that will sit down and think about the risk. Some of the issues facing the customers we think about our proposals.
Manav Patnaik - Barclays Capital
Two quick questions, of the various half dozen new customers that you said, on new states that you were in discussions although you had people on the ground. How many of those that just to trying to get a sense are currently not out sourcing or not using private prison?
Damon Hininger
I couldn't give you an exact number because what I said in my remarks is they are currently not doing business with CCA, there could be a couple of states there like I couldn't give an exact number that maybe one of our competitors has got a juvenile or community corrections within state, couldn't give you exact number there Manav.
Manav Patnaik - Barclays Capital
You guys didn't addressed or mention just sort of the situation in Tennessee itself that the Governor's new budgets on your Whiteville facility, I was just wondering if you could give your read as of today in terms of what's going to happen there?
Damon Hininger
It's 2009, all over again. Obviously it's the same thing that happened last year.
So as you know obviously there's going to be a new Governor and the Governor's mentioned in the January of next year there is a new DOC Director, so I suspect probably there would be a similar exercise as last year where the legislator who picked this up. The DOC did say I think several times during the course of late last year that they did see some incremental growth and didn't need those beds.
So I think its just going to probably go as same exercises as last year we're likely to take it up and determine if that's appropriate to not fund those beds.
Operator
Your next question comes from Chuck Ruff - Insight Management.
Chuck Ruff - Insight Management
Lot of states have been examining their sentencing and parole regulations etc in an attempt to reduce inmate population. Can you help me understand why you seem comfortable that that the country’s inmate population is going to continue to grow over a long-term, over the next three to five years?
Damon Hininger
Well, it’s -- some states have had some success, most notably I guess Kansas, New York and even somewhat in Texas on doing some structural changes on their both sensing and then the threshold that inmate become eligible for parole. Obviously Kansas and New York I said I think those are the most notable ones and they have gotten immediate attention.
Those are not currently customers of CCA. But as we think about Arizona, Florida, Georgia, states that were doing business with, we haven’t seen really the interest or the ability of different stakeholders within the state to try to get some type of meaningful change.
So that is always something we are going to monitor very closely and obviously affecting our decision making as we think about new state business and it’s tied a little bit to Manav’s question earlier about ROI. That is one factor we’ll think about and thinking about what a state may do in the short to long term to affect their population.
So every state is going to be a little different and it’s that’s going to be part of our decision making process.
Operator
Your next question comes from Jamie Sullivan - RBC Capital Markets.
Jamie Sullivan - RBC Capital Markets
I guess, a quick question in the Federal market, you talked about some of the budget pressures on the ICE front and I was just wondering with the RFI’s and potential RFP’s out there, what needs to happen, what the budget impact is on the ability of those to move forward?
Damon Hininger
That’s a great question and that I think ties again to Manav’s question earlier about how we think about new construction. So as we think about new opportunities on Federal side, especially in ICE side where we are seeing a little bit of softening in the population, that will be definitely part of our decision making process and thinking about the risk versus reward on those type of opportunities.
Jamie Sullivan - RBC Capital Markets
But, I guess you don't see them, there is a delay that they need additional budget for them to move forward on the decision, not necessarily your strategy for the proposals?
Damon Hininger
I understand, yes I'm sorry. So no, we understand that especially there's one up in California, but that is a solution for population they already have primarily as we understand in the LA county jail system.
So I guess the current thinking is that a lot of funding is already kind of built into their base, this is an opportunity to essentially get some consolidation, some cost savings but also some of the commitment that they've got those beds long-term in that part of the country.
Jamie Sullivan - RBC Capital Markets
Follow on to the new stage you're talking with. I'm just wondering what's the status of their systems are they currently experiencing sever capacity pressure or they more planning for population growth that they wont' be able absorb.
Damon Hininger
It's all of the above and so we are seeing some states that are overcapacity but its like all of our existing customers dealing with the toughest environment. So having similar challenge, do anything her in the short-term and then you've got some state that, potentially talk about building the capacity in state and they just don’t have the bandwidth to do any new bricks and mortar.
So they are doing similar planning to think about what their needs are both for growth and also reliving overcrowding.
Jamie Sullivan - RBC Capital Markets
On the sate construction, either any of your customers currently underway with capacity expansion or building right now?
Damon Hininger
We saw a little bit of spend incrementally in fairly small quantities from existing state customers to deal with their growth. And so in essence what we saw of some states, and this is kind of part of their overall kind of short term strategy to deal with the tough fiscal environment is to add a few beds here and there throughout their system to deal with incremental growth and not do a formal expansion with their system or with CCA.
So we have seen some of that and probably we'll still see some of that during this year going to next year. And then we also see Washington, Minnesota we mentioned and obviously Arizona has got the capacity to come in on line, both public and private over the next 12 months, but even that capacity coming on line, you have to ask the state, they still have a significant overcrowding problem and also a growth problem over the 3 years to 5 years.
So the activity this year has been fairly limited on dollars being appropriated for new prison construction in like this tough fiscal environment, where you've got prioritize and determine how you're going to spend your money on new capital projects that relates to not only prisons but road, bridges, and schools and universities; prisons appears to be getting down the priority list.
Operator
Your next question comes from Todd Van Fleet - First Analysis.
Todd Van Fleet - First Analysis
Guys what’s the latest in Tennessee I guess specifically with respect to Whitefield in terms of funding and then Todd if you could provide us with the capitalized interest in the fourth quarter?
Damon Hininger
Todd, I'll address the Whitefield, that’s again feels a lot like 2009. It’s almost kind of the same as what happened last year.
So, we think it’s going to be a very similar exercise as 2009, which is that the legislature will take this up. The previous DOC director, and I think Todd, you’re aware that there is a new director within the State of Tennessee, previous director, right before he left late last year, had indicated to some of the legislative committees that they were going to see incremental growth and that these were obviously cost effective beds and how they need these beds.
So, I think we’ll go through a similar exercise where the legislature will take this up and think about potentially funding these beds through this fiscal year and potentially long-term. And, obviously a new Governor, there will be a new Governor in place in January of next year.
With regards to capitalized interest Todd, the fourth quarter was called at $800,000. Our full year 2009 was $1.6 million.
Operator
And with that there are no further questions in queue. I would like to turn the conference back over to our speakers for any additional or closing remarks.
John Ferguson
Okay, as always, we appreciate everyone taking the time to visit with us and hear our report. Appreciate the compliments on the thoroughness of it.
We try to do that as best we can and we look forward to visiting with you next quarter. So we will see everyone then.
Goodbye.
Operator
That does conclude today’s conference. We thank you for your participation.
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