The GEO Group, Inc. (GEO) Q2 2012 Earnings Report, Transcript and Summary

Good morning. My name is Sarah, and I will be your conference operator today. At this time, I would like to welcome everyone to the Second Quarter 2012 Earnings Call. [Operator Instructions] I would now like to turn the call over to Mr. Pablo Paez, Vice President of Corporate Relations. Mr. Paez, you may begin.

Thank you, operator. Good morning, everyone. And thank you for joining us for today’s discussion of The GEO Group’s second quarter 2012 earnings results. With us today is George Zoley, Chairman and Chief Executive Officer; Brian Evans, Chief Financial Officer; John Hurley, President of GEO Corrections & Detention; and Jorge Dominicis, President of GEO Care. This morning, we will discuss our second quarter performance and current business development activities. We will conclude the call with a question-and-answer session. This conference call is also being webcast live on our website at www.geogroup.com. Today we will discuss non-GAAP basis information. A reconciliation from non-GAAP basis information to GAAP basis results is included in the press release and supplemental disclosure we issued last night. Additionally, much of the information we will discuss today, including the answers we give in response to your questions may include forward-looking statements, regarding our beliefs and current expectations with respect to various matters. These forward-looking statements are intended to fall within the Safe Harbor provisions of the securities laws. Our actual results may differ materially from those in the forward-looking statements as a result of various factors contained in our Securities and Exchange Commission filings, including the Forms 10-K, 10-Q and 8-K reports. With that, please allow me to turn this call over to our Chairman and CEO, George Zoley. George?

Thanks, Pablo, and good morning to everyone. And thanks for joining us as we review our second quarter results and provide an update of our efforts to pursue quality growth opportunities and return value to our shareholders. Our strong second quarter results continue to be driven by sound operational financial performance from our diversified business units in the U.S. and internationally. During the quarter, our regional operations teams completed the activation of 3 important new projects. In Karnes, Texas we completed the intake process at the first facility designed and operated for low risk immigration detainees under new federal detention standards in the United States. The new GEO owned 600-bed Karnes Civil Detention Center will be operated under a partnership between GEO, Karnes County and ICE. In Indiana, we began operation of a new company-financed expansion of 512 beds to the New Castle Correctional Facility and in Georgia we completed the intake of inmates at the 1,500-bed Riverbend Correctional Facility which is our first project in this important new market. In addition to these project activations, we have completed the development of the 650-bed Adelanto ICE Processing Center West, which is located adjacent to the 650-bed Adelanto East Center in California which we activated last year. We activated the new Adelanto West Center last week and have begun a 75-day intake period. We continue to be optimistic regarding the outlook for our industry. Our diversified platform has enabled us to participate in a number of new opportunities, currently in the states of New Hampshire and Arizona have active procurements for new correctional beds. Internationally, the U.K. Ministry of Justice known as MoJ has inactive procurement for the management of 9 existing prisons totaling approximately 6,000 beds. Proposals for this important procurement are currently under review with contract awards expected before the end of the year. Following the completion of this procurement, we expect MoJ will begin another prison managed-only procurement of a similar or even larger size. The MoJ has also issued procurement for the provision of electronic monitoring services, covering all of England and Wales which is -- presently involves monitoring 2,500 individuals on a daily basis, making this the largest electronic monitoring contract in the world. BI, our U.S.-based electronic monitoring division, is actively participating in our efforts on this project. Our diversified divisions within GEO Care continue to also pursue several new business opportunities, each in their respective markets. With respect to our current inventory of beds, we are continuing our efforts to market our existing facilities in California, Michigan and Oklahoma, and hope these efforts will result in the reactivation of these idle facilities, which would significantly increase and enhance our overall returns on capital. As we have expressed to you in the past, our Board and our management team remain focused on the careful evaluation of the allocation of capital to enhance shareholder value. We will continue to evaluate investments in new projects, which meet or exceed our targeted capital returns and are focused on balancing these capital investments with long-term goal to return value to our shareholders. In the last 2 years, we have executed significant stock buyback programs, which we believe resulted in enhanced value for our shareholders and we continue to retain the ability to opportunistically execute on the remaining stock repurchase program authorized by our Board. Additionally, as we have announced in our press release this morning, we will be paying our first quarterly dividend of $0.20 per share beginning in September, which we increased from our prior expectations of $0.10 per share. GEO’s dividend will be paid on September 7 to the shareholders of record as of the close of business on August 21. This dividend policy is indicative of our long-term view that we can return value to our shareholders, while continuing to pursue quality growth and deleverage through earnings growth and pay down debt. Before I turn the call over to Brian, I’d like to provide an update on our ongoing review of the potential impact of a REIT conversion. Following our first quarter earnings call, we engaged the law firm of Skadden Arps as our legal advisors and the Bank of America Merrill Lynch and Barclays Capital as our financial co-advisors to assist us with this comprehensive review. Our analysis has focused on a potential conversion to a REIT with a taxable REIT subsidiary or TRS, in which non-real estate related businesses are part of a wholly-owned taxable subsidiaries of the REIT. This REIT structure is an entirely different corporate organizational structure from that of our current company and we will be working with our advisors to conduct a thorough comprehensive review of the benefits of the REIT structure. In mid-July, we submitted a request to the IRS for a private letter ruling in order to better inform our Board as to potential benefits and limitations of a REIT conversion, and to determine whether GEO would qualify to convert to a REIT. Only after completing this comprehensive analysis being performed with our advisors, will our Board of Directors be adequately informed and in a position to decide whether to move forward with a REIT conversion. If our Board decides to move forward, we would strive to complete the conversion by the earliest conversion date, which is January, 2013. However, given the short timeframe, the conversion could be delayed, until the next available conversion date, which is January, 2014. Now I would like to turn the call over to Brian to review our financial performance.

Thank you, George. Good morning, everyone. As disclosed in our press release, we reported second quarter pro forma EPS of $0.41 from continuing operations, which excludes $0.03 per share in after-tax start-up and transition expenses, international bid and proposal costs and M&A-related expenses. Our total revenues for the quarter increased to $412 million from $397 million a year ago. Our company-wide adjusted EBITDA for the quarter grew to $86 million from $80 million a year ago. Additionally, our adjusted funds from operations grew to $54 million from $47 million for the same period last year. Breaking down each of our reporting segments, our U.S. Corrections & Detention second quarter revenue increased to $246 million from $231 million in the previous year. In comparison to second quarter 2011, our second quarter 2012 revenues reflect the activation of the new Adelanto California ICE Center East in August 2011, the new Riverbend Georgia Correctional Facility in December 2011 and the opening of the Karnes, Texas ICE project and the New Castle, Indiana expansion during the first quarter of this year. These facility activations were offset by the deactivation of the Regional Correctional Center in New Mexico in the second quarter 2011, our Leo Chesney facility in California in the third quarter 2011 and our Desert View and Central Valley facilities in California in the fourth quarter 2011. GEO Care reported second quarter revenue of $110 million, while our International Services division reported quarterly revenues of $56 million. Moving to our updated financial guidance for 2012. As disclosed in our press release, we have updated our earnings guidance for the full year and have issued our guidance for the third and fourth quarters. We expect our full year 2012 revenues to be in a range of $1.64 billion to $1.65 billion and our full year pro forma earnings to be in a range of about $1.56 to $1.58, exclusive of $0.14 per share in start-up and transition expenses, international bid and proposal costs and also exclusive of one-time transaction and financing expenses in connection with the MCF acquisition. Our 2012 adjusted EBITDA is expected to be in a range of $330 million to $340 million. Our third quarter revenues are expected to be in a range of $410 million to $415 million and our pro forma earnings are expected to be in a range of $0.42 to $0.43 per share, excluding $0.04 per share in start-up and transition expenses, international bid and proposal costs and MCF-related acquisition expenses. Our fourth quarter revenues are expected to be in a range of $413 million to $418 million and our pro forma earnings are expected to be in a range of 42% to 43% -- $0.42 to $0.43 per share, excluding $0.01 per share in international bid and proposal costs. Our updated guidance reflects the continuation of the Golden State Community Correctional Facility contract in California through mid-December and the activation of the new Adelanto ICE Center West, offset by the previously announced discontinuation of our Mississippi managed-only contract in July and August of this year. Additionally, our guidance does not reflect the potential reactivation of our remaining idle facilities, although we are actively marketing these facilities and remain hopeful that our efforts will result in the reactivation of number of them. As a reminder, our guidance includes approximately $0.15 per share of carrying costs for idle facilities totaling 7,000 beds. More than half of these carrying costs are non-cash expenses. Our guidance also reflects approximately $0.18 per share in intangibles amortization expense, primarily related to the acquisitions of Cornell and BI and our facility depreciation expense is expected to be more than twice as large as our normalized level of maintenance CapEx of approximately $30 million per year. Due to these large non-cash expenses, we continue to believe that our adjusted funds from operations is an important measure of our company’s strong cash flows and underlying profitability. We expect our 2012 adjusted funds from operations to be approximately $195 million to $205 million, or $3.18 to $3.34 per share. With respect to our uses of cash, our current projects under development have been substantially completed. Our total project CapEx in 2012 is expected to be approximately $100 million of which, $75 million has been spent through the end of July. The balance of our adjusted funds from operations in 2012 will be used to fund approximately $25 million in dividends for the balance of the year or $0.20 per share quarterly and repay our debt. We also expect to complete the purchase of the MCF partnership interest for $27 million during the third quarter of 2012. In connection with the acquisition of MCF, we announced yesterday that we will be paying off approximately $67 million net of bond cash reserves and inclusive of a make whole premium of approximately $15 million to redeem the current MCF bonds. In order to finance the MCF acquisition and the redemption of the MCF bonds, we have received bank commitments to our Senior Credit Facility for a new $100-million, 3-year term loan. The MCF bonds have a net effective interest carrying cost of approximately 5% and the new term loan will bear interest at the same rate of our existing term loans, which is currently at LIBOR plus 3% and will be stepping down to LIBOR plus 2.75% by the end of August. During this process, we have also amended our Senior Credit Facility covenants to enhance our ability to make restricted payments by resetting our initial restricted payment basket to $50 million and increasing the senior secured leverage ratio test to access the net income restricted basket from 2.5 to 2.7x. With our available borrowing capacity, cash on hand and strong adjusted funds from operations of approximately $200 million annually, we will have adequate liquidity to execute our strategic growth and return capital to our shareholders. We continue to have a balanced approach to meaningfully return value to shareholders through a combination of cash dividends and opportunistic share buybacks. Our dividend policy reflects our long-term view that we can return value to our shareholders while continuing to pursue quality growth and deleverage. With that, I will turn the call to John Hurley for an update on GEO Corrections & Detention. John?

Thanks, Brian, and good morning, everyone. I’d like to address our business development efforts for our GEO Corrections & Detention. I’ll start with the federal market segment and the 3 federal government agencies that we serve, the Federal Bureau of Prisons, the United States Marshals Service and the Immigration and Customs Enforcement or ICE. With regards to our recent project activations at the federal level, we have completed the intake process at our new 600-bed Civil Detention Center in Karnes County, under an intergovernmental agreement between Karnes County and ICE. This $32 million company-owned facility is expected to generate approximately $15 million in annualized revenues. Last August, we opened the 650-bed Adelanto ICE Processing Center East through an intergovernmental agreement between the City of Adelanto and ICE. We have now completed the development of a new $70 million 650-bed center adjacent to the existing one and began a 75-day intake process last week. At 1,300 beds, the Adelanto ICE detention complex is expected to generate approximately $42 million in annualized revenues. With regards to new business opportunities at the federal level, the Bureau Prisons has issued a solicitation for 1,000 beds under its Criminal Alien Requirement or CAR program. Under this new CAR 14 procurement, bidders can propose facilities anywhere in the country. The total contract term for this procurement will be 10 years, assuming a base term of 4 years with three 2-year options. Proposals under this procurement are due in mid-September with a contract commencement date projected for September 1, 2013. Additionally, our GEO Transport division will be submitting a proposal in response to a procurement issued by the federal government for the provision of secured transportation services for the Southwest border for the Customs and Border Protection Agency. We expect the contract award will be announced in late third quarter with a service commencement date in late fourth quarter. Now I’d like to turn to the state market segment. As states across the country continue to face budgetary pressures, their ability to achieve cost savings becomes an even more important priority, which leads to increased interest in prison privatization projects. Many of our state clients require additional beds as inmate populations continue to increase and aging and inefficient prisons needs to be replaced with new, more cost efficient facilities. With regards to our recent project activations, we have completed the intake process at our new $80 million company-owned 1,500-bed Riverbend Correctional Facility in Georgia. We expect the 1,500-bed facility to generate approximately $28 million in annualized operating revenues. In Indiana, we completed the construction and activation of a 512-bed expansion at the New Castle Correctional Facility under an agreement with the Indiana Department of Corrections. GEO funded the $21 million expansion, which is expected to generate an additional $8 million in annual operating revenues. With regards to contract discontinuation, as we had previously disclosed, we have now completed the transition out of our managed-only contracts in Mississippi for the East Mississippi and Walnut Grove facilities in July and we’ll complete the transition of the Marshall County facility next week. Turning now to new state solicitations, we remain optimistic about the new growth opportunities in our industry. As you may recall, the State of Arizona had a pending RFP for up to 2,000 in state beds. The state has decided to initially award 1,000 beds under this solicitation. We expect the contract award to be announced in the second half of the year. In New Hampshire, the state issued RFPs for the development and management of separate male and female facilities or a combined hybrid male and female facility, totaling 1,500 to 1,700 beds. The procurement allows for the development of new facilities or the renovation and expansion of existing facility. The state has retained outside experts to assist with the evaluation of the proposal and we expect an award to be announced in the second half of this year. In California, the Department of Corrections and Rehabilitation issued a bed utilization plan in April that would increase the use of 1,800 community correctional facility beds beginning next year. The plan also calls for increased use of community supervision programs. We currently have more than 2,200 community correctional facility beds in inventory in California, and we will continue to monitor the state’s proposed plan. In Michigan, the Department of Corrections has announced an upcoming RFP for 1,750 correctional beds. We expect the RFP to be issued by the end of the third quarter and we will be proposing our Baldwin facility in this competition. Next, I’d like to update you on our international business development efforts. In the United Kingdom, the Ministry of Justice has an active procurement to privatize 9 existing public facilities, which total approximately 6,000 beds. We believe the proposal evaluation process has been completed. Under the procurement, companies were permitted to bid on up to 6 of the 9 prisons and can be awarded long-term contracts of 7 to 15 years for the management of no more than 5 prisons. The facilities range in size from 260 beds to more than 1,100 beds. The total contract term is expected to be 15.5 years, assuming a base term of 7.5 and one 8-year option. Preferred bidders are expected to be announced in mid-September, with the signing of contracts in the first quarter of 2013. This procurement is intended to be followed by another solicitation of similar or larger size by yearend. At this time, I’ll turn the call over to Jorge Dominicis for review of GEO Care.

Thank you, John, and good morning to everyone. Each of our GEO Care divisions continues to pursue several new growth opportunities. Our residential treatment services subsidiary is currently competing on several formal procurements. In Texas, the State Department of Health issued a request for proposal for the operation of an existing state forensic hospital. In the RFP, the state identified a number of existing state hospitals that can be proposed and the state will select one facility to be privatized. We have submitted our proposal in response to this procurement and expect a contract award to be announced in the second half of this year. In Virginia, we submitted an unsolicited proposal for the management of the state’s sexually violent predator treatment facility involving approximately 250 beds. The state is expected to make a decision in the second half of the year. In North Carolina, the state is in discussions with GEO Care for the provision of a 90-bed forensic hospital, which we hope will result in a contract award later this year as well. In addition to these states, Georgia, Louisiana, South Carolina, Pennsylvania and others have indicated an interest in exploring state psychiatric hospital or treatment center partnerships. Our community-based services division is competing for several formal solicitations from the Federal Bureau of Prisons for residential community based re-entry centers across the country. Additionally, we’re working with our existing local and state correctional clients to leverage new opportunities in the provision of community-based re-entry services in both residential facilities, as well as in non-residential day reporting centers. During 2012, our community-based services division has added more than $2 million in annual revenues with the activation of 3 new day reporting centers in California. Our youth services division continues to work towards maximizing the utilization of our existing asset base. We have successfully undertaken a number of marketing and consolidation initiatives to increase the overall utilization of our existing new services facilities in states like Pennsylvania, Ohio, Illinois, Texas and Colorado. These efforts are already yielding improvements in the utilization of our youth facilities and our overall financial performance. For example, in Illinois we closed down one of our 4 residential facilities and have since experienced to improved occupancy rates. Similarly, in Pennsylvania, we closed down an underperforming facility. These 2 initiatives have resulted in improved occupancy rates and margin improvement for our youth services division. Finally, our BI subsidiary continues to make -- continues to market its supervision and electronic monitoring services to local, state and federal correctional agencies nation-wide. BI, as you know, is the world’s largest provider of electronic monitoring services and devices for approximately 70,000 individuals. During 2012, BI has continued to actively compete on new electronic monitoring opportunities nationwide. In the first half of the year alone, BI was awarded approximately $4 million in annual revenues and contracts by states --- by the States of Colorado, North Carolina and South Carolina for the provision of electronic monitoring services. We expect a number of other correctional agencies across the U.S. to increase the use of electronic monitoring technologies to track offenders who have been placed under community supervision. In the U.K., we are participating with GEO U.K. in a procurement involving the provisioning of electronic monitoring for all of England and Wales. This procurement involves monitoring and field support for approximately 25,000 individuals on a daily basis under a single service provider contract. Financially, it represents the largest single electronic monitoring contract opportunity in the world. We will be submitting a proposal to the MoJ through GEO U.K. with BI providing the necessary technical assistance. With regards to BI’s Intensive Supervision Appearance Program or ISAP, contract with ICE, the President’s budget for fiscal year 2013 reflects an increase in funding for BI ISAP contract. An expansion of the program has congressional support on both sides of the aisle and the current congressional budget write-ups in the house and senate reflect a 20% increase in funding for the ISAP program. We are closely monitoring the appropriations process in congress and hope that an expansion of the program will be approved by the beginning of next year. At this time, I’d like to turn the call back to George for his closing remarks.

Thanks, Jorge. We are very pleased with our second quarter results and our core operations in the U.S. and internationally, which continue to deliver solid operational and financial performance. We believe our industry continues to experience overall positive trends, with growth opportunities in our core market segments in the U.S. and internationally. Our company remains focused on effectively allocating capital to enhance value for our shareholders. As we’ve discussed today, we will continue to carefully evaluate new build-to-suit capital projects, which meet or exceed our targeted returns, while also continuing to more directly return value to our shareholders through opportunistic share repurchases, as well as quarterly cash dividends. We have increased our first quarterly cash dividend to $0.20 per share to be paid on September 7 to shareholders of record as of the close of business on August 21. Our dividend policy continues to reflect our long-term view that we can return value to our shareholder while continuing to deleverage and pursue quality growth opportunities. We believe that these efforts will continue to enhance value for our shareholders and reduce our overall cost of capital. We also believe that our diversified growth and investment strategy has positioned GEO as the leading provider of corrections, detention and treatment services through a continuum of care that can deliver performance based outcomes and significant cost savings to our clients worldwide, while continuing to enhance value for our shareholder. As I have expressed to you in the past, we view all of these different initiatives to enhance shareholder value as complementary and none are pursued to the detriment of the others. And finally, we have expressed to you today, our management team along with our team of legal and financial advisors have made significant progress since our last earnings call in May in our ongoing comprehensive review of a potential REIT conversion. And we have taken steps to better inform this important decision by our Board of Directors, including the submission of a request to the IRS for a private letter ruling, which we submitted in mid-July. This concludes our presentation and we would now like to open up the call to your questions.

[Operator Instructions] And your first question comes from the line of Kevin Campbell from Avondale Partners.

I wanted to start, George, with maybe some color looking back at the TRS discussion on some of your comments on timing. Could you repeat what you said about, when you’re trying to get it done and why it might be pushed to 2014?

Well, Kevin, as -- I think you’re aware, the available conversion dates are only at the beginning of the year, so it’s either January 1, 2013 or January 1, 2014, and most importantly, that has to be preceded by a successful private letter ruling by the IRS. And the timing of that is really uncertain, nobody knows how long that will take. And it’s only after that successful private letter ruling can the Board take any further action internally and administratively to reposition itself for the conversion.

Okay. That’s great. And then, just in general, the analysis that you’ve done to date, maybe you could talk to us about some of the positives that you have had identified from a potential conversion, negatives or hurdles that you have identified? Any color you can provide there might be helpful.

Well, I think we’ve analyzed what administrative actions we would have to take and how we could accomplish them and I think, we feel comfortable with that. The positives of being REIT go to the fact that there is a mandatory 90% distribution of net income, which is not taxed and beneficial, obviously to the shareholders. And future growth is essentially predicated upon the sale of additional stock that will presumably be at a higher price and result in a lower cost to capital for new company-funded projects. But we think we understand what the conversion means and what we have to do to accomplish it. We have taken the steps in submitting our proposed restructuring to the IRS last month.

And is there any -- probably, you can give out what the proposed restructuring might look like?

I don’t think I can tell you that.

Okay, understood. In general, how should we think about the impact to FFO and if -- under a potential conversion other than the potential benefits from taxes, if there are any? And then secondly maybe, how should we think about the distribution of FFO or EBITDA or however you want to look at it to the REIT versus the TRS, is that something maybe we could talk about?

I think that’s again getting kind of to the question you asked previously about the structure and stuff. But we’ve done analysis around that. Obviously the biggest impact to FFO is going to be the difference in the amount of cash taxes that would be paid out and the tax expense to the company. And that’s going to be a factor of the amount of business and income that’s in the taxable REIT subsidiary. So we’re undergoing that analysis and obviously, given the fact that we have a high tax rate and do pay cash taxes that there will be some benefit from that.

Okay. Great. I’ll move on to couple of other questions. International segment, the margins they are continue to be weak? We’re, I guess, about 4.5% or so in the quarter and were down a couple of hundred basis points sequentially. So maybe talk to us about what’s driving that and steps you can take to address that?

Well, I think 2 things come to mind. One is the very significant business development expenses we’ve incurred this year to pursue the 2 big projects I have been discussing. One is on the prison side and the 9 prisons that are being competed and will be decided in mid-September. And then on the electronic monitoring side, we’re kind of gearing up for that procurement and we’ve had a number of consultants and advisors, particularly in the U.K. that we have had to retain to position ourselves to put together our proposal, which is really to provide electronic monitoring for the entire country and all the infrastructure that goes with that. So and then thirdly, we’ve been impacted as I have discussed in the past by our new prisoner transport contract, which we are still carrying a number of additional staff, by virtue of European law that have to be retained for a period of time, they’re all unionized and that will play out by the end of the year.

Your next question comes from the line of Manav Patnaik from Barclays.

Congratulations on the increased dividend and I guess, pretty impressive to get all this stuff done so quick. I guess on the, related to the dividend, I mean, I guess, you’re going to be paying $50 million a year now on the dividend. Can you just help us prioritize sort of how much debt pay down you guys are looking to do on yearly basis, if you have target leverage level by a certain year? And maybe just what the outlook is in terms of what you have now in terms of development CapEx?

Well, I can go back to that again, Manav, briefly. As I mentioned during the call, we have adjusted funds from operations for this year of approximately $200 million and I think that’s a reasonable approximation for next year. Significant reduction in CapEx for next year to the tune of probably $30 million to $35 million in some miscellaneous capital projects that are beyond the maintenance CapEx of the company. So that will --- adjusted funds from operations will be used for that. It will be used to pay for the dividend as we see it right now approximately $50 million as you mentioned. And then there are mandatory debt repayments of another approximately $50 million. So that leaves somewhere in the neighborhood of another $50 million to $70 million in free cash flow to either deploy for additional debt pay down, opportunistic share buybacks as I mentioned and/or additional capital deployment, which obviously, there are projects that we’re working on that have not been completed, publicly disclosed or talked about that may require some of that.

So I guess then just on the cash taxes. I think it was $25 million this year. Do you expect like, I guess, just related to I think you have $18 million of NOLs, are you going to use those up this year, next year and what should be assume for cash taxes going forward, because it’s 50% right now, I think, on your GAAP, so?

Right. I think, cash taxes as I mentioned will go up in the future and I think that some of that is offset by some of the other growth in other cash flow that’s coming online. So that’s why I think $200 million is a good approximation for next year.

Your next question comes from the line of Kevin McVeigh from Macquarie.

I just wonder if you could give us a sense of what the client reactions have been so far as you’re thinking about the REIT process and just openly, what drove the decision to increase the dividend? It seems like you’re taking a real nice balance in terms of capital returned investors here?

On increasing the dividend, as we’ve completed our portfolio of owned facilities that we’ve developed, which is the 4 or 5 projects that total $250 million with West Adelanto being the last one. We feel very good about the new cash flows that will be arriving out of those facilities plus the acquisition of MCF and the retirement of those bonds, and be able to essentially refinance it at a lower rate gives us additional cash flow. And so we think we are in a better position to return value to shareholders through an increase of dividend when there is no imminent need for those capital funds for projects at this time. As far as notification of clients regarding any potential reconversion, we think that’s a timing issue and it’ll occur on an appropriate basis if and when there’s a need to do so.

Super. And then just, in terms of, I know there are big hurdles at private letter ruling and then beyond that, systems conversions, things like that. Any, maybe it’s a little too early to start talking about that, but any sense of how long that process would take and just any thoughts around that would be helpful?

Well, I think you said it correctly that the tall tent in the pole -- tall pole in the tent is the IRS ruling. The other stuff is all doable and because it’s all administrative. But the ruling itself is something that will take some time and it’s uncertain how long that will take. But imagine there maybe 2 companies asking for the same thing at the same time.

Your next question comes from the line of Tobey Sommer from SunTrust.

Just to follow up on what you just talked about. The administrative things that, perhaps are more knowable and identifiable than the timeline for the IRS to respond to the private letter ruling? What would those be and how would those look?

Without getting into too much detail, I mean, there is, and it depends on the structure. There has to be valuation work done similar as you would see in an M&A activity regarding the taxable REIT subsidiary and the business that’s going to be in there. There has to be transfer pricing work to establish what the appropriate rates to charge for the services provided by the taxable REIT subsidiary businesses to provide the day-to-day operations of the owned facilities. There is other administrative work that needs to be done behind the scenes. We have to calculate the earnings and profits of the company on a consolidated basis, taking into account all of our historical tax returns, including for acquired subsidiaries, et cetera. So that works is ongoing and establishing the basis, the tax basis of that taxable REIT subsidiary, so all of those processes are underway. So that if a decision is made to ultimately convert debt, those steps will not be a delay in that decision making process.

So I guess you’re able to work some of these administrative tasks in parallel to the ruling?

That’s right. We’re working on those things right now.

And then, I presume there would have to be a shareholder vote and a meeting, et cetera?

Yes.

Yes. We believe there would be a requirement for a shareholder vote.

Okay. Turning to some of the, I guess, fundamentals, what sort of expectation do you have for, any kind of color you could give us on how you’ve seen the state budget kind of turn out this year, and whether you think you could see some more either asset sales from state customers or you would expect some new states to outsourcing in, I guess, this fiscal year for the states?

Well, I don’t expect any further asset sales this year because the legislative sessions have adjourned. And to my knowledge, there are none prescribed, except, possibly in Louisiana, particular facility there. So nothing this year that we’re really aware of. And so -- and that does generally require legislative approval. So it wouldn’t be until next year when the legislative tours meet again, could they have the possibility to decide to do something like that. But we are following them and it is very possible that something like that could occur in the future and we’re prepared for that, and we have the financial means to compete on such opportunities.

[Operator Instructions] And your next question comes from the line of Chuck Ruff from Insight Investments.

The Golden State Facility contract runs out in 4 months, can you talk at all about what you expect to happen there? Do you expect an extension or do you think the facility will be emptied?

Well, I believe the CDCR plan and the legislation provides for an additional 1,800 beds to be contracted in this next fiscal year and we’re hopeful that our existing facility, which is continuing to operate as a result of rescinding the termination letter that was previously received, we are hoping that facility will continue under a contract amendment. And we’re hoping for the opportunity to compete on 1,200 more beds as a result of the approved legislation.

Okay. You indicated CapEx next year of about $65 million. Can you talk about what sort of projects you’d be working on beyond the normal maintenance?

It was $35 million of maintenance, not maintenance but project CapEx. These are probably just above maintenance type issues at some of our owned facilities enhancing the physical plan that’s how I...

Right. So that’s what I’m going to pay $65 million, the $35 million plus the $30 million of maintenance, which is $65 million in total, right?

Yes.

Okay. And what I’m asking about is what sort of things are you doing for that $35 million?

Well, we have one facility in particular that we’re making some major enhancements to, that’s probably $25 million of the $35 million. So it really relates to one facility and it’s a project associated with that facility.

Can you be more specific like what facility and are you adding beds, what are you doing?

No, we can’t.

No.

No? Okay. And can you talk about the revenue growth at BI? Obviously this quarter had 5% revenue growth, when we bought it, I think the expectation was for much better.

I think, first of all, we’re doing very well with electronic monitoring which continues to grow. The ISAP contract was projected to grow more than it has and in fact, this quarter, I think we took a little bit of a step back with respect to revenue from that contract. The reality is that, where we sit today, the numbers are back up where we like them to be and the congress in both the House and the Senate has approved an increase in funding for the line item from which funds our contract that would be very meaningful. I don’t know if they’ll have agreement before December, obviously, because of the election. But I think it’s very likely that sometime in the first quarter next year being that both houses of congress are in agreement that you would see an increase that would translate into a 20% growth for that contract.

Your next question comes from the line of Kevin Campbell from Avondale Partners.

I just wanted to follow-up with a couple of quick sort of modeling questions. Brian could you give us the capitalized interest for the quarter?

For Q2, it was approximately $600 --- $700,000.

Okay. And should we basically assume that that goes away completely now since you’ve completed Adelanto and there’s really not a lot of other development CapEx beyond that, I guess, other than the $35 million that you’re working on?

That’s right. But that won’t have a meaningful impact. I would say, somewhere near 0, yes.

Okay. And then, interest expense with the MCF sort of restructuring there. How should we think about sort of maybe annual interest expense for all of 2012?

For the balance of 2012, I think for the second half of the year probably $18 million to $18.5 million per quarter.

And then D&A, you guys have sometimes given expectations for that, any thoughts there?

Again, pretty consistent with this quarter in that $24 million range.

Okay. And then, just I wanted to ask one last question about an existing customer in Alaska and the budget that’s been passed there, and what your expectations are for the Hudson Correctional Facility and whether or not you think that they will continue to use that facility or not?

We do expect the continuation through at least the third quarter of next year. So much depends on their ability to activate the new facility and in addition what happens with their population. Currently, there’s indications of a significant increase in their population. So we’re continuing to discuss that with Alaska and we’ll have a much clearer picture perhaps in the first quarter of 2013.

There are no further questions in queue. I’ll turn the call back over to the presenters for any closing remarks.

Okay. Thank you very much for your participation in today’s call. We look forward to addressing you on the next call.

This concludes today’s conference call. You may now disconnect.