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26 August 2008 No Comment
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The math is simple. More demand for immigrant detention beds, plus more government funding, equals more business for Corrections Corporation of America. Every year since 2003, the company has made record profits.

CCA generated its highest revenue ever in 2006 when ICE doubled its detention beds from 19,500 to 27,500.

The company won contracts to provide about half of these new beds.

“We’ve never seen the wind at our back like it is today,” CCA’s President and Chief Executive Officer, John D. Ferguson said after discussing $1.3 billion in revenue during a May 2006 conference call with investors.

The infusion of detention center contracts marked a high point for the company after it had struggled for several years to expand. In 1999, independent auditors expressed doubt that CCA could even stay in business after the company suffered a net loss of $72 million mainly due to an abundance of empty beds.

That year, CCA spun off its real estate operations, Prison Realty Trust, from its correctional management services in a failed move that required a bailout from well-connected private equity firm, The Blackstone Group. The firm brought in Lehman Brothers and Bank of America to lend $350 million in exchange for four seats on the company’s board and 25 percent of company stock.

Blackstone’s Senior Managing Director, Thomas Saylak, convinced the Wall Street partners that the infusion of capital would allow CCA to “maximize growth prospects. Over time, we believe this new direction will be recognized and rewarded by investors.”

The restructuring of CCA’s board led to the departure of one of its founders, Doc Crantz, who was replaced John D. Ferguson as CEO and president. Proceeds from the debt and equity financings included in the deal provided capital to fund the company’s growth.

Concerns about federal reliance on private contractors melted away after the terrorist attacks of September 11, 2001. The government needed thousands of new detention beds, and it seemed only the private sector could provide them fast enough, especially large prison services providers like CCA with significant inventory on hand.

The biggest change in CCA’s fortune came after Homeland Security Secretary Michael Chertoff complained to Congress that as much as 80 percent of immigrants from countries other than Mexico were failing to show up for deportation hearings. The problem, he argued, was a lack of detention beds to hold them until their hearing.

The next year, CCA’s federal revenues increased by 15 percent because of three new ICE contracts at its T. Don Hutto Family Residential Center, its Stewart Detention Center and its Eloy Detention Center.

ICE argues the Hutto detention center has been key to the success of its “catch and remove” policy. Formerly a medium security prison, the 600-bed facility in Taylor, Texas was shut down in 2005 when its population fell to 60 federal inmates. CCA brought it back “online” in May 2006 as a “family residential center” that housed families of illegal immigrants and asylum seekers – fathers, mothers and their young children.

Chertoff argued in March 2006 that “up until now, we have not had the ability to detain families that have come across as a group because we don’t have the capability to keep them together in a detention facility.”

Investors recognized CCA’s inventory of prison beds meant the company was best suited to meet a flood of demand. Over the next few years, CCA’s stock price more than doubled. In 2004, the company’s stock traded at a low of $12.15 and by March 2008 investor confidence had lifted the price to $26.86.

“Certainly, the forces of supply and demand are working in the company’s favor,” observed Bank of America analyst T.C. Robillard, who had a buy rating on the CCA stock in February 2007.

In fact, each new program to increase immigration enforcement has been a business opportunity for CCA. Today, amid high demand, CCA has been able to charge as much as $200 per day in its contract to hold detainees at its Hutto facility. The average rate at its prisons is $54 per day.

Currently, CCA relies on contracts with ICE and the US Marshals Service for about 40 percent of its total revenue.

Five of the company’s lucrative contracts to detain immigrants have no end date. Several of its other contracts contain “take or pay” clauses that guarantee a certain amount of revenue regardless of occupancy rates, as well as periodic rate increases. All of the contracts are renewed at a rate of almost 95 percent, any cost savings CCA reaps are kept for the company, not passed on to the taxpayer.

“At the federal level there is such a demand for beds and private operators are able to do it cheaper and build the facility at half the cost of the federal government because they don’t have to go through procurement red tape. And the government tends to go with who they built with before,” said Gregg Klein, a corrections analyst with BNP Paribas.

Now Ferguson has his eye on the next opportunity for a growth spurt in detention beds stemming from a zero tolerance program for immigrants crossing the border, called Operation Streamline.

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“The intent now is to detain everyone that’s apprehended at the border and charge them initially with something called entry without inspection,” Ferguson explained to investors. “That will be a misdemeanor, requiring somewhere between 15 and 30 days of detention. So then persons with deportation or a minimum conviction, which means someone who is then committed misdemeanor will face a felony charge, which could lead to six months to two years of detention or incarceration.”

Later in the call, Ferguson optimistically eyed the President’s fiscal year 2009 budget.

“We see that the budget supports the detention population of 33,000 inmate detainee beds – that’s up from 27,500 the previous year and quite above what the President’s original budget was,” Ferguson said. “What I am most encouraged about is everything we are hearing says 33,000 is still not enough.”

In fact, CCA’s confidence in future demand is so great, it’s not worried about an abundance of unused beds and lost profits. The company is already slated to develop 10,700 beds by 2009 in order to meet anticipated demand from federal and state customers.

That’s good news for Ferguson, who in 2007 took home close to $3 million in executive compensation.

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