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Covanta Holding Corporation (NYSE:CVA)

Q2 2011 Earnings Call

July 21, 2011 8:30 am ET

Executives

Sanjiv Khattri – EVP and CFO

Marisa Jacobs – IR

Alan Katz – IR

Tony Orlando – President and CEO

Analysts

Hamzah Mazari – Credit Suisse

Michael Horwitz – Robert W. Baird

Paul Clegg – Mizuho

Dan Mannes – Avondale

Michael Hoffman – Wunderlich Securities

JinMing Liu – Ardour Capital

Peter Christiansen – Bank of America/Merrill Lynch

Gregg Orill – Barclays Capital

Marc Andersen – Axial Capital

Akil Marsh – Atlantic Equities

Sam Taylor – Portland House Group

Operator

Good morning, everyone, and welcome to the Covanta Holding Corporation second quarter 2011 financial results conference call and webcast. This call is being taped and will be replayed, available later this morning. The playback number is 800-642-1687 for callers in the US and 706-645-9291 for callers calling outside the country. The replay pass code is 78213858. The webcast will be available and archived on www.covantaenergy.com and can be replayed or downloaded on an MP3 file.

At this time, for opening remarks and introductions, I’d like to turn the call over to Sanjiv Khattri, Covanta’s Chief Financial Officer. Please go ahead.

Sanjiv Khattri

Thank you, Andrea, and good morning. Welcome to Covanta’s second quarter 2011 conference call. You must be surprised to hear from me first. Don’t worry. I won’t be reading the Safe Harbor statement. As you may have picked up, we’ve made an important management change on Monday in our IR function. We announced that Alan Katz has joined us as our new Head of Investor Relations here at Covanta. He will be replacing Marisa Jacobs, who is moving on to another opportunity outside of Covanta. Alan will be responsible for Covanta’s global Investor Relations program as well as our financial press efforts.

I wanted to take a minute to thank Marisa for all her hard work and the progress that she has made in improving our IR function over the past three years. She has been a valuable asset to the team and we appreciate all she has done to take the IR function to where it is today. We wish her the best. Marisa?

Marisa Jacobs

Thank you, Sanjiv. I’m really pleased that today’s call gives me the opportunity to speak with you one last time. The years have flown by, but I’d characterize them as exciting and fulfilling. I particularly appreciate the feedback we’ve received regarding enhancements in our communications, and I want you to know that I’ve enjoyed working with each of you. Thanks, Sanjiv.

Sanjiv Khattri

Thanks, Marisa. I’m also privileged to introduce Alan to the investment community. Alan joins us with some very strong IR experience and a solid financial background. I’m confident that he will get up to speed quickly and that altogether we can continue to improve our investor communication efforts. I know you would join me in welcoming him as part of the Covanta team. We are excited to have him here.

With that, I will turn it over to Alan to introduce himself and to get the call started. Alan?

Alan Katz

Thank you, Sanjiv. It’s great to join such an exciting business. As you can all imagine, preparing for the earnings call is a great way to get up to speed quickly. I can already see that this is an interesting time at Covanta. As we try and grow the business, I’m eager to take our communications with the Street and our disclosure to that next level. Thanks again for the warm welcome, everyone, and I’m very much looking forward to working with all of you.

And now on to the formal part. Joining me today on the call in addition to Sanjiv Khattri, our CFO, and Marisa Jacobs will be our President and CEO, Tony Orlando; and Tom Bucks, our Chief Accounting Officer. We will provide an operational and business update, review our financial results, and then take your questions.

During the prepared remarks, Mr. Orlando and Mr. Khattri will be referencing certain slides that we prepared to supplement the audio portion of this call. Those slides can be accessed now or after the call in the Investor Information section of our website, which is www.covantaenergy.com. The following discussion may contain certain forward-looking statements, and our actual results may differ materially from those expectations. Information concerning factors that could cause differences can be found in the company’s reports and registration statements filed with the SEC.

The content of this conference call contains time-sensitive information that is only accurate as of the date of this live broadcast, July 21, 2011. We do not assume any obligation to update our forward-looking information unless required by law. Any redistribution, retransmission or rebroadcast of this call in any form without the express written consent of Covanta is prohibited.

The information presented includes non-GAAP financial measures. The reconciliation to the most directly comparable GAAP measure and management’s reasons for presenting such information is set forth in the press release that was issued last night as well the slides posted on our website. Because these measures are not calculated in accordance with US GAAP, they should not be considered in isolation from our financial statements prepared in accordance with GAAP. It should also be noted that our computations of free cash flow, adjusted EBITDA, and adjusted EPS may differ from similarly titled computations used by other companies.

I’d like to now turn the call over to our President and CEO, Tony Orlando.

Tony Orlando

Thanks, Alan. And once again, welcome to the team. I also want to add my best wishes to Marisa for success in her future endeavors. Over the past three years, she has made valuable contributions to our Investor Relations and communications functions. I’m sure many of you have gotten to know her and will join me in wishing her all the best.

On to our results. It’s hard to believe that we are halfway through the year already, but we are. So let me give you my assessment of how we’ve done so far as well as my thoughts on our near-term outlook. First, begin with the second quarter. For those of you using the web deck, please turn to slide three. It was a solid quarter operationally and financially. We continued our program of returning capital to shareholders while simultaneously focusing on growing our base business and advancing development projects all with an eye towards creating long-term shareholder value.

Revenue during the quarter increased approximately 5% from last year, with construction activity accounting for most of the increase. Adjusted EBITDA was also up slightly, as various operational improvements more than offset reductions in debt service pass through revenue and increases in scheduled maintenance. This is the maintenance that we talked about on the last call. Remember, the increase in scheduled maintenance activity is just timing. This will reverse in the back half of the year.

Free cash flow was lower, driven as expected by increased interest payments on the high yield debt we issued last year to take advantage of the attractive long-term rates. Sanjiv will review all of our metrics in detail, but I do want to note that our cash flow is an area where we continue to perform extremely well. We manage our business for cash flow, and it’s good to see such strong results. We’ve also repatriated over $135 million in cash from our Asia IPP sale. That is much more than our original estimate.

As you can see on slide four on the web deck, we used our strong cash flow and asset sale proceeds to move aggressively on the share repurchase front. During the quarter, we acquired over 4.2 million shares at a total cost of $70 million. Since we first began our repurchase program a little over a year ago, we have repurchased approximately 9% of our shares for approximately $220 million and returned $475 million of capital to shareholders. Along with our dividend, we plan to continue buying back shares opportunistically, largely depending on the timing of our investments in growth initiatives.

Let me turn to our outlook. We talked in the past about managing the business to produce modest growth in the phase of contract transition headwind. I’m confident we will achieve that objective this year and for the next few years, provided the global economic recovery isn’t derailed by continuing debt challenges on both sides of the Atlantic.

Let me provide additional color on the markets and growth initiatives that support our plan to grow our core business. Let’s start with the waste markets on slide five. We’ve had our second quarter in a row of improved year-over-year tip fee prices, and we are seeing improvements in spot market trends that we believe will continue into the second half. We are forecasting a full year tip fee price improvement of 1% to 2%. Looking beyond this year, we expect to see total tip fee revenue move up with inflation, driven largely by contract escalators, the strengthening spot market, and our growing special waste business.

We haven’t talked much about special waste business in the past. So let me just pause on that front for a moment. This business is different than it is for landfills. In fact, our best special waste customers are companies that want to avoid landfills. Historically, our big selling point is that we offer a sure destruction for off-deck or out-of-date products as well as confidential or sensitive material. That is still strong driver.

But recently, we’ve been attracting more and more customers that want to achieve zero landfill sustainability objectives. And our broad footprint of energy from waste facilities creates an excellent opportunity for us to satisfy this growing customer demand. Furthermore, in select locations, we plan to invest modest amounts of capital to expand our service offering. The special waste business commands premium pricing, and we foresee a nice growth runway for several years that will help boost profitability.

On slide six, we describe the metal markets, which have been very strong and show no signs of letting up. We’re taking advantage of these market conditions to help drive organic growth. For example, during the second quarter, we purchased a metal shredding system at our Dade, Florida facility. Effectively, this is a small step down the vertical integration chain. All of our recovered metal is first shred and cleaned by others before being sent for processing into new products at the mills.

Now, for the metal on our Dade facility, we will be internalizing this process, which enhances the marketability and price of our recovered metal. As we become more familiar with this system and these markets, we will consider similar investments elsewhere. It was a small transaction, under $10 million, but we expect it to be an attractive return and that exemplifies one way for us to drive growth. We are also exploring ways to recover more metal from the waste. And our initial tests are encouraging. Based on these tests, I’m optimistic that over the next few years, we will be able to invest small amounts of capital to yield both increased recovery rate and very attractive returns.

For our commentary on energy, please turn to slide seven. With respect to the markets, there is not really much to update here since our last discussion. Prices are running close to our plan, and we have not hedged any additional output for this year, nor do we plan to do so. We currently have plus or minus $10 million in market price exposure for the remainder of the year. Price changes of 25% would have to happen to move the numbers that much, but nonetheless it’s possible.

In response to the market energy prices, we’ve idled three biomass facilities. As we said before, this has a noticeable impact on revenue. However, the impact on the bottom line is much smaller although it is causing a bit of a drag on results this year. Looking ahead to next year, we expect the biomass facilities to give us a small boost because we are now in the process of finalizing some new contracts with improved pricing that kicks in next year and will allow us to start some of those facilities back up.

With respect to the market more generally, we remain bullish on long-term power prices. More and more coal production is being curtailed. Fossil fuel emissions are being more tightly regulated and the demand for natural gas is growing. Eventually, this will result in power prices trending upward. It’s simply a matter of time. We’ve provided energy output data, so you can plug in your own assumptions for future power prices. The data that we’ve provided has only really one change from the information provided last quarter, and that is that we’ve now reflected the biomass contract that I just mentioned.

Now, let me turn to our service contract transitions on slide eight. Overall, I feel we’ve done an excellent job managing these transitions to be smooth for all stakeholders. And we’ve extended all of our important contracts that have come to term. With respect to the facilities that we operate on behalf of our clients, we’ve already extended many contracts. Between now and 2014, we have only one such contract that ends, and that will effectively be offset by the Honolulu expansion contract that will begin next year.

For the further facilities we own, we have and we will continue to experience a reduction in debt service pass-through revenue as our project debt is paid off. As we told you at the beginning of the year, this is creating a headwind of about $20 million this year and another $20 million next year. Of course, this is neutral to cash flow after debt service.

Furthermore, we are more than offsetting this revenue decline this year and I’m confident we will continue to do so in the future. The biggest of these transitions relates to our 1 million ton per year Fairfax, Virginia facility. During our last call, I told you that the Fairfax County client had completed a review of their options and that it was our collective goal to enter into a 30-year extension to our service contract. We were, however, unable to reach a final agreement with the county, and negotiations have ceased. Therefore, we will continue to operate under the existing service contract, which ends in 2016.

This contract provides the county with waste disposal cost substantially below market for five years. That’s what the county bargained for a long time ago, just as we bargain to be the owner of this valuable debt free facility that will produce a tailwind for Covanta when the existing contract ends. As we look forward to that, we are also focused on maintaining a mutually beneficial partnership with the county and all of our clients. I’m confident we will do that.

Now let me turn to our construction and business development activities, as described on slide nine. All of our construction activities are on track, with our biggest project being expansion of the Honolulu energy-from-waste facility. This is a $300 million construction project, which is now almost 60% complete. It’s on time and on budget, and we expect to move into the operational phase about a year from now, at which time our long-term operating contract will become effective.

Our two construction projects in China are also moving along nicely. In fact, we began converting waste into energy at our small project in Taixing a few weeks ago, and we expect to do the same at the Chengdu project later this year. We are the majority owner of the Taixing project and the minority owner of the Chengdu project. These two projects combined will give us a little boost next year.

Now let me move on to development projects. I will start with some very good news that we received a short while ago regarding our Durham York project in Ontario, Canada. The final environmental permit has been received, and we expect our client will issue us a notice to proceed with construction sometime during the third quarter. This is really exciting because it’s the first large scale energy from waste project to break ground in North America in quite some time, and we hope to pave the way for additional projects in Canada.

Let me just give a quick recap of this project. Covanta was selected under competitive procurement in 2009, and we signed a contract late last year to design, build and operate the plant on behalf of our Durham and York client communities. This will be a state-of-the-art municipal-owned showcase facility, and because it is owned by the client, it does not require capital investment on our part.

Design completion and construction is expected to take a little over three years with a fixed price of approximately 250 million Canadian. During construction, we will earn revenue and recognize related expense, making this comparable to the Honolulu expansion project. Upon completion, we will receive a fee to operate and maintain the facility for 20 years. We’re really looking forward to getting this project started.

In the UK, where our most intense development activity is underway, we submitted our best and final bid for the Leeds project last week. We along with our joint venture partner Kelda, a UK water and infrastructure company, are one of two remaining bidders on the project. And we hope to know if we will be selected as a preferred bidder this fall. If selected, we will move forward in the planning and permitting process with the aim of starting construction in 2013.

Our other important bid this year is Merseyside. Again, we are one of two final bidders. The bid due date for this has been pushed back to later this year with the selection scheduled for early next year. This bid supports our Ince development project where we are well advanced in the planning and permitting process. We hope to begin construction on this project next year. We continue to see the UK market as very attractive.

The government updated its waste policy in June, and it continues to be supportive of our strategy given their drive to eliminate waste from being landfills. Specifically, the report contained a strong endorsement of energy from waste because of its important contribution that it makes to improve energy security and reduced carbon emission. We are well positioned to be successful on several projects to capitalize on this market potential.

I covered a lot of ground. So let me just summarize by turning to slide 10. First and foremost, we had a very solid first half of the year, and we feel good about where we are positioned as we head into the back half. Looking beyond that, I’m confident we will continue to grow. We have approximately 70% of our revenue under contract, and this gives us great amount of stability.

Furthermore, markets in key areas appear to be moving in our favor. Waste markets are firming, metal prices are very strong, and I believe energy prices have far more upside than downside. Contract transitions are causing some continued headwinds, but we will more than offset the transitions with our pipeline of construction projects, organic growth initiatives, and basic cost control. Our business is a solid and stable fast producer, capable of withstanding economic ups and downs.

We focus on cash generation and how to best deploy that cash to create value. Our most attractive option is to invest in well-structured energy-from-waste development project. These projects hold great potential, and we will know where we stand on a couple of key UK bids in the next six to nine months. Until these projects are ready to go, we will continue our share buyback program. At this point, I hope our actions speak a lot than our words. Since first introducing the capital return program a year ago, we have returned nearly $0.5 billion to our shareholders, which adds meaningfully to our value proposition.

Now I’ll turn the call over to Sanjiv for his remarks.

Sanjiv Khattri

Thanks, Tony. And good morning again. It’s great to be updating you today on our second quarter results and our outlook for the rest of 2011. I hope you are all enjoying the hot summer so far. It is amazing how time flies. In case you’ve been counting, this is my fourth earnings call since I joined the Covanta team. Now let’s get to work.

As you’ve already heard Tony remark, our second quarter results were right in line with our expectations and consistent with our full year guidance. Our core business continued its solid operating performance. We are now through our major maintenance period and are well positioned for a strong second half, consistent with the guidance we gave you.

Turning to slide 11, this is a quick snapshot for the quarter. My commentary is going to focus primarily on the second quarter compared to Q2 of last year. You will see that we had operating revenue of $411 million versus $393 million in 2010; adjusted EBITDA of $123 million versus $122 million last year; free cash flow of $43 million versus $58 million last year; and finally, adjusted EPS of $0.14 versus $0.11 in 2010. At the bottom of the chart, please note the significant reduction in shares outstanding since the end of Q2 last year. It’s nice to see that the cumulative impact of our buyback program is becoming quite visible now.

Now I’ll take you through the big ticket items driving Q2’s year-over-year performance variances using the waterfalls we’ve referenced in prior quarters, starting with revenue on slide 12. Our quarter-over-quarter total revenue is up about 5%. The most significant driver was the higher construction revenue related to the Honolulu expansion project that Tony covered, with more modest contributions from recycled metals and contractual escalations to waste revenues, offset by some biomass dispatch and lower revenues from contract transitions.

As Tony mentioned, we saw a reduction in debt service pass-through revenue as we paid off project debt. We will continue to see this impact moving forward, but the important point to note is that this has no impact to net cash flow. This will be a headwind of about $20 million this year and another $20 million next year, which we are more than offsetting with some of the growth initiatives we’ve discussed.

For example, metal continues to be a bright spot with Q2 revenues of $19 million, up $4 million versus last year. So with revenues of $35 million year-to-date, it is fair to say that absent the sudden reversal in the commodities markets, we will exceed our full year performance of $55 million from 2010. The positive impact over time of all the initiatives related to metal recovery that Tony talked about would ultimately result in even more upside over the next several years.

Before moving on to the next slide, I would like to remind you that we are still effectively managing our biomass facilities and have economically dispatched some of them during the quarter, consistent with our plans to curtail operations when the bark spread is negative. As we noted previously, since our biomass operating expenses are correspondingly scaled back when dispatched, the impact is not material to the bottom line although, as Tony noted, it did create a bit of a drag during Q2. Unfortunately, for many of you who model our business on a line item basis, this can create some noise, but as we’ve said, the bottom line impact is not material.

Going to slide 13, adjusted EBITDA was relatively flat, up $1 million year-over-year. We saw an increase in organic growth, which we define as growth in our core business, including contributions from asset management and contract escalations. This also included the impact of higher recycled metal pricing and reduced growth spending. This more than offset the $10 million increase in scheduled plant maintenance activity and the impact of the debt service revenue reduction, most of which notably relate to our Fairfax facility.

Moving on to slide 14, our Q2 free cash flow was $43 million, down $15 million from Q2 last year, which was primarily driven by our first semi-annual interest payment related to the 7.25% high yield senior notes that we issued in late 2010. In addition, higher maintenance CapEx of $4 million was fully offset by the pickup in adjusted EBITDA and some good working capital for the quarter.

Let me remind you that our full year guidance of $250 million to $300 million takes into account the expected reversal of some of the working capital benefits we experienced in 2010. Absent that, it compares very well year-over-year despite the higher cash costs of the high yield debt. In fact, we are quite pleased with how free cash flow is playing out, which as you know is our primary financial metric to manage our business.

Now turning to slide 15, our adjusted EPS is up $0.03 compared to 2010. Most of the increase is due to the higher operating income, lower share count, and lower effective tax rate. I hope that all of you are as pleased as I am that the stock buyback efforts are now flowing through to actual adjusted EPS calculations due to the lower share count.

Now that we’ve gone through the key variance drivers for the key metrics, I wanted to spend the next few minutes talking about the strength and sustainability of both our adjusted EBITDA and free cash flow, especially when compared to net income. I am on slide 16. Last quarter, I’ve spent some time explaining why we continuously generate significant adjusted EBITDA and free cash flow compared to modest book income. This topic remains of huge interest to many of you. So this quarter we decided to put pen to paper and show you the analysis piece-by-piece. We would love your feedback as our objective is to make the bridge from low book earnings to high cash flow as lucid as possible. It is a key driver contributing to our performance and will remain so.

I’ll briefly walk you through the calculations of adjusted EBITDA and free cash flow. While on this slide, we also have Q2 and 2011 year-to-date data. I would focus on the full year estimate for this discussion so that we can get a feel for the full year dynamics of our cash flow performance. Let’s start with our calculation of adjusted EBITDA where we adjust our net income estimate of $60 million to $83 million to add back interest, taxes, depreciation and amortization. Further, we add back certain other non-cash items. Some examples are stock-based compensation expense and foreign currency gains or losses on our debt.

We also make an adjustment unique to us. Debt service billings in excess of revenue recognized so that we can reflect in our adjusted EBITDA the actual cash payments received from clients for debt service principle and not the straight line revenue recognized under GAAP requirement. This adjustment brings it back to the more appropriate actual cash basis. Let me remind you, in the past this item was called decreased unbilled service receivable in our cash flow statement. However, we feel this new name better reflects the purpose of this appropriate adjustment. Doing all this gets us to an adjusted EBITDA estimate of $480 million to $520 million and net income of $60 million to $83 million for 2011.

Let me also spend a little time on both D&A and taxes since they are also areas of focus. In terms of depreciation and amortization, or D&A, our discussions repeatedly focus on the issue of why it’s so much higher than our maintenance CapEx number. Looking at full year estimates for D&A of $190 million to $196 million, which exceeds our maintenance CapEx projection of $75 million to $85 million by more than $100 million, we understand why this question is repeatedly asked.

The answer is quite simple and breaks down into two major items. First off, in past acquisitions, we required significant intangible assets and step-ups to fair value will acquire fixed assets. These create higher run rate D&A, which don’t necessarily have corresponding maintenance CapEx. The other item relates to construction cost back when we originally built the facilities we own. Significant construction costs related to assets that last 40 to 50 years and don’t have much recurring CapEx.

These assets are depreciated over their useful life on a straight line basis. For the cost to repair these components of the facility as well as many other repair and maintenance costs are recorded as an expense in plant maintenance rather than capitalized. Good examples of that are routine turbine overhauls where virtually all of the maintenance activities expensed rather than capitalized.

In 2010, we spent approximately $230 million on plant maintenance expense, which was expensed in the P&L and has already reflected in our EBITDA number. The key takeaway is that cash capital will always be much less than the non-cash expense without, of course, compromising the underlying performance or quality of our facilities. Our plus-90% boiler availability year-in and year-out and our solid environmental record are testimony of that.

As for tax expense, as you can see on the slide, this number is $30 million to $50 million more than our expected cash taxes of $10 million to $15 million for full year 2011. As you can see, we have significant tax NOL balance, which is being used to offset federal taxes otherwise due. Over the long-term, once we have fully utilized our NOLs, our free cash flow will be impacted. This is, however, not expected to occur until mid-decade, and even then, we won’t become a full taxpayer for a few more years due to the federal tax carry-forwards such as minimum tax credits and production tax credits. To complete the walk to free cash flow, we do factor in cash interest payments, working capital changes, and maintenance CapEx.

So in summary, starting with net income of $60 million to $83 million, we end up with adjusted EBITDA of $480 million to $520 million and free cash flow of $250 million to $300 million for 2011. Hopefully, this helps with your understanding of how we get high adjusted EBITDA and free cash flow from modest net income. We wanted to do this comprehensive walk through this one time. Going forward, we will update this slide and include it in the supplemental section of our presentation. As I said earlier, I think this is an important foundation to our valuation.

Turning to slide 17, I wanted to qualitatively describe the key attributes that demonstrate the strength and sustainability of our free cash flow. We generally don’t like to comment on valuation metrics. But our free cash flow yield comes up often in interaction that we have with analysts and investors. This is top of the mind to many of you. We thought to cover it briefly in our remarks.

Our free cash flow yield as of June 30th using the midpoint of our 2011 guidance range was 12%. As you know, we’ve been very proactive recently in returning a significant portion of that cash generation to shareholders. We believe the following factors drive the sustainable nature of our cash generation. Our baseline business is highly contracted. A run rate of about 70% contracted, and it is predictable.

Looking at the near term, we see several growth opportunities in the core business to offset headwinds from lower project revenues and higher corporate interest, as we continue to refinance our balance sheet. Our NOLs, we fully utilize sometime mid-decade, increasing our cash taxes. However, this will be offset by tailwinds from contract additions and organic growth opportunities at that time.

Lastly, we have significant upside from development projects and potentially higher energy prices. As you also know, we are prepaying debt at the project level, which strengthens our financial position by increasing corporate borrowing capacity. This is important when we have to fund development. This sustainable cash generation allows us to reinvest in the business wherever we see the best use of our capital, including our current development pipeline. As we have said in the past, we also believe in the value of returning capital to shareholders to cash dividends and share repurchases and will continue returning all amounts not invested in our growth initiatives.

Turning to slide 18, I want to get into some specifics regarding our 2011 sources of cash and how we expect to deploy it. You’ve heard me say many times that we want to be totally transparent with how our strong free cash flow gets spent. Our strategy is (inaudible) pursuing growth and returning excess cash to shareholders, which is exactly how 2011 is playing out. So for 2011, we are projecting that we will generate at least $250 million to $300 million of free cash flow.

When combined with more than $135 million of cash proceeds from the Asia IPP asset sales that we were able to repatriate in a tax efficient manner, we anticipate having about $400 million available to put together to generate shareholder value. A quick note on the $135 million of proceeds. Our estimate was for over $100 million. So it’s good that we were able to squeeze out another $35 million tax efficiently. After making scheduled payments, including the repayment of project debt and paying our regular cash dividend, we anticipate having between $225 million and $275 million remaining to allocate between our growth pipeline and share repurchases.

Some of these dollars may of course spill over into 2012 depending on the timing of business initiatives or the timing of buying back shares. In addition, the remaining net proceeds from the Asia IPP sales of at least $100 million completed to date is being held overseas and will be available when development projects there come to fruition. We have also planned to use any additional proceeds derived from the sale of the remaining two assets as well.

We are firstly using these funds to pay down the project debt. You may be wondering why we are not re-leveraging at the corporate level as we deleverage at the project level. We have the option to refinance, but we elected not to do so, so as to ensure we have enough dry powder in the event we need to raise that to fund our growth initiatives. As Tony and I have said before, investments in the core business, acquisitions and business development opportunities provide the best long-term return to our capital. That said, our current expectations on the development pipeline related investments are unlikely to occur this year, leaving significant amount of cash to be returned to shareholders.

Turning to our balance sheet for a few quick comments, let’s move to slide 19, which we have been showing you for a while now. Our debt and leverage converses year-end 2010 have improved due to continued debt pay-downs as well as proceeds from the Asia asset sales. Net-net, our balance sheet is in solid shape.

Finally, let me wrap up with a few comments on the outlook for the remainder of the year. With half of the year behind us, we thought it’s best to discuss the rest of the year rather than just the next quarter. Broadly speaking, the current outlook is consistent with the full year guidance we gave you in the beginning of the year. I will start with the third quarter.

Let’s turn to slide 20 and start with the drivers impacting Q3. We expect revenue to be up versus last year due to the continued Honolulu construction activity. Remember the margin on the construction project is modest. So, not much of that revenue falls to the bottom line. Separately, we do expect adjusted EBITDA and adjusted EPS to be up slightly as a result of continued strength in metals pricing. We expect free cash flow to remain relatively flat compared to Q3 last year with a slightly higher operating results being offset by marginally higher maintenance CapEx. Like always, Q3 is an important quarter for us in terms of absolute levels of adjusted EBITDA and free cash flow.

Moving on to the fourth quarter outlook, we expect that our adjusted EBITDA and adjusted EPS to be up significantly compared to the prior year, mainly due to the shifting of maintenance activity out of Q4 into Q2, but also as a result of improved performance at facilities that we acquired in 2009 and 2010. As for free cash flow, we expect it to be relatively flat with higher operating results offset by the semi-annual interest payments on the high yield notes.

So in conclusion, our second quarter results were right in line with our expectations. And based on where we are year-to-date and the outlook I just provided for the balance of the year, we are confident about reaffirming our guidance for 2011 for adjusted EBITDA of $480 million to $520 million, free cash flow of $250 million to $300 million, and adjusted EPS of $0.40 to $0.55 per share.

As I said before, with this earnings call, I will have completed a full cycle of earnings at Covanta. I want to thank you all for your patience and support as I’ve tried to learn this fantastic business. Overall, as you know, the business is operationally very well managed and is poised to enjoy the potential upside of both secular and cyclical trends. I’m excited to be on Tony’s team and to play my small role in making that happen.

Now let’s do some Q&A. Andrea, please open up the phone lines.

Question-and-Answer Session

Operator

Yes, sir. Your first question comes from the line of Hamzah Mazari with Credit Suisse.

Hamzah Mazari – Credit Suisse

Good morning. Thank you. The first question is just if you could maybe update us on the project financing environment you are facing currently, if there has been any improvement there, and then any potential regulatory hurdles you foresee in some of your development pipeline at this stage.

Sanjiv Khattri

Hamzah, good morning, and I hope Toronto is doing well for you. I think there’s not much new to update from when we last talked about it. The market remains good. I think it has improved from 2008 for sure, but it’s still on a project-by-project basis, it really depends on what the dynamics of the project are. But we are sort of quietly confident that all the projects that we do develop will get good project financing. But as on a case-by-case basis, overall the market in the UK is better. Of course, the wildcard is what happens to all the dynamics on the continent and how that may affect some of the banks. But we are engaged with all the key players and feeling pretty good about it. With respect to the regulatory issues, Tony is a lot closer to it. So, Tony?

Tony Orlando

Yes. Well, I think the regulatory hurdles are in fact set up to support energy-from-waste. I mean, the regulations from a national policy level, certainly in the UK, are set up to support energy-from-waste. And really the hurdles are just the process – the administrative process of obtaining the various planning permission and permits necessary to move forward with the project, which obviously takes some time. That is a fairly time consuming process. Planning a large infrastructure project like this appropriately has a lot of public review. We have a number of projects that are deep into that permitting process, others that are still at the very incipient stages. So it takes times and we’ll take that one step at a time. As I mentioned earlier, the project that we’re dealing [ph] at Ince is probably the most advanced in terms of its permits in the UK. And we are optimistic that we’ll be in a position to get that into construction sometime next year.

Hamzah Mazari – Credit Suisse

Okay, great. And then just on China, are you folks still less bullish on that market? And is that a function of just a market dynamic there or is that a function of just your local partners that you have?

Tony Orlando

We’re pursuing the market there for some time. And we of course, as mentioned here, have two construction projects underway that are actually nearing completion. We did decide after working there for some time that we didn’t want to really invest additional capital there. We didn’t think that the returns were as attractive, given kind of a risk-adjusted basis as we were seeing in other parts of the world. And we thought it was more appropriate to focus our capital investment in the UK. So we’re kind of still there. We’ve got two projects operating, two about to come online, and we’ll continue to monitor and see how the market moves forward and decide kind of our next step. But right now, we are not pursuing additional investment in China at this time.

Hamzah Mazari – Credit Suisse

All right. And just a last question just on your guidance. It seems like you had a good quarter, you have lots of tailwinds in the second half, maintenance is pretty much done. Why aren’t you guys narrowing your guidance range? Why is it so wide? Thank you.

Tony Orlando

Well, by all accounts, it was a solid first half and the market conditions are looking good. So certainly we’re confident in our current guidance ranges, which, as you do know, reflect a nice growth in adjusted EBITDA and a very solid free cash flow. If we thought we’re going to finish the year outside the range, we would update. But that’s not the case. So we’ll consider narrowing the range in the third quarter, but it’s premature to do so now.

Operator

Your next question comes from the line of Michael Horwitz with Robert W. Baird.

Michael Horwitz – Robert W. Baird

Hello. I appreciate all the transparency. This is a great call.

Tony Orlando

Thanks, Michael.

Michael Horwitz – Robert W. Baird

Maybe a – and you just discussed my question about the guidance range. So I’ll move on from that. But can you give us an update what’s going on in Dublin given some of the things we read in the newspapers and what your status is there given that you took the write-off I guess last year?

Tony Orlando

Yes, sure. Well, as we know, the overall banking and economic environment in Ireland remains challenging. And that does create some uncertainty. But we do believe that well-structured projects can be financed. And as you may have read in the newspaper, the current minister of the environment is putting in place waste policies that support the EU Landfill Directive, and that recognizes the benefits of energy-from-waste as environmentally superior to landfill. So that’s very encouraging, and we’re hopeful that those new policies that are being put in place will support our project financings. And if we can get there, that would enable us to resume construction. We think that would be positive step for all stakeholders; certainly an opportunity to put people to work, which I know the local economy would enjoy. We’d be providing the Dublin region with environmental superior and cost competitive waste disposal and creating value for our shareholders. But having said that, given that overall economic and financial environment, some challenges do remain. We’ll be working with our client community in the hopes that we can realize these benefits and move the project forward. And when we get some more clarity on that, we’ll be sure to update you as the situation progresses.

Michael Horwitz – Robert W. Baird

Understood. And just so I’m clear, I think previously you were doing a lot of the financial activities over there off your own balance sheet. If you move forward this time, would you have a different approach?

Tony Orlando

It’s our plan to move forward with the project financing.

Michael Horwitz – Robert W. Baird

Okay. And then on a different subject, on the recycled metals area, historically quite volatile, clearly been a high point for you over the last couple of years making some small investments there. But we’ve seen some big swings in the past. So how do you mitigate that risk? And because it is so profitable, how can investors understand the risk around the volatility around those numbers?

Tony Orlando

Well, there’s no question that the scrap metal market is volatile. And it does respond to kind of the overall economic conditions, particularly globally, but lot of the demand is actually from China and Eastern Europe. But what we are looking to do is to maximize the recovery rate, which of course is going to drive revenues irrespective of the price. Now, to the extent we’re going to make investments to recover more metal, we are – because of that volatility because we’re going to get more attractive returns because we have some uncertainty. So we’ll make those investments where there’s very attractive returns that can withstand a variety of market prices. And where we look right now given the strength today and what we want to do is move quickly to capitalize on the strong prices that we do have. And I think long-term, there’s some kind of that fundamental issue of the populations growing and there’s already so many resources out there that we believe that, generally speaking, the prices of commodities like scrap metal are going to go up faster than inflation. But no question there will be volatility there. And we don’t really have a particularly good way at this point in time to hedge that. So we just kind of ride up and down with those markets.

Michael Horwitz – Robert W. Baird

Okay. And then just a last question, and that’s I’d say more off the beaten track, but there has been quite a bit of activity in the biofuels area. You do have some work you’re doing converting waste to ethanol with your partner Global Energy. I heard some things are improving there or perhaps you are making some progress. Can you give us an update?

Tony Orlando

Well, we are making some progress, and I think many of you know we’ve talked about a project that we have invested some money in where we’re looking to convert waste and biomass into diesel – into renewable diesel. But like any process here, this is really looking to take something out of a lab and into a pilot commercial scale operation that is kind of one step forward, two back. And so while we’ve made some step forward, we’ve made a few steps backward as well. So we’re not to the point yet where we are ready to say that this is either something that is not going to work or that it is something that’s going to work. So we continue to move forward with that. We continue to put some human capital as well as a little bit of money in, and we’ll see. When we get a definitive answer, we’ll be sure to let you know.

Michael Horwitz – Robert W. Baird

Great. Thanks for the update.

Operator

Your next question comes from the line of Paul Clegg with Mizuho.

Paul Clegg – Mizuho

Hi. Congratulations on the strong results.

Sanjiv Khattri

Thanks, Paul.

Paul Clegg – Mizuho

Thanks for taking my question. A follow-up question on specialty waste and metals shutting. They are obviously small businesses for you today, but could you kind of characterize the potential size of those markets and how you think about capital deployment? I think Michael’s question also kind of touched on the affected metals markets obviously are more volatile. So how do you think about capital deployment for those businesses going forward and how could the markets be?

Sanjiv Khattri

Good morning, Paul. I think the core size of the markets are huge, but you have to remember Tony talked about internalizing. So our focus is that the ash that we generate how much metals can we recover, and one of the ways you manage the volatility is through getting more metal out of the recovering more metals and also I think importantly, improving the quality of the metal so that you can operate at a higher level of the food chain. Right now, the metal we sell is most of it is at the very bottom of the food chain, and our goal is to try to improve that. That’s how you manage it. I don’t want to speculate in anyway what the size of the goal is. And as a CFO, I can assure you that the return on some of these projects is very, very high. So it has the ability to absorb a fair amount of volatility. I think the key is in getting the permits, the key is in figuring out how to do it and what the actual logistics are. If we can manage those, I see upside. But that all takes time and work, as you all know.

Tony Orlando

I think maybe just to add a little bit in terms of the size. I think as we look at these capital investments, we’re talking tens of millions.

Sanjiv Khattri

Yes, exactly.

Tony Orlando

Not hundreds of millions.

Sanjiv Khattri

Really the small ticket item. These are the sort of stuff you want us to be doing all the time.

Paul Clegg – Mizuho

And how much more metals can you actually recover out of the yield improvement?

Tony Orlando

I think time will tell. We currently recover approximately 2%, maybe a little bit more than 2% of what’s coming in. And our goal is to increase that. It’s hard to say at this point how much further we can go. The other aspect of this is the ferrous metal versus the non-ferrous metal. We’ve over the years – virtually every one of our facilities has ferrous metal recovery because it’s a relatively simple system. And that commence prices of whatever – you know, $100 a ton versus the non-ferrous that might be $800 a ton. And I don’t even know how close those are to today’s market, but the non-ferrous is much, much more valuable, but it’s also much harder to get. So some of the things – can we get a little bit more non-ferrous, which maybe won’t really show up in big numbers in tons, but it can be more meaningful in terms of the revenue. So we’re looking at it as a value proposition. And anything that we send out the door, we’re spending money to send out the door. If there’s a way to invest money to recover it and sell it, obviously that’s going to be a winner.

Paul Clegg – Mizuho

Okay. And then switching topics there for a second to you, if you are successful on leads on Merseyside, how would that affect your view of returns to capital to investors in 2012? Because it sounds like you don’t really have to spend much on either of those projects until 2013 when you really have to lock in project financing and move forward.

Sanjiv Khattri

That would be a happy problem, Paul. I think obviously we will look at this very prudently with the Board in terms of what our capital uses and sources are, and we plan to be very transparent. We do view buying back shares as a very important and valuable part of our capital structure and our planning. So I view that as a happy problem. The more we can find projects that have higher return, the better I think our shareholders are in the long-term. So I don’t want to be giving you specific bogies or anything like that, but we recognize the value of share buybacks, we recognize the value of a solid dividend, and obviously we recognize the value of good development.

Operator

Your next question comes from the line of Dan Mannes with Avondale.

Dan Mannes – Avondale

Hey, good morning. Nice quarter.

Tony Orlando

Hello, Dan.

Sanjiv Khattri

Thanks, Dan.

Dan Mannes – Avondale

A couple of quick follow-up questions. I’m going to close the loop on scrap. I think at 2%, you are in the ballpark of maybe 400,000 tons give or take a few. How much of that weighted towards the larger plants versus the smaller? And is it really just looking at a couple large plants that maybe don’t have the right separation equipment? I’m wondering if there may be some low-hanging fruit there (inaudible) some of the large plants.

Tony Orlando

Certainly the larger plants are the places that we will go after first because you get the biggest kind of bank for the effort. But again, we look at this as across the board how do we maximize what we are getting out. I think you’re absolutely right that we will look at the larger plant first. But we think this is going to be a process over several years. This is not going to happen all at once. We’ll take the kind of the best project first and we’ll move down the line. And we’re still in the process of conducting tests and trying out different things and how we might recovery, what new equipment – some of the equipment has improved over the last several years in terms of the strength of how you can recover the materials. So we’re exploring those different options and expect this to play out over the next couple of years.

Dan Mannes – Avondale

Got it. Real quick on the UK, you’ve talked extensively about the market on the waste side and how attractive it is and how much it drives EfW. We’ve seen – it looks like there have been some improvements maybe in the power – in the treatment of power from EfW plants. Can you talk a little bit about that and maybe if that impacts the return profile, we could expect from these projects go-forward?

Tony Orlando

Sure. I’d say the UK policies, as we’ve mentioned many times on the waste side, are the big driver because they want to take wastes out of landfill. Having said that, they also have a low carbon energy policy that they are putting in place. In fact, they came out with kind of a white paper update on that. They are really trying to push to a low-carbon energy and they are putting in place a number of incentives for that, and that does include energy from waste. So clearly that’s going to be very helpful to us. And effectively, with those policies in place, of course it also allows us to be more aggressive and provide more competitive pricing to the communities that we hope to serve.

Operator

Your next question comes from the line of Michael Hoffman with Wunderlich Securities.

Michael Hoffman – Wunderlich Securities

Good morning, and let me echo, a nice quarter.

Sanjiv Khattri

Thank you, Michael.

Tony Orlando

Glad you approved.

Michael Hoffman – Wunderlich Securities

So one more person standing at metals. Just so I’m clear, I thought I picked up once that one of the objectives of shredding is to improve sort of your options within the price sheet as well. Instead of being stuck at the bottom of the price sheet, you could actually improve where you fall out on the price sheet. Am I right about that?

Tony Orlando

Yes. I mean, basically what happens is the quality of the metal becomes more suitable. We sell into the market that’s referred as mini scraps in the market, and that kind of has a standard quality that it’s accepted to be at. And as you can imagine, taking metal out of waste and ash tends to be on the dirtier side of that quality. So, if you run it through a shredder, you get better quality, more uniform quality, and you move up on the price sheet.

Michael Hoffman – Wunderlich Securities

And doesn’t that – as you move up, that tends to not have quite a severe volatility that the low end does.

Sanjiv Khattri

Yes, that’s fair.

Tony Orlando

Yes. We would hope to take out a little bit of the volatility because the low end tends to suffer the bigger swings.

Michael Hoffman – Wunderlich Securities

Okay. And –

Sanjiv Khattri

I don’t want to – Michael, I don’t want to overplay the volatility, but I also don’t want to underplay the volatility.

Michael Hoffman – Wunderlich Securities

Fair enough. I wanted to characterize a little bit of the decision-making going into the – those are pieces of it that helped sort of bring some comfort around what is a bigger number but not part of the core business.

Tony Orlando

Yes.

Michael Hoffman – Wunderlich Securities

Last question on metals. Are you doing the sales direct or are you using brokers? So what’s your sort of visibility about the demand side?

Sanjiv Khattri

Market-by-market it depends. In certain markets, we are well positioned. In certain markets, we are totally relying on brokers. So it’s really on a case-by-case basis.

Tony Orlando

And of course, this acquisition at Dade will give us a little more visibility into that process. So we think that that’s also going to be helpful.

Michael Hoffman – Wunderlich Securities

Okay. Quick question on Fairfax. Can you remind us of the percentage of that million tons a year, that’s the county’s actual volume?

Tony Orlando

All of it.

Michael Hoffman – Wunderlich Securities

All of it. Okay. On the buyback, I thank you for initiating capital allocation plan, but now we’re kind of one year into it. Is there an intention to, I’m going to call it, get into a routine of certain time of the year you’ll address the reauthorization and you kind of do it as this is what we’re going to do for the next 12 months potentially? And if so, can you talk to us about what that cycle looks like that process?

Sanjiv Khattri

Michael, we have the decision of how much to buy and what authorization is obviously a prerogative of the Board. We do have an annual budget process at the end of the year where we sit down and look at our performance, and part of that, there is a capital plan. So my expectation is that every year when we share guidance with you, we will also share our capital plan. And if there’s any change to that, we will update you. We are not – I repeat, we are not going to fall into the trap of quarterly capital numbers and things like that. We have a stable dividend, which over time we are optimistic of being able to increase. And otherwise once a year we will sit down and then take any questions like we are doing right now.

Operator

Your next question comes from the line of JinMing Liu with Ardour Capital.

JinMing Liu – Ardour Capital

Good morning. Thanks for taking my question.

Tony Orlando

Good morning.

Sanjiv Khattri

Hi, JinMing, how are you?

JinMing Liu – Ardour Capital

Good. My question is related to the special waste. What is the percentage of your revenue coming from that source at this moment? And also, can you give us some clarity about the potential for that market, let’s say, the size of the market and your expectation for the growth of your company on that segment?

Tony Orlando

Well, it is a very small percent of revenue today total. It’s in the few percent range. But we think that there is a nice potential there. I think, as I mentioned in my prepared remarks, one of the things that we see – I don’t know, I almost see them weekly, is different companies coming out with sustainability objectives and desire to have zero landfill. And one of the things that the companies put those in place, they typically put them in place for a few years out. And we’ve found that that’s opening up a nice market for us to help service companies that want to have zero landfill operation. We think that there is a big potential there. And we’re optimistic that we can grow that business. Now obviously when we bring that waste in, it does displace other waste. So it’s a little bit different than that often comes to the overall economic. We think we can command some premium pricing in the special waste business.

JinMing Liu – Ardour Capital

Okay. My second question relates to the biomass power generation. In your current discussion with the power purchase agreement, does it only include power production or also include some capacity revenue?

Tony Orlando

It’s primarily – for the energy, it does recognize kind of the renewable attributes, which is really the key for us there, California in particular. And we’ve got two different groups here. We’ve got Maine. Those are both into the market. One of them is running today, one of them is not. Then we have our plant in California. The market there is much better for us, driven by the state regulations to generate 33% renewable. I forget what year they have to get to that target by. But that’s what’s enabling us to get some contracts that are at attractive prices that allow us to start making some money again over the course of the next few years.

Operator

Your next question comes from the line of Peter Christiansen with Bank of America/Merrill Lynch.

Peter Christiansen – Bank of America/Merrill Lynch

Good morning. This is Peter in for Steve Milunovich. Thanks for taking my question. And congrats on a good quarter.

Sanjiv Khattri

Thank you, Peter.

Peter Christiansen – Bank of America/Merrill Lynch

On the Leeds project, is there any sense on what differentiates your bid from the Veolia at this point?

Tony Orlando

Well, again, we think it’s going to be a very competitive situation. Our partnership there with Kelda, we’re bidding with a different location than our competitor. And I think that we feel that we’ve really put our best foot forward. I think given the circumstances that we are still in the midst of competitive situation, I’ll just say I’m sure it’s going to be competitive. We feel good about our bid and we’ll have to see where it plays out here in the next coming months.

Peter Christiansen – Bank of America/Merrill Lynch

Great. And with the cyclicality of the economy in recent quarters, have you noticed any trends in energy content per ton on the waste side, and has that moved or shifted at all?

Tony Orlando

Actually, I mean, we do track that pretty closely, and we’ve not seen any big movements off late other than attributable to kind of weather conditions. So it feels pretty stable right now and has now for the last couple of years.

Peter Christiansen – Bank of America/Merrill Lynch

Great. And then –

Operator

Your next question comes from the line of Gregg Orill with Barclays Capital.

Gregg Orill – Barclays Capital

Thanks. Appreciate it. On the biomass production rather the contracts, it sounded like the ones you are pursuing are in California. Did I get that right?

Tony Orlando

Yes, yes. The ones that we are contracting up are in California.

Gregg Orill – Barclays Capital

And those would be – those would sort of be with utility off-takers?

Tony Orlando

Yes.

Gregg Orill – Barclays Capital

Okay. Through the RFO process annually, and so I guess we would hear later on in the year how that turns out?

Tony Orlando

Yes. We’re literally in the midst of trying to finalize those contracts now. We expect that to happen later this year, and we can kind of lay some of that out. But again, the biomass, I know it creates a lot of noise, especially if you guys try to model things out. It’s a little bit of a drag this year. We expect it to be a little bit of a pickup next year. It’s not a big deal one way or the other. Until energy prices really take off, happy days, we can make some nice money there. But right now, it’s going to be a modest benefit next year.

Sanjiv Khattri

But the way you should model it, if I could, Gregg, if there is no contract, then we focus on box bed. Our goal is to get some modestly in the money contract, which because of all the renewables that Tony talked about, and then the upside is we’ll make a lot of money in this for the short period of time when energy is going to be good and fuel prices are going to be low. So that’s the goal.

Operator

Your next question comes from the line of Marc Andersen with Axial Capital.

Marc Andersen – Axial Capital

Hey, guys. One just a quick comment. Your long-term shareholders have always recognized that your business generates a ton of great free cash flow. And it’s largely not captured in any sort of traditional earnings number. And we always thought that that was what we are buying, and then we always thought the company had a great opportunity to invest in itself by buying a 12% free cash flow yield, which is sort of where you’ve been trading for a while. And I just want to say that we are thrilled to see you investing in yourself by buying back a lot of stock. And we hope you continue it. We know we’ve been very supportive of the dual approach to both growing your company and investing in yourself when no one else recognizes the true value of your company. We hope you continue it, and again, we appreciate it. Thank you.

Sanjiv Khattri

Thank you, Marc. That’s good coming from you. Peter, we did cut you off. So at the very end, Andrea, if you could bring Peter back so that we can get his question answered. We didn’t mean to do that. But let’s keep on going with the call, Andrea.

Operator

Yes, sir. Your next question comes from the line of Akil Marsh with Atlantic Equities.

Akil Marsh – Atlantic Equities

Thanks for taking my question. Just in regards to previous commentary you made about the amount of energy from waste infrastructure that is (inaudible) UK, I believe you talked about a range of around 10 million to 20 million tons. How are you looking at things right now? Would you say that that’s kind of trending towards the upper end of the range or lower end of that range?

Tony Orlando

I don’t think I’d say anything different now. These things take a long time to play out. The policies that they have put in place again are really taking hold. I mean, they drive what their goal is, is to drive waste away from landfills, and first to recycle and to take what’s left over and convert it to energy. So I think a lot of progress is being made, and overall I think that those numbers are still pretty good estimates because again we’re talking about kind of over a 10-year time period. So, nothing has changed since the last time we talked about it.

Akil Marsh – Atlantic Equities

All right. Thank you.

Sanjiv Khattri

Thanks, Akil.

Operator

Your next question comes from the line of Sam Taylor with Portland House Group.

Sam Taylor – Portland House Group

Hi. Would you be able to tell us how much you expect to spend this year in Europe on trying to move forward on the development opportunities there?

Sanjiv Khattri

Sam, good to hear from you. We normally don’t like to break that out. I think last year when the company made the direction to focus, we did recognize that Europe and, in particular, Ireland and the UK are core markets for us where our spending is focused. And we don’t underemphasize China and the mainland in the US. And that focus remains, and we are obviously very careful that we make our dollars count. And so we don’t give specific numbers in terms of what we are spending. One step at a time.

Sam Taylor – Portland House Group

Okay. Fair enough. Just a related question. I think I remember few years ago you talked about the amount you might be spending lobbying in the US. Are you still spending any significant dollars on lobbying in the US and can you disclose that number?

Sanjiv Khattri

Well, significant is in the eyes of the beholder. We obviously try to utilize forums in which we can emphasize the renewable energy and the clean environment focus of our business, our whole clean world initiative. We don’t specifically disclose any numbers, but the amount of spending is modest at best.

Sam Taylor – Portland House Group

Okay, great. Thank you very much.

Sanjiv Khattri

Thank you, Sam.

Operator

Your last question comes from the line of Peter Christiansen with Bank of America/Merrill Lynch.

Peter Christiansen – Bank of America/Merrill Lynch

Thank you, Sanjiv, for your consideration. I just had two quick questions on construction. In terms of the Honolulu expansion and given some of the comments that it’s on budget, it’s on time, and I guess some of the differences between budgeted revenue and expense recognition versus actual, is there a potential that we could see some margin upside upon completion of the project?

Tony Orlando

It’s too early to say. I mean, we are 60% through in the way the accounting works for construction. You book your revenue and expense based on your anticipated profit. So we’ve taken 50% of our revenue and 50% of our expense that we anticipate so far. We still have a year to go before we wrap things up and we’re looking forward to getting that project online and putting forth really a terrific project for the island that really needs the disposal.

Peter Christiansen – Bank of America/Merrill Lynch

Great. And then one final question – and again, great quarter, congratulations. On some of these new projects, it’s maybe a little bit early to speculate in terms of Ontario, but looking at some of these China projects, how would you compare some of the profitability versus Honolulu or some previous construction products?

Tony Orlando

Well, the projects that we own versus the projects that we are building on behalf of others, of course, those are very different from an accounting perspective. Taixing, for example, we own. So what that shows up is a capital investment in – I forget what schedule it is, but one of the schedules there shows our capital investment that’s non-maintenance CapEx and there is money that’s going into that project because of course we’re investing in it and we own it and it’s fully consolidated. So there’s no profit during construction, and then of course we get a return once the project is up and running versus Honolulu and project that we hope to get started here later this year in Durham and York. We don’t own those projects. We are building them on a fixed price basis, and therefore we will record construction revenue with construction expense. So they look very different on the P&L. Hopefully that clarifies it a little bit for you. The Chengdu project is even different yet again because we are minority owner. So that’s an equity contribution and shows up as an equity return.

Peter Christiansen – Bank of America/Merrill Lynch

Great. Thanks again, guys.

Tony Orlando

Yes.

Sanjiv Khattri

Thanks, Peter.

Operator

And you do have a follow-up question from the line of Michael Hoffman.

Michael Hoffman – Wunderlich Securities

Thank you. Very quickly, the UK News Corp crisis that the Cameron government fails, does that have any implications to the timing on Leeds or Merseyside?

Sanjiv Khattri

We were busy preparing for questions to talk about Greek crisis, and this one is a new one. I have no idea, Michael, and that would be pure speculation. You have to remember though that both the procurements are local efforts. They are done by the local authorities. One is in Merseyside and one is the Leeds City Council. So it’s hard to imagine and we would be pure speculation land here.

Michael Hoffman – Wunderlich Securities

Okay. That’s really what I was after. There’s no tie-in from a federal standpoint that if that government wasn’t there, you lose that support at that local level, therefore. So –

Sanjiv Khattri

Most of – all the support we have is mandated by law. It’s not an issue.

Tony Orlando

And that was put in place by the prior government and reaffirmed by this government.

Sanjiv Khattri

All three parties.

Tony Orlando

Hard to imagine, but again as Sanjiv said, that will be just speculation.

Michael Hoffman – Wunderlich Securities

De minimus. And then, is it accurate that the Irish government is supposed to be putting out a white paper with regards to the waste policy? Do you have any visibility on the timing of that?

Tony Orlando

They are working on their policy. I think actually there was a hearing a week or so ago. So they are working on a policy that, again as I said earlier, we believe would be supportive of getting a project financing done.

Michael Hoffman – Wunderlich Securities

Great. Thank you for letting me ask the last question.

Tony Orlando

All right. Thank you.

Sanjiv Khattri

Anything to keep you happy, Michael.

Tony Orlando

I guess there are no more questions. And thank you, everybody, for your time today. Enjoy the rest of the summer. We look forward to talking to you in a few months. Bye bye.

Operator

Thank you, ladies and gentlemen. This concludes today’s conference call. You may now disconnect.

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