UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarter ended ~~September~~March 3031, ~~2005~~2006


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

0001261679	MSW Energy Holdings LLC	Delaware	14-1873119
0001261680	MSW Energy Finance Co., Inc.	Delaware	20-0047886
Commission File Number	(Exact name of each registrant as	(State or other jurisdiction	(I.R.S. Employer
	specified in its charter)	of incorporation or	Identification Number)
		organization)

For the transition period from to

~~c/o~~00012616790001261680Commission ~~Covanta~~File ~~Holding Corporation~~Number ~~40 Lane Road Fairfield, New Jersey 07004 Phone No. 973-882-9000 (Address, including zip code, and telephone number, including area code, of the registrants’ principal executive offices)~~

~~Indicate~~MSW byEnergy ~~check~~Holdings ~~mark~~LLCMSW ~~whether~~Energy ~~the~~Finance registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports)Co., ~~and (2) has been subject to such filing requirements for the past 90 days~~Inc. ~~Yes R No £~~

~~Indicate~~(Exact byname ~~check~~of ~~mark~~each ~~whether the~~ registrant ~~is an accelerated filer (~~as ~~defined~~specified in ~~Rule 12b-2~~its ~~of the Act~~charter):

MSW Energy Holdings LLC: yes o no þ MSW Energy Finance Co., Inc: yes o no þ


Delaware		14-1873119
Delaware		20-0047886
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

c/o Covanta Holding Corporation

40 Lane Road

Fairfield, New Jersey 07004

973-882-9000

(Address, including zip code, and telephone number, including area code, of the registrants’ principal executive offices)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act:


MSW Energy Holdings LLC:	Large accelerated filer o	Accelerated filer o	Non-accelerated filer þ
MSW Energy Finance Co., Inc:	Large accelerated filer o	Accelerated filer o	Non-accelerated filer þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

MSW Energy Holdings LLC: ~~yes~~Yes o noNo þ MSW Energy Finance Co., Inc: ~~yes~~Yes o noNo þ

Indicate the number of shares outstanding of each of the registrants’ classes of common stock, as of the latest practicable date.

MSW Energy Holdings LLC:		None, as of the close of business on May 1, 2006
MSW Energy Finance Co., Inc:		100 shares of Common Stock, as of the close of business on May 1, 2006

MSW Energy Holdings LLC and MSW Energy Finance Co., Inc. ~~meets~~meet the conditions set forth in General Instruction H (1)(a) and (b) of Form 10-Q and isare therefore filing this Form 10-Q with the reduced disclosure format.

TABLE OF CONTENTS

Part I FINANCIAL INFORMATION			3
Cautionary Note Regarding Forward–Looking Statements			3
Item 1. Condensed Consolidated Financial Statements			3
Part I. Financial Information
Condensed Consolidated Balance Sheets as of September 30, 2005 (Unaudited) and December 31, 2004			3
Item 1. Financial Statements			4
Condensed Consolidated Statements of Operations for Three Months Ended September 30, 2005 and 2004 (Unaudited)			4
Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2006 and 2005 (Unaudited).			4
Condensed Consolidated Statements of Operations for the period from June 25 through September 30, 2005, the period from January 1 through June 24, 2005 and the Nine Months Ended September 30, 2004 (Unaudited)			5
Condensed Consolidated Balance Sheets as of March 31, 2006 (Unaudited) and December 31, 2005			5
Condensed Consolidated Statements of Members’ Equity for the period from January 1, 2004 to June 24, 2005 (Predecessor) and the period from June 24 to September 30, 2005 (Successor) (Unaudited)			6
Condensed Consolidated Statement of Members’ Equity as of March 31, 2006 (Unaudited)			6
Condensed Consolidated Statements of Cash Flows for the period from June 25 through September 30, 2005, the period from January 1 through June 24, 2005 and the Nine Months Ended September 30, 2004 (Unaudited)			7
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2006 and 2005 (Unaudited).			7
Notes to the Condensed Consolidated Financial Statements (Unaudited)			8
Notes to Condensed Consolidated Financial Statements (Unaudited)			8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			1918
Item 4. Controls and Procedures			26
Item 3. Quantitative and Qualitative Disclosures about Market Risk			22
PART II OTHER INFORMATION			27
Item 4. Controls and Procedures			22
Item 1. Legal Proceedings			27
Part II. Other Information
Item 5. Other Information			27
Item 1. Legal Proceedings			23
Item 6. Exhibits			28
Item 1A. Risk Factors			24
SIGNATURES			29
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			24
Statement Re: Computation of Ratio of Earnings to Fixed Charges
Item 3. Defaults Upon Senior Securities			24
15d-14(a) Certification of Anthony J. Orlando
Item 4. Submission of Matters to a Vote of Security Holders			24
15d-14(a) Certification of Craig D. Abolt
Item 5. Other Information			24
15d-14(a) Certification of Anthony J. Orlando
Item 6. Exhibits			25
15d-14(a) Certification of Craig D. Abolt
Other
Section 1350 Certification of Anthony J. Orlando & Craig D. Abolt
Signatures			26
Section 1350 Certification of Anthony J. Orlando & Craig D. Abolt
Statement re Computation of Ratio of Earnings to Fixed Charges
15d-14(a) Certification of Anthony J. Orlando for MSW Energy Holdings LLC.
15d-14(a) Certification of Craig D. Abolt for MSW Energy Holdings LLC.
15d-14(a) Certification of Anthony J. Orlando for MSW Energy Finance Co., Inc.
15d-14(a) Certification of Craig D. Abolt for MSW Energy Finance Co., Inc.
Section 1350 Certification for MSW Energy Holdings LLC.
Section 1350 Certification for MSW Energy Finance Co., Inc.

~~Part~~Cautionary INote ~~FINANCIAL~~Regarding ~~INFORMATION~~Forward-Looking Statements

~~Item~~ Certain statements in the Quarterly Report on Form 10-Q may constitute “forward-looking” statements as defined in Section 127A of the Securities Act of 1933 (the “Securities Act”), Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”), the Private Securities Litigation Reform Act of 1995 (the “PSLRA”) or in releases made by the Securities and Exchange Commission (“SEC”), all as may be amended from time to time. ~~Condensed~~Such ~~Consolidated~~forward-looking ~~Financial~~statements involve known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievements of MSW Energy Holdings LLC and its subsidiaries (the “Company”), or industry results, to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Statements that are not historical fact are forward-looking statements. Forward-looking statements can be identified by, among other things, the use of forward-looking language, such as the words “plan,” “believe,” “expect,” “anticipate,” “intend,” “estimate,” “project,” “may,” “will,” “would,” “could,” “should,” “seeks,” or “scheduled to,” or other similar words, or the negative of these terms or other variations of these terms or comparable language, or by discussion of strategy or intentions. These cautionary statements are being made pursuant to the Securities Act, the Exchange Act and ~~Notes~~the PSLRA with the intention of obtaining the benefits of the “safe harbor” provisions of such laws. The Company cautions investors that any forward-looking statements made by the Company are not guarantees or indicative of future performance. Important assumptions and other important factors that could cause actual results to differ materially from those forward-looking statements with respect to the Company, include, but are not limited to, the risks and uncertainties affecting its businesses described in Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2005 and in other securities filings by the Company, and in Item 1A of Covanta Holding Corporation’s Annual Report on Form 10-K for the year ended December 31, 2005 and in other securities filings by Covanta Holding Corporation.

~~MSW~~ Although ~~ENERGY~~the ~~HOLDINGS~~Company ~~LLC~~believes ~~AND~~that ~~SUBSIDIARIES~~its plans, intentions and expectations reflected in or suggested by such forward-looking statements are reasonable, actual results could differ materially from a projection or assumption in any of its forward-looking statements. The Company’s future financial condition and results of operations, as well as any forward-looking statements, are subject to change and inherent risks and uncertainties. The forward-looking statements contained in this Quarterly Report on Form 10-Q are made only as of the date hereof and the Company does not have or undertake any obligation to update or revise any forward-looking statements whether as a result of new information, subsequent events or otherwise, unless otherwise required by law.

CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands of dollars)

	September 30, 2005		December 31, 2004
	(unaudited)
Assets
Current assets
Cash and cash equivalents	$	39,917	$	86,310
Restricted cash and short-term investments		68,403		64,703
Accounts receivable, net of allowance for doubtful accounts of $2,419 and $1,317, respectively		74,322		72,027
Prepaid expenses and other current assets		14,213		12,426
Total current assets		196,855		235,466
Long-term assets
Property, plant and equipment, net		1,879,580		1,174,896
Intangible assets, net		261,836		535,134
Goodwill		292,810		2,175
Restricted cash and long-term investments		88,179		90,972
Other long-term assets		12,382		17,088
Total long-term assets		2,534,787		1,820,265
Total assets	$	2,731,642	$	2,055,731
Liabilities and Members’ Equity
Current liabilities
Accounts payable trade	$	4,282	$	5,050
Accounts payable — related party		793		—
Current portion of intermediate debt		24,345		20,000
Current portion of project debt		65,444		67,184
Accrued interest payable		16,625		16,583
Accrued expenses and other current liabilities		41,452		39,951
Total current liabilities		152,941		148,768
Long-term liabilities
Intermediate debt		415,873		420,000
Project debt		681,417		738,829
Other long-term liabilities		161,899		224,619
Deferred income taxes		146,253		27,044
Total long-term liabilities		1,405,442		1,410,492
Total liabilities		1,558,383		1,559,260
Commitments and contingencies (Note 12)
Minority interests		771,043		365,123
Members’ equity
Total members’ equity		402,216		131,348
Total liabilities and members’ equity	$	2,731,642	$	2,055,731

The accompanying notes are an integral part of these condensed consolidated financial statements.

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

MSW ENERGY HOLDINGS LLC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS ~~(Unaudited, in thousands of dollars)~~

	For the Three			For the Three
	Months Ended			Months Ended
	September 30, 2005			September 30, 2004
Revenues
Waste disposal and related services revenues	$	81,719		$	81,606
Electricity and steam sales		43,482			43,066
Total operating revenues		125,201			124,672
Expenses
Plant operating expenses		47,028			47,329
Depreciation and amortization		26,802			29,457
Net interest expense on project debt		7,692			7,526
General and administrative		3,704			5,444
(Gain) on asset retirement		(494	)		(218	)
Operating income		40,469			35,134
Interest income		350			285
Interest expense		(8,514	)		(9,143	)
Minority interests in net loss (income) of subsidiary		(18,408	)		(15,502	)
Income (loss) before income taxes		13,897			10,774
Income tax (provision)		(5,963	)		(1,427	)
Net income	$	7,934		$	9,347

(Unaudited, in thousands of dollars)


	For the Three			For the Three
	Months Ended			Months Ended
	March 31, 2006			March 31, 2005
Operating Revenues
Waste and service revenues	$	74,501		$	72,473
Electricity and steam sales		42,940			40,284

Total operating revenues		117,441			112,757

Operating Expenses
Plant operating expenses		63,842			56,715
Depreciation and amortization expense		30,308			29,738
Net interest expense on project debt		6,887			7,318
General and administrative expenses		6,604			6,273
Loss on asset retirements		—			1,386

Total operating expenses		107,641			101,430

Operating income		9,800			11,327

Other Income (Expense)
Interest income		421			558
Interest expense		(7,690	)		(9,023	)

Total other expenses		(7,269	)		(8,465	)

Income before income tax benefit and minority interests		2,531			2,862

Minority interests		(3,608	)		(4,101	)
Income tax benefit		449			519

Net Loss	$	(628	)	$	(720	)

The accompanying notes are an integral part of these condensed consolidated financial statements.

MSW ENERGY HOLDINGS LLC AND SUBSIDIARIES

CONDENSED CONSOLIDATED ~~STATEMENTS~~BALANCE ~~OF OPERATIONS~~SHEETS ~~(Unaudited, in thousands of dollars)~~

	For the Period			For the Period
	from			from
	June 25			January 1			For the Nine
	through			through			Months Ended
	September 30, 2005			June 24, 2005			September 30, 2004
Revenues
Waste disposal and related services revenues	$	87,400		$	148,792		$	135,408
Electricity and steam sales		46,461			79,660			69,630
Total operating revenues		133,861			228,452			205,038
Expenses
Plant operating expenses		49,797			103,616			80,883
Depreciation and amortization		28,737			57,032			47,957
Net interest expense on project debt		8,150			13,964			12,546
General and administrative		3,962			39,745			9,839
(Gain) loss on asset retirement		(494	)		519			618
Operating income		43,709			13,576			53,195
Interest income		388			1,076			440
Interest expense		(9,130	)		(17,553	)		(22,041	)
Equity in net earnings of unconsolidated affiliate — Covanta Ref-Fuel Holdings		—			—			6,545
Minority interests in net income of subsidiary		(19,922	)		(3,637	)		(23,498	)
Income (loss) before income taxes		15,045			(6,538	)		14,641
Income tax (provision) benefit		(6,440	)		2,761			(1,640	)
Net income (loss)		8,605			(3,777	)		13,001
Other comprehensive loss		—			—			(211	)
Comprehensive income (loss)	$	8,605		$	(3,777	)	$	12,790

(In thousands of dollars)


	As of
	March 31, 2006		December 31, 2005
	(unaudited)
Assets

Current assets
Cash and cash equivalents	$	31,931	$	48,895
Restricted cash and short-term investments		42,447		74,095
Accounts receivable, net of allowance for doubtful accounts of $2,327 and $2,267, respectively		71,955		73,994
Prepaid expenses and other current assets		15,931		16,542

Total current assets		162,264		213,526

Long-term assets
Property, plant and equipment, net		1,913,126		1,928,144
Intangible assets, net		263,115		271,787
Goodwill		255,927		255,927
Restricted cash and long-term investments		124,060		123,483
Other long-term assets		17,005		10,254

Total long-term assets		2,573,233		2,589,595

Total assets	$	2,735,497	$	2,803,121


Liabilities and Members’ Equity

Current liabilities
Accounts payable trade	$	5,975	$	3,007
Accounts payable to related party, net		15,455		4,243
Current portion of intermediate debt		32,056		45,997
Current portion of project debt		59,752		59,668
Other current liabilities		55,400		69,470

Total current liabilities		168,638		182,385

Long-term liabilities
Intermediate debt		403,456		404,567
Project debt		678,879		699,056
Deferred income taxes		166,860		165,417
Other long-term liabilities		173,544		176,184

Total long-term liabilities		1,422,739		1,445,224

Total liabilities		1,591,377		1,627,609


Commitments and contingencies (Note 10)

Minority interests		766,820		779,637

Members’ equity
Total members’ equity		377,300		395,875

Total liabilities and members’ equity	$	2,735,497	$	2,803,121

The accompanying notes are an integral part of these condensed consolidated financial statements.

MSW ENERGY HOLDINGS LLC AND SUBSIDIARIES

CONDENSED CONSOLIDATED ~~STATEMENTS~~STATEMENT OF MEMBERS’ EQUITY ~~(Unaudited, in thousands of dollars)~~

				Accumulated
				Other
	Members’			Comprehensive
	Equity			Income			Total
Balance, January 1, 2004	$	160,111		$	—		$	160,111
Assumption of tax liability		(14,892	)		—			(14,892	)
Current tax benefit contributed to member		(3,463	)		—			(3,463	)
Distribution to members		(29,355	)		—			(29,355	)
Unrealized gain on investments from the consolidation of Covanta Ref-Fuel Holdings		—			211			211
Comprehensive income		18,947			(211	)		18,736
Balance, December 31, 2004		131,348			—			131,348
Distribution to members		(19,395	)		—			(19,395	)
Current tax benefit contributed to member		(11,346	)		—			(11,346	)
Net (loss) for the period from January 1, 2005 through June 24, 2005		(3,777	)		—			(3,777	)
Balance, June 24, 2005 (predecessor)	$	96,830		$	—		$	96,830
Balance, June 24, 2005 (successor)	$	393,255		$	—		$	393,255
Current tax provision contributed by member		4,077			—			4,077
Adjustments to purchase accounting, net of tax		124			—			124
Acquisition of Duke’s interest in Covanta Ref-Fuel Holdings		(21	)		—			(21	)
Distribution to member		(3,824	)		—			(3,824	)
Net income for the period from June 25, 2005 through September 30, 2005		8,605			—			8,605
Balance, September 30, 2005	$	402,216		$	—		$	402,216

(Unaudited, in thousands of dollars)


	Members’
	Equity
Balance, December 31, 2005	$	395,875
Distribution to members		(16,096	)
Current tax benefit contributed to members		(1,851	)
Net loss		(628	)

Balance, March 31, 2006	$	377,300

The accompanying notes are an integral part of these condensed consolidated financial statements.

MSW ENERGY HOLDINGS LLC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS ~~(Unaudited, in thousands of dollars)~~

				For the Period
				from January 1
	For the Period from			through			For the Nine
	June 25 through			June 24,			Months Ended
	September 30, 2005			2005			September 30, 2004
Cash flows from operating activities
Net income (loss)	$	8,605		$	(3,777	)	$	13,001
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		28,737			57,032			47,957
Deferred income taxes		2,199			8,380			18,588
Revenue contract levelization		1,007			692			9,002
Amortization of lease liability		748			(1,593	)		(275	)
Amortization of debt premium and deferred financing costs		(3,020	)		(5,287	)		(5,318	)
Amortization of deferred revenue		(6	)		(75	)		(16	)
Interest on loss contracts		462			1,069			—
(Gain) loss asset retirements		(494	)		519			618
Equity earnings in unconsolidated affiliate — Covanta Ref-Fuel Holdings		—			—			(6,545	)
Distributions from Covanta Ref-Fuel Holdings		—			—			31,374
Minority interests		19,922			3,637			18,478
Changes in assets and liabilities:
Accounts receivable, net		1,916			(4,211	)		(3,277	)
Prepaid expenses and other current assets		(274	)		(2,732	)		1,475
Other long-term assets		(1,186	)		(2,944	)		292
Accounts payable and current liabilities		(1,323	)		(4,198	)		(666	)
Accounts payable affiliates		758			—			(480	)
Income taxes payable		4,077			(11,421	)		—
Accrued interest payable		(5,584	)		5,626			(6,643	)
Other long-term liabilities		405			(1,131	)		(12,601	)
Net cash provided by operating activities		56,949			39,586			104,964
Cash flows from investing activities
Additions of property, plant and equipment		(1,898	)		(25,228	)		(8,534	)
Acquisition of Duke minority interest		(1,307	)		—			—
Proceeds from sale of assets		487			2,651			20
Cash from consolidation of unconsolidated subsidiary (Note 3)		—			—			40,238
Net cash provided by (used in) investing activities		(2,718	)		(22,577	)		31,724
Cash flows from financing activities
Change in restricted cash and investments, net		7,203			(8,110	)		(42,007	)
Payment of long-term debt		(23,346	)		(29,178	)		(5,731	)
Distributions paid to members		(3,824	)		(19,395	)		(19,900	)
Distributions paid to holders of minority interests in consolidated subsidiary		(15,883	)		(25,100	)		—
Net cash (used in) provided by financing activities		(35,850	)		(81,783	)		(67,638	)
Net increase (decrease) in cash and cash equivalents		18,381			(64,774	)		69,050
Cash and cash equivalents, beginning of period		21,536			86,310			3,633
Cash and cash equivalents, end of period	$	39,917		$	21,536		$	72,683

(Unaudited, in thousands of dollars)


	For the Three Months			For the Three Months
	Ended March 31, 2006			Ended March 31, 2005
Cash flows from operating activities
Net loss	$	(628	)	$	(720	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		30,308			29,738
Deferred income taxes		1,403			5,394
Revenue contract levelization		1,061			328
Amortization of lease liability		748			(824	)
Amortization of debt premium and deferred financing costs		(3,459	)		(2,757	)
Interest on loss contracts		456			547
Loss asset retirements		—			1,386
Minority interests		3,608			4,101
Amortization of deferred revenue		—			(33	)
Changes in assets and liabilities:
Accounts receivable, net		2,039			3,786
Prepaid expenses and other current assets		611			(3,466	)
Other long-term assets		(6,751	)		(6,902	)
Accounts payable and other current liabilities		(5,945	)		3,914
Accounts payable to related party, net		11,212			—
Accrued interest payable		(6,968	)		3,738
Other long-term liabilities		(1,402	)		(1,915	)

Net cash provided by operating activities		26,293			36,315

Cash flows from investing activities
Additions of property, plant and equipment		(10,121	)		(17,076	)
Proceeds from sale of assets		—			1,036

Net cash used in investing activities		(10,121	)		(16,040	)

Cash flows from financing activities
Change in restricted cash and investments, net		31,071			16,694
Payment of long-term debt		(31,686	)		(29,156	)
Distributions paid to members		(16,096	)		(25,302	)
Distributions paid to holders of minority interests in consolidated subsidiary		(16,425	)		(19,578	)

Net cash used in financing activities		(33,136	)		(57,342	)

Net decrease in cash and cash equivalents		(16,964	)		(37,067	)
Cash and cash equivalents, beginning of fiscal year		48,895			86,310

Cash and cash equivalents, end of quarter	$	31,931		$	49,243

The accompanying notes are an integral part of these condensed consolidated financial statements.

MSW Energy Holdings LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

Note 1. Organization and Basis of Presentation

~~MSW Energy Holdings LLC (MSW Energy Holdings, collectively with its subsidiaries, hereinafter~~Organization referred to as “the Company”), a Delaware limited liability company formed in March 2003 and its consolidated wholly-owned subsidiaries, MSW Energy Finance Co., Inc. (“MSW Finance”), a Delaware corporation, and MSW Energy Hudson LLC (“MSW Hudson”), a Delaware limited liability company, were organized for the purpose of acquiring and holding a 50% interest in Covanta Ref-Fuel Holdings LLC (“Covanta Ref-Fuel Holdings”), formerly known as Ref-Fuel Holdings LLC, from Duke Energy Corporation (“Duke”). The initial acquisition of Covanta Ref-Fuel Holdings (the initial closing) was completed on June 30, 2003. MSW Finance was organized for the sole purpose of acting as co-issuer, with MSW Energy Holdings, of $200 million aggregate principal amount of 8 1/2% senior secured notes due September 1, 2010 (“Senior Notes”). Other than serving as co-issuer, MSW Finance does not conduct operations of its own and has no assets.

MSW Energy Holdings LLC (“MSW Energy Holdings”) (collectively herein with its subsidiaries the “Company”) was formed in March 2003 as a Delaware limited liability company for the purpose of acquiring a 50% indirect membership interest in Covanta Ref-Fuel Holdings LLC (“Covanta Ref-Fuel”). At the initial closing on June 30, 2003, MSW Energy Holdings acquired MSW Energy Hudson LLC (“MSW Hudson”), which ~~holds~~held a 49.8% membership interest in Covanta Ref-Fuel ~~Holdings~~. MSW Energy Holdings had agreed to acquire Duke Energy Erie, LLC (“~~Duke~~ Erie”), ana ~~indirect,~~ wholly-owned subsidiary of Duke Energy Corporation (“Duke”), ~~within~~that held an additional 0.2% membership interest in Covanta Ref-Fuel within two years and six months after ~~its~~the purchase of MSW Hudson (the “second closing”). ~~Duke~~MSW ~~Erie~~Energy Holdings ~~holds~~consummated this transaction and acquired the remaining 0.2% membership interest inon ~~Covanta~~September 30, 2005. MSW Energy Holdings currently owns 50% of Covanta Ref-Fuel ~~Holdings~~, ~~and~~which ~~was~~owns ~~purchased~~100% onof ~~September 30,~~Covanta ~~2005~~ARC byLLC (“Covanta ~~the~~ARC”). ~~Company;~~MSW asEnergy ofHoldings ~~that~~II ~~date~~LLC (“MSW Energy Holdings II”) holds amembership interests directly and indirectly that constitute in the aggregate the other 50% membership interest in Covanta Ref-Fuel ~~Holdings~~.

AsCovanta ARC, a ~~result~~wholly-owned subsidiary of aCovanta ~~series~~Ref-Fuel, ofowns ~~transactions~~partnerships ~~known~~that asdevelop, own ~~the~~and ~~Equalization~~operate ~~Transactions~~waste-to-energy facilities, which ~~were consummated~~combust onmunicipal ~~April 30,~~solid ~~2004,~~waste ~~several~~and ~~private~~produce ~~equity~~energy in ~~funds (~~the ~~“DLJMB~~form ~~Funds”),~~of ~~each~~electricity ofand ~~which~~steam. ~~is managed~~Through bysuch ~~entities~~partnerships, ~~affiliated~~Covanta ~~with~~ARC ~~Credit~~owns ~~Suisse~~or ~~First~~controls ~~Boston~~six waste-to-energy ~~Private~~facilities ~~Equity,~~located ~~Inc.~~in the northeastern United States (the “~~CSFB~~ARC ~~Private~~operating ~~Equity~~facilities”),. ~~and~~The ~~several~~subsidiaries ~~investment~~of ~~funds~~Covanta ARC that operate the ARC operating facilities (the “~~Highstar~~ARC operating ~~Funds~~companies”) ~~managed~~derive byrevenues ~~AIG~~principally ~~Global~~from ~~Investment Corp.~~disposal ~~(“AIGGIC”)~~or ~~(the~~tipping ~~DLJMB~~fees ~~Funds~~received for accepting waste and from the ~~Highstar~~sale ~~Funds~~of ~~collectively~~electricity ~~constituted~~and ~~the~~steam ~~control group)~~produced ~~beneficially~~by ~~owned~~the ~~60%~~ARC ~~and 39~~operating facilities.~~99%,~~ ~~respectively,~~ARC ofoperating ~~the~~subsidiaries ~~equity~~include: ~~interests~~(a) Covanta inARC ~~the~~ Company, ~~and~~(“Ref-Fuel Management”); ~~60%~~(b) TransRiver ~~and~~Marketing ~~40%~~Company, ~~respectively,~~L.P. of(“TransRiver”); ~~the~~(c) Covanta ~~equity~~Company ~~interests~~of inHempstead (“Hempstead”); (d) Covanta ~~ARC~~Essex ~~Holdings~~Company ~~Corp.~~(“Essex”); (e) Covanta Southeastern Connecticut Company (“~~Holdings~~Seconn”); ~~Corp~~(f) Covanta Niagara, L.P. (“Niagara”~~, and~~); ~~formerly~~(g) Covanta ~~known~~Company asof ~~American~~Semass, L.P. (“Ref-Fuel Semass”); ~~Holdings Corp.~~(h). Covanta ~~Holdings~~of ~~Corp~~Semass, L.P. ~~owned~~(“Semass aOperator”); ~~0.01%~~and ~~managing member~~(i) Covanta ~~interest~~Delaware inValley, ~~the~~L.P. (“Delaware ~~Company~~Valley”).

~~The~~Effective ~~Equalization~~June 24, ~~Transactions~~2005, ~~also~~Covanta ~~resulted~~Holding inCorporation ~~Holdings~~(“Covanta”), ~~Corp.~~a ~~assuming~~Delaware ~~full control of the~~corporation, ~~management~~through ~~and~~its ~~operations~~wholly-owned ofsubsidiary, ~~the~~Covanta ~~Company~~Energy ~~and~~Corporation (“Covanta ~~Ref-Fuel~~Energy”), ~~Holdings~~a ~~through~~Delaware corporation, ~~its~~acquired ~~interests~~all inof the ~~Company~~ issued and ~~MSW~~outstanding ~~Energy~~shares ~~Holdings~~of IIcapital ~~LLC~~stock ~~(“MSW~~of ~~Energy~~Covanta ARC Holdings, ~~II”)~~Inc. ~~MSW~~(“Covanta ~~Energy~~ARC Holdings”) II(the ~~acquired its~~“Acquisition”). ~~membership~~The ~~interest~~Acquisition inwas ~~Covanta~~made ~~Ref-Fuel~~pursuant ~~Holdings~~to the interms of a ~~separate~~Stock ~~series~~Purchase ofAgreement, ~~transactions~~dated ~~completed on~~as ~~December~~of January 1231, ~~2003.~~2005 Asamong aCovanta, ~~result~~Covanta ofARC Holdings ~~the~~and ~~Equalization Transactions,~~ the ~~Company~~stockholders ~~has effective control~~ of Covanta ~~Ref-Fuel~~ARC Holdings, ~~and~~(the is“Purchase ~~therefore~~Agreement”). ~~consolidating~~As ~~its~~a ~~results~~result of the ~~operations~~Acquisition, ~~and cash~~Covanta, ~~flows~~through ~~for~~Covanta ~~the~~Energy, ~~period~~owns ~~from~~100% ~~May 1,~~of ~~2004~~the ~~(See~~voting ~~Note~~securities 5)of Covanta ARC Holdings.

OnCovanta ~~August~~Energy paid approximately $747 31million, ~~2004~~including transaction costs, for the shares of Covanta ARC Holdings ~~Corp.,~~and assumed the ~~indirect~~consolidated ~~parent~~net debt of ~~MSW~~Covanta ~~Energy~~ARC Holdings, IIwhich ~~and~~was approximately ~~managing~~$1.3 billion as of June 24, 2005 ($1.5 billion of consolidated indebtedness net of ~~member~~$0.2 billion of cash and restricted cash). Upon consummation of the ~~Company~~Acquisition, ~~the~~a ~~DLJMB~~change ~~Funds~~in ownership occurred, and in accordance with Emerging Issues Task Force (“EITF”) Topic D-97, “Push-Down Accounting” (“EITF D-97”), the ~~Highstar~~Company’s ~~Funds~~financial ~~effected~~statements areflect ~~series~~the effects of ~~transactions~~its ~~that~~change ~~resulted~~in ownership and the new owner’s basis in ~~Holdings~~the ~~Corp~~net assets and liabilities acquired. ~~becoming~~As a result, the ~~direct~~statement of operations and ~~indirect~~the ~~parent~~statement of cash flows for the three months ended March 31, 2005 reflect the results of the Company prior to purchase accounting adjustments (referred to as “predecessor”) and the ~~August~~balance sheet at December 31, 2005 and the statement of operations and statement of cash flows for the three months ended March 31, ~~Transactions~~2006, reflect the impact of preliminary purchase accounting adjustments arising from the Acquisition (referred to as “successor”).

~~Effective~~Basis June 24, 2005, Covanta Holding Corporation (“CHC”), formerly Danielson Holding Corporation, a Delaware corporation, through its wholly-owned subsidiary, Covanta Energy Corporation (“Covanta”), a Delaware corporation, acquired all of ~~the issued and outstanding shares~~Presentation of capital stock of Holdings Corp. (the “Acquisition”). The Acquisition was made pursuant to the terms of a Stock Purchase Agreement, dated as of January 31, 2005 among CHC, Holdings Corp. and its owners (the “Purchase Agreement”). As a result of the Acquisition, CHC, through Covanta, owns 100% of the voting securities of Holdings Corp.

~~Covanta~~The accompanying ~~paid~~unaudited ~~$747 million~~condensed inconsolidated ~~cash~~financial ~~for~~statements ~~transaction~~as ~~costs~~of March 31, 2006 and for the ~~shares of Holdings Corp.~~ ~~and~~three ~~assumed~~months ~~the~~ended ~~consolidated~~March 31, ~~net~~2006 ~~debt~~and of2005, ~~Holdings~~have ~~Corp.,~~been ~~which~~prepared ~~was~~in ~~approximately~~accordance ~~$1.3 billion~~with asthe ofinstructions ~~June 24,~~to ~~2005~~Form 10-Q. ~~Upon~~As ~~consummation~~permitted ofby the ~~Acquisition,~~rules aand ~~change~~regulations inof ~~ownership~~the ~~occurred,~~Securities and ~~in accordance~~Exchange ~~with Emerging Issues Task Force~~ Commission (the “~~EITF~~SEC”), ~~Topic~~the ~~D-97,~~financial ~~“Push-Down~~statements ~~Accounting,”~~contain ~~the Company’s~~certain condensed financial ~~statements~~information ~~reflect~~and ~~the~~exclude certain ~~effects~~footnote ofdisclosures ~~its~~normally ~~change~~included in ~~ownership~~audited ~~and~~consolidated ~~the~~financial ~~new owner’s~~statements ~~basis~~prepared in ~~the~~accordance ~~net~~with ~~assets~~United ~~and~~States ~~liabilities~~generally ~~acquired.~~accepted Asaccounting aprinciples ~~result,~~(“GAAP”). In presenting the ~~statements~~unaudited ofcondensed ~~operations~~consolidated ~~and~~financial ~~the~~ statements, ofmanagement ~~cash~~makes ~~flows~~estimates and ~~for~~assumptions that affect the ~~period~~amounts ~~from~~reported ~~January 1,~~and ~~2005~~related ~~through~~disclosures. ~~June 24~~Estimates, ~~2005~~by ~~reflect the~~their ~~results~~nature, ofare ~~the~~based ~~Company~~on ~~prior~~judgments toand ~~purchase~~available ~~accounting~~information. ~~adjustments~~Accordingly, ~~and~~actual ~~the~~results ~~statement~~could ofdiffer from ~~operations~~those ~~and statement~~estimates. ofIn ~~cash~~the ~~flows~~opinion ~~for~~of management, the ~~period~~accompanying ~~from~~financial ~~June 25~~statements tocontain all ~~September 30~~adjustments, ~~2005,~~including ~~reflect~~normal ~~the~~recurring ~~impact~~accruals, ~~of preliminary~~necessary ~~purchase~~to ~~accounting~~fairly ~~adjustments~~present ~~arising from~~ the ~~Acquisition~~accompanying financial statements. ~~See~~For ~~Note~~further 3information, ~~for~~refer ~~further~~to the consolidated financial ~~information.~~

~~Covanta~~MSW ~~ARC~~Energy ~~LLC~~Holdings ~~(“Covanta ARC”), formerly known as American Ref-Fuel Company~~ LLC, ~~a wholly-owned subsidiary of Covanta Ref-Fuel Holdings, owns partnerships that develop, own~~ and ~~operate~~ ~~waste-to-energy facilities, which combust municipal solid waste and produce energy in the~~Subsidiaries form of electricity and steam. Through such partnerships, Covanta ARC owns or controls six waste-to-energy facilities located in the northeastern United States (the “Covanta ARC operating facilities”). The subsidiaries of Covanta ARC that operate the Covanta ARC operating facilities (the “Covanta ARC operating companies”) derive revenues principally from disposal or tipping fees received for accepting waste and from the sale of electricity and steam produced by those facilities. Covanta ARC operating subsidiaries include: (a) Covanta ARC Company, formerly American Ref-Fuel Company, (“Covanta ARC Management”); (b) TransRiver Marketing Company, L.P. (“TransRiver”); (c) Covanta Hempstead LLC, formerly American Ref-Fuel Company of Hempstead (“Hempstead”); (d) Covanta Essex Company, formerly American Ref-Fuel Company of Essex County (“Essex”); (e) Covanta Southeastern Connecticut Company, formerly American Ref-Fuel Company of Southeastern Connecticut (“Seconn”); (f) Covanta Niagara, L.P., formerly American Ref-Fuel Company of Niagara, L.P. (“Niagara”); (g) Covanta Company of Semass, L.P., formerly known as American Ref-Fuel Company of Semass, L.P. (“Ref-Fuel Semass”); (h) Covanta of Semass, L.P., formerly known as American Ref-Fuel Operations of Semass, L.P. (“Semass Operator”); (i) Covanta Delaware Valley, L.P., formerly known as American Ref-Fuel Company of Delaware Valley, L.P. (“Delaware Valley”) (collectively referred to as the “Covanta ARC Partnerships”).

~~The~~Notes ~~accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with the instructions~~ to ~~Form~~Condensed ~~10-Q.~~Consolidated AsFinancial ~~permitted~~Statements ~~by the rules and regulations of the Securities and Exchange Commission~~ (~~the “SEC”~~Unaudited), the financial statements contain certain condensed financial information and exclude certain footnote disclosures normally included in audited consolidated financial statements prepared in accordance with United States generally accepted accounting principles (“GAAP”). In the opinion of management, the accompanying financial statements contain all adjustments, including normal recurring accruals, necessary to fairly present the accompanying financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004. Operating results for the interim period are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2005.

2statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005. ~~Summary~~Operating results for the interim period are not necessarily indicative of ~~Significant~~the ~~Accounting~~results ~~Policies~~that may be expected for the fiscal year ending December 31, 2006. Certain prior period amounts have been reclassified to conform to the current year’s presentation. See Note 4 — Reclassifications of Prior Periods of the Notes to Condensed Consolidated Financial Statements.

~~Principles~~ Note of2. ~~Consolidation~~Significant Accounting Policies and New Accounting Pronouncements

~~The~~Significant ~~accompanying~~Accounting ~~condensed consolidated financial statements include the accounts of MSW~~Policies Energy Holdings, its wholly-owned subsidiaries and Covanta Ref-Fuel Holdings. Prior to the Equalization Transactions, the Company’s investment in Covanta Ref-Fuel Holdings was accounted for using the equity method. As a result of the Equalization Transactions, the Company had effective control of Covanta Ref-Fuel Holdings and as of April 30, 2004, consolidated its results of operations, cash flows and balance sheet. All significant intercompany transactions and accounts have been eliminated. The minority interests reported relates to Duke’s 0.2% interest, which was acquired by MSW Energy Holdings on September 30, 2005, and MSW Energy Holdings II’s 50% interest in Covanta Ref-Fuel Holdings.

~~Reclassifications~~ Stock-Based Compensation

~~Certain~~The ~~previously~~Company ~~reported~~had ~~amounts~~adopted ~~have~~the ~~been~~disclosure-only ~~reclassified~~provisions toof ~~conform~~Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), as amended by SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure — an Amendment of FAS No. 123,” concerning certain transition and disclosure provisions, but applied the intrinsic value recognition provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), and related interpretations in accounting for stock-based compensation plans of the ~~current~~Company. During 2005, the Company’s stock plan was cancelled as a result ~~presentation~~of the Acquisition and there were no stock options or shares of restricted stock outstanding as ~~described~~of December 31, 2005. The employees of the Company are eligible to participate in Covanta’s equity award plans. See Note 411 — Employee Compensation and Benefit Plans of the Notes to Condensed Consolidated Financial Statements.

~~Use~~ The Company has adopted SFAS 123 (revised 2004),“Share-Based Payment” (“SFAS 123R”), as of January 1, ~~Estimates~~2006 and pro forma disclosures under SFAS 123 are no longer an alternative after such date. Generally, the approach to determining fair value under the SFAS 123 has not changed. However, there are revisions to the accounting guidelines established, such as accounting for forfeitures that will affect the Company’s accounting for stock-based awards in the future.

The ~~preparation of financial statements in conformity with U.S. generally accepted accounting~~ ~~principles~~adoption ~~requires management~~ of ~~the~~SFAS ~~Company~~123R todid ~~make~~not ~~estimates~~have ~~and~~a ~~assumptions~~material ~~that~~impact ~~affect~~on the ~~(a)~~ ~~reported~~Company’s ~~amounts~~consolidated ofresults ~~assets and liabilities at the date~~ of ~~the financial statements; (b) disclosure~~ ofoperations ~~contingent~~upon ~~assets~~adoption, ~~and~~but ~~liabilities~~depending aton the ~~date~~number ~~of the consolidated financial statements;~~ and ~~(c) reported~~type ~~amounts~~ of ~~revenues and expenses recognized during the reporting period. Significant management estimates include the estimated lives of long~~stock-~~lived~~based ~~assets,~~compensation ~~allowances for doubtful~~awards ~~accounts~~that ~~receivable,~~will ~~estimated~~be ~~useful~~granted ~~lives~~in ~~and~~the ~~fair value adjustments of net tangible and intangible assets~~future, ~~liabilities~~this ~~for~~expense ~~self-insurance and certain landfill liabilities. Such estimates~~ may bebecome ~~subsequently revised as necessary when additional information becomes available~~material. ~~Actual~~ ~~results could differ from those estimates.~~

~~Equity~~New ~~Method~~Accounting ~~Investment~~Pronouncements

The following new pronouncements were issued during the first quarter of 2006. None of these pronouncements have an impact on the Company’s consolidated results of operations and earnings per share.

In February 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) No. FAS 123(R)-4, “Classification of Options and Similar Instruments Issued as Employee Compensation That Allow for Cash Settlement upon the Occurrence of a Contingent Event” (“FSP 123(R)-4”). FSP 123(R)-4 is effective upon initial adoption of SFAS 123R. FSP 123(R)-4 requires that an option or similar instrument that is classified as equity, but subsequently becomes a liability because a contingent cash settlement event is probable of occurring, be accounted for similar to a modification from an equity to liability award. The Company does not have any options or similar instruments that allow for cash settlement upon the occurrence of an event.

~~Investments~~MSW ~~are~~Energy ~~accounted~~Holdings ~~for~~LLC using the equity method of accounting if the Company has the ability to exercise significant influence, but not control, over an investee. Significant influence is generally deemed to exist if the Company has an ownership interest in the voting stock of the investee of between 20% and ~~50%, although other factors, such as representation on the investee’s~~Subsidiaries ~~board of directors, are considered in determining whether the equity method of accounting is appropriate.~~

~~The~~Notes ~~Company’s investment in Covanta Ref-Fuel Holdings was accounted for using the equity method of accounting prior~~ to ~~the~~Condensed ~~Equalization~~Consolidated ~~Transactions.~~Financial AsStatements a result, the accompanying consolidated results of operations include the Company’s share of net earnings in “Equity in net earnings unconsolidated affiliate — Covanta Ref-Fuel Holdings” for the period up to April 30, 2004. (Unaudited)

~~Income~~Note ~~Taxes~~3. Business Combinations

AsIn ~~the~~connection ~~Company~~with isthe ~~a limited liability company which is treated as a partnership for federal income tax purposes~~Acquisition, ~~it is not subject to Federal and State income taxes; rather its income or loss is included in~~ the ~~income tax returns of its member. The~~ Company’s isassets ~~owned~~have ~~100%~~been ~~directly~~valued ~~and indirectly~~ by ~~Holdings Corp., which is a C Corporation for Federal Income tax purposes. The Company~~independent ~~has~~appraisers ~~provided Federal and State income taxes~~ in order to ~~reflect~~assist ~~what~~management in the ~~effect~~determination onof ~~its~~the ~~income~~purchase ~~would~~price allocations ~~have~~relating ~~been~~to if the ~~taxes~~fair ~~had~~market ~~been~~value ~~incurred~~of by the ~~Company~~assets ~~directly~~and ~~rather~~liabilities ~~than~~acquired by ~~its~~Covanta ~~members. Changes~~on ~~in taxes payable have been treated as capital contributions and/or distributions to the~~June 24, ~~Company’s members~~2005.

~~The~~In ~~Company~~recording ~~accounts for income taxes under~~ the ~~asset~~Acquisition and ~~liability~~in ~~method.~~accordance ~~The~~with ~~provision~~EITF ~~for income~~D-97, ~~taxes~~the ~~includes~~Company ~~deferred~~recorded incremental ~~income~~fair ~~taxes~~value ~~resulting~~of ~~from~~$296.7 million ~~items~~as ~~reported~~an inaddition ~~different~~to ~~periods~~members’ ~~for income~~equity ~~tax~~ and ~~financial~~applied ~~statement purposes. Deferred income tax assets and liabilities represent~~ the respective ~~expected~~fair ~~future~~value ~~tax consequences~~ of the ~~differences~~acquisitions ~~between~~in ~~the~~accordance ~~financial~~with ~~statement~~SFAS ~~carrying~~No. 141 “Business Combinations” ~~amounts~~(“SFAS of141”). ~~existing~~The assets acquired and liabilities ~~and~~assumed ~~their~~were ~~respective~~recorded ~~tax~~at ~~bases.~~estimated ~~The~~fair ~~effects~~values ~~of changes~~as indetermined ~~tax~~by ~~rates~~the onCompany’s ~~deferred~~management, ~~income~~using ~~tax~~a ~~assets~~preliminary ~~and~~valuation ~~liabilities~~prepared ~~are~~by ~~recognized in~~ the ~~period that~~independent ~~includes the enactment date~~appraisers.

~~Stock-Based~~ The ~~Compensation~~purchase price was allocated as follows, as of March 31, 2006 (in thousands of dollars):

The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation”, (“SFAS 123”) as amended by SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure — an Amendment of FAS No. 123” concerning certain transition and disclosure provisions, but applies the intrinsic value recognition provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and related interpretations in accounting for stock-based compensation plans.


Fair value of assets acquired
Current assets	$	180,805
Property, plant and equipment		1,973,317
Intangible assets (excluding goodwill)		287,421
Other assets		146,604
Goodwill		255,927

Total Assets Acquired		2,844,074

Fair value of liabilities assumed
Current liabilities		67,987
Current portion of Intermediate debt		28,212
Current portion of Project debt		64,305
Long-term Intermediate debt		434,746
Long-term Project debt		737,385
Deferred income taxes		157,311
Other liabilities		177,438

Total Liabilities Assumed		1,667,384

Minority interest account		783,129

Net assets acquired	$	393,561

~~Treatment~~ As a result of ~~Pass~~the ~~Through~~Acquisition, ~~Costs~~the Company recorded a liability relating to the closure of its headquarters of approximately $2.1 million and liabilities for severance and other compensation in the amount of $9.0 million, approximately $4.1 million of which has been paid relating to these liabilities as of March 31, 2006.

Pass through costs are costs for which the Company receives a direct contractually committed reimbursement from the municipality. These costs generally include utility charges, insurance premiums, ash residue transportation and disposal, and certain chemical costs. These costs are recorded net of the reimbursements from the municipalities in the Company’s consolidated financial statements. Total pass through expenses for the periods from January 1, 2005 through June 24, 2005; June 25, 2005 though September 30, 2005; July 1, 2005 through September 30, 2005; January 1, 2004 through September 30, 2004; July 1, 2004 through September 30, 2004, were $2.8 million, $1.7 million, $1.6 million, $2.5 million, and $1.6 million, respectively.

Risks and Uncertainties

The Company’s operations involve a number of significant risks and uncertainties. Factors that could affect the Company’s future operating results and cause actual results to vary materially from expectations and adversely affect the Company’s financial condition and prevent it from fulfilling its obligations include, but are not limited to, the Company’s dependency on the operations of the Covanta ARC operating companies and the Company’s substantial indebtedness. For additional detail regarding risks attendant to the Company’s operating subsidiaries, see “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

~~Effect~~MSW ofEnergy ~~New~~Holdings ~~Accounting~~LLC ~~Standard~~and Subsidiaries

OnNotes ~~December 16,~~to ~~2004,~~Condensed ~~the~~Consolidated Financial ~~Accounting~~Statements ~~Standards Board~~ (~~“FASB”~~Unaudited) issued FASB Statement No. 123(R), “Share-Based Payment” (“SFAS 123(R)”). SFAS 123(R) revises SFAS 123 and requires companies to expense the fair value of employee stock options and other forms of stock-based compensation. This requirement represents a change from the Company’s current practice. On April 14, 2005, the SEC announced that SFAS 123(R) is now effective for public companies for annual, rather than interim, periods that begin after June 15, 2005. As a result of the termination of Holdings Corp.’s stock plan, there will be no impact upon adoption of SFAS 123(R) on the Company (See Note 13).

3. Pro ~~Business~~Forma ~~Combinations~~Information

The ~~Company’s~~following ~~assets~~results ~~have~~represent ~~been~~the ~~valued~~unaudited bypro ~~independent~~forma ~~appraisers~~results inas ~~order~~if tothe ~~assist~~Acquisition ~~management~~had inoccurred ~~the~~on ~~determination~~January 1, of2005. ~~the~~These ~~purchase~~results ~~price~~are ~~allocations~~presented ~~relating~~for toinformational ~~the~~purposes ~~fair~~only, ~~market~~and ~~value~~are not necessarily indicative of the ~~assets~~ ~~and~~actual ~~liabilities~~results ~~acquired~~that inwould have resulted had the Acquisition. actually occurred on January 1, 2005 (in thousands of dollars):

In recording the Acquisition and in accordance with EITF Topic D-97, “Push-Down Accounting”, the Company recorded incremental fair value of $296.4 million as an addition to members’ equity and applied the respective fair value of the acquisitions in accordance with Statement of Financial Accounting Standards No. 141 “Business Combinations” (“SFAS No. 141”). The assets acquired and liabilities assumed were recorded at estimated fair values as determined by the Company’s management, using a preliminary valuation prepared by the independent appraisers.


	Pro Forma
	For the Three
	Months Ended
	March 31, 2005
Operating Revenues
Waste and service revenues	$	73,142
Electricity and steam sales		40,284

Total operating revenues		113,426
Operating Expenses
Plant operating expenses		58,422
Depreciation and amortization expense		29,906
Net interest expense on project debt		7,955
General and administrative expenses		5,871
Loss on asset retirements		1,386

Total operating expenses		103,540

Operating income		9,886
Interest income		584
Interest expense		(7,128	)

Income before minority interests and income taxes	$	3,342

The purchase price as of (unaudited, in thousands of dollars):

	June 24, 2005		September 30, 2005
Fair value of assets acquired
Current assets	$	180,805	$	180,805
Property, plant and equipment		1,901,787		1,901,787
Intangible assets (excluding goodwill)		269,436		269,436
Other assets		111,459		108,870
Goodwill		298,089		292,810
Total Assets Acquired		2,761,576		2,753,708
Fair value of liabilities assumed
Current liabilities		147,996		147,996
Long-term Intermediate debt		426,791		426,791
Long-term Project debt		718,805		706,732
Deferred income taxes		142,042		145,819
Other liabilities		164,756		164,756
Total Liabilities Assumed		1,600,390		1,592,094
Minority interest account		767,931		768,145
Net assets acquired	$	393,255	$	393,469

As a result of the Acquisition, the Company recorded a liability relating to the closure of its headquarters of approximately $2.1 million and liabilities for severance and other compensation in the amount of $9.2 million, approximately $0.7 million have been paid relating to these liabilities as of September 30, 2005. As of September 30, 2005, goodwill was $292.8 million which reflected adjustments to the carrying value of project debt by $12.1 million, a fair value adjustment related to a service agreement of $2.5 million, a deferred tax adjustment of $3.8 million and various other liability adjustments of $0.5 million, which also impacted minority interest, as part of management’s ongoing purchase accounting true-up. The net assets of the Company changed as a result of a purchase accounting true-up on the books of company owned by the Company’s indirect parent.

4. Reclassifications of Prior Periods

In order to conform to Covanta’s ~~statements~~statement of operations presentation, the following reclassifications were made to the ~~prior~~statement ~~year’s statements~~ of operations for the three months ended March 31, 2005 (unaudited, in thousands of dollars).:


	As Previously						As Reported
	Reported For the						For the
	Three Months Ended						Three Months Ended
	March 31, 2005			Reclassifications			March 31, 2005
Operating Revenues
Waste and service revenues	$	64,639		$	7,834		$	72,473
Electricity and steam sales		32,388			7,896			40,284
Other revenues		3,204			(3,204	)		—

Total operating revenues		100,231			12,526			112,757

Operating Expenses
Plant operating expenses		52,794			3,921			56,715
Depreciation and amortization expense		16,736			13,002			29,738
Net interest expense on project debt		—			7,318			7,318
General and administrative expenses		11,030			(4,757	)		6,273
Loss on asset retirements		1,386			—			1,386

Total operating expenses		81,946			19,484			101,430

Operating income		18,285			(6,958	)		11,327

Interest income		1,130			(572	)		558
Interest expense		(16,913	)		7,890			(9,023	)
Minority interests		(4,101	)		—			(4,101	)
Other income, net		360			(360	)		—

Loss before income taxes	$	(1,239	)	$	—		$	(1,239	)

These reclassifications consisted of the following:

•

The amortization of above and below market contracts were reclassified from waste and service revenues ($1.8 million decrease to depreciation and amortization expense) and electricity and steam sales ($14.8 million increase to depreciation and amortization expense) into depreciation and amortization expense.

	As Previously
	Reported Three						As Reported Three
	Months Ended						Months Ended
	September 30, 2004			Reclassifications			September 30, 2004
Revenues
Waste disposal and related service revenues	$	73,004		$	8,602		$	81,606
Electricity and steam sales		36,208			6,858			43,066
Other revenues		3,746			(3,746	)		—
Total operating revenues		112,958			11,714			124,672
Expenses
Plant operating expenses		44,430			2,899			47,329
Depreciation and amortization		16,820			12,637			29,457
Net interest expense on project debt		—			7,526			7,526
General and administrative		9,269			(3,825	)		5,444
Loss on asset retirements		(218	)		—			(218	)
Operating income		42,657			(7,523	)		35,134
Interest income		890			(605	)		285
Interest expense		(17,274	)		8,131			(9,143	)
Minority interests in net income of subsidiary		(15,502	)		—			(15,502	)
Other income, net		3			(3	)		—
Income before income taxes	$	10,774		$	—		$	10,774

MSW Energy Holdings LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

	•		Other revenues, which primarily consisted of sales of scrap metals, were reclassified from other revenues into waste and service revenues ($3.2 million).

	•		Net interest expense on project debt and interest income on funds restricted for the payment of project debt were reclassified as part of operating income (a net $7.3 million).

	•		Certain costs associated with operating facilities and TransRiver were reclassified from general and administrative expenses into plant operating expenses ($4.8 million).

	•		Reimbursements from certain municipal clients for operating expenses were reclassified from revenues to reductions of plant operating expenses ($1.1 million reduction).

	•		Reductions of revenues shared with certain municipal customers for energy produced were reclassified from waste and service revenues to electricity and steam sales ($6.9 million reduction in electricity and steam sales).

	•		Other minor miscellaneous reclassifications were also made to conform to Covanta’s presentation.

In addition to the reclassifications made to the Condensed Consolidated Statement of Operations, the “Change in restricted cash and investments, net” line on the Condensed Consolidated Statement of Cash Flows was reclassified from Investing Activities into Financing Activities, also to conform to Covanta’s presentation.

5. Intangible Assets and Goodwill

Intangible assets consisted of the following at (in thousands of dollars):


		As of
	Useful Life	March 31, 2006			December 31, 2005
Waste and energy contracts	4 — 11 years	$	194,562		$	194,562
Lease interest	24 years		71,845			71,845
Landfill	8 years		17,985			17,985
Other intangibles	Indefinite		3,029			3,029

			287,421			287,421
Accumulated amortization			(24,306	)		(15,634	)

Intangible assets, net		$	263,115		$	271,787

The following table details the amount of actual and expected amortization expense associated with intangible assets as of March 31, 2006 included, or expected to be included, in the Company’s statement of operations for each of the years indicated (in thousands of dollars):


	Waste and		Lease Interest
	Energy		and
	Contracts		Landfill		Totals
Three Months ended March 31, 2006	$	6,889	$	1,783	$	8,672

Remainder of 2006	$	20,600	$	3,844	$	24,444
2007		27,489		5,125		32,614
2008		27,478		5,125		32,603
2009		23,933		5,125		29,058
2010		13,593		5,125		18,718
2011		13,171		5,125		18,296
Thereafter		47,701		56,652		104,353

Total	$	173,965	$	86,121	$	260,086

Goodwill

In connection with the Acquisition, approximately $255.9 million of goodwill was recorded, which represents the total consideration paid in excess of the fair value of net tangible and intangible assets acquired in accordance with SFAS No. 142, “Goodwill and Other Intangibles” (“SFAS 142”).

	As Previously
	Reported Nine						As Reported Nine
	Months Ended						Months Ended
	September 30, 2004			Reclassifications			September 30, 2004
Revenues
Waste disposal and related service revenues	$	122,124		$	13,284		$	135,408
Electricity and steam sales		58,527			11,103			69,630
Other revenues		5,759			(5,759	)		—
Total operating revenues		186,410			18,628			205,038
Expenses
Plant operating expenses		75,139			5,744			80,883
Depreciation and amortization		27,993			19,964			47,957
Net interest expense on project debt		—			12,546			12,546
General and administrative		17,024			(7,185	)		9,839
Loss on asset retirements		618			—			618
Operating income		65,636			(12,441	)		53,195
Interest income		1,419			(979	)		440
Interest expense		(35,566	)		13,525			(22,041	)
Equity in net earnings of unconsolidated affiliate — Covanta Ref-Fuel Holdings		6,545			—			6,545
Minority interests in net income of subsidiary		(23,498	)		—			(23,498	)
Other income, net		105			(105	)		—
Income before income taxes	$	14,641		$	—		$	14,641

MSW Energy Holdings LLC and Subsidiaries

~~These~~Notes ~~reclassifications~~to ~~consisted~~Condensed ofConsolidated ~~the~~Financial ~~following:~~ Statements (Unaudited)

~~• The amortization of above and below market contracts were reclassified from waste disposal and related service revenues and electricity and steam sales into depreciation and amortization expense~~6. • Other ~~revenues,~~Current which primarily consisted of sales of scrap metals, were reclassified from other revenues into waste and service revenues. • Interest expense on project debt and interest income on funds restricted for the payment of project debt were reclassified as part of operating income. • Certain costs associated with operating facilities and TransRiver were reclassified from general and administrative expenses into plant operating expenses. • Reimbursements from certain municipal clients for operating expenses were reclassified from revenues to reductions of operating expenses. • Reductions of revenues shared with certain municipal customers for energy produced were reclassified from waste and service revenues to energy revenues. • Other minor miscellaneous reclassifications were also made.Liabilities

Other current liabilities consisted of the following (in thousands of dollars):


	As of
	March 31, 2006		December 31, 2005
Accrued interest expense	$	15,752	$	22,720
Accrued expenses		23,611		22,928
Incentive plan accruals		1,693		3,135
Compensation liabilities		6,388		11,307
Duke liability		2,500		2,500
Other		5,456		6,880

Total other current liabilities	$	55,400	$	69,470

7. Financing Arrangements

Long-term debt obligations consisted of the following (in thousands of dollars):


						As of
						March 31,			December 31,
	Interest Rate			Maturity		2006			2005
Company and Intermediate debt
Senior Notes		8.50	%		2010	$	195,785		$	195,785
Covanta ARC Senior Notes		6.26	%		2015		220,000			234,000

Subtotal of Company and Intermediate debt							415,785			429,785
Project debt
Project debt related to Service Fee Structure:
Seconn project debt		5.125% — 5.50	%		2015		53,705			53,705
Seconn Corporate Credit Bonds — 1992 Series A		6.45	%		2022		30,000			30,000
Seconn Corporate Credit Bonds I Series A and II Series A		5.50	%		2015		13,500			13,500
Essex project debt		5.248% — 7.375	%		2020		83,422			83,422
Tip fee structure related Project debt:
Niagara Series 2001		5.45% — 5.625	%		2015		165,010			165,010
Hempstead Corporate Credit Bonds		5.00	%		2010		42,670			42,670
Hempstead project debt		4.875% — 5.00	%		2009		123,625			123,625
Semass Series 2001A		5.50% — 5.625	%		2016		134,345			134,345
Semass Series 2001B		5.25% — 5.50	%		2010		57,580			75,250
Other obligations							183			199

Subtotal of Project debt							704,040			721,726

Total debt at par value							1,119,825			1,151,511
Unamortized premium							54,318			57,777
Current portion							(91,808	)		(105,665	)

Total long-term debt obligations						$	1,082,335		$	1,103,623

Project debt associated with the financing of facilities is generally arranged by municipal entities through the issuance of tax-exempt and taxable revenue bonds.

Certain of the debt agreements held by the Company contain restrictions on cash distributions, new borrowings and require certain defined leverage ratios and adjusted cash flow coverage ratios. As of March 31, 2006, the Company was not in default under the provisions of its debt obligations. Substantially all of the assets and revenues of the ARC operating facilities owned or controlled and operated by subsidiaries of the Company are pledged to trustees under the terms of the debt agreements. In addition, the terms of the documents governing these obligations limit the business activities and the circumstances and timing of making partnership distributions. In the event of any bankruptcy or liquidation, the Covanta ARC debt would be repaid prior to the repayment of the Senior Notes.

5.MSW ~~Equity~~Energy ~~Investment~~Holdings inLLC ~~Covanta~~and ~~Ref-Fuel Holdings~~Subsidiaries

~~Summarized~~Notes ~~statement of operations information for Covanta Ref-Fuel Holdings, prior~~ to ~~consolidation~~ byCondensed ~~the~~Consolidated ~~Company~~Financial ~~following~~Statements ~~the Equalization Transactions is as follows~~ (~~unaudited, in thousands of dollars~~Unaudited):

	For the Four
	Months Ended
	April 30, 2004
Revenues	$	156,623
Operating income		18,000
Net earnings		12,753
Company’s equity in net earnings		6,545

8. Other Long-Term Liabilities

~~Pro~~ Other ~~Forma~~long-term ~~Information~~liabilities consist of the following (in thousands of dollars):

The following results represent the pro forma results as if the Acquisition, the Equalization Transactions and the August 31 Transactions had occurred on January 1, 2004. These results are presented for informational purposes only, and are not necessarily indicative of the actual results that would have resulted had the acquisition, the Equalization Transactions and the August 31 Transactions actually occurred on January 1, 2004 (unaudited, in thousands of dollars):


			As of
	Amortization		March 31,		December 31,
	Period (years)		2006		2005
Waste contracts		9 — 17	$	129,795	$	132,371
Duke liability		15		26,058		25,602
Energy contract levelization		12		3,129		2,068
Landfill liabilities and ARO		8		11,768		11,577
Other		N/A		1,889		1,842
Incentive plan accruals		N/A		905		2,724

			$	173,544	$	176,184

	Pro Forma			Pro Forma
	For the Nine			For the Nine
	Months Ended			Months Ended
	September 30, 2005			September 30, 2004
Revenues
Waste disposal and related services revenues	$	236,192		$	238,574
Electricity and steam sales		126,121			123,085
Total operating revenues		362,313			361,659
Expenses
Plant operating expenses		156,551			165,194
Depreciation and amortization		80,389			80,808
Net interest expense on project debt		23,587			26,945
General and administrative		14,668			11,747
Loss on asset retirements		25			960
Operating income		87,093			76,005
Interest income		1,464			732
Interest expense		(27,099	)		(28,305	)
Net income (loss) before taxes	$	61,458		$	48,432

In connection with the acquisition, waste and service contracts were recorded at their fair market values, in accordance with SFAS 141, based upon discounted cash flows attributable to the “below market” portion of the waste contracts using currently available information.

6. The ~~Property,~~following ~~Plant~~table details the amount of the actual/estimated amortization expense associated with the below market waste and ~~Equipment~~service contracts liability as of March 31, 2006 included or expected to be included in the Company’s statements of operations for each of the years indicated (in thousands of dollars):

Property, plant and equipment consisted of the following (unaudited, in thousands of dollars):


	Waste
	Contracts
Three Months ended March 31, 2006	$	2,576

Remainder of 2006	$	7,726
2007		10,302
2008		10,302
2009		10,302
2010		10,302
2011		10,302
Thereafter		70,559

Total	$	129,795

		September 30,			December 31,
	Useful Life	2005			2004
Plant and equipment	2—50 years	$	1,873,996		$	1,206,558
Land			3,813			3,813
Leasehold improvements	Up to 17 years		5,575			5,575
Landfill	13 years		17,831			17,768
Construction in progress			2,268			6,244
Total property, plant and equipment			1,903,483			1,239,958
Accumulated depreciation			(23,903	)		(65,062	)
Property, plant and equipment, net		$	1,879,580		$	1,174,896

9. Income Taxes

The components of the provision for income taxes consisted of the following (in thousands of dollars):


	For the Three			For the Three
	Months Ended			Months Ended
	March 31, 2006			March 31, 2005
Current provision	$	(1,852	)	$	(5,913	)
Deferred provision		1,403			5,394

Total consolidated income tax benefit	$	(449	)	$	(519	)

The Company had federal net operating loss carryforwards of approximately $1.5 million at December 31, 2005, which will expire between 2021 and 2024, and state net operating loss carryforwards of approximately $2.4 million, which have various expiration dates.

7.MSW ~~Intangible~~Energy ~~Assets~~Holdings LLC and ~~Goodwill~~Subsidiaries

~~Intangible~~Notes ~~assets~~to ~~consisted~~Condensed ofConsolidated ~~the~~Financial ~~following~~Statements (~~unaudited, in thousands of dollars~~Unaudited):

	Useful Life	September 30, 2005			December 31, 2004
Waste, electricity and steam contracts	3—11 years	$	194,562		$	548,725
Financing costs	7 years		—			8,382
Lease asset	24 years		71,845			—
Emissions credits	Indefinite		—			43,377
Other intangibles	Indefinite		3,029			3,579
			269,436			604,063
Accumulated amortization			(7,600	)		(68,929	)
Intangible assets, net		$	261,836		$	535,134

10. Commitments and Contingencies

The Company ~~following~~and/or ~~table~~its ~~represents~~subsidiaries ~~the~~are ~~amount~~party to a number of ~~estimated~~claims, lawsuits ~~expense~~and ~~associated~~pending ~~with~~actions, ~~the~~most ~~intangible~~of which are routine and all of ~~assets~~which ~~expected~~are incidental to beits ~~included~~business. inThe ~~the~~Company ~~statement~~assess the likelihood of ~~operations~~potential ~~for~~losses ~~each~~on an ongoing basis and when losses are considered probable and reasonably estimable, records as a loss an estimate of the ~~years~~ultimate ~~indicated~~outcome. If the company can only estimate ~~(unaudited~~the range of a possible loss, inan ~~thousands~~amount representing the low end of the ~~dollars):~~range of possible outcomes is recorded. The final consequences of these proceedings are not presently determinable with certainty.

	Waste, electricity		Lease
	and steam		Asset
	contracts		Contract		Totals
Estimated
2005 (after September 30, 2005)	$	7,026	$	748	$	7,774
2006		26,979		2,994		29,973
2007		26,979		2,994		29,973
2008		26,969		2,994		29,963
2009		23,423		2,994		26,417
Thereafter		76,372		58,335		134,707
Total	$	187,748	$	71,059	$	258,807

Environmental Matters

~~Goodwill~~ The Company operates in an environmentally sensitive industry and is subject to extensive federal, state and local laws and regulations adopted for the protection of the environment. The laws and regulations primarily applicable to the Company are those related to discharge of emissions into the air and management of solid waste, but can also include those related to water use, discharges to water, wetlands preservation and hazardous waste management. Certain of these laws have extensive and complex requirements relating to obtaining construction and operating permits, monitoring, record keeping and reporting. While management believes that it is in substantial compliance with permits and other applicable environmental laws relating to the Company, its facilities, from time to time, may not be in full compliance with all such laws.

InNoncompliance ~~connection~~ with ~~the~~environmental ~~Acquisition,~~laws ~~approximately~~and ~~$292.8 million~~regulations can result in the imposition of ~~goodwill~~civil ~~was~~or criminal ~~recorded~~fines or penalties. In some instances, ~~which~~ ~~represents~~environmental ~~the~~laws ~~total~~also ~~consideration~~may ~~paid~~impose clean-up or other remedial obligations in ~~excess~~the event of a release of pollutants or contaminants into the environment. ~~fair~~The ~~value~~Company ofincurs ~~net~~operating ~~tangible~~costs and capital expenditures related to various ~~intangible~~environmental ~~assets~~protection ~~acquired~~and inmonitoring ~~accordance~~programs. ~~with~~Such ~~Statement~~expenditures ofhave ~~Financial~~not ~~Accounting~~had ~~Standards~~a Nomaterial adverse effect on the Company’s consolidated financial position or results of operations. ~~142~~ However, federal, ~~“Goodwill~~state and ~~Other~~local ~~Intangibles”~~regulatory ~~(“SFAS~~authorities Nomay consider proposals to restrict or tax certain emissions, which proposals, if adopted, could impose additional costs on the operation of the Company. ~~142”).~~

Lower Passaic River Study. By letters dated August 13, 2004 and May 3, 2005, the Environmental Protection Agency (“EPA”) notified the Essex facility that it was potentially liable under CERCLA Section 107(a) for response actions in the Lower Passaic River Study Area (“LPRSA”), a 17-mile stretch of river in northern New Jersey. Essex is one of at least 52 PRPs named thus far. EPA alleged that hazardous substances found in the LPRSA were being released from the Essex site, which abuts the river. EPA’s notice letters stated that Essex may be liable for costs related to a proposed $10 million study of the Lower Passaic River, for certain past costs incurred by EPA totaling approximately $2.8 million and for unspecified natural resource damages. ~~Accrued~~Considering ~~Expenses~~the history of industrial and ~~Other~~other ~~Current~~discharges ~~Liabilities~~into the LPRSA from other sources, including named PRPs, Essex believes any releases from its site to be de minimus in comparison; however, it is not possible at this time to predict that outcome with certainty or to estimate Essex’s ultimate liability in the matter, including for natural resource damages. Given the uncertainty, Essex has entered into an arrangement with EPA and the cooperating PRP group to settle the potential liability Essex might have for the $2.8 million in past costs incurred by EPA, and for the $10 million cost of the study, by contributing $0.25 million to the cost of the study and by agreeing to share in certain past and ongoing legal fees and other costs of the cooperating PRP group.

Accrued expenses and other current liabilities consisted of the following (unaudited, in thousands of dollars):

	September 30, 2005		December 31, 2004
Accrued expenses	$	21,596	$	19,988
Incentive plan accruals		1,688		3,569
Compensation liabilities		9,738		8,254
Short-term Duke liability		2,500		2,500
Other		5,930		5,640
	$	41,452	$	39,951

9.MSW ~~Financing~~Energy ~~Arrangements~~Holdings LLC and Subsidiaries

~~Long-term~~Notes ~~debt~~to ~~obligations~~Condensed ofConsolidated ~~the~~Financial ~~Company~~Statements ~~consisted of the following~~ (~~unaudited, in thousands of dollars~~Unaudited):

				Final		September 30,			December 31,
	Interest Rate			Maturity		2005			2004
Company and Intermediate debt
Senior Notes		8.5	%		2010	$	195,785		$	200,000
Covanta ARC Senior Notes		6.26	%		2015		234,000			240,000
Intermediate debt							429,785			440,000
Project debt
Niagara Series 2001		5.45%––5.625	%		2015		165,010			165,010
Seconn Corporate Credit Bonds — 1992 Series A		6.45	%		2022		30,000			30,000
Seconn Corporate Credit Bonds I Series A and II Series A		5.50	%		2015		13,500			13,500
Hempstead Corporate Credit Bonds		5.00	%		2010		42,670			42,670
Hempstead project debt		4.625%––5.00	%		2009		114,543			114,543
Essex project debt		5.32%––7.48	%		2020		83,422			96,496
Seconn project debt		5.125%––5.50	%		2015		50,602			50,602
Semass Series 2001A		5.50%––5.625	%		2016		134,345			134,345
Semass Series 2001B		5.25%––5.50	%		2010		75,250			104,385
Other obligations							215			273
Subtotal of Project debt							709,557			751,824
Total debt at par value							1,139,342			1,191,824
Unamortized debt premium, net							47,737			54,189
Current portion							(89,789	)		(87,184	)
Total long-term debt obligations						$	1,097,290		$	1,158,829

Other Matters

~~As a~~The ~~result~~Company ofis ~~the~~involved ~~Acquisition,~~in avarious ~~Change~~claims ofor ~~Control~~litigation ~~(as defined~~ in the ~~Indenture~~ ~~entered~~ordinary ~~into~~course ~~in connection with the issuance~~ of ~~the Senior Notes) occurred~~business. Management ~~The~~believes ~~Indenture provides~~ that, ~~upon~~ the ~~occurrence~~ ofultimate aresolution ~~Change~~ of ~~Control~~these matters, ~~the~~either ~~Company~~individually ~~shall make an offer (a Change of Control Offer) to each registered holder of the Senior Notes (“Holder”) to repurchase all~~ or ~~any~~in ~~part (equal to~~the $1aggregate,~~000~~ orwill annot ~~integral~~have ~~multiple~~a ofmaterial ~~$1,000)~~impact ofon ~~each Holder of~~ the ~~Senior~~future ~~Notes~~results ~~at a purchase price equal to 101%~~ of ~~the aggregate principal amount thereof~~operations, ~~plus~~cash ~~accrued~~flows ~~and unpaid interest on the~~or ~~Senior~~financial ~~Notes~~position ~~repurchased,~~of ~~if any, to (but not including)~~ the ~~payment date (the “Purchase Price”)~~Company.

~~Accordingly,~~Mercury onRegulation ~~June~~at Essex. On December 246, ~~2005~~2004, the ~~Company~~New ~~made~~Jersey aDepartment ~~Change~~ of ~~Control~~Environmental Protection ~~Offer,~~(“NJDEP”) ~~pursuant~~promulgated regulations applicable to ~~which~~the Essex facility that will make mercury emission requirements more stringent. Specifically, the ~~Company~~new ~~offered~~regulations increase the required removal efficiency to ~~repurchase~~85% removal on January 3, ~~for~~2006 ~~cash~~and 95% removal on January 3, ~~all~~2012, while orretaining ~~any~~the ~~part~~alternative limit of ~~each~~28 ~~Holder’s~~micrograms ~~Senior~~per ~~Notes~~cubic atmeter. As a result of the ~~Purchase~~ ~~Price~~new regulations, ~~subject~~there is an increased risk that emission exceedances will occur and therefore an increased probability that additional controls will ultimately be required to prevent such exceedances. The Company believes that the ~~terms~~new ~~and~~requirements ~~conditions~~may ~~set~~at ~~forth~~a minimum result in increased operating costs due to increased use of activated carbon in the ~~Change~~existing control equipment. The Company cannot currently determine the likelihood of ~~Control~~additional ~~Notice~~capital and operating costs being ~~Offer~~incurred toin ~~Purchase,~~connection ~~and~~with ~~the~~these ~~accompanying~~changes ~~Letter~~in ofregulation, ~~Transmittal~~or (the ~~“Offer~~total ~~Documents”)~~of any such costs. If ~~Approximately~~additional ~~$4.2 million~~cost ofis ~~Senior~~required, ~~Notes~~it ~~were~~is ~~tendered~~not anticipated to have a material impact on ~~July 26,~~the ~~2005~~Company asbecause the Essex service agreement provides a ~~result~~mechanism for a pass-through to the Port Authority of ~~this~~New ~~offer~~York and New Jersey of the majority of any additional capital costs and all operating costs that may be required.

CMW Landfill. Semass Partnership, a 90% owned subsidiary of Ref-Fuel Semass, has a waste management agreement (the “WMA”) dated May 25, 1982, as amended, with the Carver, Marion, Wareham Regional Refuse Disposal District (“CMW”). The WMA allows Semass Partnership to utilize a portion of a landfill (the “CMW Landfill”), which CMW leases from Wankinco River, Inc. (“Wankinco”).

In March 1990, the Semass Partnership, CMW and Wankinco entered into an agreement related to the CMW Landfill, as amended (the “Settlement Agreement”), which requires, among other things, the Semass Partnership to make annual deposits into an environmental protection trust fund (the “Fund”) in lieu of obtaining environmental impairment liability insurance for the CMW Landfill. The Semass Partnership is required under the Settlement Agreement to deposit $0.5 million annually into the Fund, payable in equal quarterly installments. Certain additional deposits are required subject to the availability of cash in accordance with the Loan Agreement. The Semass Partnership’s obligation to make deposits into the Fund ceases when the Fund reaches a balance of $20 million unless the fund limit is increased by agreement of the parties, or absent such agreement, by arbitration, wherein it is determined the fund limit needs to be increased to adequately protect against environmental damage. Wankinco by letter dated March 29, 2005, and pursuant to its rights under the Settlement Agreement, has requested a re-evaluation of the Fund limit and an increase of such limit to $29.7 million. Management believes that the $20 million fund limit is adequate for its intended purpose. Discussions between Semass Partnership and Wankinco about the Fund limit are ongoing; no arbitration has been commenced. Proceeds from the Fund are to be used primarily for remediation of the CMW Landfill in the event of environmental damage. The Semass Partnership and Wankinco are each entitled to receive one-half of the balance of the Fund upon final closure of the CMW Landfill and receipt of required governmental approvals. During the three months ended March 31, 2006 and the year ended December 31, 2005, the Semass Partnership made the required quarterly deposits into the Fund and charged operations for one-half of the deposits into the Fund, representing one-half of the balance of the Fund which will be disbursed to Wankinco upon final closure of the CMW Landfill. Additional charges to operations may be required in future years if any disbursements are required from the Fund to remediate any environmental damages. To date, management is not aware of any such environmental damages. As of March 31, 2006 and December 31, 2005, the balance in the Fund was approximately $17.5 million and $17.3 million, respectively, and was included in restricted cash and long-term investments. A corresponding liability, representing approximately one-half of the deposits and related earnings in the Fund, was included in other long-term liabilities.

The Company and certain of its subsidiaries have issued or are party to performance guarantees and related contractual support obligations undertaken mainly pursuant to agreements to construct and operate certain waste-to-energy facilities. The Company and certain of its subsidiaries have issued guarantees to municipal clients and other parties that the Company’s subsidiaries will perform in accordance with contractual terms, including, where required, the payment of damages or other obligations. Such contractual damages or other obligations could be material, and in circumstances where one or more subsidiary’s contract has been terminated for its default, such damages could include amounts sufficient to repay project debt. The Company has not recorded any amount as a liability in its condensed consolidated balance sheet as of March 31, 2006 as it believes that it had not incurred such liability at the date of the financial statements. If the Company is asked to perform under one or more such guarantees, its liability for damages upon contract termination could be reduced by funds held in trust and proceeds from sales of the facilities securing the project debt, which is presently not estimable.

11. Employee Compensation and Benefit Plans

Stock Option Plan

On August 11, 2004, the Board of Directors of Covanta ARC Holdings adopted the 2004 Stock Option Plan (the “SOP”), effective January 1, 2004, as further modified on September 16, 2004. The SOP was designed to link the interests of former officers of Covanta ARC Holdings (who were also the senior management of Covanta Ref-Fuel) to the interests of Covanta ARC Holdings shareholders through the granting of options to purchase stock of Covanta ARC Holdings. Covanta ARC Holdings is a privately held company. During 2004, Covanta ARC Holdings granted 13,199 options to the executive officers of Covanta Ref-Fuel under the SOP, with a weighted average exercise price per share of $1,189.51.

~~10.~~MSW ~~Other~~Energy ~~Long-Term~~Holdings ~~Liabilities~~LLC and Subsidiaries

~~Other~~Notes ~~long-term~~to ~~liabilities~~Condensed ~~consisted~~Consolidated ofFinancial ~~the~~Statements ~~following~~ (~~unaudited, in thousands of dollars~~Unaudited):

	Amortization
	Period		September 30,		December 31,
	(years)		2005		2004
Waste contracts acquired		9—17	$	118,881	$	120,276
Operating lease acquired		14		—		38,453
Duke liability		16		25,074		22,623
Energy contract levelization		12		1,007		24,123
Landfill liabilities		13		11,596		10,699
Deferred revenue		8—20		—		5,112
Other long-term accruals				5,341		3,333
			$	161,899	$	224,619

On January 31, 2005, in conjunction with the Acquisition, the Board of Directors of Covanta ARC Holdings and optionees under the SOP adopted an Option Modification Agreement (“OMA”). Under the terms of the OMA, immediately prior to the Acquisition, the SOP plan was terminated, and on June 24, 2005, a cash payment representing all outstanding options granted or ungranted, but authorized under the terms of the SOP, together with certain amounts due and anticipated under other long term compensation plans, was made in the amount of approximately $30.2 million and was recorded as compensation expense prior to the Acquisition.

11 The weighted average fair value of these options granted for the three months ended March 31, 2005 was $133.24 ~~Income~~per ~~Taxes~~share. The weighted average fair value of each stock option at March 31, 2005 was calculated using the minimum value option pricing model with the following assumptions: expected life three years; expected dividend of zero; and risk free interest rate or 3.9%. Options awarded under the SOP vest over a period of four years and expire ten years from the date of grant. Such ten-year period is automatically extended under certain circumstances.

The ~~components~~Company ofhad applied the ~~provision~~recognition provisions of APB 25 and related interpretations in accounting for ~~income~~its ~~taxes~~stock-based ~~consisted~~compensation ofplans. ~~the~~No ~~following~~compensation ~~(unaudited,~~cost inhad been recognized for the ~~thousands~~stock ofoption ~~dollars):~~plan prior to its termination.

	For the Period		For the Period
	June 25,		January 1,
	through		through			For the Nine
	September 30,		June 24,			Months Ended
	2005		2005			September 30, 2004
Current provision	$	4,241	$	(11,141	)	$	503
Deferred provision		2,199		8,380			1,137
Total consolidated income tax provision (benefit)	$	6,440	$	(2,761	)	$	1,640

The Company applied the recognition provisions of APB 25 and related interpretations in accounting for its stock-based compensation plans. No compensation cost was recognized for the stock option plan during the three months ended March 31, 2005. The Company’s net loss as reported would have been increased by $1.8 million, resulting in a pro forma, as if compensation cost had been determined consistent with the provisions of SFAS No. 123 for the three months ended March 31, 2005, net loss of $2.5 million.

~~The~~Certain ~~Company~~employees ~~had~~are ~~federal~~covered ~~net~~under ~~operating~~comparable ~~loss~~Covanta ~~carryforwards~~long-term ofincentive ~~approximately~~plans, ~~$1.3 million~~and atthe ~~December 31,~~provisions ~~2004~~of ~~which~~SFAS ~~will~~123R ~~expire~~have ~~between~~been ~~2021~~followed. ~~and~~See ~~2024~~Note ~~and~~2 ~~state~~– Significant ~~net~~Accounting ~~operating~~Policies ~~loss carryforwards~~and ofNew ~~approximately~~Accounting ~~$2.2 million,~~Pronouncements ~~which~~of ~~have~~the Notes ~~various~~to ~~expiration~~Condensed ~~dates~~Consolidated Financial Statements.

12. ~~Commitments~~Related ~~and~~Party ~~Contingencies~~Transactions

~~The~~As ~~Company is party to~~ a ~~number~~result of ~~claims~~the Acquisition, ~~lawsuits~~Covanta and ~~pending~~its ~~actions,~~subsidiaries ~~most~~became affiliates of ~~which~~the ~~are~~Company. ~~routine~~As ~~and all~~ of ~~which~~March 31, ~~are~~2006 ~~incidental~~and toDecember 31, ~~its~~2005, ~~business.~~the ~~The~~ Company’s ~~management~~had ~~assesses~~a ~~the likelihood~~net ofpayable ~~potential~~to ~~losses~~affiliate onof an$15.5 million ~~ongoing basis~~ and ~~when~~$4.2 million, ~~losses~~respectively, ~~are~~which ~~considered~~related ~~probable~~to ~~and reasonably~~certain ~~estimable,~~costs ~~records~~paid ason abehalf ~~loss an estimate~~ of the Company ~~ultimate~~by ~~outcome~~its affiliates. IfThe ~~the~~affiliate ~~Company~~balances ~~can only~~are ~~estimate~~and ~~the~~will ~~range~~continue ofto abe ~~possible~~cash ~~loss~~settled, anand relate ~~amount~~to ~~representing~~services ~~the~~in ~~low end of~~ the ~~range~~ordinary ~~of possible~~course ~~outcomes is recorded. The final consequences~~ of ~~these proceedings are not presently determinable with certainty~~business.

Environmental

The Company’s operations are subject to environmental regulatory laws and environmental remediation laws. Although the Company’s operations are occasionally subject to proceedings and orders pertaining to emissions into the environment and other environmental violations, which may result in fines, penalties, damages or other sanctions, the Company believes that it is in substantial compliance with existing environmental laws and regulations.

The Company may be identified, along with other entities, as being among potentially responsible parties (“PRPs”) for contribution to costs associated with the correction and remediation of environmental conditions at disposal sites subject to CERCLA and/or analogous state laws. In certain instances, the Company may be exposed to joint and several liabilities for remedial action or damages. The Company’s ultimate liability in connection with such environmental claims will depend on many factors, including its volumetric share of waste, the total cost of remediation, and the financial viability of other companies that also sent waste to a given site and, in the case of divested operations, its contractual arrangement with the purchaser of such operations.

~~Lower~~ITEM Passaic River Study. By letters dated August 13, 2004 and May 3, 2005, USEPA notified Essex that it was potentially liable under CERCLA Section 107(a) for response actions in the Lower Passaic River Study Area (“LPRSA”), a 17 mile stretch of river in northern New Jersey. Essex is one of at least 52 PRPs named thus far. USEPA alleged that hazardous substances found in the LPRSA were being released from the Essex site, which abuts the river. USEPA’s notice letters stated that Essex may be liable for costs related to a proposed $10 million study of the Lower Passaic River, for certain past costs incurred by USEPA totaling approximately $2.~~8 million,~~ and for unspecified natural resource damages. Considering the history of industrial and other discharges into the LPRSA from other sources, including named PRPs, Essex believes any releases from its site to be de minimus; however, it is not possible at this time to predict that outcome with certainty or to estimate EssexMANAGEMENT’S ~~ultimate~~DISCUSSION ~~liability~~AND inANALYSIS ~~the~~OF ~~matter,~~FINANCIAL ~~including~~CONDITION ~~for~~AND ~~natural~~RESULTS ~~resource~~OF ~~damages. Given the~~OPERATIONS uncertainty, Essex has entered an arrangement with USEPA and the cooperating PRP group to settle the potential liability Essex might have for the $2.8 million in past costs incurred by USEPA, and for the $10 million cost of the study, by contributing $250,000 to the cost of the study and by agreeing to share in certain past and ongoing legal fees and other costs of the cooperating PRP group.

~~CMW~~The ~~Landfill.~~following ~~Semass~~discussion ~~Partnership,~~addresses athe ~~90%~~financial ~~owned~~condition ~~subsidiary~~ of ~~Ref-Fuel~~MSW ~~Semass,~~Energy ~~has~~Holdings aLLC ~~waste management agreement~~ (the “~~WMA~~Company”) ~~dated~~as ~~May~~of March 2531, ~~1982~~2006, asand ~~amended~~its results of operations for the three months ended March 31, 2006, compared with the ~~Carver~~same period last year. It should be read in conjunction with the Company’s Unaudited Condensed Consolidated Financial Statements and Notes thereto for the periods ended March 31, ~~Marion~~2006 and 2005 which is contained in this report. Additionally, ~~Wareham~~it should be read in ~~Regional~~conjunction ~~Refuse~~with ~~Disposal~~the ~~District~~Company’s ~~(CMW).~~Audited ~~The~~Consolidated ~~WMA~~Financial ~~allows~~Statements ~~Semass~~and ~~Partnership~~Notes tothereto ~~utilize~~for athe year ~~portion~~ended ofDecember 31, 2005 and Management’s Discussion aand ~~landfill~~Analysis (included in the ~~“CMW~~Company’s ~~Landfill”),~~Annual ~~which~~Report ~~CMW~~on ~~leases~~Form ~~from~~10-K ~~Wankinco~~for ~~River,~~the ~~Inc.~~year ~~(“Wankinco”)~~ended December 31, 2005.

InThe ~~March 1990,~~preparation ~~the~~of ~~Semass~~interim ~~Partnership,~~financial ~~CMW~~statements ~~and~~necessarily ~~Wankinco~~relies ~~entered~~heavily ~~into~~on anestimates. ~~agreement related to~~This ~~the~~and ~~CMW~~certain ~~Landfill, as amended (the “Settlement Agreement”), which requires, among~~ other ~~things~~factors, ~~the Semass~~such ~~Partnership~~as ~~to make annual deposits into an environmental protection trust fund (~~the ~~“Fund”) in~~seasonal ~~lieu~~nature of ~~obtaining~~portions ~~environmental~~of ~~impairment liability insurance for~~ the ~~CMW~~Company’s ~~Landfill.~~business ~~The Semass~~as ~~Partnership~~well isas ~~required~~competitive ~~under~~and ~~the~~other ~~Settlement~~market ~~Agreement to deposit $500~~conditions,~~000~~ ~~annually~~call ~~into~~for ~~the~~caution ~~Fund, payable~~ in ~~equal~~estimating ~~quarterly~~full ~~installments.~~year ~~Certain~~results based ~~additional~~on ~~deposits~~interim ~~are~~results ~~required subject to the availability~~ of ~~cash in accordance with the Loan Agreement~~operations. The ~~Semass~~preparation ~~Partnership’s obligation to make deposits into the Fund ceases when the Fund reaches a balance~~ of ~~$20.0 million~~financial ~~unless~~statements ~~the~~requires ~~fund~~management ~~limit is increased by agreement of the parties, or absent such agreement, by arbitration, wherein it is determined the fund limit needs~~ to bemake ~~increased~~estimates ~~to adequately protect against environmental damage. Wankinco by letter dated March 29, 2005,~~ and ~~pursuant~~assumptions tothat ~~its~~affect ~~rights under~~ the ~~Settlement Agreement,~~reported ~~has~~amounts ~~requested a re-evaluation of the Fund limit~~ and anclassification ~~increase~~ of ~~such~~assets ~~limit to $29.7~~and ~~million.~~liabilities Management believes that the $20.0 million fund limit is adequate for its intended purpose. Proceeds from the Fund are to be used primarily for remediation of the CMW Landfill in the event of environmental damage. The Semass Partnership and ~~Wankinco~~disclosure ~~are each entitled to receive one-half~~ of ~~the~~contingent ~~balance~~assets ~~of the Fund upon final closure of the CMW Landfill~~ and ~~receipt~~liabilities ofat ~~required governmental approvals. During~~ the ~~first~~date ~~six months~~ of ~~2005 and~~ the ~~year ended December 31, 2004,~~financial ~~the~~statements ~~Semass Partnership made the required quarterly deposits into the Fund~~ and ~~charged operations for one-half of~~ the ~~deposits~~reported ~~into~~amounts ~~the Fund, representing one-half~~ of ~~the~~revenues ~~balance~~and ofexpenses ~~the~~during ~~Fund which will be disbursed to Wankinco upon final closure of~~ the ~~CMW~~reporting ~~Landfill~~period. ~~Additional charges to~~Actual ~~operations~~results ~~may~~could bediffer ~~required~~materially ~~in future years if any disbursements are required~~ from ~~the~~those ~~Fund to remediate any environmental damages~~estimates. ~~To date, management is not aware of any such environmental~~ damages. As of September 30, 2005 and December 31, 2004, the balance in the Fund was approximately $15.6 million and $14.0 million, respectively, and was included in restricted cash and long-term investments. A corresponding liability, representing approximately one-half of the deposits and related earnings in the Fund, was included in other long-term liabilities.

13 Effective June 24, 2005, Covanta Holding Corporation (“Covanta”), a Delaware corporation, through its wholly-owned subsidiary, Covanta Energy Corporation (“Covanta Energy”), a Delaware corporation, acquired all of the issued and outstanding shares of capital stock of Covanta ARC Holdings, Inc. (“Covanta ARC Holdings”) (the “Acquisition”). The Acquisition was made pursuant to the terms of a Stock ~~Option~~Purchase ~~Plan~~Agreement, dated as of January 31, 2005 among Covanta, Covanta ARC Holdings and the stockholders of Covanta ARC Holdings (the “Purchase Agreement”). As a result of the Acquisition, Covanta, through Covanta Energy, owns 100% of the voting securities of Covanta ARC Holdings.

OnCovanta ~~August~~Energy paid approximately $747 11million, ~~2004~~including transaction costs, for the ~~Board~~shares of Covanta ~~Directors~~ARC of Holdings ~~Corp.~~and ~~adopted~~assumed the ~~2004~~consolidated ~~Stock~~net ~~Option Plan~~debt ~~(the~~of ~~“SOP”),~~Covanta ~~effective~~ARC ~~January 1~~Holdings, ~~2004,~~which aswas approximately ~~further~~$1.3 billion ~~modified~~as onof ~~September~~June 1624, ~~2004~~2005 ($1.5 billion ~~The~~of ~~SOP~~consolidated ~~was designed~~indebtedness tonet ~~link~~of $0.2 billion ~~the interests~~ of ~~officers~~cash ofand ~~Holdings~~restricted ~~Corp~~cash). ~~(who~~Upon ~~were~~consummation ~~also~~of the ~~senior~~Acquisition, ~~management~~a change in ofownership ~~Covanta~~occurred, ~~Ref~~and in accordance with Emerging Issues Task Force (“EITF”) Topic D-~~Fuel~~97, “Push-Down ~~Holdings~~Accounting” (“EITF D-97”), tothe Company’s financial statements reflect the ~~interests~~effects of ~~Holdings~~its change ~~Corp.~~in ~~shareholders~~ownership ~~through~~and the ~~granting of~~new ~~options~~owner’s tobasis ~~purchase~~in ~~stock~~the ofnet ~~Holdings~~assets ~~Corp.~~and ~~Holdings~~liabilities ~~Corp~~acquired. isAs a result, ~~privately~~the ~~held~~Company’s ~~company.~~statements ~~During~~of operations and the statements of cash flows for the period from ~~2004~~January 1, ~~Holdings~~2005 ~~Corp.~~through ~~granted~~March 31, 132005,~~199~~ ~~options~~reflect to the ~~executive~~results ~~officers~~ of ~~Covanta~~the ~~Ref-Fuel~~Company ~~Holdings~~prior to purchase ~~under~~accounting adjustments (referred to as “predecessor”) and the ~~SOP.~~balance ~~Options~~sheet ~~awarded~~at ~~under~~December 31, 2005 and the ~~SOP~~statement ~~vest~~of ~~over~~operations aand ~~period~~statement of ~~four~~cash ~~years~~flows ~~and~~for ~~expire~~the ~~ten~~three ~~years~~months ended March 31, ~~from~~2006 reflect the ~~date~~impact of ~~grant.~~preliminary ~~Such~~purchase ~~ten-year~~accounting ~~period~~adjustments isarising ~~automatically~~from ~~extended~~the ~~under~~Acquisition (referred ~~certain~~to ~~circumstances~~as “successor”).

~~On January 31, 2005, in conjunction with the Acquisition, the Board of Directors of Holdings~~Overview Corp. and optionees under the SOP adopted an Option Modification Agreement (“OMA”). Under the terms of the OMA, immediately prior to the Acquisition, the SOP plan was terminated, and on June 24, 2005, a cash payment representing all outstanding options granted or ungranted, but authorized under the terms of the SOP, together with certain amounts due and anticipated under other long term compensation plans was made in the amount of $30.2 million and was recorded as compensation expense prior to the Acquisition.

The Company is organized as a holding company with all of its operations conducted through subsidiaries in the waste and energy services business. As of June 24, 2005, Covanta purchased 100% of the stock of Covanta ARC Holdings. Covanta also conducts its operations through subsidiaries in the waste and energy services business, and the Company’s management, and that of its subsidiaries, is now controlled by Covanta.

The Company has issued its 8.50% Series B Senior Secured Notes due 2010 (“Senior Notes”). In order to pay periodic debt service when due on the Senior Notes, the Company relies on cash distributions from its subsidiaries. Its ability to pay such debt service is dependent upon the ability of its operating subsidiaries to generate cash flow for distributions, and upon the ability of its intermediate subsidiary, Covanta ARC LLC (“Covanta ARC”), to satisfy financial and other covenants applicable to it under its debt arrangements. The Company has historically received sufficient cash distributions to pay periodic debt service on the Senior Notes. For additional detail regarding risks attendant to the businesses of the Company’s operating subsidiaries, see “Risk Factors” in Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.

The Company’s quarterly operating income within the same fiscal year typically differs substantially due to seasonal factors, primarily as a result of the timing of scheduled plant maintenance. The Company has typically experienced lower operating income from its projects during the first six months of each year, and higher operating income during the second six months of each year.

The following discussion of the Company’s financial condition and operating results should be read in conjunction with the condensed consolidated financial statements and related notes appearing in this Quarterly Report on Form 10-Q, and in its Annual Report on

~~The~~Form 10-K ~~Company~~for ~~has~~the ~~applied~~year ~~the~~ended ~~recognition~~December 31, ~~provisions~~2005, ofwhich ~~Accounting~~includes ~~Principles~~the ~~Board~~financial ~~Opinion~~statements ~~No.~~of 25Covanta ~~and related interpretations in accounting for its stock~~Ref-~~based~~Fuel ~~compensation~~Holdings ~~plans.~~LLC, ~~No compensation~~and ~~cost had been recognized for~~ the ~~stock~~supplemental ~~option~~information ~~plan~~that ~~prior to its termination~~follows.

~~Item 2. Management’s Discussion and Analysis of Financial Condition and~~ Results of Operations

~~Cautionary~~ The ~~Note~~results ~~Regarding~~of ~~Forward-Looking~~operations ~~Statements~~for the three months ended March 31, 2006 are not comparable to the Company’s results of operations for the three months ended March 31, 2005, due to revaluation of the Company’s balance sheet as of June 24, 2005 in connection with Covanta’s acquisition of Covanta ARC Holdings.

~~Certain~~The ~~statements~~Company inbelieves ~~the~~that ~~Quarterly~~an ~~Report~~understanding onof ~~Form~~its ~~10-Q~~reported ~~may~~results, ~~constitute~~trends ~~“forward-looking”~~and ongoing ~~statements~~performance asis ~~defined~~enhanced inby ~~Section 27A~~presenting ofresults ~~the~~on ~~Securities~~a ~~Act~~pro offorma ~~1933~~basis ~~(the~~as ~~“Securities~~if ~~Act”), Section 21E of~~ the ~~Securities~~acquisition ~~Exchange Act~~ of ~~1934 (the “Exchange Act”), the Private Securities Litigation~~Covanta ~~Reform~~ARC ~~Act~~Holdings ~~of 1995 (the “PSLRA”) or in releases made~~ by ~~the~~Covanta ~~Securities~~occurred ~~and~~on ~~Exchange Commission (“SEC”)~~January 1, ~~all as may be amended from time to time~~2005. ~~Such~~This ~~forward~~pro ~~looking~~forma ~~statements~~supplemental ~~involve~~data ~~known and~~is ~~unknown~~presented ~~risks,~~because ~~uncertainties~~the ~~and~~Company ~~other~~believes ~~important factors~~ that ~~could~~it ~~cause~~provides ~~the~~a ~~actual~~more ~~results, performance~~useful orpresentation ~~achievements~~ of ~~MSW Energy Holdings LLC (~~the “Company~~”) and its subsidiaries, or~~’s ~~industry~~financial ~~results,~~condition tothan ~~differ~~does ~~materially~~the ~~from~~data ~~any~~included ~~future~~in ~~results, performance or achievements expressed or implied by such forward-looking statements. Statements that are not~~ historical ~~fact are~~financial ~~forward-looking~~ statements. ~~Forward~~As ~~looking~~a ~~statements~~result ~~can be identified by, among other~~of ~~things,~~ the ~~use of forward-looking language~~Acquisition, ~~such as~~ the ~~words~~Company’s ~~“plan”,~~balance ~~“believe”,~~sheet ~~“expect”, “anticipate”,~~was ~~“intend”,~~revalued ~~“estimate”,~~as ~~“project”,~~of ~~“may”~~June 24, ~~“will”,~~2005. ~~“would”,~~These ~~“could”,~~results ~~“should”, “seeks”,~~are orpresented ~~“scheduled~~because ~~to”,~~the orCompany ~~other~~believes ~~similar~~they ~~words,~~may orbe ~~the~~useful ~~negative~~in ofmeasuring ~~these~~its ~~terms~~ability orto ~~other~~meet ~~variations of~~debt ~~these~~service ~~terms~~obligations, orbut ~~comparable~~they ~~language,~~are ornot bynecessarily ~~discussion~~indicative of ~~strategy~~actual orresults ~~intentions.~~and ~~These~~should ~~cautionary~~not be ~~statements~~considered ~~are~~as ~~being~~an ~~made~~alternative ~~pursuant~~ to ~~the~~cash ~~Securities~~flow ~~Act,~~from ~~the~~operating ~~Exchange~~activities ~~Act~~as ~~and~~a ~~the~~measure ~~PSLRA with the intention~~ of ~~obtaining the benefits of the “safe harbor” provisions of such laws~~liquidity. The ~~Company~~ ~~cautions~~Company’s ~~investors~~consolidated ~~that~~results ~~any~~of ~~forward-looking~~operations, ~~statements~~as ~~made~~reported byand ~~the~~where ~~Company~~applicable, ~~are~~on ~~not~~a ~~guarantees~~pro orforma ~~indicative~~basis, ofare ~~future~~summarized ~~performance.~~in ~~Important~~the ~~assumptions~~tables and ~~other~~discussions ~~important~~below. ~~factors~~The ~~that~~pro ~~could cause~~forma ~~actual~~adjustments ~~results~~are todescribed on ~~differ~~page ~~materially~~20. ~~from~~The ~~those~~pro ~~forward-looking~~forma ~~statements~~financial ~~with~~information ~~respect~~is topresented ~~the Company,~~for ~~include,~~informational ~~but~~purposes ~~are~~only ~~not limited to, the risks~~ and ~~uncertainties affecting their businesses~~ ~~described~~is innot ~~Item 1~~indicative of the ~~Company’s~~results ~~Annual~~of ~~Report~~operations onthat ~~Form~~would ~~10-K~~have ~~for the year ended December 31,~~been ~~2004~~achieved ~~and~~if ~~in other securities filings by~~ the ~~Company,~~Acquisition ~~and in Item 1 of Covanta Holding Corporation’s~~had ~~Annual~~taken ~~Report~~place on ~~Form 10-K~~January 1, as2005 ~~amended,~~or ~~for~~that ~~the~~may ~~year~~result ~~ended December 31, 2004 and~~ in ~~other securities~~the ~~filings by Covanta Holding Corporation~~future.

~~Although~~Results the Company believes that its plans, intentions and expectations reflected in or suggested by such forward-looking statements are reasonable, actual results could differ materially from a projection or assumption in any of ~~its~~Operations ~~forward-looking~~— ~~statements.~~Three ~~The~~Months ~~Company’s~~Ended ~~future financial condition and results of operations~~March 31, as2006 ~~well as any forward-looking statements, are subject to change and inherent risks and uncertainties~~vs. ~~The~~Three ~~forward-looking~~Months ~~statements~~Ended contained in this Quarterly Report on Form 10-Q are made only as of the date hereof and the Company does not have or undertake any obligation to update or revise any forward-looking statements whether as a result of new informationMarch 31, ~~subsequent events or otherwise, unless otherwise required by law.~~2005

Additional Information


	For the Three Months Ended March 31,
	Reported				Pro Forma
	2006		2005		2006		2005
	(Unaudited, in thousands of dollars)
Operating Revenues
Waste and service revenues	$	74,501	$	72,473	$	74,501	$	73,142
Electricity and steam sales		42,940		40,284		42,940		40,284

Total operating revenues		117,441		112,757		117,441		113,426

Operating Expenses
Plant operating expenses		63,842		56,715		63,842		58,422
Depreciation and amortization expense		30,308		29,738		30,308		29,906
Net interest expense on project debt		6,887		7,318		6,887		7,955
General and administrative expenses		6,604		6,273		6,604		5,871
Loss on asset retirement		—		1,386		—		1,386

Total operating expenses		107,641		101,430		107,641		103,540

Operating income	$	9,800	$	11,327	$	9,800	$	9,886

~~The~~Comparison ~~following discussion addresses the financial condition~~ of ~~the~~Reported ~~Company~~Results ~~as of September 30, 2005, and its results of operations~~ for the ~~three~~Three ~~and~~Months ~~nine~~Ended ~~months ended September~~March 3031, ~~2005, compared~~2006 ~~with the same periods last year~~vs. ItThree ~~should~~Months ~~be read in conjunction with the Company’s~~Ended Unaudited Consolidated Financial Statements and Notes thereto for the periods ended September 30, 2005 and 2004 also contained in this report. It should also be read in conjunction with the Company’s Audited Consolidated Financial Statements and Notes thereto for the year ended December 31, 2004 and Management’s Discussion and Analysis included in the Company’s 2004 Annual Report on Form 10-K and in the quarterly reports on Form 10-Q for the periods ended March 31, 2005 ~~and June 30,~~ ~~2005, to which the reader is directed for additional information.~~

~~The~~Total ~~preparation~~Operating ofRevenues. ~~interim~~Total ~~financial~~operating ~~statements~~revenues ~~necessarily~~were ~~relies heavily on estimates~~$117.4 million ~~This and~~for ~~certain other factors, such as~~ the ~~seasonal nature of portions of the Company’s business as~~three ~~well~~months asended ~~competitive~~March 31, ~~and other market conditions~~2006, ~~call~~an ~~for~~increase ~~caution in estimating full year results based on interim results~~ of ~~operations~~$4.7 million ~~The~~when ~~preparation~~compared ~~of financial statements requires management~~ to ~~make estimates and assumptions that affect~~ the ~~reported~~same ~~amounts~~period ~~and~~in ~~classification of assets and liabilities and disclosure of contingent assets and liabilities at~~ the ~~date of the financial~~ ~~statements~~prior ~~and the reported amounts of revenues and expenses during the reporting period~~year. ~~Actual~~ ~~results could differ materially from those estimates.~~

~~Prior~~Waste and toservice ~~the~~revenues ~~Equalization~~increased ~~Transactions~~by ~~described~~$2.0 million indue ~~Note~~primarily 1 to ~~the Company’s Unaudited~~ ~~Consolidated~~favorable ~~Financial~~pricing ~~Statements,~~during the ~~Company’s~~three ~~investment~~months inended ~~Covanta~~March 31, ~~Ref-Fuel~~2006, compared ~~Holdings~~to ~~LLC (“Covanta~~the ~~Ref-Fuel~~same ~~Holdings”),~~period ~~formerly~~in ~~Ref-Fuel~~2005. Electricity ~~Holdings~~and ~~LLC,~~steam ~~was~~sales increased ~~accounted~~by $2.7 million for ~~using~~ the ~~equity method.~~three Asmonths aended March 31, ~~result~~2006, ofcompared to the ~~Equalization~~same ~~Transactions,~~period ~~the~~in ~~Company~~2005 ~~has~~due primarily ~~effective~~to ~~control~~improved ofenergy ~~Covanta~~pricing.

Total Operating Expenses. Total operating expenses were $107.6 million for the three months ended March 31, 2006, an increase of $6.2 million when compared to the same period in the prior year due primarily to higher levels of maintenance costs and increased compensation expense.

Operating Income. Total operating income was $9.8 million for the three months ended March 31, 2006, a decrease of $1.5 million for the same period in 2005.

Comparison of Pro Forma Results for the Three Months Ended March 31, 2006 vs. Three Months Ended March 31, 2005

Total Operating Revenues. Total operating revenues were $117.4 million for the three months ended March 31, 2006, an increase of $4.0 million over the comparable prior year period.

~~Ref-Fuel~~Waste ~~Holdings~~ and asservice ofrevenues ~~April~~were $74.5 ~~30,~~million ~~2004~~for isthe ~~consolidating~~three ~~its~~months ~~results~~ended March 31, 2006, an increase of $1.4 million ~~All~~when ~~significant~~compared to the same period in 2005. The ~~intercompany~~increase ~~transactions~~in waste and ~~accounts~~service ~~have~~revenue ~~been~~was ~~eliminated~~primarily attributable to favorable pricing during the three months ended March 31, 2006 when compared to the same period in 2005.

~~Effective~~Electricity ~~June 24,~~and ~~2005,~~steam ~~Covanta~~sales ~~Holding~~were ~~Corporation~~$42.9 million ~~(“CHC”),~~for ~~formerly~~the ~~know~~three asmonths ~~Danielson Holding~~ended ~~Corporation~~March 31, ~~a Delaware corporation~~2006, ~~through its wholly-owned subsidiary, Covanta Energy~~an ~~Corporation,~~increase ~~a Delaware corporation (“Covanta”), acquired all~~ of ~~the issued and outstanding shares of capital stock of Covanta ARC Holdings Corp (“Holdings Corp~~$2.~~”),~~7 million ~~formerly~~compared ~~American Ref-Fuel Holdings Corp., the Company’s direct and indirect owner, (the Acquisition). The Acquisition was made pursuant~~ to the ~~terms~~same ofperiod ain ~~Stock Purchase Agreement, dated as of January 31,~~ 2005 ~~among CHC,~~. ~~Holdings~~This ~~Corp.~~increase ~~and~~was ~~its~~primarily ~~owners~~attributable ~~(the~~to ~~“Purchase~~improved ~~Agreement”).~~energy Aspricing ain ~~result~~2006 ~~of the Acquisition, CHC, through Covanta,~~ as ~~CHC’s~~compared ~~permitted~~to ~~designee and assignee under~~ the ~~Purchase Agreement, now owns~~same ~~100%~~period ofin ~~the voting securities of Holdings Corp~~2005.

~~CHC,~~Plant ~~through~~Operating ~~Covanta,~~Expenses. ~~paid~~Plant operating expenses were $~~747~~63.8 million ~~in cash~~ for ~~transaction costs and for~~ the ~~shares~~three ofmonths ~~Holdings~~ended ~~Corp.~~March 31, ~~and~~2006, ~~assumed~~an ~~the~~increase ~~consolidated net debt~~ of ~~Holdings Corp., which was approximately~~ $15.34 ~~billion~~million as ofcompared ~~June 24,~~to ~~2005. Upon consummation of~~ the ~~Acquisition,~~prior ayear ~~change~~period. inThe ~~ownership occurred,~~increase ~~and~~was inprimarily ~~accordance~~due ~~with~~to ~~Emerging~~higher ~~Issues~~levels ~~Task Force (“EITF”) Topic D-97, “Push-Down Accounting,” the Company’s financial statements reflect the effects~~ of ~~its~~maintenance ~~change in ownership and~~costs ~~CHC’s basis in the net assets~~ and ~~liabilities~~increased ~~acquired.~~compensation Asexpense ain ~~result,~~ the ~~statement~~current ~~of operations and the statement of cash flows for the~~ period ~~from~~as ~~January 1,~~compared ~~2005 through June 24, 2005 reflect the results of the Company prior~~ to ~~purchase accounting adjustments and~~ the ~~statement of operations and statement of cash flows for the~~ period from ~~June 25, 2005 through September 30, 2005, reflect~~ the ~~impact~~prior ~~of purchase accounting adjustments arising from the Acquisition~~year.

~~Executive~~Net Interest ~~Summary~~Expense on Project Debt. Net interest expense on project debt decreased approximately $1.1 million for the three months ended March 31, 2006 primarily as a result of lower project debt, as compared to the three months ended March 31, 2005.

~~The~~Pro ~~Company~~Forma ~~is organized as a holding company with all of its operations conducted through~~Reconciliations subsidiaries in the waste and energy services business. As of June 24, 2005, Covanta purchased 100% of the stock of Holdings Corp. Covanta also conducts its operations through subsidiaries in the waste and energy services business, and the Company’s management, and that of its subsidiaries, is now controlled by Covanta.

The Company has issued its 8.50% Series B Senior Secured Notes due 2010 (“Senior Notes”). In order to pay periodic debt service when due on the Senior Notes, the Company relies on cash distributions from its subsidiaries. Its ability to pay such debt service is dependent upon the ability of its operating subsidiaries to generate cash flow for distributions, and upon the ability of its intermediate subsidiary, Covanta ARC LLC (“Covanta ARC”), formerly American Ref-Fuel Company LLC, to satisfy financial and other covenants applicable to it under its debt arrangements. The Company has historically received sufficient cash distributions to pay periodic debt service on the Senior Notes. For additional detail regarding risks attendant to the businesses of the Company’s operating subsidiaries, see “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.


	Reported Three					Pro Forma Three
	Months Ended		Pro Forma			Months Ended
	March 31, 2005		Adjustments			March 31, 2005
	(Unaudited, in thousands of dollars)
Operating Revenues
Waste service revenues	$	72,473	$	669		$	73,142
Electricity and steam sales		40,284		—			40,284

Total operating revenues		112,757		669			113,426

Operating Expenses
Plant operating expenses		56,715		1,707			58,422
Depreciation and amortization expense		29,738		168			29,906
Net interest expense on project debt		7,318		637			7,955
General and administrative expenses		6,273		(402	)		5,871
Loss on asset retirements		1,386		—			1,386

Total operating expenses		101,430		2,110			103,540

Operating income	$	11,327	$	(1,441	)	$	9,886

~~The~~Notes ~~following~~To ~~discussion~~Pro ofForma ~~the Company’s financial condition and operating results should be~~Reconciliations read in conjunction with the consolidated financial statements and related notes appearing in the Quarterly Report on Form 10-Q, and in its Annual Report on Form 10-K for the year ended December 31, 2004, which includes the financial statements of Covanta Ref-Fuel Holdings, and the supplemental information that follows.

Pro Forma Assumptions

The unaudited pro forma condensed combined financial statements reflect the following assumptions:

•

Covanta, through Covanta Energy, purchased 100% of the issued and outstanding shares of Covanta ARC Holdings’ capital stock on January 1, 2005 following the same terms as the Acquisition. As a result of this assumption, the assets and liabilities of the Company were assumed to be stated at their acquired fair value as of January 1, 2005.

Pro Forma Adjustments

The following is a summary of the pro forma adjustments made:

	•		Plant operating expenses: To record as rent expense the net impact of the change in the fair value of the Company’s lease of the Delaware Valley facility as of January 1, 2005.

	•		Depreciation and amortization expense: To reverse historical depreciation and amortization expense and record pro forma depreciation and amortization expense based on fair values assigned to the Company’s property, plant and equipment and amortizable intangible assets as part of the Acquisition.

	•		General and administrative expenses: To reverse the compensation expense associated with the Company’s compensation and related expenses of its executives in the periods prior to the Acquisition date. In addition, the Company’s expense associated with its

~~Operating~~headquarters ~~Results~~ was also removed and an estimated allocation of overhead expenses for certain Covanta key senior management, as well as building services was added. • Net interest expense on project debt: To reverse the prior amortization of the project debt and to record the impact of the fair value adjustment as a result of the Acquisition. • Interest expense: To reverse the Company’s pre-acquisition period amortization of deferred financing costs and to record the impact of the fair value adjustment to the intermediate debt of the Company.

~~The following~~Liquidity summarizes the historical financial information for the Company for the period from June 25, 2005 through September 30, 2005, the period from January 1, 2005 through June 24, 2005, the three months ended September 30, 2005 and ~~the~~Capital ~~three months and nine months ended~~Resources ~~September 30, 2004 (unaudited, in thousands of dollars):~~

							For the Period
	For the three			For the Three			from June 25,			For the Period			For the Nine
	Months Ended			Months Ended			Through			From January 1,			Months Ended
	September 30,			September 30,			September 30,			Through June			September 30,
	2005			2004			2005			24, 2005
													2004
Statement of Operations Data:
Net revenues	$	125,201		$	124,672		$	133,861		$	228,452		$	205,038
Equity in net earnings of Covanta Ref-Fuel Holdings		—			—			—			—			6,545
Net interest expense on project debt		(7,692	)		(7,526	)		(8,150	)		(13,964	)		(12,546	)
Plant operating expenses		(47,028	)		(47,329	)		(49,797	)		(103,616	)		(80,883	)
Depreciation and amortization expense		(26,802	)		(29,457	)		(28,737	)		(57,032	)		(47,957	)
Administrative and general expense		(3,704	)		(5,444	)		(3,962	)		(39,745	)		(9,839	)
Interest income		350			285			388			1,076			440
Interest expense		(8,514	)		(9,143	)		(9,130	)		(17,553	)		(22,041	)
Minority interest in net income of subsidiary		(18,408	)		(15,502	)		(19,922	)		(3,637	)		(23,498	)
Gain (loss) on asset retirement		494			218			494			(519	)		(618	)
Income tax (provision) benefit		(5,963	)		(1,427	)		(6,440	)		2,761			(1,640	)
Net income (loss)	$	7,934		$	9,347		$	8,605		$	(3,777	)	$	13,001
Cash Flow Data:
Cash provided by operating activities							$	56,949		$	39,586		$	104,964
Cash (used in) provided by investing activities								(2,718	)		(22,577	)		31,724
Cash (used in) provided by financing activities								(35,850	)		(81,783	)		(67,638	)

As of March 31, 2006, the Company’s assets related primarily to its indirect membership interest in the ARC operating facilities. Covanta ARC and the ARC operating facilities have historically generated adequate funds from operations for working capital requirements, capital spending, debt repayments and dividend payouts. Accordingly, the Company’s performance and significant source of future liquidity will depend solely on cash distributions, if any from these entities. The Company will need to continue to receive sufficient ongoing cash distributions from these entities in order to pay principal and interest on the Senior Notes, however such distributions are not assured. Interest only is payable throughout the term of the Senior Notes with principal and unpaid interest payable at maturity on September 1, 2010.

Balance Sheet Data:	September 30, 2005		December 31, 2004
Total assets	$	2,731,642	$	2,055,731
Total debt		1,187,079		1,246,013
Minority interest in consolidated subsidiaries		771,043		365,123
Total members’ equity		402,216		131,348

Sources and Uses of Cash for the Three Months Ended March 31, 2006

~~The following pro forma supplemental financial data presents certain information relating to~~A ~~the~~condensed ~~Company,~~statement as if the Acquisition and the Equalization Transactions had occurred on January 1, 2004. This pro forma supplemental data is presented because the Company believes that it provides a more useful presentation of the Company’s financial condition than does the data included in historical financial statements. Historical financial statements for 2004 include equity earnings for the four months ended April 30, 2004, from the Company’s 49.8% interest in Covanta Ref-Fuel Holdings, and consolidated results thereafter. In addition, and as a result of the Acquisition, the Company’s balance sheet was revalued as of June 24, 2005. These results are presented because the Company believes they may be useful in measuring its ability to meet debt service obligations, but they are not necessarily indicative of actual results and should not be considered as an alternative to cash ~~flow~~flows ~~from~~were ~~operating activities~~ as ~~a measure of liquidity.~~follows:


	For the Three Months Ended
	March 31,
	2006			2005
	(Unaudited, in thousands of dollars)
Net cash provided by (used in):
Operating Activities	$	26,293		$	36,315
Investing Activities		(10,121	)		(16,040	)
Financing Activities		(33,136	)		(57,342	)

Net decrease in cash and cash equivalents		(16,964	)		(37,067	)
Cash and cash equivalents, beginning of fiscal year		48,895			86,310

Cash and cash equivalents, end of quarter	$	31,931		$	49,243

Operating Activities

The net cash provided by operating activities was $26.3 million for the three months ended March 31, 2006, compared to $36.3 million for the same period in 2005. The decline in net cash provided by operating activities was primarily attributable to changes in working capital as well as a reduction to accrued interest.

Investing Activities

The Company’s net cash used in investing activities was $10.1 million for the three months ended March 31, 2006, compared to $16.0 million for the same period in 2005. Capital expenditures were the primary use of cash from investing activities and were $10.1 million and $17.1 million for the three months ended March 31, 2006 and 2005, respectively.

Financing Activities

The net cash used in financing activities was $33.1 million for the three months ended March 31, 2006, compared to $57.3 million for the same period in 2005. Cash used in the current quarter primarily related to $17.7 million of repayments of project debt, a $14.0 million repayment of intermediate debt, distributions of $16.1 million to the Company’s members and $16.4 million paid to holders of minority interests. This use of cash was partially offset by a net receipt of $31.1 million relating to restricted cash and investment activity which was used to fund project debt payments. Cash used in the same quarter of 2005 primarily related to $29.1 million of repayments of project debt, distributions of $25.3 million to the Company’s members and $19.6 million paid to holders of minority

~~Supplemental~~interests. This ~~Pro~~use ~~Forma~~of ~~Information~~cash was partially offset by a net receipt of $16.7 million relating to restricted cash and investment activity which was used to fund project debt payments.

The following table results represent the pro forma results for the three and nine months ended September 30, 2005 and 2004 as if the Acquisition and the Equalization Transactions had occurred on January 1, 2004. These results are presented for informational purposes only, and are not necessarily indicative of the actual results that would have resulted had the Acquisition and the Equalization Transactions actually occurred on January 1, 2004 (unaudited, in thousands of dollars):

	Actual			Pro Forma			Pro Forma			Pro Forma
	For the Three			For the Three			For the Nine			For the Nine
	Months Ended			Months Ended			Months Ended			Months Ended
	September 30, 2005			September 30, 2004			September 30, 2005			September 30, 2004
Revenues
Waste disposal and related services revenues	$	81,719		$	81,606		$	236,192		$	238,574
Electricity and steam sales		43,482			43,066			126,121			123,085
Total operating revenues		125,201			124,672			362,313			361,659
Expenses
Plant operating expenses		47,028			48,838			156,551			165,194
Depreciation and amortization		26,802			27,054			80,389			80,808
Net interest expense on project debt		7,692			8,952			23,587			26,945
General and administrative		3,704			2,697			14,668			11,747
Loss on asset retirements		(494	)		(218	)		25			960
Operating income		40,469			37,349			87,093			76,005
Interest income		350			284			1,464			732
Interest expense		(8,514	)		(9,044	)		(27,099	)		(28,305	)
Net income (loss) before minority interest and income taxes	$	32,305		$	28,589		$	61,458		$	48,432

Comparison of Actual Results for the Three Months Ended September 30, 2005 and Unaudited Pro Forma Results for the Three Months Ended September 30, 2004

Total Operating Revenues. Total actual net revenues were $125.2 million for the three months ended September 30, 2005, an increase of $0.5 million over the prior year pro forma results. Electricity and steam revenues were $43.5 million for the period, an increase of $0.4 million, primarily the result of increased steam sales.

Waste disposal and related services revenues increased approximately $0.1 million, which was caused by a combination of stronger pricing, increasing revenue approximately $7.7 million, off-set by decreased volumes, causing a decline of approximately $7.2 million.

Plant Operating Expenses. Plant operating expenses were $47.0 million for the three months ended September 30, 2005, a decrease of $1.8 million as compared to the prior year pro forma period primarily due to reductions in hauling services and related expense.

Depreciation and Amortization. Depreciation and amortization remained consistent at approximately $27 million for the three months ended September 30, 2005, as compared with the prior year pro forma period.

Net interest on project debt. Interest on project debt decreased approximately $1.3 million mainly as a result of lower project debt, as compared to the three months ended September 30, 2004.

General and Administrative. General and administrative expenses increased $1.0 million for the three months ended September 30, 2005 as compared to the prior year. This increase resulted from higher legal and audit fees in 2005 as compared to 2004.

Comparison of the Unaudited Pro Forma Nine Months Ended September 30, 2005 and 2004, respectively

Total Operating Revenues. Total pro forma net revenues were $362.3 million for the nine months ended September 30, 2005, an increase of $0.7 million over the prior year pro forma results. Electricity and steam revenues were $126.1 million for the period, an increase of $3.0 million. Of this increase, $2.1 million resulted from improved energy pricing in 2005 and $0.5 million resulted from increased electricity sold. This increase in electricity sold during 2005 resulted primarily from a planned turbine generator shut down

to conduct scheduled maintenance in May 2004 that did not recur in the nine months ended September 30, 2005. In addition, the steam revenues increased by $0.4 million for the nine months ended September 30, 2005 as compared to the prior period.

The increase in the electricity and steam sales was offset by a decrease in waste disposal and related services revenues, which decreased in the first nine months of 2005 by $2.3 million from the prior year’s period. The decrease resulted from an ash marketing arrangement which ended in the first quarter of 2004. This ash marketing arrangement generated approximately $1.6 million of revenue in the first nine months of 2004, and no comparable revenues were recorded for the 2005 period. In addition, metals revenues decreased during the first nine months of 2005 by approximately $0.8 million. Waste pricing for the nine months ended September 30, 2005 increased approximately $3.8 million, which was off-set by volume decreases of $3.7 million, causing a net increase of $0.1 million. The decreased volumes resulted from a decrease in hauling services, which created lower capacity at the facilities.

Plant Operating Expenses. Plant operating expenses were $156.6 million for the pro forma nine months ended September 30, 2005, a decrease of $8.6 million as compared to the prior year period. During 2004, one facility performed a planned major turbine overhaul, which increased operating expenses in 2004, as compared to 2005. The ash marketing arrangement had certain operating expenses associated with it, and as that arrangement was cancelled in 2004, these additional operating expenses were not incurred during the comparable period for 2005. In addition, decreased hauling services resulted in significantly lower hauling expenses, which further reduced operating expenses.

Depreciation and Amortization. Depreciation and amortization remained consistent at approximately $80.4 million for the pro forma nine months ended September 30, 2005, as compared with the prior year pro forma period.

Net interest on project debt. Interest on project debt decreased approximately $3.4 million mainly as a result of lower project debt, as compared to the nine months ended September 30, 2004.

General and Administrative. General and administrative expenses increased $3.0 million for the nine months ended September 30, 2005 as compared to the prior year. This increase resulted from higher legal and audit fees in 2005 as compared to 2004.

Debt Covenant

The indenture under which ~~our~~the Senior Notes were issued ~~contain~~contains certain restrictions which will, among other things, prevent usthe Company from incurring additional indebtedness, making ~~restricted~~ restricted payments, making investments, selling assets or merging with other companies, subject to ~~certain~~ certain exceptions. The Senior Notes are redeemable with the payment of certain stated make whole ~~amounts~~ amounts before September 1, 2007 and, thereafter, at the face amount of the Senior Notes, plus ~~accrued~~ accrued interest. Restricted ~~Payments~~payments are not permitted unless certain ratio covenants based on ~~our~~the proportionate ownership of Covanta Ref-Fuel Holdings have been met. At ~~September~~March 3031, ~~2005~~2006, the Company was is in compliance with all of its debt covenants.

Critical Accounting Policies

~~The~~In ~~Company’s~~preparing ~~management~~its iscondensed ~~responsible for the~~ consolidated financial statements ~~and~~in ~~has~~accordance with U.S. generally ~~evaluated~~accepted accounting principles the ~~accounting~~Company ~~policies~~is required to beuse ~~used~~its judgment in ~~their~~making ~~preparation.~~estimates ~~The~~and assumptions ~~Company’s~~that ~~management believes~~affect ~~these~~the ~~policies~~amounts toreported bein ~~reasonable~~its financial statements and ~~appropriate~~related notes. Management ~~The~~bases ~~following~~its ~~discussion~~estimates ~~identifies~~on ~~those accounting~~historical ~~policies~~experience and on various other assumptions that are believed to be ~~critical~~reasonable inunder the ~~preparation~~circumstances, the results of which form the ~~consolidated~~basis for making ~~financial~~judgments ~~statements,~~about the ~~judgments~~carrying value of assets and ~~uncertainties~~liabilities ~~affecting~~that ~~the~~are ~~application~~not readily apparent from other sources. Many of ~~those~~the Company’s critical accounting policies, are those subject to significant judgments and ~~the~~uncertainties ~~possibility~~which ~~that~~could ~~materially~~potentially ~~different~~result ~~amounts~~in ~~will~~materially bedifferent ~~reported~~results under different conditions and assumptions. Future events rarely develop exactly as forecast, and the orbest ~~using~~estimates ~~different~~routinely ~~assumptions~~require adjustment. See the Company’s Discussion of Critical Accounting Policies in Item 7 of its Annual Report on Form 10-K for the year ended December 31, 2005.

~~Principles~~Recent ofAccounting ~~Consolidation. The accompanying consolidated financial statements include the~~Pronouncements Company’s accounts and the accounts of its wholly-owned subsidiaries and Covanta Ref-Fuel Holdings. Prior to the Equalization Transactions, the investment in Covanta Ref-Fuel Holdings was accounted for using the equity method. As a result of the Equalization Transactions, the Company had effective control of Covanta Ref-Fuel Holdings and, as of April 30, 2004, have consolidated its results. All significant intercompany transactions and accounts have been eliminated. The minority interests reported relates to Duke’s 0.2% interest, which was purchased by MSW Energy Holdings on September 30, 2005, and MSW Energy Holdings II’s 50% interest in Covanta Ref-Fuel Holdings.

~~Use of Estimates in Preparing Financial Statements. The preparation of financial statements in~~See ~~conformity~~Note ~~with~~2 ~~GAAP~~— ~~requires~~Significant ~~management~~Accounting toPolices ~~make estimates~~ and ~~assumptions~~New ~~that~~Accounting ~~affect:~~Pronouncements ~~(a) the reported amounts~~ of ~~assets and liabilities at~~ the ~~date~~Notes ofto ~~the~~Condensed ~~financial statements; (b) the~~Consolidated ~~disclosures~~Financial ofStatements ~~contingent~~for ~~assets~~information ~~and~~related ~~liabilities~~to atnew ~~the~~accounting ~~date of the financial statements; and (c) the reported amounts of revenues and expenses recognized during the reporting period~~pronouncements. ~~Significant~~ ~~management estimates include the estimated~~

23ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

~~Table~~ The ofitem ~~Contents~~has been intentionally omitted as allowed under General Instruction H(2)(c) on Form 10-Q.

~~lives~~ITEM ~~of long-lived assets, allowances for doubtful accounts receivable, liabilities for self-insurance and certain landfill liabilities~~4. ~~Such~~CONTROLS ~~estimates~~AND ~~may be subsequently revised as~~PROCEDURES ~~necessary when additional information becomes available. Actual results could differ from those estimates.~~

Equity Method Investment. The investment in Covanta Ref-Fuel Holdings was accounted for using the equity method of accounting prior to the Equalization Transactions. As a result, the accompanying consolidated statements of operations include the Company’s share of net earnings in “Equity in net earnings of Covanta Ref-Fuel Holdings” for the period up to April 30, 2004.

Effect of New Accounting Standard

On December 16, 2004, the Financial Accounting Standards Board (“FASB”) issued FASB Statement No. 123(R), “Share-Based Payment” (“SFAS 123(R)”). SFAS 123(R) revises SFAS 123 and requires companies to expense the fair value of employee stock options and other forms of stock-based compensation. This requirement represents a change from the Company’s current practice. On April 14, 2005, the SEC announced that SFAS 123(R) is now effective for public companies for annual, rather than interim, periods that begin after June 15, 2005. As a result of the termination of Holdings Corp.’s stock plan, there will be no impact upon adoption of SFAS 123(R) on the Company (See Note 13).

Contractual Obligations and Commercial Commitments

The following table sets forth contractual obligations outstanding as of September 30, 2005 (unaudited, dollars in thousands):

													More
				Less than 1									than 5
Contractual Obligations	Total			Year			1—3 Years			3—5 Years			Years
Long-term debt principal obligations — project	$	709,557		$	42,648		$	112,468		$	132,557		$	421,884
Long-term debt principal obligations — intermediate		429,785			22,400			57,100			234,485			115,800
Total debt principal obligations of the Company		1,139,342			65,048			169,568			367,042			537,684
Less non-recourse debt to MSW Energy Holdings		(943,557	)		(65,048	)		(169,568	)		(171,257	)		(537,684	)
Total MSW Energy Holdings debt obligations		195,785			—			—			195,785			—
Long-term debt interest obligations — project		253,648			38,863			68,946			54,640			91,199
Long-term debt interest obligations — intermediate		160,143			30,852			56,836			49,797			22,658
Total debt interest obligations of the Company		413,791			69,715			125,782			104,437			113,857
Less non-recourse debt interest to MSW Energy Holdings		(330,583	)		(53,073	)		(92,499	)		(71,154	)		(113,857	)
Total MSW Energy Holdings debt interest obligations		83,208			16,642			33,283			33,283			—
Duke obligation		46,500			2,500			5,000			7,500			31,500
Operating lease obligations		151,043			14,122			27,694			42,608			66,619
Other long-term obligations		24,784			4,998			8,190			—			11,596
Less non-recourse lease and other obligation		(175,827	)		(19,120	)		(35,844	)		(42,608	)		(78,215	)
Total MSW Energy Holdings other obligations		46,500			2,500			5,000			7,500			31,500
Total MSW Energy Holdings contractual obligations	$	325,493		$	19,142		$	38,283		$	236,568		$	31,500

Table does not include premiums for debt in the amount of $47.7 million.

Impact of the Acquisition on the Company

In connection with the Acquisition, Covanta entered into new financing arrangements. The new financing arrangements are recourse to Covanta, CHC and certain of Covanta’s subsidiaries, excluding the Company and its subsidiaries. Covanta’s new financing arrangements contain restrictive covenants that may limit the Company’s ability to engage in certain activities, and which may be more restrictive than those restrictive covenants in existing indebtedness. These restrictions in Covanta’s new financing arrangements, subject to certain exceptions, further limit the Company’s ability to do the following, among other things:

• incur additional indebtedness; • create liens; • purchase or redeem capital stock; • make investments; • sell assets or consolidate or merge with or into other companies; • engage in transactions with affiliates; and • engage in new lines of business.

Failure to comply with those covenants could result in an event of default under Covanta’s new financing arrangements which, if not cured or waived, could result in the acceleration of some or all of its debt.

Covanta’s new financing arrangements include letter of credit facilities pursuant to which Covanta may make available letters of credit as required by its subsidiaries’ businesses, including the Company’s subsidiaries. The Company’s letter of credit facilities which existed prior to the Acquisition were cancelled as of June 24, 2005.

Item 4. Controls and Procedures

MSW Energy Holdings and Subsidiaries

As of the end of the period covered by this report, the Company’s management, with the participation of its Chief Executive Officer and Chief Financial Officer, have reviewed and evaluated the effectiveness of the Company’s disclosure controls and procedures, as required by Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934. Based upon the results of that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective to provide reasonable assurance that the information required to be disclosed by the Company in reports it files or submits under the Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.

The Company’s disclosure controls and procedures are designed to reasonably assure that information required to be disclosed by the Company in reports it files or submits under the Exchange Act of 1934 is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure and is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. The Company’s management, with the participation of its Chief Executive Officer and Chief Financial Officer, believes that its disclosure controls and procedures are effective to provide such reasonable assurance.

The Company’s management, including the Chief Executive Officer and Chief Financial Officer, believe that any disclosure controls and procedures or internal controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent ~~limitations in all control systems, they cannot provide~~ absolute assurance that all control issues and instances of fraud, if any, within the Company have been prevented or detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by unauthorized override of the control. The design of any systems of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Accordingly, because of the inherent limitations in a cost effective control system, misstatements due to error or fraud may occur and not be detected.

~~As a result of the Acquisition, the Company experienced reductions in and changes to~~22 accounting and finance staff. In addition, following the Acquisition, the Company’s internal controls over financial reporting and its disclosure controls and procedures, are expected to be integrated with those of CHC. The integration process may present challenges because CHC and the Company operate different software systems, and because of such staff reductions and changes. In addition, as of the filing of its Quarterly Report on Form 10-Q for the third quarter of 2005, CHC reported that a previously-reported material weakness in its internal controls over financial reporting had not yet been remediated. CHC’s reported material weakness, the net effect of which CHC reported was immaterial and was corrected prior to issuance of its 2004 Annual Report on Form 10-K, as amended, related principally to errors in certain accounting calculations that are similar to certain purchase accounting calculations that will be required in connection with the Acquisition. CHC’s efforts to remediate the reported material weakness, when coupled with the effort to integrate the controls of the Company, could adversely affect the effectiveness of the Company’s disclosure controls and procedures.

~~PART~~limitations IIin ~~OTHER~~all ~~INFORMATION~~control systems, they cannot provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been prevented or detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by unauthorized override of the control. The design of any systems of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Accordingly, because of the inherent limitations in a cost effective control system, misstatements due to error or fraud may occur and not be detected.

~~Item 1~~PART II. ~~Legal~~OTHER ~~Proceedings~~INFORMATION

~~Lower~~ITEM ~~Passaic River Study~~1. ByLEGAL ~~letters dated August 13, 2004 and May 3, 2005, USEPA notified~~PROCEEDINGS American Ref-Fuel Company of Essex County (“Essex”) that it was potentially liable under CERCLA Section 107(a) for response actions in the Lower Passaic River Study Area (“LPRSA”), a 17 mile stretch of river in northern New Jersey. Essex is one of at least 52 Potentially Responsible Parties (“PRPs”) named thus far. USEPA alleges that hazardous substances found in the LPRSA were being released from the Essex site, which abuts the river. USEPA’s notice letters state that Essex may be liable for costs related to a proposed $10 million study of the Lower Passaic River, for certain past costs incurred by USEPA totaling approximately $2.8 million, and for unspecified natural resource damages. Considering the history of industrial and other discharges into the LPRSA from other sources, including named PRPs, Essex believes any releases from its site to be de minimus; however, it is not possible at this time to predict that outcome with certainty or to estimate Essex’ ultimate liability in the matter, including for natural resource damages. Given the uncertainty, Essex has entered an arrangement with USEPA and the cooperating PRP group to settle the potential liability Essex might have for the $2.8 million in past costs incurred by USEPA, and for the $10 million cost of the study, by contributing $250,000 to the cost of the study and by agreeing to share in certain past and ongoing legal fees and other costs of the cooperating PRP group.

~~CMW~~Lower ~~Landfill.~~Passaic ~~Semass~~River ~~Partnership,~~Study. aBy ~~90%~~letters ~~owned~~dated ~~subsidiary of Ref-Fuel Semass~~August 13, ~~has~~2004 aand ~~waste management agreement (the “WMA”) dated~~ May 253, ~~1982~~2005, ~~as amended, with~~ the ~~Carver, Marion, Wareham~~ ~~Regional~~Environmental ~~Refuse~~Protection ~~Disposal~~Agency ~~District~~ (“~~CMW~~EPA”). ~~The~~notified ~~WMA~~the ~~allows~~Essex ~~Semass~~facility ~~Partnership~~that toit ~~utilize~~was apotentially ~~portion~~liable ofunder aCERCLA ~~landfill~~Section 107(~~the “CMW Landfill”~~a), ~~which~~for ~~CMW~~response ~~leases~~actions ~~from~~in ~~Wankinco River, Inc. (“Wankinco”). In March 1990,~~ the ~~Semass~~Lower ~~Partnership,~~Passaic ~~CMW~~River ~~and~~Study ~~Wankinco~~Area ~~entered into an agreement related to the CMW Landfill, as amended~~ (~~the~~ “~~Settlement Agreement~~LPRSA”), ~~which requires, among other things, the Semass~~a ~~Partnership~~17-mile tostretch ~~make~~of ~~annual~~river ~~deposits~~in ~~into~~northern anNew ~~environmental~~Jersey. ~~protection~~Essex ~~trust~~is ~~fund~~one ~~(the “Fund”) in lieu~~ of ~~obtaining~~at ~~environmental~~least ~~impairment~~52 ~~liability~~PRPs ~~insurance~~named ~~for~~thus ~~the CMW Landfill~~far. ~~The Semass~~ ~~Partnership~~EPA isalleged ~~required~~that ~~under~~hazardous ~~the~~substances ~~Settlement~~found ~~Agreement~~in ~~to deposit $500,000 annually into~~ the ~~Fund, payable~~LPRSA inwere ~~equal~~being ~~quarterly~~released ~~installments.~~from ~~Certain~~the ~~additional~~Essex ~~deposits are required subject to the~~site, ~~availability~~which ofabuts ~~cash in accordance with~~ the ~~Loan Agreement~~river. ~~The Semass Partnership~~EPA’s ~~obligation~~notice ~~to make~~letters ~~deposits~~stated ~~into~~that ~~the~~Essex ~~Fund~~may ~~ceases~~be ~~when~~liable ~~the~~for ~~Fund~~costs ~~reaches~~related to a proposed ~~balance of~~ $~~20.0~~10 million ~~unless~~study ~~the fund limit is increased by agreement~~ of the ~~parties,~~Lower orPassaic ~~absent such agreement~~River, byfor ~~arbitration,~~certain ~~wherein it~~past iscosts ~~determined~~incurred ~~the~~by ~~fund limit needs to be increased to adequately protect against environmental~~EPA ~~damage.~~totaling ~~Wankinco~~approximately ~~by letter dated March~~$2.8 ~~29,~~million ~~2005,~~ and ~~pursuant~~for tounspecified ~~its~~natural ~~rights~~resource ~~under~~damages. ~~the~~Considering ~~Settlement~~the ~~Agreement~~history ~~described~~of ~~above,~~industrial ~~has~~and ~~requested~~other adischarges ~~re-evaluation~~into of the ~~Fund~~LPRSA ~~limit~~from ~~and~~other ansources, ~~increase~~including ofnamed ~~such~~PRPs, ~~limit~~Essex ~~to $29.7 million. Management~~ believes ~~that~~any ~~the~~releases ~~$20.0 million~~from ~~fund limit is adequate for~~ its ~~intended~~ ~~purpose.~~site ~~Proceeds from the Fund are~~ to be ~~used~~de ~~primarily~~minimus ~~for remediation of the CMW Landfill~~ in ~~the~~comparison; ~~event~~however, ofit ~~environmental~~is ~~damage.~~not possible ~~The~~at ~~Semass~~this ~~Partnership~~time ~~and Wankinco are each entitled~~ to ~~receive~~predict ~~one-half~~that ofoutcome ~~the~~with ~~balance~~certainty ofor ~~the~~to ~~Fund~~estimate ~~upon~~Essex’s ~~final~~ultimate liability ~~closure~~in of the ~~CMW~~matter, ~~Landfill~~including ~~and receipt~~for ofnatural ~~required~~resource ~~governmental approvals~~damages. ~~During~~Given the ~~first~~uncertainty, ~~nine~~Essex ~~months of 2005 and the year ended~~has ~~December 31,~~entered ~~2004,~~into ~~the~~an ~~Semass~~arrangement ~~Partnership~~with ~~made~~EPA ~~the required quarterly deposits into the Fund~~ and ~~charged~~ ~~operations for one-half of~~ the ~~deposits~~cooperating ~~into~~PRP ~~the~~group ~~Fund,~~to ~~representing~~settle ~~one-half of~~ the ~~balance~~potential ofliability ~~the~~Essex ~~Fund~~might ~~which~~have ~~will~~for ~~be disbursed to Wankinco upon final closure of~~ the ~~CMW Landfill~~$2.8 million ~~Additional charges to operations may be required~~ in ~~future~~past ~~years~~costs ifincurred ~~any~~by ~~disbursements~~EPA, ~~are~~and ~~required~~for ~~from~~ the ~~Fund~~ ~~to remediate any environmental damages. To date, management is not aware of any such~~$10 ~~environmental~~million ~~damages.~~cost As of ~~September 30,~~the ~~2005 and December 31~~study, ~~2004,~~by ~~the~~contributing ~~balance in the Fund was approximately~~ $150.625 million ~~and~~to ~~$14.0 million,~~the ~~respectively,~~cost ~~and~~of ~~was~~the ~~included~~study inand ~~restricted~~by ~~cash~~agreeing ~~and~~to ~~long-term~~share ~~investments.~~in Acertain ~~corresponding~~past ~~liability,~~and ~~representing~~ongoing ~~approximately~~legal ~~one-half~~fees ~~of the deposits~~ and ~~related~~other ~~earnings~~costs inof the ~~Fund,~~cooperating ~~was~~PRP ~~included in other long-term liabilities~~group.

~~Item~~ CMW Landfill. Semass Partnership, a 90% owned subsidiary of Ref-Fuel Semass, has a waste management agreement (the “WMA”) dated May 525, 1982, as amended, with the Carver, Marion, Wareham Regional Refuse Disposal District (“CMW”). ~~Other~~The ~~Information~~WMA allows Semass Partnership to utilize a portion of a landfill (the “CMW Landfill”), which CMW leases from Wankinco River, Inc. (“Wankinco”).

ITEM 1A. RISK FACTORS

There have been no material changes in the Company’s risk factors from those disclosed in Item 1A of its Annual Report on Form 10-K for the year ended December 31, 2005.

ITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS

The item has been intentionally omitted as allowed under General Instruction H(2)(b) on Form 10-Q.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

The item has been intentionally omitted as allowed under General Instruction H(2)(b) on Form 10-Q.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The item has been intentionally omitted as allowed under General Instruction H(2)(b) on Form 10-Q.

ITEM 5. OTHER INFORMATION

None.

2724

~~Item~~ ITEM 6. ~~Exhibits~~EXHIBITS

(a) Exhibits
Exhibit
12		Statement re Computation of Ratio of Earnings to Fixed Charges
Number		Description
31(a)		15d-14(a) Certification of Anthony J. Orlando for MSW Energy Holdings LLC.
12		Statement re Computation of Ratio of Earnings to Fixed Charges.
31(b)		15d-14(a) Certification of Craig D. Abolt for MSW Energy Holdings LLC.
31.1		15d-14(a) Certification of Anthony J. Orlando for MSW Energy Holdings LLC.
31(c)		15d-14(a) Certification of Anthony J. Orlando for MSW Energy Finance Co., Inc.
31.2		15d-14(a) Certification of Craig D. Abolt for MSW Energy Holdings LLC.
31(d)		15d-14(a) Certification of Craig D. Abolt for MSW Energy Finance Co., Inc.
31.3		15d-14(a) Certification of Anthony J. Orlando for MSW Energy Finance Co., Inc.
32(a)		Section 1350 Certification of Anthony J. Orlando and Craig D. Abolt for MSW Energy Holdings LLC.
31.4		15d-14(a) Certification of Craig D. Abolt for MSW Energy Finance Co., Inc.
32(b)		Section 1350 Certification of Anthony J. Orlando and Craig D. Abolt for MSW Energy Finance Co., Inc.
32.1		Section 1350 Certification of Anthony J. Orlando and Craig D. Abolt for MSW Energy Holdings LLC.
32.2		Section 1350 Certification of Anthony J. Orlando and Craig D. Abolt for MSW Energy Finance Co., Inc.

2825

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, MSW Energy Holdings LLC has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


		MSW ENERGY HOLDINGS LLC

		By:		/s/ Craig D. Abolt

				Craig D. Abolt
				Senior Vice President and Chief Financial Officer

		By:		/s/ Thomas E. Bucks

				Thomas E. Bucks
				Vice President and Chief Accounting Officer

Date: ~~November~~May 94, ~~2005~~2006

2926

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, MSW Energy Finance Co., Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


		MSW ENERGY FINANCE CO., INC.

		By:		/s/ Craig D. Abolt

				Craig D. Abolt
				Senior Vice President and Chief Financial Officer

		By:		/s/ Thomas E. Bucks

				Thomas E. Bucks
				Vice President and Chief Accounting Officer

Date: ~~November~~May 94, ~~2005~~2006

3027

EXHIBIT INDEX

12		Statement re Computation of Ratio of Earnings to Fixed Charges
Exhibit
31(a)		15d-14(a) Certification of Anthony J. Orlando for MSW Energy Holdings LLC.
Number		Description
31(b)		15d-14(a) Certification of Craig D. Abolt for MSW Energy Holdings LLC.
12		Statement re Computation of Ratio of Earnings to Fixed Charges.
31(c)		15d-14(a) Certification of Anthony J. Orlando for MSW Energy Finance Co., Inc.
31.1		15d-14(a) Certification of Anthony J. Orlando for MSW Energy Holdings LLC.
31(d)		15d-14(a) Certification of Craig D. Abolt for MSW Energy Finance Co., Inc.
31.2		15d-14(a) Certification of Craig D. Abolt for MSW Energy Holdings LLC.
32(a)		Section 1350 Certification of Anthony J. Orlando and Craig D. Abolt for MSW Energy Holdings LLC.
31.3		15d-14(a) Certification of Anthony J. Orlando for MSW Energy Finance Co., Inc.
32(b)		Section 1350 Certification of Anthony J. Orlando and Craig D. Abolt for MSW Energy Finance Co., Inc.
31.4		15d-14(a) Certification of Craig D. Abolt for MSW Energy Finance Co., Inc.
32.1		Section 1350 Certification of Anthony J. Orlando and Craig D. Abolt for MSW Energy Holdings LLC.
32.2		Section 1350 Certification of Anthony J. Orlando and Craig D. Abolt for MSW Energy Finance Co., Inc.

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