##### Table of Contents



UNITED STATES SECURITIES AND
    EXCHANGE COMMISSIONWashington, D.C.
    20549
  Form 10-Q
  (Mark One)þ

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the quarter ended
    September 30, 2006ORo

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the transition period
    from          to   Commission



I.R.S. EmployerFile Number

Registrants and State of Incorporation or Organization

Identification No.0001261679

MSW Energy Holdings
    LLC

14-1873119Delaware0001261680

MSW Energy Finance Co.,
    Inc

20-0047886Delaware0001276518

MSW Energy Holdings II
    LLC

13-3213489Delaware0001276517

MSW Energy Finance Co. II,
    Inc

20-0400947Delaware   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 registrants (1) have
    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
    registrants were required to file such reports), and
    (2) have been subject to such filing requirements for the
    past
    90 days.  Yes þ     No o
  Indicate by check mark whether each 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:
    MSW Energy Finance Co., Inc:
    MSW Energy Holdings II LLC:
    MSW Energy Finance Co. II, Inc:

Large accelerated
    filer  o
    Large accelerated
    filer  o
    Large accelerated
    filer  o
    Large accelerated
    filer  o

Accelerated
    filer  o
    Accelerated filer  o
    Accelerated filer  o
    Accelerated filer  o

Non-accelerated
    filer  þ
    Non-accelerated
    filer  þ
    Non-accelerated
    filer  þ
    Non-accelerated
    filer  þ   Indicate by check mark whether any of the registrants are a
    shell company (as defined in
    Rule 12b-2
    of the Exchange
    Act).  Yes o No 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:
    MSW Energy Finance Co., Inc:
    MSW Energy Holdings II LLC:
    MSW Energy Finance Co. II, Inc:

None, as of the close of business
    on October 30, 2006
    100 shares of Common Stock, as of the close of business on
    October 30, 2006
    None, as of the close of business on October 30, 2006
    100 shares of Common Stock, as of the close of business on
    October 30, 2006   MSW Energy Holdings LLC, MSW Energy Finance Co., Inc., MSW
    Energy Holdings II LLC and MSW Energy Finance Co. II, Inc.
    meet the conditions set forth in General Instruction H
    (1)(a) and (b) of
    Form 10-Q
    and are therefore filing this
    Form 10-Q
    with the reduced disclosure format.




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##### 



TABLE OF
    CONTENTS
  
  Cautionary
    Note Regarding Forward  Looking
    Statements


3PART I.
    FINANCIAL INFORMATIONItem 1.

Financial
    Statements


4Condensed Consolidated Financial
    Statements


4MSW
    Energy Holdings LLC and Subsidiaries


4MSW
    Energy Holdings II LLC and Subsidiaries


9Notes to Condensed
    Consolidated Financial Statements (Unaudited)


14Item 2.

Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations


27Item 3.

Quantitative and
    Qualitative Disclosures about Market Risk


37Item 4.

Controls and
    Procedures


37PART II.
    OTHER INFORMATIONItem 1.

Legal
    Proceedings


38Item 1A.

Risk
    Factors


38Item 2.

Unregistered Sales
    of Equity Securities and Use of Proceeds


38Item 3.

Defaults Upon
    Senior Securities


38Item 4.

Submission of
    Matters to a Vote of Security Holders


38Item 5.

Other
    Information


38Item 6.

Exhibits


38OTHERSignatures


39Statement Regarding Computation of Ratio of Earnings to Fixed ChargesStatement Regarding Computation of Ratio of Earnings to Fixed ChargesCertificationCertificationCertificationCertificationCertificationCertificationCertificationCertificationCertificationCertificationCertificationCertification   2




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##### Table of Contents



Cautionary
    Note Regarding Forward-Looking Statements  Form 10-Q Form 10-K Form 10-K form 10-Q
  Form 10-Q
 3




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##### Table of Contents



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 ThreeMonths Ended


Months EndedSeptember 30, 2006


September 30, 2005Operating RevenuesWaste and service revenues

$
82,507


$
81,719Electricity and steam sales


46,580



43,482Total operating revenues


129,087



125,201Operating ExpensesPlant operating expenses


45,932



47,028Depreciation and amortization
    expense


30,108



26,802Net interest expense on project
    debt


6,451



7,692General and administrative expenses


6,412



3,704Loss (gain) on asset retirements


29



(494
)Total operating expenses


88,932



84,732Operating income


40,155



40,469Other Income
    (Expense)Interest income


779



350Interest expense


(7,319
)


(8,514
)Total other expenses


(6,540
)


(8,164
)Income before income tax expense
    and minority interests


33,615



32,305Income tax expense


(6,214
)


(5,963
)Minority interests


(18,762
)


(18,408
)Net Income

$
8,639


$
7,934    4




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##### Table of Contents



MSW
    ENERGY HOLDINGS LLC AND SUBSIDIARIES
  CONDENSED
    CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited,
    in thousands of dollars)
  For the Nine


For the Period from



For the Period fromMonths Ended


June 25 through



January 1 throughSeptember 30, 2006


September 30, 2005



June 24, 2005Operating RevenuesWaste and service revenues

$
242,315


$
87,411



$
148,792Electricity and steam sales


133,924



46,450




79,660Total operating revenues


376,239



133,861




228,452Operating ExpensesPlant operating expenses


158,603



49,797




103,616Depreciation and amortization
    expense


91,161



28,737




57,032Net interest expense on project
    debt


20,018



8,150




13,964General and administrative expenses


19,279



3,962




39,745Loss (gain) on asset retirements


907



(494
)



519Total operating expenses


289,968



90,152




214,876Operating income


86,271



43,709




13,576Other Income
    (Expense)Interest income


1,692



388




1,076Interest expense


(20,768
)


(9,130
)



(17,553
)Total other expenses


(19,076
)


(8,742
)



(16,477
)Income (loss) before income tax
    (expense) benefit and minority interests


67,195



34,967




(2,901
)Income tax (expense) benefit


(11,711
)


(6,440
)



2,761Minority interests


(39,178
)


(19,922
)



(3,637
)Net Income (Loss)

$
16,306


$
8,605



$
(3,777
)    5




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##### Table of Contents



MSW
    ENERGY HOLDINGS LLC AND SUBSIDIARIES
  CONDENSED
    CONSOLIDATED BALANCE SHEETS
 (In
    thousands of dollars)
  As ofSeptember 30, 2006


December 31, 2005(Unaudited)ASSETSCurrent assetsCash and cash equivalents

$
46,233


$
48,895Restricted funds held in trust


71,361



74,095Accounts receivable (less
    allowances of $3,293 and $2,267)


73,335



73,994Prepaid expenses and other current
    assets


18,840



16,542Total current assets


209,769



213,526Property, plant and equipment, net


1,868,693



1,928,144Intangible assets, net


246,590



271,787Goodwill


217,548



255,927Restricted funds held in trust


123,519



123,483Other assets


10,116



10,254Total assets

$
2,676,235


$
2,803,121LIABILITIES AND MEMBERS
    EQUITYCurrent liabilitiesAccounts payable trade

$
5,241


$
3,007Accounts payable to related party,
    net


9,479



4,243Current portion of intermediate
    debt


31,825



45,997Current portion of project debt


45,315



59,668Other current liabilities


56,519



69,470Total current
    liabilities


148,739



182,385Intermediate debt


393,558



404,567Project debt


674,788



699,056Deferred income taxes


179,510



165,417Other liabilities


159,471



176,184Total liabilities


1,555,706



1,627,609Commitments and contingencies
    (Note 9)Minority interests


753,866



779,637Members equityTotal members equity


366,663



395,875Total liabilities and
    members equity

$
2,676,235


$
2,803,121    6




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##### Table of Contents



MSW
    ENERGY HOLDINGS LLC AND SUBSIDIARIES
    CONDENSED CONSOLIDATED STATEMENT OF MEMBERS EQUITY
    For The Nine Months Ended September 30, 2006
    (Unaudited, in thousands of dollars)
  MembersEquityBalance, December 31, 2005

$
395,875Adjustments to purchase
    accounting, net of tax


(6,323
)Distribution paid to members


(39,195
)Net income


16,306Balance, September 30, 2006

$
366,663    7




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##### Table of Contents



MSW
    ENERGY HOLDINGS LLC AND SUBSIDIARIES
  CONDENSED
    CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited,
    in thousands of dollars)
  For the Nine


For the Period from



For the Period fromMonths Ended


June 25 through



January 1 throughSeptember 30, 2006


September 30, 2005



June 24, 2005Cash flows from operating
    activitiesNet income (loss)

$
16,306


$
8,605



$
(3,777
)Adjustments to reconcile net
    income (loss) to net cash provided by operating activities:Depreciation and amortization
    expense


91,161



28,737




57,032Deferred income taxes


4,989



2,199




8,380Revenue contract levelization


3,312



1,007




692Amortization of lease liability


2,245



748




(1,593
)Amortization of debt premium and
    deferred financing costs


(9,674
)


(3,020
)



(5,287
)Interest on loss contracts


(991
)


462




1,069Loss (gain) on asset retirements


907



(494
)



519Minority interests


39,178



19,922




3,637Amortization of deferred revenue






(6
)



(75
)Changes in assets and liabilities:Accounts receivable, net


659



1,916




(4,211
)Prepaid expenses and other current
    assets


(2,524
)


(274
)



(2,732
)Other long-term assets


30



(1,186
)



(2,944
)Accounts payable trade and other
    current liabilities


(2,747
)


2,754




(15,901
)Accounts payable to related party,
    net


5,236



758




Accrued interest payable


(7,102
)


(5,584
)



5,626Other long-term liabilities


(2,747
)


405




(849
)Net cash provided by operating
    activities


138,238



56,949




39,586Cash flows from investing
    activitiesPurchase of property, plant and
    equipment


(10,058
)


(1,898
)



(25,228
)Acquisition of Duke minority
    interest






(1,307
)



Proceeds from sale of assets


243



487




2,651Net cash used in investing
    activities


(9,815
)


(2,718
)



(22,577
)Cash flows from financing
    activitiesDecrease (increase) in restricted
    funds held in trust


2,698



7,203




(8,110
)Principal payments of intermediate
    debt


(22,400
)


(10,257
)



Principal payments of project debt


(31,767
)


(13,089
)



(29,178
)Distributions paid to members


(39,195
)


(3,824
)



(19,395
)Distributions paid to holders of
    minority interests in consolidated subsidiary


(40,421
)


(15,883
)



(25,100
)Net cash used in financing
    activities


(131,085
)


(35,850
)



(81,783
)Net (decrease) increase in cash
    and cash equivalents


(2,662
)


18,381




(64,774
)Cash and cash equivalents,
    beginning of period


48,895



21,536




86,310Cash and cash equivalents, end of
    period

$
46,233


$
39,917



$
21,536    8




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##### Table of Contents



MSW
    ENERGY HOLDINGS II LLC AND SUBSIDIARIES  CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
    (Unaudited, in thousands of dollars)
  For the Three


For the ThreeMonths Ended


Months EndedSeptember 30, 2006


September 30, 2005Operating RevenuesWaste and service revenues

$
82,507


$
81,719Electricity and steam sales


46,580



43,482Total operating revenues


129,087



125,201Operating ExpensesPlant operating expenses


45,932



47,028Depreciation and amortization
    expense


30,108



26,802Net interest expense on project
    debt


6,451



7,692General and administrative expenses


6,424



3,682Loss (gain) on asset retirements


29



(494
)Total operating expenses


88,944



84,710Operating income


40,143



40,491Other Income
    (Expense)Interest income


737



293Interest expense


(7,610
)


(8,354
)Total other expenses


(6,873
)


(8,061
)Income before income tax expense
    and minority interests


33,270



32,430Income tax expense


(6,070
)


(6,056
)Minority interests


(18,762
)


(18,321
)Net Income

$
8,438


$
8,053    9




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##### Table of Contents



MSW
    ENERGY HOLDINGS II LLC AND SUBSIDIARIES
  CONDENSED
    CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited,
    in thousands of dollars)
  For the Nine


For the Period from



For the Period fromMonths Ended


June 25 through



January 1 throughSeptember 30, 2006


September 30, 2005



June 24, 2005Operating RevenuesWaste and service revenues

$
242,315


$
87,411



$
148,792Electricity and steam sales


133,924



46,450




79,660Total operating revenues


376,239



133,861




228,452Operating ExpensesPlant operating expenses


158,603



49,797




103,616Depreciation and amortization
    expense


91,161



28,737




57,032Net interest expense on project
    debt


20,018



8,150




13,964General and administrative expenses


19,247



3,932




39,630Loss (gain) on asset retirements


907



(494
)



519Total operating expenses


289,936



90,122




214,761Operating income


86,303



43,739




13,691Other Income
    (Expense)Interest income


1,529



327




1,012Interest expense


(22,630
)


(8,930
)



(16,394
)Total other expenses


(21,101
)


(8,603
)



(15,382
)Income (loss) before income tax
    (expense) benefit and minority interests


65,202



35,136




(1,691
)Income tax (expense) benefit


(10,878
)


(6,546
)



2,317Minority interests


(39,178
)


(19,842
)



(3,690
)Net Income (Loss)

$
15,146


$
8,748



$
(3,064
)    10




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##### Table of Contents



MSW
    ENERGY HOLDINGS II LLC AND SUBSIDIARIES
  CONDENSED
    CONSOLIDATED BALANCE SHEETS
 (In
    thousands of dollars)
  As ofSeptember 30, 2006


December 31, 2005(Unaudited)ASSETSCurrent assetsCash and cash equivalents

$
46,251


$
48,844Restricted funds held in trust


71,334



71,513Accounts receivable (less
    allowances of $3,293 and $2,267)


73,335



73,994Prepaid expenses and other current
    assets


18,814



16,543Total current assets


209,734



210,894Property, plant and equipment, net


1,868,693



1,928,144Intangible assets, net


246,590



271,787Goodwill


217,548



255,927Restricted funds held in trust


123,519



118,301Other assets


10,099



10,254Total assets

$
2,676,183


$
2,795,307LIABILITIES AND MEMBERS
    EQUITYCurrent liabilitiesAccounts payable trade

$
5,241


$
3,009Accounts payable to related party,
    net


9,479



4,243Current portion of intermediate
    debt


30,549



44,721Current portion of project debt


45,315



59,668Other current liabilities


55,732



67,001Total current
    liabilities


146,316



178,642Intermediate debt


418,150



428,202Project debt


674,788



699,056Deferred income taxes


263,101



260,369Other liabilities


159,471



150,583Total liabilities


1,661,826



1,716,852Commitments and contingencies
    (Note 9)Minority interests


753,866



779,637Members equityTotal members equity


260,491



298,818Total liabilities and
    members equity

$
2,676,183


$
2,795,307    11




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##### Table of Contents



MSW
    ENERGY HOLDINGS II LLC AND SUBSIDIARIES
    CONDENSED CONSOLIDATED STATEMENT OF MEMBERS EQUITY
    For The Nine Months Ended September 30, 2006
    (Unaudited, in thousands of dollars)
  MembersEquityBalance, December 31, 2005

$
298,818Adjustments to purchase
    accounting, net of tax


(22,325
)Distribution paid to member


(31,148
)Net income


15,146Balance, September 30, 2006

$
260,491    12




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##### Table of Contents



MSW
    ENERGY HOLDINGS II LLC AND SUBSIDIARIES
  CONDENSED
    CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited,
    in thousands of dollars)
  For the Nine


For the Period from



For the Period fromMonths Ended


June 25 through



January 1 throughSeptember 30, 2006


September 30, 2005



June 24, 2005Cash flows from operating
    activitiesNet income (loss)

$
15,146


$
8,748



$
(3,064
)Adjustments to reconcile net
    income (loss) to net cash provided by operating activities:Depreciation and amortization
    expense


91,161



28,737




57,032Deferred income taxes


4,985



2,200




910Revenue contract levelization


3,312



1,007




692Amortization of lease liability


2,245



748




(1,593
)Amortization of debt premium and
    deferred financing costs


(8,717
)


(2,700
)



(5,182
)Loss (gain) on asset retirements


907



(494
)



519Minority interests


39,178



19,842




3,690Amortization of deferred revenue






(7
)



(75
)Changes in assets and liabilities:Accounts receivable, net


659



1,916




(4,211
)Prepaid expenses and other current
    assets


(2,497
)


(235
)



(2,893
)Other long-term assets


47



(1,186
)



(2,943
)Accounts payable trade and other
    current liabilities


(3,595
)


5,224




(7,912
)Accounts payable to related party,
    net


5,236



759




Accrued interest payable


(7,074
)


(5,348
)



5,515Other long-term liabilities


(2,996
)


407




(772
)Net cash provided by operating
    activities


137,997



59,618




39,713Cash flows from investing
    activitiesPurchase of property, plant and
    equipment


(10,058
)


(1,898
)



(25,228
)Proceeds from sale of assets


243



487




2,651Net cash used in investing
    activities


(9,815
)


(1,411
)



(22,577
)Cash flows from financing
    activities(Increase) decrease in restricted
    funds held in trust


(5,039
)


7,248




(8,273
)Principal payments of intermediate
    debt


(22,400
)


(6,909
)



Principal payments of project debt


(31,767
)


(13,089
)



(29,178
)Distributions paid to member


(31,148
)


(11,262
)



(19,469
)Distributions paid to holders of
    minority interests in consolidated subsidiary


(40,421
)


(15,820
)



(25,000
)Net cash used in financing
    activities


(130,775
)


(39,832
)



(81,920
)Net (decrease) increase in cash
    and cash equivalents


(2,593
)


18,375




(64,784
)Cash and cash equivalents,
    beginning of period


48,844



21,563




86,347Cash and cash equivalents, end of
    period

$
46,251


$
39,938



$
21,563    13




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##### Table of Contents



Notes to
    Condensed Consolidated Financial Statements
    (Unaudited)  Note 1.
    Organization
    and Basis of Presentation  Organization
  MSW
    Energy Holdings LLC
    MSW
    Energy Holdings II LLC
    MSW I and
    MSW II
    
 14




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##### Table of Contents



Notes to
    Condensed Consolidated Financial
    Statements  (Unaudited)
  waste-to-energy waste-to-energy
      Basis of
    Presentation
  Form 10-Q
    Form 10-Q.
 15




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##### Table of Contents



Notes to
    Condensed Consolidated Financial
    Statements  (Unaudited)
  Form 10-K
  Note 2.
    New
    Accounting Pronouncements      Note 3.  Business
    Combinations
  MSW I and
    MSW II
   16




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##### Table of Contents



Notes to
    Condensed Consolidated Financial
    Statements  (Unaudited)
    MSW I


MSW IIFair value of assets acquiredCurrent assets

$
180,579


$
175,048Property, plant and equipment


1,982,847



1,982,847Intangible assets (excluding
    goodwill)


287,421



287,421Goodwill


217,548



217,548Other assets


146,496



141,404Total assets acquired


2,814,891



2,804,268Fair value of liabilities assumedCurrent liabilities


68,409



66,980Current portion of intermediate
    debt


28,212



23,601Current portion of project debt


64,344



64,344Long-term intermediate debt


434,746



457,730Long-term project debt


737,385



737,385Deferred income taxes


166,419



251,421Other liabilities


169,537



167,284Total liabilities assumed


1,669,052



1,768,745Minority interests


758,601



755,541Net assets acquired

$
387,238


$
279,982     Pro
    Forma Information
    MSW
    I
  Three Months Ended


Nine Months EndedSeptember 30,


September 30,Pro Forma

2006


2005


2006


2005Total operating revenues

$
129,087


$
125,201


$
376,239


$
364,173Income before income tax expense
    and minority interests

$
33,615


$
31,749


$
67,195


$
62,096  17




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##### Table of Contents



Notes to
    Condensed Consolidated Financial
    Statements  (Unaudited)
  MSW II
  Three Months Ended


Nine Months EndedSeptember 30,


September 30,Pro Forma

2006


2005


2006


2005Total operating revenues

$
129,087


$
125,201


$
376,239


$
364,173Income before income tax expense
    and minority interests

$
33,270


$
31,449


$
65,202


$
60,188   Note 4.
    Intangible
    Assets and Goodwill  MSW I and
    MSW II
    As ofUseful Life (Years)

September 30, 2006


December 31, 2005Waste and energy contracts

3  10

$
194,562


$
194,562Lease interest

23


71,845



71,845Landfill

7


17,985



17,985Other intangibles

Indefinite


3,029



3,029287,421



287,421Accumulated amortization




(40,831
)


(15,634
)Intangible assets, net



$
246,590


$
271,787     Waste and


Lease InterestEnergy


andContracts


Landfill


TotalsRemainder of 2006

$
6,872


$
1,047


$
7,9192007


27,489



5,125



32,6142008


27,478



5,125



32,6032009


23,933



5,125



29,0582010


13,593



5,125



18,7182011


13,171



5,125



18,296Thereafter


47,701



56,652



104,353Total

$
160,237


$
83,324


$
243,561  18




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##### Table of Contents



Notes to
    Condensed Consolidated Financial
    Statements  (Unaudited)
  Goodwill
  MSW I and
    MSW II
  
  MSW I


MSW IIBalance, December 31, 2005

$
255,927


$
255,927Purchase accounting adjustmentsDuke liability


(27,358
)


Waste contract liability


12,140



12,140Fair value adjustment through
    equity


(6,323
)


(22,325
)Minority interest


(24,528
)


(24,528
)Deferred income taxes


9,108



(2,248
)Other


(1,418
)


(1,418
)Balance, September 30, 2006

$
217,548


$
217,548     Note 5.
    Other
    Current Liabilities    MSW
    I
  As ofSeptember 30, 2006


December 31, 2005Accrued interest expense

$
15,618


$
22,720Accrued expenses


20,072



22,928Incentive plan accruals


2,290



3,135Compensation liabilities


6,589



11,307Duke liability






2,500Other


11,950



6,880Total other current liabilities

$
56,519


$
69,470    19




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##### Table of Contents



Notes to
    Condensed Consolidated Financial
    Statements  (Unaudited)
  MSW II
  As ofSeptember 30, 2006


December 31, 2005Accrued interest expense

$
15,609


$
22,683Accrued expenses


20,034



22,894Incentive plan accruals


2,290



3,135Compensation liabilities


6,589



11,307Other


11,210



6,982Total other current liabilities

$
55,732


$
67,001   Note 6.
    Financing
    Arrangements    MSW
    I
  As ofSeptember 30, 2006


December 31, 20058.50% Senior Notes due 2010

$
195,785


$
195,7856.26% Covanta ARC Senior Notes due
    2015


211,600



234,000Unamortized premium


17,998



20,779Total intermediate debt


425,383



450,564Less: current portion (includes
    $4,125 and $3,997 of unamortized premium, respectively)


31,825



45,997Total long-term portion of
    intermediate debt

$
393,558


$
404,567   MSW II
  As ofSeptember 30, 2006


December 31, 20057.375% Senior Notes due 2010

$
224,100


$
224,1006.26% Covanta ARC Senior Notes due
    2015


211,600



234,000Unamortized premium


12,999



14,823Total intermediate debt


448,699



472,923Less: current portion (includes
    $2,849 and $2,721 of unamortized premium, respectively)


30,549



44,721Total long-term portion of
    intermediate debt

$
418,150


$
428,202  20




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##### Table of Contents



Notes to
    Condensed Consolidated Financial
    Statements  (Unaudited)
  MSW I and
    MSW II
    As ofSeptember 30, 2006


December 31, 2005Project debt related to Service
    Fee Structure:5.125  5.50% Seconn
    project debt due 2015

$
53,705


$
53,7056.45% Seconn Corporate Credit
    Bonds  1992 Series A due 2022


30,000



30,0005.50% Seconn Corporate Credit
    Bonds I Series A and II Series A due 2015


13,500



13,5005.248  7.375% Essex
    project debt due 2020


69,373



83,422Subtotal


166,578



180,627Unamortized premium


8,224



10,901Total Service Fee Structure
    related project debt


174,802



191,528Tip fee structure related Project
    debt:5.45  5.625% Niagara
    Series 2001 due 2015


165,010



165,0105.00% Hempstead Corporate Credit
    Bonds due 2010


42,670



42,6704.875  5.00% Hempstead
    project debt due 2009


123,625



123,6255.50  5.625% Semass
    Series 2001A due 2016


134,345



134,3455.25  5.50% Semass
    Series 2001B due 2010


57,580



75,250Subtotal


523,230



540,900Unamortized premium


21,919



26,097Total Tip Fee Structure related
    project debt


545,149



566,997Other obligations


152



199Total project debt


720,103



758,724Less: current portion (includes
    $8,329 and $8,600 of unamortized premium, respectively)


45,315



59,668Total long-term portion of project
    debt

$
674,788


$
699,056      21




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##### Table of Contents



Notes to
    Condensed Consolidated Financial
    Statements  (Unaudited)
  Note 7.
    Other
    Noncurrent Liabilities    MSW
    I
  Amortization

As ofPeriod (Years)

September 30, 2006


December 31, 2005Waste contracts

1  17

$
136,122


$
132,371Duke liability

N/A






25,602Energy contract levelization

11


5,379



2,068Landfill liabilities and asset
    retirement obligations

8


16,959



11,577Incentive plan accruals

N/A


959



2,724Other

N/A


52



1,842Total other noncurrent liabilities



$
159,471


$
176,184   MSW II
  Amortization

As ofPeriod (Years)

September 30, 2006


December 31, 2005Waste contracts

1  17

$
136,122


$
132,371Energy contract levelization

11


5,379



2,068Landfill liabilities and asset
    retirement obligations

8


16,959



11,577Incentive plan accruals

N/A


959



2,724Other

N/A


52



1,843Total other noncurrent liabilities



$
159,471


$
150,583   MSW I and
    MSW II
      Below MarketWaste ContractsRemainder of 2006

$
2,9092007


11,6312008


11,6442009


11,7192010


11,8312011


11,890Thereafter


74,498Total

$
136,122  22




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##### Table of Contents



Notes to
    Condensed Consolidated Financial
    Statements  (Unaudited)
  Note 8.
    Income
    Taxes    MSW
    I
  For the


For the Period from



For the Period fromNine Months Ended


June 25 through



January 1 throughSeptember 30, 2006


September 30, 2005



June 24, 2005Current provision

$
(6,722
)

$
(4,241
)


$
11,141Deferred provision


(4,989
)


(2,199
)



(8,380
)Total consolidated income tax
    (expense) benefit

$
(11,711
)

$
(6,440
)


$
2,761   MSW II
  For the


For the Period from



For the Period fromNine Months Ended


June 25 through



January 1 throughSeptember 30, 2006


September 30, 2005



June 24, 2005Current provision

$
(5,893
)

$
(4,346
)


$
3,227Deferred provision


(4,985
)


(2,200
)



(910
)Total consolidated income tax
    (expense) benefit

$
(10,878
)

$
(6,546
)


$
2,317     Note 9.
    Commitments
    and Contingencies  MSW I and
    MSW II
  and/or
  Environmental
    Matters
  MSW I and
    MSW II
    clean-up
 23




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##### Table of Contents



Notes to
    Condensed Consolidated Financial
    Statements  (Unaudited)
    Lower Passaic River Study. 17-mile
  Other
    Matters
  MSW I and
    MSW II
    Mercury Regulation at Essex.
  CMW Landfill.
   24




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##### Table of Contents



Notes to
    Condensed Consolidated Financial
    Statements  (Unaudited)
    waste-to-energy
  MSW
    I
   25




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##### Table of Contents



Notes to
    Condensed Consolidated Financial
    Statements  (Unaudited)
  Note 10.
    Employee
    Compensation and Benefit Plans  Stock
    Option Plan
  MSW I and
    MSW II
          Note 11.
    Related
    Party Transactions  MSW I and
    MSW II
   26




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##### Table of Contents



ITEM 2.
    MANAGEMENTS
    DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
    OPERATIONS  Form 10-K
         27




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##### Table of Contents



waste-to-energy waste-to-energy
      Form 10-K
     28




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##### Table of Contents



Form 10-Q, Form 10-K
  Results
    of Operations
        MSW
    I
  Three Months EndedSeptember 30,


Nine Months Ended September 30,Reported


Reported


Pro Forma2006


2005


2006


2005*


2006


2005(Unaudited, in thousands of dollars)Operating RevenueWaste and service revenues

$
82,507


$
81,719


$
242,315


$
236,203


$
242,315


$
238,063Electricity and steam sales


46,580



43,482



133,924



126,110



133,924



126,110Total operating revenues


129,087



125,201



376,239



362,313



376,239



364,173Operating ExpensesPlant operating expenses


45,932



47,028



158,603



153,413



158,603



156,550Depreciation and amortization


30,108



26,802



91,161



85,769



91,161



87,592Net interest expense on project
    debt


6,451



7,692



20,018



22,114



20,018



23,216General and administrative expenses


6,412



3,704



19,279



43,707



19,279



14,934Loss (gain) on asset retirement


29



(494
)


907



25



907



25Total operating expenses


88,932



84,732



289,968



305,028



289,968



282,317Operating income

$
40,155


$
40,469


$
86,271


$
57,285


$
86,271


$
81,856     *
    
    Represents the combined period of June 25 through
    September 30, 2005 and January 1 through June 24, 2005. 29




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##### Table of Contents



Comparison
    of Reported Results for the Three Months Ended
    September 30, 2006 vs. Reported Results for the Three
    Months Ended September 30, 2005
  Total Operating Revenues.
  Plant Operating Expenses.
  Net Interest Expense on Project Debt.
  General and Administrative Expenses.
  Comparison
    of Reported Results for the Nine Months Ended September 30,
    2006 vs. Combined Results for the Nine Months Ended
    September 30, 2005
  Total Operating Revenues.
  Total Operating Expenses.
  Operating Income.
  Comparison
    of Reported Results for the Nine Months Ended September 30,
    2006 vs. Pro Forma Results for the Nine Months Ended
    September 30, 2005
  Total Operating Revenues.
  Plant Operating Expenses.
 30




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##### Table of Contents



Net Interest Expense on Project Debt.
  General and Administrative Expenses.
  MSW II
  Three Months Ended September 30,


Nine Months Ended September 30,Reported


Reported


Pro Forma2006


2005


2006


2005*


2006


2005(Unaudited, in thousands of dollars)Operating RevenueWaste and service revenues

$
82,507


$
81,719


$
242,315


$
236,203


$
242,315


$
238,063Electricity and steam sales


46,580



43,482



133,924



126,110



133,924



126,110Total operating revenues


129,087



125,201



376,239



362,313



376,239



364,173Operating ExpensesPlant operating expenses


45,932



47,028



158,603



153,413



158,603



156,550Depreciation and amortization


30,108



26,802



91,161



85,769



91,161



87,592Net interest expense on project
    debt


6,451



7,692



20,018



22,114



20,018



23,216General and administrative expenses


6,424



3,682



19,247



43,562



19,247



14,791Loss (gain) on asset retirement


29



(494
)


907



25



907



25Total operating expenses


88,944



84,710



289,936



304,883



289,936



282,174Operating income

$
40,143


$
40,491


$
86,303


$
57,430


$
86,303


$
81,999     *
    
    Represents the combined period of June 25 through
    September 30, 2005 and January 1 through June 24, 2005.  Comparison
    of Reported Results for the Three Months Ended
    September 30, 2006 vs. Reported Results for the Three
    Months Ended September 30, 2005
  Total Operating Revenues.
  Plant Operating Expenses.
  Net Interest on Project Debt.
 31




---



##### Table of Contents



General and Administrative Expenses.
  Comparison
    of Reported Results for the Nine Months Ended September 30,
    2006 vs. Combined Results for the Nine Months Ended
    September 30, 2005
  Total Operating Revenues.
  Total Operating Expenses.
  Operating Income.
  Comparison
    of Reported Results for the Nine Months Ended September 30,
    2006 vs. Pro Forma Results for the Nine Months Ended
    September 30, 2005
  Total Operating Revenues.
  Plant Operating Expenses.
  Net Interest Expense on Project Debt.
  General and Administrative Expenses.
 32




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##### Table of Contents



Pro Forma
    Reconciliations
  MSW
    I
  Reported Nine





Pro Forma NineMonths Ended


Pro Forma


Months EndedSeptember 30, 2005*


Adjustments


September 30, 2005(Unaudited, in thousands of dollars)Operating RevenuesWaste and service revenues

$
236,203


$
1,860


$
238,063Electricity and steam sales


126,110







126,110Total operating revenues


362,313



1,860



364,173Operating ExpensesPlant operating expenses


153,413



3,137



156,550Depreciation and amortization
    expense


85,769



1,823



87,592Net interest expense on project
    debt


22,114



1,102



23,216General and administrative expenses


43,707



(28,773
)


14,934Loss on asset retirements


25







25Total operating expenses


305,028



(22,711
)


282,317Operating income

$
57,285


$
24,571


$
81,856     *
    
    Represents the combined period of June 25 through
    September 30, 2005 and January 1 through June 24, 2005.  MSW II
  Reported Nine





Pro Forma NineMonths Ended


Pro Forma


Months EndedSeptember 30, 2005*


Adjustments


September 30, 2005(Unaudited, in thousands of dollars)Operating RevenuesWaste and service revenues

$
236,203


$
1,860


$
238,063Electricity and steam sales


126,110







126,110Total operating revenues


362,313



1,860



364,173Operating ExpensesPlant operating expenses


153,413



3,137



156,550Depreciation and amortization
    expense


85,769



1,823



87,592Net interest expense on project
    debt


22,114



1,102



23,216General and administrative expenses


43,562



(28,771
)


14,791Loss on asset retirements


25







25Total operating expenses


304,883



(22,709
)


282,174Operating income

$
57,430


$
24,569


$
81,999     *
    
    Represents the combined period of June 25 through
    September 30, 2005 and January 1 through June 24, 2005. 33




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##### Table of Contents



Notes to
    Pro Forma Reconciliations
  Pro
    Forma 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, each of the
    respective assets and liabilities of MSW I and MSW II were
    assumed to be stated at their acquired fair value as of
    January 1, 2005.  Pro
    Forma Adjustments
    
    Waste and service revenues:To record
    additional revenues prior to June 25, 2005 as a result of
    conforming debt service revenue recognition to Covantas
    debt service revenue recognition policy, which policy has been
    implemented for the periods subsequent to June 25, 2005.
    Plant operating expenses:To record as rent
    expense the net impact of the change in the fair value of the
    lease for 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 property, plant and equipment,
    amortizable intangible assets and waste contract liabilities as
    part of the Acquisition.
    General and administrative expenses:To
    reverse compensation and related expenses associated with the
    MSW I and MSW II executives in the periods prior to the
    Acquisition. Additionally, the expense associated with the MSW I
    and MSW II headquarters was removed. 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.  Liquidity
    and Capital Resources
  MSW I and
    MSW II
   34




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##### Table of Contents



Sources
    and Uses of Cash for the Nine Months Ended September 30,
    2006
    MSW
    I
  For the Nine


For the Period from



For the Period fromMonths Ended


June 25 through



January 1 throughSeptember 30, 2006


September 30, 2005



June 24, 2005Net cash provided by (used in):Operating Activities

$
138,238


$
56,949



$
39,586Investing Activities


(9,815
)


(2,718
)



(22,577
)Financing Activities


(131,085
)


(35,850
)



(81,783
)Net (decrease) increase in cash
    and cash equivalents


(2,662
)


18,381




(64,774
)Cash and cash equivalents,
    beginning of period


48,895



21,536




86,310Cash and cash equivalents, end of
    period

$
46,233


$
39,917



$
21,536   Operating
    Activities
    Investing
    Activities
    Financing
    Activities
    Duke
    Agreement
   35




---



##### Table of Contents



MSW II
  For the Nine


For the Period from



For the Period fromMonths Ended


June 25 through



January 1 throughSeptember 30, 2006


September 30, 2005



June 24, 2005Net cash provided by (used in):Operating Activities

$
137,997


$
59,618



$
39,713Investing Activities


(9,815
)


(1,411
)



(22,577
)Financing Activities


(130,775
)


(39,832
)



(81,920
)Net (decrease) increase in cash
    and cash equivalents


(2,593
)


18,375




(64,784
)Cash and cash equivalents,
    beginning of period


48,844



21,563




86,347Cash and cash equivalents, end of
    period

$
46,251


$
39,938



$
21,563   Operating
    Activities
    Investing
    Activities
    Financing
    Activities
    Debt
    Covenants
  MSW I and
    MSW II
   36




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##### Table of Contents



Critical
    Accounting Policies
  MSW I and
    MSW II
  Form 10-K
  Recent
    Accounting Pronouncements
    ITEM 3.
    QUANTITATIVE
    AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK  Form 10-Q.
  ITEM 4.
    CONTROLS
    AND PROCEDURES  MSW I and
    MSW II
  Rules 13a-15(e) 15d-15(e)
     37




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##### Table of Contents



PART II.
    OTHER INFORMATION  ITEM 1.
    LEGAL
    PROCEEDINGS  MSW I and
    MSW II
    ITEM 1A.
    RISK
    FACTORS  Form 10-K
  ITEM 2.
    UNREGISTERED
    SALE OF EQUITY SECURITIES AND USE OF PROCEEDS  Form 10-Q.
  ITEM 3.
    DEFAULTS
    UPON SENIOR SECURITIES  Form 10-Q.
  ITEM 4.
    SUBMISSION
    OF MATTERS TO A VOTE OF SECURITY HOLDERS  Form 10-Q.
  ITEM 5.
    OTHER
    INFORMATION    ITEM 6.
    EXHIBITS  ExhibitNumber

Description12
.1

MSW Energy Holdings
    LLC  Statement re Computation of Ratio of Earnings to
    Fixed Charges.12
.2

MSW Energy Holdings II
    LLC  Statement re Computation of Ratio of Earnings to
    Fixed Charges.31
.1

15d-14(a)
    Certification of Anthony J. Orlando for MSW Energy Holdings LLC.31
.2

15d-14(a)
    Certification of Mark A. Pytosh for MSW Energy Holdings LLC.31
.3

15d-14(a)
    Certification of Anthony J. Orlando for MSW Energy Finance Co.,
    Inc.31
.4

15d-14(a)
    Certification of Mark A. Pytosh for MSW Energy Finance Co., Inc.31
.5

15d-14(a)
    Certification of Anthony J. Orlando for MSW Energy
    Holdings II LLC.31
.6

15d-14(a)
    Certification of Mark A. Pytosh for MSW Energy Holdings II
    LLC.31
.7

15d-14(a)
    Certification of Anthony J. Orlando for MSW Energy Finance
    Co. II, Inc.31
.8

15d-14(a)
    Certification of Mark A. Pytosh for MSW Energy Finance
    Co. II, Inc.32
.1

Section 1350 Certification of
    Anthony J. Orlando and Mark A. Pytosh for MSW Energy Holdings
    LLC.32
.2

Section 1350 Certification of
    Anthony J. Orlando and Mark A. Pytosh for MSW Energy Finance
    Co., Inc.32
.3

Section 1350 Certification of
    Anthony J. Orlando and Mark A. Pytosh for MSW Energy
    Holdings II LLC.32
.4

Section 1350 Certification of
    Anthony J. Orlando and Mark A. Pytosh for MSW Energy Finance
    Co. II, Inc.  38




---



##### Table of Contents



SIGNATURES    MSW ENERGY HOLDINGS LLC
  By:
    /s/  Mark
    A. Pytosh       By:
    /s/  Thomas
    E. Bucks       39




---



##### Table of Contents



SIGNATURES
    MSW ENERGY FINANCE CO., INC.
  By:
    /s/  Mark
    A. Pytosh     By:
    /s/  Thomas
    E. Bucks      40




---



##### Table of Contents



SIGNATURES
    MSW ENERGY HOLDINGS II LLC
  By:
    /s/  Mark
    A. Pytosh     By:
    /s/  Thomas
    E. Bucks      41




---



##### Table of Contents



SIGNATURES
    MSW ENERGY FINANCE CO. II, INC.
  By:
    /s/  Mark
    A. Pytosh      By:
    /s/  Thomas
    E. Bucks      42




---



##### Table of Contents



EXHIBIT INDEX
  ExhibitNumber

Description12
.1

MSW Energy Holdings
    LLC  Statement re Computation of Ratio of Earnings to
    Fixed Charges.12
.2

MSW Energy Holdings II
    LLC  Statement re Computation of Ratio of Earnings to
    Fixed Charges.31
.1

15d-14(a)
    Certification of Anthony J. Orlando for MSW Energy Holdings LLC.31
.2

15d-14(a)
    Certification of Mark A. Pytosh for MSW Energy Holdings LLC.31
.3

15d-14(a)
    Certification of Anthony J. Orlando for MSW Energy Finance Co.,
    Inc.31
.4

15d-14(a)
    Certification of Mark A. Pytosh for MSW Energy Finance Co., Inc.31
.5

15d-14(a)
    Certification of Anthony J. Orlando for MSW Energy
    Holdings II LLC.31
.6

15d-14(a)
    Certification of Mark A. Pytosh for MSW Energy Holdings II
    LLC.31
.7

15d-14(a)
    Certification of Anthony J. Orlando for MSW Energy Finance
    Co. II, Inc.31
.8

15d-14(a)
    Certification of Mark A. Pytosh for MSW Energy Finance
    Co. II, Inc.32
.1

Section 1350 Certification of
    Anthony J. Orlando and Mark A. Pytosh for MSW Energy Holdings
    LLC.32
.2

Section 1350 Certification of
    Anthony J. Orlando and Mark A. Pytosh for MSW Energy Finance
    Co., Inc.32
.3

Section 1350 Certification of
    Anthony J. Orlando and Mark A. Pytosh for MSW Energy
    Holdings II LLC.32
.4

Section 1350 Certification of
    Anthony J. Orlando and Mark A. Pytosh for MSW Energy Finance
    Co. II, Inc.  43