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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarter ended June 30, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For
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
 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:
    
    Large accelerated filer  o
    
    Accelerated filer  o
    
    Non-accelerated filer  þMSW Energy Finance Co., Inc:
    
    Large accelerated filer  o
    
    Accelerated filer  o
    
    Non-accelerated filer  þMSW Energy Holdings II LLC:
    
    Large accelerated filer  o
    
    Accelerated filer  o
    
    Non-accelerated filer  þMSW Energy Finance Co. II, Inc:
    
    Large accelerated filer  o
    
    Accelerated filer  o
    
    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:
    
    None, as of the close of business on August 1, 2006MSW Energy Finance Co., Inc:
    
    100 shares of Common Stock, as of the close of business on August 1, 2006MSW Energy Holdings II LLC:
    
    None, as of the close of business on August 1, 2006MSW Energy Finance Co. II, Inc:
    
    100 shares of Common Stock, as of the close of business on August 1, 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 StatementsCondensed 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
    
    
    26Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    36Item 4. Controls and Procedures
    
    
    36Part II. Other InformationItem 1. Legal Proceedings
    
    
    37Item 1A. Risk Factors
    
    
    37Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    37Item 3. Defaults Upon Senior Securities
    
    
    37Item 4. Submission of Matters to a Vote of Security Holders
    
    
    37Item 5. Other Information
    
    
    37Item 6. Exhibits
    
    
    37OtherSignatures
    
    
    38Statement re Computation of Ratio of Earnings to Fixed ChargesStatement re Computation of Ratio of Earnings to Fixed ChargesCertificationCertificationCertificationCertificationCertificationCertificationCertificationCertificationCertificationCertificationCertificationCertification
  2




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Cautionary Note Regarding Forward-Looking Statements
   3




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PART I. FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 
 MSW ENERGY HOLDINGS LLC AND SUBSIDIARIES
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands of dollars)
 Restated*For the Three
    
    
    For the Period From
    
    
    
    For the Period FromMonths Ended
    
    
    June 25 through
    
    
    
    April 1 throughJune 30, 2006
    
    
    June 30, 2005
    
    
    
    June 24, 2005Operating RevenuesWaste and service revenues
    
    $
    85,307
    
    
    $
    5,692
    
    
    
    $
    76,319Electricity and steam sales
    
    
    44,404
    
    
    
    2,968
    
    
    
    
    39,376Total operating revenues
    
    
    129,711
    
    
    
    8,660
    
    
    
    
    115,695Operating ExpensesPlant operating expenses
    
    
    48,829
    
    
    
    2,769
    
    
    
    
    46,902Depreciation and amortization expense
    
    
    30,745
    
    
    
    1,935
    
    
    
    
    27,294Net interest expense on project debt
    
    
    6,680
    
    
    
    458
    
    
    
    
    6,645General and administrative expenses
    
    
    6,263
    
    
    
    258
    
    
    
    
    33,470Loss (gain) on asset retirements
    
    
    878
    
    
    
    
    
    
    
    
    (867
    )Total operating expenses
    
    
    93,395
    
    
    
    5,420
    
    
    
    
    113,444Operating income
    
    
    36,316
    
    
    
    3,240
    
    
    
    
    2,251Other Income (Expense)Interest income
    
    
    492
    
    
    
    38
    
    
    
    
    519Interest expense
    
    
    (5,759
    )
    
    
    (616
    )
    
    
    
    (8,529
    )Total other expenses
    
    
    (5,267
    )
    
    
    (578
    )
    
    
    
    (8,010
    )Income (loss) before income tax
(expense) benefit and minority
interests
    
    
    31,049
    
    
    
    2,662
    
    
    
    
    (5,759
    )Income tax (expense) benefit
    
    
    (5,946
    )
    
    
    (477
    )
    
    
    
    2,242Minority interests
    
    
    (16,808
    )
    
    
    (1,514
    )
    
    
    
    464Net Income (Loss)
    
    $
    8,295
    
    
    $
    671
    
    
    
    $
    (3,053
    )
 
 *
    
    Note 11  4




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MSW ENERGY HOLDINGS LLC AND SUBSIDIARIES
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands of dollars)
 For the Six
    
    
    For the Period From
    
    
    
    For the Period FromMonths Ended
    
    
    June 25 through
    
    
    
    January 1 throughJune 30, 2006
    
    
    June 30, 2005
    
    
    
    June 24, 2005Operating RevenuesWaste and service revenues
    
    $
    159,808
    
    
    $
    5,692
    
    
    
    $
    148,792Electricity and steam sales
    
    
    87,344
    
    
    
    2,968
    
    
    
    
    79,660Total operating revenues
    
    
    247,152
    
    
    
    8,660
    
    
    
    
    228,452Operating ExpensesPlant operating expenses
    
    
    112,671
    
    
    
    2,769
    
    
    
    
    103,616Depreciation and amortization expense
    
    
    61,053
    
    
    
    1,935
    
    
    
    
    57,032Net interest expense on project debt
    
    
    13,567
    
    
    
    458
    
    
    
    
    13,964General and administrative expenses
    
    
    12,867
    
    
    
    258
    
    
    
    
    39,745Loss on asset retirements
    
    
    878
    
    
    
    
    
    
    
    
    519Total operating expenses
    
    
    201,036
    
    
    
    5,420
    
    
    
    
    214,876Operating income
    
    
    46,116
    
    
    
    3,240
    
    
    
    
    13,576Other Income (Expense)Interest income
    
    
    913
    
    
    
    38
    
    
    
    
    1,076Interest expense
    
    
    (13,449
    )
    
    
    (616
    )
    
    
    
    (17,553
    )Total other expenses
    
    
    (12,536
    )
    
    
    (578
    )
    
    
    
    (16,477
    )Income (loss) before income tax
(expense) benefit and minority
interests
    
    
    33,580
    
    
    
    2,662
    
    
    
    
    (2,901
    )Income tax (expense) benefit
    
    
    (5,497
    )
    
    
    (477
    )
    
    
    
    2,761Minority interests
    
    
    (20,416
    )
    
    
    (1,514
    )
    
    
    
    (3,637
    )Net Income (Loss)
    
    $
    7,667
    
    
    $
    671
    
    
    
    $
    (3,777
    )
  5




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MSW ENERGY HOLDINGS LLC AND SUBSIDIARIES
 CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
 As ofJune 30, 2006
    
    
    December 31, 2005(unaudited)AssetsCurrent assetsCash and cash equivalents
    
    $
    31,475
    
    
    $
    48,895Restricted funds held in trust
    
    
    70,375
    
    
    
    74,095Accounts receivable (less allowances of $2,627 and $2,267)
    
    
    77,541
    
    
    
    73,994Prepaid expenses and other current assets
    
    
    16,490
    
    
    
    16,542Total current assets
    
    
    195,881
    
    
    
    213,526Property, plant and equipment, net
    
    
    1,893,125
    
    
    
    1,928,144Intangible assets, net
    
    
    254,970
    
    
    
    271,787Goodwill
    
    
    217,548
    
    
    
    255,927Restricted funds held in trust
    
    
    117,649
    
    
    
    123,483Other long-term assets
    
    
    10,958
    
    
    
    10,254Total assets
    
    $
    2,690,131
    
    
    $
    2,803,121Liabilities and Members EquityCurrent liabilitiesAccounts payable trade
    
    $
    3,678
    
    
    $
    3,007Accounts payable to related party, net
    
    
    10,814
    
    
    
    4,243Current portion of intermediate debt
    
    
    31,756
    
    
    
    45,997Current portion of project debt
    
    
    59,585
    
    
    
    59,668Other current liabilities
    
    
    54,068
    
    
    
    69,470Total current liabilities
    
    
    159,901
    
    
    
    182,385Intermediate debt
    
    
    394,319
    
    
    
    404,567Project debt
    
    
    676,829
    
    
    
    699,056Deferred income taxes
    
    
    177,089
    
    
    
    165,417Other long-term liabilities
    
    
    161,183
    
    
    
    176,184Total liabilities
    
    
    1,569,321
    
    
    
    1,627,609Commitments and contingencies (Note 9)Minority interests
    
    
    749,100
    
    
    
    779,637Members equityTotal members equity
    
    
    371,710
    
    
    
    395,875Total liabilities and members equity
    
    $
    2,690,131
    
    
    $
    2,803,121
  6




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MSW ENERGY HOLDINGS LLC AND SUBSIDIARIES
 CONDENSED CONSOLIDATED STATEMENT OF MEMBERS EQUITY
(Unaudited, in thousands of dollars)
 Members'EquityBalance, December 31, 2005
    
    $
    395,875Adjustments to purchase accounting, net of tax
    
    
    (6,323
    )Distribution
paid to members
    
    
    (25,509
    )Net income
    
    
    7,667Balance, June 30, 2006
    
    $
    371,710
  7




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MSW ENERGY HOLDINGS LLC AND SUBSIDIARIES
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands of dollars)
 For the Six
    
    
    For the Period From
    
    
    
    For the Period FromMonths Ended
    
    
    June 25 through
    
    
    
    January 1 throughJune 30, 2006
    
    
    June 30, 2005
    
    
    
    June 24, 2005Cash flows from operating activitiesNet income (loss)
    
    $
    7,667
    
    
    $
    671
    
    
    
    $
    (3,777
    )Adjustments to reconcile net income (loss) to net cash provided by operating
activities:Depreciation and amortization expense
    
    
    61,053
    
    
    
    1,935
    
    
    
    
    57,032Deferred income taxes
    
    
    2,564
    
    
    
    1,224
    
    
    
    
    8,380Revenue contract levelization
    
    
    2,174
    
    
    
    31
    
    
    
    
    692Amortization of lease liability
    
    
    1,497
    
    
    
    
    
    
    
    
    (1,593
    )Amortization of debt premium and deferred financing costs
    
    
    (6,735
    )
    
    
    (199
    )
    
    
    
    (5,287
    )Interest on loss contracts
    
    
    (991
    )
    
    
    38
    
    
    
    
    1,069Loss on asset retirements
    
    
    878
    
    
    
    
    
    
    
    
    519Minority interests
    
    
    20,416
    
    
    
    1,514
    
    
    
    
    3,637Amortization of deferred revenue
    
    
    
    
    
    
    (2
    )
    
    
    
    (75
    )Changes in assets and liabilities:Accounts receivable, net
    
    
    (3,547
    )
    
    
    6,741
    
    
    
    
    (4,211
    )Prepaid expenses and other current assets
    
    
    (174
    )
    
    
    869
    
    
    
    
    (2,732
    )Other long-term assets
    
    
    (812
    )
    
    
    178
    
    
    
    
    (2,944
    )Accounts payable trade and other current liabilities
    
    
    (6,042
    )
    
    
    (455
    )
    
    
    
    (15,901
    )Accounts payable to related party, net
    
    
    6,571
    
    
    
    
    
    
    
    
    Accrued interest payable
    
    
    (7,821
    )
    
    
    (6,388
    )
    
    
    
    5,626Other long-term liabilities
    
    
    (2,803
    )
    
    
    32
    
    
    
    
    (849
    )Net cash provided by operating activities
    
    
    73,895
    
    
    
    6,189
    
    
    
    
    39,586Cash flows from investing activitiesPurchase of property, plant and equipment
    
    
    (9,008
    )
    
    
    
    
    
    
    
    (25,228
    )Proceeds from sale of assets
    
    
    175
    
    
    
    
    
    
    
    
    2,651Net cash used in investing activities
    
    
    (8,833
    )
    
    
    
    
    
    
    
    (22,577
    )Cash flows from financing activitiesDecrease (increase) in restricted funds held in trust
    
    
    9,554
    
    
    
    17,609
    
    
    
    
    (8,110
    )Payment of long-term debt
    
    
    (40,102
    )
    
    
    (6,000
    )
    
    
    
    (29,178
    )Distributions paid to members
    
    
    (25,509
    )
    
    
    
    
    
    
    
    (19,395
    )Distributions paid to holders of minority interests in consolidated subsidiary
    
    
    (26,425
    )
    
    
    
    
    
    
    
    (25,100
    )Net cash (used in) provided by financing activities
    
    
    (82,482
    )
    
    
    11,609
    
    
    
    
    (81,783
    )Net (decrease) increase in cash and cash equivalents
    
    
    (17,420
    )
    
    
    17,798
    
    
    
    
    (64,774
    )Cash and cash equivalents, beginning of period
    
    
    48,895
    
    
    
    21,536
    
    
    
    
    86,310Cash and cash equivalents, end of period
    
    $
    31,475
    
    
    $
    39,334
    
    
    
    $
    21,536
  8




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MSW ENERGY HOLDINGS II LLC AND SUBSIDIARIES
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands of dollars)
 Restated*For the Three
    
    
    For the Period From
    
    
    
    For the Period FromMonths Ended
    
    
    June 25 through
    
    
    
    April 1 throughJune 30, 2006
    
    
    June 30, 2005
    
    
    
    June 24, 2005Operating RevenuesWaste and service revenues
    
    $
    85,307
    
    
    $
    5,692
    
    
    
    $
    76,319Electricity and steam sales
    
    
    44,404
    
    
    
    2,968
    
    
    
    
    39,376Total operating revenues
    
    
    129,711
    
    
    
    8,660
    
    
    
    
    115,695Operating ExpensesPlant operating expenses
    
    
    48,829
    
    
    
    2,769
    
    
    
    
    46,902Depreciation and amortization expense
    
    
    30,745
    
    
    
    1,935
    
    
    
    
    27,294Net interest expense on project debt
    
    
    6,680
    
    
    
    458
    
    
    
    
    6,645General and administrative expenses
    
    
    6,235
    
    
    
    252
    
    
    
    
    33,413Loss (gain) on asset retirements
    
    
    878
    
    
    
    
    
    
    
    
    (867
    )Total operating expenses
    
    
    93,367
    
    
    
    5,414
    
    
    
    
    113,387Operating income
    
    
    36,344
    
    
    
    3,246
    
    
    
    
    2,308Other Income (Expense)Interest income
    
    
    425
    
    
    
    34
    
    
    
    
    477Interest expense
    
    
    (7,495
    )
    
    
    (576
    )
    
    
    
    (7,965
    )Total other expenses
    
    
    (7,070
    )
    
    
    (542
    )
    
    
    
    (7,488
    )Income (loss) before income tax
(expense) benefit and minority
interests
    
    
    29,274
    
    
    
    2,704
    
    
    
    
    (5,180
    )Income tax (expense) benefit
    
    
    (5,204
    )
    
    
    (490
    )
    
    
    
    2,109Minority interests
    
    
    (16,808
    )
    
    
    (1,521
    )
    
    
    
    288Net Income (Loss)
    
    $
    7,262
    
    
    $
    693
    
    
    
    $
    (2,783
    )
 
 *
    
    Note 11  9




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MSW ENERGY HOLDINGS II LLC AND SUBSIDIARIES
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands of dollars)
 For the Six
    
    
    For the Period From
    
    
    
    For the Period FromMonths Ended
    
    
    June 25 through
    
    
    
    January 1 throughJune 30, 2006
    
    
    June 30, 2005
    
    
    
    June 24, 2005Operating RevenuesWaste and service revenues
    
    $
    159,808
    
    
    $
    5,692
    
    
    
    $
    148,792Electricity and steam sales
    
    
    87,344
    
    
    
    2,968
    
    
    
    
    79,660Total operating revenues
    
    
    247,152
    
    
    
    8,660
    
    
    
    
    228,452Operating ExpensesPlant operating expenses
    
    
    112,671
    
    
    
    2,769
    
    
    
    
    103,616Depreciation and amortization expense
    
    
    61,053
    
    
    
    1,935
    
    
    
    
    57,032Net interest expense on project debt
    
    
    13,567
    
    
    
    458
    
    
    
    
    13,964General and administrative expenses
    
    
    12,823
    
    
    
    252
    
    
    
    
    39,630Loss on asset retirements
    
    
    878
    
    
    
    
    
    
    
    
    519Total operating expenses
    
    
    200,992
    
    
    
    5,414
    
    
    
    
    214,761Operating income
    
    
    46,160
    
    
    
    3,246
    
    
    
    
    13,691Other Income (Expense)Interest income
    
    
    792
    
    
    
    34
    
    
    
    
    1,012Interest expense
    
    
    (15,020
    )
    
    
    (576
    )
    
    
    
    (16,394
    )Total other expenses
    
    
    (14,228
    )
    
    
    (542
    )
    
    
    
    (15,382
    )Income (loss) before income tax
(expense) benefit and minority
interests
    
    
    31,932
    
    
    
    2,704
    
    
    
    
    (1,691
    )Income tax (expense) benefit
    
    
    (4,808
    )
    
    
    (490
    )
    
    
    
    2,317Minority interests
    
    
    (20,416
    )
    
    
    (1,521
    )
    
    
    
    (3,690
    )Net Income (Loss)
    
    $
    6,708
    
    
    $
    693
    
    
    
    $
    (3,064
    )
  10




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MSW ENERGY HOLDINGS II LLC AND SUBSIDIARIES
 CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
 As ofJune 30, 2006
    
    
    December 31, 2005(unaudited)AssetsCurrent assetsCash and cash equivalents
    
    $
    31,482
    
    
    $
    48,844Restricted funds held in trust
    
    
    70,326
    
    
    
    71,513Accounts receivable (less allowances of $2,627 and $2,267)
    
    
    77,541
    
    
    
    73,994Prepaid expenses and other current assets
    
    
    16,466
    
    
    
    16,543Total current assets
    
    
    195,815
    
    
    
    210,894Property, plant and equipment, net
    
    
    1,893,125
    
    
    
    1,928,144Intangible assets, net
    
    
    254,970
    
    
    
    271,787Goodwill
    
    
    217,548
    
    
    
    255,927Restricted funds held in trust
    
    
    117,649
    
    
    
    118,301Other long-term assets
    
    
    10,949
    
    
    
    10,254Total assets
    
    $
    2,690,056
    
    
    $
    2,795,307Liabilities and Members EquityCurrent liabilitiesAccounts payable trade
    
    $
    3,678
    
    
    $
    3,009Accounts payable to related party, net
    
    
    10,806
    
    
    
    4,243Current portion of intermediate debt
    
    
    30,480
    
    
    
    44,721Current portion of project debt
    
    
    59,585
    
    
    
    59,668Other current liabilities
    
    
    53,401
    
    
    
    67,001Total current liabilities
    
    
    157,950
    
    
    
    178,642Intermediate debt
    
    
    418,593
    
    
    
    428,202Project debt
    
    
    676,829
    
    
    
    699,056Deferred income taxes
    
    
    260,681
    
    
    
    260,369Other long-term liabilities
    
    
    161,183
    
    
    
    150,583Total liabilities
    
    
    1,675,236
    
    
    
    1,716,852Commitments and contingencies (Note 9)Minority interests
    
    
    749,100
    
    
    
    779,637Members equityTotal members equity
    
    
    265,720
    
    
    
    298,818Total liabilities and members equity
    
    $
    2,690,056
    
    
    $
    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
(Unaudited, in thousands of dollars)
 Member'sEquityBalance, December 31, 2005
    
    $
    298,818Adjustments to purchase accounting, net of tax
    
    
    (22,325
    )Distribution
paid to member
    
    
    (17,481
    )Net income
    
    
    6,708Balance, June 30, 2006
    
    $
    265,720
  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 Six
    
    
    For the Period From
    
    
    
    For the Period FromMonths Ended
    
    
    June 25 through
    
    
    
    January 1 throughJune 30, 2006
    
    
    June 30, 2005
    
    
    
    June 24, 2005Cash flows from operating activitiesNet income (loss)
    
    $
    6,708
    
    
    $
    693
    
    
    
    $
    (3,064
    )Adjustments to reconcile net income (loss) to net cash provided by operating
activities:Depreciation and amortization expense
    
    
    61,053
    
    
    
    1,935
    
    
    
    
    57,032Deferred income taxes
    
    
    2,560
    
    
    
    (72
    )
    
    
    
    910Revenue contract levelization
    
    
    2,174
    
    
    
    31
    
    
    
    
    692Amortization of lease liability
    
    
    1,497
    
    
    
    
    
    
    
    
    (1,593
    )Amortization of debt premium and deferred financing costs
    
    
    (6,097
    )
    
    
    (199
    )
    
    
    
    (5,182
    )Loss on asset retirements
    
    
    878
    
    
    
    
    
    
    
    
    519Minority interests
    
    
    20,416
    
    
    
    1,521
    
    
    
    
    3,690Amortization of deferred revenue
    
    
    
    
    
    
    (2
    )
    
    
    
    (75
    )Changes in assets and liabilities:Accounts receivable, net
    
    
    (3,547
    )
    
    
    6,741
    
    
    
    
    (4,211
    )Prepaid expenses and other current assets
    
    
    (149
    )
    
    
    845
    
    
    
    
    (2,893
    )Other long-term assets
    
    
    (803
    )
    
    
    177
    
    
    
    
    (2,943
    )Accounts payable trade and other current liabilities
    
    
    (6,742
    )
    
    
    840
    
    
    
    
    (7,912
    )Accounts payable to related party, net
    
    
    6,563
    
    
    
    
    
    
    
    
    Accrued interest payable
    
    
    (7,821
    )
    
    
    (6,335
    )
    
    
    
    5,515Other long-term liabilities
    
    
    (3,050
    )
    
    
    2,536
    
    
    
    
    (772
    )Net cash provided by operating activities
    
    
    73,640
    
    
    
    8,711
    
    
    
    
    39,713Cash flows from investing activitiesPurchase of property, plant and equipment
    
    
    (9,008
    )
    
    
    
    
    
    
    
    (25,228
    )Proceeds from sale of assets
    
    
    175
    
    
    
    
    
    
    
    
    2,651Net cash used in investing activities
    
    
    (8,833
    )
    
    
    
    
    
    
    
    (22,577
    )Cash flows from financing activitiesDecrease (increase) in restricted funds held in trust
    
    
    1,839
    
    
    
    15,111
    
    
    
    
    (8,273
    )Payment of long-term debt
    
    
    (40,102
    )
    
    
    (6,000
    )
    
    
    
    (29,178
    )Distributions paid to member
    
    
    (17,481
    )
    
    
    
    
    
    
    
    (19,469
    )Distributions paid to holders of minority interests in consolidated subsidiary
    
    
    (26,425
    )
    
    
    
    
    
    
    
    (25,000
    )Net cash (used in) provided by financing activities
    
    
    (82,169
    )
    
    
    9,111
    
    
    
    
    (81,920
    )Net (decrease) increase in cash and cash equivalents
    
    
    (17,362
    )
    
    
    17,822
    
    
    
    
    (64,784
    )Cash and cash equivalents, beginning of period
    
    
    48,844
    
    
    
    21,563
    
    
    
    
    86,347Cash and cash equivalents, end of period
    
    $
    31,482
    
    
    $
    39,385
    
    
    
    $
    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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Notes to Condensed Consolidated Financial Statements (Unaudited)
    Basis of Presentation
    15




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##### Table of Contents



Notes to Condensed Consolidated Financial Statements (Unaudited)
 Note 2. New Accounting Pronouncements
  Note 3. Business Combinations
 MSW I and MSW II
   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
    
    Six Months EndedJune 30,
    
    June 30,Pro Forma
    
    2006
    
    2005
    
    2006
    
    2005Total operating revenues
    
    $
    129,711
    
    
    $
    125,546
    
    
    $
    247,152
    
    
    $
    238,972Income before income
taxes and minority
interests
    
    $
    31,049
    
    
    $
    26,458
    
    
    $
    33,580
    
    
    $
    30,347
 16




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##### Table of Contents



Notes to Condensed Consolidated Financial Statements (Unaudited)
 MSW II
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,Pro Forma
    
    2006
    
    2005
    
    2006
    
    2005Total operating revenues
    
    $
    129,711
    
    
    $
    125,546
    
    
    $
    247,152
    
    
    $
    238,972Income before income
taxes and minority
interests
    
    $
    29,274
    
    
    $
    25,579
    
    
    $
    31,932
    
    
    $
    28,739
 Note 4. Intangible Assets and Goodwill
 MSW I and MSW II
  As ofUseful Life (years)
    
    June 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
    
    
    
    
    (32,451
    )
    
    
    (15,634
    )Intangible assets, net
    
    
    
    $
    254,970
    
    
    $
    271,787
  Waste and
    
    
    Lease InterestEnergy
    
    
    andContracts
    
    
    Landfill
    
    
    TotalsRemainder of 2006
    
    $
    13,736
    
    
    $
    2,563
    
    
    $
    16,2992007
    
    
    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
    
    $
    167,101
    
    
    $
    84,840
    
    
    $
    251,941
 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, June 30, 2006
    
    $
    217,548
    
    
    $
    217,548
  17




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##### Table of Contents



Notes to Condensed Consolidated Financial Statements (Unaudited)
 Note 5. Other Current Liabilities
  MSW I
 As ofJune 30, 2006
    
    
    December 31, 2005Accrued interest expense
    
    $
    14,899
    
    
    $
    22,720Accrued expenses
    
    
    21,100
    
    
    
    22,928Incentive plan accruals
    
    
    975
    
    
    
    3,135Compensation liabilities
    
    
    6,625
    
    
    
    11,307Duke liability
    
    
    
    
    
    
    2,500Other
    
    
    10,469
    
    
    
    6,880Total other current liabilities
    
    $
    54,068
    
    
    $
    69,470
  MSW II
 As ofJune 30, 2006
    
    
    December 31, 2005Accrued interest expense
    
    $
    14,862
    
    
    $
    22,683Accrued expenses
    
    
    21,066
    
    
    
    22,894Incentive plan accruals
    
    
    975
    
    
    
    3,135Compensation liabilities
    
    
    6,625
    
    
    
    11,307Other
    
    
    9,873
    
    
    
    6,982Total other current liabilities
    
    $
    53,401
    
    
    $
    67,001
 Note 6. Financing Arrangements
  MSW I
 As ofJune 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
    
    
    18,690
    
    
    
    20,779Total intermediate debt
    
    
    426,075
    
    
    
    450,564Less: current portion (includes $4,056 and $3,997
of unamortized premium, respectively)
    
    
    31,756
    
    
    
    45,997Total long-term portion of intermediate debt
    
    $
    394,319
    
    
    $
    404,567
 18




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##### Table of Contents



Notes to Condensed Consolidated Financial Statements (Unaudited)
 MSW II
 As ofJune 30,
    
    
    December 31,2006
    
    
    20057.375% Senior Notes due 2010
    
    $
    224,100
    
    
    $
    224,1006.26% Covanta ARC Senior Notes due 2015
    
    
    211,600
    
    
    
    234,000Unamortized premium
    
    
    13,373
    
    
    
    14,823Total intermediate debt
    
    
    449,073
    
    
    
    472,923Less: current portion (includes $2,780 and $2,721
of unamortized premium, respectively)
    
    
    30,480
    
    
    
    44,721Total long-term portion of intermediate debt
    
    $
    418,593
    
    
    $
    428,202
 MSW I and MSW II
  As ofJune 30,
    
    
    December 31,2006
    
    
    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
    
    
    83,422
    
    
    
    83,422Subtotal
    
    
    180,627
    
    
    
    180,627Unamortized premium
    
    
    9,123
    
    
    
    10,901Total Service Fee Structure related project debt
    
    
    189,750
    
    
    
    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
    
    
    23,266
    
    
    
    26,097Total Tip Fee Structure related project debt
    
    
    546,496
    
    
    
    566,997Other obligations
    
    
    168
    
    
    
    199Total project debt
    
    
    736,414
    
    
    
    758,724Less: current portion (includes $8,544 and
$8,600 of unamortized premium, respectively)
    
    
    59,585
    
    
    
    59,668Total long-term portion of project debt
    
    $
    676,829
    
    
    $
    699,056
   19




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Notes to Condensed Consolidated Financial Statements (Unaudited)
 Note 7. Other Long-Term Liabilities
  MSW I
 As ofAmortization
    
    
    June 30,
    
    
    December 31,Period (years)
    
    
    2006
    
    
    2005Waste contracts
    
    
    1  17
    
    
    $
    139,031
    
    
    $
    132,371Duke liability
    
    
    N/A
    
    
    
    
    
    
    
    25,602Energy contract levelization
    
    
    11
    
    
    
    4,242
    
    
    
    2,068Landfill liabilities and asset retirement obligations
    
    
    8
    
    
    
    16,769
    
    
    
    11,577Incentive plan accruals
    
    
    N/A
    
    
    
    1,089
    
    
    
    2,724Other
    
    
    N/A
    
    
    
    52
    
    
    
    1,842Total other long-term liabilities
    
    
    
    
    
    $
    161,183
    
    
    $
    176,184
 MSW II
 As ofAmortization
    
    
    June 30,
    
    
    December 31,Period (years)
    
    
    2006
    
    
    2005Waste contracts
    
    
    1  17
    
    
    $
    139,031
    
    
    $
    132,371Energy contract levelization
    
    
    11
    
    
    
    4,242
    
    
    
    2,068Landfill liabilities and asset retirement obligations
    
    
    8
    
    
    
    16,769
    
    
    
    11,577Incentive plan accruals
    
    
    N/A
    
    
    
    1,089
    
    
    
    2,724Other
    
    
    N/A
    
    
    
    52
    
    
    
    1,843Total other long-term liabilities
    
    
    
    
    
    $
    161,183
    
    
    $
    150,583
 MSW I and MSW II
   Below MarketWasteContractsRemainder of 2006
    
    $
    5,8182007
    
    
    11,6312008
    
    
    11,6442009
    
    
    11,7192010
    
    
    11,8312011
    
    
    11,890Thereafter
    
    
    74,498Total
    
    $
    139,031
 20




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##### Table of Contents



Note 8. Income Taxes
  MSW I
 For the
    
    
    For the Period From
    
    
    
    For the Period FromSix Months Ended
    
    
    June 25 through
    
    
    
    January 1 throughJune 30, 2006
    
    
    June 30, 2005
    
    
    
    June 24, 2005Current provision
    
    $
    (2,933
    )
    
    $
    747
    
    
    
    $
    11,141Deferred provision
    
    
    (2,564
    )
    
    
    (1,224
    )
    
    
    
    (8,380
    )Total consolidated income tax (expense) benefit
    
    $
    (5,497
    )
    
    $
    (477
    )
    
    
    $
    2,761
 MSW II
 For the
    
    
    For the Period From
    
    
    
    For the Period FromSix Months Ended
    
    
    June 25 through
    
    
    
    January 1 throughJune 30, 2006
    
    
    June 30, 2005
    
    
    
    June 24, 2005Current provision
    
    $
    (2,248
    )
    
    $
    (562
    )
    
    
    $
    3,227Deferred provision
    
    
    (2,560
    )
    
    
    72
    
    
    
    
    (910
    )Total consolidated income tax (expense) benefit
    
    $
    (4,808
    )
    
    $
    (490
    )
    
    
    $
    2,317
  Note 9. Commitments and Contingencies
 MSW I and MSW II
  Environmental Matters
 MSW I and MSW II
   Lower Passaic River Study.
 21




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##### Table of Contents



Notes to Condensed Consolidated Financial Statements (Unaudited)
  Other Matters
 MSW I and MSW II
  Mercury Regulation at Essex.
 CMW Landfill.
   22




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##### Table of Contents



Notes to Condensed Consolidated Financial Statements (Unaudited)
  MSW I
  Note 10. Employee Compensation and Benefit Plans
 Stock Option Plan
 MSW I and MSW II
    23




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##### Table of Contents



Notes to Condensed Consolidated Financial Statements (Unaudited)
  Note 11. Correction of a Presentation Error in Prior Period
   MSW I
 As PreviouslyReported For the
    
    
    
    
    
    
    As Restated For thePeriod from April 1
    
    
    
    
    
    
    Period from April 1through
    
    
    
    
    
    
    throughJune 24, 2005
    
    
    Reclassifications
    
    
    June 24, 2005Operating RevenuesWaste and service revenues
    
    $
    76,452
    
    
    $
    (133
    )
    
    $
    76,319Electricity and steam sales
    
    
    54,007
    
    
    
    (14,631
    )
    
    
    39,376Total operating revenues
    
    
    130,459
    
    
    
    (14,764
    )
    
    
    115,695Operating ExpensesPlant operating expenses
    
    
    46,902
    
    
    
    
    
    
    
    46,902Depreciation and amortization expense
    
    
    42,058
    
    
    
    (14,764
    )
    
    
    27,294Net interest expense on project debt
    
    
    6,645
    
    
    
    
    
    
    
    6,645General and administrative expenses
    
    
    33,470
    
    
    
    
    
    
    
    33,470Gain on asset retirements
    
    
    (867
    )
    
    
    
    
    
    
    (867
    )Total operating expenses
    
    
    128,208
    
    
    
    (14,764
    )
    
    
    113,444Operating income
    
    
    2,251
    
    
    
    
    
    
    
    2,251Other Income (Expense)Interest income
    
    
    519
    
    
    
    
    
    
    
    519Interest expense
    
    
    (8,529
    )
    
    
    
    
    
    
    (8,529
    )Total other expenses
    
    
    (8,010
    )
    
    
    
    
    
    
    (8,010
    )Loss before income tax benefit
and minority interests
    
    
    (5,759
    )
    
    
    
    
    
    
    (5,759
    )Income tax benefit
    
    
    2,242
    
    
    
    
    
    
    
    2,242Minority interests
    
    
    464
    
    
    
    
    
    
    
    464Net Loss
    
    $
    (3,053
    )
    
    $
    
    
    
    $
    (3,053
    )
 24




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##### Table of Contents



Notes to Condensed Consolidated Financial Statements (Unaudited)
 MSW II
 As PreviouslyReported For the
    
    
    
    
    
    
    As Restated For thePeriod from April 1
    
    
    
    
    
    
    Period from April 1through
    
    
    
    
    
    
    throughJune 24, 2005
    
    
    Reclassifications
    
    
    June 24, 2005Operating RevenuesWaste and service revenues
    
    $
    76,452
    
    
    $
    (133
    )
    
    $
    76,319Electricity and steam sales
    
    
    54,007
    
    
    
    (14,631
    )
    
    
    39,376Total operating revenues
    
    
    130,459
    
    
    
    (14,764
    )
    
    
    115,695Operating ExpensesPlant operating expenses
    
    
    46,902
    
    
    
    
    
    
    
    46,902Depreciation and amortization expense
    
    
    42,058
    
    
    
    (14,764
    )
    
    
    27,294Net interest expense on project debt
    
    
    6,645
    
    
    
    
    
    
    
    6,645General and administrative expenses
    
    
    33,413
    
    
    
    
    
    
    
    33,413Gain on asset retirements
    
    
    (867
    )
    
    
    
    
    
    
    (867
    )Total operating expenses
    
    
    128,151
    
    
    
    (14,764
    )
    
    
    113,387Operating income
    
    
    2,308
    
    
    
    
    
    
    
    2,308Other Income (Expense)Interest income
    
    
    477
    
    
    
    
    
    
    
    477Interest expense
    
    
    (7,965
    )
    
    
    
    
    
    
    (7,965
    )Total other expenses
    
    
    (7,488
    )
    
    
    
    
    
    
    (7,488
    )Loss before income tax benefit
and minority interests
    
    
    (5,180
    )
    
    
    
    
    
    
    (5,180
    )Income tax benefit
    
    
    2,109
    
    
    
    
    
    
    
    2,109Minority interests
    
    
    288
    
    
    
    
    
    
    
    288Net Loss
    
    $
    (2,783
    )
    
    $
    
    
    
    $
    (2,783
    )
 Note 12. Related Party Transactions
 MSW I and MSW II
  25




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
     26




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##### Table of Contents



27




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##### Table of Contents



Results of Operations
    MSW I
 Results of Operations  Three Months Ended June 30, 2006 vs. Three Months Ended June 30, 2005
 For the Three Months Ended June 30,Reported
    
    
    Pro Forma2006
    
    
    2005*
    
    
    2006
    
    
    2005(Unaudited, in thousands of dollars)Operating RevenuesWaste and service revenues
    
    $
    85,307
    
    
    $
    82,011
    
    
    $
    85,307
    
    
    $
    83,202Electricity and steam sales
    
    
    44,404
    
    
    
    42,344
    
    
    
    44,404
    
    
    
    42,344Total operating revenues
    
    
    129,711
    
    
    
    124,355
    
    
    
    129,711
    
    
    
    125,546Operating ExpensesPlant operating expenses
    
    
    48,829
    
    
    
    49,671
    
    
    
    48,829
    
    
    
    51,100Depreciation and amortization expense
    
    
    30,745
    
    
    
    29,229
    
    
    
    30,745
    
    
    
    29,779Net interest expense on project debt
    
    
    6,680
    
    
    
    7,103
    
    
    
    6,680
    
    
    
    7,693General and administrative expenses
    
    
    6,263
    
    
    
    33,728
    
    
    
    6,263
    
    
    
    5,359Loss (gain) on asset retirement
    
    
    878
    
    
    
    (867
    )
    
    
    878
    
    
    
    (867
    )Total operating expenses
    
    
    93,395
    
    
    
    118,864
    
    
    
    93,395
    
    
    
    93,064Operating income
    
    $
    36,316
    
    
    $
    5,491
    
    
    $
    36,316
    
    
    $
    32,482
 
 *
    
    Represents the combined period of June 25 through June 30, 2005 and April 1 through June 24,
2005. Comparison of Reported Results for the Three Months Ended June 30, 2006 vs. Combined Results for
the Three Months Ended June 30, 2005
 Total Operating Revenues.
  Total Operating Expenses.
 28




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##### Table of Contents



Operating Income.
 Comparison of Pro Forma Results for the Three Months Ended June 30, 2006 vs. Pro Forma Results for
the Three Months Ended June 30, 2005
 Total Operating Revenues.
  Plant Operating Expenses.
 Net Interest Expense on Project Debt
 Results of Operations  Six Months Ended June 30, 2006 vs. Six Months Ended June 30, 2005
 For the Six Months Ended June 30,Reported
    
    
    Pro Forma2006
    
    
    2005*
    
    
    2006
    
    
    2005(Unaudited, in thousands of dollars)Operating RevenuesWaste and service revenues
    
    $
    159,808
    
    
    $
    154,484
    
    
    $
    159,808
    
    
    $
    156,344Electricity and steam sales
    
    
    87,344
    
    
    
    82,628
    
    
    
    87,344
    
    
    
    82,628Total operating revenues
    
    
    247,152
    
    
    
    237,112
    
    
    
    247,152
    
    
    
    238,972Operating ExpensesPlant operating expenses
    
    
    112,671
    
    
    
    106,385
    
    
    
    112,671
    
    
    
    109,522Depreciation and amortization expense
    
    
    61,053
    
    
    
    58,967
    
    
    
    61,053
    
    
    
    59,685Net interest expense on project debt
    
    
    13,567
    
    
    
    14,422
    
    
    
    13,567
    
    
    
    15,648General and administrative expenses
    
    
    12,867
    
    
    
    40,003
    
    
    
    12,867
    
    
    
    11,230Loss on asset retirement
    
    
    878
    
    
    
    519
    
    
    
    878
    
    
    
    519Total operating expenses
    
    
    201,036
    
    
    
    220,296
    
    
    
    201,036
    
    
    
    196,604Operating income
    
    $
    46,116
    
    
    $
    16,816
    
    
    $
    46,116
    
    
    $
    42,368
 
 *
    
    Represents the combined period of June 25 through June 30, 2005 and January 1 through June 24,
2005. Comparison of Reported Results for the Six Months Ended June 30, 2006 vs. Combined Results for the
Six Months Ended June 30, 2005
 Total Operating Revenues.
  Total
Operating Expenses.
 29




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##### Table of Contents



Operating Income.
 Comparison of Pro Forma Results for the Six Months Ended June 30, 2006 vs. Pro Forma Results for
the Six Months Ended June 30, 2005
 Total Operating Revenues.
  Plant Operating Expenses.
 Net Interest Expense on Project Debt
 MSW II
 Results of Operations  Three Months Ended June 30, 2006 vs. Three Months Ended June 30, 2005
 For the Three Months Ended June 30,Reported
    
    
    Pro Forma2006
    
    
    2005*
    
    
    2006
    
    
    2005(Unaudited, in thousands of dollars)Operating RevenuesWaste and service revenues
    
    $
    85,307
    
    
    $
    82,011
    
    
    $
    85,307
    
    
    $
    83,202Electricity and steam sales
    
    
    44,404
    
    
    
    42,344
    
    
    
    44,404
    
    
    
    42,344Total operating revenues
    
    
    129,711
    
    
    
    124,355
    
    
    
    129,711
    
    
    
    125,546Operating ExpensesPlant operating expenses
    
    
    48,829
    
    
    
    49,671
    
    
    
    48,829
    
    
    
    51,100Depreciation and amortization expense
    
    
    30,745
    
    
    
    29,229
    
    
    
    30,745
    
    
    
    29,779Net interest expense on project debt
    
    
    6,680
    
    
    
    7,103
    
    
    
    6,680
    
    
    
    7,693General and administrative expenses
    
    
    6,235
    
    
    
    33,665
    
    
    
    6,235
    
    
    
    5,296Loss (gain) on asset retirement
    
    
    878
    
    
    
    (867
    )
    
    
    878
    
    
    
    (867
    )Total operating expenses
    
    
    93,367
    
    
    
    118,801
    
    
    
    93,367
    
    
    
    93,001Operating income
    
    $
    36,344
    
    
    $
    5,554
    
    
    $
    36,344
    
    
    $
    32,545
 
 *
    
    Represents the combined period of June 25 through June 30, 2005 and April 1 through June 24,
2005. Comparison of Reported Results for the Three Months Ended June 30, 2006 vs. Combined Results for
the Three Months Ended June 30, 2005
 Total Operating Revenues.
  Total Operating Expenses.
 30




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##### Table of Contents



Operating Income.
 Comparison of Pro Forma Results for the Three Months Ended June 30, 2006 vs. Pro Forma Results for
the Three Months Ended June 30, 2005
 Total Operating Revenues.
  Plant Operating Expenses.
 Net Interest Expense on Project Debt
 Results of Operations  Six Months Ended June 30, 2006 vs. Six Months Ended June 30, 2005
 For the Six Months Ended June 30,Reported
    
    
    Pro Forma2006
    
    
    2005*
    
    
    2006
    
    
    2005(Unaudited, in thousands of dollars)Operating RevenuesWaste and service revenues
    
    $
    159,808
    
    
    $
    154,484
    
    
    $
    159,808
    
    
    $
    156,344Electricity and steam sales
    
    
    87,344
    
    
    
    82,628
    
    
    
    87,344
    
    
    
    82,628Total operating revenues
    
    
    247,152
    
    
    
    237,112
    
    
    
    247,152
    
    
    
    238,972Operating ExpensesPlant operating expenses
    
    
    112,671
    
    
    
    106,385
    
    
    
    112,671
    
    
    
    109,522Depreciation and amortization expense
    
    
    61,053
    
    
    
    58,967
    
    
    
    61,053
    
    
    
    59,685Net interest expense on project debt
    
    
    13,567
    
    
    
    14,422
    
    
    
    13,567
    
    
    
    15,648General and administrative expenses
    
    
    12,823
    
    
    
    39,882
    
    
    
    12,823
    
    
    
    11,109Loss on asset retirement
    
    
    878
    
    
    
    519
    
    
    
    878
    
    
    
    519Total operating expenses
    
    
    200,992
    
    
    
    220,175
    
    
    
    200,992
    
    
    
    196,483Operating income
    
    $
    46,160
    
    
    $
    16,937
    
    
    $
    46,160
    
    
    $
    42,489
 
 *
    
    Represents the combined period of June 25 through June 30, 2005 and January 1 through June 24,
2005. Comparison of Reported Results for the Six Months Ended June 30, 2006 vs. Combined Results for the
Six Months Ended June 30, 2005
 Total Operating Revenues.
  Total Operating Expenses.
 Operating Income.
 31




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##### Table of Contents



Comparison of Pro Forma Results for the Six Months Ended June 30, 2006 vs. Pro Forma Results
for the Six Months Ended June 30, 2005
 Total Operating Revenues.
  Plant Operating Expenses.
 Net Interest Expense on Project Debt
 Pro Forma Reconciliations
 MSW I
 Reported Three
    
    
    
    
    
    
    Pro Forma ThreeMonths Ended
    
    
    Pro Forma
    
    
    Months EndedJune 30, 2005*
    
    
    Adjustments
    
    
    June 30, 2005(Unaudited, in thousands of dollars)Operating RevenuesWaste and service revenues
    
    $
    82,011
    
    
    $
    1,191
    
    
    $
    83,202Electricity and steam sales
    
    
    42,344
    
    
    
    
    
    
    
    42,344Total operating revenues
    
    
    124,355
    
    
    
    1,191
    
    
    
    125,546Operating ExpensesPlant operating expenses
    
    
    49,671
    
    
    
    1,429
    
    
    
    51,100Depreciation and amortization expense
    
    
    29,229
    
    
    
    550
    
    
    
    29,779Net interest expense on project debt
    
    
    7,103
    
    
    
    590
    
    
    
    7,693General and administrative expenses
    
    
    33,728
    
    
    
    (28,369
    )
    
    
    5,359Loss on asset retirements
    
    
    (867
    )
    
    
    
    
    
    
    (867
    )Total operating expenses
    
    
    118,864
    
    
    
    (25,800
    )
    
    
    93,064Operating income
    
    $
    5,491
    
    
    $
    26,991
    
    
    $
    32,482
 
 *
    
    Represents the combined period of June 25 through June 30, 2005 and April 1 through June 24,
2005. Reported Six
    
    
    
    
    
    
    Pro Forma SixMonths Ended
    
    
    Pro Forma
    
    
    Months EndedJune 30, 2005*
    
    
    Adjustments
    
    
    June 30, 2005(Unaudited, in thousands of dollars)Operating RevenuesWaste and service revenues
    
    $
    154,484
    
    
    $
    1,860
    
    
    $
    156,344Electricity and steam sales
    
    
    82,628
    
    
    
    
    
    
    
    82,628Total operating revenues
    
    
    237,112
    
    
    
    1,860
    
    
    
    238,972Operating ExpensesPlant operating expenses
    
    
    106,385
    
    
    
    3,137
    
    
    
    109,522Depreciation and amortization expense
    
    
    58,967
    
    
    
    718
    
    
    
    59,685Net interest expense on project debt
    
    
    14,422
    
    
    
    1,226
    
    
    
    15,648General and administrative expenses
    
    
    40,003
    
    
    
    (28,773
    )
    
    
    11,230Loss on asset retirements
    
    
    519
    
    
    
    
    
    
    
    519Total operating expenses
    
    
    220,296
    
    
    
    (23,692
    )
    
    
    196,604Operating income
    
    $
    16,816
    
    
    $
    25,552
    
    
    $
    42,368
 
 *
    
    Represents the combined period of June 25 through June 30, 2005 and January 1 through June 24,
2005. 32




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##### Table of Contents



MSW II
 Reported Three
    
    
    
    
    
    
    Pro Forma ThreeMonths Ended
    
    
    Pro Forma
    
    
    Months EndedJune 30, 2005*
    
    
    Adjustments
    
    
    June 30, 2005(Unaudited, in thousands of dollars)Operating RevenuesWaste and service revenues
    
    $
    82,011
    
    
    $
    1,191
    
    
    $
    83,202Electricity and steam sales
    
    
    42,344
    
    
    
    
    
    
    
    42,344Total operating revenues
    
    
    124,355
    
    
    
    1,191
    
    
    
    125,546Operating ExpensesPlant operating expenses
    
    
    49,671
    
    
    
    1,429
    
    
    
    51,100Depreciation and amortization expense
    
    
    29,229
    
    
    
    550
    
    
    
    29,779Net interest expense on project debt
    
    
    7,103
    
    
    
    590
    
    
    
    7,693General and administrative expenses
    
    
    33,665
    
    
    
    (28,369
    )
    
    
    5,296Loss on asset retirements
    
    
    (867
    )
    
    
    
    
    
    
    (867
    )Total operating expenses
    
    
    118,801
    
    
    
    (25,800
    )
    
    
    93,001Operating income
    
    $
    5,554
    
    
    $
    26,991
    
    
    $
    32,545
 
 *
    
    Represents the combined period of June 25 through June 30, 2005 and April 1 through June 24,
2005. Reported Six
    
    
    
    
    
    
    Pro Forma SixMonths Ended
    
    
    Pro Forma
    
    
    Months EndedJune 30, 2005*
    
    
    Adjustments
    
    
    June 30, 2005(Unaudited, in thousands of dollars)Operating RevenuesWaste and service revenues
    
    $
    154,484
    
    
    $
    1,860
    
    
    $
    156,344Electricity and steam sales
    
    
    82,628
    
    
    
    
    
    
    
    82,628Total operating revenues
    
    
    237,112
    
    
    
    1,860
    
    
    
    238,972Operating ExpensesPlant operating expenses
    
    
    106,385
    
    
    
    3,137
    
    
    
    109,522Depreciation and amortization expense
    
    
    58,967
    
    
    
    718
    
    
    
    59,685Net interest expense on project debt
    
    
    14,422
    
    
    
    1,226
    
    
    
    15,648General and administrative expenses
    
    
    39,882
    
    
    
    (28,773
    )
    
    
    11,109Loss on asset retirements
    
    
    519
    
    
    
    
    
    
    
    519Total operating expenses
    
    
    220,175
    
    
    
    (23,692
    )
    
    
    196,483Operating income
    
    $
    16,937
    
    
    $
    25,552
    
    
    $
    42,489
 
 *
    
    Represents the combined period of June 25 through June 30, 2005 and January 1 through June 24,
2005. 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.
 33




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##### Table of Contents




    
    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
  Sources and Uses of Cash for the Six Months Ended June 30, 2006
  MSW I
 For the Six
    
    
    For the Period From
    
    
    
    For the Period FromMonths Ended
    
    
    June 25 through
    
    
    
    January 1 throughJune 30, 2006
    
    
    June 30, 2005
    
    
    
    June 24, 2005Net cash provided by (used in):Operating Activities
    
    $
    73,895
    
    
    $
    6,189
    
    
    
    $
    39,586Investing Activities
    
    
    (8,833
    )
    
    
    
    
    
    
    
    (22,577
    )Financing Activities
    
    
    (82,482
    )
    
    
    11,609
    
    
    
    
    (81,783
    )Net (decrease) increase in cash and cash equivalents
    
    
    (17,420
    )
    
    
    17,798
    
    
    
    
    (64,774
    )Cash and cash equivalents, beginning of period
    
    
    48,895
    
    
    
    21,536
    
    
    
    
    86,310Cash and cash equivalents, end of period
    
    $
    31,475
    
    
    $
    39,334
    
    
    
    $
    21,536
 Operating Activities
  Investing Activities
  Financing Activities
  34




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##### Table of Contents



Duke Agreement
  MSW II
 For the Six
    
    
    For the Period From
    
    
    
    For the Period FromMonths Ended
    
    
    June 25 through
    
    
    
    January 1 throughJune 30, 2006
    
    
    June 30, 2005
    
    
    
    June 24, 2005Net cash provided by (used in):Operating Activities
    
    $
    73,640
    
    
    $
    8,711
    
    
    
    $
    39,713Investing Activities
    
    
    (8,833
    )
    
    
    
    
    
    
    
    (22,577
    )Financing Activities
    
    
    (82,169
    )
    
    
    9,111
    
    
    
    
    (81,920
    )Net (decrease) increase in cash and cash equivalents
    
    
    (17,362
    )
    
    
    17,822
    
    
    
    
    (64,784
    )Cash and cash equivalents, beginning of period
    
    
    48,844
    
    
    
    21,563
    
    
    
    
    86,347Cash and cash equivalents, end of period
    
    $
    31,482
    
    
    $
    39,385
    
    
    
    $
    21,563
 Operating Activities
  Investing Activities
  Financing Activities
  Debt Covenants
 MSW I and MSW II
  35




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##### Table of Contents



Critical Accounting Policies
 MSW I and MSW II
  Recent Accounting Pronouncements
  
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4. CONTROLS AND PROCEDURES
 MSW I and MSW II
    36




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##### Table of Contents



PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
 MSW I and MSW II
  
 ITEM 1A. RISK FACTORS
  
 ITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 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 Craig D. Abolt 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 Craig D. Abolt 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 Craig D. Abolt 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 Craig D. Abolt for MSW Energy Finance Co. II, 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.32.3
    
    Section 1350 Certification of Anthony J. Orlando and Craig D. Abolt for MSW Energy Holdings II LLC.32.4
    
    Section 1350 Certification of Anthony J. Orlando and Craig D. Abolt for MSW Energy Finance Co. II, Inc.
 37




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##### Table of Contents



SIGNATURES
  MSW ENERGY HOLDINGS LLCBy:
    /s/ Craig D. AboltCraig D. AboltSenior Vice President and Chief Financial OfficerBy:
    /s/ Thomas E. BucksThomas E. BucksVice President and Chief Accounting Officer  38




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##### Table of Contents



SIGNATURES
  MSW ENERGY FINANCE CO., INC.By:
    /s/ Craig D. AboltCraig D. AboltSenior Vice President and Chief Financial OfficerBy:
    /s/ Thomas E. BucksThomas E. BucksVice President and Chief Accounting Officer  39




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##### Table of Contents



SIGNATURES
  MSW ENERGY HOLDINGS II LLCBy:
    /s/ Craig D. AboltCraig D. AboltSenior Vice President and Chief Financial OfficerBy:
    /s/ Thomas E. BucksThomas E. BucksVice President and Chief Accounting Officer  40




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##### Table of Contents



SIGNATURES
  MSW ENERGY FINANCE CO. II, INC.By:
    /s/ Craig D. AboltCraig D. AboltSenior Vice President and Chief Financial OfficerBy:
    /s/ Thomas E. BucksThomas E. BucksVice President and Chief Accounting Officer  41




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##### 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 Craig D. Abolt 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 Craig D. Abolt 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 Craig D. Abolt 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 Craig D. Abolt for MSW Energy Finance Co. II, 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.32.3
    
    Section 1350 Certification of Anthony J. Orlando and Craig D. Abolt for MSW Energy Holdings II LLC.32.4
    
    Section 1350 Certification of Anthony J. Orlando and Craig D. Abolt for MSW Energy Finance Co. II, Inc.
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