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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 March 31, 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
 
 0001276518
0001276517  Commission File Number
 MSW Energy Holdings II LLC
MSW Energy Finance Co. II, Inc.
 Delaware
    
    
    
    
    
    13-3213489Delaware
    
    
    
    
    
    20-0400947(State or other
jurisdiction of
incorporation or
organization)
    
    
    
    
    
    (I.R.S. Employer
Identification
Number)
 c/o Covanta Holding Corporation
 40 Lane Road
Fairfield, New Jersey 07004
973-882-9000
  Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
 Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act:
 MSW Energy Holdings II LLC:
    
    Large accelerated filero
    
    Accelerated filero
    
    Non-accelerated filerþMSW Energy Finance Co. II, Inc:
    
    Large accelerated filero
    
    Accelerated filero
    
    Non-accelerated filerþ
 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
 MSW Energy Holdings II LLC:
    
    Yes o
    
    No þMSW Energy Finance Co. II, Inc:
    
    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 II LLC:
    
    None, as of the close of business on May 1, 2006MSW Energy Finance Co. II, Inc:
    
    100 shares of Common Stock, as of the close of business on May 1, 2006
 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 Statements of Operations for the Three Months Ended March 31, 2006 and 2005 (Unaudited)
    
    
    4Condensed Consolidated Balance Sheets as of March 31, 2006 (Unaudited) and December 31, 2005
    
    
    5Condensed Consolidated Statement of Members Equity as of March 31, 2006 (Unaudited)
    
    
    6Condensed
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2006 and 2005 (Unaudited)
    
    
    7Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    
    8Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    18Item 3.
Quantitative and Qualitative Disclosures about Market Risk
    
    
    22Item 4. Controls and Procedures
    
    
    22Part II. Other InformationItem 1. Legal Proceedings
    
    
    23Item 1A. Risk Factors
    
    
    24Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    24Item 3. Defaults Upon Senior Securities
    
    
    24Item 4. Submission of Matters to a Vote of Security Holders
    
    
    24Item 5. Other Information
    
    
    24Item 6. Exhibits
    
    
    25OtherSignatures
    
    
    26Statement re Computation of Ratio of Earnings to Fixed Charges15d-14(a) Certification of Anthony J. Orlando for MSW Energy Holdings II LLC15d-14(a) Certification of Craig D. Abolt for MSW Energy Holdings II LLC15d-14(a) Certification of Anthony J. Orlando for MSW Energy Finance Co. II, Inc.15d-14(a) Certification of Craig D. Abolt for MSW Energy Finance Co. II, Inc.Section 1350 Certification for MSW Energy Holdings II LLC.Section 1350 Certification for MSW Energy Finance Co. II, Inc.
  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 II LLC AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands of dollars)
 For the Three
    
    
    
    For the ThreeMonths Ended
    
    
    
    Months EndedMarch 31, 2006
    
    
    
    March 31, 2005Operating RevenuesWaste and service revenues
    
    $
    74,501
    
    
    
    $
    72,473Electricity and steam sales
    
    
    42,940
    
    
    
    
    40,284Total operating revenues
    
    
    117,441
    
    
    
    
    112,757Operating ExpensesPlant operating expenses
    
    
    63,842
    
    
    
    
    56,715Depreciation
and amortization expense
    
    
    30,308
    
    
    
    
    29,738Net interest expense on project debt
    
    
    6,887
    
    
    
    
    7,318General and administrative expenses
    
    
    6,588
    
    
    
    
    6,214Loss on asset retirements
    
    
    
    
    
    
    
    1,386Total operating expenses
    
    
    107,625
    
    
    
    
    101,371Operating income
    
    
    9,816
    
    
    
    
    11,386Other Income
(Expense)Interest income
    
    
    367
    
    
    
    
    534Interest expense
    
    
    (7,525
    )
    
    
    
    (8,429
    )Total other
expenses
    
    
    (7,158
    )
    
    
    
    (7,895
    )Income before
income tax benefit and minority interests
    
    
    2,658
    
    
    
    
    3,491Minority interests
    
    
    (3,608
    )
    
    
    
    (3,978
    )Income tax benefit
    
    
    396
    
    
    
    
    208Net loss
    
    $
    (554
    )
    
    
    $
    (279
    )
  4




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MSW ENERGY HOLDINGS II LLC AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
 As ofMarch 31, 2006
    
    
    
    December 31, 2005(unaudited)AssetsCurrent assetsCash and cash equivalents
    
    $
    31,872
    
    
    
    $
    48,844Restricted cash and short-term investments
    
    
    39,921
    
    
    
    
    71,513Accounts receivable, net of allowance for
doubtful accounts of $2,327 and $2,267,
respectively
    
    
    71,955
    
    
    
    
    73,994Prepaid expenses and other current assets
    
    
    15,953
    
    
    
    
    16,543Total current assets
    
    
    159,701
    
    
    
    
    210,894Long-term assetsProperty, plant and equipment, net
    
    
    1,913,126
    
    
    
    
    1,928,144Intangible assets, net
    
    
    263,115
    
    
    
    
    271,787Goodwill
    
    
    255,927
    
    
    
    
    255,927Restricted cash and long-term investments
    
    
    118,832
    
    
    
    
    118,301Other long-term assets
    
    
    17,005
    
    
    
    
    10,254Total long-term assets
    
    
    2,568,005
    
    
    
    
    2,584,413Total assets
    
    $
    2,727,706
    
    
    
    $
    2,795,307Liabilities and Members EquityCurrent liabilitiesAccounts payable trade
    
    $
    5,975
    
    
    
    $
    3,009Accounts payable to related party, net
    
    
    15,440
    
    
    
    
    4,243Current portion of intermediate debt
    
    
    30,780
    
    
    
    
    44,721Current portion of project debt
    
    
    59,752
    
    
    
    
    59,668Other current liabilities
    
    
    52,961
    
    
    
    
    67,001Total current liabilities
    
    
    164,908
    
    
    
    
    178,642Long-term liabilitiesIntermediate debt
    
    
    427,411
    
    
    
    
    428,202Project debt
    
    
    678,879
    
    
    
    
    699,056Deferred income taxes
    
    
    261,811
    
    
    
    
    260,369Other long-term liabilities
    
    
    147,486
    
    
    
    
    150,583Total long-term liabilities
    
    
    1,515,587
    
    
    
    
    1,538,210Total liabilities
    
    
    1,680,495
    
    
    
    
    1,716,852Commitments and contingencies (Note 10)Minority interests
    
    
    766,820
    
    
    
    
    779,637Members equityTotal members equity
    
    
    280,391
    
    
    
    
    298,818Total liabilities and members equity
    
    $
    2,727,706
    
    
    
    $
    2,795,307
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MSW ENERGY HOLDINGS II LLC AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENT OF MEMBERS EQUITY
(Unaudited, in thousands of dollars)
 MembersEquityBalance, December 31, 2005
    
    $
    298,818Distribution to member
    
    
    (16,083
    )Current tax benefit contributed to member
    
    
    (1,790
    )Net loss
    
    
    (554
    )Balance, March 31, 2006
    
    $
    280,391
  6




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MSW ENERGY HOLDINGS II LLC AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands of dollars)
 For the Three Months
    
    
    
    For the Three MonthsEnded March 31, 2006
    
    
    
    Ended March 31, 2005Cash flows from operating activitiesNet loss
    
    $
    (554
    )
    
    
    $
    (279
    )Adjustments to reconcile net loss to net cash provided by
operating activities:Depreciation and amortization
    
    
    30,308
    
    
    
    
    29,738Deferred income taxes
    
    
    1,403
    
    
    
    
    1,613Revenue contract levelization
    
    
    1,061
    
    
    
    
    328Amortization of lease liability
    
    
    748
    
    
    
    
    (824
    )Amortization of debt premium and deferred financing costs
    
    
    (3,139
    )
    
    
    
    (2,703
    )Loss asset retirements
    
    
    
    
    
    
    
    1,386Minority interests
    
    
    3,608
    
    
    
    
    3,978Amortization of deferred revenue
    
    
    
    
    
    
    
    (33
    )Changes in assets and liabilities:Accounts receivable, net
    
    
    2,039
    
    
    
    
    3,786Prepaid expenses and other current assets
    
    
    590
    
    
    
    
    (3,486
    )Other long-term assets
    
    
    (6,751
    )
    
    
    
    (6,902
    )Accounts payable and other current liabilities
    
    
    (5,886
    )
    
    
    
    3,891Accounts payable to related party, net
    
    
    11,197
    
    
    
    
    Accrued interest payable
    
    
    (6,940
    )
    
    
    
    3,839Other long-term liabilities
    
    
    (1,402
    )
    
    
    
    (1,915
    )Net cash provided by operating activities
    
    
    26,282
    
    
    
    
    32,417Cash flows from investing activitiesAdditions of property, plant and equipment
    
    
    (10,121
    )
    
    
    
    (17,076
    )Proceeds from sale of assets
    
    
    
    
    
    
    
    1,036Net cash used in investing activities
    
    
    (10,121
    )
    
    
    
    (16,040
    )Cash flows from financing activitiesChange in restricted cash and investments, net
    
    
    31,061
    
    
    
    
    16,510Payment of long-term debt
    
    
    (31,686
    )
    
    
    
    (29,156
    )Distributions paid to member
    
    
    (16,083
    )
    
    
    
    (21,324
    )Distributions paid to holders of minority interests in
consolidated subsidiary
    
    
    (16,425
    )
    
    
    
    (19,500
    )Net cash used in financing activities
    
    
    (33,133
    )
    
    
    
    (53,470
    )Net decrease in cash and cash equivalents
    
    
    (16,972
    )
    
    
    
    (37,093
    )Cash and cash equivalents, beginning of fiscal year
    
    
    48,844
    
    
    
    
    86,347Cash and cash equivalents, end of quarter
    
    $
    31,872
    
    
    
    $
    49,254
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MSW Energy Holdings II LLC and Subsidiaries





Notes to Condensed Consolidated Financial Statements (Unaudited)


Note 1. Organization and Basis of Presentation


Organization
     Basis of Presentation
  8




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MSW Energy Holdings II LLC and Subsidiaries
 
 Notes to Condensed Consolidated Financial Statements (Unaudited)
  Note
2. Significant Accounting Policies and New Accounting Pronouncements
 Significant Accounting Policies
 Stock-Based Compensation
   
  New Accounting Pronouncements
   9




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MSW Energy Holdings II LLC and Subsidiaries
 
 Notes to Condensed Consolidated Financial Statements (Unaudited)
 Note 3. Business Combinations
    Fair value of assets acquiredCurrent assets
    
    $
    175,274Property, plant and equipment
    
    
    1,973,317Intangible assets (excluding goodwill)
    
    
    287,421Other assets
    
    
    141,512Goodwill
    
    
    255,927Total Assets Acquired
    
    
    2,833,451Fair value of liabilities assumedCurrent liabilities
    
    
    64,058Current portion of Intermediate debt
    
    
    23,601Current portion of Project debt
    
    
    64,305Long-term Intermediate debt
    
    
    457,730Long-term Project debt
    
    
    737,385Deferred income taxes
    
    
    253,669Other liabilities
    
    
    150,327Total Liabilities Assumed
    
    
    1,751,075Minority interest account
    
    
    780,069Net assets acquired
    
    $
    302,307
  10




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MSW Energy Holdings II LLC and Subsidiaries
 
 Notes to Condensed Consolidated Financial Statements (Unaudited)
 Pro Forma Information
  Pro FormaFor the ThreeMonths EndedMarch 31, 2005Operating RevenuesWaste and service revenues
    
    $
    73,142Electricity and steam sales
    
    
    40,284Total operating revenues
    
    
    113,426Operating ExpensesPlant operating expenses
    
    
    58,422Depreciation
and amortization expense
    
    
    29,906Net interest expense on project debt
    
    
    7,955General and administrative expenses
    
    
    5,812Loss on asset retirements
    
    
    1,386Total operating expenses
    
    
    103,481Operating income
    
    
    9,945Interest income
    
    
    560Interest expense
    
    
    (7,345
    )Income before minority interests and income taxes
    
    $
    3,160
 4. Reclassifications of Prior Periods
  As Previously
    
    
    
    
    
    
    As ReportedReported For the
    
    
    
    
    
    
    For theThree Months Ended
    
    
    
    
    
    
    Three Months EndedMarch 31, 2005
    
    
    Reclassifications
    
    
    March 31, 2005Operating RevenuesWaste and service revenues
    
    $
    64,639
    
    
    $
    7,834
    
    
    $
    72,473Electricity and steam sales
    
    
    32,388
    
    
    
    7,896
    
    
    
    40,284Other revenues
    
    
    3,204
    
    
    
    (3,204
    )
    
    
    Total operating revenues
    
    
    100,231
    
    
    
    12,526
    
    
    
    112,757Operating ExpensesPlant operating expenses
    
    
    52,794
    
    
    
    3,921
    
    
    
    56,715Depreciation
and amortization expense
    
    
    16,736
    
    
    
    13,002
    
    
    
    29,738Net interest expense on project debt
    
    
    
    
    
    
    7,318
    
    
    
    7,318General and administrative expenses
    
    
    10,971
    
    
    
    (4,757
    )
    
    
    6,214Loss on asset retirements
    
    
    1,386
    
    
    
    
    
    
    
    1,386Total operating expenses
    
    
    81,887
    
    
    
    19,484
    
    
    
    101,371Operating income
    
    
    18,344
    
    
    
    (6,958
    )
    
    
    11,386Interest income
    
    
    1,106
    
    
    
    (572
    )
    
    
    534Interest expense
    
    
    (16,319
    )
    
    
    7,890
    
    
    
    (8,429
    )Minority interests
    
    
    (3,978
    )
    
    
    
    
    
    
    (3,978
    )Other income, net
    
    
    360
    
    
    
    (360
    )
    
    
    Loss before income taxes
    
    $
    (487
    )
    
    $
    
    
    
    $
    (487
    )
  
    
    The amortization of above and below
market contracts were reclassified from waste and service
revenues ($1.8 million decrease to depreciation and amortization
expense) and electricity and steam
sales ($14.8 million increase to depreciation and amortization
expense) into depreciation and
amortization expense.
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MSW Energy Holdings II LLC and Subsidiaries
 
 Notes to Condensed Consolidated Financial Statements (Unaudited)
 
 
    
    Other revenues, which primarily consisted of sales of scrap metals, were reclassified
from other revenues into waste and service revenues
($3.2 million).
    
    Net interest expense on project debt and interest income on funds restricted for the payment
of project debt were reclassified as part of operating income (a net $7.3 million).
    
    Certain costs associated with operating facilities and TransRiver were reclassified from
general and administrative expenses into plant operating expenses ($4.8 million).
    
    Reimbursements from certain municipal clients for operating expenses were reclassified
from revenues to reductions of plant operating expenses ($1.1 million reduction).
    
    Reductions of revenues shared with certain municipal customers for energy produced were
reclassified from waste and service revenues to electricity and steam sales ($6.9 million
reduction in electricity and steam sales).
    
    Other minor miscellaneous reclassifications were also made to conform to Covantas
presentation.
  5. Intangible Assets and Goodwill
  As
ofUseful Life
    
    
    March 31, 2006
    
    
    
    December 31, 2005Waste and energy contracts
    
    4  11  years
    
    $
    194,562
    
    
    
    $
    194,562Lease interest
    
    24 years
    
    
    71,845
    
    
    
    
    71,845Landfill
    
    8 years
    
    
    17,985
    
    
    
    
    17,985Other intangibles
    
    Indefinite
    
    
    3,029
    
    
    
    
    3,029287,421
    
    
    
    
    287,421Accumulated amortization
    
    
    
    
    
    
    (24,306
    )
    
    
    
    (15,634
    )Intangible assets, net
    
    
    
    
    
    $
    263,115
    
    
    
    $
    271,787
  Waste and
    
    
    Lease InterestEnergy
    
    
    andContracts
    
    
    Landfill
    
    
    TotalsThree Months ended March 31, 2006
    
    $
    6,889
    
    
    $
    1,783
    
    
    $
    8,672Remainder of 2006
    
    $
    20,600
    
    
    $
    3,844
    
    
    $
    24,4442007
    
    
    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
    
    $
    173,965
    
    
    $
    86,121
    
    
    $
    260,086
 Goodwill
 
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MSW Energy Holdings II LLC and Subsidiaries
 
 Notes to Condensed Consolidated Financial Statements (Unaudited)
 6. Other Current Liabilities
  As ofMarch 31, 2006
    
    
    
    December 31, 2005Accrued interest expense
    
    $
    15,743
    
    
    
    $
    22,683Accrued expenses
    
    
    23,584
    
    
    
    
    22,894Incentive plan accruals
    
    
    1,693
    
    
    
    
    3,135Compensation liabilities
    
    
    6,388
    
    
    
    
    11,307Other
    
    
    5,553
    
    
    
    
    6,982Total other current liabilities
    
    $
    52,961
    
    
    
    $
    67,001
 7. Financing Arrangements
  As ofMarch 31,
    
    
    
    December 31,Interest Rate
    
    
    Maturity
    
    
    2006
    
    
    
    2005Company and Intermediate debtSenior Notes
    
    
    7.375
    %
    
    
    2010
    
    
    $
    224,100
    
    
    
    $
    224,100Covanta ARC Senior Notes
    
    
    6.26
    %
    
    
    2015
    
    
    
    220,000
    
    
    
    
    234,000Subtotal of Company and Intermediate debt
    
    
    
    
    
    
    
    
    
    
    444,100
    
    
    
    
    458,100Project debtProject debt related to Service Fee Structure:Seconn project debt
    
    
    5.125%5.50
    %
    
    
    2015
    
    
    
    53,705
    
    
    
    
    53,705Seconn
Corporate Credit Bonds  1992 Series A
    
    
    6.45
    %
    
    
    2022
    
    
    
    30,000
    
    
    
    
    30,000Seconn Corporate Credit Bonds I Series A and II Series A
    
    
    5.50
    %
    
    
    2015
    
    
    
    13,500
    
    
    
    
    13,500Essex project debt
    
    
    5.248%7.375
    %
    
    
    2020
    
    
    
    83,422
    
    
    
    
    83,422Tip fee structure related Project debt:Niagara Series 2001
    
    
    5.45%5.625
    %
    
    
    2015
    
    
    
    165,010
    
    
    
    
    165,010Hempstead Corporate Credit Bonds
    
    
    5.00
    %
    
    
    2010
    
    
    
    42,670
    
    
    
    
    42,670Hempstead project debt
    
    
    4.875%5.00
    %
    
    
    2009
    
    
    
    123,625
    
    
    
    
    123,625Semass Series 2001A
    
    
    5.50%5.625
    %
    
    
    2016
    
    
    
    134,345
    
    
    
    
    134,345Semass Series 2001B
    
    
    5.25%5.50
    %
    
    
    2010
    
    
    
    57,580
    
    
    
    
    75,250Other obligations
    
    
    
    
    
    
    
    
    
    
    183
    
    
    
    
    199Subtotal of Project debt
    
    
    
    
    
    
    
    
    
    
    704,040
    
    
    
    
    721,726Total debt at par value
    
    
    
    
    
    
    
    
    
    
    1,148,140
    
    
    
    
    1,179,826Unamortized premium
    
    
    
    
    
    
    
    
    
    
    48,682
    
    
    
    
    51,821Current portion
    
    
    
    
    
    
    
    
    
    
    (90,532
    )
    
    
    
    (104,389
    )Total long-term debt obligations
    
    
    
    
    
    
    
    
    
    $
    1,106,290
    
    
    
    $
    1,127,258
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MSW Energy Holdings II LLC and Subsidiaries
 
 Notes to Condensed Consolidated Financial Statements (Unaudited)
 8. Other Long-Term Liabilities
  As ofAmortization
    
    
    March 31,
    
    
    
    December 31,Period (years)
    
    
    2006
    
    
    
    2005Waste contracts
    
    
    917
    
    
    $
    129,795
    
    
    
    $
    132,371Energy contract levelization
    
    
    12
    
    
    
    3,129
    
    
    
    
    2,068Landfill liabilities and ARO
    
    
    8
    
    
    
    11,768
    
    
    
    
    11,577Other
    
    
    N/A
    
    
    
    1,889
    
    
    
    
    1,843Incentive plan accruals
    
    
    N/A
    
    
    
    905
    
    
    
    
    2,724$
    147,486
    
    
    
    $
    150,583
   WasteContractsThree Months ended March 31, 2006
    
    $
    2,576Remainder of 2006
    
    $
    7,7262007
    
    
    10,3022008
    
    
    10,3022009
    
    
    10,3022010
    
    
    10,3022011
    
    
    10,302Thereafter
    
    
    70,559Total
    
    $
    129,795
 9. Income Taxes
  For the Three
    
    
    
    For the ThreeMonths Ended
    
    
    
    Months EndedMarch 31, 2006
    
    
    
    March 31, 2005Current provision
    
    $
    (1,799
    )
    
    
    $
    (1,821
    )Deferred provision
    
    
    1,403
    
    
    
    
    1,613Total consolidated income tax benefit
    
    $
    (396
    )
    
    
    $
    (208
    )
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MSW Energy Holdings II LLC and Subsidiaries
 
 Notes to Condensed Consolidated Financial Statements (Unaudited)


10. Commitments and Contingencies




Environmental Matters






Lower Passaic River Study.


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MSW Energy Holdings II LLC and Subsidiaries





Notes to Condensed Consolidated Financial Statements (Unaudited)


Other Matters




Mercury Regulation at Essex.


CMW Landfill.






11. Employee Compensation and Benefit Plans


Stock Option Plan
  16




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MSW Energy Holdings II LLC and Subsidiaries
 
 Notes to Condensed Consolidated Financial Statements (Unaudited)
      12. Related Party Transactions
  17




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
     Overview
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Results of Operations
   Results of Operations  Three Months Ended March 31, 2006 vs. Three Months Ended March 31, 2005
 For the Three Months Ended March 31,Reported
    
    
    Pro Forma2006
    
    
    2005
    
    
    2006
    
    
    2005(Unaudited, in thousands of dollars)Operating RevenuesWaste and service revenues
    
    $
    74,501
    
    
    $
    72,473
    
    
    $
    74,501
    
    
    $
    73,142Electricity and steam sales
    
    
    42,940
    
    
    
    40,284
    
    
    
    42,940
    
    
    
    40,284Total operating revenues
    
    
    117,441
    
    
    
    112,757
    
    
    
    117,441
    
    
    
    113,426Operating ExpensesPlant operating expenses
    
    
    63,842
    
    
    
    56,715
    
    
    
    63,842
    
    
    
    58,422Depreciation
and amortization expense
    
    
    30,308
    
    
    
    29,738
    
    
    
    30,308
    
    
    
    29,906Net interest expense on project debt
    
    
    6,887
    
    
    
    7,318
    
    
    
    6,887
    
    
    
    7,955General and administrative expenses
    
    
    6,588
    
    
    
    6,214
    
    
    
    6,588
    
    
    
    5,812Loss on asset retirement
    
    
    
    
    
    
    1,386
    
    
    
    
    
    
    
    1,386Total operating expenses
    
    
    107,625
    
    
    
    101,371
    
    
    
    107,625
    
    
    
    103,481Operating income
    
    $
    9,816
    
    
    $
    11,386
    
    
    $
    9,816
    
    
    $
    9,945
 Comparison of Reported Results for the Three Months Ended March 31, 2006 vs. Three Months Ended
March 31, 2005
 Total Operating Revenues.
  Total Operating Expenses.
 Operating Income.
 Comparison of Pro Forma Results for the Three Months Ended March 31, 2006 vs. Three Months Ended
March 31, 2005
 Total Operating Revenues.
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Plant Operating Expenses.


Net
Interest Expense on Project Debt


Pro Forma Reconciliations


Reported Three
    
    
    
    
    
    
    Pro Forma ThreeMonths Ended
    
    
    Pro Forma
    
    
    Months EndedMarch 31, 2005
    
    
    Adjustments
    
    
    March 31, 2005(Unaudited, in thousands of dollars)Operating RevenuesWaste service revenues
    
    $
    72,473
    
    
    $
    669
    
    
    $
    73,142Electricity and steam sales
    
    
    40,284
    
    
    
    
    
    
    
    40,284Total operating revenues
    
    
    112,757
    
    
    
    669
    
    
    
    113,426Operating ExpensesPlant operating expenses
    
    
    56,715
    
    
    
    1,707
    
    
    
    58,422Depreciation
and amortization expense
    
    
    29,738
    
    
    
    168
    
    
    
    29,906Net interest expense on project debt
    
    
    7,318
    
    
    
    637
    
    
    
    7,955General and
administrative expenses
    
    
    6,214
    
    
    
    (402
    )
    
    
    5,812Loss on asset retirements
    
    
    1,386
    
    
    
    
    
    
    
    1,386Total operating expenses
    
    
    101,371
    
    
    
    2,110
    
    
    
    103,481Operating income
    
    $
    11,386
    
    
    $
    (1,441
    )
    
    $
    9,945


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, the assets and liabilities of the Company were
assumed to be stated at their acquired fair value as of January 1, 2005.
 Pro Forma Adjustments
  
    
    Plant operating expenses: To record as rent expense the net impact of the change in the
fair value of the Companys lease of the Delaware Valley facility as of January 1, 2005.
    
    Depreciation and amortization: To reverse historical depreciation and amortization
expense and record pro forma depreciation and amortization expense based on fair values
assigned to the Companys property, plant and equipment and amortizable intangible assets as
part of the Acquisition.
    
    General and administrative: To reverse the compensation expense associated with the
Companys compensation and related expenses of its executives in the periods prior to the
Acquisition date. In addition, the Companys expense associated with its
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headquarters was also removed and an estimated allocation of overhead expenses for certain
Covanta key senior management, as well as building services was added.
    
    Net interest expense on project debt: To reverse the prior amortization of the project
debt and to record the impact of the fair value adjustment as a result of the Acquisition.
    
    Interest expense: To reverse the Companys pre-acquisition period amortization of
deferred financing costs and to record the impact of the fair value adjustment to the
intermediate debt of the Company.
 Liquidity and Capital Resources
  Sources and Uses of Cash for the Three Months Ended March 31, 2006
  For the Three Months EndedMarch 31,2006
    
    
    2005(Unaudited, in thousands of dollars)Net cash provided by (used in):Operating Activities
    
    $
    26,282
    
    
    $
    32,417Investing Activities
    
    
    (10,121
    )
    
    
    (16,040
    )Financing Activities
    
    
    (33,133
    )
    
    
    (53,470
    )Net decrease in cash and cash equivalents
    
    
    (16,972
    )
    
    
    (37,093
    )Cash and cash equivalents, beginning of fiscal year
    
    
    48,844
    
    
    
    86,347Cash and cash equivalents, end of quarter
    
    $
    31,872
    
    
    $
    49,254
 Operating Activities
  Investing Activities
  Financing Activities
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Debt Covenant
  Critical Accounting Policies
  Recent Accounting Pronouncements
  
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4. CONTROLS AND PROCEDURES
 MSW Energy Holdings II and Subsidiaries
    22




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PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
 Lower Passaic River Study.
 CMW Landfill.
  23




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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
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ITEM 6. EXHIBITS
 ExhibitNumber
    
    Description12
    
    Statement re Computation of Ratio of Earnings to Fixed Charges.31.1
    
    15d-14(a) Certification of Anthony J. Orlando for MSW Energy Holdings II LLC.31.2
    
    15d-14(a) Certification of Craig D. Abolt for MSW Energy Holdings II LLC.31.3
    
    15d-14(a) Certification of Anthony J. Orlando for MSW Energy Finance Co. II, Inc.31.4
    
    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 II LLC.32.2
    
    Section 1350 Certification of Anthony J. Orlando and Craig D. Abolt for MSW Energy Finance Co. II, Inc.
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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
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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
  27




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EXHIBIT INDEX
 ExhibitNumber
    
    Description12
    
    Statement re Computation of Ratio of Earnings to Fixed Charges.31.1
    
    15d-14(a) Certification of Anthony J. Orlando for MSW Energy Holdings II LLC.31.2
    
    15d-14(a) Certification of Craig D. Abolt for MSW Energy Holdings II LLC.31.3
    
    15d-14(a) Certification of Anthony J. Orlando for MSW Energy Finance Co. II, Inc.31.4
    
    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 II LLC.32.2
    
    Section 1350 Certification of Anthony J. Orlando and Craig D. Abolt for MSW Energy Finance Co. II, Inc.
 28