##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 (Mark
One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934For the quarter ended September 30, 2005
  OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
 0001276518
0001276517
    
    MSW Energy Holdings II LLC
MSW Energy Finance Co. II, Inc.
    
    Delaware
Delaware
    
    13-3213489
20-0400947Commission File Number
    
    (Exact name of each registrant 
as specified in its charter)
    
    (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
Phone No. 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 R No £
 Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Act):
 MSW Energy Holdings II LLC:
    
    yes
£ no
þMSW Energy Finance Co. II, Inc:
    
    yes
£ no
þ
 Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act).
 MSW Energy Holdings II LLC:
    
    yes
£ no
þMSW Energy Finance Co. II, Inc:
    
    yes
£ 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:
    
    NoneMSW Energy Finance Co. II, Inc:
    
    100 shares of Common Stock
 MSW Energy Finance Co. II, Inc. meets the conditions set forth in General Instruction H(1)(a) and
(b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced disclosure format.




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TABLE OF CONTENTS
 Part I FINANCIAL INFORMATION
    
    
    3Item 1. Consolidated Financial Statements
    
    
    3Consolidated Balance Sheets as of September 30, 2005 (Unaudited) and December 31, 2004
    
    
    3Consolidated Statements of Operations for the Three Months Ended September 30, 2005 and 2004 (Unaudited)
    
    
    4Consolidated Statements of Operations for the period from June 25 through September 30, 2005, the
period from January 1 through June 24, 2005 and the Nine Months Ended September 30, 2004 (Unaudited)
    
    
    5Consolidated Statements of Members Equity for the period from January 1, 2004 to June 24, 2005
(Predecessor) and the period from June 24 to September 30, 2005 (Successor) (Unaudited)
    
    
    6Consolidated Statements of Cash Flows for the period from June 25 through September 30, 2005, the
period from January 1 through June 24, 2005 and the Nine Months Ended September 30, 2004 (Unaudited)
    
    
    7Notes to the Consolidated Financial Statements (Unaudited)
    
    
    8Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    17Item 4. Controls and Procedures
    
    
    25PART II OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    26Item 5. Other Information.
    
    
    26Item 6. Exhibits
    
    
    27SIGNATURES
    
    
    28Computation 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.15-d-14(a) Certification of Craig D. Abolt for MSW Energy Finance Co. II, Inc.Section 1350 Certification of Anthony J. Orlando and Craig D. Abolt for MSW Energy Holdings II, LLCSection 1350 Certification of Anthony J. Orlando and Craig D. Abolt for MSW Energy Finance Co. II, Inc.
  2




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##### Table of Contents



Part I FINANCIAL INFORMATION
 
 Item 1. Consolidated Financial Statements
 MSW ENERGY HOLDINGS II LLC AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (In thousands of dollars)
 September 30,
    
    
    
    December 31,2005
    
    
    
    2004(unaudited)AssetsCurrent assetsCash and cash equivalents
    
    $
    39,938
    
    
    
    $
    86,347Restricted cash and short-term investments
    
    
    65,905
    
    
    
    
    61,995Accounts receivable, net of allowance for
doubtful accounts of $2,419 and $1,491,
respectively
    
    
    74,322
    
    
    
    
    72,027Prepaid expenses and other current assets
    
    
    14,173
    
    
    
    
    11,012Total current assets
    
    
    194,338
    
    
    
    
    231,381Long-term assetsProperty, plant and equipment, net
    
    
    1,879,580
    
    
    
    
    1,174,896Intangible assets, net
    
    
    261,836
    
    
    
    
    536,229Goodwill
    
    
    292,810
    
    
    
    
    123,984Restricted cash and long-term investments
    
    
    83,041
    
    
    
    
    85,926Other long-term assets
    
    
    12,382
    
    
    
    
    17,088Total long-term assets
    
    
    2,529,649
    
    
    
    
    1,938,123Total assets
    
    $
    2,723,987
    
    
    
    $
    2,169,504Liabilities and Members EquityCurrent liabilitiesAccounts payable trade
    
    $
    4,282
    
    
    
    $
    5,050Accounts payable intercompany
    
    
    793
    
    
    
    
    Current portion of intermediate debt
    
    
    23,175
    
    
    
    
    20,000Current portion of project debt
    
    
    64,724
    
    
    
    
    67,184Accrued interest payable
    
    
    16,615
    
    
    
    
    16,448Other current liabilities
    
    
    39,058
    
    
    
    
    36,156Total current liabilities
    
    
    148,647
    
    
    
    
    144,838Long-term liabilitiesIntermediate debt
    
    
    439,084
    
    
    
    
    445,000Project debt
    
    
    682,137
    
    
    
    
    738,829Deferred income taxes
    
    
    242,612
    
    
    
    
    126,944Other long-term liabilities
    
    
    136,825
    
    
    
    
    201,996Total long-term liabilities
    
    
    1,500,658
    
    
    
    
    1,512,769Total liabilities
    
    
    1,649,305
    
    
    
    
    1,657,607Commitments and contingencies (Note 12)Minority interests
    
    
    770,984
    
    
    
    
    364,004Members equityTotal members equity
    
    
    303,698
    
    
    
    
    147,893Total liabilities and members equity
    
    $
    2,723,987
    
    
    
    $
    2,169,504
  3




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MSW ENERGY HOLDINGS II LLC AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (in thousands)
 For the Three
    
    
    
    For the ThreeMonths Ended
    
    
    
    Months EndedSeptember 30,
    
    
    
    September 30,2005
    
    
    
    2004RevenuesWaste disposal and related services revenues
    
    $
    81,719
    
    
    
    $
    81,606Electricity and steam sales
    
    
    43,482
    
    
    
    
    43,066Total operating revenues
    
    
    125,201
    
    
    
    
    124,672ExpensesPlant operating expenses
    
    
    47,028
    
    
    
    
    47,329Depreciation and amortization
    
    
    26,802
    
    
    
    
    29,457Net interest expense on project debt
    
    
    7,692
    
    
    
    
    7,526General and administrative
    
    
    3,682
    
    
    
    
    5,404(Gain) on asset retirement
    
    
    (494
    )
    
    
    
    (218
    )Operating income
    
    
    40,491
    
    
    
    
    35,174Interest income
    
    
    293
    
    
    
    
    281Interest expense
    
    
    (8,354
    )
    
    
    
    (8,579
    )Minority interests in net (income) loss of subsidiary
    
    
    (18,321
    )
    
    
    
    (15,693
    )Income (loss) before income taxes
    
    
    14,109
    
    
    
    
    11,183Income tax (provision) benefit
    
    
    (6,056
    )
    
    
    
    (4,744
    )Net income (loss)
    
    $
    8,053
    
    
    
    $
    6,439
  4




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MSW ENERGY HOLDINGS II LLC AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (in thousands of dollars)
 For the Period
    
    
    
    For the Periodfrom
    
    
    
    fromJune 25
    
    
    
    January 1
    
    
    For the Ninethrough
    
    
    
    through
    
    
    Months EndedSeptember 30,
    
    
    
    June 24,
    
    
    September 30,2005
    
    
    
    2005
    
    
    2004RevenuesWaste disposal and related services revenues
    
    $
    87,400
    
    
    
    $
    148,792
    
    
    $
    135,408Electricity and steam sales
    
    
    46,461
    
    
    
    
    79,660
    
    
    
    69,630Total operating revenues
    
    
    133,861
    
    
    
    
    228,452
    
    
    
    205,038ExpensesPlant operating expenses
    
    
    49,797
    
    
    
    
    103,616
    
    
    
    80,883Depreciation and amortization
    
    
    28,737
    
    
    
    
    57,032
    
    
    
    47,957Net interest expense on project debt
    
    
    8,150
    
    
    
    
    13,964
    
    
    
    12,546General and administrative
    
    
    3,932
    
    
    
    
    39,630
    
    
    
    9,934(Gain) loss on asset retirement
    
    
    (494
    )
    
    
    
    519
    
    
    
    618Operating income
    
    
    43,739
    
    
    
    
    13,691
    
    
    
    53,100Interest income
    
    
    327
    
    
    
    
    1,012
    
    
    
    424Interest expense
    
    
    (8,930
    )
    
    
    
    (16,394
    )
    
    
    (20,343
    )Equity in net earnings of unconsolidated affiliate  Covanta Ref-Fuel Holdings
    
    
    
    
    
    
    
    
    
    
    
    6,148Minority interests in net income of subsidiary
    
    
    (19,842
    )
    
    
    
    (3,690
    )
    
    
    (23,826
    )Income (loss) before income taxes
    
    
    15,294
    
    
    
    
    (5,381
    )
    
    
    15,503Income tax (provision) benefit
    
    
    (6,546
    )
    
    
    
    2,317
    
    
    
    (6,528
    )Net income (loss)
    
    
    8,748
    
    
    
    
    (3,064
    )
    
    
    8,975Other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    (211
    )Comprehensive income (loss)
    
    $
    8,748
    
    
    
    $
    (3,064
    )
    
    $
    8,764
  5




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MSW ENERGY HOLDINGS II LLC AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF MEMBERS EQUITY
 (Unaudited, in thousands of dollars)
 Accumulated OtherComprehensiveMembers Equity
    
    
    Income
    
    
    TotalBalance, January 1, 2004
    
    $
    149,980
    
    
    $
    
    
    
    $
    149,980Finalization of purchase accounting
    
    
    4,573
    
    
    
    
    
    
    
    4,573Current tax benefit contributed to member
    
    
    11,479
    
    
    
    
    
    
    
    11,479Capital contribution from member
    
    
    52
    
    
    
    
    
    
    
    52Distribution to member
    
    
    (31,150
    )
    
    
    
    
    
    
    (31,150
    )Unrealized gain on investments from the consolidation of Covanta Ref-
Fuel Holdings
    
    
    
    
    
    
    211
    
    
    
    211Comprehensive income
    
    
    12,959
    
    
    
    (211
    )
    
    
    12,748Balance, December 31, 2004
    
    
    147,893
    
    
    
    
    
    
    
    147,893Distributions to member
    
    
    (19,469
    )
    
    
    
    
    
    
    (19,469
    )Current tax benefit contributed to member
    
    
    (3,444
    )
    
    
    
    
    
    
    (3,444
    )Net loss for the period from January 1, 2005 through June 24, 2005
    
    
    (3,064
    )
    
    
    
    
    
    
    (3,064
    )Balance, June 24, 2005 (predecessor)
    
    $
    121,916
    
    
    $
    
    
    
    $
    121,916Balance, June 24, 2005 (successor)
    
    $
    302,001
    
    
    $
    
    
    
    $
    302,001Current tax provision contributed by member
    
    
    4,065
    
    
    
    
    
    
    
    4,065Adjustments to purchase accounting, net of tax
    
    
    124
    
    
    
    
    
    
    
    124Adjustment for the change in minority interest
    
    
    22
    
    
    
    
    
    
    
    22Distribution to member
    
    
    (11,262
    )
    
    
    
    
    
    
    (11,262
    )Net income for the period from June 25, 2005 through September 30, 2005
    
    
    8,748
    
    
    
    
    
    
    
    8,748Balance, September 30, 2005
    
    $
    303,698
    
    
    $
    
    
    
    $
    303,698
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MSW ENERGY HOLDINGS II LLC AND SUBSIDIARIES
 
 CONSDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited, in thousands of dollars)
 For the Period
    
    
    
    For the Periodfrom
    
    
    
    fromJune 25
    
    
    
    January 1
    
    
    For the Ninethrough
    
    
    
    through
    
    
    Months EndedSeptember 30,
    
    
    
    June 24,
    
    
    September 30,2005
    
    
    
    2005
    
    
    2004Cash flows from operating activitiesNet income (loss)
    
    $
    8,748
    
    
    
    $
    (3,064
    )
    
    $
    8,975Adjustments to reconcile net income (loss) to net cash
provided by operating activities:Depreciation and amortization
    
    
    28,737
    
    
    
    
    57,032
    
    
    
    47,957Deferred income taxes
    
    
    2,200
    
    
    
    
    910
    
    
    
    4,142Revenue contract levelization
    
    
    1,007
    
    
    
    
    692
    
    
    
    9,002Amortization of lease
    
    
    748
    
    
    
    
    (1,593
    )
    
    
    (275
    )Amortization of debt premium and deferred financing costs
    
    
    (2,700
    )
    
    
    
    (5,182
    )
    
    
    (5,159
    )Amortization of deferred revenue
    
    
    (7
    )
    
    
    
    (75
    )
    
    
    (16
    )Equity
earnings in unconsolidated affiliate  Covanta Ref-Fuel Holdings
    
    
    
    
    
    
    
    
    
    
    
    (6,148
    )Distributions from Covanta Ref-Fuel Holdings
    
    
    
    
    
    
    
    
    
    
    
    31,500(Gain) loss on asset retirements
    
    
    (494
    )
    
    
    
    519
    
    
    
    618Minority interests
    
    
    19,842
    
    
    
    
    3,690
    
    
    
    18,826Changes in assets and liabilities:Accounts receivable, net
    
    
    1,916
    
    
    
    
    (4,211
    )
    
    
    (3,277
    )Prepaid expenses and other current assets
    
    
    (235
    )
    
    
    
    (2,893
    )
    
    
    1,565Other long-term assets
    
    
    (1,186
    )
    
    
    
    (2,943
    )
    
    
    292Accounts payable and current liabilities
    
    
    1,159
    
    
    
    
    (4,073
    )
    
    
    (262
    )Accounts payable related parties
    
    
    759
    
    
    
    
    
    
    
    
    Income taxes payable
    
    
    4,065
    
    
    
    
    (3,479
    )
    
    
    4,599Accrued interest payable
    
    
    (5,348
    )
    
    
    
    5,515
    
    
    
    (1,612
    )Other long-term liabilities
    
    
    407
    
    
    
    
    (1,132
    )
    
    
    (116
    )Net cash provided by operating activities
    
    
    59,618
    
    
    
    
    39,713
    
    
    
    110,611Cash flows from investing activitiesAdditions of property, plant and equipment
    
    
    (1,898
    )
    
    
    
    (25,228
    )
    
    
    (8,534
    )Proceeds from sale of assets
    
    
    487
    
    
    
    
    2,651
    
    
    
    20Additional investment in unconsolidated subsidiary
    
    
    
    
    
    
    
    
    
    
    
    (75
    )Cash from consolidation of unconsolidated subsidiary (Note 3)
    
    
    
    
    
    
    
    
    
    
    
    40,238Net cash (used in) provided by investing activities
    
    
    (1,411
    )
    
    
    
    (22,577
    )
    
    
    31,649Cash flows from financing activitiesChange in restricted cash and investments, net
    
    
    7,248
    
    
    
    
    (8,273
    )
    
    
    (41,850
    )Payment of financing costs
    
    
    
    
    
    
    
    
    
    
    
    (25
    )Payment of long-term debt
    
    
    (19,998
    )
    
    
    
    (29,178
    )
    
    
    (5,731
    )Distributions paid to members
    
    
    (11,262
    )
    
    
    
    (19,469
    )
    
    
    (21,494
    )Distributions to be paid to holders of minority interest
    
    
    (15,820
    )
    
    
    
    (25,000
    )
    
    
    Net cash (used in) financing activities
    
    
    (39,832
    )
    
    
    
    (81,920
    )
    
    
    (69,100
    )Net increase (decrease) in cash and cash equivalents
    
    
    18,375
    
    
    
    
    (64,784
    )
    
    
    73,160Cash and cash equivalents, beginning of period
    
    
    21,563
    
    
    
    
    86,347
    
    
    
    2Cash and cash equivalents, end of period
    
    $
    39,938
    
    
    
    $
    21,563
    
    
    $
    73,162
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MSW Energy Holdings II LLC and Subsidiaries
 
 Notes to Consolidated Financial Statements
 1. Organization
        Push-Down Accounting
 8




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##### Table of Contents



2. Summary of Significant Accounting Policies
 Principles of Consolidation
  Reclassifications
  Use of Estimates
  9




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Equity Method Investment
   Income Taxes
   Stock-Based Compensation
 Accounting for Stock-Based Compensation, Accounting for Stock-Based Compensation
 Transition and Disclosure  an Amendment
of FAS No. 123 Accounting for Stock
Issued to Employees
 Treatment of Pass Through Costs
  Risks and Uncertainties
  10




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Effect of New Accounting Standard
 Share-Based Payment
 3. Business Combinations
  Push-Down Accounting Business Combinations
  June 24, 2005
    
    

September 30, 2005Fair value of assets acquiredCurrent assets
    
    $
    175,274
    
    
    $
    175,274Property, plant and equipment
    
    
    1,901,787
    
    
    
    1,901,787Intangible assets (excluding goodwill)
    
    
    269,436
    
    
    
    269,436Other assets
    
    
    106,367
    
    
    
    103,778Goodwill
    
    
    298,089
    
    
    
    292,810Total Assets Acquired
    
    $
    2,750,953
    
    
    $
    2,743,085Fair value of liabilities assumedCurrent liabilities
    
    
    140,752
    
    
    
    140,752Long-term Intermediate debt
    
    
    448,479
    
    
    
    448,479Long-term Project debt
    
    
    718,805
    
    
    
    706,732Deferred income taxes
    
    
    238,400
    
    
    
    242,177Other liabilities
    
    
    137,645
    
    
    
    137,645Total Liabilities Assumed
    
    
    1,684,081
    
    
    
    1,675,785Minority interest acquired
    
    
    764,871
    
    
    
    765,085Net assets acquired
    
    $
    302,001
    
    
    $
    302,215
  4. Reclassifications of Prior Periods
  11




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As PreviouslyReported Three
    
    
    
    
    
    
    As Reported ThreeMonths Ended
    
    
    
    
    
    
    Months EndedSeptember 30, 2004
    
    
    Reclassifications
    
    
    September 30, 2004RevenuesWaste disposal and related service revenues
    
    $
    73,004
    
    
    $
    8,602
    
    
    $
    81,606Electricity and steam sales
    
    
    36,208
    
    
    
    6,858
    
    
    
    43,066Other revenues
    
    
    3,746
    
    
    
    (3,746
    )
    
    
    Total operating revenues
    
    
    112,958
    
    
    
    11,714
    
    
    
    124,672ExpensesPlant operating expenses
    
    
    44,430
    
    
    
    2,899
    
    
    
    47,329Depreciation and amortization
    
    
    16,820
    
    
    
    12,637
    
    
    
    29,457Net interest expense on project debt
    
    
    
    
    
    
    7,526
    
    
    
    7,526General and administrative
    
    
    9,229
    
    
    
    (3,825
    )
    
    
    5,404Loss on asset retirements
    
    
    (218
    )
    
    
    
    
    
    
    (218
    )Operating income
    
    
    42,697
    
    
    
    (7,523
    )
    
    
    35,174Interest income
    
    
    886
    
    
    
    (605
    )
    
    
    281Interest expense
    
    
    (16,710
    )
    
    
    8,131
    
    
    
    (8,579
    )Minority interests in net income of subsidiary
    
    
    (15,693
    )
    
    
    
    
    
    
    (15,693
    )Other income, net
    
    
    3
    
    
    
    (3
    )
    
    
    Income before income taxes
    
    $
    11,183
    
    
    $
    
    
    
    $
    11,183
 As PreviouslyReported Nine
    
    
    
    
    
    
    As Reported NineMonths Ended
    
    
    
    
    
    
    Months EndedSeptember 30, 2004
    
    
    Reclassifications
    
    
    September 30, 2004RevenuesWaste disposal and related service revenues
    
    $
    122,124
    
    
    $
    13,284
    
    
    $
    135,408Electricity and steam sales
    
    
    58,527
    
    
    
    11,103
    
    
    
    69,630Other revenues
    
    
    5,759
    
    
    
    (5,759
    )
    
    
    Total operating revenues
    
    
    186,410
    
    
    
    18,628
    
    
    
    205,038ExpensesPlant operating expenses
    
    
    75,139
    
    
    
    5,744
    
    
    
    80,883Depreciation and amortization
    
    
    27,993
    
    
    
    19,964
    
    
    
    47,957Net interest expense on project debt
    
    
    
    
    
    
    12,546
    
    
    
    12,546General and administrative
    
    
    17,119
    
    
    
    (7,185
    )
    
    
    9,934Loss on asset retirements
    
    
    618
    
    
    
    
    
    
    
    618Operating income
    
    
    65,541
    
    
    
    (12,441
    )
    
    
    53,100Interest income
    
    
    1,403
    
    
    
    (979
    )
    
    
    424Interest expense
    
    
    (33,868
    )
    
    
    13,525
    
    
    
    (20,343
    )Equity in net earnings of unconsolidated
affiliate  Covanta Ref-Fuel Holdings
    
    
    6,148
    
    
    
    
    
    
    
    6,148Minority interests in net income of subsidiary
    
    
    (23,826
    )
    
    
    
    
    
    
    (23,826
    )Other income, net
    
    
    105
    
    
    
    (105
    )
    
    
    Income before income taxes
    
    $
    15,503
    
    
    $
    
    
    
    $
    15,503
  
    
    The amortization of above and below market contracts were reclassified
from waste disposal and related service revenues and electricity and
steam sales into depreciation and amortization expense.
    
    Other revenues, which primarily consisted of sales of scrap metals,
were reclassified from other revenues into waste and service revenues.
    
    Interest expense on project debt and interest income on funds
restricted for the payment of project debt were reclassified as a
reduction of operating income.
 12




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##### Table of Contents




    
    Certain costs associated with operating facilities and TransRiver were
reclassified from general and administrative expenses into operating
expenses.
    
    Reimbursements from certain municipal clients for operating expenses
were reclassified from revenues to reductions of operating expenses.
    
    Reductions of revenues shared with certain municipal customers for
energy produced were reclassified from waste and service revenues to
energy revenues.
    
    Other minor miscellaneous reclassifications were also made.
 5. Equity Investment in Covanta Ref-Fuel Holdings
  For the FourMonths EndedApril 30, 2004Revenues
    
    $
    156,623Operating income
    
    
    18,000Net earnings
    
    
    12,753Companys equity in net earnings
    
    
    6,148
 Pro Forma Information
  Pro Forma
    
    
    Pro FormaFor the Nine
    
    
    For the NineMonths Ended
    
    
    Months EndedSeptember 30, 2005
    
    
    September 30, 2004RevenuesWaste disposal and related services revenues
    
    $
    236,192
    
    
    $
    238,574Electricity and steam sales
    
    
    126,121
    
    
    
    123,085Total operating revenues
    
    
    362,313
    
    
    
    361,659ExpensesPlant operating expenses
    
    
    156,551
    
    
    
    165,194Depreciation and amortization
    
    
    80,389
    
    
    
    80,808Net interest expense on project debt
    
    
    23,587
    
    
    
    26,945General and administrative
    
    
    14,522
    
    
    
    11,846Loss on asset retirements
    
    
    25
    
    
    
    960Operating income
    
    
    87,239
    
    
    
    75,906Interest income
    
    
    1,339
    
    
    
    715Interest expense
    
    
    (26,286
    )
    
    
    (26,339
    )Net income (loss) before minority interest and income taxes
    
    $
    62,292
    
    
    $
    50,282
 6. Property, Plant and Equipment
  13




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##### Table of Contents



Useful Life
    
    
    September 30, 2005
    
    
    
    December 31, 2004Plant and equipment
    
    2-50 years
    
    $
    1,873,996
    
    
    
    $
    1,206,558Land
    
    
    
    
    
    
    3,813
    
    
    
    
    3,813Leasehold improvements
    
    Up to 17 years
    
    
    5,575
    
    
    
    
    5,575Landfill
    
    13 years
    
    
    17,831
    
    
    
    
    17,768Construction in progress
    
    
    
    
    
    
    2,268
    
    
    
    
    6,244Total property, plant and equipment
    
    
    
    
    
    
    1,903,483
    
    
    
    
    1,239,958Accumulated depreciation
    
    
    
    
    
    
    (23,903
    )
    
    
    
    (65,062
    )Property, plant and equipment, net
    
    
    
    
    
    $
    1,879,580
    
    
    
    $
    1,174,896
 7. Intangible Assets and Goodwill
  Useful Life
    
    
    September 30, 2005
    
    
    
    December 31, 2004Waste, electricity and steam contracts
    
    3-11 years
    
    $
    194,562
    
    
    
    $
    548,725Financing costs
    
    7 years
    
    
    
    
    
    
    
    9,270Lease asset
    
    24 years
    
    
    71,845
    
    
    
    
    Emissions credits
    
    Indefinite
    
    
    
    
    
    
    
    43,377Other intangibles
    
    Indefinite
    
    
    3,029
    
    
    
    
    3,579269,436
    
    
    
    
    604,951Accumulated amortization
    
    
    
    
    
    
    (7,600
    )
    
    
    
    (68,722
    )Intangible assets, net
    
    
    
    
    
    $
    261,836
    
    
    
    $
    536,229
  Waste, electricity
    
    
    Leaseand steam
    
    
    Assetcontracts
    
    
    Contract
    
    
    TotalsEstimated
2005 (after September 30, 2005)
    
    $
    7,026
    
    
    $
    748
    
    
    $
    7,7742006
    
    
    26,979
    
    
    
    2,994
    
    
    
    29,9732007
    
    
    26,979
    
    
    
    2,994
    
    
    
    29,9732008
    
    
    26,969
    
    
    
    2,994
    
    
    
    29,9632009
    
    
    23,423
    
    
    
    2,994
    
    
    
    26,417Thereafter
    
    
    76,372
    
    
    
    58,335
    
    
    
    134,707Total
    
    $
    187,748
    
    
    $
    71,059
    
    
    $
    258,807
 Goodwill
 Goodwill and Other Intangibles
 8. Accrued Expenses and Other Current Liabilities
  September 30, 2005
    
    
    
    December 31, 2004Accrued expenses
    
    $
    21,702
    
    
    
    $
    19,965Incentive plan accruals
    
    
    1,688
    
    
    
    
    3,569Compensation liabilities
    
    
    9,738
    
    
    
    
    8,254Other
    
    
    5,930
    
    
    
    
    4,368$
    39,058
    
    
    
    $
    36,156
 14




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##### Table of Contents



9. Financing Arrangements
  Interest Rate(average rate)
    
    
    Final Maturity
    
    
    September 30, 2005
    
    
    
    December 31, 2004Company and Intermediate debtSenior Notes
    
    
    7.375
    %
    
    
    2010
    
    
    $
    224,100
    
    
    
    $
    225,000Covanta ARC Senior Notes
    
    
    6.26
    %
    
    
    2015
    
    
    
    234,000
    
    
    
    
    240,000Intermediate debt
    
    
    
    
    
    
    
    
    
    
    458,100
    
    
    
    
    465,000Project debtNiagara Series 2001
    
    
    5.45%-5.625
    %
    
    
    2015
    
    
    
    165,010
    
    
    
    
    165,010Seconn 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
    
    
    
    
    13,500Hempstead Corporate Credit Bonds
    
    
    5.00
    %
    
    
    2010
    
    
    
    42,670
    
    
    
    
    42,670Hempstead project debt
    
    
    4.625%-5.00
    %
    
    
    2009
    
    
    
    114,543
    
    
    
    
    114,543Essex project debt
    
    
    5.32%-7.48
    %
    
    
    2020
    
    
    
    83,422
    
    
    
    
    96,496Seconn project debt
    
    
    5.125%-5.50
    %
    
    
    2015
    
    
    
    50,602
    
    
    
    
    50,602Semass Series 2001A
    
    
    5.50%-5.625
    %
    
    
    2016
    
    
    
    134,345
    
    
    
    
    134,345Semass Series 2001B
    
    
    5.25%-5.50
    %
    
    
    2010
    
    
    
    75,250
    
    
    
    
    104,385Other obligations
    
    
    
    
    
    
    
    
    
    
    215
    
    
    
    
    273Subtotal of Project debt
    
    
    
    
    
    
    
    
    
    
    709,557
    
    
    
    
    751,824Total debt at par value
    
    
    
    
    
    
    
    
    
    
    1,167,657
    
    
    
    
    1,216,824Unamortized debt premium, net
    
    
    
    
    
    
    
    
    
    
    41,463
    
    
    
    
    54,189Current portion
    
    
    
    
    
    
    
    
    
    
    (87,899
    )
    
    
    
    (87,184
    )Total long-term debt obligations
    
    
    
    
    
    
    
    
    
    $
    1,121,221
    
    
    
    $
    1,183,829
   10. Other Long-Term Liabilities
  AmortizationPeriod (years)
    
    
    September 30, 2005
    
    
    
    December 31, 2004Waste contracts acquired
    
    
    9-17
    
    
    $
    118,881
    
    
    
    $
    120,276Operating lease acquired
    
    
    14
    
    
    
    
    
    
    
    
    38,453Energy contract levelization
    
    
    12
    
    
    
    1,007
    
    
    
    
    24,123Landfill liabilities
    
    
    13
    
    
    
    11,596
    
    
    
    
    10,699Deferred revenue
    
    
    8-20
    
    
    
    
    
    
    
    
    5,112Incentive plan accruals
    
    
    
    
    
    
    5,341
    
    
    
    
    3,333$
    136,825
    
    
    
    $
    201,996
 15




---



##### Table of Contents



11. Income Taxes
  For the Period from
    
    
    
    For the Period fromJune 25,
    
    
    
    January 1,
    
    
    For the Ninethrough
    
    
    
    through
    
    
    Months EndedSeptember 30, 2005
    
    
    
    June 24, 2005
    
    
    September 30, 2004Current provision
    
    $
    4,346
    
    
    
    $
    (3,227
    )
    
    $
    5,189Deferred provision
    
    
    2,200
    
    
    
    
    910
    
    
    
    1,339Total consolidated income tax provision (benefit)
    
    $
    6,546
    
    
    
    $
    (2,317
    )
    
    $
    6,528
  12. Commitments and Contingencies
  Environmental
   Lower Passaic River Study.
 CMW Landfill.
 16




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##### Table of Contents



13. Stock Option Plan
    
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Cautionary Note Regarding Forward-Looking Statements
  17




---



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Additional Information
     Push-Down
 18




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##### Table of Contents



Accounting
 Executive Summary
    Operating Results
  For the PeriodFor the Three
    
    
    
    For the Three
    
    
    from June 25,
    
    
    
    For the Period
    
    
    For the NineMonths Ended
    
    
    
    Months Ended
    
    
    Through
    
    
    
    From January 1,
    
    
    Months EndedSeptember 30,
    
    
    
    September 30,
    
    
    September 30,
    
    
    
    Through June 24,
    
    
    September 30,2005
    
    
    
    2004
    
    
    2005
    
    
    
    2005
    
    
    2004Statement of Operations Data (at end of
period):Net revenues
    
    $
    125,201
    
    
    
    $
    124,672
    
    
    $
    133,861
    
    
    
    $
    228,452
    
    
    $
    205,038Equity in net earnings of Covanta Ref-Fuel
Holdings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,148Net interest expense on project debt
    
    
    (7,692
    )
    
    
    
    (7,526
    )
    
    
    (8,150
    )
    
    
    
    (13,964
    )
    
    
    (12,546
    )Plant operating expenses
    
    
    (47,028
    )
    
    
    
    (47,329
    )
    
    
    (49,797
    )
    
    
    
    (103,616
    )
    
    
    (80,883
    )Depreciation and amortization expense
    
    
    (26,802
    )
    
    
    
    (29,457
    )
    
    
    (28,737
    )
    
    
    
    (57,032
    )
    
    
    (47,957
    )Administrative and general expense
    
    
    (3,682
    )
    
    
    
    (5,404
    )
    
    
    (3,932
    )
    
    
    
    (39,630
    )
    
    
    (9,934
    )Interest income
    
    
    293
    
    
    
    
    281
    
    
    
    327
    
    
    
    
    1,012
    
    
    
    424Interest expense
    
    
    (8,354
    )
    
    
    
    (8,579
    )
    
    
    (8,930
    )
    
    
    
    (16,394
    )
    
    
    (20,343
    )Minority interest in net income of subsidiary
    
    
    (18,321
    )
    
    
    
    (15,693
    )
    
    
    (19,842
    )
    
    
    
    (3,690
    )
    
    
    (23,826
    )Gain (loss) on asset retirement
    
    
    494
    
    
    
    
    218
    
    
    
    494
    
    
    
    
    (519
    )
    
    
    (618
    )Income tax (provision) benefit
    
    
    (6,056
    )
    
    
    
    (4,744
    )
    
    
    (6,546
    )
    
    
    
    2,317
    
    
    
    (6,528
    )Net income (loss)
    
    $
    8,053
    
    
    
    $
    6,439
    
    
    $
    8,748
    
    
    
    $
    (3,064
    )
    
    $
    8,975Cash Flow Data:Cash provided by operating activities
    
    
    
    
    
    
    
    
    
    
    $
    59,618
    
    
    
    $
    39,713
    
    
    $
    110,611Cash (used in) provided by investing activities
    
    
    
    
    
    
    
    
    
    
    
    (1,411
    )
    
    
    
    (22,577
    )
    
    
    31,649Cash provided by (used in) financing activities
    
    
    
    
    
    
    
    
    
    
    
    (39,832
    )
    
    
    
    (81,920
    )
    
    
    (69,100
    )
 19




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20




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##### Table of Contents



Balance Sheet Data:
    
    September 30, 2005
    
    
    
    December 31, 2004Total assets
    
    $
    2,723,987
    
    
    
    $
    2,169,504Total debt
    
    
    1,209,120
    
    
    
    
    1,271,013Minority interest in consolidated subsidiaries
    
    
    770,984
    
    
    
    
    364,004Total members equity
    
    
    303,698
    
    
    
    
    147,893
  Supplemental Pro Forma Information
  Actual
    
    
    Pro Forma
    
    
    Pro Forma
    
    
    Pro FormaFor the Three
    
    
    For the Three
    
    
    For the Nine
    
    
    For the NineMonths Ended
    
    
    Months Ended
    
    
    Months Ended
    
    
    Months EndedSeptember 30, 2005
    
    
    September 30, 2004
    
    
    September 30, 2005
    
    
    September 30, 2004RevenuesWaste disposal and related services
revenues
    
    $
    81,719
    
    
    $
    81,606
    
    
    $
    236,192
    
    
    $
    238,574Electricity and steam sales
    
    
    43,482
    
    
    
    43,066
    
    
    
    126,121
    
    
    
    123,085Total operating revenues
    
    
    125,201
    
    
    
    124,672
    
    
    
    362,313
    
    
    
    361,659ExpensesPlant operating expenses
    
    
    47,028
    
    
    
    48,838
    
    
    
    156,551
    
    
    
    165,194Depreciation and amortization
    
    
    26,802
    
    
    
    27,054
    
    
    
    80,389
    
    
    
    80,808Net interest expense on project debt
    
    
    7,692
    
    
    
    8,952
    
    
    
    23,587
    
    
    
    26,945General and administrative
    
    
    3,682
    
    
    
    2,656
    
    
    
    14,522
    
    
    
    11,846(Gain) loss on asset retirements
    
    
    (494
    )
    
    
    (218
    )
    
    
    25
    
    
    
    960Operating income
    
    
    40,491
    
    
    
    37,390
    
    
    
    87,239
    
    
    
    75,906Interest income
    
    
    293
    
    
    
    280
    
    
    
    1,339
    
    
    
    715Interest expense
    
    
    (8,354
    )
    
    
    (8,725
    )
    
    
    (26,286
    )
    
    
    (26,339
    )Net income (loss) before minority
interest and income taxes
    
    $
    32,430
    
    
    $
    28,945
    
    
    $
    62,292
    
    
    $
    50,282
 Comparison of Actual Results for the Three Months Ended September 30, 2005 and the Unaudited Pro
Forma Results for the Three Months Ended September 30, 2004
 Total Operating Revenues.
  Plant Operating Expenses.
 21




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##### Table of Contents



Depreciation and Amortization
 Net interest on project debt
 General and Administrative
 Comparison of the Unaudited Pro Forma Nine Months Ended September 30, 2005 and 2004, respectively
 Total Operating Revenues.
  Plant Operating Expenses.
 Depreciation and Amortization
 Net interest on project debt
 General and Administrative
 Debt Covenant
  22




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Critical Accounting Policies
  Principles of Consolidation.
 Use of Estimates in Preparing Financial Statements.
 Equity Method Investment.
 Effect of New Accounting Standard
 Share-Based Payment
 Contractual Obligations and Commercial Commitments
  MoreLess than 1
    
    
    
    
    
    
    
    
    
    
    than 5Contractual Obligations
    
    Total
    
    
    Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    YearsLong-term debt principal obligations  project
    
    $
    709,557
    
    
    $
    42,648
    
    
    $
    112,468
    
    
    $
    132,557
    
    
    $
    421,884Long-term debt principal obligations  intermediate
    
    
    458,100
    
    
    
    22,400
    
    
    
    57,100
    
    
    
    262,800
    
    
    
    115,800Total debt principal obligations of the Company
    
    
    1,167,657
    
    
    
    65,048
    
    
    
    169,568
    
    
    
    395,357
    
    
    
    537,684Less non-recourse debt to MSW Energy Holdings II
    
    
    (943,557
    )
    
    
    (65,048
    )
    
    
    (169,568
    )
    
    
    (171,257
    )
    
    
    (537,684
    )Total MSW Energy Holdings II debt obligations
    
    
    224,100
    
    
    
    
    
    
    
    
    
    
    
    224,100
    
    
    
    Long-term debt interest obligations  project
    
    
    253,648
    
    
    
    38,863
    
    
    
    68,946
    
    
    
    54,640
    
    
    
    91,199Long-term debt interest obligations  intermediate
    
    
    159,572
    
    
    
    30,737
    
    
    
    56,608
    
    
    
    49,569
    
    
    
    22,658Total debt interest obligations of the Company
    
    
    413,220
    
    
    
    69,600
    
    
    
    125,554
    
    
    
    104,209
    
    
    
    113,857Less non-recourse debt interest to MSW Energy Holdings II
    
    
    (330,583
    )
    
    
    (53,073
    )
    
    
    (92,499
    )
    
    
    (71,154
    )
    
    
    (113,857
    )Total MSW Energy Holdings II debt interest obligations
    
    
    82,637
    
    
    
    16,527
    
    
    
    33,055
    
    
    
    33,055
    
    
    
    Operating lease obligations
    
    
    151,043
    
    
    
    14,122
    
    
    
    27,694
    
    
    
    42,608
    
    
    
    66,619
 23




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##### Table of Contents



MoreLess than 1
    
    
    
    
    
    
    
    
    
    
    than 5Contractual Obligations
    
    Total
    
    
    Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    YearsOther long-term obligations
    
    
    24,784
    
    
    
    4,998
    
    
    
    8,190
    
    
    
    
    
    
    
    11,596Less non-recourse lease and other obligation
    
    
    (175,827
    )
    
    
    (19,120
    )
    
    
    (35,844
    )
    
    
    (42,608
    )
    
    
    (78,215
    )Total MSW Energy Holdings II other obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total MSW Energy Holdings II contractual
obligations
    
    $
    306,737
    
    
    $
    16,527
    
    
    $
    33,055
    
    
    $
    257,155
    
    
    $
    
  Impact of the Acquisition on the Company
  
    
    incur additional indebtedness;
    
    create liens;
    
    purchase or redeem capital stock;
    
    make investments;
    
    sell assets or consolidate or merge with or into other companies;
    
    engage in transactions with affiliates; and
    
    engage in new lines of business.
   24




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Item 4. Controls and Procedures
 MSW Energy Holdings II
     25




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##### Table of Contents



PART II OTHER INFORMATION
 
 Item 1. Legal Proceedings
 Lower Passaic River Study.
 CMW Landfill.
 
 Item 5. Other Information.
  26




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##### Table of Contents



Item 6. Exhibits
 (a) Exhibits
 12
    
    Statement re Computation of Ratio of Earnings to Fixed Charges.31(a)
    
    15d-14(a) Certification of Anthony J. Orlando for MSW Energy Holdings II LLC.31(b)
    
    15d-14(a) Certification of Craig D. Abolt for MSW Energy Holdings II LLC.31(c)
    
    15d-14(a) Certification of Anthony J. Orlando for MSW Energy Finance Co. II, Inc.31(d)
    
    15d-14(a) Certification of Craig D. Abolt for MSW Energy Finance Co. II, Inc.32(a)
    
    Section 1350 Certification of Anthony J. Orlando and Craig D. Abolt for MSW Energy Holdings II LLC.32(b)
    
    Section 1350 Certification of Anthony J. Orlando and Craig D. Abolt for MSW Energy Finance Co. II, Inc.
 27




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##### Table of Contents



SIGNATURES
  MSW ENERGY HOLDINGS II LLCBy:
    /s/ Craig D. AboltCraig D. AboltSenior Vice President and Chief Financial Officer By:
    /s/ Thomas E. BucksThomas E. BucksVice President and Chief Accounting Officer  28




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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 Officer By:
    /s/  Thomas E. BucksThomas E. BucksVice President and Chief Accounting Officer  29




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##### Table of Contents



EXHIBIT INDEX
 12
    
    Statement re Computation of Ratio of Earnings to Fixed Charges.31(a)
    
    15d-14(a) Certification of Anthony J. Orlando for MSW Energy Holdings II LLC.31(b)
    
    15d-14(a) Certification of Craig D. Abolt for MSW Energy Holdings II LLC.31(c)
    
    15d-14(a) Certification of Anthony J. Orlando for MSW Energy Finance Co. II, Inc.31(d)
    
    15d-14(a) Certification of Craig D. Abolt for MSW Energy Finance Co. II, Inc.32(a)
    
    Section 1350 Certification of Anthony J. Orlando and Craig D. Abolt for MSW Energy Holdings II LLC.32(b)
    
    Section 1350 Certification of Anthony J. Orlando and Craig D. Abolt for MSW Energy Finance Co. II, Inc.
 30