10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

þ	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the fiscal year ended December 31, 2005
	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 file number: 1-06732

COVANTA HOLDING CORPORATION

(Exact name of registrant as specified in its charter)

Delaware	95-6021257
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employee Identification No.)
40 Lane Road, Fairfield, N.J	07004
(Address of Principal Executive Offices)	(Zip Code)

Registrant’s telephone number, including area code:

(973) 882-9000

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class	Name of Each Exchange on Which Registered
Common Stock, $0.10 par value per share	New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

N/ A

     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes o         No þ

     Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.    Yes o         No þ

     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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    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.

Large accelerated filer    þ         Accelerated filer    o         Non-accelerated filer    o

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes o         No þ

     As of June 30, 2005, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $872,088,630 based on the closing sale price as reported on the American Stock Exchange (the exchange upon which the registrant’s common stock was listed on such date).

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

Class	March 3, 2006
Common Stock, $0.10 par value per share	146,995,790 shares

Documents Incorporated By Reference:

Part of Form 10-K of Covanta Holding Corporation	Documents Incorporated by Reference
Part III	Portions of the Proxy Statement to be filed with the Securities and Exchange Commission in connection with the Annual Meeting of Stockholders to be held May 31, 2006.

TABLE OF CONTENTS

		Page
Cautionary Note Regarding Forward-Looking Statements			3
Availability Of Information			3
PART I
Item 1.	Business		5
Item 1A.	Risk Factors		28
Item 1B.	Unresolved Staff Comments		41
Item 2.	Properties		41
Item 3.	Legal Proceedings		42
Item 4.	Submission Of Matters To A Vote Of Security Holders		43
PART II
Item 5.	Market For Registrant’s Common Equity And Related Stockholder Matters And Issuer Purchases Of Equity Securities		43
Item 6.	Selected Financial Data		44
Item 7.	Management’s Discussion And Analysis of Financial Condition And Results Of Operations		45
Item 7A.	Quantitative And Qualitative Disclosures About Market Risk		89
Item 8.	Financial Statements And Supplementary Data		93
Item 9.	Changes In And Disagreements With Accountants On Accounting And Financial Disclosure		163
Item 9A.	Controls And Procedures		163
Item 9B.	Other Information		167
PART III
Item 10.	Directors And Executive Officers Of The Registrant		167
Item 11.	Executive Compensation		167
Item 12.	Security Ownership Of Certain Beneficial Owners And Management And Related Stockholder Matters		167
Item 13.	Certain Relationships And Related Transactions		168
Item 14.	Principal Accountant Fees And Services		168
PART IV
Item 15.	Exhibits And Financial Statement Schedules		168
Indenture
First Supplemental Indenture
Specimen copy of Covanta ARC LLC 6.26% Senior Notes
Consent of Independent Registered Public Accounting Firm
Consent of Independent Registered Public Accounting Firm
Certification of CEO
Certification of CFO
Certification of CEO
Certification of CFO

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

      Certain statements in the Annual Report on Form 10-K may constitute “forward-looking” statements as defined in Section 27A of the Securities Act of 1933 (the “Securities Act”), Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”), the Private Securities Litigation Reform Act of 1995 (the “PSLRA”) or in releases made by the Securities and Exchange Commission (“SEC”), all as may be amended from time to time. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievements of Covanta Holding Corporation and its subsidiaries (“Covanta”), formerly known as Danielson Holding Corporation, or industry results, to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Statements that are not historical fact are forward-looking statements. Forward-looking statements can be identified by, among other things, the use of forward-looking language, such as the words “plan”, “believe”, “expect”, “anticipate”, “intend”, “estimate”, “project”, “may”, “will”, “would”, “could”, “should”, “seeks”, or “scheduled to”, or other similar words, or the negative of these terms or other variations of these terms or comparable language, or by discussion of strategy or intentions. These cautionary statements are being made pursuant to the Securities Act, the Exchange Act and the PSLRA with the intention of obtaining the benefits of the “safe harbor” provisions of such laws. Covanta cautions investors that any forward-looking statements made by Covanta are not guarantees or indicative of future performance. Important assumptions and other important factors that could cause actual results to differ materially from those forward-looking statements with respect to Covanta include, but are not limited to, the risks and uncertainties affecting their businesses described in Item 1A of this Annual Report on Form 10-K for the year ended December 31, 2005 and in other securities filings by Covanta and its subsidiaries.

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

AVAILABILITY OF INFORMATION

Covanta Holding Corporation

      You may read and copy any materials Covanta files with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. Copies of such material also can be obtained at the SEC’s website, www.sec.gov or by mail from the Public Reference Room of the SEC, at prescribed rates. Please call the SEC at 1-800-SEC-0330 for further information on the Public Reference Room. Covanta’s SEC filings are also available to the public, free of charge, on its corporate website, www.covantaholding.com as soon as reasonably practicable after Covanta electronically files such material with, or furnishes it to, the SEC. Covanta’s common stock is traded on the New York Stock Exchange. Material filed by Covanta can be inspected at the offices of the New York Stock Exchange at 20 Broad Street, New York, NY 10005.

Covanta Energy Corporation

      Covanta Energy Corporation is a wholly-owned subsidiary of Covanta. As of June 30, 2005, Covanta Energy Corporation ceased to file periodic reports or other information with the SEC. Covanta Energy Corporation’s historical reports and other information filed by Covanta Energy Corporation with the SEC can be read and copied at the Public Reference Room of the SEC at the address set forth above. Copies of such historical material also can be obtained at the SEC’s website, www.sec.gov or by mail from the Public Reference Room of the SEC, at prescribed rates. Please call the SEC at the number set forth above for

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further information on the Public Reference Room. Historical information on Covanta Energy Corporation is also available to the public on Covanta’s corporate website at www.covantaholding.com.

Covanta ARC Holdings, Inc.

      Covanta ARC Holdings, Inc. is a wholly-owned subsidiary of Covanta Energy Corporation and does not currently file periodic reports or other information with the SEC. However, certain of its subsidiaries MSW Energy Holdings LLC, MSW Energy Finance Co. Inc., (collectively “MSW I”) and MSW Energy Holdings II LLC, and MSW Energy Finance Co. II, Inc., (collectively “MSW II”) file periodic reports and other information with the SEC. Such reports and other information filed by these entities with the SEC can be read and copied at the Public Reference Room of the SEC at the address set forth above. Copies of such material also can be obtained at the SEC’s website, www.sec.gov or by mail from the Public Reference Room of the SEC, at prescribed rates. Please call the SEC at the number set forth above for further information on the Public Reference Room. These SEC filings are also available to the public on Covanta’s corporate website at www.covantaholding.com.

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PART I

Item 1. BUSINESS

About Covanta Holding Corporation

      Covanta Holding Corporation (“Covanta”) is a holding company incorporated in Delaware on April 16, 1992. Covanta changed its name as of September 20, 2005 from Danielson Holding Corporation to Covanta Holding Corporation. Covanta primarily operates in the waste and energy markets through Covanta Energy Corporation and its subsidiaries (“Covanta Energy”). Covanta acquired Covanta Energy on March 10, 2004 and acquired Covanta ARC Holdings, Inc. (formerly known as American Ref-Fuel Holdings Corp., and referred to as “ARC Holdings”) and its subsidiaries on June 24, 2005. Substantially all of Covanta’s operations were conducted in the insurance industry prior to its acquisition of Covanta Energy through its indirect subsidiaries, National American Insurance Company of California (“NAICC”) and related entities.

      Covanta Energy develops, constructs, owns and operates for itself and others infrastructure for the conversion of waste-to-energy and independent power production in the United States and abroad. Following its acquisition of ARC Holdings, an owner and operator of six waste-to-energy projects and related businesses in the northeast United States, Covanta Energy owns or operates 55 energy generation facilities, 43 of which are in the United States and 12 of which are located outside of the United States. Covanta Energy’s energy generation facilities use a variety of fuels, including municipal solid waste, water (hydroelectric), natural gas, coal, wood waste, landfill gas and heavy fuel oil. Covanta Energy also owns or operates several businesses that are associated with its waste-to-energy business, including a waste procurement business, two landfills, and several waste transfer stations. Covanta Energy also operates one water treatment facility which is located in the United States.

      The nature of Covanta’s business, the risks attendant to such business and the trends that Covanta faces have been significantly altered by the acquisitions of Covanta Energy and ARC Holdings. Accordingly, Covanta’s financial results prior to the acquisitions of Covanta Energy in March 2004 and ARC Holdings in June 2005 are not directly comparable to current and future financial results.

Covanta’s Business Strategy

      With the acquisition of Covanta Energy and ARC Holdings, Covanta is focused on the Waste and Energy Services business. Covanta’s mission is to be the world’s leading waste-to-energy company, with a complementary network of waste disposal and energy generation assets. Covanta expects to build value for its shareholders by satisfying its clients’ waste disposal and energy generation needs with safe, reliable and environmentally superior solutions. In order to accomplish this mission, Covanta intends to:

      Leverage its core competencies by:

•  providing outstanding client service,

•  utilizing an experienced management team,

•  developing and utilizing world-class technologies and operational expertise, and

•  applying proven asset management and cost control; and

      Maximize long-term value of its existing portfolio by:

•  continuing to operate at historic production levels,

•  continuing to execute effective maintenance programs,

•  extending operating contracts, and

•  enhancing the value of Covanta Energy-owned facilities after expiration of existing contracts; and

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      Capitalize on growth opportunities by:

•  expanding existing waste-to-energy facilities in attractive markets,

•  developing TransRiver Marketing Company, L.P. (“TransRiver”) and its waste procurement and other expertise by leveraging that knowledge across a larger platform,

•  seeking new ownership opportunities or operating contracts for waste-to-energy and other energy projects, and

•  seeking additional opportunities in businesses ancillary to its existing business, including additional waste transfer, transportation, processing and landfill businesses.

Business Segments

      Covanta has two business segments: Waste and Energy Services, which is comprised of Covanta Energy’s business, and Other Services, which includes Covanta’s parent company operations and insurance business. Covanta’s Waste and Energy Services segment is substantially larger than its Other Services segment. Each of these segments are described below.

      Additional information about Covanta’s business segments is contained in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview — Covanta’s Business Segments and in Note 1. Organization and Summary of Significant Accounting Policies and Note 27. Business Segments of the Notes to the Consolidated Financial Statements (“Notes”).

WASTE AND ENERGY SERVICES BUSINESS

      Covanta’s strategic acquisitions of Covanta Energy and ARC Holdings have made it a leader in the waste and energy services markets.

Covanta Energy

      On December 2, 2003, Covanta executed a definitive investment and purchase agreement to acquire Covanta Energy in connection with Covanta Energy’s emergence from Chapter 11 proceedings. On March 5, 2004, the Bankruptcy Court confirmed Covanta Energy’s proposed plans of reorganization and on March 10, 2004, Covanta acquired 100% of Covanta Energy’s equity for approximately $30 million.

ARC Holdings

      Covanta, through its wholly-owned subsidiary Covanta Energy, acquired ARC Holdings on June 24, 2005 by purchasing 100% of the issued and outstanding shares of ARC Holdings’ capital stock. Covanta’s purchase price was approximately $747 million, including transaction costs, for the stock of ARC Holdings and the assumption of the consolidated net debt of ARC Holdings, which was approximately $1.3 billion ($1.5 billion of consolidated indebtedness net of $0.2 billion of cash and restricted cash). Covanta financed this transaction through a combination of debt and equity financing. The equity component of the financing was effected through a rights offering to existing Covanta shareholders (the “ARC Holdings Rights Offering”) that was consummated as of June 24, 2005.

      See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Management’s Discussion and Analysis of Liquidity and Capital Resources — Financing Arrangements, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Management’s Discussion of Liquidity and Capital Resources — Related Party Transactions — Affiliate Agreements, Note 3. Acquisitions and Dispositions and Note 18. Long-Term Debt of the Notes for a detailed description of this financing associated with this acquisition.

      ARC Holdings is now a wholly-owned subsidiary of Covanta Energy, and Covanta Energy controls the management and operations of the ARC Holdings facilities.

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Waste-to-Energy Projects

      The fundamental purpose of Covanta Energy’s waste-to-energy projects is to provide waste disposal services, typically to municipal clients who sponsor the projects. Generally, Covanta Energy provides these services pursuant to long-term service contracts. The electricity or steam generated is generally sold pursuant to long-term power purchase agreements with local utilities or industrial customers, and most of the resulting revenues reduce the overall cost of waste disposal services to the municipal clients. The original terms of the service contracts are each 20 or more years, with the majority now in the second half of their respective terms. Many of Covanta Energy’s service contracts may be renewed for varying periods of time, at the option of the municipal client. Covanta Energy receives its revenue in the form of fees pursuant to the service or waste contracts, and in some cases, energy purchase agreements, at facilities it owns or operates. TransRiver, one of Covanta Energy’s subsidiaries, markets waste disposal services to third parties predominantly to efficiently utilize that portion of the waste disposal capacity of Covanta Energy’s projects which is not dedicated to municipal clients under such long-term service contracts.

      Covanta Energy currently operates waste-to-energy projects in 15 states, identified below under “Domestic Project Summaries.” Most of Covanta Energy’s operating waste-to-energy projects were developed and structured contractually as part of competitive procurement processes conducted by municipal entities. As a result, many of these projects have common features. However, each service agreement is different to reflect the specific needs and concerns of a client community, applicable regulatory requirements and other factors. The following describes features generally common to these agreements, as well as important distinctions among them:

•  Covanta Energy designs the facility, helps to arrange for financing and then either constructs and equips the facility on a fixed price and schedule basis, or undertakes an alternative role, such as construction management, if that better meets the goals of the municipal client.

•  Following construction and during operations, Covanta Energy receives revenue from two primary sources: from fees it charges for operating projects or for processing waste received, and from payments for electricity and/or steam sales. Covanta Energy has twenty-three waste-to-energy projects at which it charges a fixed fee (which escalates over time pursuant to contractual indices) for its operation and maintenance services, referred to herein as having a “Service Fee” structure. Covanta Energy also has 8 waste-to-energy projects at which it charges a per-ton fee under contracts for processing waste, referred to herein as having a “Tip Fee” structure. At its Tip Fee projects, Covanta Energy contracts on both a long-term and short-term basis to utilize project disposal capacity, and as such generally has a greater exposure to waste market price fluctuation, as well as a greater exposure to project operating disruptions that may cause it to reduce waste acceptance.

•  The energy output from Covanta Energy’s projects is generally sold pursuant to long-term contracts to local utilities. Where a Service Fee structure exists, Covanta Energy’s client community usually retains a portion (generally 90%) of the energy revenues generated by the facility, and pays the balance to Covanta Energy. Where Tip Fee structures exist, Covanta Energy retains 100% of the energy revenues. At 3 of its projects, Covanta Energy sells its energy output under short-term contracts or on a spot-basis into the regional electricity grid. At its Tip Fee projects, Covanta Energy generally has a greater exposure to energy market price fluctuation, as well as a greater exposure to project operating performance.

•  Covanta Energy operates the facility and generally guarantees that it will meet minimum waste processing capacity and efficiency standards, energy production levels and environmental standards. Covanta Energy’s failure to meet these guarantees or to otherwise observe the material terms of the service agreement (unless caused by the client community or by events beyond its control), may result in liquidated damages charged to Covanta Energy or, if the breach is substantial, continuing and unremedied, the termination of the applicable agreement. In the case of such a termination, Covanta Energy may be obligated to pay material damages, including payments to discharge project indebtedness. At three publicly-owned facilities Covanta Energy operates, the client community may terminate the operating contract under limited circumstances but without cause.

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•  The client community is generally required to deliver minimum quantities of municipal solid waste to the facility on a put-or-pay basis and is obligated to pay a fee for its disposal. A put-or-pay commitment means that the client community promises to deliver a stated quantity of waste and pay an agreed amount for its disposal. This payment is due even if the counterparty delivers less than the full amount of waste promised. Where a Service Fee structure exists, portions of the service fee escalate to reflect indices of inflation. In many cases the client community must also pay for other costs, such as insurance, taxes, and transportation and disposal of the ash residue to the disposal site. If the facility is owned by Covanta Energy and a Service Fee structure exists, the client community also pays, as part of the service fee, an amount equal to the debt service due to be paid on the bonds issued to finance the facility. Generally, expenses resulting from the delivery of unacceptable and hazardous waste on the site are also borne by the client community. In addition, the contracts generally require that the client community pay increased expenses and capital costs resulting from unforeseen circumstances, subject to limits which may be specified in the service agreement.

•  Financing for Covanta Energy’s domestic waste-to-energy projects is generally accomplished through tax-exempt and taxable revenue bonds issued by or on behalf of the client community. If the facility is owned by a Covanta Energy subsidiary, the client community loans the bond proceeds to the subsidiary to pay for facility construction and pays to the subsidiary amounts necessary to pay debt service. For such facilities, project-related debt is included as “project debt (short-and long-term)” in the consolidated financial statements. Generally, such debt is secured by the revenues pledged under the respective indentures and is collateralized by the assets of Covanta Energy’s subsidiary with the only recourse to Covanta Energy being related to construction and operating performance defaults.

•  Covanta Energy and certain of its subsidiaries have issued instruments to their client communities and other parties which guarantee that Covanta Energy’s operating subsidiaries will perform in accordance with contractual terms including, where required, the payment of damages. Such contractual damages could be material, and in circumstances where one or more subsidiary’s contract has been terminated for its default, such damages could include amounts sufficient to repay project debt. For facilities owned by client communities and operated by Covanta Energy subsidiaries, Covanta Energy’s potential maximum liability as of December 31, 2005 associated with the repayment of project debt on such facilities was in excess of $1 billion. If Covanta Energy is asked to perform under one or more of such guarantees, its liability for damages upon contract termination would be reduced by funds held in trust and proceeds from sales of the facilities securing the project debt which is presently not estimable. To date, Covanta Energy has not incurred material liabilities under such guarantees.

      Covanta Energy’s service and waste disposal agreements, as well as its energy contracts, expire at various times as noted in the table below. The extent to which any such expiration will affect Covanta Energy will depend upon a variety of factors, including whether the project itself is owned by Covanta Energy or its municipal client, market conditions then prevailing, and whether the municipal client exercises options it may have to extend the contract term. As Covanta Energy’s contracts expire it will become subject to greater market risk in maintaining and enhancing its revenues. As its service agreements at municipally-owned facilities expire, Covanta Energy intends to seek to enter into renewal or replacement contracts to operate several such facilities. Covanta Energy also will seek to bid competitively in the market for additional contracts to operate other facilities as similar contracts of other vendors expire. As Covanta Energy’s service and waste disposal agreements at facilities it owns or leases begin to expire, it intends to seek replacement or additional contracts, and because project debt on these facilities will be paid off at such time, Covanta Energy expects to be able to offer rates that will attract sufficient quantities of waste while providing acceptable revenues to Covanta Energy. At Covanta Energy-owned facilities, the expiration of existing energy contracts will require Covanta Energy to sell its output either into the local electricity grid at prevailing rates or pursuant to new contracts. There can be no assurance that Covanta Energy will be able to enter into such renewals, replacement or additional contracts, or that the terms available in the market at the time will be favorable to Covanta Energy. See Item 1A. Risk Factors — Waste and Energy Services Business-Specific Risks — Covanta Energy may face increased risk of market influences on its domestic revenues after its contracts expire.

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      Covanta Energy’s opportunities for growth by investing in new projects will be limited by existing non-project debt covenants, as well as by competition from other companies in the waste disposal business. For a discussion of such debt covenants, see Note 18. Long-Term Debt of the Notes. See Item 1A. Risk Factors — Waste and Energy Services Business-Specific Risks — Our ability to grow our Waste and Energy Services business may be limited.

Other Waste-Related Businesses

      TransRiver, a wholly-owned subsidiary of Covanta Energy, provides waste procurement services to Covanta Energy’s waste disposal and transfer facilities which have available capacity to receive waste. In doing so, TransRiver seeks to maximize Covanta Energy’s revenue, and ensures that Covanta Energy’s facilities are being utilized most efficiently, taking into account maintenance schedules and operating restrictions that may exist from time to time at each facility. TransRiver also provides management and marketing of ferrous and non-ferrous metals recovered from waste-to-energy operations, as well as services related to non-hazardous special waste destruction and residue management for Covanta Energy’s waste-to-energy projects.

      Covanta Energy’s waste-related business also include the operations of five transfer stations and two landfills in the northeast United States, which it utilizes to supplement and manage more efficiently the fuel requirements at its waste-to-energy operations.

Independent Power Projects

      Covanta Energy is also engaged domestically in developing, owning and/or operating independent power production facilities utilizing a variety of energy sources including water (hydroelectric), waste wood (biomass) and landfill gas. The electrical output from each facility, with one exception, is sold to local utilities. Covanta Energy’s revenues from the independent power production facilities are derived primarily from the sale of energy and capacity under energy contracts. The facilities and locations are identified below under “Domestic Project Summaries”.

Hydroelectric

      Covanta Energy owns a 50% equity interest in two run-of-river hydroelectric facilities which have a combined gross generating capacity of 17 megawatts (“MW”). Both facilities are located in the State of Washington and both sell energy and capacity to Puget Sound Energy under long-term energy contracts. A subsidiary of Covanta Energy provides operation and maintenance services at one of the facilities under a cost plus fixed-fee agreement.

Waste Wood

      Covanta Energy owns 100% interests in three wood-fired generation facilities and a 50% interest in a partnership which owns a fourth wood-fired generation facility, all of which are located in northern California. Fuel for the facilities is procured from local sources, primarily through short-term supply agreements. The price of the fuel varies depending on time of year, supply and price of energy. These projects have a combined gross generating capacity of 67.1 MW and sell energy and capacity to Pacific Gas & Electric Company under energy contracts which have fixed pricing through July 2006 and market pricing thereafter through 2011.

Landfill Gas

      Covanta Energy has interests in and/or operates six landfill gas projects which produce electricity by burning methane gas produced in landfills. Five of these projects are located in California, and one is located in Maryland. The six projects have a total gross generating capacity of 16.1 MW. The Maryland facility’s energy contract has expired and the facility is currently selling its output into the regional utility grid. The remaining five projects sell energy to various California utilities. Upon the expiration of the energy contracts, it is expected that these projects will enter into new power off-take arrangements or the projects will be shut down.

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Water Project

      Covanta Energy designed, built and now continues to operate and maintain a 24 million gallon per day (“mgd”) potable water treatment facility and associated transmission and pumping equipment in Alabama. Under a long-term contract with a public utility authority, Covanta Energy is paid a fixed-fee plus pass-through costs for delivering processed water to a municipal water distribution system.

Domestic Project Summaries

      Summary information with respect to Covanta Energy’s domestic projects that are currently operating is provided in the following table:

										Contract Expiration
				Design Capacity						Dates
				Waste		Gross				Service/
				Disposal		Electric				Waste
		Location		(TPD)		(MW)		Nature of Interest		Disposal		Energy
A.	WASTE-TO-ENERGY
	TIP FEE STRUCTURES
1.	Alexandria/ Arlington		Virginia		975		22.0		Owner/Operator		2013		2023
2.	Delaware Valley		Pennsylvania		2,688		87.0		Lessee/Operator		2017		2016
3.	Haverhill		Massachusetts		1,650		44.6		Owner/Operator		NA		2019
4.	Hempstead		New York		2,671		75.0		Owner/Operator		2009		2009
5.	Niagara(1)		New York		2,250		50.0		Owner/Operator		NA		2014
6.	Southeast
	Massachusetts(2)		Massachusetts		2,700		78.0		Owner/Operator		NA		2015
7.	Union County		New Jersey		1,440		42.1		Lessee/Operator		2023		NA
8.	Warren County		New Jersey		400		11.8		Owner/Operator		NA		2013

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										Contract Expiration
				Design Capacity						Dates
				Waste		Gross				Service/
				Disposal		Electric				Waste
		Location		(TPD)		(MW)		Nature of Interest		Disposal		Energy
	SERVICE FEE STRUCTURES
9.	Babylon		New York		750		16.8		Owner/Operator		2019		2019
10.	Bristol		Connecticut		650		16.3		Owner/Operator		2014		2014
11.	Detroit(1)(2)(3)		Michigan		2,832		68.0		Lessee/Operator		2009		2008
12.	Essex County		New Jersey		2,700		64.0		Owner/Operator		2020		2021
13.	Fairfax County		Virginia		3,000		93.0		Owner/Operator		2011		2015
14.	Hartford(2)(4)		Connecticut		2,000		68.5		Operator		2012		2012
15.	Hennepin County		Minnesota		1,212		38.7		Operator		2018		2018
16.	Hillsborough County(5)		Florida		1,800		29.0		Operator		2027		2010
17.	Honolulu(2)(3)		Hawaii		2,160		57.0		Lessee/Operator		2010		2015
18.	Huntington(6)		New York		750		24.3		Owner/Operator		2012		2012
19.	Huntsville(1)		Alabama		690		—		Operator		2016		2016
20.	Indianapolis(1)		Indiana		2,362		6.5		Owner/Operator		2008		2008
21.	Kent County(1)		Michigan		625		16.8		Operator		2010		2022
22.	Lake County		Florida		528		14.5		Owner/Operator		2014		2014
23.	Lancaster County		Pennsylvania		1,200		33.1		Operator		2011		2016
24.	Lee County(7)		Florida		1,836		57.3		Operator		2024		2015
25.	Marion County		Oregon		550		13.1		Owner/Operator		2014		2014
26.	Montgomery County		Maryland		1,800		63.4		Operator		2016		2006
27.	Onondaga County(6)		New York		990		36.8		Owner/Operator		2015		2025
28.	Pasco County		Florida		1,050		29.7		Operator		2011		2024
29.	Southeast Connecticut		Connecticut		689		17.0		Owner/Operator		2015		2017
30.	Stanislaus County		California		800		22.4		Owner/Operator		2010		2010
31.	Wallingford		Connecticut		420		11.0		Owner/Operator		2010		2010
			SUBTOTAL		46,168		1,207.7
B.	OTHER WASTE
	LANDFILLS
32.	Haverhill		Massachusetts		555		NA		Lessee/Operator		NA		NA
33.	CMW — Semass		Massachusetts		1,700		NA		Operator		2016		NA
	TRANSFER STATIONS
34.	Braintree		Massachusetts		1,200		NA		Owner/Operator		2015		NA
35.	Lynn		Massachusetts		885		NA		Owner/Operator		NA		NA
36.	Derwood		Maryland		2,500		NA		Operator		2015		NA
37.	Danvers		Massachusetts		250		NA		Operator		2011		NA
38.	Essex		Massachusetts		6		NA		Operator		2015		NA
			SUBTOTAL		7,096
C.	HYDROELECTRIC
39.	Koma Kulshan(8)		Washington		NA		12.0		Part Owner/Operator		NA		2037
40.	Weeks Falls(8)		Washington		NA		5.0		Part Owner		NA		2022
			SUBTOTAL				17.0

11

Contract Expiration

Design Capacity

Dates

Waste

Gross

Service/

Disposal

Electric

Waste

Location

(TPD)

(MW)

Nature of Interest

Disposal

Energy

D.

WOOD

41.

Burney Mountain

California

NA

11.4

Owner/Operator

NA

2013

42.

Mount Lassen

California

NA

11.4

Owner/Operator

NA

2013

43.

Pacific Oroville

California

NA

18.7

Owner/Operator

NA

2013

44.

Pacific Ultrapower

Chinese Station(8)

California

NA

25.6

Part Owner

NA

2013

SUBTOTAL

67.1

E.

LANDFILL GAS

45.

Gude

Maryland

NA

3.0

Owner/Operator

NA

NA

46.

Otay

California

NA

3.7

Owner/Operator

NA

2009 - 2015

47.

Oxnard

California

NA

5.6

Owner/Operator

NA

2009

48.

Salinas

California

NA

1.5

Owner/Operator

NA

2007

49.

Santa Clara

California

NA

1.5

Owner/Operator

NA

2007

50.

Stockton

California

NA

0.8

Owner/Operator

NA

2007

SUBTOTAL

NA

16.1

TOTAL

53,264

1,307.9

F.

WATER

51.

Bessemer

Alabama

24 mgd

Operator

(1)	Facility has been designed to export steam for sale.
(2)	Facility uses a refuse-derived fuel technology.
(3)	These projects are leased from third party lessors under arrangements where the lease benefits and burdens are primarily those of the related client community.
(4)	Under contracts with the Connecticut Resource Recovery Authority, Covanta Energy operates only the boilers and turbines for this facility.
(5)	With respect to this project, Covanta Energy has entered into agreements to expand waste processing capacity from 1,200 tons-per-day (“tpd”) to 1,800 tpd. The agreements will also extend the contract term from 2007 to 2027. If the client community is unable to obtain permits and financing for the expansion, the existing contract, processing capacity and contract term will remain in place. See Hillsborough County, Florida discussion below regarding expansion construction for this project.
(6)	Owned by a limited partnership in which the limited partners are not affiliated with Covanta Energy.
(7)	With respect to this project, Covanta Energy has entered into agreements to expand waste processing capacity from 1,200 tpd to 1,836 tpd and to increase gross electricity capacity from 36.9 MW to 57.3 MW. The agreements will also extend the contract term from 2014 to 2024. Construction of the expansion has commenced.
(8)	Covanta Energy has a 50% ownership interest in the project.

International Waste and Energy Services Business

      Covanta Energy conducts its international energy business through its wholly-owned subsidiary, Covanta Power International Holdings, Inc. (“CPIH”) and its subsidiaries. The largest element of CPIH’s waste and energy services business is its 26% ownership in and operation of a 510 MW (gross) pulverized coal-fired electric generating facility in the Philippines. CPIH also has interests in other fossil fuel generating projects in

12

Bangladesh, China, India and the Philippines, a waste-to-energy project in Italy and two small hydroelectric projects in Costa Rica. In general, these projects provide cash returns primarily from equity distributions and, to a lesser extent, operating fees. The projects sell the electricity and steam they generate under long-term contracts or market concessions to utilities, governmental agencies providing power distribution, creditworthy industrial users, or local governmental units. In select cases, such sales of electricity and steam may be provided under short-term arrangements as well.

      Covanta Energy presently has interests in international power projects with an aggregate generating capacity of approximately 1,051 MW (gross) with proportionate ownership in these facilities being approximately 461 MW. In addition to its headquarters in Fairfield, New Jersey, Covanta Energy’s international business is facilitated through field offices in Shanghai, China; Chennai, India; Manila, Philippines; and Bangkok, Thailand.

General Approach to International Projects

      In developing its international business, Covanta Energy has employed the same general approach to projects as is described above with respect to domestic projects. While Covanta Energy intends to focus its business primarily in domestic markets, it may seek to develop or participate in additional international projects, particularly waste-to-energy projects. Covanta Energy’s financing arrangements place limitations on investments and borrowings it may make in connection with such projects. For information related to the revenues and identifiable assets of the international business, see Note 27. Business Segments of the Notes.

      The ownership and operation of facilities in foreign countries in connection with Covanta Energy’s international business entails significant political and financial uncertainties that typically are not encountered in such activities in the United States as described in Item 1A. Risk Factors — Waste and Energy Services Business — Specific Risks — Exposure to international economic and political factors may materially and adversely affect our Waste and Energy Services businesses.

      Many of the countries in which Covanta Energy operates are lesser developed countries or developing countries where the political, social and economic conditions are typically less stable than in the United States. The financial condition and creditworthiness of the potential purchasers of power and services provided by Covanta Energy or of the suppliers of fuel for projects in these countries may not be as strong as those of similar entities in developed countries. The obligations of the purchaser under the energy contract, the service recipient under the related service agreement and the supplier under the fuel supply agreement generally are not guaranteed by any host country or other creditworthy governmental agency. At the time it develops a project, Covanta Energy undertakes a credit analysis of the proposed power purchaser or fuel supplier and to the extent appropriate and achievable within the commercial parameters of a project, requires such entities to provide financial instruments, such as letters of credit or arrangements regarding the escrowing of the receivables.

      Covanta Energy has typically sought to negotiate long-term contracts for the supply of fuel with creditworthy and reliable suppliers. However, the reliability of fuel deliveries may be compromised by one or more of several factors that may be more acute or may occur more frequently in developing countries than in developed countries, including a lack of sufficient infrastructure to support deliveries under all circumstances; bureaucratic delays in the import, transportation and storage of fuel in the host country; customs and tariff disputes; and local or regional unrest or political instability. In most of the foreign projects in which Covanta Energy participates, it has sought, to the extent practicable, to shift the consequences of interruptions in the delivery of fuel (whether due to the fault of the fuel supplier or due to reasons beyond the fuel supplier’s control) to the electricity purchaser or service recipient by securing a suspension of its operating responsibilities under the applicable agreements and an extension of its operating concession under such agreements. In some instances, Covanta Energy requires the energy purchaser or service recipient to continue to make payments in respect of fixed costs if such interruptions occur. In order to mitigate the effect of short-term interruptions in the supply of fuel, Covanta Energy has also endeavored to provide on-site storage of fuel in sufficient quantities to address such interruptions.

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      Payment for services that Covanta Energy provides will often be made in whole or in part in the domestic currencies of the host countries. Conversion of such currencies into U.S. dollars generally is not assured by a governmental or other creditworthy country agency and may be subject to limitations in the currency markets, as well as restrictions of the host country. In addition, fluctuations in the value of such currencies against the value of the U.S. dollar may cause Covanta Energy’s participation in such projects to yield less return than expected. Transfer of earnings and profits in any form beyond the borders of the host country may be subject to special taxes or limitations imposed by host country laws. Covanta Energy has sought to participate in projects in jurisdictions where limitations on the convertibility and expatriation of currency have been lifted by the host country and where such local currency is freely exchangeable on the international markets. In most cases, components of project costs incurred or funded in the currency of the United States are recovered without risk of currency fluctuation through negotiated contractual adjustments to the price charged for electricity or service provided. This contractual structure may cause the cost in local currency to the project’s power purchaser or service recipient to rise from time to time in excess of local inflation, and consequently there is risk in such situations that such power purchaser or service recipient will, at least in the near-term, be less able or willing to pay for the project’s power or service.

      Covanta Energy has sought to manage and mitigate these risks through all means that it deems appropriate, including: political and financial analysis of the host countries and the key participants in each project; guarantees of relevant agreements with creditworthy entities; political risk and other forms of insurance; participation by United States and/or international development finance institutions in the financing of projects in which Covanta Energy participates; and joint ventures with other companies to pursue the development, financing and construction of these projects. Covanta Energy determines which mitigation measures to apply based on its balancing of the risk presented, the availability of such measures and their cost.

      In addition, Covanta Energy has generally participated in projects which provide services that are treated as a matter of national or key economic importance by the laws and politics of the host country. Therefore, there is a risk that the assets constituting the facilities of these projects could be temporarily or permanently expropriated or nationalized by a host country, made subject to local or national control or be subject to unfavorable legislative action, regulatory decisions or changes in taxation.

      In certain cases, Covanta Energy has issued guarantees of its operating subsidiaries contractual obligations to operate certain international power projects. The potential damages owed under such arrangements for international projects may be material if called. Depending upon the circumstances giving rise to such damages, the contractual terms of the applicable contracts, and the contract counterparty’s choice of remedy at the time a claim against a guarantee is made, the amounts owed pursuant to one or more of such guarantees could be greater than Covanta Energy’s then-available sources of funds. To date, Covanta Energy has not incurred any material liabilities under its guarantees on international projects.

      Covanta Energy’s international power projects are identified below under “International Project Summaries.” The following describes the important features of these projects, by fuel type:

Waste-to-Energy

      Covanta Energy owns a 13% equity interest in an 18 MW mass-burn waste-to-energy project at Trezzo sull’Adda in the Lombardy Region of Italy (the “Trezzo project”) which burns up to 500 metric tons per day of municipal solid waste. The remainder of the equity in the project is held by a subsidiary of Falck S.p.A. and the municipality of Trezzo sull’Adda. The Trezzo project is operated by Ambiente 2000 S.r.l. (“A2000”), an Italian special purpose limited liability company of which Covanta Energy owns 40%. The solid waste supply for the project comes from municipalities and privately-owned waste haulers under long-term contracts. The electrical output from the Trezzo project is sold at governmentally established preferential rates under a long-term purchase contract to Italy’s state-owned grid operator, Gestore della Rete di Trasmissione Nazionale S.p.A. (“GRTN”).

      A2000 also entered into a 15-year operations and maintenance agreement to operate and maintain a 10 MW waste-to-energy facility capable of processing up to 300 metric tons per day of refuse-derived fuel in the Municipality of San Vittore del Lazio (Frosinone), Italy (the “San Vittore project”). Operation and

14

maintenance of the plant by A2000 was scheduled to commence during 2004, but has been delayed due to a dispute as to the validity of the operations and maintenance agreement. There can be no assurance as to the outcome of this dispute, or that A2000 will operate the San Vittore project.

Hydroelectric

      Covanta Energy operates two hydroelectric facilities in Costa Rica through an operating subsidiary pursuant to long-term contracts. Covanta Energy also has a nominal equity investment in each project. The electric output from both of these facilities is sold to Instituto Costarricense de Electricidad, a Costa Rica national electric utility.

Coal

      A partnership, in which Covanta Energy holds a 26% equity interest, owns a 510 MW (gross) coal-fired electric power generation facility located in Mauban, Quezon Province, the Philippines, (the “Quezon project”). The remaining equity interests are held by an affiliate of International Generating Company, an affiliate of General Electric Capital Corporation, and an entity owned by the original project developer. The project company sells electricity to Manila Electric Company (“Meralco”), the largest electric distribution company in the Philippines, which serves the area surrounding and including metropolitan Manila.

      Under an energy contract expiring in 2025, Meralco is obligated to take-or-pay for stated minimum annual quantities of electricity produced by the facility at an all-in tariff which consists of capacity, operating, energy, transmission and other fees adjusted to inflation, fuel cost and foreign exchange fluctuations. Project management continues to negotiate with Meralco with respect to proposed amendments to the power purchase agreement to modify certain commercial terms under the existing contract and to resolve issues relating to the project’s performance during its first year of operation. The project company has entered into two coal supply contracts expiring in 2015 and 2022. Under these supply contracts, the cost of coal is determined using a base energy price adjusted to fluctuations of specified international benchmark prices. Covanta Energy is operating the project through a subsidiary under a long-term agreement with the project company. In 2005, the project lenders permitted the full release for distribution of cash previously required to be held back in excess of reserve requirements. In addition, the project lenders granted an extension of an existing waiver permitting the project to continue to forego obtaining certain project insurance coverage levels that are not available at commercially reasonable rates.

      The financial condition of Meralco has been stressed by the failure of regulators to grant tariff increases to allow Meralco to achieve rates of return permitted by law. However, in late 2004, Meralco successfully refinanced $228 million (U.S.) in expiring short-term debt on a long-term seven year basis, improving Meralco’s financial condition. Covanta Energy has obtained political risk insurance for its equity investment in this project.

      Covanta Energy has majority equity interests in three coal-fired cogeneration facilities in three provinces in the People’s Republic of China. Two of these projects (the “Yanjiang project” and the “Linan project”) are operated by the project entity in which Covanta Energy holds a majority interest. The third project (the “Huantai project”) is operated by an affiliate of that project’s minority equity shareholder. Parties holding minority positions in the projects include a private company, a local government enterprise and affiliates of the local municipal government. In connection with the Linan project, the local People’s Congress has enacted a non-binding resolution calling for the relocation of the cogeneration facility from the city center to an industrial zone. The project company continues to review its options in this matter. While the steam produced at each of the three projects is intended to be sold under long-term contracts to the industrial hosts, in practice, steam has been sold on either a short-term basis to local industries or the industrial hosts, in each case at varying rates and quantities. At the Yanjiang and Linan projects, the electric power is sold at an “average grid rate” to a subsidiary of the Provincial power bureau. At the Huantai project, the electric power is sold directly to the industrial host at a similar rate. In December 2005, Covanta Energy entered into a letter of intent to sell the assets of the Huantai project to an affiliate of the minority equity shareholder for a sale price of $3.5 million in cash. The potential sale of this interest is subject to satisfactory diligence by the

15

purchaser and execution of definitive documentation. Covanta can provide no assurance that such proposed sale will close.

Natural Gas

      Covanta Energy holds a 45% equity interest in a barge-mounted 126 MW (gross) diesel/natural gas-fired electric power generation facility located near Haripur, Bangladesh (the “Haripur project”). The remaining equity interests are held by an affiliate of El Paso Energy Corporation and an affiliate of Wartsila North America, Inc. Subject to consents from the project lenders and the Government of Bangladesh, El Paso Energy Corporation is in the process of transferring its 50% interest in the project to Globaleq Asia Holdings Limited. The electrical output of the project is sold to the Bangladesh Power Development Board (“BPDB”), pursuant to an energy contract with minimum energy off-take provisions at a tariff divided into a fuel component and an “other” component. The fuel component reimburses the fuel cost incurred by the project up to a specified heat rate. The “other” component consists of a pre-determined base rate adjusted to actual load factor and foreign exchange fluctuations. The energy contract also obligates the BPDB to supply all the natural gas requirements of the project at a pre-determined base cost adjusted to fluctuations on actual landed cost of the fuel in Bangladesh. The BPDB’s obligations under the agreement are guaranteed by the Government of Bangladesh. Covanta Energy is operating the project through a subsidiary under a long-term agreement with the project company. In 2005, the project obtained the extension of an existing waiver from the project lenders permitting it to continue to forego obtaining certain project insurance coverage levels that are not available at commercially reasonable rates. Covanta Energy has obtained political risk insurance for its equity interest in this project.

Diesel/ Heavy Fuel Oil

      Covanta Energy holds majority equity interests in two 106 MW (gross) heavy fuel-oil fired electric power generation facilities in India. The first project, where Covanta Energy holds a 60% equity interest, is located near Samalpatti, in the state of Tamil Nadu (the “Samalpatti project”). The remaining equity interests are held by affiliates of Shapoorji Pallonji Infrastructure Capital Co. Ltd. and by Wartsila India Power Investment, LLC. The second project, where Covanta Energy holds a 77% equity interest, is located at Samayanallur, also in the state Tamil Nadu (the “Madurai project”). The balance of this equity interest is held by an Indian company controlled by the original project developer. The electrical output of both projects is sold to the Tamil Nadu Electricity Board (“TNEB”) pursuant to long-term agreements with full pass-through tariffs at a specified heat rates, operation and maintenance costs, and equity returns. TNEB’s obligations are guaranteed by the government of the State of Tamil Nadu. Indian oil companies supply the oil requirements of both projects through 15-year fuel supply agreements based on market prices. Covanta Energy operates both projects through subsidiaries under long-term agreements with the project companies.

      Disputing several tariff provisions, TNEB has failed to pay the full amount due under the energy contracts for both the Samalpatti and Madurai projects. Similar to many Indian state electricity boards, TNEB has also failed to fund the escrow account or post a letter of credit required under the project energy contracts, which failure constitutes a default under the project finance documents. The project lenders for both projects have not declared an event of default due to this matter and have permitted continued distributions of project dividends. To date, TNEB has paid the undisputed portion of its payment obligations (approximately 95%) representing each project’s operating costs, fuel costs, debt service and some equity return. Project lenders for both projects have either granted periodic waivers of such default or potential default and/or otherwise approved scheduled equity distributions. Neither such default nor potential default in the project financing arrangements constitutes a default under Covanta Energy’s recourse debt. TNEB has indicated a desire to renegotiate tariffs for both project energy contracts, and it is possible that the issue of the escrow account or letter of credit requirement will be resolved as part of any such process.

      A subsidiary of Covanta Energy owns and operates a 63 MW heavy fuel-oil fired electric power generation facility located in the province of Cavite, the Philippines (the “Magellan project”). Due to high fuel pricing and low tariff conditions, project revenues were insufficient to cover both operating costs and debt service beyond the second quarter of 2004 and in May 2004, the Magellan project company filed a petition for

16

corporate rehabilitation under Philippine Law. On October 20, 2005, the Court overseeing the rehabilitation issued an order approving, with certain modifications, a rehabilitation plan. The approved rehabilitation plan, among other things, provided for debt restructuring and reduction via a debt-to-preferred equity swap. Covanta Energy will retain management control of the project, but its equity interest will be reduced from 100% to approximately 30 to 36%. The court’s order has been appealed by certain creditors which could result in modifications to the rehabilitation plan. Covanta Energy wrote off its investment in this project in 2002.

      Covanta Energy owns a minority interest in a 7 MW heavy fuel-oil fired electric power generation facility located in the province of Mindoro, the Philippines (the “Island Power project”) that has a long-term power sales contract.

International Project Summaries

      Summary information with respect to Covanta Energy’s projects that are currently operating is provided in the following table:

Gross

Contract Expiration Dates

Electric

Capacity

Operation and

Location

(MW)

Nature of Interest

Maintenance

Energy

A

WASTE-TO-ENERGY

1.

Trezzo(1)

Italy

18

Part Owner/Operator

2023

2023

B.

HYDROELECTRIC

2.

Don Pedro(2)

Costa Rica

14

Part Owner/Operator

2009

2009

3.

Rio Volcan(2)

Costa Rica

17

Part Owner/Operator

2009

2009

SUBTOTAL

31

C.

COAL

4.

Huantai(3)(4)

China

36

Part Owner

NA

NA

5.

Linan(4)(5)

China

24

Part Owner/Operator

NA

NA

6.

Quezon(6)

Philippines

510

Part Owner/Operator

2025

2025

7.

Yanjiang(4)(7)

China

24

Part Owner/Operator

NA

NA

SUBTOTAL

594

D.

NATURAL GAS

8.

Haripur(8)

Bangladesh

126

Part Owner/Operator

2014

2014

E.

DIESEL/ HEAVY FUEL OIL

9.

Island Power(9)

Philippines

7

Part Owner

NA

2010

10.

Madurai(10)

India

106

Part Owner/Operator

2016

2016

11.

Magellan(11)

Philippines

63

Owner/Operator

NA

2009

12.

Samalpatti(3)

India

106

Part Owner/Operator

2016

2016

SUBTOTAL

282

TOTAL INTERNATIONAL MW IN OPERATION

1,051

(1)	Covanta Energy has a 13% interest in this project and a 40% interest in the operator Ambiente 2000 S.r.l.
(2)	Covanta Energy has a nominal ownership interest in this project.
(3)	Covanta Energy has a 60% ownership interest in these projects.

17

(4)	Assets of the project revert back to the local Chinese partner at the expiration of the Joint Venture Agreement in 2017.
(5)	Covanta Energy has an approximate 64% ownership interest in this project.
(6)	Covanta Energy has an approximate 26% ownership interest in this project.
(7)	Covanta Energy has an approximate 96% ownership interest in this project.
(8)	Covanta Energy has an approximate 45% ownership interest in this project. This project is capable of operating through combustion of diesel oil in addition to natural gas.
(9)	Covanta Energy has an approximate 20% ownership interest in this project.

(10)	Covanta Energy has an approximate 77% ownership interest in this project.
(11)	This project is in corporate rehabilitation proceedings. Under the rehabilitation plan approved by the Philippine Court, Covanta Energy’s ownership interest will be reduced from 100% to approximately 30% to 36%.

Business Development

      Covanta’s opportunities for growth by investing in new domestic business will be limited by Covanta Energy’s debt covenants, as well as by competition from other companies in the waste disposal and energy businesses. For Covanta to achieve meaningful growth, due to the capital intensive nature of its municipal solid waste processing and energy generating projects, Covanta must be able to invest its own funds, obtain equity or debt financing, and provide support to its operating subsidiaries. Covanta’s domestic project development has recently concentrated on working with its client communities to expand existing waste-to-energy project capacities, and has one project in advanced stages of development and another in construction. Covanta is pursuing additional expansion opportunities, as well as opportunities in businesses ancillary to its existing business such as additional waste transfer, transportation, processing and landfill businesses. Covanta is also pursuing international waste and/or energy business opportunities, particularly in markets where the regulatory environment encourages waste-to-energy development, such as in Italy, where Covanta has an existing presence, as well as in the United Kingdom.

      Covanta’s development efforts regarding project expansions are described below.

Hillsborough County, Florida

      Covanta Energy designed, constructed and now operates and maintains this 1,200 tpd mass-burn waste-to-energy facility located in and owned by Hillsborough County. Due to the growth in the amount of municipal solid waste generated in Hillsborough County, Hillsborough County informed Covanta Energy of its desire to expand the facility’s waste processing and electricity generation capacities, a possibility contemplated by the original contract between Covanta Energy and Hillsborough County. In August 2005, Covanta Energy and Hillsborough County entered into agreements to implement this expansion, and to extend the agreement under which Covanta Energy operates the facility, which would otherwise expire in 2007, through 2027. Environmental and other project related permits will need to be secured and financing completed by Hillsborough County in order for the agreements to take effect and construction to commence.

Lee County, Florida

      Covanta Energy designed, constructed and now operates and maintains this 1,200 tpd mass-burn waste-to-energy facility located in and owned by Lee County. Due to the growth in the amount of solid waste generated in Lee County, Lee County informed Covanta Energy of its desire to engage Covanta Energy to manage the expansion of the facility’s waste processing and electricity generation capacities, a possibility contemplated by the original contract between Covanta Energy and Lee County. As part of the agreement to implement this expansion, Covanta Energy received a long-term operating contract extension expiring in 2024. Contracts for construction of the expansion and contracts for operation and maintenance of the expanded facility have been executed by the parties. The principal environmental permit for the expansion has been received and construction of the expansion has commenced.

18

Honolulu, Hawaii

      This 2,160 ton per day refuse-derived fuel facility was designed and constructed by an entity not related to Covanta Energy. Subsequently, Covanta Energy purchased the rights to operate and maintain the facility on behalf of the City and County of Honolulu. Previously, the City and County of Honolulu had informed Covanta Energy of their desire to expand the facility’s waste processing capacity, a possibility contemplated by the original contract between Covanta Energy and the City and County of Honolulu. However, more recently the City and County of Honolulu may be reconsidering their desire to expand their facility and are evaluating alternatives to accommodate their waste disposal needs. At this time, there can be no assurance that any definitive agreements will be finalized or approved by the parties or that the City and County of Honolulu will, in fact, expand the facility.

OTHER SERVICES BUSINESS

Discussion of Other Services Business

      Given the significance of the Covanta Energy and ARC Holdings acquisitions to Covanta’s business, results of operations and financial condition, Covanta decided, during the third quarter of 2005, to combine the previously separate business segments of Insurance Services and Parent-only operations into one reportable segment referred to as “Other Services.” Certain prior period amounts, such as parent investment income, have been reclassified in the consolidated financial statements to conform to the current period presentation.

      The operations of the parent company prior to the acquisition of Covanta Energy on March 10, 2004, primarily included general and administrative expense related to officer salaries, legal and other professional fees and insurance. Subsequent to the acquisition of Covanta Energy, these expenses are reimbursed by Covanta Energy under an administrative services agreement. The parent company operations also include income earned on its investments.

     Insurance Business

      Following the acquisitions of Covanta Energy and ARC Holdings, the relative contribution of Covanta’s insurance business to Covanta’s cash flow and its relative percentage of Covanta’s financial obligations were significantly reduced. Consequently, unlike prior years, Covanta’s insurance business neither contributes materially to Covanta’s cash flow nor imposes material financial obligations on Covanta.

      Covanta’s insurance business continues to represent an important element of Covanta’s structure in that its net operating loss carryforwards (“NOLs”) were primarily generated through the operations of former subsidiaries of Danielson Indemnity Company (“DIND”). Covanta’s ability to utilize that portion of the NOLs will depend upon the continued inclusion of its insurance business in Covanta’s consolidated federal income tax return. See Note 22. Income Taxes of the Notes for more information on Covanta’s NOLs.

      Covanta’s insurance operations are conducted through wholly-owned subsidiaries. NAICC, an indirect wholly-owned subsidiary of Covanta through DIND, is Covanta’s principal operating insurance subsidiary. References to “NAICC” include NAICC and its subsidiaries unless otherwise indicated. NAICC has historically managed its business across four principal lines of business: non-standard private passenger automobile; commercial automobile; workers’ compensation; and property and casualty. However, as of December 31, 2004, NAICC was engaged in writing exclusively non-standard private passenger automobile primarily in California.

      As discussed more fully below, Covanta’s insurance businesses have succeeded in reducing their loss ratio by tightening underwriting criteria, exiting unprofitable lines of business and focusing on writing more profitable lines of business through its arrangements with third parties providing marketing, underwriting and administration services. Such third parties do not have rate making authority or authority to enter into reinsurance arrangements. Such third parties are paid flat commission on new and renewal policies written and they participate in an incentive compensation arrangement dictated solely by underwriting results.

19

      Insurers admitted in California are required to obtain approval, from the California Department of Insurance, of rates and/or forms prior to being used. Many of the other states in which NAICC does business have similar requirements. Rates and policy forms are developed by NAICC and filed with the regulators in each of the relevant states, depending upon each state’s requirements. NAICC relies upon its own, as well as industry, experience in establishing rates.

      Non-standard risks are those segments of the driving public which generally are not considered “preferred” business, such as drivers with a record of prior accidents or driving violations, drivers involved in particular occupations or driving certain types of vehicles, or those drivers whose policies have not been renewed or whose policies have been declined by another insurance company. Generally, in order to address the associated higher risk of non-standard private automobile insurance, their premium rates are higher than standard premium rates while policy limits are lower than typical policy limits. Policyholder selection is governed by underwriting guidelines established by NAICC. Management believes that it is able to achieve underwriting success through refinement of various risk profiles, thereby dividing the non-standard market into more defined segments which can be adequately priced. Additionally, traditional lower policy limits lend themselves to quicker claims processing allowing management to respond more quickly to changing loss trends, by revising underlying underwriting guidelines and class and rate filings accordingly.

      NAICC maintains reserves with respect to net unpaid losses and loss adjustment expense (“LAE”), representing the estimated indemnity cost and expense necessary to cover the ultimate net cost of investigating and settling claims. Such estimates are based upon estimates for reported losses, historical company experience of losses reported by reinsured companies for insurance assumed and actuarial estimates based upon historical company and industry experience for development of reported and unreported claims (incurred but not reported). Any changes in estimates of ultimate liability are reflected in current operating results. Inflation is assumed, along with other factors, in estimating future claim costs and related liabilities. NAICC does not discount any of its loss reserves. NAICC believes its provisions for unpaid losses and LAE are adequate to cover the net cost of losses and loss expenses incurred to date, and that it satisfies all reserve based capital requirements imposed under applicable insurance regulations.

      In its normal course of business, NAICC typically reinsures a portion of its exposure with other insurance companies so as to effectively limit its maximum loss arising out of any one occurrence. Contracts of reinsurance do not legally discharge the original insurer from its primary liability. Estimated reinsurance receivables arising from these contracts of reinsurance are reported separately as assets in accordance with generally accepted accounting principles in the United States.

MARKETS, COMPETITION AND BUSINESS CONDITIONS

General Business Conditions

      Covanta Energy’s business can be adversely affected by general economic conditions, war, inflation, adverse competitive conditions, governmental restrictions and controls, changes in laws, natural disasters, energy shortages, fuel costs, weather, the adverse financial condition of customers and suppliers, various technological changes and other factors over which Covanta Energy has no control.

      Covanta Energy expects in the foreseeable future that competition for new contracts and projects will be intense in all markets in which Covanta Energy conducts or intends to conduct its businesses, and its businesses will be subject to a variety of competitive and market influences.

      With respect to its waste-related businesses, including its waste-to-energy and TransRiver businesses, Covanta Energy competes in the waste disposal market, which is highly competitive. While Covanta Energy currently processes for disposal over 5% of the municipal solid waste in the United States, the market for waste

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disposal is almost entirely price-driven and is greatly influenced by economic factors within regional “waste sheds.” These factors include:

•  regional population and overall waste production rates;

•  the number of other waste disposal sites (including principally landfills and transfer stations) in existence or in the planning or permitting process;

•  the available disposal capacity (in terms of tons of waste per day) that can be offered by other regional disposal sites; and

•  the availability and cost of transportation options (rail, intermodal, trucking) to provide access to more distant disposal sites, thereby affecting the size of the waste shed itself.

      In the waste disposal market, disposal service providers seek to obtain waste supplies to their facilities by competing on disposal price (usually on a per-ton basis) with other disposal service providers. At all but 8 of its waste-to-energy facilities, Covanta Energy typically is unable to compete in this market because it does not have the contractual right to solicit waste. At these facilities, it is the client community which is responsible for obtaining the waste, if necessary by competing on price to obtain the tons of waste it has contractually promised to deliver to Covanta Energy’s facility. At 8 of its waste-to-energy facilities and at its TransRiver businesses, Covanta Energy is responsible for obtaining material amounts of waste supply and therefore, is actively competing in these markets to enter into spot medium- and long-term contracts. All of these waste-to-energy projects are in densely populated areas, with high waste generation rates and numerous large and small participants in the regional market. Certain of its competitors in these markets are vertically-integrated waste companies which include waste collection operations, and thus have the ability to control supplies of waste which may restrict Covanta Energy’s ability to offer disposal services at attractive prices. Covanta Energy’s business does not include waste collection operations.

      Covanta Energy’s waste operations are largely concentrated in the northeastern United States. See Item 1A. Risk Factors — Waste and Energy Services Business-Specific Risks — Covanta Energy’s waste operations are concentrated in one region, and expose us to regional economic or market declines for additional information concerning this geographic concentration.

      If a long-term contract expires and is not renewed or extended by a client community, Covanta Energy’s percentage of contracted disposal capacity will decrease, and it will need to compete in the regional market for waste disposal. At that point, it will compete on price with landfills, transfer stations, other waste-to-energy facilities and other waste disposal technologies that are then offering disposal service in the region. See discussion under Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview — Waste and Energy Service — Contract Duration for additional information concerning the expiration of existing contracts.

      Covanta may develop or acquire, itself or jointly with others, additional waste or energy projects or businesses. If it were to do so in a competitive procurement, Covanta would face competition in the selection process from other companies, some of which may have greater financial resources than Covanta. If it were selected, the amount of market competition it would thereafter face would depend upon the extent to which the capacity at any such project would be committed under contract. If Covanta were to develop or acquire additional projects or businesses not in the context of a competitive procurement, it would face competition in the regional market and compete on price with landfills, transfer stations, other waste-to-energy facilities, other energy producers and other waste disposal or energy generation technologies that are then offering service in the region.

      With respect to its sales of electricity from its waste-to-energy projects and independent power projects, Covanta Energy primarily sells its output pursuant to long-term contracts. Accordingly, it generally does not sell its output into markets where it must compete on price. As these contracts expire, Covanta Energy will participate in such markets if it is unable to enter into new or renewed long-term contracts. See discussion under Item 1A. Risk Factors — Waste and Energy Services Business-Specific Risks — Covanta Energy may

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face increased risk of market influences on its domestic revenues after its contracts expire for additional information concerning the expiration of existing contracts.

      Once a contract is awarded or a project is financed and constructed, Covanta Energy’s business can be impacted by a variety of risk factors which can affect profitability over the life of a project. Some of these risks are at least partially within Covanta Energy’s control, such as successful operation in compliance with law and the presence or absence of labor difficulties or disturbances. Other risk factors are largely out of Covanta Energy’s control and may have an adverse impact on a project over a long-term operation. See Item 1A. Risk Factors — Waste and Energy Services Business-Specific Risks for more information on these types of risks.

     Technology

      Covanta Energy has the exclusive right to market in the United States the proprietary mass-burn technology of Martin GmbH fur Umwelt und Energietechnik, referred to herein as “Martin.” The principal feature of the Martin technology is the reverse-reciprocating stoker grate upon which the waste is burned. The patent for the basic stoker grate technology used in the Martin technology has expired and there are various other expired and unexpired patents relating to the Martin technology. Covanta Energy believes that it is Martin’s know-how and worldwide reputation in the waste-to-energy field, and Covanta Energy’s know-how in designing, constructing and operating waste-to-energy facilities, rather than the use of patented technology, that is important to Covanta Energy’s competitive position in the waste-to-energy industry in the United States. Covanta Energy does not believe that the expiration of the remaining patents covering portions of the Martin technology will have a material adverse effect on Covanta Energy’s financial condition or competitive position.

      Covanta Energy believes that mass-burn technology is now the predominant technology used for the combustion of municipal solid waste. Covanta Energy believes that the Martin technology is a proven and reliable mass-burn technology, and that its association with Martin has created significant name recognition and value for Covanta Energy’s domestic waste-to-energy business.

      Since 1984, Covanta Energy’s rights to the Martin technology have been provided pursuant to a cooperation agreement with Martin which gives Covanta Energy exclusive rights to market, and distribute parts and equipment for the Martin technology in the United States, Canada, Mexico, Bermuda and certain Caribbean countries. Martin is obligated to assist Covanta Energy in installing, operating and maintaining facilities incorporating the Martin technology. The cooperation agreement renews automatically each year unless notice of termination is given, in which case the cooperation agreement would terminate ten years after such notice. Any termination would not affect the rights of Covanta Energy to design, construct, operate, maintain or repair waste-to-energy facilities for which contracts have been entered into or proposals made prior to the date of termination.

      Through facility acquisitions, Covanta Energy owns and/or operates some waste-to-energy facilities which utilize additional technologies, including non-Martin mass-burn technologies, and refuse-derived fuel technologies which include pre-combustion waste processing not required with a mass-burn design.

     Insurance Business

      The insurance industry is highly competitive, comprised of a large number of companies, many of which operate in more than one state, offering automobile, homeowners and commercial property insurance, as well as insurance coverage in other lines. Many of NAICC’s competitors have larger volumes of business, greater financial resources and higher financial strength ratings. NAICC’s competitors having greater shares of the California market sell automobile insurance either directly to consumers, through independent agents and brokers or through exclusive agency arrangements similar to those utilized by NAICC.

      The principal means by which Covanta’s insurance business competes with other automobile insurers is by its focus on meeting the needs of the non-standard private passenger automobile market in California where it believes it has competitive pricing, underwriting and service capabilities. Covanta’s insurance business also competes by using niche marketing efforts of its products.

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      The operating results of a property and casualty insurer are influenced by a variety of factors including general economic conditions, competition, regulation of insurance rates, weather and frequency and severity of losses. The California non-standard personal automobile market in which NAICC operates has experienced a recovery of rate adequacy; however, competition is rising with a number of new entrants into the marketplace, resulting in underwriting guidelines softening. Frequency of claims remained stable from 2003 to 2004 and increased in 2005, while the average cost of settling claims has steadily improved from 2003 to 2005.

REGULATION OF BUSINESS

      Covanta’s waste and energy services business and its insurance business are both highly regulated.

Environmental Regulatory Laws Affecting Covanta’s Waste and Energy Services Business

      Covanta Energy’s business activities in the United States are pervasively regulated pursuant to federal, state and local environmental laws. Federal laws, such as the Clean Air Act and Clean Water Act, and their state counterparts, govern discharges of pollutants to air and water. Other federal, state and local laws comprehensively govern the generation, transportation, storage, treatment and disposal of solid and hazardous waste and also regulate the storage and handling of chemicals and petroleum products (such laws and regulations are referred to collectively as the “Environmental Regulatory Laws”).

      Other federal, state and local laws, such as the Comprehensive Environmental Response Compensation and Liability Act commonly known as “CERCLA” and collectively referred to with such other laws as the “Environmental Remediation Laws”, make Covanta Energy potentially liable on a joint and several basis for any onsite or offsite environmental contamination which may be associated with Covanta Energy’s activities and the activities at sites. These include landfills that Covanta Energy’s subsidiaries have owned, operated or leased or, at which there has been disposal of residue or other waste generated, handled or processed by such subsidiaries. Some state and local laws also impose liabilities for injury to persons or property caused by site contamination. Some service agreements provide for indemnification of operating subsidiaries from certain liabilities. In addition, other subsidiaries involved in landfill gas projects have access rights to landfill sites pursuant to certain leases that permit the installation, operation and maintenance of landfill gas collection systems. A portion of these landfill sites have been federally-designated “Superfund” sites. Each of these leases provide for indemnification of the Covanta Energy subsidiary from some liabilities associated with these sites.

      The Environmental Regulatory Laws require that many permits be obtained before the commencement of construction and operation of any waste, independent power project or water facility, and further require that permits be maintained throughout the operating life of the facility. There can be no assurance that all required permits will be issued or re-issued, and the process of obtaining such permits can often cause lengthy delays, including delays caused by third-party appeals challenging permit issuance. Failure to meet conditions of these permits or of the Environmental Regulatory Laws can subject an operating subsidiary to regulatory enforcement actions by the appropriate governmental unit, which could include fines, penalties, damages or other sanctions, such as orders requiring certain remedial actions or limiting or prohibiting operation. See Item 1A. Risk Factors — Waste and Energy Services Business-Specific Risks — Compliance with environmental laws could adversely affect our results of operations. To date, Covanta Energy has not incurred material penalties, been required to incur material capital costs or additional expenses, or been subjected to material restrictions on its operations as a result of violations of Environmental Regulatory Laws or permit requirements.

      Although Covanta Energy’s operations are occasionally subject to proceedings and orders pertaining to emissions into the environment and other environmental violations, which may result in fines, penalties, damages or other sanctions, Covanta Energy believes that it is in substantial compliance with existing Environmental Regulatory Laws. Covanta Energy may be identified, along with other entities, as being among parties potentially responsible for contribution to costs associated with the correction and remediation of environmental conditions at disposal sites subject to CERCLA and/or analogous state laws. In certain instances Covanta Energy may be exposed to joint and several liabilities for remedial action or damages.

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Covanta Energy’s ultimate liability in connection with such environmental claims will depend on many factors, including its volumetric share of waste, the total cost of remediation, and the financial viability of other companies that also sent waste to a given site and, in the case of divested operations, its contractual arrangement with the purchaser of such operations.

      The Environmental Regulatory Laws are subject to revision. New technology may be required or stricter standards may be established for the control of discharges of air or water pollutants, for storage and handling of petroleum products or chemicals, or for solid or hazardous waste or ash handling and disposal. Thus, as new technology is developed and proven, it may be required to be incorporated into new facilities or major modifications to existing facilities. This new technology may often be more expensive than that used previously.

      The Clean Air Act Amendments of 1990 required the Environmental Protection Agency (“EPA”) to issue New Source Performance Standards (“NSPS”) and Emission Guidelines (“EG”) applicable to new and existing municipal waste combustion (“MWC”) units. EPA issued its first NSPS and EG for large MWCs (“First MACT Rule”) in 1995 and 1997. Covanta Energy installed all new equipment needed to achieve the emissions limits imposed by the First MACT Rule prior to the December 19, 2000 general compliance deadline. On December 19, 2005, EPA issued for public comment its proposed revisions to the NSPS and EG for large MWCs (“Proposed MACT Revisions”). Although EPA does not propose to expand the list of regulated pollutants beyond those included in the First MACT Rule, its Proposed MACT Revisions would lower the emission limits for most of those pollutants.

      The public comment period for the Proposed MACT Revisions closed on February 6, 2006; EPA is expected to issue the final rule (“Final MACT Rule”) in April 2006. The compliance deadlines for the Final MACT Rule are expected to be July 2006 for the NSPS (new MWC units), and on or before April 2009 for the EG (existing MWC units). Until the Final MACT Rule is issued, it is not possible to predict with certainty its impact on waste-to-energy facilities operated by Covanta Energy subsidiaries. However, Covanta Energy anticipates that it is unlikely existing waste-to-energy facilities will require capital improvements to comply with the EG. It is, however, likely that most existing facilities will incur increased operating and maintenance costs. The costs to Covanta Energy associated with compliance with the Final MACT Rule is not expected to be material, and at many projects such costs are expected to be shared with Covanta Energy’s municipal clients.

      On November 1, 2005, EPA issued a proposed rule to implement the revised National Ambient Air Quality Standards for fine particulate matter, or PM2.5 (“PM2.5 Rule”). Unlike the MACT rules discussed above, the PM2.5 Rule is not specific to waste-to-energy facilities, but instead is a nationwide standard for ambient air quality. The primary impact of the PM2.5 Rule will be on those counties in certain states that are designated by EPA as “non-attainment” with respect to those standards. EPA’s proposed rule to implement the PM2.5 Rule will guide how states achieve compliance with the PM2.5 Rule, and could result in more stringent regulation of certain waste-to-energy facility emissions that already are regulated by the MACT standards.

      The costs to meet new rules for existing facilities owned by municipal clients generally will be borne by the municipal clients. For projects owned or leased by Covanta Energy subsidiaries, the municipal clients generally have the obligation to fund such capital improvements, and at certain of its projects Covanta Energy may be required to fund a portion of the related costs. In certain cases, the Covanta Energy subsidiary is required to fund the full cost of capital improvements.

      Covanta Energy believes that most costs incurred to meet the Final MACT Rule and PM2.5 Rule at facilities it operates may be recovered from municipal clients and other users of its facilities through increased fees permitted to be charged under applicable contracts.

      The Environmental Remediation Laws prohibit disposal of regulated hazardous waste at Covanta Energy’s municipal solid waste facilities. The service agreements recognize the potential for improper deliveries of hazardous waste and specify procedures for dealing with hazardous waste that is delivered to a facility. Although some service agreements require Covanta Energy’s subsidiary to be responsible for some

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costs related to hazardous waste deliveries, to date no operating subsidiary has incurred material hazardous waste disposal costs.

      Domestic drinking water facilities are subject to regulation of water quality by the state and federal agencies under the federal Safe Drinking Water Act and by similar state laws. These laws provide for the establishment of uniform minimum national water quality standards, as well as governmental authority to specify the type of treatment processes to be used for public drinking water. Under the federal Clean Water Act, Covanta Energy may be required to obtain and comply with National Pollutant Discharge Elimination System permits for discharges from its treatment stations. Generally, under its current contracts, Covanta Energy is not responsible for fines and penalties resulting from the delivery to Covanta Energy’s treatment facility of water not meeting standards set forth in those contracts.

Energy and Water Regulations Affecting Covanta’s Waste and Energy Services Business

      Covanta Energy’s businesses are subject to the provisions of federal, state and local energy laws applicable to the development, ownership and operation of their domestic facilities and to similar laws applicable to their foreign operations. Federal laws and regulations applicable to many of Covanta Energy’s domestic energy businesses impose limitations on the types of fuel used and prescribe the degree to which these businesses are subject to federal and state utility-type regulation. State regulatory regimes govern rate approval and the other terms and conditions pursuant to which utilities purchase electricity from independent power producers, except to the extent such regulation is governed by federal law.

      Pursuant to the Public Utility Regulatory Policies Act of 1978 (“PURPA”), the Federal Energy Regulatory Commission (“FERC”) has promulgated regulations that exempt qualifying facilities (facilities meeting certain size, fuel and ownership requirements, referred to as “QFs”) from compliance with certain provisions of the Federal Power Act (“FPA”), the Public Utility Holding Company Act of 1935 (“PUHCA”) (through February 2006), and certain state laws regulating the rates charged by, or the financial and organizational activities of, electric utilities. PURPA was enacted in 1978 to encourage the development of cogeneration facilities and other facilities making use of non-fossil fuel power sources, including waste-to-energy facilities. The exemptions afforded by PURPA to QFs from regulation under the FPA and most aspects of state electric utility regulation are of great importance to Covanta Energy and its competitors in the waste-to-energy and independent power industries. Except with respect to waste-to-energy facilities with a net power production capacity in excess of 30 MW (where rates are set by the FERC), state public utility commissions must approve the rates, and in some instances other contract terms, by which public utilities purchase electric power from QFs.

      The Energy Policy Act of 2005, passed in August 2005, makes certain changes to the federal energy laws applicable to Covanta Energy’s businesses, the most significant of which are described below:

•  The Energy Policy Act repeals PUHCA, effective February 2006, which eliminates any remote risk Covanta Energy might have faced by being subject to extensive, utility-type regulation and reporting if it were considered a holding company under PUHCA. The repeal of PUHCA has been balanced with increased FERC authority to cause record keeping and conduct investigations under appropriate circumstances. As a company that owns only QFs, exempt wholesale generators and/or foreign utility companies, Covanta Energy may be entitled to an exemption from FERC’s authority to cause such record keeping and conduct such investigations if it timely files a FERC-prescribed form, which it intends to do.

•  The Energy Policy Act amends certain provisions of PURPA. It terminates PURPA’s mandatory purchase (and sale) obligation imposed on utilities for the benefit of QFs where the QF has nondiscriminatory access to competitive power markets. Existing contracts are grandfathered, but expansions, renewals and new development projects must rely on competitive power markets, rather than PURPA protections, in establishing and maintaining their viability in most geographic regions in which the Covanta Energy businesses operate. The Energy Policy Act also eliminates the utility ownership limitation for QFs. This change might have the effect of making some transactions and development projects more likely to be consummated. This could result in greater utility ownership of

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	QFs than previously was the case due to PURPA and PUHCA restrictions and considerations. If these transactions and development projects occur in the areas of waste-to-energy, other renewable energy and independent power, it could serve to increase competition with Covanta Energy’s businesses by bringing greater utility participation to these markets.
•	The Energy Policy Act extends or establishes certain renewable energy incentives and tax credits which might be helpful to expansions of Covanta Energy’s businesses or to new development.

Regulation Affecting Covanta’s International Business

      Covanta Energy presently has ownership and operating interests in electric generating projects outside the United States. Most countries have expansive systems for the regulation of the power business. These generally include provisions relating to ownership, licensing, rate setting and financing of generation and transmission facilities.

      Covanta Energy aims to provide energy generating and other infrastructure through environmentally protective project designs, regardless of the location of a particular project. This approach is consistent with the stringent environmental requirements of multilateral financing institutions, such as the World Bank, and also with Covanta Energy’s experience in domestic waste-to-energy projects, where environmentally protective facility design and performance is required. Compliance with environmental standards comparable to those of the United States may be conditions to the provision of credit by multilateral banking agencies, as well as other lenders or credit providers. The laws of other countries also may require regulation of emissions into the environment, and provide governmental entities with the authority to impose sanctions for violations, although these requirements are generally different from those applicable in the United States. See Item 1A. Risk Factors — Waste and Energy Services Business-Specific Risks — Exposure to international economic and political factors may materially and adversely affect our Waste and Energy Services businesses and Item 1A. Risk Factors — Waste and Energy Services Business-Specific Risks — Compliance with environmental laws could adversely affect our results of operations. As with domestic project development, there can be no assurance that all required permits will be issued, and the process can often cause lengthy delays.

Regulation Affecting Covanta’s Insurance Business

      Insurance companies are subject to insurance laws and regulations established by the states in which they transact business. The agencies established pursuant to these state laws have broad administrative and supervisory powers relating to the granting and revocation of licenses to transact business, regulation of trade practices, establishment of guaranty associations, licensing of agents, approval of policy forms, premium rate filing requirements, reserve requirements, the form and content of required regulatory financial statements, capital and surplus requirements and the maximum concentrations of certain classes of investments. Most states also have enacted legislation regulating insurance holding company systems, including acquisitions, extraordinary dividends, the terms of affiliate transactions and other related matters. Covanta and its insurance subsidiaries have registered as holding company systems pursuant to such legislation in California and Montana, and routinely report to other jurisdictions. The National Association of Insurance Commissioners has formed committees and appointed advisory groups to study and formulate regulatory proposals on such diverse issues as the use of surplus debentures, accounting for reinsurance transactions and the adoption of risk-based capital requirements. It is not possible to predict the impact of future state and federal regulation on the operations of Covanta or its insurance business.

      NAICC is an insurance company domiciled in the State of California and is regulated by the California Department of Insurance for the benefit of policyholders. The California Insurance Code does not permit the payment of an extraordinary shareholder dividend without prior approval from the California Insurance Commissioner. Dividends are considered extraordinary if they exceed the greater of net income or 10% of statutory surplus as of the preceding December 31st. As of the date of this filing, and into the foreseeable future, NAICC does not have sufficient accumulated earned surplus to pay dividends.

      A model for determining the risk-based capital requirements, referred to as “RBC requirements,” for property and casualty insurance companies was adopted in December 1993. The model generally assesses the

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assets at risk and underwriting operations and determines policyholders’ surplus levels necessary to support such activity. NAICC has calculated its RBC requirement under the most recent RBC requirement model and, as of December 31, 2005, it had capital in excess of the regulatory Authorized Control level. As of December 31, 2005, the RBC requirement of NAICC improved to 589% compared to 361% in 2004.

EMPLOYEES

      As of December 31, 2005, Covanta employed 3,600 full-time employees worldwide, of which a majority are employed in the United States.

      Of Covanta’s employees in the United States, approximately 11% are represented by organized labor. Currently, Covanta Energy is party to seven collective bargaining agreements: two of these agreements are scheduled to expire in 2006, four in 2007, and one in 2008.

      Covanta considers relations with its employees to be good and does not anticipate any significant labor disputes in 2006.

EXECUTIVE OFFICERS

		Age as of
		February 24,		Officer
Name	Position and Office Held	2006		Since
Anthony J. Orlando	President and Chief Executive Officer		46		2004
Craig D. Abolt	Senior Vice President and Chief Financial Officer		45		2004
John M. Klett	Senior Vice President, Operations of Covanta Energy		59		1987
Timothy J. Simpson	Senior Vice President, General Counsel and Secretary		47		2004
Thomas E. Bucks	Vice President and Chief Accounting Officer		49		2005

      Anthony J. Orlando was named the President and Chief Executive Officer of Covanta in October 2004 and was elected as a director of Covanta in September 2005 and is a member of the Public Policy Committee. Previously, he had been President and Chief Executive Officer of Covanta Energy since November 2003. From March 2003 to November 2003 he served as Senior Vice President, Business and Financial Management of Covanta Energy. From January 2001 until March 2003, Mr. Orlando served as Covanta Energy’s Senior Vice President, Waste-to-Energy. Previously, he served as executive Vice President of Covanta Energy Group, Inc. Mr. Orlando joined Covanta Energy in 1987.

      Craig D. Abolt has served as the Senior Vice President and Chief Financial Officer of Covanta since October 2004. He has served as Senior Vice President and Chief Financial Officer of Covanta Energy since June 2004. Prior to joining Covanta, Mr. Abolt served as chief financial officer of DIRECTV Latin America, a majority-owned subsidiary of Hughes Electronics Corporation, from June 2001 until May 2004. From December 1991 until June 2001, he was employed by Walt Disney Company in several executive finance positions.

      John M. Klett was named Senior Vice President, Operations of Covanta Energy in March 2003. Prior thereto he served as Executive Vice President of Covanta Waste to Energy, Inc. for more than five years. Mr. Klett joined Covanta Energy in 1986. Mr. Klett has been in the waste to energy business since 1977. He has been in the power business since 1965.

      Timothy J. Simpson has served as the Senior Vice President, General Counsel and Secretary of Covanta since October 2004. Since March 2004 he has served as Senior Vice President, General Counsel and Secretary of Covanta Energy. From June 2001 to March 2004, Mr. Simpson served as Vice President, Associate General Counsel and Assistant Secretary of Covanta Energy. Previously, he served as Senior Vice President,

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Associate General Counsel and Assistant Secretary of Covanta Energy Group, Inc. Mr. Simpson joined Covanta Energy in 1992.

      Thomas E. Bucks has served as the Vice President and Chief Accounting Officer of Covanta since April 2005. Mr. Bucks served as Covanta’s Controller from February 2005 to April 2005. Prior to joining Covanta, Mr. Bucks served as Senior Vice President — Controller of Centennial Communications Corp., a leading provider of regional wireless and integrated communications services in the United States and the Caribbean, from March 1995 through February 2005, where he was the principal accounting officer and was responsible for accounting operations and external financial reporting.

Involvement In Certain Legal Proceedings

      Messrs. Orlando, Klett and Simpson were officers of Covanta Energy when it filed for bankruptcy and have continued as officers of Covanta Energy after its emergence from bankruptcy and confirmation of its plan of reorganization. As further described in the Business section above, Covanta Energy’s Chapter 11 proceedings commenced on April 1, 2002. Covanta Energy and most of its domestic subsidiaries filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Southern District of New York. All of the bankruptcy cases were jointly administered under the caption “In re Ogden New York Services, Inc., et al., Case Nos. 02-40826 (CB), et al.” On March 5, 2004, the Bankruptcy Court entered an order confirming the plan of reorganization and plan for liquidation for subsidiaries involved in non-core businesses and on March 10, 2004, both plans were effected.

      Mr. Abolt served as the Chief Financial Officer of DirectTV Latin America, LLC, referred to a “DLA”, when it filed for bankruptcy in March 2003 and after its emergence from bankruptcy and confirmation of its plan of reorganization in February 2004. DLA filed a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code on March 18, 2003 in the United States Bankruptcy Court for the District of Delaware, which entered an order confirming DLA’s plan of reorganization on February 13, 2004, and the plan became effective on February 24, 2004.

Item 1A. RISK FACTORS

      The terms “we,” “our,” “ours,” “us” and “Company” refer to Covanta Holding Corporation and its subsidiaries; the term “Covanta Energy” refers to Covanta Energy Corporation and its subsidiaries; the term “ARC Holdings” refers to Covanta ARC Holdings, Inc. and its subsidiaries; and the term “NAICC” refers to National American Insurance Company of California and its subsidiaries.

      The following risk factors could have a material adverse effect on our business, financial condition and results of operations.

Covanta Holding Corporation-Specific Risks

We cannot be certain that our NOLs will continue to be available to offset our tax liability.

      As of December 31, 2005, we estimated that we had approximately $489 million of NOLs. In order to utilize the NOLs, we must generate consolidated taxable income which can offset such carryforwards. The NOLs are also utilized by income from certain grantor trusts that were established as part of the reorganization of certain of our subsidiaries engaged in the insurance business (which we refer to as the “Mission Insurance entities”). The NOLs will expire if not used. The availability of NOLs to offset taxable income could be substantially reduced if we were to undergo an “ownership change” within the meaning of Section 382(g)(1) of the Internal Revenue Code. We will be treated as having had an “ownership change” if there is more than a 50% increase in stock ownership during a three-year “testing period” by “5% stockholders.”

      In order to help us preserve the NOLs, our certificate of incorporation contains stock transfer restrictions designed to reduce the risk of an ownership change for purposes of Section 382 of the Internal Revenue Code. The transfer restrictions were implemented in 1990, and we expect that the restrictions will remain in force as

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long as the NOLs are available. We cannot assure you, however, that these restrictions will prevent an ownership change.

      The NOLs will expire in various amounts, if not used, between 2006 and 2023. The Internal Revenue Service (“IRS”) has not audited any of our tax returns for any of the years during the carryforward period including those returns for the years in which the losses giving rise to the NOLs were reported. We cannot assure you that we would prevail if the IRS were to challenge the availability of the NOLs. If the IRS were successful in challenging our NOLs, all or some portion of the NOLs would not be available to offset our future consolidated taxable income and we may not be able to satisfy our obligations to Covanta Energy under a tax sharing agreement described below or to pay taxes that may be due from our consolidated tax group.

      Reductions in our NOLs could occur in connection with the administration of the grantor trusts associated with the Mission Insurance entities which are in state insolvency proceedings. During or at the conclusion of the administration of these grantor trusts, material taxable income could result which could utilize a substantial portion of our NOLs, which in turn could materially reduce our cash flow and ability to service our current debt. The impact of a material reduction in our NOLs could also cause an event of default under our current debt and a possible substantial reduction of our deferred tax asset, as reflected in our financial statements. For a more detailed discussion of the Mission Insurance entities and the grantor trusts, please see Note 4. California Grantor Trust Settlement and Note 22. Income Taxes of the Notes and Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview.

      In addition, if our existing insurance business were to require capital infusions from us in order to meet certain regulatory capital requirements and were we to fail to provide such capital, some or all of our subsidiaries comprising our insurance business could enter insurance insolvency or bankruptcy proceedings. In such event, such subsidiaries may no longer be included in our consolidated tax return, and a portion, which could constitute a significant portion, of our remaining NOLs may no longer be available to us. In such event, there may be a significant inclusion of taxable income in Covanta’s federal consolidated income tax return.

Reduced liquidity and price volatility could result in a loss to investors.

      Although our common stock is listed on the New York Stock Exchange, there can be no assurance as to the liquidity of an investment in our common stock or as to the price an investor may realize upon the sale of our common stock. These prices are determined in the marketplace and may be influenced by many factors, including the liquidity of the market for our common stock, the market price of our common stock, investor perception and general economic and market conditions, company performance, and waste and energy market conditions.

Concentrated stock ownership and a restrictive certificate of incorporation provision may discourage unsolicited acquisition proposals.

      As of March 3, 2006, SZ Investments (together with EGI Fund (05-07)), Third Avenue and Laminar, separately own or will have the right to acquire approximately 15.78%, 6.00% and 18.46%, respectively, or when aggregated, 40.24% of our outstanding common stock. Although there are no agreements among SZ Investments, Third Avenue and Laminar regarding their voting or disposition of shares of our common stock, the level of their combined ownership of shares of common stock could have the effect of discouraging or impeding an unsolicited acquisition proposal. In addition, the change in ownership limitations contained in Article Fifth of our certificate of incorporation could have the effect of discouraging or impeding an unsolicited takeover proposal.

Future sales of our common stock may depress our stock price.

      No prediction can be made as to the effect, if any, that future sales of our common stock, or the availability of our common stock for future sales, will have on the market price of our common stock. Sales in the public market of substantial amounts of our common stock, or the perception that such sales could occur, could adversely affect prevailing market prices for our common stock. In addition, in connection with the Covanta Energy acquisition financing, we filed a registration statement on Form S-3 to register the resale of

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17,711,491 shares of our common stock held by Laminar, Third Avenue and SZ Investments, which was declared effective on August 24, 2004. In connection with our acquisition of ARC Holdings, we have agreed to register upon demand, within twelve months of the June 24, 2005 closing of the ARC Holdings acquisition, the resale of certain shares held or acquired by Laminar, Third Avenue and SZ Investments in an underwritten public offering. The potential effect of these shares being sold may be to depress the price at which our common stock trades.

Our controls and procedures may not prevent or detect all acts of fraud.

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

Failure to maintain an effective system of internal control over financial reporting may have an adverse effect on our stock price.

      Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, and the rules and regulations promulgated by the SEC, to implement Section 404, we are required to furnish a report by our management to include in our Annual Report on Form 10-K regarding the effectiveness of our internal control over financial reporting. The report includes, among other things, an assessment of the effectiveness of our internal control over financial reporting as of the end of our fiscal year, including a statement as to whether or not our internal control over financial reporting is effective. This assessment must include disclosure of any material weaknesses in our internal control over financial reporting identified by management.

      We have in the past discovered, and may potentially in the future, discover areas of our internal control over financial reporting which may require improvement. If we are unable to assert that our internal control over financial reporting is effective now or in any future period, or if our auditors are unable to express an opinion on the effectiveness of our internal controls, we could lose investor confidence in the accuracy and completeness of our financial reports, which could have an adverse effect on our stock price.

Waste and Energy Services Business-Specific Risks

In connection with the ARC Holdings acquisition, Covanta has incurred a large amount of debt, and we cannot assure you that our cash flow from operations will be sufficient to pay this debt.

      Following the acquisition of ARC Holdings, Covanta Energy had corporate debt of $675 million, of which $629 million remains outstanding as of December 31, 2005, which we have guaranteed. Our ability to service this debt will depend upon:

•  the continued operation and maintenance of our facilities, consistent with historical performance levels;

•  compliance with our debt covenants under our, and our subsidiaries’, various credit arrangements;

•  compliance by our subsidiaries with their respective debt covenants in order to permit distributions of cash to Covanta Energy;

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•  maintenance or enhancement of revenue from renewals or replacement of existing contracts, and from new contracts to expand existing facilities or operate additional facilities;

•  market conditions affecting waste disposal and energy pricing, as well as competition from other companies for contract renewals, expansions and additional contracts, particularly after Covanta Energy’s existing contracts expire; and

•  the continued availability to Covanta Energy of the benefit of our NOLs under a tax sharing agreement.

      For a more detailed discussion of Covanta Energy’s domestic debt covenants, see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Management’s Discussion and Analysis of Liquidity and Capital Resources — Waste and Energy Services Segment and Note 18. Long-Term Debt of the Notes.

      Covanta’s ability to make payments on its indebtedness and to fund planned capital expenditures and other necessary expenses will depend on its ability to generate cash and receive dividends and distributions from its subsidiaries in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. We cannot assure you that Covanta Energy’s business will generate sufficient cash flow from operations to pay this debt.

We may not have access to the cash flow and other assets of our subsidiaries that may be needed to make payment on Covanta Energy’s debt.

      Much of our business is conducted through our subsidiaries. Our ability to make payments on the debt incurred by Covanta Energy is dependent on the earnings and the distribution of funds from our subsidiaries.

      Certain of our subsidiaries and affiliates are already subject to project and other financing arrangements and will not guarantee our obligations on Covanta Energy’s debts. The debt agreements of these subsidiaries and affiliates generally restrict their ability to pay dividends, make distributions or otherwise transfer funds to us. In addition, a substantial amount of the assets of our non-guarantor subsidiaries and affiliates has been pledged as collateral under their respective project financing agreements, or financings at intermediate subsidiary levels, and will be excluded entirely from the liens in favor of Covanta Energy’s financing. See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Management’s Discussion and Analysis of Liquidity and Capital Resources — Waste and Energy Services Segment and Note 18. Long-Term Debt of the Notes for a more complete description of the terms of such indebtedness. We cannot assure you that certain of the agreements governing the current and future indebtedness of our subsidiaries will permit our subsidiaries to provide us with sufficient dividends, distributions or loans to fund payments on the Covanta Energy indebtedness when due.

Our ability to grow our Waste and Energy Services business may be limited.

      Our ability to grow our Waste and Energy Services business by investing in new projects may be limited by debt covenants in Covanta Energy’s principal financing agreements, and by potentially fewer market opportunities for new waste-to-energy facilities. Our Waste and Energy Services business is based upon building and operating municipal solid waste disposal and energy generating projects, which are capital intensive businesses that require financing through direct investment and the incurrence of debt. The covenants in Covanta Energy’s financing agreements limit investments in new projects or acquisitions of new businesses and place restrictions on Covanta Energy’s ability to expand existing projects. The covenants limit borrowings to finance new construction, except in limited circumstances related to expansions of existing facilities.

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Operation of our Waste and Energy Services facilities and the expansion of facilities involve significant risks.

      The operation of our Waste and Energy Services facilities and the construction of new or expanded facilities involve many risks, including:

•  the inaccuracy of our assumptions with respect to the timing and amount of anticipated revenues;

•  supply interruptions;

•  the breakdown or failure of equipment or processes;

•  difficulty or inability to find suitable replacement parts for equipment;

•  the unavailability of sufficient quantities of waste;

•  decreases in the fees for solid waste disposal;

•  decreases in the demand or market prices for recovered ferrous or non-ferrous metal;

•  disruption in the transmission of electricity generated;

•  permitting and other regulatory issues, license revocation and changes in legal requirements;

•  labor disputes and work stoppages;

•  unforeseen engineering and environmental problems;

•  unanticipated cost overruns;

•  weather interferences, catastrophic events including fires, explosions, earthquakes, droughts and acts of terrorism;

•  the exercise of the power of eminent domain; and

•  performance below expected levels of output or efficiency.

      We cannot predict the impact of these risks on our Waste and Energy Services business or operations. These risks, if they were to occur, could prevent Covanta Energy and its subsidiaries from meeting their obligations under their operating contracts.

Development, construction and operation of new projects may not commence as scheduled, or at all.

      The development and construction of new facilities involves many risks including siting, permitting, financing and construction delays and expenses, start-up problems, the breakdown of equipment and performance below expected levels of output and efficiency. New facilities have no operating history and may employ recently developed technology and equipment. Our Waste and Energy Services businesses maintain insurance to protect against risks relating to the construction of new projects; however, such insurance may not be adequate to cover lost revenues or increased expenses. As a result, a new facility may be unable to fund principal and interest payments under its debt service obligations or may operate at a loss. In certain situations, if a facility fails to achieve commercial operation, at certain levels or at all, termination rights in the agreements governing the facility’s financing may be triggered, rendering all of the facility’s debt immediately due and payable. As a result, the facility may be rendered insolvent and we may lose our interest in the facility.

Our insurance and contractual protections may not always cover lost revenues, increased expenses or liquidated damages payments.

      Although our Waste and Energy Services businesses maintain insurance, obtain warranties from vendors, require contractors to meet certain performance levels and, in some cases, pass risks, we cannot control to the service recipient or output purchaser, the proceeds of such insurance, warranties, performance guarantees or risk sharing arrangements may not be adequate to cover lost revenues, increased expenses or liquidated damages payments.

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Performance reductions could materially and adversely affect us and our projects may operate at lower levels than expected.

      Most service agreements for our waste-to-energy facilities provide for limitations on damages and cross-indemnities among the parties for damages that such parties may incur in connection with their performance under the contract. In most cases, such contractual provisions excuse our Waste and Energy Services businesses from performance obligations to the extent affected by uncontrollable circumstances and provide for service fee adjustments if uncontrollable circumstances increase its costs. We cannot assure you that these provisions will prevent our Waste and Energy Services businesses from incurring losses upon the occurrence of uncontrollable circumstances or that if our Waste and Energy Services businesses were to incur such losses they would continue to be able to service their debt.

      Covanta Energy and certain of its subsidiaries have issued or are party to performance guarantees and related contractual obligations associated with its waste-to-energy, independent power and water facilities. With respect to its domestic businesses, Covanta Energy and certain of its subsidiaries have issued guarantees to their municipal clients and other parties that Covanta Energy’s subsidiaries will perform in accordance with contractual terms, including, where required, the payment of damages or other obligations. The obligations guaranteed will depend upon the contract involved. Many of Covanta Energy’s subsidiaries have contracts to operate and maintain waste-to-energy facilities. In these contracts the subsidiary typically commits to operate and maintain the facility in compliance with legal requirements; to accept minimum amounts of solid waste; to generate a minimum amount of electricity per ton of waste; and to pay damages to contract counterparties under specified circumstances, including those where the operating subsidiary’s contract has been terminated for default. Any contractual damages or other obligations incurred by Covanta Energy and certain of its subsidiaries could be material, and in circumstances where one or more subsidiary’s contract has been terminated for its default, such damages could include amounts sufficient to repay project debt. Additionally, damages payable under such guarantees on our owned waste-to-energy facilities could expose us to recourse liability on project debt. Covanta Energy and certain of its subsidiaries may not have sufficient sources of cash to pay such damages or other obligations. We cannot assure you that Covanta Energy and such subsidiaries will be able to continue to avoid incurring material payment obligations under such guarantees or that if it did incur such obligations that they would have the cash resources to pay them.

Our Waste and Energy Services businesses generate their revenue primarily under long-term contracts and must avoid defaults under their contracts in order to service their debt and avoid material liability to contract counterparties.

      Covanta Energy’s subsidiaries must satisfy performance and other obligations under contracts governing waste-to-energy facilities. These contracts typically require Covanta Energy’s subsidiaries to meet certain performance criteria relating to amounts of waste processed, energy generation rates per ton of waste processed, residue quantity and environmental standards. The failure of Covanta Energy subsidiaries to satisfy these criteria may subject them to termination of their respective operating contracts. If such a termination were to occur, Covanta Energy’s subsidiaries would lose the cash flow related to the projects and incur material termination damage liability, which may be guaranteed by Covanta Energy or certain of its subsidiaries. In circumstances where the contract of one or more subsidiaries has been terminated due to the default of the Covanta Energy subsidiary they may not have sufficient sources of cash to pay such damages. We cannot assure you that Covanta Energy’s subsidiaries will be able to continue to perform their respective obligations under such contracts in order to avoid such contract terminations, or damages related to any such contract termination, or that if they could not avoid such terminations that they would have the cash resources to pay amounts that may then become due.

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Covanta Energy and certain of its subsidiaries have provided guarantees and support in connection with its subsidiaries’ projects.

      Covanta Energy and certain of its subsidiaries are obligated to guarantee or provide financial support for its subsidiaries’ projects in one or more of the following forms:

•  support agreements in connection with service or operating agreement-related obligations;

•  direct guarantees of certain debt relating to three of its facilities;

•  contingent obligation to pay lease payment installments in connection with three of its facilities;

•  contingent credit support for damages arising from performance failures;

•  environmental indemnities; and

•  contingent capital and credit support to finance costs, in most cases in connection with a corresponding increase in service fees, relating to uncontrollable circumstances.

      Many of these contingent obligations cannot readily be quantified, but, if we were required to provide this support, it may be material to our cash flow and financial condition.

Covanta Energy may face increased risk of market influences on its domestic revenues after its contracts expire.

      Covanta Energy’s contracts to operate waste-to-energy projects expire on various dates between 2008 and 2023, and its contracts to sell energy output generally expire when the project’s operating contract expires. Expiration of these contracts will subject Covanta to greater market risk in maintaining and enhancing its revenues. As its operating contracts at municipally-owned projects approach expiration, Covanta Energy will seek to enter into renewal or replacement contracts to continue operating such projects. However, we cannot assure you that Covanta Energy will be able to enter into renewal or replacement contracts on terms favorable to it, or at all. Covanta Energy will seek to bid competitively for additional contracts to operate other facilities as similar contracts of other vendors expire. The expiration of existing energy sales contracts, if not renewed, will require Covanta Energy to sell project energy output either into the electricity grid or pursuant to new contracts.

      At some of our facilities, market conditions may allow Covanta Energy to effect extensions of existing operating contracts along with facility expansions. Such extensions and expansions are currently being considered at a limited number of Covanta Energy’s facilities in conjunction with its municipal clients. If Covanta Energy is unable to reach agreement with its municipal clients on the terms under which it would implement such extensions and expansions, or if the implementation of these extensions, including renewals and replacement contracts, and expansions are materially delayed, this may adversely affect Covanta Energy’s cash flow and profitability. We cannot assure you that Covanta Energy will be able to enter into such contracts or that the terms available in the market at the time will be favorable to it.

Our Waste and Energy Services businesses depend on performance by third parties under contractual arrangements.

      Our Waste and Energy Services businesses depend on a limited number of third parties to, among other things, purchase the electric and steam energy produced by its facilities, and supply and deliver the waste and other goods and services necessary for the operation of our energy facilities. The viability of our facilities depends significantly upon the performance by third parties in accordance with long-term contracts, and such performance depends on factors which may be beyond our control. If those third parties do not perform their obligations, or are excused from performing their obligations because of nonperformance by our Waste and Energy Services businesses or other parties to the contracts, or due to force majeure events or changes in laws or regulations, our Waste and Energy Services businesses may not be able to secure alternate arrangements on substantially the same terms, if at all, for the services provided under the contracts. In addition, the

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bankruptcy or insolvency of a participant or third party in our Waste and Energy Services facilities could result in nonpayment or nonperformance of that party’s obligations to us.

Concentration of suppliers and customers may expose us to heightened financial exposure.

      Our Waste and Energy Services businesses often rely on single suppliers and single customers at our facilities, exposing such facilities to financial risks if any supplier or customer should fail to perform its obligations.

      Our Waste and Energy Services businesses often rely on a single supplier to provide waste, fuel, water and other services required to operate a facility and on a single customer or a few customers to purchase all or a significant portion of a facility’s output. In most cases our Waste and Energy Services businesses have long-term agreements with such suppliers and customers in order to mitigate the risk of supply interruption. The financial performance of these facilities depends on such customers and suppliers continuing to perform their obligations under their long-term agreements. A facility’s financial results could be materially and adversely affected if any one customer or supplier fails to fulfill its contractual obligations and we are unable to find other customers or suppliers to produce the same level of profitability. We cannot assure you that such performance failures by third parties will not occur, or that if they do occur, such failures will not adversely affect the cash flows or profitability of our Waste and Energy Services business.

      In addition, for their waste-to-energy facilities, our subsidiaries rely on their municipal clients as a source not only of waste for fuel but also of revenue from fees for disposal services our subsidiaries provide. Because contracts of our subsidiaries with their municipal clients are generally long-term, our subsidiaries may be adversely affected if the credit quality of one or more of their municipal clients were to decline materially.

Our Waste and Energy Services business is subject to pricing fluctuations caused by the waste disposal and energy markets.

      While our Waste and Energy Services businesses both sell the majority of their waste disposal capacity and energy output pursuant to long-term contracts, a portion of this capacity and output representing approximately 30% of our anticipated revenue through 2009 is subject to market price fluctuation. With the acquisition of ARC Holdings, a larger percentage of our revenue is subject to market risk from fluctuations in waste market prices than has historically been the case. Consequently, short-term fluctuations in the waste and energy markets may have a greater impact on our revenues than we have previously experienced.

Covanta Energy’s waste operations are concentrated in one region, and expose us to regional economic or market declines.

      The majority of Covanta Energy’s waste disposal facilities are located in the northeastern United States, primarily along the Washington, D.C. to Boston, Massachusetts corridor. Adverse economic developments in this region could affect regional waste generation rates and demand for waste disposal services provided by Covanta Energy. Adverse market developments caused by additional waste disposal capacity in this region could adversely affect waste disposal pricing. Either of these developments could have a material adverse effect on Covanta Energy’s revenues and cash generation.

Some of Covanta Energy’s energy contracts involve greater risk of exposure to performance levels which could result in materially lower revenues.

      Eight of our 31 waste-to-energy facilities receive 100% of the energy revenues they generate. As a result, if we are unable to operate these facilities at their historical performance levels for any reason, our revenues from energy sales could materially decrease.

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We may be unable to integrate the operations of ARC Holdings and Covanta Energy successfully and may not realize the full anticipated benefits of the acquisition.

      Achieving the anticipated benefits of the recent acquisition of ARC Holdings will depend in part upon our ability to integrate the two companies’ businesses in an efficient and effective manner. Our attempt to integrate two companies that have previously operated independently may result in significant challenges, and we may be unable to accomplish the integration smoothly or successfully. In particular, the necessity of coordinating organizations in additional locations and addressing possible differences in corporate cultures and management philosophies may increase the difficulties of integration. The integration will require the dedication of significant management resources, which may temporarily distract management’s attention from the day-to-day operations of the businesses of the combined company. The process of integrating operations could cause an interruption of, or loss of momentum in, the activities of one or more of the combined company’s businesses and the loss of key personnel. Employee uncertainty and lack of focus during the integration process may also disrupt the businesses of the combined company. Any inability of management to successfully integrate ARC Holdings’ operations with the operations of Covanta Energy could have a material adverse effect on our business and financial condition.

      The anticipated benefits of the transaction include the elimination of duplicative costs, the strategic expansion of Covanta Energy’s core waste-to-energy business in the northeast region of the United States and the strengthening of Covanta Energy’s credit profile and lowering of our cost of capital. We may not be able to realize, in whole or in part, or within the anticipated time frames, any of these expected costs savings or improvements. The realization of the anticipated benefits of the transaction are subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. As a result, we may not be able to achieve our expected results of operations and our actual income, cash flow or earnings available to satisfy debt obligations may be materially lower than the pro forma results we have previously filed with the SEC.

Exposure to international economic and political factors may materially and adversely affect our Waste and Energy Services businesses.

      CPIH is a wholly-owned subsidiary of Covanta Energy. CPIH’s operations are conducted entirely outside the United States and expose it to legal, tax, currency, inflation, convertibility and repatriation risks, as well as potential constraints on the development and operation of potential business, any of which can limit the benefits to CPIH of a foreign project.

      CPIH’s projected cash distributions from existing facilities come from facilities located in countries with sovereign ratings below investment grade, including Bangladesh, the Philippines and India. The financing, development and operation of projects outside the United States can entail significant political and financial risks, which vary by country, including:

•  changes in law or regulations;

•  changes in electricity tariffs;

•  changes in foreign tax laws and regulations;

•  changes in United States federal, state and local laws, including tax laws, related to foreign operations;

•  compliance with United States federal, state and local foreign corrupt practices laws;

•  changes in government policies or personnel;

•  changes in general economic conditions affecting each country, including conditions in financial markets;

•  changes in labor relations in operations outside the United States;

•  political, economic or military instability and civil unrest; and

•  expropriation and confiscation of assets and facilities.

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      The legal and financial environment in foreign countries in which CPIH currently owns assets or projects also could make it more difficult for it to enforce its rights under agreements relating to such projects.

      Any or all of the risks identified above with respect to the CPIH projects could adversely affect our revenue and cash generation. As a result, these risks may have a material adverse effect on our Waste and Energy Services business, consolidated financial condition and results of operations.

Exposure to foreign currency fluctuations may affect CPIH’s costs of operations.

      CPIH participates in projects in jurisdictions where limitations on the convertibility and expatriation of currency have been lifted by the host country and where such local currency is freely exchangeable on the international markets. In most cases, components of project costs incurred or funded in the currency of the United States are recovered with limited exposure to currency fluctuations through negotiated contractual adjustments to the price charged for electricity or service provided. This contractual structure may cause the cost in local currency to the project’s power purchaser or service recipient to rise from time to time in excess of local inflation. As a result, there is a risk in such situations that such power purchaser or service recipient will, at least in the near term, be less able or willing to pay for the project’s power or service.

Exposure to fuel supply prices may affect CPIH’s costs and results of operations.

      Changes in the market prices and availability of fuel supplies to generate electricity may increase CPIH’s cost of producing power, which could adversely impact our energy businesses’ profitability and financial performance.

      The market prices and availability of fuel supplies of some of CPIH’s facilities fluctuate. Any price increase, delivery disruption or reduction in the availability of such supplies could affect CPIH’s ability to operate its facilities and impair its cash flow and profitability. CPIH may be subject to further exposure if any of its future operations are concentrated in facilities using fuel types subject to fluctuating market prices and availability. We may not be successful in our efforts to mitigate our exposure to supply and price swings.

Our inability to obtain resources for operations may adversely affect our ability to effectively compete.

      Our waste-to-energy facilities depend on solid waste for fuel, which provides a source of revenue. For most of our facilities, the prices they charge for disposal of solid waste are fixed under long-term contracts and the supply is guaranteed by sponsoring municipalities. However, for some of our waste-to-energy facilities, the availability of solid waste to us, as well as the tipping fee that we must charge to attract solid waste to its facilities, depends upon competition from a number of sources such as other waste-to-energy facilities, landfills and transfer stations competing for waste in the market area. In addition, we may need to obtain waste on a competitive basis as our long-term contracts expire at our owned facilities. There has been consolidation and there may be further consolidation in the solid waste industry which would reduce the number of solid waste collectors or haulers that are competing for disposal facilities or enable such collectors or haulers to use wholesale purchasing to negotiate favorable below-market disposal rates. The consolidation in the solid waste industry has resulted in companies with vertically integrated collection activities and disposal facilities. Such consolidation may result in economies of scale for those companies as well as the use of disposal capacity at facilities owned by such companies or by affiliated companies. Such activities can affect both the availability of waste to us for disposal at some of our waste-to-energy facilities and market pricing.

Our efforts to grow our business will require us to incur significant costs in business development, often over extended periods of time, with no guarantee of success.

      Our efforts to grow our waste and energy business will depend in part on how successful we are in developing new projects and expanding existing projects. The development period for each project may occur over several years, during which we incur substantial expenses relating to siting, design, permitting, community relations, financing, and professional fees associated with all of the foregoing. Not all of our development efforts will be successful, and we may decide to cease developing a project for a variety of

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reasons. If the cessation of our development efforts were to occur at an advanced stage of development, we may have incurred a material amount of expenses for which we will realize no return.

Compliance with environmental laws could adversely affect our results of operations.

      Costs of compliance with federal, state and local existing and future environmental regulations could adversely affect our cash flow and profitability. Our Waste and Energy Services businesses are subject to extensive environmental regulation by federal, state and local authorities, primarily relating to air, waste (including residual ash from combustion) and water. We are required to comply with numerous environmental laws and regulations and to obtain numerous governmental permits in operating our facilities. Our Waste and Energy Services businesses may incur significant additional costs to comply with these requirements. Environmental regulations may also limit our ability to operate our facilities at maximum capacity or at all. If our Waste and Energy Services businesses fail to comply with these requirements, we could be subject to civil or criminal liability, damages and fines. Existing environmental regulations could be revised or reinterpreted and new laws and regulations could be adopted or become applicable to us or our facilities, and future changes in environmental laws and regulations could occur. This may materially increase the amount we must invest to bring our facilities into compliance. In addition, lawsuits or enforcement actions by federal and/or state regulatory agencies may materially increase our costs. Stricter environmental regulation of air emissions, solid waste handling or combustion, residual ash handling and disposal, and waste water discharge could materially affect our cash flow and profitability.

      Our Waste and Energy Services businesses may not be able to obtain or maintain, from time to time, all required environmental regulatory approvals. If there is a delay in obtaining any required environmental regulatory approvals or if we fail to obtain and comply with them, the operation of our facilities could be jeopardized or become subject to additional costs.

Energy regulation could adversely affect our revenues and costs of operations.

      Our Waste and Energy Services businesses are subject to extensive energy regulations by federal, state and foreign authorities. We cannot predict whether the federal, state or foreign governments will modify or adopt new legislation or regulations relating to the solid waste or energy industries. The economics, including the costs, of operating our facilities may be adversely affected by any changes in these regulations or in their interpretation or implementation or any future inability to comply with existing or future regulations or requirements.

      The FPA regulates energy generating companies and their subsidiaries and places constraints on the conduct of their business. The FPA regulates wholesale sales of electricity and the transmission of electricity in interstate commerce by public utilities. Under PURPA, our domestic facilities are exempt from most provisions of the FPA and state rate regulation. Our foreign projects are also exempt from regulation under the FPA.

      The Energy Policy Act of 2005 enacted comprehensive changes to the domestic energy industry which may affect our businesses. The Energy Policy Act removed certain regulatory constraints that previously limited the ability of utilities and utility holding companies to invest in certain activities and businesses, which may have the effect over time of increasing competition in energy markets in which we participate. In addition, the Energy Policy Act includes provisions that may remove some of the benefits provided to non-utility electricity generators, like Covanta Energy, after its existing energy sale contracts expire. As a result, we may face increased competition after such expirations occur.

      If our Waste and Energy Services businesses become subject to either the FPA or lose the ability under PURPA to require utilities to purchase our electricity, the economics and operations of our energy projects could be adversely affected, including as a result of rate regulation by the FERC, with respect to our output of electricity, which could result in lower prices for sales of electricity. In addition, depending on the terms of the project’s power purchase agreement, a loss of our exemptions could allow the power purchaser to cease taking and paying for electricity under existing contracts. Such results could cause the loss of some or all contract revenues or otherwise impair the value of a project and could trigger defaults under provisions of the

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applicable project contracts and financing agreements. Defaults under such financing agreements could render the underlying debt immediately due and payable. Under such circumstances, we cannot assure you that revenues received, the costs incurred, or both, in connection with the project could be recovered through sales to other purchasers.

Failure to obtain regulatory approvals could adversely affect our operations.

      Our Waste and Energy Services businesses are continually in the process of obtaining or renewing federal, state and local approvals required to operate our facilities. While our Waste and Energy Services businesses currently have all necessary operating approvals, we may not always be able to obtain all required regulatory approvals, and we may not be able to obtain any necessary modifications to existing regulatory approvals or maintain all required regulatory approvals. If there is a delay in obtaining any required regulatory approvals or if we fail to obtain and comply with any required regulatory approvals, the operation of our facilities or the sale of electricity to third parties could be prevented, made subject to additional regulation or subject our Waste and Energy Services businesses to additional costs or a decrease in revenue.

The energy industry is becoming increasingly competitive, and we might not successfully respond to these changes.

      We may not be able to respond in a timely or effective manner to the changes resulting in increased competition in the energy industry in both domestic and international markets. These changes may include deregulation of the electric utility industry in some markets, privatization of the electric utility industry in other markets and increasing competition in all markets. To the extent U.S. competitive pressures increase and the pricing and sale of electricity assumes more characteristics of a commodity business, the economics of our business may come under increasing pressure. Regulatory initiatives in foreign countries where our Waste and Energy Services businesses have or will have operations involve the same types of risks.

Changes in technology may have a material adverse effect on our profitability.

      Research and development activities are ongoing to provide alternative and more efficient technologies to dispose of waste or produce power, including fuel cells, microturbines and solar cells. It is possible that advances in these or other technologies will reduce the cost of waste disposal or power production from these technologies to a level below our costs. Furthermore, increased conservation efforts could reduce the demand for power or reduce the value of our facilities. Any of these changes could have a material adverse effect on our revenues and profitability.

We have incurred and will continue to incur significant transaction and combination-related costs in connection with the acquisition of ARC Holdings.

      We expect to incur significant costs, which we currently estimate to be approximately $20 million through 2007, including costs incurred to date, associated with combining the operations of Covanta Energy and ARC Holdings. However, we cannot predict with certainty the specific size of those charges at this preliminary stage of the integration process. Although we expect the elimination of duplicative costs, as well as the realization of other efficiencies related to the integration of the businesses, we cannot give any assurance that this net benefit will be achieved as planned in the near future or at all.

Insurance Business-Specific Risks

Insurance regulations may affect NAICC’s operations.

      The insurance industry is highly regulated. NAICC is subject to regulation by state and federal regulators, and a significant portion of NAICC’s operations are subject to regulation by the state of California. Changes in existing insurance regulations or adoption of new regulations or laws which could affect NAICC’s results of operations and financial condition may include, without limitation, proposed changes to California’s personal automobile rating regulations extension of California’s Low Cost Automobile Program beyond Los Angeles and San Francisco counties and changes to California’s workers’ compensation laws. We cannot

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predict the impact of changes in existing insurance regulations or adoption of new regulations or laws on NAICC’s results of operations and financial condition.

The insurance products sold by NAICC are subject to intense competition.

      The insurance products sold by NAICC are subject to intense competition from many competitors, many of whom have substantially greater resources than NAICC. The California non-standard personal automobile marketplace consists of over 100 carriers.

      In order to decrease rates, insurers in California must obtain prior permission for rate reductions from the California Department of Insurance. In lieu of requesting rate decreases, competitors may soften underwriting standards as an alternative means of attracting new business. Such tactics, should they occur, would introduce new levels of risk for NAICC and could limit NAICC’s ability to write new policies or renew existing profitable policies. We cannot assure you that NAICC will be able to successfully compete in these markets and generate sufficient premium volume at attractive prices to be profitable. This risk is enhanced by the reduction in lines of business NAICC writes as a result of its decision to reduce underwriting operations.

If NAICC’s loss experience exceeds its estimates, additional capital may be required.

      Unpaid losses and loss adjustment expenses are based on estimates of reported losses, historical company experience of losses reported for reinsurance assumed and historical company experience for unreported claims. Such liability is, by necessity, based on estimates that may change in the near term. NAICC cannot assure you that the ultimate liabilities will not exceed, or even materially exceed, the amounts estimated. If the ultimate liability materially exceeds estimates, then additional capital may be required to be contributed to some of our insurance subsidiaries. NAICC and the other insurance subsidiaries received additional capital contributions from us in 2003 and 2002, and NAICC cannot provide any assurance that it and its subsidiaries will be able to obtain additional capital on commercially reasonable terms or at all.

      In addition, due to the fact that NAICC and its other insurance subsidiaries are in the process of running off several significant lines of business, the risk of adverse development and the subsequent requirement to obtain additional capital is heightened.

Failure to satisfy capital adequacy and risk-based capital requirements would require NAICC to obtain additional capital.

      NAICC is subject to regulatory risk-based capital requirements. Depending on its risk-based capital, NAICC could be subject to various levels of increasing regulatory intervention ranging from company action to mandatory control by insurance regulatory authorities. NAICC’s capital and surplus is also one factor used to determine its ability to distribute or loan funds to us. If NAICC has insufficient capital and surplus, as determined under the risk-based capital test, it will need to obtain additional capital to establish additional reserves. NAICC cannot provide any assurance that it will be able to obtain such additional capital on commercially reasonable terms or at all.

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Item 1B.      UNRESOLVED STAFF COMMENTS

      None.

Item 2. PROPERTIES

      Covanta’s executive offices are located at 40 Lane Road, Fairfield, New Jersey, in an office building located on a 5.4 acre site owned by a subsidiary. The following table summarizes certain information relating to the locations of the properties Covanta or its subsidiaries own or lease:

			Approximate
			Size Site			Nature of
Location			(in Acres)(1)		Site Use	Interest(2)
OTHER SERVICES
	1.	Fairfield, New Jersey		5.4	Office space		Own
	2.	Long Beach, California(3)		14,632 sq.  ft.	Office space		Lease
WASTE AND ENERGY SERVICES
		Domestic
	3.	Anderson, California		2,000 sq. ft	Office space		Lease
	4.	City of Industry, California		953 sq. ft.	Office space		Lease
	5.	Montvale, New Jersey		34,000 sq.  ft.	Office space		Lease
	6.	Woodcliff Lake, New Jersey		18,048 sq.  ft.	Office space		Lease
	7.	Imperial County, California		83.0	Undeveloped desert land		Own
	8.	Lake County, Florida		15.0	Waste-to-energy facility		Own
	9.	Marion County, Oregon		15.2	Waste-to-energy facility		Own
	10.	Bristol, Connecticut		18.2	Waste-to-energy facility		Own
	11.	Niagara Falls, New York		12.5	Waste-to-energy facility		Own
	12.	Rochester, Massachusetts		123.2	Waste-to-energy facility		Own (90%)
	13.	Hempstead, New York		14.9	Waste-to-energy facility		Lease
	14.	Newark, New Jersey		15.4	Waste-to-energy facility		Lease
	15.	Preston, Connecticut		11.9	Waste-to-energy facility		Lease
	16.	Alexandria/ Arlington, Virginia		3.3	Waste-to-energy facility		Lease
	17.	Indianapolis, Indiana		23.5	Waste-to-energy facility		Lease
	18.	Stanislaus County, California		16.5	Waste-to-energy facility		Lease
	19.	Babylon, New York		9.5	Waste-to-energy facility		Lease
	20.	Haverhill, Massachusetts		12.7	Waste-to-energy facility		Lease
	21.	Wallingford, Connecticut		10.3	Waste-to-energy facility		Lease
	22.	Fairfax County, Virginia		22.9	Waste-to-energy facility		Lease
	23.	Union County, New Jersey		20.0	Waste-to-energy facility		Lease
	24.	Huntington, New York		13.0	Waste-to-energy facility		Lease
	25.	Warren County, New Jersey		19.8	Waste-to-energy facility		Lease
	26.	Onondaga County, New York		12.0	Waste-to-energy facility		Lease
	27.	Chester, Pennsylvania		51.2	Waste-to-energy facility		Lease
	28.	Whatcom County, Washington		N/A	Hydroelectric project		Own (50%)
	29.	Weeks Falls, Washington		N/A	Hydroelectric project		Lease
	30.	Haverhill, Massachusetts		20.2	Landfill		Lease
	31.	Haverhill, Massachusetts		16.8	Landfill expansion		Lease
	32.	Derwood, Maryland		N/A	Landfill gas project		Lease

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			Approximate
			Size Site			Nature of
Location			(in Acres)(1)		Site Use	Interest(2)
	33.	San Diego, California		N/A	Landfill gas project		Lease
	34.	Oxnard, California		N/A	Landfill gas project		Lease
	35.	Salinas, California		N/A	Landfill gas project		Lease
	36.	Santa Clara, California		N/A	Landfill gas project		Lease
	37.	Stockton, California		N/A	Landfill gas project		Lease
	38.	Lawrence, Massachusetts		11.8	Vacant Land		Own
	39.	Burney, California		40.0	Wood waste project		Lease
	40.	Jamestown, California		26.0	Wood waste project		Own (50%)
	41.	Westwood, California		60.0	Wood waste project		Own
	42.	Oroville, California		43.0	Wood waste project		Own
	43.	Braintree, Massachusetts		6.7	Transfer station		Lease
	44.	Lynn, Massachusetts		1.4	Transfer station		Own
		International
	45.	Manila, Philippines		5,038 sq.  ft.	Office space		Lease
	46.	Bangkok, Thailand		7,276 sq.  ft.	Office space		Lease
	47.	Chennai, India		1,797 sq.  ft.	Office space		Lease
	48.	Samalpatti, India		2,546 sq.  ft.	Office space		Lease
	49.	Samayanallur, India		1,300 sq.  ft.	Office space		Lease
	50.	Shanghai, China		1,561 sq.  ft.	Office space		Lease
	51.	Zhejiang Province, People’s Republic of China		8.2	Coal-fired cogeneration facility		(4)
	52.	Shandong Province, People’s Republic of China		8.2	Coal-fired cogeneration facility		(4)
	53.	Jiangsu Province, People’s Republic of China		16.1	Coal-fired cogeneration facility		(4)
	54.	Cavite, Philippines		3.2	Heavy fuel oil project		Lease
	55.	Cavite, Philippines		2.5	Heavy fuel oil project		Lease
	56.	Samayanallur, India		17.1	Heavy fuel oil project		Lease
	57.	Samayanallur, India		2.3	Heavy fuel oil project		Lease
	58.	Samalpatti, India		30.3	Heavy fuel oil project		Lease
	59.	Bataan, Philippines		7.4	Diesel power plant		Lease

(1)	All sizes are in acres unless otherwise indicated.
(2)	All ownership or leasehold interests relating to projects are subject to material liens in connection with the financing of the related project, except those listed above under item 25, 32-37, 51-53. In addition, all leasehold interests exist at least as long as the term of applicable project contracts, and several of the leasehold interests are subject to renewal and/or purchase options.
(3)	NAICC entered into a five-year lease in July 2004 and lease payments began in February 2005.
(4)	Land use right reverts to China joint venture partner upon termination of joint venture agreement.

Item 3. LEGAL PROCEEDINGS

      For information regarding legal proceedings, see Note 29. Commitments and Contingent Liabilities of the Notes to the Consolidated Financial Statements in Item 8, which information is incorporated herein by reference.

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

      There were no submission of matters to a vote of the security holders of Covanta that are required to be reported on this Annual Report on Form 10-K. The results of the proposals voted on at Covanta’s Annual Meeting of Stockholders held on September 19, 2005 were previously reported by Covanta in its Quarterly Report on Form 10-Q for the quarter ended September 30, 2005 that was filed with the SEC on November 9, 2005.

PART II

Item 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES

      On September 20, 2005, Danielson Holding Corporation changed its name to Covanta Holding Corporation. Covanta’s common stock was traded on the American Stock Exchange under the symbol “DHC” until close of trading on October 4, 2005. Since that date, Covanta’s common stock has been traded on the New York Stock Exchange under the symbol “CVA”. On March 3, 2006, there were approximately 1,160 holders of record of common stock. On March 3, 2006, the closing price of Covanta’s common stock on the New York Stock Exchange was $16.97 per share.

      The following table sets forth the high, low and closing stock prices of Covanta’s common stock for the last two years. These prices are as reported on the American Stock Exchange Composite Tape with respect to dates through the close of business on October 4, 2005 and these prices are as reported on the New York Stock Exchange Composite Tape with respect to dates on and after October 5, 2005.

	2005						2004
	High		Low		Close		High		Low		Close
First Quarter	$	17.34	$	7.95	$	17.25	$	10.03	$	2.87	$	9.30
Second Quarter		17.70		10.42		12.17		10.40		5.40		6.91
Third Quarter		13.64		11.67		13.43		7.15		5.52		6.09
Fourth Quarter		15.06		10.41		15.06		8.60		6.00		8.45

      The prices above reflect the impact of a rights offering announced in December 2003 and completed on May 18, 2004 and the ARC Holdings rights offering announced in February 2005 and completed on June 24, 2005.

      Covanta has not paid dividends on its common stock and does not expect to declare or pay any dividends in the foreseeable future. Under current financing arrangements there are material restrictions on the ability of Covanta’s subsidiaries to transfer funds to Covanta in the form of cash dividends, loans or advances that would likely materially limit the future payment of dividends on common stock. See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Management’s Discussion and Analysis of Liquidity and Capital Resources — Waste and Energy Services Segment for more detailed information on Covanta’s financing arrangements.

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Item 6. SELECTED FINANCIAL DATA

      Given the significance of the Covanta Energy and ARC Holdings acquisitions to Covanta’s business, results of operations and financial condition, Covanta decided, during the third quarter of 2005, to combine the previously separate business segments of Insurance Services and Parent-only operations into one reportable segment referred to as “Other Services.” Certain prior period amounts, such as parent investment income, have been reclassified in the consolidated financial statements to conform to the current period presentation.

		For the Years Ended December 31,
		2005(1)			2004(2)			2003(3)			2002(4)			2001
		(In thousands of dollars, except per share amounts)
Statements of Operations Data
Operating revenues		$	978,763		$	576,196		$	41,123		$	531,501		$	92,104
Operating expenses			832,547			499,326			55,463			529,246			106,365
Operating income (loss)			146,216			76,870			(14,340	)		2,255			(14,261	)
Other income			15,193			—			—			2,793			—
Interest (expense) income, net			(83,844	)		(41,396	)		10			(37,657	)		—
Income (loss) before taxes, minority interests and equity income (loss)			77,565			35,474			(14,330	)		(32,609	)		(14,261	)
Minority interests			9,197			6,869			—			—			—
Income tax expense			34,651			11,535			18			346			73
Equity in net income (loss) from unconsolidated investments			25,609			17,024			(54,877	)		—			—
Net income (loss)			59,326			34,094			(69,225	)		(32,955	)		(14,334	)
Income (loss) per share(5)
	Basic		0.49			0.39			(1.05	)		(0.58	)		(0.34	)
	Diluted		0.46			0.37			(1.05	)		(0.58	)		(0.34	)
Balance Sheet Data
Cash and cash equivalents		$	128,556		$	96,148		$	17,952		$	25,183		$	17,866
Restricted funds held in trust			447,432			239,918			—			—			—
Investments			52,573			65,042			71,057			93,746			148,512
Property, plant and equipment — net			2,724,843			819,400			254			654,575			131
Intangible assets, net			434,543			177,290			—			—			—
Goodwill			255,927			—			—			—			—
Deferred tax asset			47,294			26,910			—			—			—
Total assets			4,702,165			1,939,081			162,648			1,032,945			208,871
Deferred income taxes			533,169			109,465			—			—			—
Unpaid losses and LAE			46,868			64,270			83,380			101,249			105,745
Long-term debt			1,308,119			312,896			40,000			597,246			—
Project debt			1,598,284			944,737			—			—			—
Minority interest			80,628			83,350			—			—			—
Shareholders’ equity			599,241			134,815			27,791			77,360			74,463
Book value per share of common stock			4.24			1.84			0.50			1.63			2.48
Shares of common stock outstanding			141,166			73,430			55,105			47,459			30,039

(1)  For the year ended December 31, 2005, ARC Holdings’ results of operations are included in Covanta’s consolidated results subsequent to June 24, 2005. As a result of the consummation of the ARC Holdings acquisition on June 24, 2005, Covanta’s future performance will be significantly driven by the combined performance of Covanta Energy and ARC Holdings’ operations. As a result, the nature of Covanta’s

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	business, the risks attendant to such business and the trends that it will face have been significantly altered by the acquisitions of Covanta Energy and ARC Holdings. Accordingly, Covanta’s historic financial performance and results of operations will not be indicative of our future performance.
(2)	For the year ended December 31, 2004, Covanta Energy’s results of operations are included in Covanta’s consolidated results since March 10, 2004. As a result of the consummation of the Covanta Energy acquisition on March 10, 2004, the future performance of Covanta will predominantly reflect the performance of Covanta Energy’s operations which are significantly larger than Covanta’s insurance operations.
(3)	ACL, which was acquired on May 29, 2002, and certain of its subsidiaries, filed a petition on January 31, 2003 with the U.S. Bankruptcy Court for the Southern District of Indiana, New Albany Division to reorganize under Chapter 11 of the U.S. Bankruptcy Code. As a result of this filing, Covanta no longer maintained control of the activities of ACL and Covanta’s equity interest in ACL was cancelled when ACL’s plan of reorganization was confirmed on December 30, 2004 and it emerged from bankruptcy on January 11, 2005. Covanta’s investments in these entities are presented using the equity method effective as of the beginning of the year ending December 31, 2003 and were no longer consolidated. Equity in net loss from unconsolidated investments above consists of Covanta’s equity in the net loss of ACL, GMS and Vessel Leasing in 2003.
(4)	In 2002, Covanta purchased 100% of ACL, 5.4% of GMS and 50% of Vessel Leasing.
(5)	Basic and diluted earnings per share and the average shares used in the calculation of basic and diluted earnings per share and book value per share of common stock and shares of common stock outstanding for all periods have been adjusted retroactively to reflect the bonus element contained in the rights offering issued on May 18, 2004 and for the ARC Holdings rights offering issued on June 21, 2005.

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

      Covanta Holding Corporation (“Covanta”) is organized as a holding company with substantially all of its historic consolidated operations conducted in the insurance industry prior to the acquisition of Covanta Energy Corporation (“Covanta Energy”) in March 2004 and the acquisition of Covanta ARC Holdings, Inc. (formerly known as American Ref-Fuel Holdings Corp., referred to as “ARC Holdings”) in June 2005.

      On March 10, 2004, Covanta Energy, and most of its subsidiaries engaged in waste-to-energy, water and independent power production in the United States, consummated a reorganization plan (“Reorganization Plan”) and emerged from proceedings under Chapter 11 of the Bankruptcy Code (“Chapter 11”). As a result of the consummation of the Reorganization Plan, Covanta Energy became a wholly-owned subsidiary of Covanta. The results of operations and financial condition of Covanta Energy were consolidated for financial reporting purposes commencing on March 11, 2004. Several subsidiaries of Covanta Energy did not emerge from the Chapter 11 proceedings on March 10, 2004. These subsidiaries are referred to herein as “Remaining Debtors”. Covanta has included Lake County and Warren County as consolidated subsidiaries in its financial statements since their respective emergence dates. Upon Tampa Bay’s emergence from Chapter 11, Covanta Energy did not have any operating or ownership rights in this facility.

      On June 24, 2005, Covanta acquired, through Covanta Energy, 100% of the issued and outstanding shares of ARC Holdings. ARC Holdings and its subsidiaries operate six waste-to-energy facilities located in the northeastern United States and TransRiver Marketing Company, L.P. (“TransRiver”), a waste procurement company. Immediately upon closing of the acquisition, ARC Holdings became a wholly-owned subsidiary of Covanta Energy, and Covanta Energy assumed control of the management and operations of the ARC Holdings facilities. ARC Holdings’ results of operations were consolidated into Covanta beginning on June 25, 2005.

      The nature of Covanta’s business, the risks attendant to such business and the trends that it will face have been significantly altered by these acquisitions. The consolidated performance of Covanta in 2004 and 2005

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has predominantly reflected, and the continued future performance of Covanta will predominantly reflect, the performance of its waste and energy services operations which are significantly larger than its insurance operations. Accordingly, Covanta’s financial performance prior to 2004 will not be comparable with its future performance and its financial performance in 2005 has been materially affected by the magnitude of the ARC Holdings acquisition relative to the size of the business of Covanta prior to such acquisition. Readers are directed to Management’s Discussion and Analysis of Covanta’s waste and energy services business below for a discussion of management’s perspective on important factors of operating and financial performance.

      Covanta’s acquisition of ARC Holdings markedly increased the size and scale of its Waste and Energy Services segment, and thus Covanta’s business. While Covanta’s consolidated assets increased to $4.7 billion at December 31, 2005 from $1.9 billion at the end of 2004, its consolidated debt increased to $2.9 billion from $1.3 billion in the same respective periods. The acquisition of ARC Holdings also provided Covanta Energy with the opportunity to achieve cost savings by combining its businesses with those of ARC Holdings and the opportunity to refinance its existing recourse debt and thereby lower its cost of capital and obtain less restrictive covenants in the credit agreements.

      With the acquisition of ARC Holdings, Covanta’s management is focused on:

•  providing its customers with superior service by operating its existing businesses to historic high standards;

•  generating sufficient cash to meet its liquidity needs;

•  paying down Covanta Energy’s new debt, as well as project and intermediate holding company debt, with a stated goal of paying down $700 million in debt (at all levels) between 2005 and the end of 2007; and

•  investing in and growing its business in order to create additional value for shareholders.

      Maintaining historic facility production levels while effectively managing operating and maintenance expense is important to optimize Covanta Energy’s long-term cash generation. Covanta Energy does not expect to receive any cash contributions from Covanta, and is prohibited under its principal financing arrangements from using its cash to issue dividends to Covanta except in limited circumstances. For expanded discussions of liquidity, see Liquidity and Capital Resources below.

      As part of the Covanta Energy acquisition, Covanta agreed to conduct a rights offering for up to 3.0 million shares of its common stock to certain holders of 9.25% debentures issued by Covanta Energy prior to its bankruptcy at a purchase price of $1.53 per share (the “9.25% Offering”). Because of the possibility that the 9.25% Offering could not be completed prior to the completion of the ARC Holdings acquisition, and the commencement of the related rights offering to shareholders (the “ARC Holdings Rights Offering”), Covanta restructured the 9.25% Offering so that the holders that participated in the 9.25% Offering were offered the right to purchase an additional 2.7 million shares of Covanta’s common stock which was an equivalent number of shares of common stock that such holders would have been entitled to purchase in the ARC Holdings Rights Offering if the 9.25% Offering had been consummated on or prior to the record date for the ARC Holdings Rights Offering. The purchase price for these additional shares was $6.00 per share, the same purchase price as in the ARC Holdings Rights Offering. On February 24, 2006, Covanta completed the 9.25% Offering in which 5,696,911 shares were issued in consideration for $20.8 million in gross proceeds.

      Covanta’s liquidity is enhanced by the existence of net operating loss carryforwards (“NOLs”), which predominantly arose from predecessor insurance entities of Covanta (formerly named Mission Insurance Group, Inc.). As described below, Covanta’s taxable income and loss relating to certain grantor trusts associated with these predecessor insurance entities continues to be included in Covanta’s consolidated tax group. The Internal Revenue Service (“IRS”) has not audited any of Covanta’s tax returns relating to the years during which the NOLs were generated. It is possible that the IRS could undertake an audit of Covanta’s tax returns for such years, as well as subsequent years during which taxable income or loss of such grantor trusts continue to be included in Covanta’s consolidated tax group. For additional detail relating to Covanta’s NOLs and risks attendant thereto, see Note 22. Income Taxes of the Notes to the Consolidated

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Financial Statements (“Notes”) and Item 1A. Risk Factors — We cannot be certain that our NOLs will continue to be available to offset our tax liability.

      The ability of Covanta to utilize its NOLs to offset taxable income generated by the Waste and Energy Services operations could have a material effect on Covanta’s consolidated financial condition and results of operations. Covanta had NOLs estimated to be $489 million for federal income tax purposes as of December 31, 2005. The NOLs will expire in various amounts from December 31, 2006 through December 31, 2023, if not used. The amount of NOLs available to Covanta Energy will be reduced by any taxable income generated by current members of Covanta’s consolidated tax group, which include such grantor trusts associated with the Mission Insurance entities which have been in state insolvency proceedings in California and Missouri since the late 1980’s. During or at the conclusion of the administration of these grantor trusts by state insurance regulatory agencies, material taxable income could result which could utilize a substantial portion of Covanta’s NOLs, which in turn could materially reduce Covanta’s cash flow and its ability to service current debt and achieve debt reduction goals. The impact of a material reduction in Covanta’s NOLs could also cause an event of default under Covanta Energy’s current secured credit facilities and/or a reduction of a substantial portion of Covanta’s deferred tax asset relating to such NOLs.

      In January 2006, Covanta executed agreements with the California Commissioner of Insurance (the “California Commissioner”), who administers the majority of the grantor trusts, regarding the final administration and conclusion of such trusts. The agreements, which were approved by the California state court overseeing the Mission insolvency proceedings (the “Mission Court”), will take effect upon satisfaction of remaining conditions and settle matters that had been in dispute regarding the historic rights and obligations relating to the conclusion of the grantor trusts. The most significant of these conditions is a determination by the Mission Court of the aggregate amount of certain claims against the grantor trusts which are entitled to distributions of an aggregate of 1,572,625 shares of Covanta common stock previously issued to the California Commissioner under existing agreements entered into at the inception of the Mission Insurance entities’ reorganization. The distribution of such shares by the California Commissioner is among the final steps necessary to conclude the insolvency cases relating to the trusts being administered by the California Commissioner, and such arrangements would include a process by which a complete list of such claimants would be identified, and thereafter the shares to be delivered to such claimants by the California Commissioner. In connection with these agreements and in order to facilitate the orderly conclusion of the grantor trust estates, the distribution of such stock and the settlement of the related disputes, Covanta has agreed to pay an aggregate amount equal to approximately $9.14 million to the California Commissioner. While Covanta cannot predict with certainty what amounts, if any, may be includable in Covanta’s taxable income as a result of the final administration of the trusts, Covanta believes that these arrangements with the California Commissioner will result in no material reduction in available NOLs. For additional information regarding these arrangements (which are referred to herein as the “California Grantor Trust Settlement”) including its effects on Covanta’s deferred tax asset, see Note 4. California Grantor Trust Settlement and Note 22. Income Taxes of the Notes.

      Covanta is in preliminary discussions with the Director of the Division of Insurance of the State of Missouri (the “Missouri Director”), who administers the balance of the grantor trusts relating to the Mission Insurance entities, regarding similar arrangements for distribution of the remaining 154,756 shares of Covanta common stock by the Missouri Director to claimants of the Missouri grantor trusts. Covanta cannot give any assurance that it will enter into similar arrangements with the Missouri Director or that the administration of such estates will not result in a material reduction in available NOLs.

Covanta’s Business Segments

      Given the significance of the Covanta Energy and ARC Holdings acquisitions to Covanta’s results of operations and financial condition, Covanta decided, during the third quarter of 2005, to combine the previously separate business segments of Insurance Services and Parent-Only operations into one reportable segment called Other Services. Covanta currently has two reportable business segments — Waste and Energy Services and Other Services.

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Waste and Energy Services

      The Waste and Energy Services segment includes Covanta Energy’s domestic and international businesses. Covanta Energy’s subsidiary Covanta Power International Holdings, Inc. (“CPIH”) and its subsidiaries engage in the independent power production business outside the United States.

      For all waste-to-energy projects, Covanta Energy receives revenue from two primary sources: fees it charges for operating projects or processing waste received and payments for electricity and steam sales. Covanta Energy also operates, and in some cases has ownership interests in, transfer stations and landfills which generate revenue from waste disposal fees or operating fees. In addition, Covanta Energy owns and in some cases operates other renewable energy projects in the United States which generate electricity from wood waste, landfill gas, and hydroelectric resources. The electricity from these projects is sold to utilities. For these projects, Covanta Energy receives revenue from electricity sales, and in some cases cash from equity distributions.

      Through CPIH, Covanta Energy also has ownership interests in, and/or operates, independent power production facilities in the Philippines, China, Bangladesh, India, and Costa Rica, and one waste-to-energy facility in Italy. The Costa Rica facilities generate electricity from hydroelectric resources while the other independent power production facilities generate electricity and steam by combusting coal, natural gas, or heavy fuel oil. For these projects, CPIH receives revenue from operating fees, electricity and steam sales, and in some cases cash from equity distributions.

Contract Structures

      Covanta Energy has 23 waste-to-energy projects at which it charges a fixed fee (which escalates over time pursuant to contractual indices Covanta Energy believes are appropriate to reflect price inflation) for its operation and maintenance services. These projects are referred to as having a “Service Fee” structure. Covanta Energy’s contracts at its Service Fee projects provide revenue that does not materially vary based on the amount of waste processed or energy generated and as such is relatively stable for the contract term. In addition, at most of Covanta Energy’s Service Fee projects, the operating subsidiary retains only a fraction of the energy revenues generated, with the balance used to provide a credit to the municipal client against its disposal costs. Therefore, in these projects, the municipal client derives most of the benefit and risk of energy production and changing energy prices.

      Covanta Energy also has 8 waste-to-energy projects at which it receives a per-ton fee under contracts for processing waste. These projects are referred to as having a “Tip Fee” structure. At its Tip Fee projects, Covanta Energy generally enters into long-term waste disposal contracts for a substantial portion of project disposal capacity and retains all of the energy revenue generated. Covanta Energy’s waste disposal and energy revenue from these projects is more dependent upon operating performance, and as such is subject to greater revenue fluctuation to the extent performance levels fluctuate.

      Under both structures, Covanta’s returns are expected to be stable if it does not incur material unexpected operation and maintenance costs or other expenses. In addition, most of Covanta Energy’s waste-to-energy project contracts are structured so that contract counterparties generally bear, or share in, the costs associated with events or circumstances not within Covanta Energy’s control, such as uninsured force majeure events and changes in legal requirements. The stability of Covanta Energy’s domestic revenues and returns could be affected by its ability to continue to enforce these obligations. Also, at some of Covanta Energy’s waste-to-energy facilities, commodity price risk is mitigated by passing through commodity costs to contract counterparties. With respect to its domestic and international independent power projects, such structural features generally do not exist because either Covanta Energy operates and maintains such facilities for its own account or does so on a cost-plus basis rather than a fixed-fee basis.

      Certain energy contracts related to domestic projects provide for energy sales prices linked to the “avoided costs” of producing such energy and, therefore, energy revenues fluctuate with various economic factors. Three of Covanta Energy’s waste-to-energy facilities have the ability to sell electricity under either

48

contracts or to the regional electricity grid without a contract, and therefore are subject to energy market price fluctuations.

      At some of Covanta Energy’s domestic and international independent power projects, Covanta Energy’s operating subsidiary purchases fuel in the open markets. Covanta Energy is exposed to fuel price risk at these projects. At other plants, fuel costs are contractually included in Covanta Energy’s electricity revenues, or fuel is provided by Covanta Energy’s customers. In some of Covanta Energy’s international projects, the project entity (which in some cases is not a subsidiary of Covanta Energy) has entered into long-term fuel purchase contracts that protect the project from changes in fuel prices, provided counterparties to such contracts perform their commitments.

Seasonal Effects

      Covanta Energy’s quarterly operating income from domestic and international operations within the same fiscal year typically differs substantially due to seasonal factors, primarily as a result of the timing of scheduled plant maintenance.

      Covanta Energy typically conducts scheduled maintenance periodically each year, which requires that individual boiler units temporarily cease operations. During these scheduled maintenance periods, Covanta Energy incurs material repair and maintenance expenses and receives less revenue, until the boiler units resume operations. This scheduled maintenance typically occurs during periods of off-peak electric demand in the spring and fall. The spring scheduled maintenance period is typically more extensive than scheduled maintenance conducted during the fall. As a result Covanta Energy has typically incurred its highest maintenance expense in the first half of the year. Given these factors, Covanta Energy has typically experienced lower operating income from its projects during the first six months of each year, and higher operating income during the second six months of each year.

Contract Duration

      Covanta Energy operates its domestic waste-to-energy projects under long-term agreements. Energy sales contracts at Covanta Energy-owned waste-to-energy projects generally expire at or after the date on which that project’s agreement expires. Expiration of these contracts will subject Covanta Energy to greater market risk in maintaining and enhancing its revenues. As its agreements at municipally-owned projects expire, Covanta Energy will seek to enter into renewal or replacement contracts to continue operating such projects. As its agreements at facilities it owns begin to expire, Covanta Energy intends to seek replacement or additional contracts for waste supplies. Because project debt on these facilities will be paid off at such time, Covanta Energy believes it will be able to offer disposal services at rates that will attract sufficient quantities of waste and provide acceptable revenues. Covanta Energy will seek to bid competitively in the market for additional contracts to operate other facilities as similar contracts of other vendors expire. At Covanta Energy’s domestic facilities, the expiration of existing energy sales contracts will require Covanta Energy to sell project energy output either into the electricity grid or pursuant to new contracts. There can be no assurance that Covanta will be able to enter into such renewals, replacement or additional contracts, or that the terms available in the market at the time will be favorable to Covanta Energy. For additional information regarding contract expiration dates, see Item 1. Business.

Waste-to-Energy Project Ownership

      Covanta Energy operates many publicly-owned waste-to-energy facilities and owns and operates many other facilities. In addition, as a result of acquisitions of additional projects originally owned or operated by other vendors, Covanta Energy operates several projects under a lease structure where a third party lessor owns the project. Regardless of ownership structure, Covanta Energy provides the same service to its municipal client or customers.

      Under any of these ownership structures, the municipalities typically borrow funds to pay for the facility construction by issuing bonds. In a private ownership structure, the municipal entity loans the bond proceeds to Covanta Energy’s project subsidiary, and the facility is recorded as an asset, and the project debt is recorded

49

as a liability, on Covanta Energy’s consolidated balance sheet. In a public ownership structure, the municipality would fund the construction costs without loaning the bond proceeds to Covanta Energy.

      At all projects where a Service Fee structure exists (regardless of ownership structure), Covanta Energy’s municipal clients are generally responsible contractually for paying the project debt after construction is complete. At the 11 publicly-owned Service Fee projects Covanta Energy operates, the municipality pays periodic debt service directly to a trustee under an indenture. Covanta Energy owns 12 projects where a Service Fee structure exists, and at these projects the municipal client pays debt service as a component of a monthly service fee payment to Covanta Energy. The debt service payment is retained by a trustee, and is not held or available to Covanta Energy for general use. At these projects, Covanta Energy records on its consolidated financial statements revenue with respect to debt service (both principal and interest) on project debt, and interest expense on project debt. For Covanta Energy-owned projects, all cash held by trustees is recorded as restricted funds held in trust on its consolidated balance sheet.

      Covanta Energy owns or leases 8 projects where a Tip Fee structure exists and neither debt service nor lease rent is expressly included in the fee Covanta Energy is paid. Accordingly, Covanta Energy does not record revenue reflecting principal on this project debt or on lease rent. Its operating subsidiaries for these projects make equal monthly deposits with their respective project trustees in amounts sufficient for the trustees to pay principal and interest, or lease rent, when due.

      The term of Covanta Energy’s operating contracts with its municipal clients generally coincides with the term of the bonds issued to pay for the project construction. Therefore, another important difference between public and private ownership of Covanta Energy’s waste-to-energy projects is project ownership after these contracts expire. In many cases, the municipality has contractual rights (not obligations) to extend the contract. If a contract is not extended on a publicly-owned project, Covanta Energy’s role, and its revenue, with respect to that project would cease. If a contract is not extended on a Covanta Energy-owned project, it would be free to enter into new revenue generating contracts for waste supply (with the municipality, other municipalities, or private waste haulers) and for electricity or steam sales. Covanta Energy would in such cases have no remaining project debt to repay from project revenue, and would be entitled to retain 100% of energy sales revenue.

Other Factors Affecting Performance

      Covanta Energy has historically performed its operating obligations without experiencing material unexpected service interruptions or incurring material increases in costs. In addition, with respect to many of its contracts at domestic projects, Covanta Energy generally has limited its exposure for risks not within its control. With respect to projects acquired in the ARC Holdings acquisition, Covanta Energy has assumed contracts where there is less contractual protection against such risks and more exposure to market influences. For additional information about such risks and damages that Covanta Energy may owe for its unexcused operating performance failures, see the risk factors set forth under the sub-heading Item 1A. Risk Factors — Waste and Energy Services Business. In monitoring and assessing the ongoing operating and financial performance of Covanta Energy’s businesses, management focuses on certain key factors: tons of waste processed, electricity and steam sold, and boiler availability.

      Covanta Energy’s ability to meet or exceed historical levels of performance at projects, and its general financial performance, is affected by the following:

•  Seasonal or long-term changes in market prices for waste, energy, or scrap metals, for projects where Covanta Energy sells into those markets;

•  Seasonal, geographic and other variations in the heat content of waste processed, and thereby the amount of waste that can be processed by a waste-to-energy facility;

•  Its ability to avoid unexpected increases in operating and maintenance costs while ensuring that adequate facility maintenance is conducted so that historic levels of operating performance can be sustained;

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•  Contract counterparties’ ability to fulfill their obligations, including the ability of Covanta Energy’s various municipal customers to supply waste in contractually committed amounts, and the availability of alternate or additional sources of waste if excess processing capacity exists at Covanta Energy’s facilities; and

•  The availability and adequacy of insurance to cover losses from business interruption in the event of casualty or other insured events.

      General financial performance at CPIH’s international projects is affected by the following:

•  Changes in fuel price for projects in which such costs are not completely passed through to the electricity purchaser through revenue adjustments, or delays in the effectiveness of revenue adjustments;

•  The amounts of electricity actually requested by purchasers of electricity, and whether or when such requests are made, CPIH’s facilities are then available to deliver such electricity;

•  CPIH’s ability to avoid unexpected increases in operating and maintenance costs while ensuring that adequate facility maintenance is conducted so that historic levels of operating performance can be sustained;

•  The financial condition and creditworthiness of purchasers of power and services provided by CPIH;

•  Fluctuations in the value of the domestic currency against the value of the U.S. dollar for projects in which CPIH is paid in whole or in part in the domestic currency of the host country; and

•  Political risks inherent to the international business which could affect both the ability to operate the project in conformance with existing agreements and the repatriation of dividends from the host country.

Business Development

      Covanta’s opportunities for growth by investing in new development opportunities will be limited by Covanta Energy’s debt covenants, as well as by competition from other companies in the waste disposal and energy businesses. Covanta Energy’s business is capital intensive since it is based upon building and operating municipal solid waste processing and energy generating projects. In order to provide meaningful growth, Covanta must be able to invest its own funds, obtain equity or debt financing, and provide support to its operating subsidiaries. Covanta’s domestic project development has recently concentrated on working with its client communities to expand existing waste-to-energy project capacities, and it has one project in advanced stages of development and another under construction. Covanta is pursuing additional project expansion opportunities, as well as opportunities in businesses ancillary to its existing business, such as additional waste transfer, transportation, processing and landfill businesses. Covanta is also pursuing international waste and/or energy business opportunities, particularly in markets where the regulatory environment or other factors encourage technologies such as waste-to-energy in order to reduce dependence on landfilling, such as Italy, where Covanta has an existing presence, as well as the United Kingdom.

Other Services

      Covanta’s Other Services segment is comprised of the parent company and insurance subsidiaries operations. Parent company operations prior to the acquisition of Covanta Energy on March 10, 2004, primarily included general and administrative expense related to officer salaries, legal and other professional fees and insurance. Subsequent to the acquisition of Covanta Energy, these expenses have been reimbursed by Covanta Energy under a corporate services agreement. The parent company operations also include income earned on its investments.

      The operations of Covanta’s insurance subsidiary, National American Insurance Company of California (“NAICC”), and its subsidiary Valor Insurance Company, Incorporated (“Valor”), are primarily property and casualty insurance. Based upon the profitability of its insurance lines, NAICC has responded to expand,

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contract or cease issuing certain of its insurance policies. For example, effective July 2003, the decision was made to focus exclusively on the California non-standard personal automobile insurance market. In contrast, in November, 2004 NAICC ended a self-imposed moratorium and commenced writing a new non-standard automobile program under a new rate and class plan. NAICC, from time to time, has also entered into a quota share reinsurance agreement based upon its view of underwriting risk, its reserves and internal cost structure, in order to reduce its potential exposure to outstanding policies.

      As a result of declining net premium production, NAICC’s investment base has steadily declined, its reserve adjustments on discontinued lines have disproportionately impacted current operating ratios and it continues to lose operating leverage. As a result of positive results in the non-standard automobile program in 2005 despite soft market conditions, NAICC cancelled the reinsurance programs effective January 1, 2006 in an attempt to retain more net premium.

RESULTS OF OPERATIONS

      As discussed above, Covanta combined the previously separate business segments of its insurance operations and its parent-only operations into one reportable segment referred to as “Other Services” during the third quarter of 2005. Therefore, Covanta currently has two reportable business segments — Waste and Energy Services and Other Services.

      The results of operations for the years ended December 31, 2004 and 2005 are not representative of Covanta’s ongoing results since Covanta only included Covanta Energy’s and ARC Holdings’ results of operations in its consolidated results of operations from March 11, 2004 and June 25, 2005 forward, respectively.

      Therefore, given the significance of the Covanta Energy and ARC Holdings acquisition to Covanta’s current and future results of operations and financial condition, Covanta believes that an understanding of its reported results, trends and ongoing performance is enhanced by presenting results on a pro forma basis at both the consolidated and Waste and Energy Services segment levels. Covanta’s consolidated and segment results of operations, as reported and where applicable, on a pro forma basis, are summarized in the tables and discussions below. The pro forma basis presentation assumes that the acquisitions of Covanta Energy and ARC Holdings both occurred on January 1, 2004. The pro forma adjustments are described on page 62.

      The pro forma financial information is presented for information purposes only and is not indicative of the results of operations that would have been achieved if the acquisitions had taken place at the beginning of each period or that may result in the future. In addition, the pro forma information provided below has not been adjusted to reflect any operating efficiencies that may be realized as a result of the ARC Holdings acquisition.

      The comparability of the information provided below with respect to Covanta’s revenue, expense and certain other items for periods during each of the years presented was affected materially by several factors in addition to the Covanta Energy and ARC Holdings acquisitions. These factors principally include:

•  The exclusion of revenue and expense after May 2004 relating to the operations of the Philippines Magellan Project (“MCI facility”), which commenced a reorganization proceeding under Philippine law on May 31, 2004, and is no longer included as a consolidated subsidiary after such date;

•  The reduction of revenue and expense after August 2004 relating to the Philippines Edison Bataan facility, which ceased operations due to the expiration and termination of energy contracts; and

•  The emergence of the Remaining Debtors involved in the Lake County, Florida and Warren County, New Jersey waste-to-energy facilities from bankruptcy on December 14, 2004 and December 15, 2005, respectively, and their inclusion as consolidated subsidiaries since their respective emergence dates.

      The factors noted above must be taken into account in developing meaningful comparisons between the periods compared below.

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Results of Operations — Year Ended December 31, 2005 vs. Year Ended December 31, 2004

Consolidated Results

      Given the significance of the Covanta Energy and ARC Holdings acquisitions to Covanta’s business, results of operations and financial condition, Covanta decided, during the third quarter of 2005, to combine the previously separate business segments of Insurance Services and Parent-only operations into one reportable segment referred to as “Other Services.” Certain prior period amounts, such as parent investment income, have been reclassified in the consolidated financial statements to conform to the current period presentation. Basic and diluted earnings per share and the average shares used in the calculation of basic and diluted earnings per share and book value per share of common stock and shares of common stock outstanding for all periods have been adjusted retroactively to reflect the bonus element contained in the rights offerings conducted in May 2004 and June 2005.

      Covanta’s consolidated results of operations on both a reported and pro forma basis are presented in the table below (in thousands of dollars, except per share amounts):

	For the Years Ended December 31,
	Reported						Pro Forma
	2005			2004			2005			2004
							(Unaudited)
CONSOLIDATED RESULTS OF OPERATIONS
Total operating revenues	$	978,763		$	576,196		$	1,209,075		$	1,204,481
Total operating expenses		832,547			499,326			1,017,743			1,011,580
Operating income		146,216			76,870			191,332			192,901
OTHER INCOME (EXPENSE)
Investment income		6,129			2,343			7,354			4,867
Interest expense		(89,973	)		(43,739	)		(121,304	)		(122,391	)
Gain on derivative instruments, ACL warrants		15,193			—			15,193			—
Total other expense		(68,651	)		(41,396	)		(98,757	)		(117,524	)
Income before income taxes, minority interests and equity in net income from unconsolidated investments		77,565			35,474			92,575			75,377
Income tax expense		(34,651	)		(11,535	)		(41,659	)		(34,673	)
Minority interests		(9,197	)		(6,869	)		(9,253	)		(9,674	)
Equity in net income from unconsolidated investments		25,609			17,024			25,609			21,918
NET INCOME	$	59,326		$	34,094		$	67,272		$	52,948
EARNINGS PER SHARE OF COMMON STOCK:
Basic	$	0.49		$	0.39		$	0.48		$	0.38
Diluted	$	0.46		$	0.37		$	0.46		$	0.37

      The following general discussions should be read in conjunction with the above table, the consolidated financial statements and the notes to those statements and other financial information appearing and referred to elsewhere in this report. Additional detail on comparable revenues, costs and expenses, and operating income of Covanta Energy is provided in the pro forma Waste and Energy Services segment discussion and reported Other Services segment discussion below.

Consolidated Reported Results

      Covanta’s net income increased by $25.2 million for the year ended December 31, 2005, as compared to 2004. Operating income for the Waste and Energy Services segment increased by $66.5 million for the year ended December 31, 2005, as compared to 2004. The increase in operating income resulted primarily from the Covanta Energy and ARC Holdings acquisitions. Operating expenses include $10.3 million of allocated

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expenses related to the California Grantor Trust Settlement. For additional information, see Note 4. California Grantor Trust Settlement of the Notes. The year ended December 31, 2005 includes the write-off of deferred financing charges of $7.0 million on Covanta Energy’s prior domestic and international debt, as well as $6.7 million of restructuring and acquisition-related charges. Operating loss for the Other Services segment decreased by $2.8 million for the year ended December 31, 2005, as compared to 2004, primarily due to reduced general and administrative expenses.

      Total investment income increased by $3.8 million for the year ended December 31, 2005, as compared to 2004, primarily due to higher invested cash balances. Interest expense increased by $46.2 million for the year ended December 31, 2005, as compared to 2004, primarily due to the new financing arrangements put into place as part of the ARC Holdings acquisition in June 2005 and the write-off of deferred financing costs related to the debt incurred with the acquisition of Covanta Energy in 2004, which debt was refinanced in connection with the new financing arrangements. Equity in net income from unconsolidated investments increased by $8.6 million for the year ended December 31, 2005, as compared to 2004, primarily due to the acquisition of Covanta Energy, revenue adjustments which occurred in 2004 in addition to lower operating costs in 2005 at a project in the Philippines and lower project debt interest expense at projects in the Philippines and Bangladesh in 2005 as a result of project debt payments. As discussed in Note 20. Financial Instruments of the Notes, Covanta recorded a pre-tax gain on derivative instruments of $15.2 million for the year ended December 31, 2005 related to its investment in ACL warrants.

Consolidated Pro Forma Results

      Covanta’s net income increased by $14.3 million for the year ended December 31, 2005, as compared to 2004. Operating income for the Waste and Energy Services segment decreased by $4.4 million for the year ended December 31, 2005, as compared to 2004, primarily due to higher operating revenues offset by $10.3 million of allocated expenses related to the California Grantor Trust Settlement. Operating loss for the Other Services segment decreased by $2.8 million for the year ended December 31, 2005, as compared to 2004, primarily due to reduced general and administrative expenses.

      Total investment income increased by $2.5 million for the year ended December 31, 2005, as compared to 2004, primarily due to higher invested cash balances. Interest expense decreased $1.1 million for the year ended December 31, 2005, as compared to 2004. Equity in net income from unconsolidated investments increased by $3.7 million for the year ended December 31, 2005, as compared to 2004, primarily due to revenue adjustments which occurred in 2004 in addition to lower operating costs in 2005 at a project in the Philippines and lower project debt interest expense at projects in the Philippines and Bangladesh in 2005 as a result of project debt payments. As discussed in Note 20. Financial Instruments of the Notes, Covanta recorded a pre-tax gain on derivative instruments of $15.2 million for the year ended December 31, 2005 related to its investment in ACL warrants.

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Waste and Energy Services Results

      Waste and Energy Services results of operations on both a reported and pro forma basis are presented in the table below (in thousands of dollars):

	For the Years Ended December 31,
	Reported						Pro Forma
	2005			2004			2005			2004
							(Unaudited)
Waste and service revenues	$	638,503		$	372,748		$	789,155		$	783,252
Electricity and steam sales		322,770			181,074			402,430			398,797
Other operating revenues		2,693			1,506			2,693			1,564
Total operating revenues		963,966			555,328			1,194,278			1,183,613
Plant operating expenses		557,490			348,867			664,243			657,619
Depreciation and amortization expense		124,814			53,131			184,653			184,910
Net interest expense on project debt		52,431			32,586			67,497			76,465
Other operating income		(887	)		(721	)		(368	)		(732	)
General and administrative expenses		66,364			41,267			76,098			69,122
California Grantor Trust Settlement		10,342			—			10,342			—
Restructuring charges		2,765			—			—			—
Acquisition-related charges		3,950			—			—			—
Total operating expenses		817,269			475,130			1,002,465			987,384
Operating income	$	146,697		$	80,198		$	191,813		$	196,229

      The following business segment discussion is presented on a pro forma basis only. Management believes that due to the significance of the Covanta Energy and ARC Holdings acquisitions to Covanta’s current and future results of operations and financial condition that an understanding of Covanta’s reported results, trends and ongoing performance is enhanced by a discussion of the Waste and Energy Services Segment on a pro forma basis. The following general discussions should be read in conjunction with the above table, the consolidated financial statements and the Notes. Additional detail on comparable revenues, costs and expenses, and operating income, within the Waste and Energy Services segment is provided in the pro forma domestic and international business discussions below.

      Operating income remained relatively unchanged for the year ended December 31, 2005, as compared to 2004, primarily due increased revenues offset by allocated expenses related to the California Grantor Trust Settlement. Revenues increased $10.7 million for the year ended December 31, 2005 compared to 2004, primarily from increases in waste and service revenues. Total operating expenses for the year ended December 31, 2005 increased by $15.1 million, as compared to 2004, as a result of higher plant operating expenses and lower project debt interest expense in both the domestic and international operations offset by an increase in domestic general and administrative expenses and the California Grantor Trust Settlement.

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Domestic Business

      The domestic business results of operations on both a reported and pro forma basis are presented in the table below (in thousands of dollars):

	For the Years Ended December 31,
	Reported					Pro Forma
	2005			2004		2005			2004
						(Unaudited)
Waste and service revenues	$	634,268		$	369,583	$	784,920		$	778,917
Electricity and steam sales		194,057			81,894		273,717			265,252
Other operating revenues		2,693			1,506		2,693			1,564
Total operating revenues		831,018			452,983		1,061,330			1,045,733
Plant operating expenses		469,493			280,707		576,246			564,223
Depreciation and amortization		116,083			46,537		175,922			175,840
Net interest expense on project debt		44,762			23,786		59,828			64,575
Other operating (income) expenses		(3,651	)		618		(3,132	)		314
General and administrative expenses		61,397			36,334		71,131			63,770
California Grantor Trust Settlement		10,342			—		10,342			—
Acquisition-related charges		3,950			—		—			—
Total operating expenses		702,376			387,982		890,337			868,722
Operating income	$	128,642		$	65,001	$	170,993		$	177,011

      The following discussion is presented on a pro forma basis only.

      Total domestic revenue increased by $15.6 million primarily due to contract fee service escalation and higher energy prices as further described below.

      Waste and service revenues for the year ended December 31, 2005 increased by $6.0 million compared to 2004.

•  Revenue from waste-to-energy projects structured with Service Fee agreements increased by $7.4 million;

•  Revenues increased $4.1 million primarily due to contractual escalations of $10.6 million offset by a reduction of $3.9 million related to lower revenues earned explicitly to service debt and a reduction of $2.6 million in additional waste service fees; and

•  Revenues increased by $3.3 million due to one-time events including the impact of the emergence of a subsidiary from bankruptcy which was partially offset by the termination or sale of certain non-core operations primarily in the fourth quarter of 2004 and a reduction of service fees at one facility due to a contract amendment in exchange for reduced letter of credit obligations;

•  Revenue from waste-to-energy projects structured with Tip Fee agreements increased by $1.6 million. Revenues for waste handled increased $4.5 million primarily driven by waste pricing offset by a reduction of $2.9 million related to intermittent low margin waste brokered; and

•  Other waste and service fee revenues decreased by $3.0 million primarily due to lower selling price for recovered ferrous and non-ferrous metal.

      Electricity and steam sales for the year ended December 31, 2005 increased $8.5 million compared to 2004. Revenues increased $9.9 million primarily driven by higher energy rates partially offset by a biogas project that was shut down in the fourth quarter of 2004.

      Plant operating costs for the year ended December 31, 2005 were $12 million higher compared with 2004. This increase was primarily due to the normal escalation of costs such as wages and benefits, as well as

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additional scheduled maintenance and a subsidiary emerging from bankruptcy partially offset by a reduction in disposal costs related to brokered waste and the impact of the termination or sale of certain of our non-core operations.

      Depreciation and amortization for the year ended December 31, 2005 was comparable to 2004.

      Net interest expense on project debt for the year ended December 31, 2005 decreased $4.7 million, compared to 2004, primarily as a result of lower project debt balances.

      Other operating income increased by $3.5 million in 2005, compared to 2004, primarily due to a gain at a facility related to a debt refinancing in April 2005 and to third quarter insurance recoveries.

      General and administrative expenses increased $7.4 million in 2005 compared with 2004. This increase was primarily due to wage escalations, additional professional and consulting fees and an increase in non-cash stock compensation expense resulting from additional grants in 2005.

      During the fourth quarter of 2005, Covanta incurred $10.3 million of allocated expenses relating to the California Grantor Trust Settlement. For additional information, see Note 4. California Grantor Trust Settlement of the Notes.

International Business

      The international business results of operations on both a reported and pro forma basis are presented in the table below (in thousands of dollars):

	For the Years Ended December 31,
	Reported					Pro Forma
	2005		2004			2005		2004
						(Unaudited)
Waste and service revenues	$	4,235	$	3,165		$	4,235	$	4,335
Electricity and steam sales		128,713		99,180			128,713		133,545
Total revenues		132,948		102,345			132,948		137,880
Plant operating expenses		87,997		68,160			87,997		93,396
Depreciation and amortization		8,731		6,594			8,731		9,070
Net interest expense on project debt		7,669		8,800			7,669		11,890
Other operating expenses (income)		2,764		(1,339	)		2,764		(1,046	)
General and administrative expenses		4,967		4,933			4,967		5,352
Restructuring charges		2,765		—			—		—
Total operating expenses		114,893		87,148			112,128		118,662
Operating income	$	18,055	$	15,197		$	20,820	$	19,218

      The following discussion is presented on a pro forma basis only.

      Total revenues for the international business for 2005 decreased $4.9 million primarily due to elimination of revenue from marginal businesses in 2004, offset by increased tariffs due to higher fuel prices as described below. This decrease was primarily due to a $7.5 million decrease from the 2004 expiration of an energy contract in the Philippines, a $4.1 million decrease from the deconsolidation of the MCI facility in May 2004, as well as a $2.4 million decrease due to lower demand at the Huantai facility in China. These decreases were partially offset by an $8.1 million increase primarily due to increased tariffs, which resulted from higher fuel prices, at two facilities in India in 2005; as well as a $0.8 million increase in steam revenues from the Yanjiang facility in China.

      Plant operating costs were lower by $5.4 million in 2005 compared to 2004. Plant operating costs decreased primarily as a result of a $4.9 million decrease in costs from the expiration of an energy contract in the Philippines, a $4.6 million reduction in costs due to the deconsolidation of the MCI facility in the

57

Philippines in May 2004, as well as a $2.3 million decrease due to lower generation at the Huantai facility in China. These decreases were partially offset by a $6.1 million increase in plant operating costs due primarily to higher fuel prices at two facilities in India.

      Net interest expense on project debt for 2005 decreased $4.2 million compared to 2004. The decrease was primarily due to lower expenses at two Indian facilities resulting from the October 2004 refinancing and scheduled quarterly pay down of project debt, as well as the deconsolidation of the MCI facility in May 2004.

      Other operating expense increased by $3.8 million in 2005 compared to 2004 primarily due to the $1.7 million write-off of the remaining assets at the Edison Bataan facility in the Philippines, and a 2005 foreign currency exchange loss of $1.0 million, compared to a $0.2 million gain recorded in 2004 on a euro-denominated note receivable from the Trezzo project in Italy and dollar-denominated debt in India.

Other Services Results

      Other Services reported results of operations are presented in the table below (in thousands of dollars):

	For the Years Ended
	December 31,
	2005			2004
OPERATING REVENUES:
Net earned premiums	$	12,685		$	17,998
Net investment income		1,999			2,405
Net realized investment (losses) gains		(71	)		201
Other income		184			264
Total other operating revenues		14,797			20,868
Other operating expenses		11,902			17,281
Depreciation and amortization		111			151
General and administrative expenses		3,265			6,764
Total operating expenses		15,278			24,196
Operating loss	$	(481	)	$	(3,328	)

      Net written premiums decreased by $2.7 million for the year ended December 31, 2005 as compared to 2004. The decrease in net written premiums for 2005 was attributable to the insurance business entering into quota share arrangements as described in the Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview — Other Service section above.

      Net earned premiums decreased by $5.3 million for the year ended December 31, 2005 as compared to 2004. The change in net earned premiums during those periods was directly related to the change in net written premiums and the run-off of the commercial automobile program.

      Other operating expenses decreased by $5.4 million for the year ended December 31, 2005 as compared to 2004. Other operating expenses consists of net loss and loss adjustment expenses (“LAE”), and policy acquisition costs as described below.

      Net loss and LAE decreased by $2.9 million for the year ended December 31, 2005 as compared to 2004. The loss and LAE ratio worsened for the year ended December 31, 2005 over the comparable period in 2004 due to the underwriting performance of the new program which was not as profitable as the renewal book. The resulting loss and LAE ratios were 78.3% and 71.5% for the years ended December 31, 2005 and 2004, respectively. For both 2005 and 2004, adverse reserve development accounted for approximately 14.0% of the net loss and LAE ratio.

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      Policy acquisition costs decreased by $2.5 million for the year ended December 31, 2005 as compared to 2004. As a percentage of net earned premiums, policy acquisition costs were 15.5% and 24.6% for the year ended December 31, 2005 and 2004, respectively. Policy acquisition costs decreased compared to the 2004 period due to reduced profit commissions incurred related to non-standard personal automobile and from ceding commissions earned under reinsurance agreements during 2005.

      General and administrative expenses decreased by $3.5 million for the year ended December 31, 2005 as compared to 2004. Reductions in administrative personnel and rent in the insurance business contributed to the decrease in general and administrative expenses. Decreases in parent company expenses were primarily the result of the corporate services agreement, entered into between Covanta and Covanta Energy on March 10, 2004, pursuant to which Covanta provided to Covanta Energy, at Covanta Energy’s expense, certain administrative and professional services.

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Pro Forma Reconciliations

      The following tables provides a reconciliation from the as reported results to the pro forma results presented above for Covanta and its Waste and Energy Services segment where applicable (in thousands of dollars, except per share amounts). Notes to the pro forma reconciliations begin directly after the tables.

CONSOLIDATED PRO FORMA RECONCILIATIONS

		Year Ended December 31, 2005												Year Ended December 31, 2004
					Acquisition			Pro forma									Acquisition			Pro Forma
		As Reported			Activity			Adjust.			Pro Forma			As Reported			Activity			Adjust.			Pro Forma
		(Unaudited)
Operating revenues
	Waste and service revenues	$	638,503		$	148,792		$	1,860		$	789,155		$	372,748		$	411,263		$	(759	)	$	783,252
	Electricity and steam sales		322,770			79,660			—			402,430			181,074			218,258			(535	)		398,797
	Other operating revenues		17,490			—			—			17,490			22,374			58			—			22,432
	Total operating revenues		978,763			228,452			1,860			1,209,075			576,196			629,579			(1,294	)		1,204,481
Operating expenses
	Plant operating expenses		557,490			103,617			3,136			664,243			348,867			306,025			2,727			657,619
	Depreciation and amortization expense		124,925			57,032			2,807			184,764			53,282			133,973			(2,194	)		185,061
	Net interest expense on project debt		52,431			13,964			1,102			67,497			32,586			41.786			2,093			76,465
	Other operating expenses		11,015			519			—			11,534			16,560			(127	)		116			16,549
	General and administrative expenses		69,629			52,133			(42,399	)		79,363			48,031			34,210			(6,355	)		75,886
	California Grantor Trust Settlement		10,342			—			—			10,342			—			—			—			—
	Restructuring charges		2,765			—			(2,765	)		—			—			—			—			—
	Acquisition-related charges		3,950			—			(3,950	)		—			—			—			—			—
	Reorganization items		—			—			—			—			—			(58,282	)		58,282			—
	Fresh start adjustments		—			—			—			—			—			(399,063	)		399,063			—
	Gain on extinguishment of debt		—			—			—			—			—			510,680			(510,680	)		—
	Total operating expenses		832,547			227,265			(42,069	)		1,017,743			499,326			569,202			(56,948	)		1,011,580
	Operating Income		146,216			1,187			43,929			191,332			76,870			60,377			55,654			192,901
Other Income (expenses)
	Investment income		6,129			1,225			—			7,354			2,343			2,524			—			4,867
	Interest expense		(89,973	)		(26,368	)		(4,963	)		(121,304	)		(43,739	)		(66,208	)		(12,444	)		(122,391	)
	Gain on derivative instruments, ACL warrants		15,193			—			—			15,193			—			—			—			—
	Total other expenses		(68,651	)		(25,143	)		(4,963	)		(98,757	)		(41,396	)		(63,684	)		(12,444	)		(117,524	)
Income before Income tax expense, minority interest and equity in net income from unconsolidated investments			77,565			(23,956	)		38,966			92,575			35,474			(3,307	)		43,210			75,377
Income tax expense			(34,651	)		6,033			(13,041	)		(41,659	)		(11,535	)		(48,058	)		24,920			(34,673	)
Minority interest			(9,197	)		(56	)		—			(9,253	)		(6,869	)		(3,422	)		617			(9,674	)
Equity in net income of unconsolidated investments			25,609			—			—			25,609			17,024			3,924			970			21,918
Net income		$	59,326		$	(17,979	)	$	25,925		$	67,272		$	34,094		$	(50,863	)	$	69,717		$	52,948
Earnings Per Share:
Basic		$	0.49								$	0.48		$	0.39								$	0.38
Diluted		$	0.46								$	0.46		$	0.37								$	0.37

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WASTE AND ENERGY SERVICES PRO FORMA RECONCILIATIONS

Domestic

		Year Ended December 31, 2005											Year Ended December 31, 2004
					Acquisition		Pro Forma								Acquisition			Pro Forma
		As Reported			Activity		Adjust.			Pro Forma			As Reported		Activity			Adjust.			Pro Forma
		(Unaudited)
Operating revenues
	Waste and service revenues	$	634,268		$	148,792	$	1,860		$	784,920		$	369,583	$	410,093		$	(759	)	$	778,917
	Electricity and steam sales		194,057			79,660		—			273,717			81,894		183,893			(535	)		265,252
	Other operating revenues		2,693			—		—			2,693			1,506		58			—			1,564
	Total operating revenues		831,018			228,452		1,860			1,061,330			452,983		594,044			(1,294	)		1,045,733
Operating expenses
	Plant operating expenses		469,493			103,617		3,136			576,246			280,707		280,789			2,727			564,223
	Depreciation and amortization expense		116,083			57,032		2,807			175,922			46,537		130,606			(1,303	)		175,840
	Net interest expense on project debt		44,762			13,964		1,102			59,828			23,786		38,696			2,093			64,575
	Other operating expenses		(3,651	)		519		—			(3,132	)		618		(420	)		116			314
	General and administrative expenses		61,397			52,133		(42,399	)		71,131			36,334		33,791			(6,355	)		63,770
	California Grantor Trust Settlement		10,342			—		—			10,342			—		—			—			—
	Acquisition-related charges		3,950			—		(3,950	)		—			—		—			—			—
	Reorganization items		—			—		—			—			—		(58,282	)		58,282			—
	Fresh start adjustments		—			—		—			—			—		(282,924	)		282,924			—
	Gain on extinguishment of debt		—			—		—			—			—		510,680			(510,680	)		—
	Total operating expenses		702,376			227,265		(39,304	)		890,337			387,982		652,936			(172,196	)		868,722
	Operating Income	$	128,642		$	1,187	$	41,164		$	170,993		$	65,001	$	(58,892	)	$	170,902		$	177,011

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International

		Year Ended December 31, 2005									Year Ended December 31, 2004
				Acquisition		Pro Forma								Acquisition			Fro forma
		As Reported		Activity		Adjust.			Pro Forma		As Reported			Activity			Adjust.			Pro Forma
									(Unaudited)
Operating revenues
	Waste and service revenues	$	4,235	$	—	$	—		$	4,235	$	3,165		$	1,170		$	—		$	4,335
	Electricity and steam sales		128,713		—		—			128,713		99,180			34,365			—			133,545
	Other operating revenues		—		—		—			—		—			—			—			—
	Total operating revenues		132,948		—		—			132,948		102,345			35,535			—			137,880
Operating expenses
	Plant operating expenses		87,997		—		—			87,997		68,160			25,236			—			93,396
	Depreciation and amortization expense		8,731		—		—			8,731		6,594			3,367			(891	)		9,070
	Net interest expense on project debt		7,669		—		—			7,669		8,800			3,090			—			11,890
	Other operating expenses		2,764		—		—			2,764		(1,339	)		293			—			(1,046	)
	General and administrative expenses		4,967		—		—			4,967		4,933			419			—			5,352
	Restructuring charges		2,765		—		(2,765	)		—		—			—			—			—
	Fresh start adjustments		—		—		—			—		—			(116,139	)		116,139			—
	Total operating expenses		114,893		—		(2,765	)		112,128		87,148			(83,734	)		115,248			118,662
	Operating income	$	18,055	$	—	$	2,765		$	20,820	$	15,197		$	119,269		$	(115,248	)	$	19,218

Notes To Pro Forma Reconciliations

Pro Forma Assumptions

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

Covanta Energy Transactions:

•  Covanta purchased Covanta Energy on January 1, 2004, on the same terms described in “Acquisitions  — Covanta Energy” in Note 3. Acquisitions and Dispositions of the Notes.

•  The debt structure of Covanta Energy and CPIH that was in place upon Covanta Energy’s emergence from bankruptcy on March 10, 2004, was assumed to be refinanced in connection with the acquisition of ARC Holdings as of January 1, 2004 as more fully described in Note 3. Acquisitions and Dispositions of the Notes.

ARC Holdings’ Transactions:

•  Covanta, through Covanta Energy, purchased 100% of the issued and outstanding shares of ARC Holdings’ capital stock on January 1, 2004 on the same terms described in “Acquisitions — ARC Holdings” in Note 3. Acquisitions and Dispositions of the Notes.

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•  On April 30, 2004, as a result of series of transactions that ARC Holdings’ then owners entered into, ARC Holdings gained effective control of Covanta Ref-Fuel LLC (the “Ownership Change”), and began consolidating its balance sheet and results of operations thereafter. It is assumed that these transactions occurred as of January 1, 2004.

Acquisition Activity:

•  Represents Covanta Energy’s results of operations prior to March 11, 2004 for the pro forma year ended December 31, 2004.

•  Represents ARC Holdings’ results of operations prior to June 25, 2005 for the pro forma year ended December 31, 2005 and for the pro forma year ended December 31, 2004 including the period January 1, to April 30, 2004 as a result of the Ownership Change.

Pro Forma Adjustments

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

•  To exclude the operating results of the Waste and Energy Services domestic business comprising the Remaining Debtors for the period January 1 through March 10, 2004 (“predecessor period”).

•  Waste and service revenues: To record additional revenues prior to June 25, 2005 as a result of conforming debt service revenue recognition at ARC Holdings subsidiaries to Covanta Energy’s debt service revenue recognition policy, which policy has been implemented by ARC Holdings since its acquisition.

•  Plant operating costs: To record as rent expense the net impact of the change in the fair value of a lease owned by an operating subsidiary of ARC Holdings as of January 1, 2004.

•  Depreciation and amortization: To reverse historical depreciation and amortization expense and to record pro forma depreciation and amortization expense based on fair values assigned to Covanta Energy’s and ARC Holdings’ property, plant and equipment and amortizable intangible assets prior to their respective acquisition dates of March 10, 2004 and June 24, 2005. Additionally, to adjust for changes in valuation estimates of ARC Holdings and asset life assumptions in the quarter ended December 31, 2005.

•  General and administrative: To reverse the buy out of ARC Holdings’ stock option plan at the acquisition date of ARC Holdings and to reverse ARC Holdings’ compensation and related expenses of its executives in the periods prior to the acquisition date.

•  Net interest expense on project debt: To reverse Covanta Energy’s project debt prior bond issue cost amortization and to reverse ARC Holdings’ project debt prior bond issuance cost amortization and to record the impact of fair value adjustments to Covanta Energy’s and ARC Holdings’ project debt prior to their respective acquisition dates.

•  Restructuring charges: To reverse severance and incentive payments to CPIH executives as a result of overhead reductions made possible by the elimination of CPIH’s separate capital structure and debt repayments in connection with the refinancing of Covanta Energy’s and CPIH’s debt.

•  Acquisition related charges: To reverse employee bonuses and integration expenses as a result of the acquisition of ARC Holdings.

•  Reorganization items, fresh-start adjustments and gain on cancellation of pre-petition debt: To reverse the historical items resulting from Covanta Energy’s bankruptcy proceedings. Since the pro forma results of operations has been prepared on the basis that Covanta Energy’s emergence from bankruptcy and the business combination with Covanta both occurred on January 1, 2004, these items have been removed, as these transactions to effect Covanta Energy’s reorganization would have been completed and these items would have been recorded prior to January 1, 2004.

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•  Interest expense: To reverse Covanta Energy’s predecessor period and ARC Holdings’ pre-acquisition period amortization of deferred financing costs; to record the impact of the fair value adjustment to the intermediate debt of ARC Holdings; and to record the net adjustment to interest expense as a result of the new capital structure of Covanta Energy described in Management’s Discussion and Analysis of Liquidity and Capital Resources below. Additionally, to adjust for changes in valuation estimates of ARC Holdings debt premiums in the quarter ended December 31, 2005.

•  Income tax expense: To record the adjustment for the estimated income tax effects associated with the pro forma adjustments to pre-tax income and arrive at a blended assumed effective tax rate of 46% for the combined company for the year ended December 31, 2004 and 45% for the year ended December 31, 2005. Management used an effective tax rate rather than the combined federal and statutory rate based upon the nature of the permanent difference related to the pro forma adjustments.

•  Basic and diluted earnings per share and the average shares outstanding used in the calculation of basic and diluted earnings per share of common stock and shares of common stock outstanding for the pro forma year ended December 31, 2004 and the year ended December 31, 2005 have been adjusted, as necessary, to reflect the following equity transactions, as if they occurred on January 1, 2004, the issuance of: (1) 5.1 million shares to the bridge lenders relating to the Covanta Energy acquisition; (2) 27.4 million shares pursuant to a pro rata rights offering to all of Covanta’s stockholders on May 18, 2004 following the Covanta Energy acquisition; (3) 8.75 million shares pursuant to the conversion of notes issued in connection with the bridge financing related to the Covanta Energy acquisition; and (4) 66.7 million shares pursuant to a pro rata rights offering to all of Covanta’s stockholders on June 24, 2005 in connection with the ARC Holdings acquisition. In addition, diluted earnings per share and the weighted average shares used in the calculation of diluted earnings per share of common stock and shares of common stock outstanding for the pro forma year ended December 31, 2004 and the year ended December 31, 2005 have been adjusted, as necessary, to reflect Covanta’s offering to sell up to 5.7 million shares of Covanta’s common stock in the 9.25% Offering as if it occurred on January 1, 2004.

Results of Operations — Year Ended December 31, 2004 vs. Year Ended December 31, 2003

Consolidated Results

      For the year ended December 31, 2004, Covanta Energy’s results of operations are included in Covanta’s consolidated results since March 11, 2004. Covanta Energy’s operations are significantly larger than Covanta’s insurance business, which had constituted substantially all of its ongoing operations during 2003 and prior to March 11, 2004. As a result of the consummation of the Covanta Energy acquisition on March 10, 2004, the future performance of Covanta will predominantly reflect the performance of Covanta Energy’s operations.

      Covanta’s parent-only operations prior to the acquisition of Covanta Energy on March 10, 2004, primarily included general and administrative expense related to officer salaries, legal and other professional fees and insurance. Subsequent to the acquisition of Covanta Energy, these expenses are reimbursed by Covanta Energy under a corporate services agreement. Covanta’s parent-only operations also include income earned on its investments.

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      Covanta’s consolidated results of operations are presented in the table below (in thousands of dollars, except per share amounts):

	For the Years Ended
	December 31,
	2004			2003
CONSOLIDATED RESULTS OF OPERATIONS
Total operating revenues	$	576,196		$	41,123
Total operating expenses		499,326			55,463
Operating income		76,870			(14,340	)
OTHER INCOME (EXPENSE)
Investment income		2,343			1,434
Interest expense		(43,739	)		(1,424	)
Total other (expense) income		(41,396	)		10
Income (loss) before income tax expense, minority interests and equity in net income (loss) from unconsolidated investments		35,474			(14,330	)
Income tax expense		(11,535	)		(18	)
Minority interests		(6,869	)		—
Equity in net income (loss) from unconsolidated investments		17,024			(54,877	)
NET INCOME (LOSS)	$	34,094		$	(69,225	)
EARNINGS (LOSS) PER SHARE OF COMMON STOCK:
Basic	$	0.39		$	(1.05	)
Diluted	$	0.37		$	(1.05	)

      The following general discussions should be read in conjunction with the above table, the consolidated financial statements and the Notes and other financial information appearing and referred to elsewhere in this report.

      Covanta’s net income increased by $103.3 million for the year ended December 31, 2004, as compared to 2003 primarily due to the inclusion of income earned by Covanta Energy in 2004 on a consolidated basis and the loss incurred in 2003 as a result of Covanta’s $54.9 million write-down of its investment in ACL. Operating income was $76.9 million in 2004, comprised of the Waste and Energy Services operating income of $80.2 million and Other Services operating loss of $3.3 million.

      As a result of the Covanta Energy acquisition and the related addition of the Waste and Energy Services segment:

•  Total investment income increased by approximately $1.0 million for the year ended December 31, 2004, as compared to 2003, primarily due to higher invested cash balances; and

•  Interest expense increased by $42.3 million for the year ended December 31, 2004, as compared to 2003 due to additional debt of Covanta Energy which was included in Covanta’s consolidated financial statements after March 10, 2004, as well as the bridge financing incurred in connection with the acquisition of Covanta Energy.

      Equity in net income from unconsolidated investments increased by $71.9 million for the year ended December 31, 2004, as compared to 2003. In 2004, equity in net income from unconsolidated investments from the Waste and Energy Services segment was $17.0 million and in 2003, equity in net loss from unconsolidated investments of $54.9 million primarily related to Covanta’s subsidiaries engaged in the marine services industry which, beginning in 2003, were accounted for under the equity method following ACL’s bankruptcy filing in January 2003.

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Waste and Energy Services Results

      Due to the significance of the acquisition of ARC Holdings in June 2005 and Covanta Energy in March 2004, and Covanta Energy’s restructuring upon emergence from Chapter 11 proceedings in 2004, Covanta has elected to provide only a tabular presentation of its Waste and Energy Services segment’s actual results of operations from March 11, 2004 to December 31, 2004, in lieu of a discussion of Covanta Energy’s results of operations comparing December 31, 2004 to December 31, 2003. Since Covanta did not have any waste and energy operations in 2003, Covanta believes that a discussion of the Waste and Energy Services segment that compared 2004 to 2003 would not enhance a reader’s analysis or understanding of Covanta’s current business. Therefore, the reader is further directed to Covanta’s pro forma Management Discussion and Analysis of Financial Condition and Results of Operations for the periods December 31, 2005 compared to 2004 for a comprehensive analysis and discussion of its Waste and Energy Services segment. The following table presents the Waste and Energy Services segments domestic and international actual consolidated results of operations for the period since the acquisition (in thousands of dollars):

	For the Period March 11, 2004 through
	December 31, 2004
	Total Waste &
	Energy Services			Domestic		International
Waste and service revenues	$	372,748		$	369,583	$	3,165
Electricity and steam sales		181,074			81,894		99,180
Other operating revenues		1,506			1,506		—
Total operating revenues		555,328			452,983		102,345
Plant operating expenses		348,867			280,707		68,160
Depreciation and amortization expense		53,131			46,537		6,594
Net interest expense on project debt		32,586			23,786		8,800
Other operating (income) expenses		(721	)		618		(1,339	)
General and administrative expenses		41,267			36,334		4,933
Total operating expenses		475,130			387,982		87,148
Operating income	$	80,198		$	65,001	$	15,197

Other Services Results

      Other Services reported results of operations are presented below (in thousands of dollars):

	For the Years Ended
	December 31,
	2004			2003
OPERATING REVENUES:
Net earned premiums	$	17,998		$	35,851
Net investment income		2,405			3,999
Net realized investment gains		201			990
Other income		264			283
Total operating revenues		20,868			41,123
Other operating expenses		17,281			44,407
Depreciation and amortization		151			224
General and administrative expenses		6,764			10,832
Total operating expenses		24,196			55,463
Operating loss	$	(3,328	)	$	(14,340	)

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      Net earned premiums were $18.0 million and $35.9 million for the years ended 2004 and 2003. The significant decrease in earned premiums was a direct result of Covanta’s insurance business exiting the commercial automobile market in 2003. Net written premiums were $15.2 million for 2004 consisting entirely of non-standard personal automobile policies.

      Net investment income was $2.4 million and $4.0 million for 2004 and 2003, respectively. The decrease was primarily due to a decrease in the fixed income portfolio basis, as well as a reduction in the portfolio yield. The fixed income invested assets portfolio decreased by only $12.1 million in 2004 despite net loss and LAE reserves declining by $18.9 million. The differential was a result of management’s use of cash and short-term investments to satisfy the payment obligations. Due to the decrease in net written premiums on business placed in run-off noted above, NAICC also experienced negative underwriting cash flows. For the years ended 2004 and 2003, the weighted average yield on the bond portfolio was 3.8% and 4.9%, respectively. The effective duration of the portfolio at December 31, 2004 was 2.3 years which management believed was appropriate given the relative short-tail nature of the auto programs and projected run-off of all other lines of business.

      Net realized investment gains of $0.2 million were recognized in 2004 compared to $1.0 million in 2003. The difference in activity was attributed to management engaging new investment advisors in June 2003 to rebalance the portfolio to address extension, credit and reinvestment risk exposures. Concurrently, an improvement in equity investment returns and realizations in 2003 provided for improved gains. For 2004, although interest rates remained at relatively low historical levels, thereby limiting returns, improved matching of portfolio asset maturity to claims payment requirements reduced the amount of disposition activity.

      The net loss and LAE ratios were 71.5% in 2004 and 102.3% in 2003. The decrease in the loss and LAE ratio during 2004 was attributable to much more stable development activity on prior accident years. Although commercial automobile, assumed property and casualty, and Valor workers’ compensation reserves continued to generate unfavorable claim development, the non-standard personal automobile and California workers’ compensation lines performed better than anticipated.

      The non-standard personal automobile loss and allocated LAE (“ALAE”) ratio was 49.3% for accident year 2004 versus 60.4% for accident year 2003 recorded in calendar year 2003. The accident year 2003 loss and ALAE ratio declined to 53.7% by 2004 year-end. Non-standard personal automobile claim frequency was 7.7 and 7.9 per 1000 vehicle months for accident years 2004 and 2003, respectively. Claim severity in 2004 trended favorably for the non-standard personal automobile policies decreasing by 5.6% from the prior year. Meanwhile average premiums per vehicle on the non-standard personal automobile remained constant, despite a shift in the mix of business moving towards non-owner policies (37% in 2004 versus 28% in 2003). Historically, the non-owner policies loss and ALAE provided 10% to 30% lower yields than owner policies.

      Workers’ compensation reforms were enacted in California in late 2003 and again in April 2004. The reforms were designed to curb medical cost spending and resulted in more favorable settlement activity. Although the reforms did not eliminate systemic abuse, they did appear to have modified the behavior of claimants, providers and applicant attorneys. As such, management was able to recognize favorable development within the workers’ compensation line in the amount of $1.6 million in 2004.

      Policy acquisition costs as a percentage of net earned premiums were 24.6% in 2004 and 22.2% in 2003. Policy acquisition costs include expenses which are directly related to premium volume (i.e., commissions, premium taxes and state assessments), as well as certain underwriting expenses which vary with and are directly related to policy issuance. The increase in policy acquisition costs was a result of profit commissions earned by the agent responsible for the marketing, underwriting and policy administration of the non-standard personal automobile program. The recognition of the profit commission was a direct result of favorable reserve development recognized on accident year 2003 and slightly improved results for accident year 2004.

      For the insurance business, general and administrative expenses were $4.4 million in 2004 compared to $6.7 million in 2003. In 2004, management recognized additional pension expense of $0.8 million related to participants electing to receive lump sum distributions of the pension plan and severance costs of $0.1 million related to the outsourcing of its workers’ compensation claims. In 2003, additional allowance for uncollectible

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reinsurance recoverable of $1.3 million and $0.2 million in employee severance expenses related to business contraction inflated normal expenses. Normalizing both years for items noted, general and administrative expenses decreased by $1.6 million. Management continues to examine its expense structure; however, given the decreases in premium production and its obligation to run-off several lines of business, a core amount of fixed governance costs is required and consequently its expense ratio will run higher than industry averages until it can increase premium production.

      For the parent company, Covanta’s expenses were primarily the result of the corporate services agreement between Covanta and Covanta Energy, pursuant to which Covanta provided to Covanta Energy, at Covanta Energy’s expense, certain administrative and professional services and Covanta Energy pays most of Covanta’s expenses. Such expenses totaled $3.5 million for the period March 11, 2004 through December 31, 2004. In addition, Covanta and Covanta Energy entered into an agreement pursuant to which Covanta Energy provided, at Covanta’s expense, payroll and benefit services for Covanta employees, which totaled $0.5 million for the period March 11, 2004 through December 31, 2004.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF LIQUIDITY AND CAPITAL RESOURCES

      The information set forth below regarding liquidity and capital resources is presented according to Covanta’s consolidated operations and Covanta’s current business segments of Waste and Energy Services and Other Services.

Capital Resources and Commitments

      As part of the ARC Holdings acquisition, Covanta Energy entered into new credit arrangements which totaled approximately $1.1 billion and are guaranteed by Covanta and certain domestic subsidiaries of Covanta Energy. The proceeds of the new financing arrangements were used to fund the acquisition of ARC Holdings, to refinance approximately $479 million of Covanta Energy’s and CPIH’s recourse debt and letter of credit facilities, and to pay the related fees and expenses. The new credit facilities are further available for ongoing permitted expenditures and for general corporate purposes. The following chart summarizes the various components and amounts of Covanta Energy’s project and intermediate debt and Credit Facilities as of December 31, 2005 (in millions of dollars):

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Cash Flow and Liquidity

Summary

      Covanta’s sources of funds are its investments and financing activities, as well as dividends, if any, and other payments received from Covanta Energy and NAICC. Various state insurance requirements restrict the amounts that may be transferred to Covanta in the form of dividends or loans from Covanta’s insurance subsidiaries without prior regulatory approval. Currently, NAICC cannot pay dividends or make loans to Covanta. Under its new financing arrangements, Covanta Energy’s ability to pay dividends to Covanta is limited, except in certain circumstances.

      The following summarizes the actual inflows and outflows relating to the ARC Holdings rights offering (in millions of dollars):

Proceeds from ARC Holdings rights offering	$	400.0
Transfers to Covanta Energy (to fund a portion of ARC Holdings purchase price)		(385.0	)
Warrant agent and other costs		(4.2	)
Net cash inflow to Covanta	$	10.8

      Summarized cash flow information for Covanta’s current business segments reconciled to the consolidated statements of cash flows is as follows (in thousands of dollars):

	For the Year Ended December 31, 2005
	Waste and Energy			Other			Eliminations			Total
Net cash provided by (used in) operating activities	$	229,963		$	(21,925	)	$	—		$	208,038
Net cash (used in) provided by investing activities(1)		(707,472	)		(354,361	)		384,954			(676,879	)
Net cash provided by (used in) financing activities		493,948			392,255			(384,954	)		501,249
Net increase in cash and cash equivalents	$	16,439		$	15,969		$	—		$	32,408

	For the Year Ended December 31, 2004
	Waste and Energy			Other			Eliminations		Total
Net cash provided by (used in) operating activities	$	134,004		$	(25,763	)	$	—	$	108,241
Net cash (used in) provided by investing activities(2)		(12,103	)		68,094			—		55,991
Net cash (used in) provided by financing activities		(101,583	)		15,547			—		(86,036	)
Net increase in cash and cash equivalents	$	20,318		$	57,878		$	—	$	78,196

(1)	Waste and Energy Services is net of cash acquired of ARC Holdings of $62,358.
(2)	Other is net of cash acquired of Covanta Energy, at parent-level of $57,795.

Waste and Energy Services Segment

      Cash provided by operating activities was $230 million and $134 million for the year ended December 31, 2005 and 2004, respectively. The increase in cash flow from operating activities was primarily due to the ARC Holdings acquisition. Net cash used in investing activities was $707.5 million in the year ended December 31, 2005 and was primarily due to the purchase of ARC Holdings, net of acquired cash. Net cash provided by financing activities was $493.9 million for the year ended December 31, 2005 and was primarily driven by the

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capital contribution from Covanta, the net impact of the refinancing of the prior long-term debt and for the acquisition of ARC Holdings offset partially by the payment and future funding of project debt.

      Restricted funds held in trust were $447.4 million as of December 31, 2005. Restricted funds held in trust are primarily amounts received and held by third party trustees relating to projects owned by Covanta Energy, and which may be used only for specified purposes. These payments are made directly to the trustee primarily for related project debt and are held by it until paid to project debt holders. Covanta does not have access to these funds. In addition, as of December 31, 2005, Covanta had $19.6 million in cash held in restricted accounts to pay for additional bankruptcy emergence expenses that are estimated to be paid in the future. Cash held in such reserve accounts is not available for general corporate purposes.

      Generating sufficient cash to meet Covanta Energy’s liquidity needs, pay down its debt and invest in its business remains an important objective of management. Maintaining historic facility production levels while effectively managing operating and maintenance expenses is important to optimize Covanta Energy’s long-term cash generation. Covanta Energy does not expect to receive any cash contributions from Covanta and is prohibited under its principal financing arrangements from using its cash to issue dividends to Covanta except in limited circumstances.

      Covanta Energy derives its cash flow principally from its domestic and international project operations and businesses. The frequency and predictability of Covanta Energy’s receipt of cash from projects differs, depending upon various factors, including whether restrictions on distributions exist in applicable project debt arrangements or in debt arrangements at Covanta Energy’s intermediate-level subsidiaries, whether a project is domestic or international, and whether a project has been able to operate at historical levels of production.

      A material portion of Covanta Energy’s domestic cash flows are expected to be derived from projects where financial tests and other covenants contained in respective debt arrangements must be satisfied in order for project subsidiaries to make cash distributions to intermediate Covanta Energy subsidiaries, and for such intermediate-level subsidiaries to make cash distributions to Covanta Energy. Distributions from these intermediate-level subsidiaries may only be made quarterly, if such financial tests and other covenants are satisfied. Historically all such financial tests and covenants have been satisfied. Covanta Energy’s remaining domestic projects generally are not restricted in making cash distributions, and no restrictions exist at intermediate Covanta Energy subsidiary levels. As a result, Covanta Energy generally receives cash from these projects on a monthly basis.

      Covanta Energy’s receipt of cash from its international projects is also subject to satisfaction of financial tests and other covenants contained in applicable project debt arrangements. A material portion of cash distributions from Covanta Energy’s international projects are received semi-annually, during the second and fourth quarters. In addition, risks inherent in international operations can affect the reliability of such cash distributions.

      Covanta believes that when combined with its other sources of liquidity, Covanta Energy’s operations generate sufficient cash to meet operational needs, capital expenditures, and service debt due prior to maturity. Management will also seek to enhance Covanta Energy’s cash flow from renewals or replacement of existing contracts, from new contracts to expand existing facilities or operate additional facilities and by investing in new projects. Covanta Energy’s new financing arrangements place certain restrictions on its ability to make investments in new projects or expansions of existing projects.

      As previously announced, Covanta agreed as part of the Covanta Energy acquisition to conduct the 9.25% Offering. Also as previously announced, because of the possibility that the 9.25% Offering could not be completed prior to the completion of the ARC Holdings Rights Offering, Covanta restructured the 9.25% Offering to offer an additional 2.7 million shares of Covanta’s common stock at the same purchase price as in the ARC Holdings Rights Offering. On February 24, 2006, Covanta completed the 9.25% Offering in which 5,696,911 shares were issued for $20.8 million in gross proceeds.

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Financing Arrangements

      Covanta does not have any outstanding debt for borrowed money. Covanta Energy and several of its subsidiaries have outstanding debt obligations, which are described below. Covanta has guaranteed Covanta Energy’s debt obligations described below.

Covanta Energy Debt

      On June 24, 2005, Covanta’s subsidiary, Covanta Energy, entered into two credit and guaranty agreements with syndicates of lenders led by Goldman Sachs Credit Partners, L.P. and Credit Suisse, respectively. The financing provided Covanta with available credit for the working capital and general corporate needs of Covanta Energy and its subsidiaries.

      The two credit agreements consist of (1) the Credit and Guaranty Agreement, dated as of June 24, 2005, among Covanta Energy, Covanta, as a guarantor, certain subsidiaries of Covanta Energy, as guarantors, and various lenders, arrangers and agents (“First Lien Credit Agreement”); and (2) the Second Lien Credit and Guaranty Agreement, dated as of June 24, 2005, among Covanta Energy, Covanta, as a guarantor, certain subsidiaries of Covanta Energy, as guarantors, and various lenders, arrangers and agents (“Second Lien Credit Agreement”). Under these credit agreements, the lenders agreed to provide secured revolving credit, letter of credit and term loan facilities in the amount of up to $1.115 billion as described below. The following is a description of the general terms of these senior secured credit facilities.

      The senior secured credit facilities are comprised of the following:

•  a first priority secured term loan facility in the initial amount of $275 million that matures in 2012 (the “First Lien Term Loan Facility”);

•  a first priority secured revolving credit facility in the amount of $100 million, up to $75 million of which may be utilized for letters of credit, that matures in 2011 (the “Revolving Credit Facility”);

•  a first priority secured funded letter of credit facility in the amount of $340 million that matures in 2012, (the “Funded L/ C Facility,” and collectively with the First Lien Term Loan Facility and the Revolving Credit Facility, as the “First Lien Facilities”); and

•  a second priority secured term loan facility in the amount of $400 million that matures in 2013, (the “Second Lien Term Loan Facility,” and collectively with the First Lien Facilities, as the “Credit Facilities”).

      Letters of credit that may in the future be issued under the Revolving Credit Facility will accrue fees at the then effective borrowing margins on eurodollar rate loans (described below), plus a fee on each issued letter of credit payable to the issuing bank. Letter of credit availability under the Funded L/ C Facility accrues fees (whether or not letters of credit are issued thereunder) at the then-effective borrowing margin for eurodollar rate loans times the total availability under letters of credit (whether or not then utilized), plus a fee on each issued letter of credit payable to the issuing bank. In addition, Covanta Energy has agreed to pay to the participants under the Funded L/ C Facility any shortfall between the eurodollar rate applicable to the relevant Funded L/ C Facility interest period and the investment income earned on the pre-agreed investments made by the relevant issuing banks with the purchase price paid by such participants for their participations under the Funded L/ C Facility.

      As of December 31, 2005, Covanta Energy had neither drawn on the Revolving Credit Facility nor caused to be issued any letters of credit under the Revolving Credit Facility. As of December 31, 2005, Covanta Energy had $307.5 million outstanding letters of credit under the Funded L/ C Facility.

      Covanta Energy also entered into an intercreditor agreement with the respective lenders under the Revolving Credit Facility, the Funded L/ C Facility, and the First Lien Term Loan Facility and the Second Lien Term Loan Facility described under “Capital Resources and Commitments.” This agreement includes certain provisions regarding the application of payments made by Covanta Energy among the respective creditors and certain matters relating to priorities upon the exercise of remedies with respect to the collateral.

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      Under these agreements Covanta Energy is obligated to apply 50% of excess cash from operations (calculated pursuant to the new credit agreements), as well as specified other sources, to repay borrowing under the First Lien Term Loan Facility and reduce commitments under the financing arrangements, and in some circumstances to collateralize its reimbursement obligations with respect to outstanding letters of credit and/or repay borrowings under the Second Lien Term Loan Facility.

      The new debt issued in the refinancing transaction is outlined in the following table:

Designation	Principal Amount	Interest	Principal Payments
First Lien Term Loan Facility	$229.3 million as of December 31, 2005	Eurodollar or base rate as elected by Covanta plus a margin of 3.00%	Annual amortization paid quarterly beginning December 31, 2006
Second Lien Term Loan Facility	$400 million as of December 31, 2005	Eurodollar or base rate as elected by Covanta plus a margin of 5.50%		Due at maturity in 2013

      In December 2005, Covanta Energy voluntarily prepaid $45 million under the First Lien Term Loan. The mandatory annual amortization was reset and will be paid in quarterly installments beginning December 31, 2006, through the date of maturity as follows (in thousands of dollars):

	Annual
	Remaining
First Lien Term Loan Facility	Amortization
2006	$	581
2007		2,322
2008		2,322
2009		2,322
2010		2,322
2011		110,302
2012		109,141

      The Second Lien Term Loan Facility has no mandatory amortization requirements and is required to be repaid in full on its maturity date.

      Loans under the senior secured credit facilities are designated, at Covanta’s election, as Eurodollar rate loans or base rate loans. Eurodollar loans bear interest at a reserve adjusted British Bankers Association Interest Settlement Rate, commonly referred to as “LIBOR,” for deposits in dollars plus a borrowing margin as described below. Interest on Eurodollar rate loans is payable at the end of the applicable interest period of one, two, three or six months (and at the end of every three months in the case of six month eurodollar loans). Base rate loans bear interest at (a) a rate per annum equal to the greater of (1) the “prime rate” designated in the relevant facility or (2) the federal funds rate plus 0.50% per annum, plus (b) a borrowing margin as described below.

      The borrowing margins referred to above for the Revolving Credit Facility are as follows:

	Borrowing Margin for			Borrowing Margin for
	Revolving Eurodollar			Revolving Base Rate
Company Leverage Ratio	Loans			Loan
≥4.25:1.00		3.00	%		2.00	%
<4.25:1.00		2.75	%		1.75	%
≥3.50:1:00
<3.50:1:00		2.50	%		1.50	%

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      The borrowing margins for First Lien Term Loan Facility and the Funded Letter of Credit Facility are 3.00% for Eurodollar rate loans and 2.00% for base rate loans. The borrowing margins under the Second Lien Term Loan Facility are 5.50% for Eurodollar rate loans and 4.50% for base rate loans.

      The Credit Facilities provide that Covanta Energy and its subsidiaries must comply with certain affirmative and negative covenants. See Note 18. Long-Term Debt to the Notes for a description of such covenants, as well as other material terms and conditions of such agreements.

      As of December 31, 2005, Covanta Energy was not in default under the Credit Facilities.

      Covanta Energy’s obligations under the First Lien Facilities and certain interest rate or other hedging arrangements entered into with any of the lenders and their affiliates and Covanta’s subsidiary guarantors’ guaranty obligation are secured by a first priority security interest in substantially all assets, including substantially all of the personal, real and mixed property of Covanta Energy and the subsidiary guarantors pursuant to the terms of the First Lien Facilities documentation including the First Lien Pledge and Security Agreement between each of Covanta Energy and the other grantors party to the agreement and a collateral agent acting on behalf of lenders (“First Lien Security Agreement”).

      In addition, the First Lien Facilities are secured by a first priority perfected lien or pledge on 100% of the capital stock of Covanta Energy and certain direct subsidiaries of Covanta Energy and the subsidiary guarantors, up to 65% of the capital stock of certain first tier foreign subsidiaries of Covanta Energy and the subsidiary guarantors, and all intercompany debt owed to Covanta Energy or the subsidiary guarantors, pursuant to the terms of the First Lien Facilities documentation including the First Lien Security Agreement and the First Lien Pledge Agreement between Covanta and a collateral agent acting on behalf of lenders. Other subsidiaries of ours are not subject to any guaranty.

      The Second Lien Term Loan Facility is secured by a second priority security interest in the same collateral as secures the First Lien Facilities pursuant to the terms of the Second Lien Term Loan Facility documentation including the Parity Lien Pledge and Security Agreement and a Parity Pledge Agreement between the same Covanta entities and collateral agents acting on behalf of lenders (the “Parity Lien Security Agreement”).

      The priority of the security interests and related creditor rights between the First Lien Facilities (the “First Lien Obligations”) and those of the Second Lien Term Loan Facility (the “Second Lien Obligations”) are set forth in the Intercreditor Agreement among Covanta Energy and various lender parties (the “Intercreditor Agreement”). Under the terms of the Intercreditor Agreement, for as long as any of the First Lien Obligations are outstanding:

•  liens securing the Second Lien Obligations will be junior and subordinated in all respects to liens securing the First Lien Obligations;

•  the collateral agent for the Second Lien Obligations will not exercise any rights or remedies with respect to any collateral for 180 days from the date of delivery of notice in writing to the collateral agent for the First Lien Obligations;

•  the collateral agent for the Second Lien Obligations will not take or receive any collateral or any proceeds of collateral in connection with the exercise of any right or remedy (including setoff) with respect to any collateral;

•  any proceeds of collateral received in connection with the sale or disposition of such collateral by the collateral agent for the holders of the First Lien Obligations will be applied to the First Lien Obligations in the order specified by the Intercreditor Agreement and the applicable First Lien Obligation documents. Upon discharge of the First Lien Obligations, any proceeds of collateral held by the collateral agent for the First Lien Obligations will be delivered to the collateral agent for the Second Lien Obligations to be applied in the order specified by the Intercreditor Agreement and the applicable Second Lien Obligation documents; and

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•  except as permitted under the Intercreditor Agreement and the senior secured credit facilities, Covanta Energy will not make prepayments of the Second Lien Obligations prior to any voluntary or mandatory prepayment of any amounts outstanding under the First Lien Obligations.

      The loan documentation under the Credit Facilities contains customary affirmative and negative covenants and financial covenants. During the term of the Credit Facilities, Covanta expects that the negative covenants will restrict the ability of Covanta Energy and its subsidiaries to take specified actions, subject to exceptions, including but not limited to:

•  incurring additional indebtedness, including guarantees of indebtedness;

•  creating, incurring, assuming or permitting to exist liens on property and assets;

•  making loans and investments and entering into mergers, consolidations, acquisitions and joint ventures;

•  engaging in sales, transfers and other dispositions of their property or assets;

•  paying, redeeming or repurchasing debt, or amending or modifying the terms of certain material debt or certain other agreements;

•  declaring or paying dividends to, making distributions to or making redemptions and repurchases from, equity holders;

•  entering into certain affiliate transactions; and

•  entering into agreements that would restrict the ability of Covanta Energy’s subsidiaries to pay dividends and make distributions, making certain loans and advances to Covanta Energy, and incurring liens or transferring property or assets to Covanta Energy or certain of its subsidiaries.

      The financial covenants of the First Lien Facilities include the following:

•  maximum Covanta Energy leverage ratio, which measures Covanta Energy-level recourse debt to a specified Covanta Energy-level cash flow;

•  maximum capital expenditures;

•  minimum Covanta Energy interest coverage ratio, which measures Covanta Energy-level recourse debt interest expense to a specified Covanta Energy-level cash flow; and

•  minimum consolidated adjusted earnings before interest, taxes, depreciation and amortization.

      Covanta Energy is required to make mandatory prepayments of the senior secured credit facilities in the amounts set forth in the Credit Facilities in the event it receives proceeds from the following specified sources:

•  excess cash flow, as defined in the loan documentation;

•  net cash proceeds of any property or asset sale, subject to certain exceptions and reinvestment requirements;

•  net insurance and condemnation proceeds, subject to certain exceptions and reinvestment provisions;

•  net cash proceeds from the issuance of additional equity securities, subject to certain exceptions; and

•  net cash proceeds of certain debt issuances, subject to certain exceptions.

      Except as otherwise provided in the Intercreditor Agreement, mandatory prepayments are applied to prepay the First Lien Term Loan Facility prior to application with respect to the remaining Credit Facilities.

      The loan documentation for the Credit Facilities contains events of default, including, but not limited to, failure to make debt payments when due, cross defaults to certain other debt of Covanta Energy and its subsidiaries, certain change of control events and specified material reductions in net operating losses available to us, other than through utilization. Upon the occurrence and during the continuance of events of default under the Credit Facilities, and subject to the terms of the Intercreditor Agreement, the administrative agents and/or the lenders under the credit agreements may accelerate Covanta Energy’s payment obligations

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thereunder and the collateral agents under the documents securing these obligations may foreclose upon, and exercise other rights with respect to, Covanta’s assets and the assets of Covanta Energy and/or the subsidiary guarantors in which security interests have been granted.

Domestic Project Debt

      Financing for Covanta Energy’s waste-to-energy projects is generally accomplished through tax-exempt and taxable municipal revenue bonds issued by or on behalf of the municipal client. For such facilities that are owned by Covanta Energy’s subsidiary, the issuer of the bonds loans the bond proceeds to Covanta Energy’s subsidiary to pay for facility construction. For such facilities, project-related debt is included as “Project debt (short- and long-term)” in Covanta’s consolidated financial statements. Generally, such project debt is secured by the revenues generated by the project and other project assets including the related facility. Such project debt of Covanta Energy’s subsidiaries is described in the chart below under “Capital Requirements” as non-recourse project debt. The only potential recourse to Covanta Energy with respect to project debt arises under the operating performance guarantees described below under “Other Commitments.”

      Certain subsidiaries have recourse liability for project debt which is non-recourse to Covanta Energy as of December 31, 2005 as follows (in thousands of dollars):

Niagara Series 2001 Bonds	$	165,010
Seconn Corporate Credit Bonds		43,500
Hempstead Corporate Credit Bonds		42,670

International Project Debt

      Financing for projects in which Covanta Energy has an ownership or operating interest is generally accomplished through commercial loans from local lenders or financing arranged through international banks, bonds issued to institutional investors and from multilateral lending institutions based in the United States. Such debt is generally secured by the revenues generated by the project and other project assets and is without recourse to CPIH or Covanta Energy. Project debt relating to two CPIH projects in India is included as “Project debt (short- and long-term)” in Covanta’s consolidated financial statements. In most projects, the instruments defining the rights of debt holders generally provide that the project subsidiary may not make distributions to its parent until periodic debt service obligations are satisfied and other financial covenants complied with.

Intermediate Subsidiary Debt

      The three ARC Holdings subsidiaries identified below have outstanding non-project debt facilities, which are described below.

MSW I Financing

      As of December 31, 2005, MSW I had outstanding debt financing consisting of $196 million of 8.50% senior secured notes due 2010, referred to as the “MSW I notes.” Interest on the MSW I notes is payable semi-annually in arrears on March 1st and September 1st of each year. The MSW I notes mature on September 1, 2010. Holders of MSW I notes may require MSW I to repurchase the MSW I notes upon a change in control or if MSW I or any of its restricted subsidiaries receives any proceeds from certain financings or asset sales by Covanta Ref-Fuel Holdings LLC (formerly known as Ref-Fuel Holdings LLC, referred to as “Ref-Fuel Holdings”) and its subsidiaries.

      The MSW I notes are general obligations of MSW I and are secured by a first priority lien on substantially all the assets of MSW I, including a first priority pledge of the membership interest in MSW I’s subsidiaries and of Ref-Fuel Holdings indirectly owned by MSW I.

      The indenture under which the MSW I notes were issued, referred to as the “MSW I indenture,” provides for certain restrictive covenants including, among other things, restrictions on incurrence of

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indebtedness, creation of liens, certain payments to related and unrelated parties, acquisitions, asset sales and transactions with affiliates.

      The MSW I indenture provides that MSW I is not permitted to make certain distributions or other restricted payments, subject to certain exceptions, unless, and at the time of and after giving effect to such restricted payment:

•  no default or event of default shall have occurred and be continuing or would occur as a consequence of such restricted payment;

•  MSW I is not required to make an offer, which they have not yet consummated, to repurchase or redeem MSW I notes with the net proceeds received from Ref-Fuel Holdings or its subsidiaries upon the issuance of debt or equity securities, incurrence of indebtedness or consummation of an asset sale by Ref-Fuel Holdings or any of its subsidiaries; and

•  at the time of such restricted payment, the proportionate consolidated interest coverage ratio for MSW I’s most recently ended four full fiscal quarters would have been at least 2.0 to 1.0 on a pro forma basis as if the restricted payment had been made at the beginning of such four-quarter period, and the projected proportionate consolidated interest coverage ratio for MSW I’s four full fiscal quarters commencing with the first full fiscal quarter after the date of the proposed restricted payment would be at least 2.0 to 1.0.

      Proportionate consolidated interest coverage ratio is defined in the MSW I indenture to mean the ratio obtained by dividing an amount equal to the applicable ownership percentage multiplied by the consolidated cash flow of Ref-Fuel Holdings for such period, by the sum of (1) an amount equal to the applicable ownership percentage multiplied by the consolidated interest expense of Ref-Fuel Holdings for the period, plus (2) without duplication, the consolidated interest expense of MSW I for such period. The consolidated interest coverage ratio of MSW I was approximately 3.2x for the twelve-month period ended December 31, 2005.

      Upon the occurrence of a change of control, as defined in the MSW I indenture, MSW I shall be required to make an offer to each holder of MSW I notes to repurchase all or any part of such holder’s MSW I notes at a purchase price equal to 101% of the aggregate principal amount plus accrued and unpaid interest to the date of purchase. Within 30 days following a change of control, MSW I shall mail a notice to each holder of MSW I notes stating that a change of control offer is being made and setting forth, among other things, the purchase price and the purchase date, which shall be no earlier than 30 days and no later than 60 days from the date such notice is mailed.

      The MSW I indenture governing the MSW I notes includes limitations on the ability of MSW I and its restricted subsidiaries to incur additional indebtedness or issue preferred equity. The MSW I indenture provides that MSW I and its subsidiaries may only incur indebtedness or issue preferred equity if the proportionate consolidated interest coverage ratio tests set forth above are met. Other permitted indebtedness under the MSW I indenture is generally limited to:

•  the MSW I notes;

•  indebtedness in respect of member loans;

•  refinancing indebtedness;

•  intercompany debt among MSW I and its restricted subsidiaries;

•  indebtedness in respect of hedging obligations;

•  guarantees of permitted indebtedness;

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•  if Ref-Fuel Holdings becomes a subsidiary of MSW I, under specific circumstances indebtedness may be permitted to be incurred by Ref-Fuel Holdings and its subsidiaries including:

•  purchase money indebtedness;

•  indebtedness incurred to finance capital expenditures required by law;

•  indebtedness that is non-recourse to Ref-Fuel Holdings; and

•  other indebtedness not to exceed $30 million.

      Ref-Fuel Holdings and its subsidiaries are not currently deemed to be restricted subsidiaries under the MSW I indenture, including for purposes of the restrictive covenants described above.

MSW II Financing

      As of December 31, 2005, MSW II had outstanding debt financing consisting of $224 million aggregate principal amount of 7.375% senior secured notes due 2010, referred to as the “MSW II notes.” All terms and indenture descriptions for the MSW II notes are consistent with those terms and indenture descriptions as described above for the MSW I notes.

      As described in Management’s Discussion and Analysis of Financial Condition and Results of Operations — Management’s Discussion and Analysis of Liquidity and Capital Resources — Waste and Energy Services Segment and Note 18. Long-Term Debt of the Notes, MSW I and MSW II outstanding notes were issued pursuant to indentures containing covenants and other obligations of such subsidiaries. Under applicable indentures, holders of these notes were entitled to receive from the respective issuer an offer to repurchase such notes upon a change of control, such as was caused by the purchase of ARC Holdings by Covanta. On June 24, 2005, change of control offers were issued by both MSW I and MSW II. Holders of approximately $4.2 million of MSW I notes properly tendered their notes for repurchase, and holders of approximately $0.9 million of MSW II notes properly tendered their notes for repurchase. All such notes were repurchased on July 26, 2005. MSW I and MSW II paid the purchase price of such notes, which was $5.1 million in the aggregate with cash made available by Covanta.

ARC LLC Financing

      As of December 31, 2005, Covanta ARC LLC (“ARC LLC”), formerly known as American Ref-Fuel Company LLC, had outstanding debt financing consisting of $234 million aggregate principal amount of 6.26% senior notes due 2015, referred to as the “ARC notes.” Interest on the ARC notes is payable June 30th and December 31st of each year through maturity.

      The indenture under which the ARC notes were issued, referred to as the “ARC indenture” provides for certain restrictive covenants including, among other things, restrictions on the incurrence of indebtedness, certain payments to related and unrelated parties, acquisitions and asset sales. In addition, the ARC indenture provides that distributions of cash to parent entities (including Covanta Energy) may occur quarterly and only if certain financial covenants are satisfied.

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Capital Requirements

      The following table summarizes our gross contractual obligations including: project debt, long-term debt, estimated interest payments, leases and other contractual obligations as of December 31, 2005. (Amounts expressed in thousands of dollars. Note references are to the Notes):

				Payments Due by Period
				Less Than
				One
		Total		Year		1 to 3 Years		4 to 5 Years		After 5 Years
Domestic Covanta project debt (Note 19)		$	1,449,341	$	133,052	$	294,218	$	319,710	$	702,361
CPIH project debt (Note 19)			85,633		24,170		27,371		28,828		5,264
Total project debt (Note 19)			1,534,974		157,222		321,589		348,538		707,625
First Lien Term Loan facility (Note 18)			229,312		583		4,642		4,644		219,443
Second Lien Term Loan facility (Note 18)			400,000		—		—		—		400,000
6.26% senior notes (Note 18)			234,000		42,035		61,965		17,000		113,000
8.5% senior secured notes (Note 18)			195,785		—		—		195,785		—
7.375% senior secured notes (Note 18)			224,100		—		—		224,100		—
Other long-term debt (Note 18)			196		124		72		—		—
Total debt obligations of Covanta(1)			2,818,367		199,964		388,268		790,067		1,440,068
Less:
	Non-recourse project debt(2)		2,189,055		199,381		383,626		785,423		820,625
Covanta recourse debt		$	629,312	$	583	$	4,642	$	4,644	$	619,443
Operating leases			447,764		34,036		67,390		93,141		253,197
Less: Non-recourse rental payments			264,305		15,555		35,028		46,427		167,295
Covanta recourse rental payments		$	183,459	$	18,481	$	32,362	$	46,714	$	85,902
Interest payments(3)			1,262,945		196,560		366,531		318,316		381,538
Less: Non-recourse interest payments			735,735		130,959		230,874		186,139		187,763
Covanta recourse interest payments		$	527,210	$	65,601	$	135,657	$	132,177	$	193,775
Retirement plan obligations(4)		$	31,246	$	16,299	$	3,584	$	3,673	$	7,690
Other long-term obligations		$	55,217	$	2,500	$	5,000	$	7,500	$	40,217
Total Covanta contractual obligations		$	1,426,444	$	103,464	$	181,245	$	194,708	$	947,027

(1)	Excludes $88.0 million of Covanta Energy’s unamortized debt premium.
(2)	Payment obligations for the project debt associated with waste-to-energy facilities owned by Covanta Energy are limited recourse to the operating subsidiary and non-recourse to Covanta Energy, subject to operating performance guarantees and commitments.
(3)	Interest payments and letter of credit fees are estimated based on current rates.
(4)	Retirement plan obligations are based on actuarial estimates for the defined contribution plan, pension plan obligations and post-retirement plan obligations as of December 31, 2005.

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Other Commitments

      Covanta’s other commitments as of December 31, 2005 were as follows (in thousands of dollars):

	Commitments Expiring by Period
			Less Than		More Than
	Total		One Year		One Year
Letters of credit	$	314,206	$	19,684	$	294,522
Surety bonds		50,999		—		50,999
Total other commitments — net	$	365,205	$	19,684	$	345,521

      The letters of credit were issued pursuant to the Funded L/ C Facility (and for one international project under a separate unsecured, letter of credit facility) to secure Covanta Energy’s performance under various contractual undertakings related to its domestic and international projects, or to secure obligations under its insurance program. Each letter of credit relating to a project is required to be maintained in effect for the period specified in related project contracts, and generally may be drawn if it is not renewed prior to expiration of that period.

      Some of these letters of credit reduce over time. As of December 31, 2005, Covanta Energy had approximately $32.5 million in available capacity for additional letters of credit under its Funded L/ C Facility and $75 million under its Revolving Credit Facility.

      Covanta Energy believes that it will be able to fully perform its contracts to which these existing letters of credit relate, and that it is unlikely that letters of credit would be drawn because of a default of its performance obligations. If any of Covanta Energy’s letters of credit were to be drawn under its current debt facilities, the amount drawn would be immediately repayable to the issuing bank. If Covanta Energy were unable to immediately repay such amounts drawn under letters of credit, unreimbursed amounts would be treated under the Credit Facilities as additional term loans issued under the First Lien Facilities.

      The surety bonds listed on the table above primarily relate to assumed contracts from ARC Holdings ($35.3 million) and possible closure costs for various energy projects when such projects cease operating ($9.7 million). Were these bonds to be drawn upon, Covanta Energy would have a contractual obligation to indemnify the surety company.

      Covanta Energy and certain of its subsidiaries have issued or are party to performance guarantees and related contractual support obligations undertaken mainly pursuant to agreements to construct and operate certain waste-to-energy and water facilities. With respect to its domestic businesses, Covanta Energy and certain of its subsidiaries have issued guarantees to municipal clients and other parties that Covanta Energy’s subsidiaries will perform in accordance with contractual terms, including, where required, the payment of damages or other obligations. Such contractual damages or other obligations could be material, and in circumstances where one or more subsidiary’s contract has been terminated for its default, such damages could include amounts sufficient to repay project debt. For facilities owned by municipal clients and operated by Covanta Energy, Covanta Energy’s potential maximum liability as of December 31, 2005 associated with the repayment of the municipalities’ project debt on such facilities was in excess of $1 billion. This amount was not recorded as a liability in Covanta Energy’s consolidated balance sheet as of December 31, 2005 as Covanta Energy believes that it had not incurred such liability at the date of the financial statements. Additionally, damages payable under such guarantees on Covanta Energy-owned waste-to-energy facilities could expose Covanta Energy to recourse liability on project debt shown on the foregoing table. Covanta Energy also believes that it has not incurred such damages at the date of the financial statements. If Covanta Energy is asked to perform under one or more of such guarantees, its liability for damages upon contract termination would be reduced by funds held in trust and proceeds from sales of the facilities securing the project debt, which is presently not estimable.

      With respect to its international businesses, Covanta Energy has issued guarantees of certain of CPIH’s operating subsidiaries contractual obligations to operate power projects. The potential damages owed under such arrangements for international projects may be material. See Item 1A. Risk Factors — Waste and Energy

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Services Business-Specific Risks — Covanta Energy and certain of its subsidiaries have provided guarantees and support in connection with its subsidiaries’ projects.

      Depending upon the circumstances giving rise to such domestic and international damages, the contractual terms of the applicable contracts, and the contract counterparty’s choice of remedy at the time a claim against a guarantee is made, the amounts owed pursuant to one or more of such guarantees could be greater than Covanta Energy’s then-available sources of funds. To date, Covanta Energy has not incurred material liabilities under its guarantees, either on domestic or international projects.

Insurance Coverage

      Covanta has obtained insurance for Covanta’s assets and operations that provides coverage for what Covanta believes are probable maximum losses, subject to self-insured retentions, policy limits and premium costs which Covanta believes to be appropriate. However, the insurance obtained does not cover Covanta for all possible losses.

Off-Balance Sheet Arrangements

      Subsidiaries of Covanta Energy are parties to lease arrangements with Covanta Energy’s municipal clients at its Union County, New Jersey, its Alexandria, Virginia and its Delaware County, Pennsylvania waste-to-energy facilities. At its Union County facility, Covanta Energy’s operating subsidiary leases the facility from the Union County Utilities Authority, referred to as the “UCUA,” under a lease that expires in 2023, which Covanta Energy may extend for an additional five years. Covanta Energy guarantees a portion of the rent due under the lease. Rent under the lease is sufficient to allow the UCUA to repay tax exempt bonds issued by it to finance the facility and which mature in 2023.

      At its Alexandria facility, a Covanta Energy subsidiary is a party to a lease related to certain pollution control equipment that was required in connection with the Clean Air Act amendments of 1990, and which was financed by the City of Alexandria and by Arlington County, Virginia. Covanta Energy’s subsidiary owns this facility, and rent under this lease is sufficient to pay debt service on tax exempt bonds issued to finance such equipment and which mature in 2013.

      At its Delaware Valley facility, a Covanta Energy subsidiary is a party to a lease with the Delaware County Solid Waste Authority, known as “DCSWA,” for the facility that expires in 2019. Covanta Energy’s operating subsidiary, referred to as the “Delaware Partnership,” is obligated to pay a portion of lease rent, designated as “Basic Rent B,” and could be liable to pay certain related contractually-specified amounts, referred to as “Stipulated Loss”, in the event of a default in the payment of rent under the Delaware Valley lease beyond the applicable grace period. The Stipulated Loss is similar to lease termination liability and is generally intended to provide the lessor with the economic value of the lease, for the remaining lease term, had the default in rent payment not occurred. The balance of rental and Stipulated Loss obligations are payable by a trust formed and collateralized by the project’s former operator in connection with the disposition of its interest in the Delaware Valley facility. Pursuant to the terms of various guarantee agreements, ARC has guaranteed the payments of Basic Rent B and Stipulated Loss to the extent such payments are not made by the Delaware Partnership. Covanta does not believe, however, that such payments constitute a material obligation of Covanta’s subsidiary since Covanta’s subsidiary expects to continue to operate the Delaware Valley facility in the ordinary course for the entire term of the lease and will continue to pay rent throughout the term of the lease. As of December 31, 2005, the estimated Stipulated Loss would have been $161.6 million.

      Covanta Energy is also a party to lease arrangements pursuant to which it leases rolling stock in connection with its waste-to-energy and independent power facilities, as well as certain office equipment. Rent payable under these arrangements is not material to Covanta Energy’s financial condition.

      Covanta Energy generally uses operating lease treatment for all of the foregoing arrangements. A summary of Covanta Energy’s operating lease obligations is contained in Note 17. Leases of the Notes.

      As described above under “Other Commitments”, Covanta Energy and certain of its subsidiaries have issued or are party to performance guarantees and related contractual obligations undertaken mainly pursuant

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to agreements to construct and operate certain energy and waste facilities. To date, Covanta Energy has not incurred material liabilities under its guarantees, either on domestic or international projects.

      Covanta Energy has investments in several investees and joint ventures which are accounted for under the equity and cost methods and therefore does not consolidate the financial information of those companies. See Note 5. Equity in Net Income (Loss) from Unconsolidated Investments of the Notes for additional information regarding these leases.

Other Services Segment

      For the year ended December 31, 2005, Covanta, on a parent-only basis, held cash and investments of approximately $39.3 million, of which $32.8 million was available to pay general corporate expenses and for general working capital purposes. Covanta is required to maintain a separate cash fund of approximately $6.5 million to provide potential liquidity to its insurance business. Cash deposited for this purpose is restricted and is not available for general corporate expenses or for working capital requirements. Covanta, through its subsidiaries, had an investment in ACL warrants that were given by certain of the former creditors of ACL. In October 2005, Covanta converted the ACL warrants into shares of ACL common stock and subsequently sold the shares for net proceeds of approximately $18.0 million. See Note 20. Financial Instruments of the Notes for further information.

      Covanta received net proceeds from the ARC Holdings rights offering of $395.9 million and contributed approximately $385 million to Covanta Energy to fund a portion of the $740 million cash purchase price for the outstanding shares in ARC Holdings.

      During 2005, a subsidiary of Covanta liquidated its interest in ACL warrants as described in Note 20. Financial Instruments of the Notes. A portion of the warrant proceeds were paid to NAICC to redeem an approximate 14% interest held by NAICC in such subsidiary. NAICC received net proceeds of approximately $1.5 million.

      Cash used in operations from the insurance business was $14.2 million and $18.7 million for the year ended December 31, 2005 and 2004, respectively. The ongoing use of cash in operations was due to the insurance business continuing to make payments related to discontinued lines and territories in excess of premium receipts from existing lines. This negative cash flow restricted the insurance business from fully re-investing bond maturity proceeds and in some circumstances required the sale of bonds in order to meet obligations as they arose. Cash provided from investing activities was $13.6 million for the year ended December 31, 2005 compared with $10.9 million for the comparable period in 2004. The $2.7 million increase in cash provided by investing activities in 2005 was due to a reduction in reinvestment activity in conjunction with reduced premium production. There were no financing activities in either twelve-month period ended December 31, 2005 and 2004.

      Covanta’s insurance business, which comprises a portion of Covanta’s Other Services segment, requires both readily liquid assets and adequate capital to meet ongoing obligations to policyholders and claimants, as well as to pay ordinary operating expenses. The insurance business meets both its short-term and long-term liquidity requirements through operating cash flows that include premium receipts, investment income and reinsurance recoveries. To the extent operating cash flows do not provide sufficient cash flow, the insurance business relies on the sale of invested assets. Its investment policy guidelines require that all loss and LAE liabilities be matched by a comparable amount of investment grade assets. Covanta believes that the insurance business has both adequate capital resources and sufficient reinsurance to meet its current operating requirements.

      The National Association of Insurance Commissioners provides minimum solvency standards in the form of risk based capital requirements (“RBC”). The RBC model for property and casualty insurance companies requires that carriers report their RBC ratios based on their statutory annual statements as filed with the regulatory authorities. Covanta believes Covanta’s insurance business has projected its RBC requirement as of December 31, 2005 under the RBC model and believes that it is above the level which would trigger increased oversight by regulators.

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      Covanta estimates its insurance business’ reserves for unpaid losses and LAE based on reported losses and historical experience, including losses reported by other insurance companies for reinsurance assumed, and estimates of expenses for investigating and adjusting all incurred and unadjusted claims. Key assumptions used in the estimation process could have significant effects on the reserve balances. Covanta’s insurance business regularly evaluates its estimates and assumptions based on historical experience adjusted for current economic conditions and trends. Changes in the unpaid losses and LAE can materially affect the statement of operations.

      California and Montana insurance laws and regulations regulate the amount and type of NAICC’s investments. NAICC’s investment portfolio is comprised primarily of fixed maturities and is weighted heavily toward investment grade short and medium term securities. See Note 1. Organization and Summary of Significant Accounting Policies of the Notes for information regarding significant accounting policies affecting these investments.

      NAICC’s investment portfolio as of December 31, 2005 was as follows (in thousands of dollars):

			Amortized Cost		Fair Value
Investments by investment by grade:
Fixed maturities:
	U.S. Government/ Agency		$	21,240	$	20,776
	Mortgage-backed			10,414		10,005
	Corporate (AAA to A)			12,103		11,875
	Corporate (BBB)			1,067		1,011
	Total fixed maturities			44,824		43,667
	Equity securities			1,376		1,506
		Total	$	46,200	$	45,173

      NAICC pledges assets and posts letters of credit for the benefit of other insurance companies in connection with risks assumed by predecessor companies or as ordered by courts and arbitration panels, in the event that NAICC is not able to pay such creditors. NAICC had pledged assets of $6.3 million and had letters of credit outstanding of $2.8 million as of December 31, 2005.

      Covanta’s insurance business’ contractual commitments under operating lease agreements total approximately $1.8 million as of December 31, 2005 and are due as follows: $0.8 million in 2006, $0.3 million in each year from 2007 through 2009 and $0.1 million thereafter.

Discussion of Critical Accounting Policies

      In preparing its consolidated financial statements in accordance with generally accepted accounting principles in the United States, Covanta is required to use judgment in making estimates and assumptions that affect the amounts reported in its financial statements and related notes. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Many of Covanta’s critical accounting policies are those subject to significant judgments and uncertainties which could potentially result in materially different results under different conditions and assumptions. Future events rarely develop exactly as forecast, and the best estimates routinely require adjustment.

Purchase Accounting

      Covanta applied purchase accounting in accordance with the Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 141 “Business Combinations”, for its acquisitions in 2004 and 2005. As described in Note 3. Acquisitions and Dispositions of the Notes, Covanta

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valued the acquired assets and liabilities assumed at fair value. The estimates of fair value used by Covanta reflect its best estimates based on the work of Covanta and independent valuation consultants and, where such work has not been completed, such estimates have been based on Covanta’s experience and relevant information available to management. These estimates, and the assumptions used by Covanta and by its valuation consultants, are subject to inherent uncertainties and contingencies beyond Covanta’s control. For example, Covanta used the discounted cash flow method to estimate value of many of its assets. This entails developing projections about future cash flows and adopting an appropriate discount rate. Covanta cannot predict with certainty actual cash flows and the selection of a discount rate is heavily dependent on judgment. If different cash flow projections or discount rates were used, the fair values of Covanta’s assets and liabilities could be materially increased or decreased. Accordingly, there can be no assurance that such estimates and assumptions reflected in the valuations will be realized, or that further adjustments will not occur. The assumptions and estimates used by Covanta therefore have substantial effect on Covanta’s balance sheet. In addition because the valuations impact depreciation and amortization, changes in such assumptions and estimates may affect earnings in the future. During the current year, some of Covanta’s estimates have been refined and have resulted in changes to assets and liabilities recognized in the 2005 balance sheet.

Depreciation and Amortization

      Covanta has estimated the useful lives over which it depreciates its long-lived assets. Additionally, in accordance with SFAS No. 143, “Accounting for Asset Retirement Obligations”, Covanta Energy has capitalized the estimate of Covanta’s legal liabilities which includes capping, closure and post-closure costs of landfill cells and site restoration for certain waste-to-energy and power producing sites.

Goodwill and Intangible Assets

      Covanta Energy has recognized goodwill and intangible assets relative to its acquisition of ARC Holdings and its emergence from bankruptcy in 2004. In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets”, Covanta evaluates its goodwill and nonamortizable intangible assets for impairment at least annually or when indications of impairment exist. The impact of recognizing an impairment could have a material impact on financial position and results of operations. There has been no impairment recognized in the current year, however an impact of impairment in the future could have a material impact on the financial position and results of operations.

      In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, Covanta evaluates its long-term assets and amortizable intangible assets for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. No events or change in circumstances occurred during the period to warrant this testing. However, had an event or change in circumstances occurred, the impact of recognizing an impairment could have a material impact on financial position and results of operations.

Net Operating Loss Carryforwards — Deferred Tax Assets

      As described in Note 22. Income Taxes of the Notes to the Consolidated Financial Statements, Covanta has recorded a deferred tax asset related to the NOLs. The amount recorded was calculated based upon future taxable income arising from (a) the reversal of temporary differences during the period the NOLs are available and (b) future operating income expected from Covanta’s domestic and international businesses, to the extent it is reasonably predictable.

      Covanta cannot be certain that the NOLs will be available to offset the tax liability of Covanta. If the NOLs were not available to offset the tax liability of Covanta, Covanta may not have sufficient cash flow available to pay debt service on the Credit Facilities described above under “Cash Flow and Liquidity”.

      Covanta estimated that it had NOLs of approximately $489 million for federal income tax purposes as of the end of 2005. The NOLs will expire in various amounts beginning on December 31, 2006 through December 31, 2023, if not used. The amount of NOLs available to Covanta will be reduced by any taxable

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income generated by current members of Covanta’s tax consolidated group including certain grantor trusts relating to the Mission Insurance entities.

      The Internal Revenue Service (“IRS”) has not audited any of Covanta’s tax returns for the years in which the losses giving rise to the NOLs were reported, and it could challenge any past and future use of the NOLs.

      Under applicable tax law, the use and availability of Covanta’s NOLs could be limited if there is a more than 50% increase in stock ownership during a 3-year testing period by stockholders owning 5% or more of Covanta’s stock. Covanta’s Certificate of Incorporation contains stock transfer restrictions that were designed to help preserve Covanta’s NOLs by avoiding such an ownership change. Covanta expects that the restrictions will remain in-force as long as Covanta has NOLs. There can be no assurance, however, that these restrictions will prevent such an ownership change.

Loss Contingencies

      As described in Note 29. Commitments and Contingent Liabilities of the Notes, Covanta’s subsidiaries are party to a number of claims, lawsuits and pending actions, most of which are routine and all of which are incidental to its business. Covanta assesses the likelihood of potential losses with respect to these matters on an ongoing basis and when losses are considered probable and reasonably estimable, records as a loss an estimate of the ultimate outcome. If Covanta can only estimate the range of a possible loss, an amount representing the low end of the range of possible outcomes is recorded and disclosure is made regarding the possibility of additional losses. Covanta reviews such estimates on an ongoing basis as developments occur with respect to such matters and may in the future increase or decrease such estimates. There can be no assurance that Covanta’s initial or adjusted estimates of losses will reflect the ultimate loss Covanta may experience regarding such matters. Any inaccuracies could potentially have a material adverse effect on Covanta’s consolidated financial condition.

Financial Instruments

      As described in Note 20. Financial Instruments of the Notes, the estimated fair-value amounts have been determined using available market information and appropriate valuation methodologies. However, considerable judgment is necessarily required in interpreting market data to develop estimates of fair value. Accordingly the estimates presented are not necessarily indicative of the amounts that Covanta would realize in a current market exchange.

      For cash and cash equivalents, restricted cash, and marketable securities, the carrying value of these amounts is a reasonable estimate of their fair value. The fair value of long-term unbilled receivables is estimated by using a discount rate that approximates the current rate for comparable notes. The fair value of noncurrent receivables is estimated by discounting the future cash flows using the current rates at which similar loans would be made to such borrowers based on the remaining maturities, consideration of credit risks, and other business issues pertaining to such receivables. The fair value of restricted funds held in trust is based on quoted market prices of the investments held by the trustee.

      Fair values for debt were determined based on interest rates that are currently available to Covanta for issuance of debt with similar terms and remaining maturities for debt issues that are not traded on quoted market prices. The fair value of project debt is estimated based on quoted market prices for the same or similar issues.

      The fair value of Covanta’s interest rate swap agreements is the estimated amount Covanta would receive or pay to terminate the agreement based on the net present value of the future cash flows as defined in the agreement.

Revenue Recognition

      Covanta Energy earns fees to service project debt (principal and interest) where such fees are expressly included as a component of the service fee paid by the client community pursuant to applicable waste-to-

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energy service agreements. Regardless of the timing of amounts paid by client communities relating to project debt principal, Covanta Energy records service revenue with respect to this principal component on a levelized basis over the term of the applicable service agreement. Unbilled service receivables related to waste-to-energy operations are discounted in recognizing the present value for services performed currently in order to service the principal component of the project debt. Such unbilled receivables amounted to $144 million at December 31, 2005. Fees for waste disposal are recognized in the period received. Revenue from electricity and steam sales are recorded when delivered at rates specified in the contracts. Covanta Energy also earns fees under fixed-price construction contracts, in which case revenue is accounted for using the percentage of completion of services rendered.

Pensions

      Covanta Energy has defined benefit and defined contribution retirement plans that cover substantially all of its employees. The employees of ARC Holdings continued to be covered under their separate retirement savings plan until December 31, 2005. During the third quarter of 2005, Covanta froze the Covanta Energy defined benefit pension plan effective December 31, 2005. All active employees who were eligible participants in the Covanta Energy Pension Plan as of December 31, 2005, were 100% vested and have a nonforfeitable right to this benefit at December 31, 2005. Beginning January 1, 2006, all eligible employees will receive a company contribution into a new defined contribution retirement plan.

      Covanta Energy recorded a pension plan liability equal to the amount by which the present value of the projected benefit obligations (using a discount rate of 5.75%) exceeded the fair value of pension assets as of December 31, 2005.

Unpaid Losses and Loss Adjustment Expenses

      The insurance subsidiaries establish loss and LAE reserves that are estimates of amounts needed to pay claims and related expenses in the future for insured events that have already occurred. The process of estimating reserves involves a considerable degree of judgment by management and, as of any given date, is inherently uncertain.

      Reserves are typically comprised of (1) case reserves for claims reported and (2) reserves for losses that have occurred but for which claims have not yet been reported, referred to as incurred but not reported (“IBNR”) reserves, which include a provision for expected future development on case reserves. Case reserves are estimated based on the experience and knowledge of claims staff regarding the nature and potential cost of each claim and are adjusted as additional information becomes known or payments are made. IBNR reserves are derived by subtracting paid loss and LAE and case reserves from estimates of ultimate loss and LAE. Actuaries estimate ultimate loss and LAE using various generally accepted actuarial methods applied to known losses and other relevant information. Like case reserves, IBNR reserves are adjusted as additional information becomes known or payments are made.

      Ultimate loss and LAE are generally determined by extrapolation of claim emergence and settlement patterns observed in the past that can reasonably be expected to persist into the future. In forecasting ultimate loss and LAE with respect to any line of business, past experience with respect to that line of business is the primary resource, but cannot be relied upon in isolation. The insurance businesses’ own experience, particularly claims development experience, such as trends in case reserves, payments on and closings of claims, as well as changes in business mix and coverage limits, are the most important information for estimating its reserves.

      Uncertainties in estimating ultimate loss and LAE are magnified by the time lag between when a claim actually occurs and when it is reported and settled. This time lag is sometimes referred to as the “claim-tail”. The claim-tail for most property coverages is typically short (usually a few days up to a few months). The claim-tail for automobile liability is relatively short (usually one to two years) and liability/casualty coverages, such as general liability, multiple peril coverage, and workers compensation, can be especially long as claims are often reported and ultimately paid or settled years, even decades, after the related loss events occur. During the long claims reporting and settlement period, additional facts regarding coverages written in prior

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accident years, as well as about actual claims and trends may become known and, as a result, the insurance subsidiaries may adjust their reserves. If management determines that an adjustment is appropriate, the adjustment is booked in the accounting period in which such determination is made in accordance with generally accepted accounting principles in the United States. Accordingly, should reserves need to be increased or decreased in the future from amounts currently established, future results of operations would be negatively or positively impacted, respectively.

      The insurance subsidiaries use independent actuaries which it significantly relies on to form a conclusion on reserve estimates. Those independent actuaries use several generally accepted actuarial methods to evaluate the insurance business loss reserves, each of which has its own strengths and weaknesses. The independent actuaries place more or less reliance on a particular method based on the facts and circumstances at the time the reserve estimates are made and through discussions with the insurance subsidiaries’ management.

Recent Accounting Pronouncements

      See Note 1. Organization and Summary of Significant Accounting Policies and Note 2. New Accounting Pronouncements of the Notes for a summary of additional accounting policies and new accounting pronouncements.

Related Party Transactions

Employment Arrangements

      See the descriptions of Covanta’s employment agreements with Anthony Orlando, Craig Abolt, John Klett and Timothy Simpson which are incorporated by reference into Item 11. Executive Compensation of this Form 10-K.

Affiliate Agreements

      As part of the investment and purchase agreement dated as of December 2, 2003 pursuant to which Covanta agreed to acquire Covanta Energy, Covanta arranged for a new replacement letter of credit facility for Covanta Energy, secured by a second priority lien on Covanta Energy’s available domestic assets, consisting of commitments for the issuance of standby letters of credit in the aggregate amount of $118 million. This financing was provided by SZ Investments, L.L.C., Third Avenue Business Trust, on behalf of Third Avenue Value Fund Series (“Third Avenue”), and D. E. Shaw Laminar Portfolios, L.L.C. (“Laminar”), a significant creditor of Covanta Energy (collectively, SZ Investments, Third Avenue and Laminar, the “Bridge Lenders”). This financing was refinanced on June 24, 2005 through a syndicate of lenders that did not include the Bridge Lenders. During the term of this financing and prior to its termination on June 24, 2005, Covanta Energy paid to the agent bank for this facility an upfront fee of $2.36 million, and a commitment fee equal to 0.5% per annum of the daily calculation of available credit, an annual agency fee of $30,000, and with respect to each issued letter of credit an amount equal to 6.5% per annum of the daily amount available to be drawn under such letter of credit.

      Each of SZ Investments, Third Avenue and Laminar or an affiliate own over five percent of Covanta’s common stock. Samuel Zell, current Chairman and the former Chief Executive Officer and William Pate, the former Chairman and current director, are affiliated with SZ Investments. David Barse, a director of Covanta, is affiliated with Third Avenue.

      Covanta obtained the financing for its acquisition of Covanta Energy pursuant to a note purchase agreement dated December 2, 2003, from the Bridge Lenders. Pursuant to the note purchase agreement, the Bridge Lenders provided Covanta with $40 million of bridge financing in exchange for notes issued by Covanta. Covanta repaid the notes with the proceeds from a rights offering of common stock of Covanta which was completed in June 2004 and in connection with the conversion of a portion of the note held by Laminar into 8.75 million shares of common stock of Covanta pursuant to the note purchase agreement. In consideration for the $40 million of bridge financing and the arrangement by the Bridge Lenders of the

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$118 million second lien credit facility and the arrangement by Laminar of a $10 million international revolving credit facility secured by Covanta’s international assets, Covanta issued to the Bridge Lenders an aggregate of 5,120,853 shares of common stock during 2004. As noted above, the second lien facility was terminated with the refinancing of its indebtedness in connection with the ARC Holdings acquisition.

      Pursuant to registration rights agreements Covanta filed a registration statement with the SEC to register the shares of common stock issued to the Bridge Lenders under the note purchase agreement. The registration statement was declared effective on August 24, 2004.

      As part of Covanta’s negotiations with Laminar and it becoming a five percent stockholder, pursuant to a letter agreement dated December 2, 2003, Laminar agreed to transfer restrictions on the shares of common stock that Laminar acquired pursuant to the note purchase agreement. Further, in accordance with the transfer restrictions contained in Article Fifth of Covanta’s charter restricting the resale of Covanta’s common stock by five percent stockholders, Covanta has agreed with Laminar to provide it with limited rights to resell the common stock that it holds. As of March 10, 2006, Laminar was permitted to sell up to 20% of Covanta’s outstanding shares, or all of the shares of Covanta common stock then held by it.

      Also in connection with the financing for the acquisition of Covanta Energy, Covanta agreed to pay up to $0.9 million in the aggregate to the Bridge Lenders as reimbursement for expenses incurred by them in connection with the note purchase agreement.

      The note purchase agreement and other transactions associated with the Covanta Energy acquisition involving SZ Investments, Third Avenue and Laminar were negotiated, reviewed and approved by a special committee of Covanta’s Board of Directors composed solely of disinterested directors and advised by independent legal and financial advisors.

      On January 31, 2005, Covanta entered into a stock purchase agreement with ARC Holdings, and ARC Holdings’ stockholders to purchase the issued and outstanding shares of ARC Holdings capital stock. Under the terms of the stock purchase agreement, Covanta paid $747 million including transaction costs for the stock of ARC Holdings and assumed the consolidated net debt of ARC Holdings, which was approximately $1.3 billion ($1.5 billion of consolidated indebtedness net of $0.2 billion of cash and restricted cash), resulting in an enterprise value of approximately $2 billion for ARC Holdings. The transaction was completed on June 24, 2005 and ARC Holdings is now a wholly-owned subsidiary of Covanta Energy.

      Covanta financed the purchase of ARC Holdings through a combination of debt and equity financing. The equity component of the financing consisted of an approximate $400 million offering of rights to purchase Covanta’s common stock to all of Covanta’s existing stockholders. In the ARC Holdings rights offering, Covanta’s existing stockholders were issued rights to purchase Covanta’s stock on a pro rata basis, with each holder entitled to purchase 0.9 shares of Covanta’s common stock at an exercise price of $6.00 per full share for each share of Covanta’s common stock then held.

      SZ Investments and its affiliate EGI-Fund (05-07) Investors, L.L.C., Third Avenue and Laminar representing ownership of approximately 40% of Covanta’s outstanding common stock, each separately committed to participate in the ARC Holdings rights offering and acquire their respective pro rata portion of the shares. As consideration for their commitments, Covanta paid each of these stockholders an amount equal to 1.75% of their respective equity commitments. Covanta agreed to amend an existing registration rights agreement to provide these stockholders with the right to demand that Covanta undertake an underwritten offering within twelve months of the closing of the acquisition of ARC Holdings in order to provide such stockholders with liquidity. The equity commitments and related agreements involving SZ Investments, Third Avenue and Laminar were negotiated, reviewed and approved by a special committee of Covanta’s Board of Directors composed solely of disinterested directors and advised by independent legal and financial advisors.

      As part of the Covanta Energy acquisition, Covanta agreed to and conducted the 9.25% Offering. The 9.25% Offering was made solely to those holders of Covanta Energy’s 9.25% Debentures (which had been issued prior to its bankruptcy) who had voted in favor of Covanta Energy’s second reorganization plan on January 12, 2004 or were otherwise authorized to participate by the bankruptcy court. Laminar held a portion of such debentures and was entitled to participate in the 9.25% Offering. On January 31, 2005, Covanta

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entered into a letter agreement with Laminar pursuant to which Covanta agreed that if the 9.25% Offering had not closed prior to the record date for the ARC Holdings rights offering, then Covanta would revise the 9.25% Offering so that the holders that participated in the 9.25% Offering would be offered additional shares of Covanta’s common stock at the same purchase price as in the ARC Holdings rights offering and in an amount equal to the number of shares of common stock that such holders would have been entitled to purchase in the ARC Holdings rights offering if the 9.25% Offering was consummated on or prior to the record date for the ARC Holdings rights offering. Accordingly, Covanta restructured its offering to offer up to an additional 2.7 million contingently issuable shares at $6.00 per share. The 9.25% Offering was completed on February 24, 2006 and Laminar exercised its rights to purchase a total of 633,380 shares.

      SZ Investments, a company affiliated with Samuel Zell, the former Chief Executive Officer and current Chairman of Covanta’s Board of Directors, and William Pate, the former Chairman of Covanta’s Board and a current Director, was a holder through its affiliate, HYI Investments, L.L.C. (“HYI”), of approximately 42% of the senior notes and payment-in-kind notes of ACL, a former unconsolidated subsidiary of Covanta. ACL emerged from Chapter 11 bankruptcy proceedings in 2004 with its plan of reorganization being confirmed without material condition as of December 30, 2004 and effective as of January  11, 2005. Pursuant to the terms of ACL’s plan of reorganization the notes held by HYI were converted into equity of ACL. The holders of ACL’s senior notes were among the class of grantors of the ACL warrants to subsidiaries of Covanta, which during October 2005 were exercised and Covanta’s interest in ACL was liquidated.

      Following ACL’s emergence from bankruptcy, Covanta sold its entire 50% interest in Vessel Leasing LLC to ACL for $2.5 million on January 13, 2005. The price and other terms and conditions of the sale were negotiated on an arm’s length-basis for Covanta by a special committee of its Board of Directors.

      Clayton Yeutter, a director of Covanta, is senior advisor to the law firm of Hogan & Hartson LLP. Hogan & Hartson has provided Covanta Energy with certain legal services for many years including 2005. This relationship preceded Covanta’s acquisition of Covanta Energy and Mr. Yeutter did not direct or have any direct or indirect involvement in the procurement, provision, oversight or billing of such legal services and does not directly or indirectly benefit from those fees. The Board has determined that such relationship does not interfere with Mr. Yeutter’s exercise of independent judgment as a director.

      As described in Note 5. Equity in Net Income (Loss) from Unconsolidated Investments of the Notes, Covanta Energy holds a 26% investment in Quezon. Covanta Energy and Quezon are both party to an agreement in which Covanta Energy assumed responsibility for the operation and maintenance of Quezon’s coal-fired electricity generation facility. For the fiscal years ended December 31, 2005 and 2004, Covanta Energy, subsequent to their acquisition by Covanta, collected $29.5 million and $34.7 million, respectively, for the operation and maintenance of the facility. As of December 31, 2005 the net amount due from Quezon was $0.1 million and as of December 31, 2004 the net amount due to Quezon related to the operation and maintenance of the facility was $3.8 million, which reflected advance payments made by Quezon.

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      In the normal course of business, Covanta’s subsidiaries are party to financial instruments that are subject to market risks arising from changes in interest rates, foreign currency exchange rates, and commodity prices. Covanta’s use of derivative instruments is very limited and it does not enter into derivative instruments for trading purposes. The following analysis provides quantitative information regarding Covanta’s exposure to financial instruments with market risks. Covanta uses a sensitivity model to evaluate the fair value or cash flows of financial instruments with exposure to market risk that assumes instantaneous, parallel shifts in exchange rates and interest rate yield curves. There are certain limitations inherent in the sensitivity analysis presented, primarily due to the assumption that exchange rates change in a parallel manner and that interest rates change instantaneously. In addition, the fair value estimates presented herein are based on pertinent information available to management as of December 31, 2005. Further information is included in Note 20. Financial Instruments of the Notes.

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Waste and Energy Services

Interest Rate Risk

      Covanta Energy and/or its subsidiaries have project debt outstanding bearing interest at floating rates that could subject it to the risk of increased interest expense due to rising market interest rates, or an adverse change in fair value due to declining interest rates on fixed rate debt. Of Covanta Energy’s project debt, approximately $206.7 million was floating rate debt at December 31, 2005. However, the entire interest rate risk related to the floating rate project debt is borne by the client communities because debt service is passed through to those clients under the contractual structure of their waste services agreements. Covanta Energy had only one interest rate swap relating to project debt outstanding at December 31, 2005 in the notional amount of $80.2 million related to floating rate Project debt. Gains and losses, however, on this swap are for the account of the client community and are not borne by Covanta Energy.

      As described in Note 18. Long-Term Debt of the Notes, Covanta Energy is required to enter into hedging arrangements with respect to a portion of its exposure to interest rate changes with respect to its borrowing under the Credit Facilities. On July 8, 2005, Covanta Energy entered into two pay-fixed, receive floating interest rate swap agreements with a total notional amount of $300 million. These swaps were designated as cash flow hedges in accordance with SFAS No. 133. Accordingly, unrealized gains or losses will be deferred in other comprehensive income until the hedged cash flows affect earnings. Covanta Energy expects to enter into similar arrangements during 2006 for at least an additional $37.5 million in notional amount.

      For floating rate project debt, a 20 percent hypothetical increase in the underlying December 31, 2005 market interest rates would result in a potential loss to twelve month future earnings of $3.7 million. For fixed rate project debt, the potential reduction in fair value from a 20 percent hypothetical increase in the underlying December 31, 2005 market interest rates would be approximately $51.8 million. The fair value of Covanta Energy’s fixed rate project debt (including $1.328 billion in fixed rate debt related to revenue bonds in which debt service is an explicit component of the service fees billed to the client communities) was $1.395 billion at December 31, 2005, and was determined using average market quotations of price and yields provided by investment banks.

Foreign Currency Exchange Rate Risk

      Covanta Energy has investments in energy projects in various foreign countries, including the Philippines, China, India and Bangladesh, and to a much lesser degree, Italy and Costa Rica. Neither Covanta nor Covanta Energy enters into currency transactions to hedge its exposure to fluctuations in currency exchange rates. Instead, Covanta Energy attempts to mitigate its currency risks by structuring its project contracts so that its revenues are adjusted in line with corresponding changes in currency rates. Therefore, only working capital and project debt denominated in other than a project entity’s functional currency are exposed to currency risks.

      At December 31, 2005, Covanta Energy had $85.6 million of project debt related to two diesel engine projects in India. For $73.4 million of the debt (related to project entities whose functional currency is the Indian rupee), exchange rate fluctuations are recorded as translation adjustments in other comprehensive income within stockholders’ equity in Covanta’s consolidated balance sheets. The remaining $12.2 million of debt is denominated in U.S. dollars.

      The potential loss in fair value for such financial instruments from a 10% adverse change in December 31, 2005 quoted foreign currency exchange rates would be approximately $7.3 million.

      At December 31, 2005, Covanta Energy also had net investments in foreign subsidiaries and projects. See Note 5. Equity in Net Income (Loss) from Unconsolidated Investments of the Notes for further discussion.

Commodity Price Risk and Contract Revenue Risk

      Neither Covanta nor Covanta Energy has entered into futures, forward contracts, swaps or options to hedge purchase and sale commitments, fuel requirements, inventories or other commodities. Alternatively,

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Covanta Energy attempts to mitigate the risk of energy and fuel market fluctuations by structuring contracts related to its energy projects in the manner described above under Management’s Discussion and Analysis of Financial Condition and Results of Operation — Overview — Contract Structures.

      Generally, Covanta Energy is protected against fluctuations in the waste disposal market, and thus its ability to charge acceptable fees for its services, through long-term service agreements and disposal contracts at its waste-to-energy facilities. At 8 of its waste-to-energy facilities, differing amounts of waste disposal capacity are not subject to long-term contracts and, therefore, Covanta Energy is partially exposed to the risk of market fluctuations in the waste disposal fees it may charge. Covanta Energy’s long-term service agreements begin to expire in 2008, and energy sales contracts at Company-owned projects generally expire at or after the date on which that project’s long-term agreement expires. Expiration of these contracts will subject Covanta Energy to greater market risk in maintaining and enhancing its revenues. As its agreements at municipally-owned projects expire, Covanta Energy will seek to enter into renewal or replacement contracts to continue operating such projects. As Covanta Energy’s agreements at facilities it owns begin to expire, Covanta Energy intends to seek replacement or additional contracts for waste supplies, and because project debt on these facilities will be paid off at such time, Covanta Energy expects to be able to offer disposal services at rates that will attract sufficient quantities of waste and provide acceptable revenues. Covanta Energy will seek to bid competitively in the market for additional contracts to operate other facilities as similar contracts of other vendors expire. At Company-owned facilities, the expiration of existing energy sales contracts will require Covanta Energy to sell its output either into the local electricity grid or pursuant to new contracts. There can be no assurance that Covanta Energy will be able to enter into such renewals, replacement or additional contracts, or that the price and other terms available in the market at the time will be favorable to Covanta Energy.

Other Services

Risk Related to the Investment Portfolio

      NAICC’s objectives in managing its investment portfolio are to maximize investment income and investment returns while minimizing overall market risk. Investment strategies are developed based on many factors including duration of liabilities, underwriting results, overall tax position, regulatory requirements, and fluctuations in interest rates. Investment decisions are made by management, in consultation with an independent investment advisor, and approved by its board of directors. Market risk represents the potential for loss due to adverse changes in the fair value of securities. The market risks related to NAICC’s fixed maturity portfolio are primarily credit risk, interest rate risk, reinvestment risk and prepayment risk. The market risk related to NAICC’s equity portfolio is price risk.

Fixed Maturities

      Interest rate risk is the price sensitivity of fixed maturities to changes in interest rate. Management views these potential changes in price within the overall context of asset and liability matching. Management estimates the payout patterns of NAICC’s liabilities, primarily loss reserves, to determine their duration. Management sets duration targets for the fixed income portfolio after consideration of the duration of NAICC’s liabilities that it believes mitigates the overall interest rate risk. NAICC’s exposure to interest rate risk is mitigated by the relative short-term nature of its insurance and other liabilities. The effective duration of the portfolio at December 31, 2005 and 2004 was 1.9 years and 2.3 years, respectively. Management believes its portfolio duration is appropriate given the relative short-tail nature of the auto programs and projected run-off of all other lines of business. A hypothetical 100 basis point increase in market interest rates would cause an approximate 2.4% decrease in the fair value of the portfolio while a hypothetical 100 basis point decrease would cause an approximate 2.1% increase in fair value. Credit risk is the price sensitivity of fixed maturities to changes in the credit quality of such investment. NAICC’s exposure to credit risk is mitigated by its investment in high quality fixed income alternatives.

      Fixed maturities of NAICC include Mortgage-Backed Securities and Collateralized Mortgage Obligations, collectively (“MBS”) representing 23.1% and 24.3% of total fixed maturities at December 31, 2005 and

91

2004, respectively. All MBS held by NAICC are issued by the Federal National Mortgage Association (“FNMA”) or the Federal Home Loan Mortgage Corporation (“FHLMC”), which are both rated AAA by Moody’s Investors Services. Both FNMA and FHLMC are corporations that were created by Acts of Congress. FNMA and FHLMC guarantee the principal balance of their securities. FNMA guarantees timely payment of principal and interest.

      One of the risks associated with MBS is the timing of principal payments on the mortgages underlying the securities. NAICC attempts to limit repayment risk by purchasing MBS whose cost is below or does not significantly exceed par, and by primarily purchasing structured securities with repayment protection which provides more certain cash flow to the investor such as MBS with sinking fund schedules known as Planned Amortization Classes (“PAC”) and Targeted Amortization Classes (“TAC”). The structures of PAC’s and TAC’s attempt to increase the certainty of the timing of prepayment and thereby minimize the prepayment and interest rate risk. In 2005, NAICC recognized less than $0.1 million in loss on sales of fixed maturities.

      MBS, as well as callable bonds, have a greater sensitivity to market value declines in a rising interest rate environment than to market value increases in a declining interest rate environment. NAICC realized significant increases in its prepayments of principal during 2004 and 2003 and to a lesser extent in 2005. The prepayments mitigated the need to sell securities to meet operating cash requirements as noted previously.

Equity Securities

      In the fourth quarter of 2003, NAICC sold nearly all of its equity investments capitalizing on the general stock market recovery and specifically the technology sector. In 2003, NAICC recognized $0.4 million as net realized gains from equity investments. In third and fourth quarter of 2004, NAICC began reinvesting in equity securities, generally limited to Fortune 500 companies with strong balance sheets, history of dividend growth and price appreciation. As of December 31, 2005, equity securities represented 3.4% of the total NAICC investment portfolio.

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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Report of Independent Registered Public Accounting Firm

Consolidated Statements of Operations for the Years ended December 31, 2005, 2004 and 2003

Consolidated Balance Sheets as of December 31, 2005 and 2004

Consolidated Statements of Cash Flows for the Years ended December 31, 2005, 2004 and 2003

Statements of Stockholders’ Equity for the Years ended December 31, 2005, 2004 and 2003

Notes to Consolidated Financial Statements

Note 1.     Organization and Summary of Significant Accounting Policies

Note 2.     New Accounting Pronouncements

Note 3.     Acquisitions and Dispositions

Note 4.     California Grantor Trust Settlement

Note 5.     Equity in Net Income (Loss) from Unconsolidated Investments

Note 6.     Waste and Energy Service Revenues and Unbilled Service Receivables

Note 7.     Reinsurance

Note 8.     Investments

Note 9.     Restricted Funds Held in Trust

Note 10. Property, Plant and Equipment

Note 11. Intangible Assets and Goodwill

Note 12. Other Noncurrent Assets

Note 13. Accrued Expenses and Other Current Liabilities

Note 14. Deferred Revenue

Note 15. Other Noncurrent Liabilities

Note 16. Unpaid Losses and Loss Adjustment Expenses

Note 17. Leases

Note 18. Long-Term Debt

Note 19. Project Debt

Note 20. Financial Instruments

Note 21. Employee Benefit Plans

Note 22. Income Taxes

Note 23. Insurance Regulation, Dividend Restrictions and Statutory Surplus

Note 24. Stockholders’ Equity and Stock Option Plans

Note 25. Accumulated Other Comprehensive Income

Note 26. Earnings (Loss) Per Share

Note 27. Business Segments

Note 28. Quarterly Data (Unaudited)

Note 29. Commitments and Contingent Liabilities

Note 30. Related Party Transactions

Financial Statement Schedules:

     Schedule I Parent Company Only Financial Statements

     Schedule II Valuation and Qualifying Accounts

93

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of Covanta Holding Corporation

We have audited the accompanying consolidated balance sheets of Covanta Holding Corporation as of December 31, 2005 and 2004, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2005. Our audits also included the financial statement schedules listed in the Index at Item 8. These financial statements and schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Covanta Holding Corporation at December 31, 2005 and 2004, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Covanta Holding Corporation’s internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 8, 2006 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

MetroPark, New Jersey

March 8, 2006

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COVANTA HOLDING CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

				For the Years Ended December 31
				2005			2004			2003
				(In thousands, except per share
				amounts)
	OPERATING REVENUES:
		Waste and service revenues		$	638,503		$	372,748		$	—
		Electricity and steam sales			322,770			181,074			—
		Other operating revenues			17,490			22,374			41,123
			Total operating revenues		978,763			576,196			41,123
	OPERATING EXPENSES:
		Plant operating expenses			557,490			348,867			—
		Depreciation and amortization expense			124,925			53,282			224
		Net interest expense on project debt			52,431			32,586			—
		Other operating expenses			11,015			16,560			44,407
		General and administrative expenses			69,629			48,031			10,832
		California Grantor Trust Settlement			10,342			—			—
		Restructuring charges			2,765			—			—
		Acquisition-related charges			3,950			—			—
			Total operating expenses		832,547			499,326			55,463
	Operating income (loss)				146,216			76,870			(14,340	)
Other income (expense):
	Investment income				6,129			2,343			1,434
	Interest expense				(89,973	)		(43,739	)		(1,424	)
	Gain on derivative instruments, ACL warrants				15,193			—			—
		Total other expenses			(68,651	)		(41,396	)		10
Income (loss) before income tax expense, minority interests and equity in net income (loss) from unconsolidated investments					77,565			35,474			(14,330	)
Income tax expense					(34,651	)		(11,535	)		(18	)
Minority interests					(9,197	)		(6,869	)		—
Equity in net income (loss) from unconsolidated investments					25,609			17,024			(54,877	)
NET INCOME (LOSS)				$	59,326		$	34,094		$	(69,225	)
INCOME (LOSS) PER SHARE OF COMMON STOCK — BASIC				$	0.49		$	0.39		$	(1.05	)
INCOME (LOSS) PER SHARE OF COMMON STOCK — DILUTED				$	0.46		$	0.37		$	(1.05	)

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

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COVANTA HOLDING CORPORATION

CONSOLIDATED BALANCE SHEETS

	As of December 31,
	2005			2004
	(In thousands, except per
	share amounts)
ASSETS
Current:
Cash and cash equivalents	$	128,556		$	96,148
Marketable securities available for sale		7,400			6,400
Investments in securities (securities at cost: $1,377 and $1,324)		1,506			1,432
Restricted funds held in trust		197,527			116,092
Receivables (less allowances of $4,959 and $1,455)		202,893			133,994
Unbilled service receivables		57,588			58,206
Deferred income taxes		21,058			8,868
Prepaid expenses and other assets		77,872			72,006
Total Current Assets		694,400			493,146
Property, plant and equipment, net		2,724,843			819,400
Investments in fixed maturities at market (cost: $44,824 and $57,264)		43,667			57,210
Restricted funds held in trust		249,905			123,826
Unbilled service receivables		86,830			98,248
Intangible assets, net		434,543			177,290
Goodwill		255,927			—
Investments in and advances to investees and joint ventures		66,301			64,156
Deferred income taxes		26,236			18,042
Other assets		119,513			87,763
Total Assets	$	4,702,165		$	1,939,081
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current:
Current portion of long-term debt	$	47,549		$	112
Current portion of project debt		174,114			109,701
Accounts payable		19,447			16,243
Deferred revenue		14,524			15,219
Accrued expenses and other liabilities		205,351			139,453
Total Current Liabilities		460,985			280,728
Long-term debt		1,260,570			312,784
Project debt		1,424,170			835,036
Deferred income taxes		533,169			109,465
Other liabilities		343,402			182,903
Total Liabilities		4,022,296			1,720,916
Minority Interests		80,628			83,350
Stockholders’ Equity:
Preferred stock ($0.10 par value; authorized 10,000 shares; none issued and outstanding)		—			—
Common stock ($0.10 par value; authorized 250,000 and 150,000 shares; issued 141,246 and 73,441 shares; outstanding 141,166 and 73,430 shares)		14,125			7,344
Additional paid-in capital		594,186			194,783
Unearned compensation		(4,583	)		(3,489	)
Accumulated other comprehensive income		535			583
Accumulated deficit		(5,014	)		(64,340	)
Treasury stock		(8	)		(66	)
Total Stockholders’ Equity		599,241			134,815
Total Liabilities and Stockholders’ Equity	$	4,702,165		$	1,939,081

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

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COVANTA HOLDING CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

			For the Years Ended December 31,
			2005			2004			2003
			(In thousands)
OPERATING ACTIVITIES:
Net income (loss)			$	59,326		$	34,094		$	(69,225	)
Adjustments to reconcile net income to net cash provided by operating activities:
	Depreciation and amortization			124,925			53,282			224
	Revenue contract levelization			2,068			—			—
	Amortization of deferred financing costs			10,785			7,045			1,024
	Amortization of project debt premium and discount			(18,058	)		(10,457	)		—
	Accretion on principal of High Yield Notes			872			2,736			—
	Provision for doubtful accounts			2,008			733			—
	Stock option and amortization of unearned compensation expense			4,057			1,425			521
	Equity in net (loss) income from unconsolidated investments			(25,609	)		(17,024	)		54,877
	Dividends from unconsolidated Waste and Energy Services investments			19,287			16,926			—
	Minority interests			9,197			6,869			—
	Gain on derivative instruments, ACL warrants			(15,193	)		—			—
	Deferred income taxes			17,759			(2,916	)		—
	Other, net			6,003			(172	)		(1,929	)
	Change in operating assets and liabilities, net of effects of acquisition:
		Restricted funds for emergence costs		13,201			65,681			—
		Receivables		2,701			13,084			7,295
		Unbilled service receivables		11,949			11,221			—
		Accounts payable		(64	)		(8,053	)		—
		Accrued expenses		7,755			8,034			—
		Accrued emergence costs		(13,201	)		(65,681	)		—
		Deferred revenue		(695	)		(4,736	)		(6,027	)
		Unpaid losses and loss adjustment expenses		(17,402	)		(19,110	)		(17,869	)
		Other, net		6,367			15,260			7,938
Net cash provided by (used in) operating activities				208,038			108,241			(23,171	)
INVESTING ACTIVITIES:
	Decrease (increase) in restricted cash, Covanta Energy escrow			—			37,026			(37,026	)
	Purchase of ARC Holdings and Covanta Energy, respectively			(747,348	)		(36,400	)		—
	Cash acquired of ARC Holdings and Covanta Energy, respectively			62,358			57,795			—
	Proceeds from the sale of, matured and called investment securities			30,827			27,307			58,366
	Purchase of investment securities			(3,458	)		(24,828	)		(36,624	)
	Purchase of property, plant and equipment			(23,527	)		(11,999	)		(96	)
	Other			4,269			7,090			5,114
Net cash (used in) provided by investing activities				(676,879	)		55,991			(10,266	)
FINANCING ACTIVITIES:
	Proceeds from rights offerings, net			395,791			41,021			—
	Proceeds from the exercise of options for common stock			2,984			3,474			—
	Borrowings of recourse debt			675,000			—			40,000
	Premium received on refinancing			1,862			—			—
	Payment of deferred financing costs			(35,485	)		(7,255	)		—
	Repayment of bridge financing			—			(26,612	)		—
	Borrowings for facilities			43,561			14,488			—
	Payment of long-term debt			(368,432	)		(19,673	)		—
	Payment of project debt			(188,975	)		(67,943	)		—
	Increase in restricted funds held in trust			(6,337	)		(13,839	)		—
	Increase in parent restricted funds			(6,471	)		—			—
	Distributions to minority partners			(12,249	)		(8,261	)		—
	Other			—			(1,436	)		1,450
Net cash provided by (used in) financing activities				501,249			(86,036	)		41,450
Net increase in cash and cash equivalents				32,408			78,196			8,013
Cash and cash equivalents at beginning of period				96,148			17,952			25,183
Deconsolidation of ACL, GMS and Vessel Leasing				—			—			(15,244	)
Cash and cash equivalents at end of period			$	128,556		$	96,148		$	17,952
Cash Paid for Interest and Income Taxes:
Interest (net of amounts capitalized)			$	97,339		$	66,917		$	—
Income taxes paid			$	16,737		$	24,207		$	—

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

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CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

															Accumulated
			Common Stock						Additional						Other						Treasury Stock
									Paid-In			Unearned			Comprehensive			Retained
			Shares			Amount			Capital			Compensation			(Loss) Income			(Deficit)			Shares		Amount			Total
			(In thousands)
Balance as of December 27, 2002				30,828		$	3,083		$	117,148		$	(1,132	)	$	(12,464	)	$	(29,209	)		11	$	(66	)	$	77,360
	Common stock issued pursuant to Note Purchase Agreement			5,121			512			6,657																	7,169
	Stock option compensation expense									137																	137
	Amortization of unearned compensation												384														384
	Adjustment of unearned compensation for terminated employees			(156	)		(16	)		(496	)		459														(53	)
Comprehensive loss:
	Net loss																		(69,225	)							(69,225	)
	Minimum pension liability — Insurance business															(426	)										(426	)
	Net unrealized loss on available-for-sale securities															(2,877	)										(2,877	)
	Net reclassification adjustment for amount included in equity in net loss of unconsolidated Marine Services subsidiaries															15,322											15,322
		Total comprehensive income (loss)														12,019			(69,225	)							(57,206	)
Balance as of December 31, 2003				35,793			3,579			123,446			(289	)		(445	)		(98,434	)		11		(66	)		27,791
	Stock option compensation expense									181																	181
	Amortization of unearned compensation												1,345														1,345
	Adjustment of unearned compensation for terminated employees			(41	)		(4	)		(200	)		68														(136	)
	Shares issued in Covanta Energy Rights Offering, net of costs			27,438			2,744			38,277																	41,021
	Right cancelled for terminated employees			(12	)		(1	)		(18	)																(19	)
	Exercise of options to purchase common stock			966			96			5,520																	5,616
	Shares cancelled in exercise of options			(89	)		(9	)		(785	)																(794	)
	Conversion of portion of bridge financing			8,750			875			12,513																	13,388
	Share issued in restricted stock award			636			64			4,549			(4,613	)													—
	Stock purchase rights issued to Covanta creditors			—			—			11,300																	11,300
Comprehensive income, net of income taxes:
	Net income																		34,094								34,094
	Foreign currency translation															549											549
	Minimum pension liability															1,225											1,225
	Net unrealized loss on available-for-sale securities															(746	)										(746	)
		Total comprehensive income														1,028			34,094								35,122
Balance as of December 31, 2004				73,441			7,344			194,783			(3,489	)		583			(64,340	)		11		(66	)		134,815
	Stock option compensation expense									(29	)																(29	)
	Amortization of unearned compensation												4,086														4,086
	Adjustment of unearned compensation for terminated employees			(18	)		(2	)		(164	)		166														—
	Shares issued in ARC Holdings Rights Offering, net of costs			66,673			6,667			389,124																	395,791
	Exercise of options to purchase common stock			724			72			4,937																	5,009
	Shares cancelled in exercise of options			(21	)		(1	)		(290	)											69		58			(233	)
	Share issued in restricted stock award			447			45			5,317			(5,346	)													16
	ACL gift upon emergence from bankruptcy									508																	508
Comprehensive income, net of income taxes:
	Net income																		59,326								59,326
	Foreign currency translation															(675	)										(675	)
	Minimum pension liability															(331	)										(331	)
	Net unrealized loss on available-for-sale-securities															(1,055	)										(1,055	)
	Net unrealized gain on interest rate swap															2,013											2,013
		Total comprehensive income														(48	)		59,326								59,278
Balance as of December 31, 2005				141,246		$	14,125		$	594,186		$	(4,583	)	$	535		$	(5,014	)		80	$	(8	)	$	599,241

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Organization and Summary of Significant Accounting Policies

Organization

      On September 20, 2005, Danielson Holding Corporation changed its name to Covanta Holding Corporation (“Covanta”). Covanta’s common stock was traded on the American Stock Exchange under the symbol “DHC” until close of trading on October 4, 2005. Since that date, Covanta’s stock has been traded on the New York Stock Exchange under the symbol “CVA”.

      Covanta is a holding company that owns subsidiaries currently engaged in the businesses of waste and energy services, and insurance services. The predominant business is the waste and energy business which is comprised of Covanta Energy Corporation and its subsidiaries (“Covanta Energy”), which Covanta acquired on March 10, 2004. Covanta Energy’s subsidiaries also include Covanta ARC Holdings Inc., formerly known as American Ref-Fuel Holdings Corp., and its subsidiaries (“ARC Holdings”), which Covanta Energy acquired on June  24, 2005 (the “Acquisition Date”). See Note 3. Acquisitions and Dispositions of the Notes to Consolidated Financial Statements (“Notes”) for a description of these acquisitions. Covanta has changed the names of the ARC Holdings subsidiaries such that they will conduct business under the Covanta name.

      Covanta Energy and its domestic subsidiaries, including ARC Holdings, develop, construct, own and operate for itself and others infrastructure for the conversion of waste-to-energy, waste disposal, independent power production and water treatment businesses in the United States. Covanta Energy’s subsidiary Covanta Power International Holdings, Inc. and its subsidiaries (“CPIH”) engage in the independent power production business outside the United States. Covanta’s business segments are comprised of Waste and Energy Services, which is comprised of Covanta Energy’s domestic and international operations, and Other Services, which is comprised of the holding company and insurance subsidiaries’ operations.

      On March 10, 2004 (the “Effective Date”), Covanta Energy consummated a plan of reorganization and emerged from its reorganization proceeding under Chapter 11 of the United States Bankruptcy Code (“Chapter 11”). Pursuant to the plan of reorganization (“Reorganization Plan”), Covanta acquired 100% of the equity in Covanta Energy. Covanta’s subsidiaries owning and operating Covanta’s Warren County, New Jersey and Lake County, Florida waste-to-energy facilities and which were engaged in the Tampa Bay, Florida desalination project remained debtors-in-possession (the “Remaining Debtors”) after the Effective Date. As a result, Covanta recorded its investment in the Remaining Debtors using the equity method as of March 10, 2004. Subsequent to the Effective Date, all Remaining Debtors associated with the Tampa Bay, Lake County, and Warren County projects emerged from bankruptcy on August 6, 2004, December 14, 2004, and December 15, 2005, respectively. Covanta has included Lake County and Warren County as consolidated subsidiaries in its financial statements since their respective emergence dates. Upon Tampa Bay’s emergence from Chapter 11, Covanta Energy did not have any operating or ownership rights in this facility.

      Covanta also has investments in subsidiaries engaged in insurance operations in California. Covanta holds all of the voting stock of Danielson Indemnity Company (“DIND”). DIND owns 100% of the common stock of National American Insurance Company of California, Covanta’s principal operating insurance subsidiary. National American Insurance Company of California and its subsidiaries are collectively referred to herein as “NAICC.” The operations of NAICC are in property and casualty insurance. NAICC writes non-standard private automobile insurance policies in California.

      During 2004, Covanta also had an investment in American Commercial Lines LLC (“ACL”), an integrated marine transportation and service company, which throughout 2004 was in bankruptcy proceedings under Chapter 11. ACL is no longer a subsidiary of Covanta. On December 30, 2004, ACL confirmed a plan of reorganization and has since emerged from bankruptcy. As part of ACL’s plan of reorganization, Covanta’s stock in ACL was cancelled, and its ownership interest terminated. Covanta received no distribution under the ACL plan of reorganization, but received from ACL’s creditors, in January 2005, warrants to purchase three percent of ACL stock. During October 2005, Covanta exercised such warrants and sold all of its resulting

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shares in ACL. See Note 20. Financial Instruments of the Notes for additional information regarding the ACL warrants.

Summary of Significant Accounting Policies

Principles of Consolidation

      The consolidated financial statements reflect the results of operations, cash flows and financial position of Covanta and its majority-owned or controlled subsidiaries. All intercompany accounts and transactions have been eliminated. Investments in companies that are not majority-owned or controlled but in which Covanta has significant influence are accounted for under the equity method.

Equity Method of Investments

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

Cash and Cash Equivalents

      Cash and cash equivalents include all cash balances and highly liquid investments having maturities of three months or less from the date of purchase.

Restricted Funds for Emergence Costs

      Covanta Energy had $19.6 million and $32.8 million as of December 31, 2005 and 2004, respectively, in cash held in such accounts to pay for additional emergence expenses that are estimated to be paid in the future and which relate to Covanta Energy’s emergence from bankruptcy. Cash held in such accounts is not available for general corporate purposes.

Income Taxes

      Deferred income taxes are based on the difference between the financial reporting and tax basis of assets and liabilities. The deferred income tax provision represents the change during the reporting period in the deferred tax assets and deferred tax liabilities, net of the effect of acquisitions and dispositions. Deferred tax assets include tax losses and credit carryforwards and are reduced by a valuation allowance if, based on available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

      During the periods covered by the consolidated financial statements, Covanta filed a consolidated Federal income tax return, which included all eligible United States subsidiary companies. Foreign subsidiaries were taxed according to regulations existing in the countries in which they do business. Subsequent to March 10, 2004, and prior to July 31, 2005, CPIH and its United States and foreign subsidiaries were not members of the Covanta consolidated tax group. In addition, Covanta Lake was not a member of any consolidated tax group after February 20, 2004.

Stock-Based Compensation

      In 2005, Covanta applied the intrinsic-value-based method prescribed in Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” (“APB 25”) in accounting for employee and director stock-based compensation. All of the options are granted with an exercise price equal to the market price on the date of grant. Under APB 25, Covanta does not recognize stock-based compensation expense for its employee and director stock options. Stock-based compensation expense is recognized for

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options granted to non-employees using the fair value of the options on the date of grant. See Note 24. Stockholders’ Equity and Stock Option Plans for a description of Covanta’s option plans.

      In 2005, Covanta determined pro forma amounts as if the fair value method required by Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” (“SFAS 123”), as amended by SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure” (“SFAS 148”), had been applied to its stock-based compensation. The stock options fair values were estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions for 2005: dividend yield of 0% per annum; an expected life of approximately 8 years; expected volatility of 70%-80%; and a risk free interest rate of 4% - 5%. The stock options fair values were estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions for 2004: dividend yield of 0% per annum; an expected life of approximately 8 years; expected volatility of 50% - 73%; and a risk free interest rate of 4% - 6%. Pro forma net income (loss) and earnings (loss) per share are disclosed below as if the fair value based method of accounting under SFAS 123, as amended by SFAS 148, had been applied to its unvested stock options (in thousands of dollars, except per share amounts):

		For the Years Ended December 31,
		2005			2004			2003
Net income (loss) as reported		$	59,326		$	34,094		$	(69,225	)
Add: Actual stock-based option expense included in net income (loss) — net of tax effects			(19	)		128			137
Less: Stock-based compensation expense determined under SFAS 123 — net of tax effects			(2,613	)		(987	)		(970	)
Pro forma net income (loss)		$	56,694		$	33,235		$	(70,058	)
Basic earnings (loss) per share:
	As reported	$	0.49		$	0.39		$	(1.05	)
	Pro forma	$	0.46		$	0.38		$	(1.06	)
Diluted earnings (loss) per share:
	As reported	$	0.46		$	0.37		$	(1.05	)
	Pro forma	$	0.44		$	0.36		$	(1.06	)

      Stock-based compensation expense associated with restricted stock grants that continue to vest based on future employment is measured based on the grant-date market value of Covanta’s common stock and is recognized on the accelerated attribution method under SFAS 123 over the required employment period, which is the vesting period.

      Covanta accelerated the vesting period for 330,000 options from February  28, 2006 to March 21, 2005. The average of the high and low trading price for Covanta’s common stock on March 18, 2005, the new measurement date, was $16.48 per share. The exercise price is $7.43 per share. At the time the options were granted, they had a fair value per option of $5.68 per share using the Black-Scholes valuation model. The 2004 pro forma after-tax compensation expense under SFAS 123 related to the options for which the vesting period was accelerated was $0.2 million. The pro forma after-tax compensation expense related to the options for which vesting was accelerated, which would otherwise have not been included in 2005 was $0.1 million. The purpose of the acceleration was to permit officers and employees who held the options to exercise their options and participate in the ARC Holdings rights offering to ensure that those participants’ rights with respect to this subset of options were not diluted by the issuance of the new shares.

      Under APB 25 and authoritative interpretations, when the vesting provisions are modified, Covanta is required to recognize compensation expense for the estimated portion of the award that, absent the modification, would have expired unexercisable. Accordingly, Covanta estimated the number of employees who might cease to be employees prior to the original vesting date of February 28, 2006. Covanta anticipates

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that all participating employees will remain employees through the original vesting date, based upon the compensation structure of the employees holding these options, including the vesting provisions of other awards, and the diminutive period of time remaining until February 28, 2006. Covanta would be required to recognize compensation expense of up to $2.9 million if all employees holding the subset of options were to cease being employees of Covanta prior to the original vesting date. If one or more participating employees were to cease being employed, Covanta would be required to revise its estimate quarterly and recognize compensation expense in an amount equal to that employee’s vested options divided by 330,000 and applying that ratio to $2.9 million. No participating employees have ceased to be employed as of December 31, 2005.

      Covanta must adopt SFAS 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”) as of January 1, 2006 and pro forma disclosures under SFAS 123 are no longer an alternative. Covanta will use the Black-Scholes valuation model to fair value its share-base payments and will apply the modified prospective method which requires that compensation expense be recorded for all unvested stock options and restricted stock upon adoption of SFAS 123R. See the further discussion of SFAS 123R in Note 2. New Accounting Pronouncements of the Notes.

      Due to the insignificant amount of unvested options as of December 31, 2005, the adoption of SFAS 123R will not have a material impact on Covanta’s consolidated results of operations and earnings per share. Had Covanta earlier adopted the provisions of SFAS 123R, the compensation expense recorded would not have been materially different than the pro forma SFAS 123 expense disclosed but may be significantly different in the future depending on the number and type of stock-based compensation awards that will be granted.

Waste and Energy Services

Revenues

Waste and Service Revenues

      Revenue from waste and service agreements consist of the following:

      1) Fees earned under contract to operate and maintain waste-to-energy, independent power and water facilities are recognized as revenue when services are rendered, regardless of the period they are billed;

      2) Fees earned to service project debt (principal and interest) where such fees are expressly included as a component on the service fee paid by the client community pursuant to applicable waste-to-energy service agreements. Regardless of the timing of amounts paid by client communities relating to project debt principal, Covanta Energy records service revenue with respect to this principal component on a levelized basis over the term of the service agreement. Unbilled service receivables related to waste-to-energy operations are discounted in recognizing the present value for services performed currently in order to service the principal component of the Project debt. Such unbilled receivables amounted to $144.4 million and $156.5 as of December 31, 2005 and 2004, respectively;

      3) Fees earned for processing waste in excess of service agreement requirements are recognized as revenue beginning in the period Covanta Energy processes waste in excess of the contractually stated requirements;

      4) Tipping fees earned under waste disposal agreements are recognized as revenue in the period waste is received; and

      5) Other miscellaneous fees, such as revenue for scrap metal recovered and sold, are generally recognized as revenue when scrap metal is sold.

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Electricity and Steam Sales

      Revenue from the sale of electricity and steam are earned and recorded based upon output delivered and capacity provided at rates specified under contract terms or prevailing market rates net of amounts due to client communities under applicable service agreements. Covanta Energy is accounting for certain long-term power contracts in accordance with Emerging Issues Task Force (“EITF”) No. 91-6, “Revenue Recognition of Long-Term Power Sales Contracts” and EITF No. 96-17, “Revenue Recognition under Long-Term Power Sales Contracts That Contain both Fixed and Variable Pricing Terms” which require that power revenues under these contracts be recognized as the lesser of (a) amounts billable under the respective contracts; or (b) an amount determinable by the kilowatt hours made available during the period multiplied by the estimated average revenue per kilowatt hour over the term of the contract. The determination of the lesser amount is to be made annually based on the cumulative amounts that would have been recognized had each method been applied consistently from the beginning of the contract. The difference between the amount billed and the amount recognized is included in other long-term liabilities.

Construction Revenues

      Revenues under fixed-price construction contracts, including construction, are recognized on the basis of the estimated percentage of completion of services rendered. Construction revenues also include design, engineering and construction management fees.

Pass Through Costs

      Pass through costs are costs for which Covanta Energy receives a direct contractually committed reimbursement from the municipal client which sponsors a waste-to-energy project. These costs generally include utility charges, insurance premiums, ash residue transportation and disposal and certain chemical costs. These costs are recorded net of municipal client reimbursements in Covanta’s consolidated financial statements. Total pass through costs for the years ended December 31, 2005 and 2004 were $60.9 million and $39.9 million, respectively.

Deferred Financing Costs

      At December 31, 2005 and 2004, Covanta Energy had $28.9 million and $6.2 million, respectively, of net deferred financing costs recorded on the consolidated balance sheet. These costs were incurred in connection with arranging its various financing arrangements. These costs are being amortized over the expected period that the related financing will be outstanding using the effective interest rate method.

Property, Plant and Equipment

      As of March 10, 2004 and June 24, 2005, the assets and liabilities of Covanta Energy and ARC Holdings, respectively, including property, plant, and equipment were recorded at management’s estimate of their fair values. Additions, improvements and major expenditures are capitalized if they increase the original capacity or extend the useful life of the original asset more than one year. Maintenance repairs and minor expenditures are expensed in the period incurred. For financial reporting purposes, depreciation is calculated by the straight-line method over the estimated remaining useful lives of the assets, which range up to 40 years for waste-to-energy facilities. The original useful lives generally range from three years for computer equipment to 50 years for waste-to-energy facilities. Leaseholds are depreciated over the life of the lease or the asset, whichever is shorter.

Asset Retirement Obligations

      In accordance with SFAS No. 143, “Accounting for Asset Retirement Obligations,” (“SFAS 143”), Covanta recognizes a legal liability for asset retirement obligations when it is incurred — generally upon acquisition, construction, or development. Covanta’s legal liabilities include capping, closure and post-closure costs of landfill cells and site restoration for certain waste-to-energy and power producing sites. Covanta

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

principally determines the liability using internal estimates of the costs using current information, assumptions, and interest rates, but also uses independent appraisals as appropriate to estimate costs. When a new liability for asset retirement obligation is recorded, Covanta capitalizes the cost of the liability by increasing the carrying amount of the related long-lived asset. The liability is accreted to its present value each period and the capitalized cost is depreciated over the useful life of the related asset.

      Covanta adopted Financial Interpretation (“FIN”) No. 47, “Accounting for Conditional Asset Retirement Obligations, an Interpretation of Financial Accounting Standards Board (“FASB”) Statement No. 143”, at December 31, 2005. The adoption of this Interpretation had no affect on Covanta’s consolidated balance sheets or its operating results since all of its asset retirement obligations were recognized upon the adoption of SFAS 143.

Waste and Energy Contracts and Other Intangible Assets

      As of March 10, 2004, Covanta Energy’s waste and energy contracts were recorded at their estimated fair market values in accordance with SFAS No. 141, “Business Combinations” (“SFAS 141”), based upon discounted cash flows from the service contracts and the “above market” portion and “below market” portion of the energy contracts using currently available information. Amortization was calculated by the straight-line method over the remaining contract lives. The remaining weighted-average life of the agreements is approximately 14 years. However, many of such contracts have remaining lives that are significantly shorter. See Note 11. Intangible Assets and Goodwill of the Notes.

      As of June 24, 2005, ARC Holdings’ waste and energy contracts, lease interest, renewable energy credits and other indefinite-lived assets were recorded at their preliminary fair value, in accordance with SFAS 141, based upon discounted cash flows attributable to the “above market” and “below market” portion of these contracts and assets using currently available information.

      Amortization for the “above market” waste and energy contracts were calculated using the straight-line method over the remaining contract lives which range from four to fifteen years and twenty-four years for the lease interest. See Note 11. Intangible Assets and Goodwill of the Notes. Amortization for the “below market” waste and energy contracts were calculated using the straight-line method over the remaining weighted-average contract life which is approximately 14 years. See Note 15. Other Noncurrent Liabilities of the Notes.

Restricted Funds Held in Trust

      Restricted funds held in trust are primarily amounts received by third party trustees relating to certain projects which may be used only for specified purposes. Covanta Energy generally does not control these accounts. They include debt service reserves for payment of principal and interest on project debt, deposits of revenues received with respect to projects prior to their disbursement, as provided in the relevant indenture or other agreements, and lease reserves for lease payments under operating leases. Such funds are invested principally in United States Treasury bills and notes and United States government agency securities.

Interest Rate Swap Agreements

      Covanta uses derivative financial instruments to manage risk from changes in interest rates pursuant to its business plans and prudent practices. Covanta recognizes derivative instruments on the balance sheet at their fair value. Changes in the fair value of a derivative that is highly effective as, and that is designated and qualifies as, a cash flow hedge are included in the consolidated statements of stockholder’s equity as a component of other comprehensive income (“OCI”) until earnings are affected by the variability of cash flows of the hedged transaction. Any hedge ineffectiveness is included in current-period earnings. For additional information regarding derivative financial instruments, see Note 20. Financial Instruments of the Notes.

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Impairment of Long-Lived Assets

      Long-lived assets, such as property, plant and equipment and purchased intangible assets with finite lives, are evaluated for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable over their estimated useful life in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Covanta Energy reviews its long-lived assets for impairment when events or circumstances indicate that the carrying value of such assets may not be recoverable over the estimated useful life. Determining whether an impairment has occurred typically requires various estimates and assumptions, including which cash flows are directly attributable to the potentially impaired asset, the useful life over which the cash flows will occur, their amount and the assets residual value, if any. Also, impairment losses require an estimate of fair value, which is based on the best information available. Covanta Energy principally uses internal discounted cash flow estimates, but also uses quoted market prices when available and independent appraisals as appropriate to determine fair value. Cash flow estimates are derived from historical experience and internal business plans with an appropriate discount rate applied.

Foreign Currency Translation

      For foreign operations, assets and liabilities are translated at year-end exchange rates and revenues and expenses are translated at the average exchange rates during the year. Gains and losses resulting from foreign currency translation are included in the consolidated statements of stockholders’ equity as a component of other comprehensive income (loss). For subsidiaries whose functional currency is deemed to be other than the U.S. dollar, translation adjustments are included as a separate component of other comprehensive income (loss) and stockholders’ equity. Currency transaction gains and losses are recorded in Other Operating Expenses in the consolidated statements of operations.

Other Services

Investments

      The insurance subsidiaries’ fixed maturity debt and equity securities portfolio are classified as “available-for-sale” and are carried at fair value. Changes in fair value are credited or charged directly to other comprehensive income (loss) in the consolidated statements of stockholders’ equity as unrealized gains or losses, respectively. All securities transactions are recorded on the trade date. Investment gains or losses realized on the sale of securities are determined using the specific identification method. “Other than temporary” declines in fair value are recorded as realized losses in the consolidated statements of operations and the cost basis of the security is reduced. Realized gains and losses are recognized in the consolidated statements of operations based on the amortized cost of fixed maturities and cost basis for equity securities on the date of trade, subject to any previous adjustments for “other than temporary” declines.

Deferred Policy Acquisition Costs

      The insurance subsidiaries deferred policy acquisition costs, consisting principally of commissions and premium taxes paid at the time of issuance of the insurance policy, are deferred and amortized over the period during which the related insurance premiums are earned. Deferred policy acquisition costs are limited to the estimated future profit after anticipated losses and loss adjustment expenses (“LAE”) (based on historical experience), maintenance costs, policyholder dividends, and anticipated investment income.

Unpaid Losses and Loss Adjustment Expenses

      Unpaid losses and LAE are based on estimates of reported losses and historical experience for incurred but unreported claims, including losses reported by other insurance companies for reinsurance assumed, and estimates of expenses for investigating and adjusting all incurred and unadjusted claims. Management believes that the provisions for unpaid losses and LAE are adequate to cover the cost of losses and LAE incurred to

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date. However, such liability is, by necessity, based upon estimates, which may change in the near term, and there can be no assurance that the ultimate liability will not exceed, or even materially exceed, such estimates. Unpaid losses and LAE are continually monitored and reviewed, and as settlements are made or reserves adjusted, differences are included in current operations.

Reinsurance

      In the normal course of business, the insurance subsidiaries seek to reduce the loss they may incur on the policies they each write by reinsuring certain portions of the insured benefit with other insurance enterprises or reinsurers.

      The insurance subsidiaries account for their reinsurance contracts which provide indemnification by reducing earned premiums for the amounts ceded to the reinsurer and establishing recoverable amounts for paid and unpaid losses and LAE ceded to the reinsurer. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policy. Contracts that do not result in the reasonable possibility that the reinsurer may realize a significant loss from the insurance risk generally do not meet conditions for reinsurance accounting and are accounted for as deposits. For the years ended December 31, 2005 and 2004, the insurance subsidiaries had no reinsurance contracts which were accounted for as deposits.

Earned Premiums

      The insurance subsidiaries earned premium income is recognized ratably over the contract period of an insurance policy. A liability is established for unearned insurance premiums that represents the portion of premium received which is applicable to the remaining portion of the unexpired terms of the related policies. Reinsurance premiums are accounted for on a basis consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts.

Use of Estimates

      The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets or liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include useful lives of long-lived assets, unbilled service receivables, cash flows and taxable income from future operations, unpaid losses and loss adjustment expenses, allowances for uncollectible receivables, and liabilities related to pension obligations, and for workers’ compensation, severance and certain litigation.

Reclassifications

      Certain prior period amounts have been reclassified in the financial statements to conform to the current period presentation.

Note 2. New Accounting Pronouncements

      In December 2004, the FASB issued SFAS 123R which replaces SFAS 123 and supersedes APB 25. SFAS 123R, as modified, requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. The pro forma disclosures previously permitted under SFAS 123 will no longer be an alternative to financial statement recognition.

      Under SFAS 123R, Covanta will use the Black-Scholes valuation model to fair value its share-based payments, the amortization method for compensation expense will be based on the accelerated attribution method and Covanta will apply the modified prospective method upon adoption on January 1, 2006. The modified prospective method requires that compensation expense be recorded for all unvested stock options and restricted stock at the beginning of the first quarter of adoption of SFAS 123R.

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      In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections” (“SFAS 154”), which replaces APB Opinion No 20, “Accounting Changes” and FASB Statement No. 3, “Reporting Accounting Changes in Interim Financial Statements — an amendment of APB Opinion No. 28”. This Statement is effective for accounting changes and corrections of errors made in the fiscal year beginning after December 15, 2005. SFAS 154 requires retrospective application to prior period’s financial statements for voluntary changes in accounting principles, unless it is impracticable to determine either the period specific effects or the cumulative effect of the change. SFAS 154 also requires that a change in depreciation, amortization, or depletion method for long-lived non-financial assets be accounted for as a change in an accounting estimate effected by a change in an accounting principle.

Note 3. Acquisitions and Dispositions

Acquisitions

ARC Holdings

      On January 31, 2005, Covanta entered into a stock purchase agreement with ARC Holdings, the owner and operator of six waste-to-energy facilities in the northeastern United States, and ARC Holdings’ stockholders. On June 24, 2005, Covanta, through its wholly-owned subsidiary Covanta Energy, purchased 100% of the issued and outstanding shares of ARC Holdings’ capital stock. Under the terms of the stock purchase agreement, Covanta paid approximately $747 million in cash and transaction costs for the stock of ARC Holdings and assumed the consolidated net debt of ARC Holdings of $1.3 billion at June 24, 2005 ($1.5 billion of consolidated indebtedness and $0.2 billion of cash and restricted cash). The acquisition of ARC Holdings was financed by a combination of debt and equity described below. Immediately after the transaction was completed, ARC Holdings became a wholly-owned subsidiary of Covanta Energy.

      Covanta’s acquisition of ARC Holdings markedly increased the size and scale of Covanta Energy’s waste-to-energy business, and thus Covanta’s business. The acquisition also provided Covanta Energy with the opportunity to achieve cost savings by combining the businesses of Covanta Energy and ARC Holdings. Furthermore, Covanta Energy lowered its cost of capital and obtained less restrictive covenants than under its previous financing arrangements when it refinanced its existing recourse debt concurrent with the acquisition of ARC Holdings.

Financing the ARC Holdings Acquisition

      As part of the ARC Holdings acquisition, Covanta Energy entered into new credit arrangements which totaled approximately $1.1 billion and are guaranteed by Covanta and certain domestic subsidiaries of Covanta Energy. These credit arrangements consisted of a first priority senior secured credit facility and a second priority senior secured credit facility. The first priority senior secured credit facility is comprised of a $275 million first lien term loan, a $100 million revolving credit facility, and a $340 million letter of credit facility. The second priority senior secured credit facility is a $400 million second lien term loan facility. See Note 18. Long-Term Debt of the Notes for a detailed description of these credit arrangements.

      The proceeds from the new credit arrangements were used to fund the acquisition of ARC Holdings, to refinance approximately $479 million of Covanta Energy’s existing recourse debt and letters of credit, and to pay related fees and expenses. The revolving credit and letter of credit facilities are further available for ongoing permitted expenditures and for general corporate purposes.

      The equity component of the financing consisted of a $400 million offering of warrants to purchase Covanta’s common stock (the “ARC Holdings Rights Offering”). Such warrants entitled Covanta’s existing stockholders to purchase Covanta’s stock on a pro rata basis, with each holder entitled to purchase 0.9 shares of Covanta’s common stock at an exercise price of $6.00 for each share of Covanta’s common stock held as of May 27, 2005, the record date. Covanta received net proceeds of approximately $395.8 million ($400 million gross proceeds, net of $4.2 million of expenses) and issued 66,673,004 shares of common stock.

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      Three of Covanta’s largest stockholders, SZ Investments L.L.C. (together with its affiliate EGI-Fund (05-07) Investors, L.L.C. to which it transferred a portion of its shares, “SZ Investments”), Third Avenue Business Trust, on behalf of Third Avenue Value Fund Series (“Third Avenue”), and D. E. Shaw Laminar Portfolios, L.L.C. (“Laminar”), representing ownership, at the time of the ARC Holdings Rights Offering, of approximately 40.4% of Covanta’s outstanding common stock, committed to participate in the ARC Holdings Rights Offering and acquired at least their pro rata portion of the shares. As consideration for their commitments, Covanta paid each of these stockholders, an amount equal to 1.75% of their respective equity commitments, which in the aggregate was $2.8 million and was accounted for as a reduction of proceeds. Covanta agreed to amend an existing registration rights agreement to provide these stockholders with the right to demand that Covanta undertake an underwritten offering within twelve months of the closing of the acquisition of ARC Holdings in order to provide such stockholders with liquidity.

      The purchase price was comprised of the following (in millions of dollars):

Cash	$	740.0
Debt assumed		1,494.0
Direct transaction costs		7.3
Restructuring liability		9.1
	$	2,250.4

      The preliminary purchase price included acquisition related restructuring charges of $9.1 million which were recorded as a liability and assumed in the ARC Holdings acquisition, and consisted primarily of severance and related benefits, and the costs of vacating duplicate facilities. As of December 31, 2005, the restructuring liability was $7.0 million.

      The following table summarizes the preliminary allocation of values to the assets acquired and liabilities assumed at the Acquisition Date in conformity with SFAS 141 and SFAS No. 109, “Accounting for Income Taxes” (“SFAS 109”). The allocation of purchase price to ARC Holdings is preliminary and subject to change as additional information and analysis is obtained. Management is in the process of performing the valuation studies necessary to finalize the fair values of the assets and liabilities of ARC Holdings and the related allocation of purchase price, and expects adjustments to the preliminary fair values which may include those related to:

•  property, plant and equipment, intangibles, goodwill and debt, all of which may change based on consideration of additional analysis by Covanta and its valuation consultants;

•  accrued expenses for transaction costs and restructuring efforts which may change based on identification of final fees and costs; and

•  tax liabilities and deferred taxes, which may be adjusted based upon additional information to be received from taxing authorities and which result from changes in the allocated book basis of items for which deferred taxes are provided.

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		Purchase Price Allocation as of
		December 31, 2005
		(In thousands of dollars)
Current assets		$	233,885
Property, plant and equipment			1,973,316
Intangible assets (excluding goodwill)			287,421
Goodwill			255,927
Other assets			146,603
	Total assets acquired	$	2,897,152
Current liabilities		$	75,836
Current portion of long-term debt			29,958
Current portion of project debt			64,305
Long-term debt			662,379
Project debt			737,385
Deferred income taxes			398,953
Other liabilities			177,930
	Total liabilities assumed		2,146,746
Minority interest acquired			3,058
Net assets acquired		$	747,348

      The acquired intangible assets of $287.9 million relate to favorable energy and waste contracts, landfill rights, other nonamortizing intangibles and a favorable leasehold interest with an approximate 10 year average useful life. As of December 31, 2005, goodwill of $255.9 million was recorded to reflect the excess of cost over the preliminary fair value of acquired net assets.

Covanta Energy

      On December 2, 2003, Covanta executed a definitive investment and purchase agreement to acquire Covanta Energy in connection with Covanta Energy’s emergence from Chapter 11 proceedings after the non-core and geothermal assets of Covanta Energy were divested. The primary components of the transaction were: (1) the purchase by Covanta of 100% of the equity of Covanta Energy in consideration for a cash purchase price of approximately $30 million, and (2) agreement as to new letter of credit and revolving credit facilities for Covanta Energy’s domestic and international operations, provided by some of the existing Covanta Energy lenders and a group of additional lenders organized by Covanta. Covanta’s acquisition of Covanta Energy was consummated on March 10, 2004.

      The aggregate purchase price was $47.5 million which included the cash purchase price of $30 million, $6.4 million for professional fees and other estimated costs incurred in connection with the acquisition, and an estimated fair value of $11.3 million for Covanta’s commitment to sell up to 3.0 million shares of its common stock at $1.53 per share to certain creditors of Covanta Energy, subject to certain limitations. See Note 24. Stockholders’ Equity and Stock Option Plans of the Notes for additional information regarding such commitment.

      In addition to the purchase price allocation adjustments, Covanta Energy’s emergence from Chapter 11 proceedings on March 10, 2004 resulted in the adoption of fresh start accounting as of that date, in accordance with AICPA Statement of Position (“SOP”) No. 90-7, “Financial Reporting by Entities in Reorganization Under the Bankruptcy Code”. The following table summarizes the final allocation of values to the assets

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acquired and liabilities assumed at March 10, 2004 in conformity with SFAS 141 and SFAS 109 (in thousands of dollars):

Current assets		$	522,659
Property, plant and equipment			814,369
Intangible assets			191,943
Other assets			327,065
	Total assets acquired	$	1,856,036
Current liabilities		$	364,480
Long-term debt			328,053
Project debt			850,591
Deferred income taxes			88,405
Other liabilities			176,982
	Total liabilities assumed		1,808,511
	Net assets acquired	$	47,525

      The acquired intangible assets of $191.9 million primarily relate to service and energy agreements on publicly-owned waste-to-energy projects.

Pro Forma Results of Operations

      The results of operations from Covanta Energy and ARC Holdings are included in Covanta’s consolidated results of operations from March 11, 2004 and June 25, 2005, respectively. The following table sets forth certain unaudited consolidated operating results for 2005 and 2004, as if the acquisitions of Covanta Energy and ARC Holdings were consummated on the same terms at January 1, 2004 (in thousands, except per share amounts):

		For the Years Ended
		December 31,
Pro Forma (unaudited)		2005		2004
Total operating revenues		$	1,209,075	$	1,204,481
Net income		$	67,272	$	52,948
Basic earnings per share:
	Weighted average shares outstanding		139,996		138,854
	Earnings per share	$	0.48	$	0.38
Diluted earnings per share:
	Weighted average shares outstanding		145,698		143,487
	Earnings per share	$	0.46	$	0.37

Restructuring and Acquisition-Related Charges

      In connection with the acquisition of ARC Holdings, Covanta Energy incurred integration costs of $4.0 million for the year ended December 31, 2005 primarily related to professional fees and employee incentive costs. These charges were included as part of the operating costs of the Waste and Energy Services business.

      Covanta Energy also incurred restructuring costs in 2005 of $2.8 million. The restructuring costs resulted from a $2.1 million severance payment to CPIH executives in connection with overhead reductions made possible by the elimination of CPIH’s separate capital structure during the second quarter of 2005. An additional $0.7 million was paid to remaining CPIH executives as incentive payments from existing contractual obligations relating to CPIH debt repayment in connection with the ARC Holdings acquisition.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Dispositions

Marine Services

      Covanta had investments in the marine services business, the largest of which was ACL, an integrated marine transportation and service company which, throughout 2004 was in Chapter 11 bankruptcy proceedings. ACL is no longer a subsidiary of Covanta. On December 30, 2004, ACL’s plan of reorganization was confirmed and ACL has since emerged from bankruptcy. As part of ACL’s plan of reorganization, the ACL stock owned by Covanta was cancelled, and its ownership interest terminated. Covanta received no cash distributions under the ACL plan of reorganization but, through a subsidiary, received from ACL’s former creditors warrants to purchase 672,920 shares of ACL stock at an exercise price of $3.00 per share after ACL’s emergence in January 2005. See Note 20. Financial Instruments of the Notes for a discussion of these warrants.

      Covanta’s other investees in the marine services business consisted of Global Materials Services, LLC (“GMS”) and Vessel Leasing, LLC (“Vessel Leasing”). GMS was a joint venture of ACL, a third party and Covanta, in which Covanta held a 5.4% interest. Covanta sold its interests in GMS to the third party member of the joint venture as of October 6, 2004. Vessel Leasing was a joint venture of ACL and Covanta. Covanta sold its interest in Vessel Leasing to ACL on January 13, 2005.

Note 4. California Grantor Trust Settlement

      Covanta had NOLs estimated to be $489 million for federal income tax purposes as of December 31, 2005. Covanta’s NOLs predominantly arose from predecessor insurance entities of Covanta (formerly named Mission Insurance Group, Inc., “Mission”). The amount of NOLs available to Covanta Energy will be reduced by any taxable income generated by current members of Covanta’s consolidated tax group, which include grantor trusts associated with the Mission insurance entities which have been in state insolvency proceedings in California and Missouri since the late 1980’s. During or at the conclusion of the administration of these grantor trusts by state insurance regulatory agencies, material taxable income could result which could utilize a substantial portion of Covanta’s NOLs, which in turn could materially reduce cash flow and the ability to service current debt. The impact of a material reduction in Covanta’s NOLs could also cause an event of default under Covanta Energy’s current secured credit facilities and/or a reduction of a substantial portion of Covanta’s deferred tax asset relating to such NOLs.

      In January 2006, Covanta executed agreements with the California Commissioner of Insurance (the “California Commissioner”), who administers the majority of the grantor trusts, regarding the final administration and conclusion of such trusts. These agreements, which were approved by the California state court overseeing the Mission insurance insolvency proceedings (the “Mission Court”), will take effect upon satisfaction of remaining conditions, and settle matters that had been in dispute regarding the historic rights and obligations relating to the conclusion of the grantor trusts. The most significant of these conditions is a determination by the Mission Court of the aggregate amount of certain claims against the grantor trusts which are entitled to distributions of an aggregate 1,572,625 shares of Covanta common stock issued to the California Commissioner under existing agreements entered into at the inception of the Mission insurance companies’ reorganization. The distribution of such shares by the California Commissioner is among the final steps necessary to conclude the insolvency cases relating to the trusts being administered by the California Commissioner, and such arrangements would include a process by which a complete list of such claimants would be identified, and thereafter the shares to be delivered to such claimants by the California Commissioner. While Covanta cannot predict with certainty what amounts, if any, may be includable in Covanta’s taxable income as a result of the final administration of the trusts, Covanta believes that these arrangements with the California Commissioner will result in no material reduction in available NOLs.

      The new agreements require Covanta to pay to the California Commissioner an aggregate amount equal to approximately $9.14 million to settle these disputes, and to facilitate the effectuation of the terms of the

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existing agreements entered into in 1989 relating to the procedures for the winding up of the trusts. Additionally, the new agreements specify that Covanta will reimburse the California Commissioner’s Conservation and Liquidation Office (“CLO”) for certain expenses and providing assistance under the agreements. Covanta recorded an additional $1.175 million related to these expenses as a settlement to the California Grantor Trust Settlement in the fourth quarter of 2005.

      Covanta is in preliminary discussions with the Director of the Division of Insurance of the State of Missouri (the “Missouri Director”), who administers the balance of the grantor trusts relating to the Mission Insurance entities, regarding similar arrangements for distribution of the remaining 154,756 shares of Covanta common stock by the Missouri Director to claimants of the Missouri grantor trusts.

Note 5. Equity in Net Income (Loss) from Unconsolidated Investments

      Subsidiaries of Covanta are party to joint venture agreements through which Covanta has equity investments in several operating projects. The joint venture agreements generally provide for the sharing of operational control as well as voting percentages. Covanta records its share of earnings from its equity investees in equity in net income (loss) from unconsolidated investments in its consolidated statement of operations.

      Equity in net income (loss) from unconsolidated investments, after March  10, 2004, primarily relates to Covanta Energy’s 26% investment in Quezon Power, Inc. in the Philippines (“Quezon”). The project company sells electricity to Manila Electric Company (“Meralco”), the largest electric distribution company in the Philippines, which serves the area surrounding and including metropolitan Manila.

      Under an energy contract expiring in 2025, Meralco is obligated to take-or-pay for stated minimum annual quantities of electricity produced by the facility at an all-in tariff which consists of capacity, operating, energy, transmission and other fees adjusted to inflation, fuel cost and foreign exchange fluctuations. Project management continues to negotiate with Meralco with respect to proposed amendments to the power purchase agreement to modify certain commercial terms under the existing contract and to resolve issues relating to the project’s performance during its first year of operation. The project company has entered into two coal supply contracts expiring in 2015 and 2022. Under these supply contracts, cost of coal is determined using a base energy price adjusted to fluctuations of specified international benchmark prices. Covanta Energy is operating the project through a subsidiary under a long-term agreement with the project company. In 2005, the project lenders permitted the full release for distribution of cash previously required to be held-back in excess of reserve requirements. In addition, the project lenders granted an extension of an existing waiver permitting the project to continue to forego obtaining certain project insurance coverage levels that are not available at commercially reasonable rates.

      The financial condition of Meralco has been stressed by the failure of regulators to grant tariff increases to allow Meralco to achieve rates of return permitted by law. However, in late 2004, Meralco successfully refinanced $228 million in expiring short-term debt on a long-term seven year basis, improving Meralco’s financial condition. Covanta Energy has obtained political risk insurance for its equity investment in this project.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      As of December 31, 2005, energy investments in and advances to investees and joint ventures accounted for under the equity method were as follows (in thousands of dollars):

	Ownership					Ownership
	Interest as of					Interest as of
	December 31,					December 31,
	2005			2005		2004			2004
Ultrapower Chinese Station Plant (U.S.)		50	%	$	4,327		50	%	$	5,112
South Fork Plant (U.S.)		50	%		859		50	%		641
Koma Kulshan Plant (U.S.)		50	%		4,519		50	%		4,116
Ambiente 2000 (Italy)		40	%		333		—	%		—
Haripur Barge Plant (Bangladesh)		45	%		10,703		45	%		6,983
Quezon Power (Philippines)		26	%		45,560		26	%		44,804
Total investments in power plants				$	66,301				$	61,656

      The unaudited combined results of operations and financial position of Covanta’s equity method affiliates are summarized below (in thousands of dollars):

	2005		2004
Condensed Statements of Operations for the years ended December 31:
Revenues	$	295,649	$	271,744
Operating income		128,476		122,704
Net income		77,114		65,528
Company’s share of net income		25,609		17,535
Condensed Balance Sheets as of December 31:
Current assets	$	141,139	$	119,972
Noncurrent assets		839,575		873,362
Total assets		980,714		993,334
Current liabilities		138,002		97,968
Noncurrent liabilities		457,484		515,432
Total liabilities		595,486		613,400

      Covanta wrote off its investment in ACL during the quarter ended March 28, 2003. The GMS and Vessel Leasing investments were not considered by Covanta to be impaired. Covanta and ACL sold their investment in GMS on October 6, 2004. Covanta sold its investment in Vessel Leasing to ACL on January 13, 2005.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The reported net income (loss) included under the caption Equity in net income (loss) from unconsolidated investments is presented below (in thousands of dollars):

	For the Years Ended December 31,
	2005		2004			2003
ACL’s reported loss as of March 31, 2003	$	—	$	—		$	(46,998	)
Other than temporary impairment of remaining investment in ACL as of March 28, 2003		—		—			(8,205	)
Total ACL loss		—		—			(55,203	)
GMS income as of October 6, 2004		—		156			55
Vessel Leasing income		—		318			271
Write down of Vessel Leasing investment held for sale		—		(985	)		—
Equity in net loss from unconsolidated Marine Services investments		—		(511	)		(54,877	)
Equity in net income from unconsolidated Waste and Energy investments		25,609		17,535			—
Equity in net income (loss) from unconsolidated investments(1)	$	25,609	$	17,024		$	(54,877	)

(1)  The year ended December 31, 2004 includes amounts from March 11 to December 31, 2004.

      The results of operations of Covanta’s significant equity investees were (in thousands of dollars):

	For the Years Ended December 31,
	2005		2004		2003
Quezon Power (Philippines)
Revenues	$	245,571	$	214,865	$	—
Operating income		110,872		101,240		—
Net income		66,824		53,828		—
Haripur Barge Plant (Bangladesh)
Revenues	$	36,272	$	35,959	$	—
Operating income		16,707		16,977		—
Net income		9,394		8,907		—
ACL
Revenues	$	—	$	—	$	620,071
Operating income*		—		—		367
Net loss		—		—		(61,576	)

*  Before ACL Reorganization Expenses

      The Tampa Bay, Florida subsidiaries, the Lake County, Florida subsidiaries, and the Warren County, New Jersey subsidiaries emerged from bankruptcy on August 6, 2004, December 14, 2004, and December 15, 2005, respectively. Covanta has included Lake County and Warren County as consolidated subsidiaries in its financial statements since their respective emergence dates. Upon Tampa Bay’s emergence from Chapter 11, Covanta Energy did not have any operating or ownership rights in this facility.

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Note 6. Waste and Energy Service Revenues and Unbilled Service Receivables

      The following table summarizes the components of waste and service revenues for the periods presented below (in thousands of dollars):

			For the Period
			March 11, through
	For the Year Ended		December 31,
	December 31, 2005		2004
Waste and service revenues unrelated to project debt	$	544,418	$	311,669
Revenue earned explicitly to service project debt-principal		59,060		36,029
Revenue earned explicitly to service project debt-interest		35,025		25,050
Total waste and service revenues	$	638,503	$	372,748

      Unbilled service receivables include fees related to the principal portion of debt service earned to service project debt principal where such fees are expressly included as a component of the service fee paid by the municipality pursuant to applicable waste-to-energy service agreements. Regardless of the timing of amounts paid by municipalities relating to project debt principal, Covanta Energy records service revenue with respect to this principal component on a levelized basis over the term of the service agreement. Long-term unbilled service receivables related to waste-to-energy operations are recorded at their discounted amounts.

Note 7. Reinsurance

      Reinsurance is the transfer of risk, by contract, from one insurance company to another for consideration (premium). Reinsurance contracts do not relieve the insurance business from its obligations to policyholders. Failure of reinsurers to honor their obligations could result in losses to the insurance business; consequently, allowances are established for amounts deemed uncollectible. The insurance business evaluates the financial condition of its reinsurers and monitors concentrations of credit risk arising from similar geographic regions, activities, or economic characteristics to reinsurers to minimize its exposure to significant losses from reinsurer insolvencies.

      NAICC has reinsurance under both excess of loss and quota share treaties. NAICC cedes reinsurance on an excess of loss basis for workers’ compensation risks in excess of $0.4 million prior to January 1996, $0.5 million through March 2000 and $0.2 million thereafter. Beginning in May 2001, NAICC retained 50% of the loss between $0.2 million and $0.5 million. For commercial automobile, NAICC cedes reinsurance on loss basis risks in excess of $0.25 million. From January 1999 to December 2001, the California non-standard personal automobile quota share reinsurance ceded percentage was 10%. Between January 2002 and December 2004, no reinsurance was in place for the personal automobile business, however, with the introduction of a new program, that business was reinsured at 40% through 2005, and the renewal business, including new non-owner policies, was reinsured at 28%. The non-standard automobile reinsurance programs established in 2005 were cancelled effective January 1, 2006. The property and casualty book of business of former affiliates contains both excess of loss and quota share reinsurance protection. Typically all excess of loss contracts effectively reduce NAICC’s net exposure to any occurrence below $0.1 million.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The effect of reinsurance on written premiums and earned premiums reflected in other revenues in Covanta’s consolidated financial statements is as follows (in thousands of dollars):

	For the Years Ended December 31,
	2005			2004			2003
Direct written premium	$	18,312		$	15,165		$	32,733
Ceded written premium		(5,872	)		—			(2,325	)
Net written premium	$	12,440		$	15,165		$	30,408
Direct earned premium	$	18,557		$	18,506		$	38,805
Ceded earned premium		(5,873	)		(508	)		(2,954	)
Net earned premium	$	12,684		$	17,998		$	35,851

      The effect of ceded reinsurance on loss and LAE incurred was a decrease of $3.9 million, $3.5 million, and $3.0 million for the years ended December 31, 2005, 2004 and 2003, respectively.

      As of December 31, 2005, General Reinsurance Corporation (“GenRe”) was the only reinsurer that comprised more than 10% of NAICC’s reinsurance recoverable on paid and unpaid claims. NAICC monitors all reinsurers, by reviewing A.M. Best reports and ratings, information obtained from reinsurance intermediaries and analyzing financial statements. As of December 31, 2005 and 2004, NAICC had reinsurance recoverable on paid and unpaid balances of $8.1 million and $12.4 million from GenRe. GenRe has an A.M. Best rating of A++. Allowances for paid and unpaid recoverables were $1.3 million and $1.1 million as of December 31, 2005 and 2004, respectively.

Note 8. Investments

Other Services

      The cost or amortized cost, unrealized gains, unrealized losses and fair value of Covanta’s investments categorized by type of security, were as follows (in thousands of dollars):

		As of December 31, 2005
		Cost or
		Amortized		Unrealized		Unrealized		Fair
		Cost		Gain		Loss		Value
Fixed maturities — parent company		$	3,300	$	—	$	—	$	3,300
Fixed maturities — insurance business:
	U.S. government/ Agency		21,240		10		474		20,776
	Mortgage-backed		10,415		4		414		10,005
	Corporate		13,169		19		302		12,886
Total fixed maturities — insurance business			44,824		33		1,190		43,667
Equity securities — insurance business			1,377		146		17		1,506
Total available-for-sale		$	49,501	$	179	$	1,207	$	48,473

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

		As of December 31, 2004
		Cost or
		Amortized		Unrealized		Unrealized		Fair
		Cost		Gain		Loss		Value
Fixed maturities — parent company		$	3,300	$	—	$	—	$	3,300
Fixed maturities — insurance business:
	U.S. government/ Agency		27,024		174		129		27,069
	Mortgage-backed		13,625		22		206		13,441
	Corporate		16,615		216		131		16,700
Total fixed maturities — insurance business			57,264		412		466		57,210
Equity securities — insurance business			1,324		110		2		1,432
Total available-for-sale		$	61,888	$	522	$	468	$	61,942

      The following table sets forth a summary of NAICC’s temporarily impaired investments (in thousands of dollars):

	As of December 31,
	2005
	Fair		Unrealized
Description of Investments	Value		Losses
U.S. Treasury and other direct U.S. Government obligations	$	18,958	$	474
Federal agency MBS		9,667		414
Corporate Bonds		10,892		302
Equity Securities		287		17
Total temporarily impaired investments	$	39,804	$	1,207

	As of December 31,
	2004
	Fair		Unrealized
Description of Investments	Value		Losses
U.S. Treasury and other direct U.S. Government obligations	$	13,579	$	129
Federal agency MBS		10,583		206
Corporate Bonds		6,096		131
Equity Securities		148		2
Total temporarily impaired investments	$	30,406	$	468

      Of the fixed maturity investments noted above 87% were acquired subsequent to 2002 during an historic low interest rate environment and are investment grade securities rated A or better. The number of U.S. Treasury obligations, federal agency mortgage backed securities, corporate bonds and equity securities temporarily impaired are 37, 28, 13 and 6, respectively. Of the total temporarily impaired fixed maturity investments with a fair value of $39.5 million as of December 31, 2005, approximately $1.8 million have maturities within 12 months and $37.7 million have maturities greater than 12 months.

      Fixed maturities of Covanta include mortgage-backed securities and collateralized mortgage obligations, collectively (“MBS”) representing 22.9% and 23.5% of the total fixed maturities at years ended December 31, 2005 and 2004, respectively. All MBS held by Covanta are issued by the Federal National Mortgage Association (“Fannie Mae”) or the Federal Home Loan Mortgage Corporation (“Freddie Mac”), both of which are rated “AAA” by Moody’s Investors Services. MBS and callable bonds, in contrast to other bonds, are more sensitive to market value declines in a rising interest rate environment than to market value increases in a declining interest rate environment. This is primarily because of payors’ increased incentive and ability to prepay principal and issuers’ increased incentive to call bonds in a declining interest rate environment.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Management does not believe that the inherent prepayment risk in its portfolio is significant. However, management believes that the potential impact of the interest rate risk on Covanta’s consolidated financial statements could be significant because of the greater sensitivity of the MBS portfolio to market value declines and the classification of the entire portfolio as available-for-sale. Covanta has no MBS concentrations in any geographic region.

      The expected maturities of fixed maturity securities, by amortized cost and fair value are shown below. Expected maturities may differ from contractual maturities due to borrowers having the right to call or prepay their obligations with or without call or prepayment penalties. Expected maturities of MBS are estimated based upon the remaining principal balance, the projected cash flows and the anticipated prepayment rates of each security (in thousands of dollars):

			As of December 31, 2005
			Amortized Cost		Fair Value
Available-for-sale:
	One year or less		$	3,799	$	3,797
	Over one year to five years			40,311		39,158
	Over five years to ten years			714		712
	More than ten years			—		—
		Total fixed maturities	$	44,824	$	43,667

      Covanta’s fixed maturity and equity securities portfolio is classified as “available-for-sale” and is carried at fair value. Changes in fair value are credited or charged directly to stockholders’ equity as unrealized gains or losses included as part of OCI, respectively. “Other than temporary” declines in fair value are recorded as realized losses in the statement of operations and the cost basis of the security is reduced.

      The following reflects the change in net unrealized loss on available-for-sale securities included as a separate component of accumulated other comprehensive income in stockholders’ equity (in thousands of dollars):

		For the Years Ended
		December 31,
		2005			2004			2003
Fixed maturities, net		$	(1,103	)	$	(874	)	$	(4,284	)
Equity securities, net			22			74			1,407
	Change in net unrealized loss on investments	$	(1,081	)	$	(800	)	$	(2,877	)

      The components of net unrealized loss on available-for-sale securities consist of the following (in thousands of dollars):

		For the Years Ended
		December 31,
		2005			2004			2003
Net unrealized holding losses on available-for-sale securities arising during the period		$	(976	)	$	(500	)	$	(797	)
Reclassification adjustment for net realized losses on available-for-sale securities included in net income (loss)			(105	)		(300	)		(2,080	)
	Net unrealized loss on available-for-sale securities	$	(1,081	)	$	(800	)	$	(2,877	)

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      Covanta considers the following factors in determining whether declines in the fair value of securities are “other than temporary”:

•  the significance of the decline in fair value compared to the cost basis;

•  the time period during which there has been a significant decline in fair value;

•  whether the unrealized loss is credit-driven or a result of changes in market interest rates;

•  a fundamental analysis of the business prospects and financial condition of the issuer; and

•  Covanta’s ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery in fair value.

      During 2003, three equity securities had declines in fair value that were “other than temporary” and, accordingly, Covanta recorded a realized loss of $1.9 million. All of these securities were sold by December 31, 2003.

      Net realized investment gains (losses) are as follows (in thousands of dollars):

			For the Years Ended
			December 31,
			2005			2004			2003
Parent Company
	Fixed maturities		$	—		$	252		$	1,090
		Net realized investment gains	$	—		$	252		$	1,090
Insurance Business
	Fixed maturities		$	(70	)	$	219		$	952
	Equity securities			(1	)		(18	)		38
		Net realized investment (losses) gains	$	(71	)	$	201		$	990

      Gross realized gains relating to fixed maturities were $0.06 million, $0.2 million, and $1.0 million for the years ended December 31, 2005, 2004, and 2003, respectively. Gross realized losses relating to fixed maturities were approximately $0.13 million for the year ended December 31, 2005 and $0.02 million for each of the years ended December 31, 2004, and 2003, respectively. Gross realized gains relating to equity securities were $0.001 million, $0, and $2 million for the years ended December 31, 2005, 2004, and 2003, respectively. Gross realized losses relating to equity securities were $0.002 million, $0.02 million, and $2 million, for the years ended December 31, 2005, 2004, and 2003, respectively.

119

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      Net investment income was as follows (in thousands of dollars):

				For the Years Ended
				December 31,
				2005		2004		2003
Parent Company
	Fixed maturities			$	—	$	199	$	302
	Short-term investments				702		34		42
		Net investment income — parent company		$	702	$	233	$	344
Insurance business
	Fixed maturities			$	2,021	$	2,497	$	3,951
	Short-term investments				—		—		146
	Dividend income				74		40		32
	Other, net				156		107		44
		Total investment income			2,251		2,644		4,173
			Less: investment expense		252		239		174
		Net investment income — insurance business		$	1,999	$	2,405	$	3,999

      The insurance business, in compliance with state insurance laws and regulations, had securities with a fair value of approximately $23.0 million, $31.1 million and $43.4 million as of the years ended December 31, 2005, 2004 and 2003, respectively, on deposit with various states or governmental regulatory authorities. In addition, as of the years ended December 31, 2005, 2004 and 2003, the insurance business had investments with a fair value of $6.4 million, $7.0 million, and $7.2 million, respectively, held in trust or as collateral under the terms of certain reinsurance treaties and letters of credit. NAICC has letters of credit outstanding of $2.8 million as of December 31, 2005.

Waste and Energy Services

      The cost or amortized cost, unrealized gains, unrealized losses and fair value of Waste and Energy Services’ investments categorized by type of security, were as follows (in thousands of dollars):

	As of December 31, 2005
	Cost or		Unrealized		Unrealized		Fair
	Amortized Cost		Gain		Loss		Value
Current investments:
Fixed maturities	$	4,100	$	—	$	—	$	4,100
Noncurrent investments:
Fixed maturities	$	926	$	—	$	—	$	926
Mutual and bond funds		2,149		25		—		2,174
Total noncurrent investments	$	3,075	$	25	$	—	$	3,100

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

	As of December 31, 2004
	Cost or		Unrealized		Unrealized		Fair
	Amortized Cost		Gain		Loss		Value
Current investments:
Fixed maturities	$	3,100	$	—	$	—	$	3,100
Noncurrent investments:
Fixed maturities	$	1,321	$	—	$	—	$	1,321
Mutual and bond funds		2,325		54		—		2,379
Total noncurrent investments	$	3,646	$	54	$	—	$	3,700

      Noncurrent investments are classified in other noncurrent assets in the consolidated balance sheets.

      Proceeds and realized gains and losses from the sales of securities classified as available-for-sale for the year ended December 31, 2005 were $0.5 million and zero, respectively. Proceeds and realized gains and losses from the sales of securities classified as available-for-sale from March 11, 2004 through December 31, 2004 were $0.3 million and zero, respectively. For the purpose of determining realized gains and losses, the cost of securities sold was based on specific identification.

Note 9. Restricted Funds Held in Trust

      Restricted funds held in trust are primarily amounts received and held by third party trustees relating to projects owned by Covanta Energy, and which may be used only for specified purposes. Covanta Energy generally does not control these accounts. They include debt service reserves for payment of principal and interest on project debt, deposits of revenues received with respect to projects prior to their disbursement as provided in the relevant indenture or other agreements, and lease reserves for lease payments under operating leases. Such funds are invested principally in United States Treasury bills and notes and United States government agencies securities. Restricted fund balances as follows (in thousands of dollars):

	As of December 31,
	2005				2004
	Current		Noncurrent		Current		Noncurrent
Debt service funds	$	123,902	$	199,874	$	46,655	$	112,012
Revenue funds		28,247		—		20,530		—
Lease reserve funds		4,221		—		3,970		—
Construction funds		—		402		264		—
Other funds		41,157		49,629		44,673		11,814
Total	$	197,527	$	249,905	$	116,092	$	123,826

121

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 10. Property, Plant and Equipment

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

			As of December 31,
	Useful Lives		2005			2004
Land			$	8,972		$	4,725
Facilities and equipment		3-50 years		2,813,065			838,916
Landfills				28,879			8,873
Construction in progress				7,590			5,403
Total				2,858,506			857,917
Less accumulated depreciation and amortization				(133,663	)		(38,517	)
Property, plant, and equipment — net			$	2,724,843		$	819,400

      Depreciation and amortization related to property, plant and equipment amounted to $95.8 million and $37.6 million for the year ended December 31, 2005 and 2004, respectively.

Note 11. Intangible Assets and Goodwill

Intangible Assets

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

			As of December 31,
	Useful Life		2005			2004
Waste and energy contracts		2 - 24 years	$	388,378		$	192,058
Lease interest and other		12 - 24 years		72,314			442
Landfill		11 years		17,985			—
Other intangibles		Not subject to amortization		4,528			—
				483,205			192,500
Accumulated amortization				(48,662	)		(15,210	)
Intangible assets, net			$	434,543		$	177,290

      Amortization expense related to waste and energy contracts and other intangible assets was $33.0 million and $15.2 million for the year ended December 31, 2005 and for the period March 11, through December 31, 2004. The following table details the amount of the actual/estimated amortization expense associated with intangible assets as of December 31, 2005 included or expected to be included in Covanta’s statement of operations for each of the years indicated (in thousands of dollars):

	Waste and		Landfill, Lease
	Energy		Interest and Other
	Contracts		Contracts		Totals
Year ended December 31, 2005	$	31,100	$	1,900	$	33,000
2006	$	45,003	$	4,626	$	49,629
2007		44,854		4,626		49,480
2008		43,180		4,626		47,806
2009		39,635		4,626		44,261
2010		27,317		4,626		31,943
Thereafter		141,684		65,212		206,896
Total	$	341,673	$	88,342	$	430,015

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Goodwill

      In connection with the ARC Holdings acquisition, Covanta Energy recorded $255.9 million of goodwill as of December 31, 2005. Goodwill represents the total consideration paid in excess of the fair value of the net tangible and identifiable intangible assets acquired and the liabilities assumed in the ARC Holdings acquisition in accordance with the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). Goodwill has an indefinite life and is not amortized but will be reviewed under the provisions of SFAS 142 for impairment. Covanta will perform an annual fair value test of its recorded goodwill for its reporting units using a discounted cash flow approach. Goodwill is not deductible for federal income tax purposes.

Note 12. Other Noncurrent Assets

      Other noncurrent assets consisted of the following (in thousands of dollars):

	As of December 31,
	2005		2004
Marketable securities available-for-sale	$	926	$	1,321
Unamortized bond issuance costs		2,255		1,736
Securities available-for-sale (see Note 8)		2,149		2,325
Restricted funds for emergence costs		19,604		19,599
Deferred financing costs		23,834		5,275
Other noncurrent receivables		16,890		13,798
Reinsurance recoverable on unpaid losses		14,786		18,042
Interest rate swaps		14,949		14,920
Spare parts		14,011		5,652
Other		10,109		5,095
Total	$	119,513	$	87,763

Note 13. Accrued Expenses and Other Current Liabilities

      Accrued expenses consisted of the following (in thousands of dollars):

	As of December 31,
	2005		2004
Operating expenses	$	48,631	$	36,037
Insurance		1,346		1,605
Interest payable		38,639		17,628
Municipalities’ share of revenues		48,505		36,897
Payroll and payroll taxes		33,963		18,533
Lease payments		1,549		1,025
Pension and profit sharing		4,737		3,673
California Grantor Trust Settlement (see Note 4)		10,342		—
Taxes payable		3,198		21,178
Other		14,441		2,877
Total	$	205,351	$	139,453

123

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 14. Deferred Revenue

      Deferred revenue consisted of the following (in thousands of dollars):

	As of December 31,
	2005		2004
Advance billings to municipalities	$	7,636	$	9,064
Unearned insurance premiums		1,009		1,254
Other		5,879		4,901
Total	$	14,524	$	15,219

      Advance billings to various customers are billed one or two months prior to performance of service and are recognized as income in the period the service is provided.

Note 15. Other Noncurrent Liabilities

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

	As of December 31,
	2005		2004
Waste and service contracts (see Note 1)	$	135,076	$	3,686
Interest rate swap		11,852		14,920
Accrued emergence costs		19,604		19,599
Pension benefit obligation		45,705		45,430
Asset retirement obligation		25,506		18,912
Duke liability		25,602		—
Insurance loss and loss adjustment reserves (see Note 16)		46,868		64,270
Service contract obligations		8,718		7,873
Other		24,471		8,213
	$	343,402	$	182,903

      As of June 25, 2005, ARC Holdings’ waste and service contracts were recorded at their fair market values, in accordance with SFAS 141, based upon discounted cash flows attributable to the “below market” portion of the waste and service contracts using currently available information. Amortization was calculated by the straight-line method over the remaining weighted-average contract life which is approximately 14 years.

      Waste and service contracts was $135.1 million for the year ended December 31, 2005. The following table details the amount of the actual/estimated amortization expense associated with the waste and service

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

contracts liability as of December 31, 2005 included or expected to be included in Covanta’s statements of operations for each of the years indicated (in thousands of dollars):

	Waste and
	Service
	Contracts
Year ended December 31, 2005	$	5,105
2006	$	11,287
2007		11,287
2008		11,287
2009		11,258
2010		11,239
Thereafter		78,718
Total	$	135,076

      In accordance with SFAS 143, Covanta recognizes a legal liability for asset retirement obligations when it is incurred — generally upon acquisition, construction, or development. Covanta’s legal liabilities include capping, closure and post-closure costs of landfill cells and site restoration for certain waste-to-energy and power producing sites. Covanta’s asset retirement obligation is presented as follows (in thousands of dollars):

	As of December 31,
	2005		2004
Beginning of period asset retirement obligation liability	$	18,912	$	18,632
Accretion expense		1,766		1,213
Additions/ Other(1)		4,828		(933	)
End of period asset retirement obligation liability	$	25,506	$	18,912

(1)  Additions/ Other relates to the sale of biogas business units in 2004. Additions/ Other in 2005 relates to the asset retirement obligation established upon emergence for Covanta’s Warren County, New Jersey facility and the asset retirement obligation related to the ARC Holdings acquisition.

125

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 16. Unpaid Losses and Loss Adjustment Expenses

      The following table summarizes the activity in the insurance subsidiaries’ liability for unpaid losses and LAE during the three most recent years (in thousands of dollars):

		As of December 31,
		2005			2004			2003
Net unpaid losses and LAE at beginning of year		$	46,228		$	65,142		$	79,192
Incurred, net, related to:
	Current year		8,172			10,343			23,199
	Prior years		1,763			2,518			13,485
Total net incurred			9,935			12,861			36,684
Paid, net, related to:
	Current year		(4,792	)		(5,427	)		(10,133	)
	Prior years		(19,349	)		(26,408	)		(40,661	)
Total net paid			(24,141	)		(31,835	)		(50,794	)
	Plus: Increase in allowance for reinsurance recoverable on unpaid losses		60			60			60
Net unpaid losses and LAE at end of year			32,082			46,228			65,142
Plus: Reinsurance recoverable on unpaid losses			14,786			18,042			18,238
Gross unpaid losses and LAE at end of year		$	46,868		$	64,270		$	83,380

      The net losses and LAE incurred during 2005 related to prior years was $1.8 million. The net losses and LAE incurred during 2005 related to prior years was attributable to recognition of unfavorable development in: commercial auto of $0.5 million; workers’ compensation of $0.5 million; and unallocated LAE for all lines of $1.6 million. Favorable development on prior periods was recognized in property & casualty and private passenger automobile of $0.4 million and $0.4 million, respectively. The net losses and LAE incurred during 2004 related to prior years is attributable to recognition of unfavorable development in: commercial auto of $2.4 million primarily for accident years 2001 through 2002; and property and casualty of $1.6 million; and unallocated loss adjustment expense for all lines of $0.9 million. Favorable development on prior periods was recognized in workers’ compensation and private passenger automobile of $0.7 million and $1.8 million, respectively. The net losses and LAE incurred during 2003 related to prior years was attributable to recognition of unfavorable development in: commercial auto of $5.5 million for accident years 2000 through 2002; workers’ compensation of $5.5 million of which $3.9 million was attributable to Valor; and property and casualty of $1.5 million, most of which was attributable to unallocated LAE reserves. All of the workers’ compensation lines and the private passenger automobile programs that caused higher than expected losses were placed in run-off during 2001.

      The insurance business has claims for asbestos and environmental cleanup (“A&E”) against policies issued prior to 1985 and which are currently in run-off. The principal exposure from these claims arises from direct excess and primary policies of current and past Fortune 500 companies, the obligations of which were assumed by NAICC or former affiliate companies. These direct excess and primary claims are relatively few in number and have policy limits of between $50,000 and $1 million, with reinsurance generally above $50,000. NAICC also has A&E claims primarily associated with participations in excess of loss facultative reinsurance contracts and voluntary risk pools assumed by the same former affiliates. These facultative reinsurance contracts have relatively low limits, generally less than $25,000, and estimates of unpaid losses are based on information provided by the primary insurance company.

      The unpaid losses and LAE related to A&E is established considering facts currently known and the current state of the law and coverage litigation. Liabilities are estimated for known claims (including the cost

126

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

of related litigation) when sufficient information has been developed to indicate the involvement of a specific contract of insurance or reinsurance and management can reasonably estimate its liability. Estimates for unknown claims and development of reported claims are included in NAICC’s unpaid losses and LAE. The liability for the development of reported claims is based on estimates of the range of potential losses for reported claims in the aggregate. Estimates of liabilities are reviewed and updated continually and there is the potential that NAICC’S exposure could be materially in excess of amounts which are currently recorded. Management does not expect that liabilities associated with these types of claims will result in a material adverse effect on the future liquidity or financial position of its insurance business. However, claims such as these are based upon estimates and there can be no assurance that the ultimate liability will not exceed or even materially exceed such estimates. As of the years ended December 31, 2005 and 2004, NAICC’s net unpaid losses and LAE relating to A&E were approximately $6.4 million and $8.2 million, respectively.

Note 17. Leases

      Waste and Energy Services principal leases are for leaseholds, sale and leaseback arrangements on waste-to-energy facilities and independent power projects, trucks and automobiles, and machinery and equipment. Some of these operating leases have renewal options.

      Other Services has entered into various non-cancelable operating lease arrangements for office space and data processing equipment and services. The terms of the operating leases generally contain renewal options and escalation clauses based on increases in operating expenses and other factors.

      Rent expense under operating leases was as follows (in thousands of dollars):

		For the Years Ended December 31,
		2005		2004		2003
Waste and energy services		$	20,859	$	15,823	$	—
Other services			849		1,273		1,229
	Total	$	21,708	$	17,096	$	1,229

      The following is a schedule, by year, of future minimum rental payments required under operating leases that have initial or remaining non-cancelable lease terms in excess of one year as of December 31, 2005 (in thousands of dollars):

			Non-Recourse Portion
	Future Minimum		of Future Minimum
Year	Rental Payments		Rental Payments
2006	$	34,036	$	15,555
2007		32,756		15,749
2008		34,634		19,279
2009		54,611		23,065
2010		38,530		23,362
2011 and thereafter		253,197		167,295
Total	$	447,764	$	264,305

      Waste and Energy Services’ future minimum rental payment obligations include $264.3 million of future non-recourse rental payments that relate to waste-to-energy facilities. Of this amount $156.6 million is supported by third-party commitments to provide sufficient service revenues to meet such obligations. The remaining $107.7 million is related to a waste-to-energy facility at which Covanta Energy serves as operator and directly markets one half of the facility’s disposal capacity. This facility currently generates sufficient revenues from short-, medium-, and long-term contracts to meet rental payments. Covanta Energy anticipates renewing the contracts or entering into new contracts to generate sufficient revenues to meet remaining future rental payments.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      Waste and Energy Services’ electricity and steam sales include lease income of approximately $92.1 million and $66.5 million for the year ended December 31, 2005 and for the period from March 11, 2004 to December 31, 2004, respectively, related to two Indian and one Chinese power project that were deemed to be operating lease arrangements under EITF No. 01-08 “Determining Whether an Arrangement Contains a Lease” (“EITF 01-08”) as of March 10, 2004. This amount represents contingent rentals because the lease payments for each facility depend on a factor directly related to the future use of the leased property. The output deliverable and capacity provided by the two Indian facilities have each been purchased by a single party under long-term power purchase agreements which expire in 2016. The electric power and steam off-take arrangements and maintenance agreement for the Chinese facility are also with one party and are presently contemplated to be continued through the term of the joint venture which expires in 2017. Such arrangements have effectively provided the purchaser (lessee) with “rights to use” these facilities. EITF 01-08 consensus must be applied prospectively to arrangements agreed to, modified or acquired in business combinations in fiscal periods beginning after May 28, 2003. This determination did not have a material impact on Waste and Energy Services’ results of operations and financial condition.

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

	As of December 31,
	2005			2004
Land	$	31		$	33
Energy facilities		86,885			94,612
Buildings and improvements		6,544			936
Machinery and equipment		1,886			1,464
Total		95,346			97,045
Less accumulated depreciation and amortization		(19,317	)		(6,947	)
Property, plant, and equipment — net	$	76,029		$	90,098

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 18. Long-Term Debt

      Long-term debt is comprised of credit facilities and intermediate debt as follows (in thousands of dollars):

			As of December 31,
			2005			2004
Covanta Energy Senior Secured Credit Facilities
First Lien Term Loan Facility			$	229,312		$	—
Second Lien Term Loan Facility				400,000			—
				629,312			—
Intermediate Subsidiary Debt
6.26% Senior Notes due 2015				234,000			—
8.50% Senior Secured Notes due 2010				195,785			—
7.375% Senior Secured Notes due 2010				224,100			—
				653,885			—
Unamortized debt premium				24,726			—
	Total intermediate subsidiary debt			678,611			—
Covanta Energy High Yield Notes				—			207,735
Covanta Energy Unsecured Notes (estimated)				—			28,000
CPIH term loan facility				—			76,852
Other long-term debt				196			309
Total long-term debt				1,308,119			312,896
Less: current portion (includes $4,807 of unamortized premium at December 31, 2005)				(47,549	)		(112	)
		Total long-term debt	$	1,260,570		$	312,784

      As part of the ARC Holdings acquisition, Covanta Energy entered into new credit facilities which are guaranteed by Covanta and certain subsidiaries of Covanta Energy described more fully below. The proceeds of the new credit facilities were used to fund the acquisition of ARC Holdings, to refinance approximately $479 million of Covanta Energy’s and CPIH’s recourse debt and letter of credit facilities, and to pay related fees and expenses. The new credit facilities are further available for ongoing permitted expenditures and for general corporate purposes.

      Covanta Energy’s new credit facilities are comprised of the following:

•  a first priority secured term loan facility in the amount of $275 million that will mature in 2012 and is repayable in scheduled quarterly installments that began September 30, 2005 (the “First Lien Term Loan Facility”);

•  a first priority secured revolving credit facility in the amount of $100 million that will mature in 2011 and is available for revolving loans, up to $75 million of which may be utilized for letters of credit (the “Revolving Credit Facility”);

•  a first priority secured letter of credit facility in the amount of $340 million (of which $307.5 million of letters of credit have been issued as of December 31, 2005) that will mature in 2012 (the “Funded L/C Facility” and collectively with the First Lien Term Loan Facility and the Revolving Credit Facility the “First Lien Facilities”); and

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•  a second priority secured term loan facility in the amount of $400 million that matures and is repayable in full in 2013 (the “Second Lien Term Loan Facility” and collectively with the First Lien Facilities the “Credit Facilities”).

Material Terms of Covanta Energy Senior Secured Credit Facilities

Amortization Terms

      In December, 2005, Covanta Energy paid $45 million as an advance payment against the First Lien Term Loan. The mandatory annual amortization was reset and will be paid in quarterly installments beginning December 31, 2006, through the date of maturity as follows (in thousands of dollars):

	Annual Remaining
First Lien Term Loan Facility	Amortization
2006	$	581
2007		2,322
2008		2,322
2009		2,322
2010		2,322
2011		110,302
2012		109,141

      The Second Lien Term Loan Facility has no mandatory amortization requirements and is required to be repaid in full on its maturity date in 2013.

Interest and Fee Terms

      Interest on loans under the Credit Facilities varies, depending upon interest rate periods and designation of such loans, each selected by Covanta Energy. Loans are designated as Eurodollar rate loans or base rate loans. Eurodollar loans bear interest at a reserve adjusted British Bankers Association Interest Settlement Rate, commonly referred to as “LIBOR,” for deposits in dollars plus a borrowing margin as described below. Interest on Eurodollar rate loans is payable at the end of the applicable interest period of one, two, three or six months (and at the end of every three months in the case of six month Eurodollar loans). Base rate loans bear interest at (a) a rate per annum equal to the greater of (i) the “prime rate” designated in the relevant facility or (ii) the federal funds rate plus 0.50% per annum, plus (b) a borrowing margin as described below.

      Letters of credit issued under the Revolving Credit Facility will accrue fees at the then effective borrowing margins on Eurodollar rate loans, plus a fee on each issued letter of credit payable to the issuing bank. The Funded L/ C Facility accrues fees (whether or not letters of credit are issued thereunder) at the then-effective borrowing margin for Eurodollar rate loans described below times the total funded letter of credit availability (whether or not then utilized), plus a fee on each issued letter of credit payable to the issuing bank. In addition, Covanta Energy has agreed to pay to the participants under the Funded L/ C Facility any shortfall between the Eurodollar rate applicable to the relevant Funded L/ C Facility interest period and the investment income earned on the pre-agreed investments made by the relevant issuing banks with the purchase price paid by such participants for their participations under the Funded L/ C Facility. Covanta Energy is required to enter into certain hedging obligations designed to mitigate its exposure to the risk of interest rate changes with respect to $337.5 million of its borrowings under the Credit Facilities, less any second lien notes to the extent issued. See Note 20. Financial Instruments of the Notes.

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      The borrowing margins referred to above for the Revolving Credit Facility are as follows:

	Borrowing			Borrowing
	Margin for			Margin for
	Revolving			Revolving
	Eurodollar			Base Rate
Company Leverage Ratio	Loans			Loan
≥4.25:1.00		3.00	%		2.00	%
<4.25:1.00		2.75	%		1.75	%
≥3.50:1:00
<3.50:1:00		2.50	%		1.50	%

      The borrowing margin for the First Lien Term Loan Facility and the Funded L/ C Facility are 3.00% for Eurodollar rate loans and 2.00% for base rate loans. The borrowing margins under the Second Lien Term Loan Facility are 5.50% for Eurodollar rate loans and 4.50% for base rate loans.

      Fees payable under the Credit Facilities are as follows:

•  Revolving Credit Facility — A commitment fee of 0.50% of the unfunded portion of the facility and a fronting fee of 0.125% of the average aggregate daily maximum available to be drawn under the facility per annum; and

•  Funded L/ C Facility — A funded letter of credit fee as defined in the credit agreement and a fronting fee of 0.125% of the average aggregate daily maximum available to be drawn under the facility per annum.

Guarantees and Securitization

      The Credit Facilities are guaranteed by Covanta and by certain Covanta Energy subsidiaries. Covanta Energy agreed to secure all of its obligations under the First and Second Lien Facilities by granting, for the benefit of secured parties, a first and second priority lien on substantially all of its assets, to the extent permitted by existing contractual obligations, a pledge of all of the capital stock of each of its domestic subsidiaries owned by it and 65% of all the capital stock of each of its foreign subsidiaries directly owned by it, in each case to the extent not otherwise pledged.

      The Credit Facilities provide for the mandatory prepayments of all or a portion of the amounts funded by the lenders under the First Lien Facilities from specified sources, including the sale of assets, incurrence of additional debt, net insurance or condemnation proceeds received and fifty percent of Covanta Energy’s excess annual cash flow as calculated pursuant to the credit agreement.

Debt Covenants and Defaults

      The Credit Facilities require Covanta Energy to furnish the lenders with periodic financial, operating and other information. In addition, these facilities further restrict, with specific exceptions, without consent of its lenders, Covanta Energy’s ability to, among other things:

•  incur indebtedness, or incur liens on its property;

•  pay any dividends or distributions;

•  make new investments;

•  sell or dispose of assets, enter into a merger transaction, liquidate or dissolve itself;

•  enter into any transactions with affiliates; and

•  engage in new lines of business.

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      In addition, the Credit Facilities require Covanta Energy to maintain a minimum interest coverage ratio, a maximum leverage ratio and minimum adjusted EBITDA and to comply with maximum capital expenditure limitations.

      Events of default under the Credit Facilities include any of the following:

•  a failure by Covanta Energy to pay amounts when due under the First Lien Term Loan Facility or other debt instruments;

•  material breaches of representations and warranties;

•  breaches of covenants;

•  involuntary or voluntary bankruptcy;

•  a judgment in excess of specified amounts is rendered against Covanta Energy and is unstayed, to the extent not covered by insurance;

•  any event that would cause a material adverse effect on Covanta Energy;

•  a change in control; or

•  as a result of the occurrence of certain events, the net operating losses available to Covanta or Covanta Energy to offset taxable income are less than $315 million (as reduced by amounts used by Covanta after December 31, 2004).

      The priority of the security interests and related creditor rights among the Credit Facilities are set forth in the intercreditor agreement among Covanta Energy and its lenders (the “Intercreditor Agreement”). The Intercreditor Agreement provides, among other things, that for as long as any of the First Lien Facilities are outstanding:

•  any proceeds of collateral received in connection with the sale or disposition of such collateral by the collateral agent for the holders of the First Lien Facilities will be applied to the First Lien Facilities in the order specified by the Intercreditor Agreement and the applicable First Lien Facilities documents. Upon discharge of the First Lien Facilities, any proceeds of collateral held by the collateral agent for the First Lien Facilities will be delivered to the collateral agent for the Second Lien Term Loan Facility to be applied in the order specified by the Intercreditor Agreement and the applicable Second Lien Term Loan Facility; and

•  except as permitted under the Credit Facilities, Covanta Energy will not make prepayments of the Second Lien Term Loan Facility prior to any voluntary or mandatory prepayment of any amounts outstanding under the First Lien Facilities.

Intermediate Subsidiary Debt

      Upon the consummation of the ARC Holdings acquisition, Covanta Energy assumed the existing consolidated debt of ARC Holdings and its subsidiaries. This assumed debt included certain notes issued by non-project subsidiaries of ARC Holdings described below, as of the Acquisition Date.

•  6.26% senior notes outstanding in the amount of $240 million ($234 million as of December 31, 2005) maturing in 2015. Interest is payable June 30 and December 31 each year through maturity;

•  8.50% senior secured notes in the amount of $200 million ($195.8 million as of December 31, 2005) maturing September 1, 2010. Interest is payable on March 1 and September 1 each year through maturity; and

•  7.375% senior secured notes in the amount of $225 million ($224.1 million as of December 31, 2005) maturing September 1, 2010. Interest is payable on March 1 and September 1 each year through maturity.

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      The 6.26% senior notes and the 8.5% and 7.375% senior secured notes have indentures that provide for certain restrictive covenants, including among other things, restrictions on the incurrence of indebtedness, certain payments to related and unrelated parties, acquisitions and asset sales. In addition, the indentures, pursuant to which such notes are issued, provide that distributions of cash to parent entities (including Covanta Energy) may occur quarterly and only if certain financial covenants are satisfied. Holders of 8.5% and 7.375% senior secured notes are entitled to receive from the issuer an offer to repurchase such notes upon a change of control (a “Change of Control Offer”), such as was caused by Covanta Energy’s purchase of ARC Holdings. These issuers are MSW Energy Holdings LLC (“MSW I”) issuer of the 8.5% senior secured notes, and MSW Energy Holdings II LLC (“MSW II”), issuer of the 7.375% senior secured notes. On June 24, 2005, Change of Control Offers were issued by both MSW I and MSW II. Holders of approximately $4.2 million and $0.9 million of MSW I notes and MSW II notes, respectively, properly tendered their notes for repurchase. On July 26, 2005, MSW I and MSW II purchased such notes for $5.1 million in the aggregate with cash made available by Covanta Energy.

      As of December 31, 2005, Covanta’s subsidiaries were not in default under their respective credit facilities and debt obligations.

Financing Costs

      Deferred financing costs on the consolidated balance sheet as of December 31, 2005 represent capitalizable costs incurred by Covanta in connection with the acquisition of ARC Holdings and refinancing of Covanta Energy’s recourse debt. All deferred financing costs are amortized to interest expense over the life of the related debt using the effective interest method. Deferred financing costs on the consolidated balance sheet as of December 31, 2004 represents capitalizable costs incurred by Covanta in connection with the acquisition of Covanta Energy. These costs were written down to zero on June 24, 2005 upon the refinancing in connection with the ARC Holdings acquisition.

      Amortization of deferred financing costs is included as a component of interest expense and was $10.8 million, $7.0 million and $1.0 million for the years ended December 31, 2005, 2004 and 2003, respectively.

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Note 19. Project Debt

      Project debt is presented below (in thousands of dollars):

		As of December 31,
		2005			2004
Project debt related to Service Fee structures
	4.0-6.75% serial revenue bonds due 2006 through 2015	$	305,360		$	287,388
	3.0-7.0% term revenue bonds due 2006 through 2022		244,390			221,236
	Adjustable-rate revenue bonds due 2006 through 2019		121,065			127,237
	7.322% other debt obligations due 2006 through 2020		83,621			—
Subtotal			754,436			635,861
Unamortized debt premium			34,413			33,944
Total Service Fee structure related project debt			788,849			669,805
Project debt related to Tip Fee structures
	4.875-6.70% serial revenue bonds due 2006 through 2016		429,205			100,883
	5.00-5.625% term revenue bonds due 2010 through 2019		265,700			67,567
Subtotal			694,905			168,450
Unamortized debt premium			28,897			3,899
Total Tip Fee structure related project debt			723,802			172,349
International project debt			85,633			102,583
Total project debt			1,598,284			944,737
Less current portion of project debt
	(includes $16,893 of unamortized premium at December 31, 2005)		(174,114	)		(109,701	)
Noncurrent project debt		$	1,424,170		$	835,036

      Project debt associated with the financing of waste-to-energy facilities is arranged by municipal entities through the issuance of tax-exempt and taxable revenue bonds or other borrowings. Generally, debt service for project debt related to Service Fee Structures is the primary responsibility of municipal entities, whereas debt service for project debt related to Tip Fee structures is paid by Covanta’s project subsidiary from project revenue expected to be sufficient to cover such expense.

      Payment obligations for the project debt associated with waste-to-energy facilities owned by Covanta Energy are limited recourse to the operating subsidiary and non-recourse to Covanta Energy, subject to operating performance guarantees and commitments. These obligations are secured by the revenues pledged under various indentures and are collateralized principally by a mortgage lien and a security interest in each of the respective waste-to-energy facilities and related assets. As of December 31, 2005, such revenue bonds were collateralized by property, plant and equipment with a net carrying value of $2.6 billion and restricted funds held in trust of approximately $434.8 million.

      The interest rates on adjustable-rate revenue bonds are adjusted periodically based on current municipal-based interest rates. The average adjustable rate for such revenue bonds was 3.47% and 1.96% as of December 31, 2005 and 2004, respectively, and the average adjustable rate for such revenue bonds was 2.43% and 1.24% during 2005 and 2004 for the full year, respectively.

      The $85.6 million in international project debt includes the following long-term obligations for 2005:

•  $32.4 million due to financial institutions, of which $10.1 million is denominated in U.S. dollars and $22.3 million is denominated in Indian rupees as of December 31, 2005. This debt relates to the construction of a heavy fuel oil fired diesel engine power plant in India. The U.S. dollar debt bears a

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coupon rate at the three-month LIBOR, plus 4.5% (8.55% as of December 31, 2005). The Indian rupee debt bears a coupon rate at 7.75% as of December 31, 2005. The debt extends through 2011, is non-recourse to Covanta Energy, and is secured by the project assets. The power off-taker has failed to fund the escrow account or post the letter of credit required under the energy contract which failure constitutes a technical default under the project finance documents. The project lenders have not declared an event of default due to this matter and have permitted continued distributions of project dividends.

•

$29.1 million as of December 31, 2005, due to a financial institution which relates to the construction of a second heavy fuel oil fired diesel engine power plant in India. It is denominated in Indian rupees and bears coupon rates ranging from 7.50% to 16.15% in 2005. The debt extends through 2010, is non-recourse to Covanta Energy and is secured by the project assets. The power off-taker has failed to fund the escrow account or post the letter of credit required under the energy contract which failure constitutes a technical default under the project finance documents. The project lenders have not declared an event of default due to this matter and have permitted continued distributions of project dividends.

      As of December 31, 2005, Covanta Energy had one interest rate swap agreement related to project debt that economically fixes the interest rate on certain adjustable-rate revenue bonds. For additional information related to this interest rate swap, see Note 20. Financial Instruments of the Notes.

      The maturities of long-term project debt were as follows (in thousands of dollars):

	As of December 31, 2005
Year	Debt			Premium			Total
2006	$	157,221		$	16,893		$	174,114
2007		157,822			14,573			172,395
2008		163,767			10,779			174,546
2009		174,715			7,992			182,707
2010		173,823			5,469			179,292
Thereafter		707,626			7,604			715,230
Total		1,534,974			63,310			1,598,284
Less current portion		(157,221	)		(16,893	)		(174,114	)
Total noncurrent project debt	$	1,377,753		$	46,417		$	1,424,170

Note 20. Financial Instruments

      The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of SFAS No. 107, “Disclosures About Fair Value of Financial Instruments.” The estimated fair-value amounts have been determined using available market information and appropriate valuation methodologies. However, considerable judgment is necessarily required in interpreting market data to develop estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that Covanta would realize in a current market exchange.

      The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value.

      For cash and cash equivalents, restricted funds, and marketable securities, the carrying value of these amounts is a reasonable estimate of their fair value. The fair value of noncurrent unbilled receivables is estimated by using a discount rate that approximates the current rate for comparable notes. The fair value of noncurrent receivables is estimated by discounting the future cash flows using the current rates at which similar loans would be made to such borrowers based on the remaining maturities, consideration of credit

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risks, and other business issues pertaining to such receivables. The fair value of restricted funds held in trust is based on quoted market prices of the investments held by the trustee.

      Fair values for debt were determined based on interest rates that are currently available to Covanta for issuance of debt with similar terms and remaining maturities for debt issues that are not traded on quoted market prices. The fair value of project debt is estimated based on quoted market prices for the same or similar issues.

      The fair value of Covanta’s interest rate swap agreements is the estimated amount Covanta would receive or pay to terminate the agreement based on the net present value of the future cash flows as defined in the agreement.

Waste and Energy Services

      The fair-value estimates presented herein are based on pertinent information available to management as of December 31, 2005. However, such amounts have not been comprehensively revalued for purposes of these financial statements since December 31, 2005, and current estimates of fair value may differ significantly from the amounts presented herein.

      The estimated fair value of financial instruments is presented as follows (in thousands of dollars):

	As of December 31, 2005
	Carrying		Estimated
	Amount		Fair Value
Assets:
Cash and cash equivalents	$	94,551	$	94,551
Marketable securities		4,100		4,100
Receivables and unbilled service receivables		217,405		217,405
Restricted funds		467,036		466,915
Interest rate swap receivable		14,949		14,949
Liabilities:
Debt		1,308,119		1,339,289
Project debt		1,598,284		1,598,247
Interest rate swap payable		11,852		11,852
Liabilities subject to compromise	$	—	$	—
Off Balance-Sheet Financial Instruments:
Guarantees(a)

(a)  additionally guarantees include approximately $9 million of guarantees related to international energy projects.

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Other Services

      The carrying amounts, which approximates the fair values of financial instruments, are as follows (in thousands of dollars):

	As of December 31,
	2005
	Carry		Estimated
	Amount		Fair Value
Assets:
Cash	$	34,005	$	34,005
Restricted funds		6,520		6,520
Parent investments — fixed maturity securities		3,300		3,300
Insurance business investments — fixed maturity securities		43,667		43,667
Insurance business investments — equity securities		1,507		1,507

ACL Warrants

      On January 12, 2005 (“grant date”), two subsidiaries of Covanta received warrants to purchase 168,230 shares of common stock of ACL at $12.00 per share. The number of shares and exercise price subject to the warrants were subsequently adjusted to 672,920 shares at an exercise price of $3.00 per share, as a result of a four-for-one stock split effective as of August 2005. The warrants were given by certain of the former creditors of ACL under the ACL plan of reorganization. Covanta’s investment in ACL was written down to zero in 2003.

      Covanta recorded the warrants as a derivative security in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”). Covanta recorded the warrants at their aggregate fair value of $0.8 million on the grant date and marked the warrants to their fair value each subsequent financial statement date. During October 2005, Covanta converted the ACL warrants into shares of ACL’s common stock and monetized the shares resulting in net cash proceeds of $18 million and a realized pretax gain of $15.2 million.

Interest Rate Swaps

      As of December 31, 2005, Covanta Energy had one interest rate swap agreement related to project debt that economically fixes the interest rate on certain adjustable-rate revenue bonds. This swap agreement was entered into in September 1995 and expires in January 2019. Any payments made or received under the swap agreement, including fair value amounts upon termination, are included as an explicit component of the client community’s obligation under the related service agreement. Therefore, all payments made or received under the swap agreement are a pass through to the client community. Under the swap agreement, Covanta Energy paid an average fixed rate of 9.8% from 2003 through January 2005, and will pay 5.18% thereafter through January 2019, and received a floating rate equal to the rate on the adjustable rate revenue bonds, unless certain triggering events occur (primarily credit events), which results in the floating rate converting to either a set percentage of LIBOR or a set percentage of the BMA Municipal Swap Index, at the option of the swap counterparty. In the event Covanta Energy terminates the swap prior to its maturity, the floating rate used for determination of settling the fair value of the swap would also be based on a set percentage of one of these two rates at the option of the counterparty. For the year ended December 31, 2005 the floating rate on the swap averaged 2.42%. The notional amount of the swap as of December 31, 2005 was $80.2 million and is reduced in accordance with the scheduled repayments of the applicable revenue bonds. The counterparty to the swap is a major financial institution. Covanta Energy believes the credit risk associated with nonperformance by the counterparty is not significant. The swap agreement resulted in increased debt service expense of $2.2 million and $3.2 million for 2005 and 2004, respectively. The effect on Covanta Energy’s weighted-average borrowing rate of the project debt was an increase of 0.17% for 2005.

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      As described in Note 18. Long-Term Debt of the Notes, Covanta Energy is required to enter into hedging arrangements with respect to a portion of its exposure to interest rate changes with respect to its borrowing under the Credit Facilities. On July 8, 2005, Covanta Energy entered into two pay fixed, receive floating interest rate swap agreements with a total notional amount of $300 million. These swaps were designated as cash flow hedges in accordance with SFAS 133, accordingly, unrealized gains or losses will be deferred in other comprehensive income until the hedged cash flows affect earnings. The impact of the swaps was to increase interest expense for the year ended December 31, 2005 by $0.7 million. As of December 31, 2005, the net after-tax deferred gain in other comprehensive income was $2.0 million ($3.1 million pre-tax, which is recorded in other assets).

Note 21. Employee Benefit Plans

Waste and Energy Services

      Covanta Energy sponsors defined benefit pension plans covering the majority of its domestic employees and retirees and other post-retirement benefit plans for a small number of domestic retirees that include healthcare benefits and life insurance coverage. Effective December 31, 2005, Covanta Energy froze the defined benefit pension plans for domestic employees. All active employees who were eligible participants in the defined benefit pension plans, as of December 31, 2005, will be 100% vested and have a non-forfeitable right to these benefits as of such date. Covanta Energy’s funding policy for the defined benefit pension plans has been to contribute annually an amount to be exempt from the Pension Benefit Guaranty Corporation variable rate premiums. Covanta Energy expects to make contributions of $2.3 million to its defined benefit pension plans and $1.3 million to its other post-retirement benefit plans in 2006.

      In accordance with SFAS 141, on March 10, 2004 Covanta Energy recorded a liability for the total projected benefit obligation in excess of plan assets for the defined benefit pension plan and a liability for the total accumulated post-retirement benefit obligation in excess of the fair value of plan assets for other benefit plans.

      Covanta Energy made contributions of $7.5 million and $7.8 million to the defined benefit pension plans in 2005 and for the period of March 11, through December 31, 2004, respectively.

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      The following table is a reconciliation of the changes in the benefit obligations and fair value of assets for Covanta Energy’s defined benefit pension and other postretirement benefit plans, the funded status (using a December 31 measurement date) of the plans and the related amounts recognized in Covanta Energy’s consolidated balance sheets (in thousands of dollars, except percentages as noted):

		Pension Benefits						Other Benefits
		For the Year						For the Year
		Ended			March 11, 2004 to			Ended			March 11, 2004 to
		December 31,			December 31,			December 31,			December 31,
		2005			2004			2005			2004
Change in benefit obligation:
Benefit obligation		$	67,098		$	62,226		$	11,818		$	12,105
	Service cost		7,223			6,716			—			—
	Interest cost		3,990			2,783			657			546
	Actuarial (gain) loss		(1,384	)		(3,683	)		272			(230	)
	Benefits paid		(1,760	)		(944	)		(1,164	)		(603	)
Benefit obligation at end of year		$	75,167		$	67,098		$	11,583		$	11,818
Change in plan assets:
Plan assets at fair value at December 31, 2004 and March 10, 2004, respectively		$	36,976		$	27,240		$	—		$	—
	Actual return on plan assets		2,600			2,852			—			—
	Covanta Energy contributions		7,526			7,828			1,164			603
	Benefits paid		(1,760	)		(944	)		(1,164	)		(603	)
Plan assets at fair value at end of year		$	45,342		$	36,976		$	—		$	—
Reconciliation of accrued benefit liability and net amount recognized:
Funded status of the plan		$	(29,825	)	$	(30,122	)	$	(11,582	)	$	(11,818	)
Unrecognized net gain			(5,578	)		(4,609	)		(134	)		(405	)
Net amount recognized		$	(35,403	)	$	(34,731	)	$	(11,716	)	$	(12,223	)
Amounts recognized in the consolidated balance sheets consist of:
Accrued benefit liability		$	(35,403	)	$	(34,918	)	$	(11,716	)	$	(12,223	)
Accumulated other comprehensive income			—			187			—			—
Net amount recognized		$	(35,403	)	$	(34,731	)	$	(11,716	)	$	(12,223	)
Weighted average assumptions used to determine net periodic benefit expense for years ending December 31:
Discount rate			6.00	%		6.25	%		6.00	%		6.25	%
Discount rate beginning March 10, 2004						5.75	%					5.75	%
Expected return on plan assets			8.00	%		8.00	%		N/A			N/A
Rate of compensation increase			4.00	%		4.50	%		N/A			N/A
Weighted average assumptions used to determine projected benefit obligations as of December 31:
Discount rate			5.75	%		6.00	%		5.75	%		6.00	%
Rate of compensation increase			4.00	%		4.00	%		N/A			N/A

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      Plan assets had a fair value of $45.3 million and $37.0 million as of December 31, 2005 and 2004, respectively. The allocation of plan assets was as follows:

	As of
	December 31,
	2005			2004
U.S. Equities		68	%		69	%
U.S. Debt Securities		19	%		25	%
Other		13	%		6	%
Total		100	%		100	%

      Covanta Energy’s expected return on plan assets assumption is based on historical experience and by evaluating input from the trustee managing the plans assets. The expected return on the plan assets is also impacted by the target allocation of assets, which is based on Covanta Energy’s goal of earning the highest rate of return while maintaining risk at acceptable levels. The plans strives to have assets sufficiently diversified so that adverse or unexpected results from one security class will not have an unduly detrimental impact on the entire portfolio. The target ranges of allocation of assets are as follows:

U.S. Equities	40 — 75	%
U.S. Debt Securities	10 — 55	%
Other	0 — 50	%

      Covanta Energy anticipates that the long-term asset allocation on average will approximate the targeted allocation. Actual asset allocations are reviewed and the pension plans’ investments are rebalanced to reflect the targeted allocation when considered appropriate.

      For management purposes, an annual rate of increase of 10% in the per capita cost of health care benefits was assumed for 2005 for covered employees. The rate was assumed to decrease gradually to 5.5% in 2010 and remain at that level.

      For the pension plans with accumulated benefit obligations in excess of plan assets the projected benefit obligation, accumulated benefit obligation, and fair value of plan assets were $75.2 million, $56.8 million, and $45.3 million, respectively as of December 31, 2005 and $67.1 million, $46.5 million and $37 million, respectively, as of December 31, 2004.

      Covanta Energy estimates that the future benefits payable for the retirement and post-retirement plans in place are as follows (in thousands of dollars).

	As of December 31,
			Other Benefits
	Pension		Post		Other Benefits
	Benefits		Medicare		Pre Medicare
2006	$	764	$	1,699	$	1,826
2007		776		1,766		1,899
2008		868		1,818		1,954
2009		964		1,830		1,967
2010		1,027		1,843		1,982
2011 - 2015		8,813		7,690		8,266

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      Pension costs for Covanta Energy’s defined benefit plans and other post-retirement benefit plans included the following components (in thousands of dollars):

	Pension						Other
	Benefits						Benefits
	For the Year			For the Period of			For the Year		For the Period of
	Ended			March 10, to			Ended		March 10, to
	December 31, 2005			December 31, 2004			December 31, 2005		December 31, 2004
Components of Net Periodic Benefit Cost:
Service cost	$	7,223		$	6,716		$	—	$	—
Interest cost		3,990			2,783			657		546
Expected return on plan assets		(3,015	)		(1,905	)		—		—
Net periodic benefit cost	$	8,198		$	7,594		$	657	$	546

      Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. A one-percentage point change in the assumed health care trend rate would have the following effects (in thousands of dollars):

	One-Percentage		One-Percentage
	Point Increase		Point Decrease
Effect on total service and interest cost components	$	49	$	(43	)
Effect on postretirement benefit obligation		903		(788	)

      On December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”) was signed into Law. The Act introduces a prescription drug benefit under Medicare as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a prescription drug benefit that is at least actuarially equivalent to Medicare Part D. In accordance with FASB Staff Position 106-2, the accumulated post-retirement benefit obligation and net periodic post-retirement benefit cost in Covanta’s consolidated financial statements and this note reflects the effects of the Act on the plans.

      Substantially all of Covanta Energy’s domestic employees are eligible to participate in savings plans sponsored by Covanta Energy. The savings plan allows employees to contribute a portion of their compensation on a pre-tax and after-tax basis in accordance with specified guidelines. Covanta Energy matches a percentage of employee contributions up to certain limits. Covanta Energy’s costs related to these savings plans were $3.4 million and $2.5 million for the years ended, December 31, 2005 and 2004, respectively.

      Effective January 1, 2006, in connection with freezing its defined benefit pension plans for domestic employees, Covanta Energy enhanced its savings plan for domestic employees by increasing its contribution toward the savings plan.

Other Services

      Under the NAICC 401(k) Plan, employees may elect to contribute up to 20 percent of the eligible compensation to a maximum dollar amount allowed by the Internal Revenue Service (“IRS”). In 2002, NAICC suspended its matching contribution to the 401(k) Plan. In 2003 and 2004, NAICC reinstated its matching contribution to 50% of the first 6% of compensation contributed by employees to the 401(k) Plan. Contributions for each of the three years ended December 31, 2005 were less than $0.1 million.

      A non-contributory defined benefit pension plan (the “Plan”) covers substantially all of NAICC’s employees. Pension benefits are based on an employee’s years of service and average final compensation. The funding policy of the Plan is for Covanta to contribute the minimum pension costs equivalent to the amount required under the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code.

      Net periodic defined pension benefit expense was $0.3 million, $0.9 million and $0.1 million for Covanta’s insurance business for the years ended December 31, 2005, 2004 and 2003, respectively. Settlements

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accounted for $0.3 million and $0.8 million of the net periodic benefit costs for the years ended December 31, 2005 and 2004, respectively.

Note 22. Income Taxes

      Covanta files a federal consolidated income tax return with its eligible subsidiaries. Covanta’s federal consolidated tax return will include the results of ARC Holdings after June 24, 2005. Effective July 31, 2005, CPIH and its eligible United States and foreign subsidiaries were includable in Covanta’s federal consolidated income tax return. Covanta’s subsidiary associated with its Lake County, Florida waste-to-energy project (“Covanta Lake”) is not a member of any consolidated return group. Covanta’s federal consolidated income tax return also includes the taxable results of certain grantor trusts described below.

      The grantor trusts, whose taxable income and loss is included in Covanta’s federal consolidated income tax return, were established by state insurance regulators in California and Missouri as part of the 1990 reorganization from which Mission emerged from federal bankruptcy and various state insolvency court proceedings as Covanta. These trusts were created for the purpose of assuming various liabilities associated with certain of Mission’s insurance subsidiaries. This allowed the state regulators to administer the continuing run-off of Mission’s insolvent insurance business, while Covanta and the remaining Mission insurance subsidiaries were released, discharged and dismissed from the proceedings free of any claims and liabilities of any kind, including any obligation to provide further funding to the trusts. The Insurance Commissioner of the State of California (the “California Commissioner”) and the Director of the Division of Insurance of the State of Missouri, as the trustees, have sole management authority over the trusts. Neither Covanta nor any of its subsidiaries has any power to control or otherwise influence the management of the trusts nor do they have any rights with respect to the selection or replacement of the trustees. At the present time, it is not likely that Covanta or any of its subsidiaries will receive any distribution with regard to their residual interests in the existing trusts. Since Covanta does not have a controlling financial interest in these trusts nor is Covanta the primary beneficiary of the trusts, they are not consolidated with Covanta for financial statement purposes.

      SFAS 109 requires the establishment of a valuation allowance to reflect the likelihood of realization of deferred tax assets. Pursuant to SFAS 109, Covanta makes periodic determinations of whether it is “more likely than not” that all or a portion of the Covanta’s deferred tax assets will be realized. In making these determinations, Covanta considers all of the relevant factors, both positive and negative, which may impact upon its future taxable income including the size and operating results of its subsidiaries, the competitive environment in which these subsidiaries operate and the impact of the grantor trusts.

      Reductions in Covanta’s NOLs could occur in connection with the administration and wind-up of the grantor trusts discussed above. During or at the conclusion of the administration of these grantor trusts, material taxable income could result which could utilize a substantial portion of Covanta’s NOLs which in turn could materially reduce Covanta’s cash flow and ability to service its debt. The impact of a material reduction in Covanta’s NOLs could cause an event of default under the Credit Facilities, and/or a reduction of a substantial portion of Covanta’s deferred tax assets relating to such NOLs. See Note 4. California Grantor Trust Settlement of the Notes for additional information concerning the status of matters relating to the grantor trusts and potential impacts relating to the NOLs.

      If Covanta’s existing insurance business were to require capital infusions in order to meet certain regulatory capital requirements, and were Covanta to fail to provide such capital, some or all of its subsidiaries comprising the insurance business could enter insurance insolvency or bankruptcy proceedings. In such event, such subsidiaries may no longer be included in Covanta’s consolidated tax return and a portion, which could constitute a significant portion, of Covanta’s remaining NOLs may no longer be available to it. There may also be a significant inclusion of taxable income in Covanta’s federal consolidated tax return.

      Covanta had NOLs estimated to be approximately $489 million for federal income tax purposes as of the end of 2005. The NOLs will expire in various amounts from December 31, 2006 through December 31, 2023,

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if not used. Covanta’s NOLs will expire, if not used, in the following amounts in the following years (in thousands of dollars):

	Amount of
	Carryforward
	Expiring
2006	$	76,976
2007		89,790
2008		31,688
2009		39,665
2010		23,600
2011		19,755
2012		38,255
2019		33,635
2022		26,931
2023		108,331
	$	488,626

      If Covanta were to undergo an “ownership change,” as such term is used in Section 382 of the Internal Revenue Code, the use of its NOLs would be limited. Covanta will be treated as having had an “ownership change” if there is a more than 50% increase in stock ownership during a 3-year “testing period” by “5% stockholders”. Covanta’s Certificate of Incorporation contains stock transfer restrictions that were designed to help preserve Covanta’s NOLs by avoiding an ownership change. The transfer restrictions were implemented in 1990, and Covanta expects that they will remain in-force as long as Covanta has NOLs. Covanta cannot be certain, however, that these restrictions will prevent an ownership change.

      The components of the provision (benefit) for income taxes for continuing operations, including ARC Holdings after June 24, 2005 were as follows (in thousands of dollars):

		For the Years Ended
		December 31,
		2005			2004			2003
Current:
	Federal	$	5,757		$	4,320		$	—
	State		4,194			5,392			18
	Foreign		6,941			5,079			—
Total current			16,892			14,791			18
Deferred:
	Federal		12,014			(2,030	)		—
	State		5,916			(665	)		—
	Foreign		(171	)		(561	)		—
Total deferred			17,759			(3,256	)		—
Total provision for income taxes		$	34,651		$	11,535		$	18

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      The following reflects a reconciliation of income tax expense computed by applying the applicable federal income tax rate of 35% to income before provision for income tax as compared to the provision for income taxes (in thousands of dollars):

		For the Years Ended
		December 31,
		2005			2004			2003
Computed “expected” tax benefit (expense)		$	27,148		$	12,416		$	(23,530	)
State and other tax expense			6,572			3,072			18
Change in valuation allowance			(9,485	)		(15,423	)		(1,976	)
Grantor trust income			5,250			5,810			8,500
Subpart F income and foreign dividends			7,190			5,153			—
Expiring NOL			—			—			20,689
Taxes on foreign earnings			(7	)		(138	)		—
Taxes on equity earnings			—			247			—
Production tax credits			(3,132	)		—			—
Other, net			1,115			398			(3,683	)
	Total income tax expense	$	34,651		$	11,535		$	18

      The tax effects of temporary differences that give rise to the deferred tax assets and liabilities are presented as follows (in thousands of dollars):

			As of December 31,
			2005			2004
Deferred Tax Assets:
	Loss reserve discounting		$	2,066		$	2,651
	Unearned premiums			71			88
	Capital loss carryforward			16,426			17,882
	Net operating loss carryforwards			174,198			180,752
	Allowance for doubtful accounts			697			697
	Accrued expenses			51,075			50,799
	Tax basis in bond and other costs			22,067			20,350
	Deferred tax assets attributable to pass-through entities			10,425			10,169
	Other			16,538			1,785
	AMT and other credit carryforward			10,203			6,415
		Total gross deferred tax asset		303,766			291,588
		Less: valuation allowance		(81,701	)		(91,186	)
		Total deferred tax asset		222,065			200,402

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			As of December 31,
			2005			2004
Deferred Tax Liabilities:
	Unrealized gains on available-for-sale securities			323			323
	Unremitted earnings of foreign subsidiaries			15,401			8,763
	Unbilled accounts receivable			35,049			39,041
	Property, plant and equipment			211,741			163,610
	Intangible assets			62,992			70,799
	Deferred acquisition costs			292			292
	Difference in tax basis of bonds			25			65
	Salvage and subrogation discount			17			11
	Deferred tax liabilities attributable to pass-through entities			381,334			—
	Other, net			766			53
		Total gross deferred tax liability		707,940			282,957
		Net deferred tax liability	$	(485,875	)	$	(82,555	)

Note 23. Insurance Regulation, Dividend Restrictions and Statutory Surplus

      Covanta’s insurance subsidiaries are regulated by various states. For regulatory purposes, separate financial statements which are prepared in accordance with statutory accounting principles are filed with these states. The insurance subsidiaries prepares its statutory-basis financial statements in accordance with accounting practices prescribed or permitted by the California Department of Insurance (the “CDI”). Prescribed statutory accounting practices include a variety of publications of the National Association of Insurance Commissioners (the “Insurance Association”), as well as state laws, regulations and general administrative rules. Permitted statutory accounting practices encompass all accounting practices not so prescribed (see below for discussion of the insurance businesses permitted practice). The Insurance Association has adopted a comprehensive set of accounting principles for qualification as an Other Comprehensive Basis of Accounting which was effective in 2001. As of the years ended December 31, 2005 and 2004, Covanta’s operating insurance subsidiaries had statutory capital and surplus of $17.3 million and $16.9 million, respectively. The combined statutory net loss for Covanta’s operating insurance subsidiaries, as reported to the regulatory authorities for the years ended December 31, 2005, 2004 and 2003, was $4.8 million, $0.8 million, and $10.1 million, respectively. In 2005, NAICC recognized an other than temporary impairment of its investment in Valor for an amount equal to its cost basis of $5.9 million, reducing statutory surplus in 2005 by $0.7 million.

      A model for determining the risk-based capital (“RBC”) requirements for property and casualty insurance companies was adopted in December 1993 and companies are required to report their RBC ratios based on their statutory annual statements. As of December 31, 2005, NAICC’s RBC was 589%, which is $14.4 million in excess of the regulatory Authorized Control Level.

      Insurance companies are subject to insurance laws and regulations established by the states in which they transact business. The governmental agencies established pursuant to these state laws have broad administrative and supervisory powers over insurance company operations. These powers include granting and revoking of licenses to transact business, regulating trade practices, establishing guaranty associations, licensing agents, approving policy forms, filing premium rates on certain business, setting reserve requirements, determining the form and content of required regulatory financial statements, conducting periodic examination of insurers’ records, determining the reasonableness and adequacy of capital and surplus, and prescribing the maximum concentrations of certain classes of investments. Most states have also enacted legislation regulating insurance holding company systems, including acquisitions, extraordinary dividends, the terms of affiliate transactions

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and other related matters. Covanta and its insurance subsidiaries have registered as holding company systems pursuant to such legislation in California and routinely report to other jurisdictions.

      Under the California Insurance Code, NAICC is prohibited from paying shareholder dividends, other than from accumulated earned surplus, exceeding the greater of net income or 10% percent of the preceding year’s statutory surplus, without prior approval of the CDI. No dividends were paid in 2005, 2004 or 2003. The overall limit of dividends that can be paid during 2006 is approximately $1.7 million as long as there is sufficient accumulated earned surplus to pay such. As of the year ended December 31, 2005, NAICC did not have sufficient accumulated earned surplus, as defined by the CDI, to pay further ordinary dividends.

Note 24. Stockholders’ Equity and Stock Option Plans

Stockholders’ Equity

      In connection with a pro rata rights offering to all stockholders on May 27, 2005, Covanta issued approximately 66.7 million additional shares of common stock for approximately $400 million of gross proceeds, as more fully described in Note 3. Acquisitions and Dispositions of the Notes. On September 19, 2005, Covanta’s stockholders approved an amendment to the charter to increase the number of authorized shares of common stock to 250,000,000 from 150,000,000. As of December 31, 2005, there were 141,245,545 shares of common stock issued of which 141,165,840 were outstanding; the remaining 79,705 shares of common stock issued but not outstanding were held as treasury stock as of December 31, 2005.

      In connection with a pro rata rights offering to all stockholders on May 18, 2004, Covanta issued approximately 27.4 million additional shares of common stock for approximately $42 million of gross proceeds. In addition, Covanta issued the maximum 8,750,000 shares to Laminar pursuant to the conversion of approximately $13.4 million in principal amount of notes, as more fully described in Note 3. Acquisitions and Dispositions of the Notes.

      As previously announced, Covanta agreed as part of the Covanta Energy acquisition to conduct a rights offering for up to 3.0 million shares of its common stock to certain holders of 9.25% debentures issued by Covanta Energy prior to its bankruptcy at a purchase price of $1.53 per share (the “9.25% Offering”). Also as previously announced, because of the possibility that the 9.25% Offering could not be completed prior to the completion of the ARC Holdings acquisition, and the related rights offering to shareholders (the “ARC Holdings Rights Offering”), Covanta restructured the 9.25% Offering so that the holders that participated in the 9.25% Offering were offered the right to purchase additional 2.7 million shares of Covanta’s common stock at the same purchase price ($6.00 per share) as in the ARC Holdings Rights Offering which is an equivalent number of shares of common stock that such holders would have been entitled to purchase in the ARC Holdings Rights Offering if the 9.25% Offering was consummated on or prior to the record date for the ARC Holdings Rights Offering. On February 24, 2006, Covanta completed the 9.25% Offering in which 5,696,911 shares were issued in consideration for $20.8 million in gross proceeds.

      In connection with efforts to preserve Covanta’s NOLs, Covanta has imposed restrictions on the ability of holders of five percent or more of common stock to transfer the common stock owned by them and to acquire additional common stock, as well as the ability of others to become five percent stockholders as a result of transfers of common stock.

      The following represents shares of common stock reserved for future issuance:

	As of December 31,
	2005
Estimated stock purchase rights of certain creditors of Covanta Energy		5,700,000
Shares available for issuance under Equity Plans		5,344,743

      As of December 31, 2005, there were 10,000,000 shares of preferred stock authorized, with none issued or outstanding. The preferred stock may be divided into a number of series as defined by Covanta Board of

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Directors. The Board of Directors is authorized to fix the rights, powers, preferences, privileges and restrictions granted to and imposed upon the preferred stock upon issuance, with prior approval of the stockholders required for any series of preferred stock issued to any holder of 1% or more of the outstanding common stock.

Stock Option Plans

      Covanta adopted the Covanta Holding Corporation Equity Award Plan for Employees and Officers (the “Employees Plan”) and the Covanta Holding Corporation Equity Award Plan for Directors (the “Directors Plan”), collectively (the “Award Plans”), effective with stockholder approval on October 5, 2004. On July 25, 2005, the Covanta Board of Directors approved and on September 19, 2005, Covanta’s stockholders approved the amendment to the Employees Plan to authorize the issuance of an additional 2,000,000 shares. The 1995 Stock and Incentive Plan (the “1995 Plan”) was terminated with respect to any future awards under such plan on October 5, 2004 upon stockholder approval of the Award Plans. The 1995 Plan will remain in effect until all awards have been satisfied or expired.

2004 Stock Option Plan

      The purpose of the Award Plans is to promote the interests of Covanta (including its subsidiaries and affiliates) and its stockholders by using equity interests in Covanta to attract, retain and motivate its management, non-employee directors and other eligible persons and to encourage and reward their contributions to Covanta’s performance and profitability. The Award Plans provide for awards to be made in the form of (a) incentive stock options, (b) non-qualified stock options, (c) shares of restricted stock, (d) stock appreciation rights, (e) performance awards, or (f) other stock-based awards which relate to or serve a similar function to the awards described above. Awards may be made on a stand alone, combination or tandem basis. The maximum aggregate number of shares of common stock available for issuance is 6,000,000 under the Employees Plan and 400,000 under the Directors Plan.

      On July 7, 2005, the Compensation Committee of the Board of Directors, under the Employees Plan, awarded certain key employees 404,000 shares of restricted stock. The terms of the restricted stock awards include vesting provisions based on two financial performance factors (66%) and continued service over the passage of time (34%). The awards vest over approximately 31 months, with 134,636 shares (33.33%) vesting on February 28, 2006, 134,636 shares (33.33%) vesting on February 28, 2007 and the remaining 134,728 shares (33.34%) vesting on February 29, 2008.

      On September 19, 2005, in accordance with its existing program for annual director compensation, Covanta granted options to purchase an aggregate of 120,006 shares of common stock and 13,500 shares of restricted stock under the Directors Plan. The options have an exercise price of $12.90 per share and expire 10 years from the date of grant and vest upon the date of grant (but are not exercisable for six months following such date). Restrictions on the restricted stock shall lapse on a pro rata basis over three years commencing on the date of grant.

      On October 5, 2004 Covanta granted options to purchase an aggregate of 1,020,000 shares of Common Stock and 641,010 shares of restricted stock under the Employees Plan. The options have an exercise price of $7.43 per share and expire 10 years from the date of grant and vest over three years commencing on February 28, 2006. Restrictions upon 50% of the restricted stock shall lapse on a pro rata basis over three years commencing on February 28, 2005 and the restrictions upon the remaining 50% of the restricted stock shall lapse over the same three year period based upon the satisfaction of performance-based metrics of operating cash flow or such other performance measures as may be determined by the Compensation Committee of the Board of Directors. See Note 1. Organization and Summary of Significant Accounting Policies — Stock-Based Compensation for a description of options that were accelerated under Covanta’s Award Plan.

      On October 5, 2004 Covanta granted options to purchase an aggregate of 93,338 shares of Common Stock and 15,500 shares of restricted stock under the Directors Plan. The options have an exercise price of $7.43 per share and expire 10 years from the date of grant and vest upon the date of grant. Restrictions on the

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restricted stock shall lapse on a pro rata basis over three years commencing on the date of grant. On December 5, 2004, Covanta granted an additional 11,111 stock options at an exercise price of $7.85 and an additional 1,250 share of restricted stock under the Directors Plans with similar term and vesting provisions.

1995 Stock Option Plan

      The 1995 Plan is a qualified plan which provides for the grant of any or all of the following types of awards: stock options, including incentive stock options and non-qualified stock options; stock appreciation rights, whether in tandem with stock options or freestanding; restricted stock; incentive awards; and performance awards. The purpose of the 1995 Plan is to enable Covanta to provide incentives to increase the personal financial identification of key personnel with the long-term growth of Covanta and the interests of Covanta’s stockholders through the ownership and performance of common stock, to enhance Covanta’s ability to retain key personnel, and to attract outstanding prospective employees and Directors. The 1995 Plan became effective as of March 21, 1995.

      In September 2001, Covanta’s stockholders approved amendments to the 1995 Plan which increased the aggregate number of shares available for option grants from 1,700,000 to 2,540,000 and provided for options to be awarded to independent contractors.

      On July 24, 2002, Covanta’s Board amended the 1995 Plan to increase the aggregate number of shares available for grant from 2,540,000 to 4,976,273. The Board reserved 1,936,273 shares for the grant of stock options to management of ACL, of which options for 1,560,000 shares of Covanta common stock were granted. The options have an exercise price of $5.00 per share and expire 10 years from the date of grant. One-half of the options time vest over a four-year period in equal annual installments and one-half of the options vest over a four-year period in equal annual installments contingent upon the financial performance of ACL and compliance with the terms of its senior bank facility. During 2003, options for 829,375 shares of common stock were forfeited due to terminations and ACL not achieving the performance targets.

      In July 2002, options for 918,084 shares previously granted to employees, directors and contractors of Covanta, which would have expired upon the termination of the service of these individuals to Covanta on July 24, 2002, were extended two years or two years beyond the termination of their service in a new capacity, but in no event longer than the original term with vesting accelerated simultaneously with the extension.

      On August 7, 2003, Covanta granted options for 50,000 shares of common stock to an employee of NAICC. The options have an exercise price of $1.45 per share and expire 10 years from the grant date. 20,000 of the options vest on the first and second anniversary of the grant date and the remaining 10,000 options vest on the third anniversary of the grant date.

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      The following table summarizes activity and balance information of the options under the Awards Plans and 1995 Plan:

		As of December 31,
		2005				2004				2003
				Weighted				Weighted				Weighted
				Average				Average				Average
				Exercise				Exercise				Exercise
		Shares		Price		Shares		Price		Shares		Price
1995 Stock Option Plan
Outstanding at the beginning of the year			795,677	$	4.87		2,564,543	$	4.79		3,343,918	$	4.89
	Granted		—		—		—				50,000		1.45
	Exercised		427,250		4.41		965,991		4.27		—		—
	Forfeited		53,334		6.25		802,875		5.14		829,375		5.00
Outstanding at the end of the year			315,093	$	5.26		795,677	$	4.87		2,564,543	$	4.79
Options exercisable at year end			305,093	$	5.38		715,675	$	5.04		1,783,708	$	4.84
Options available for future grant			—				—				2,141,048
2004 Stock Option Plan
Outstanding at the beginning of the year			1,124,449	$	7.43
	Granted		120,006		12.90		1,124,449	$	7.43
	Exercised		296,340		7.45		—
	Forfeited		20,000		7.43		—
Outstanding at the end of the year			928,115	$	8.14		1,124,449	$	7.43
Options exercisable at year end			258,115	$	9.97		104,449	$	7.47
Options available for future grant			4,081,535				1,475,551

      As of December 31, 2005, options for shares were outstanding in the following price ranges:

					Weighted
	Options Outstanding				Average		Options Exercisable
					Remaining
	Number of		Weighted Average		Contractual Life		Number		Weighted Average
Exercise Price Range	Shares		Exercise Price		(Years)		of Shares		Exercise Price
$1.45 - $4.26		96,668	$	3.39		7.2		86,668	$	3.61
$5.31 - $5.78		148,425		5.63		3.9		148,425		5.63
$7.06		70,000		7.06		2.0		70,000		7.06
$7.43		808,109		7.43		8.8		138,109		7.43
$12.90		120,006		12.90		9.7		120,006		12.90
		1,243,208						563,208

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Note 25. Accumulated Other Comprehensive Income

      Accumulated other comprehensive income, net of income taxes, consists of the following (in thousands of dollars):

		As of
		December 31,
		2005			2004
Foreign currency translation		$	(126	)	$	549
Minimum pension liability			(403	)		(72	)
Net unrealized gain on interest rate swap			2,013			—
Net unrealized loss on available-for-sale securities			(949	)		106
	Accumulated other comprehensive income	$	535		$	583

Note 26. Earnings (Loss) Per Share

      Per share data is based on the weighted average outstanding number of Covanta’s, par value $0.10 per share, common stock during the relevant period. Basic earnings per share are calculated using only the weighted average number of outstanding shares of common stock. Diluted earnings per share computations, as calculated under the treasury stock method, include the weighted average number of shares of additional outstanding common stock issuable for stock options, restricted stock, rights and convertible notes whether or not currently exercisable. Diluted earnings per share for all the periods presented do not include shares related to stock options and warrants if their effect was anti-dilutive (in thousands, excepts per share amounts).

	For the Years Ended December 31,
	2005		2004		2003
Net income	$	59,326	$	34,094	$	(69,225	)
Basic earnings per share:
Weighted average basic common shares outstanding		122,209		88,543		66,073
Basic earnings per share	$	0.49	$	0.39	$	(1.05	)
Diluted earnings per share:
Weighted average basic common shares outstanding		122,209		88,543		66,073
Stock options		688		302		—	(A)
Restricted stock		869		187		—	(A)
Rights		4,144		2,167		—	(A)
Weighted average diluted common shares outstanding		127,910		91,199		66,073
Diluted earnings per share	$	0.46	$	0.37	$	(1.05	)

(A) Antidilutive

      Basic and diluted earnings per share and the weighted average shares outstanding have been retroactively adjusted in 2005 to reflect the bonus element contained in the ARC Holdings Rights Offering and retroactively adjusted in 2004 to reflect the bonus element contained in the 2005 ARC Holdings Rights Offering and the rights offering completed on May 18, 2004.

      On December 2, 2003, pursuant to the note purchase agreement, 5,120,853 shares of common stock were issued and included in the weighted average outstanding shares calculation as of March 10, 2004, the date on which certain conditions upon which the shares were contingently returnable were satisfied. The shares were not included in the computation of diluted earnings per share for the year ended December 31, 2003 because

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their effect would have been antidilutive. The weighted average number of such shares included in the basic and diluted earnings per share calculation was 4,152,801 for the year ended December 31, 2004.

      Options to purchase 3,393,918 shares of common stock at exercise prices ranging from $1.45 to $7.06 per share were outstanding during the year ended December 31, 2003 but were not included in the computation of diluted earnings per share because the option’s exercise price was greater than the average market price of common stock. 2,564,543 of such options were outstanding as of December 31, 2003.

Note 27. Business Segments

      Given the significance of the Covanta Energy and ARC Holdings acquisitions to Covanta’s results of operations and financial condition, Covanta decided, during the third quarter of 2005, to combine the previously separate business segments of Insurance Services and Parent-Only operations into one reportable segment called Other Services. Covanta currently has two reportable business segments — Waste and Energy Services and Other Services. Certain prior period amounts, such as parent investment income, have been reclassified in the consolidated financial statements to conform to the current period presentation.

      Waste and Energy Services develop, construct, own and operate for others key infrastructure for the disposal of waste (primarily waste-to-energy) and independent power production facilities in the United States and abroad. Covanta also has one water treatment facility in this segment. The Other Services segment is comprised of Covanta’s insurance business, which writes property and casualty insurance in California, and the parent company which primarily receives income from its investments and incurred general and administrative expenses prior to the acquisition of Covanta Energy.

      The accounting policies of the reportable segments are consistent with those described in the summary of significant accounting policies, unless otherwise noted.

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      Segment results were as follows (in thousands of dollars):

				For the Years Ended December 31,
				2005			2004			2003
Operating Revenues:
	Waste and Energy Services
		Domestic		$	831,018		$	452,983		$	—
		International			132,948			102,345			—
			Subtotal Waste and Energy Services		963,966			555,328			—
	Other Services				14,797			20,868			41,123
			Total operating revenues	$	978,763		$	576,196		$	41,123
Income (loss) from segment operations:
	Waste and Energy Services
		Domestic		$	128,642		$	65,001		$	—
		International			18,055			15,197			—
			Subtotal Waste and Energy Services		146,697			80,198			—
	Other Services				(481	)		(3,328	)		(14,340	)
			Total operating income (loss)		146,216			76,870			(14,340	)
	Other income (expense):
		Investment income			6,129			2,343			1,434
		Interest expense			(89,973	)		(43,739	)		(1,424	)
		Gain on derivative instrument, ACL warrants			15,193			—			—
		Income (loss) before income tax expense, minority interests and equity in net income (loss) from unconsolidated investments		$	77,565		$	35,474		$	(14,330	)

      Total revenues by segment reflect sales to unaffiliated customers. In computing income (loss) from operations none of the following have been added or deducted: unallocated corporate expenses, non-operating interest expense, non-operating investment income and income taxes.

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      For the years ended December 31, 2005 and 2004, identifiable assets, depreciation and amortization and capital additions were as follows (in thousands of dollars).

			Depreciation
	Identifiable		and		Capital
	Assets		Amortization		Additions
2005
Waste and Energy Services (includes goodwill of $255.9 million)	$	4,569,025	$	124,814	$	23,468
Other Services		133,140		111		59
Consolidated	$	4,702,165	$	124,925	$	23,527
2004
Waste and Energy Services	$	1,814,042	$	53,131	$	11,878
Other Services		125,039		151		121
Consolidated	$	1,939,081	$	53,282	$	11,999
2003
Other Services	$	162,648	$	224	$	96
Consolidated	$	162,648	$	224	$	96

      Covanta’s operations are principally in the United States. Operations outside of the United States are primarily in Asia, with some projects in Latin America and Europe. A summary of revenues by geographic area is as follows (in thousands of dollars):

		For the Years Ended December 31,
		2005		2004		2003
Revenues:
	United States	$	845,814	$	473,851	$	41,123
	India		94,680		64,805		—
	Other Asia		37,735		36,648		—
	Other International		534		892		—
Total		$	978,763	$	576,196	$	41,123

      A summary of identifiable assets by geographic area is as follows (in thousands of dollars):

		As of December 31,
		2005		2004
Identifiable Assets:
	United States	$	4,470,539	$	1,674,636
	India		75,279		93,462
	Other Asia		103,585		100,655
	Other International		52,762		70,328
Total		$	4,702,165	$	1,939,081

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 28. Quarterly Data (Unaudited)

      The following tables present quarterly unaudited financial data for the periods presented on the consolidated statements of operations (in thousands of dollars, except per share amounts):

		For the Year Ended December 31, 2005(1)
Fiscal Quarter		First		Second		Third		Fourth		Total
Operating revenue		$	174,819	$	199,092	$	301,490	$	303,362	$	978,763
Operating income			13,859		28,814		64,991		38,552		146,216
Net (Loss) income			10,303		5,917		37,401		5,705		59,326
Net (Loss) income per share:
	Basic		0.10		0.06		0.27		0.04		0.49
	Diluted		0.10		0.05		0.26		0.04		0.46

		For the Year Ended December 31, 2004(2)
Fiscal Quarter		First			Second		Third		Fourth		Total
Operating revenue		$	45,875		$	184,878	$	171,622	$	173,821	$	576,196
Operating income			3,799			30,757		21,708		20,606		76,870
Net (Loss) income			(2,173	)		15,195		12,815		8,257		34,094
Net (Loss) income per share:
	Basic		(0.03	)		0.19		0.13		0.08		0.39
	Diluted		(0.03	)		0.18		0.12		0.08		0.37

(1)	Includes ARC Holdings’ results of operations since June 25, 2005.
(2)	Includes Covanta Energy’s results of operations since March 11, 2004.

      Basic and diluted earnings per share and the weighted average shares outstanding have been retroactively adjusted in 2005 to reflect the bonus element contained in the ARC Holdings Rights Offering and retroactively adjusted in 2004 to reflect the bonus element contained in the 2005 ARC Holdings Rights Offering and the rights offering completed on May 18, 2004.

Note 29. Commitments and Contingent Liabilities

      Covanta and/or its subsidiaries are party to a number of claims, lawsuits and pending actions, most of which are routine and all of which are incidental to its business. Covanta assesses the likelihood of potential losses on an ongoing basis and when losses are considered probable and reasonably estimable, records as a loss an estimate of the ultimate outcome. If Covanta can only estimate the range of a possible loss, an amount representing the low end of the range of possible outcomes is recorded. The final consequences of these proceedings are not presently determinable with certainty.

Covanta Energy Corporation

      Generally, claims and lawsuits against Covanta Energy and its subsidiaries that had filed bankruptcy petitions and subsequently emerged from bankruptcy arising from events occurring prior to their respective petition dates, have been resolved pursuant to the Covanta Energy Reorganization Plan, and have been discharged pursuant to orders of the Bankruptcy Court which confirmed the Covanta Energy Reorganization Plan or similar plans of subsidiaries emerging separately from Chapter 11. However, to the extent that claims are not dischargeable in bankruptcy, such claims may not be discharged. For example, the claims of certain persons who were personally injured prior to the petition date but whose injury only became manifest thereafter may not be discharged pursuant to the Covanta Energy Reorganization Plan.

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Environmental Matters

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

      Covanta Energy may be identified, along with other entities, as being among parties potentially responsible for contribution to costs associated with the correction and remediation of environmental conditions at disposal sites subject to CERCLA and/or analogous state laws. In certain instances, Covanta Energy may be exposed to joint and several liabilities for remedial action or damages. Covanta Energy’s ultimate liability in connection with such environmental claims will depend on many factors, including its volumetric share of waste, the total cost of remediation, and the financial viability of other companies that also sent waste to a given site and, in the case of divested operations, its contractual arrangement with the purchaser of such operations. Generally such claims arising prior to the first petition date were resolved in and discharged by Covanta Energy’s Chapter 11 cases.

      The potential costs related to the matters described below and the possible impact on future operations are uncertain due in part to the complexity of governmental laws and regulations and their interpretations, the varying costs and effectiveness of cleanup technologies, the uncertain level of insurance or other types of recovery and the questionable level of Covanta Energy’s responsibility. Although the ultimate outcome and expense of any litigation, including environmental remediation, is uncertain, Covanta Energy believes that the following proceedings will not have a material adverse effect on Covanta Energy’s consolidated financial position or results of operations.

      In June 2001, the Environmental Protection Agency (“EPA”) named Covanta Energy’s wholly-owned subsidiary, Covanta Haverhill, Inc. (“Haverhill”), as one of 2,000 potentially responsible parties, referred to as “PRPs”, at the Beede Waste Oil Superfund Site, Plaistow, New Hampshire (“Beede site”), a former waste oil recycling facility. The total quantity of waste oil alleged by the EPA to have been disposed of by PRPs at the Beede site is approximately 14.3 million gallons, of which Haverhill’s contribution is alleged to be approximately 44,000 gallons. On January 9, 2004, the EPA signed its Record of Decision with respect to the cleanup of the site. The estimated cost to implement the remedial alternative selected in the Record of Decision is $48 million. By letter dated September 28, 2005, the EPA invited Haverhill and 94 other PRPs including, among others, those PRPs that are alleged to have contributed more than 20,000 gallons of waste oil to the Beede site, to negotiate the voluntary performance and/or financing of the site cleanup, including reimbursement of past costs incurred to date by the EPA and the State of New Hampshire Department of Environmental Services, referred to as “DES”. Haverhill is a member of a PRP group at the Beede site and expects to participate in settlement negotiations with the EPA and DES as part of that PRP group. Haverhill share of liability, if any, cannot be determined at this time as a result of uncertainties regarding the source and scope of contamination, the large number of PRPs and the varying degrees of responsibility among various classes of PRPs. Covanta Energy believes that based on the amount of waste oil materials Haverhill is alleged to have sent to the site, its liability will not be material to Covanta Energy’s financial position and results of operations.

      By letters dated August 13, 2004 and May 3, 2005, the EPA notified Covanta Essex Company (“Essex” and formerly named American Ref-Fuel Company of Essex County) that it was potentially liable under CERCLA Section 107(a) for response actions in the Lower Passaic River Study Area, referred to as “LPRSA”, a 17 mile stretch of river in northern New Jersey. Essex is one of at least 52 PRPs named thus far. The EPA alleges that hazardous substances found in the LPRSA were being released from the Essex site, which abuts the river. The EPA’s notice letters state that Essex may be liable for costs related to a proposed $10 million study of the Lower Passaic River, for certain past costs incurred by the EPA totaling

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approximately $2.8 million, and for unspecified natural resource damages. Considering the history of industrial and other discharges into the LPRSA from other sources, including named PRPs, Essex believes any releases from its site to be de minimis in comparison; however, it is not possible at this time to predict that outcome with certainty or to estimate Essex’s ultimate liability in the matter, including for natural resource damage. Given the uncertainty, Essex has entered an arrangement with the EPA and the cooperating PRP group to settle the potential liability Essex might have for the $2.8 million in past costs incurred by the EPA, by contributing $0.25 million to the cost of the study and by sharing in certain past and ongoing legal fees and other costs of the cooperating PRP group.

Other Matters

      In September 2005, Covanta Energy’s subsidiaries involved with the Warren County, New Jersey waste-to-energy facility (“Covanta Warren”) filed a reorganization plan after they reached agreements with the Pollution Control Financing Authority of Warren County (the “Warren Authority”) and various contract counterparties. On December 15, 2005, Covanta Warren emerged from bankruptcy. As part of such emergence, Covanta Warren paid approximately $15 million to satisfy all amounts then due with respect to the outstanding project debt, and to pay certain amounts to project creditors and the Warren Authority. Covanta Warren and the Warren Authority also entered into certain agreements pursuant to which Covanta Warren will own and operate the Warren Facility for its own account, under a Tip Fee structure without a committed supply of waste from the Warren Authority or other municipal entities, and that the Warren Authority will provide ash disposal services to Covanta Warren at its landfill adjacent to the Warren facility. Under the reorganization plan, Covanta Warren’s creditors’ filed claims were paid in full, in cash. Since emergence, Covanta Warren has been consolidated in Covanta’s financial statements.

Other Commitments

      Covanta Energy’s other commitments as of December 31, 2005 were as follows (in thousands of dollars):

	Commitments Expiring by Period
			Less Than		More Than
	Total		One Year		One Year
Letters of credit	$	314,206	$	19,684	$	294,522
Surety bonds		50,999		—		50,999
Total other commitments — net	$	365,205	$	19,684	$	345,521

      The letters of credit were issued pursuant to the facilities described in Note 18. Long-Term Debt of the Notes to secure Covanta Energy’s performance under various contractual undertakings related to its domestic and international projects, or to secure obligations under its insurance program. Each letter of credit relating to a project is required to be maintained in effect for the period specified in related project contracts, and generally may be drawn if it is not renewed prior to expiration of that period.

      Some of these letters of credit reduce over time as well, and one of such reducing letters of credit may be cancelled if Covanta Energy receives an investment grade rating from both Moody’s Investors Service and Standard & Poor’s. As of December 31, 2005, Covanta Energy had approximately $32.5 million in available capacity for additional letters of credit under its Funded L/ C Facility.

      Covanta Energy believes that it will be able to fully perform its contracts to which these existing letters of credit relate, and that it is unlikely that letters of credit would be drawn because of a default of its performance obligations. If any of Covanta Energy’s letters of credit were to be drawn under its current debt facilities, the amount drawn would be immediately repayable to the issuing bank. If Covanta Energy were unable to immediately repay such amounts drawn under letters of credit, unreimbursed amounts would be treated under the Credit Facilities as additional term loans issued under the First Lien Facilities.

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      The surety bonds listed on the table above relate primarily to assumed contracts from ARC Holdings ($35.3 million) and possible closure costs for various energy projects when such projects cease operating ($9.7 million). Were these bonds to be drawn upon, Covanta Energy would have a contractual obligation to indemnify the surety company.

      Covanta Energy and certain of its subsidiaries have issued or are party to performance guarantees and related contractual support obligations undertaken mainly pursuant to agreements to construct and operate certain waste-to-energy facilities and a water facility. With respect to its domestic businesses, Covanta Energy and certain of its subsidiaries have issued guarantees to municipal clients and other parties that Covanta Energy’s subsidiaries will perform in accordance with contractual terms, including, where required, the payment of damages or other obligations. Such contractual damages or other obligations could be material, and in circumstances where one or more subsidiary’s contract has been terminated for its default, such damages could include amounts sufficient to repay project debt. For facilities owned by municipal clients and operated by Covanta Energy, Covanta Energy’s potential maximum liability as of December 31, 2005 associated with the repayment of the municipalities’ project debt on such facilities was in excess of $1 billion. This amount was not recorded as a liability in Covanta Energy’s consolidated balance sheet as of December 31, 2005 as Covanta Energy believes that it had not incurred such liability at the date of the financial statements. Additionally, damages payable under such guarantees on Covanta Energy-owned waste-to-energy facilities could expose Covanta Energy to recourse liability on project debt. Covanta Energy also believes that it has not incurred such damages at the date of the financial statements. If Covanta Energy is asked to perform under one or more of such guarantees, its liability for damages upon contract termination would be reduced by funds held in trust and proceeds from sales of the facilities securing the project debt, which is presently not estimable.

      With respect to its international businesses, Covanta Energy has issued guarantees on behalf of certain of CPIH’s operating subsidiaries with respect to contractual obligations to operate independent power projects. The potential damages owed under such arrangements for international projects may be material.

      Depending upon the circumstances giving rise to such domestic and international damages, the contractual terms of the applicable contracts, and the contract counterparty’s choice of remedy at the time a claim against a guarantee is made, the amounts owed pursuant to one or more of such guarantees could be greater than Covanta Energy’s then-available sources of funds. To date, Covanta Energy has not incurred material liabilities under its guarantees, either on domestic or international projects.

Note 30. Related Party Transactions

      With respect to Covanta Energy’s predecessor entity, one member of Covanta Energy’s previous Board of Directors was a partner in a major law firm, and another member is an employee of another major law firm. From time to time, Covanta Energy sought legal services and advice from those two law firms. During 2004 (prior to March 10, 2004), and 2003, Covanta Energy paid those two law firms approximately $0.4 million, and $0.5 million, and zero and zero, respectively, for services rendered. One member of Covanta’s current Board of Directors is a senior advisor to a major law firm which Covanta Energy has used for several years, predating Covanta’s acquisition of Covanta Energy. Such member of the Board of Directors has had no direct or indirect involvement in the procurement, oversight or provision of such services, is not involved in any manner in the billing of such services, and does not directly or indirectly benefit from associated fees. Covanta Energy has sought legal services and advice from this firm after March 10, 2004 and since that date has paid this law firm approximately $0.1 million in 2004 (after March 10, 2004) and $0.8 million in 2005.

      As part of the investment and purchase agreement with Covanta Energy, Covanta was obligated to arrange a second lien credit facility to be entered into by Covanta Energy (the “Second Lien Facility”). Covanta Energy paid a fee to the agent bank for the Second Lien Facility which was shared by the Bridge Lenders, among others. Also, in order to finance its acquisition of Covanta Energy and to arrange the Second Lien Facility, Covanta entered into a note purchase agreement with the Bridge Lenders. In addition, in

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connection with such note purchase agreement, Laminar arranged for a $10 million revolving loan facility for CPIH secured by CPIH’s assets. The Second Lien Facility and the CPIH revolving loan facility, were refinanced and replaced on June 24, 2005.

      Covanta and Covanta Energy have entered into a corporate services agreement, pursuant to which Covanta provides to Covanta Energy, at Covanta Energy’s expense, certain administrative and professional services and Covanta Energy pays most of Covanta’s expenses, which totaled $17.8 million for the year ended December 31, 2005 and $3 million for the period March 11, 2004 through December 31, 2004. In addition, Covanta and Covanta Energy have entered into an agreement pursuant to which Covanta Energy provides, at Covanta’s expense, payroll and benefit services for Covanta employees which totaled zero for the year ended December 31, 2005 and $0.5 million for the period March 11, 2004 through December 31, 2004. The amounts accrued but not paid under these arrangements totaled $12.4 million for the year ended December 31, 2005 and $0.9 million for the period March 11, 2004 through December 31, 2004.

      As described in Note 5. Equity in Net Income (Loss) from Unconsolidated Investments of the Notes, Covanta Energy holds a 26% investment in Quezon. Covanta Energy and Quezon are both party to an agreement in which Covanta Energy assumed responsibility for the operation and maintenance of Quezon’s coal-fired electricity generation facility. For the fiscal years ended December 31, 2005 and 2004, Covanta Energy, subsequent to their acquisition by Covanta, collected $29.5 million and $34.7 million, respectively, for the operation and maintenance of the facility. As of December 31, 2005 the net amount due from Quezon was $0.1 million and as of December 31, 2004 the net amount due to Quezon related to the operation and maintenance of the facility was $3.8 million, which reflected advance payments made by Quezon.

      ACL was an indirect, wholly-owned subsidiary of Covanta prior to ACL’s bankruptcy proceedings. At that same time, SZ Investments, LLC’s equity ownership in Covanta was approximately 18%. SZ Investments, LLC is affiliated with Samuel Zell, Covanta’s current Chairman of the Board of Directors and William Pate, the former Chairman of Covanta’s Board and a current Director. Another affiliate of SZ Investments, HY I Investments, LLC, was a holder of approximately 42% of ACL’s Senior Notes and PIK Notes. The holders of ACL’s Senior Notes were among the class of grantors of the warrants to subsidiaries of Covanta.

      SZ Investments, Third Avenue and Laminar, representing ownership of approximately 40.4% of Covanta’s outstanding common stock, each participated in ARC Holdings Rights Offering and acquired at least their respective pro rata portion of the shares. As consideration for their commitments, Covanta paid each of these stockholders an amount equal to 1.75% of their respective equity commitments, which in the aggregate was $2.8 million. Covanta also agreed to amend an existing registration rights agreement to provide these stockholders with the right to demand that Covanta undertake an underwritten offering within twelve months of the closing of the acquisition of ARC Holdings in order to provide such stockholders with liquidity.

      As previously announced, Covanta agreed as part of the Covanta Energy acquisition to conduct the 9.25% Offering. Also as previously announced, because of the possibility that the 9.25% Offering could not be completed prior to the completion of the ARC Holdings Rights Offering, Covanta restructured the 9.25% Offering to offer an additional 2.7 million shares of Covanta’s common stock at the same purchase price as in the ARC Holdings Rights Offering. On February 24, 2006, Covanta completed the 9.25% Offering in which 5,696,911 shares were issued in consideration for $20.8 million in gross proceeds, including 633,380 shares purchased by Laminar pursuant to the exercise of rights held by Laminar as a holder of 9.25% debentures.

158

SCHEDULE I

COVANTA HOLDING CORPORATION

CONDENSED STATEMENT OF OPERATIONS

PARENT COMPANY ONLY

		For the Years Ended December 31,
		2005			2004			2003
		(Dollars in thousands)
Operating revenues		$	—		$	—		$	—
Operating expenses:
	Employee compensation and benefits		—			306			611
	Director fees		—			99			163
	Professional fees		—			1,664			1,044
	Insurance expense		—			296			978
	Other general and administrative expenses		—			152			1,372
Total operating expenses			—			2,517			4,168
Operating loss before income taxes			—			(2,517	)		(4,168	)
Investment income			800			485			1,434
Interest expense			—			(9,033	)		(1,424	)
Income tax benefit			274			13,273			1
Net income (loss) before equity in net income (loss) of subsidiaries			1,074			2,208			(4,157	)
	Equity in net income of Waste and Energy Services subsidiaries including Covanta Lake		43,540			33,276			—
	Equity in net (loss) of insurance subsidiaries excluding gain on ACL warrants		(481	)		(879	)		(10,191	)
	Equity in net income of ACL Holdings LLC (former holder of the ACL warrants)		15,193			—			—
	Equity in net income of marine services subsidiaries net of 2003 impairments of equity method investees		—			(511	)		(54,877	)
	Total equity in net income (loss) of subsidiaries		58,252			31,886			(65,068	)
Net income (loss)		$	59,326		$	34,094		$	(69,225	)
Parent company expenses from above		$	—		$	2,517		$	4,168
Parent company expenses reported on Consolidated Statements of Operations		$	—		$	2,517		$	4,168

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COVANTA HOLDING CORPORATION

CONDENSED STATEMENT OF FINANCIAL POSITION

PARENT COMPANY ONLY

			As of December 31,
			2005			2004
			(Dollars in thousands)
ASSETS
Cash			$	29,478		$	12,912
Fixed maturities, available-for-sale at fair value (cost: $3,300 and $3,300)				3,300			3,300
	Total cash and investments			32,778			16,212
Restricted cash, insurance subsidiary escrow				6,520			—
Investment in Waste and Energy Services subsidiaries				511,435			81,765
Investment in insurance subsidiaries				16,627			16,842
Investment in Marine Services subsidiaries				—			2,500
Accrued investment income				—			6
Intercompany receivable				17,567			2,016
Deferred tax asset				26,235			18,042
Other assets				83			2,600
		Total assets	$	611,245		$	139,983
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
	Accounts payable		$	1,423		$	—
	Income taxes payable			239			3,421
	Other liabilities			10,342			1,747
		Total liabilities		12,004			5,168
Stockholders’ equity:
	Preferred stock ($0.10 par value; authorized 10,000 shares; none issued and outstanding)			—			—
	Common stock ($0.10 par value; authorized 250,000 and 150,000 shares; issued 141,246 and 73,441 shares; outstanding 141,166 and 73,430 shares)			14,125			7,344
	Additional paid-in capital			594,186			194,783
	Unearned compensation			(4,583	)		(3,489	)
	Accumulated other comprehensive income			535			583
	Accumulated deficit			(5,014	)		(64,340	)
	Treasury stock			(8	)		(66	)
		Total stockholders’ equity		599,241			134,815
		Total liabilities and stockholders’ equity	$	611,245		$	139,983

160

COVANTA HOLDING CORPORATION

CONDENSED STATEMENT CASH FLOWS

PARENT COMPANY ONLY

				For the Years Ended December 31,
				2005			2004			2003
				(Dollars in thousands)
Operating activities:
Net income (loss)				$	59,326		$	34,094		$	(69,225	)
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
		Net realized gain on the sale of investment securities			—			(159	)		(1,090	)
		Depreciation and amortization			—			—			36
		Amortization of deferred financing costs			—			7,045			1,024
		Change in accrued investment income			—			39			18
		Stock option and unearned compensation expense			2			1,425			521
		Interest payable			—			(400	)		—
		Deferred tax asset			(6,661	)		(16,693	)		—
		Receivable from Waste and Energy Services			(11,495	)		(2,016	)		—
		Equity in net income of Waste and Energy Services subsidiaries			(43,540	)		(33,276	)		—
		Equity in net loss of marine services subsidiaries			—			511			44,898
		Equity in net income of ACL Holdings LLC			(15,193	)		—			—
		Equity in net loss of insurance subsidiaries			481			879			20,198
		Changes in other assets and liabilities:
			Other assets		(190	)		(1,723	)		1,730
			Other liabilities		8,060			3,224			1,926
Net cash (used in) provided by operating activities					(9,210	)		(7,050	)		36
Investing activities:
	Collection of note receivable from affiliate				—			—			6,035
	Distribution received from unconsolidated Marine Services subsidiary				—			—			58
	Purchase of Energy and Marine Services				—			(36,400	)		—
	Contribution to Waste and Energy Services				(384,954	)		—			—
	Proceeds from sale of marine services subsidiaries				2,500			1,512			—
	Proceeds from the sale of investment securities				15,975			612			4,110
	Restricted cash, Covanta escrow				—			37,026			(37,026	)
	Purchase of investment securities, net				—			(3,300	)		—
	Other investing activities, net				—			—			(978	)
	Capital contributions to insurance subsidiaries				—			—			(6,000	)
Net cash used in investing activities					(366,479	)		(550	)		(33,801	)
Financing activities
	Repayment of debt from insurance subsidiaries NAICC				—			—			(4,000	)
	Borrowings under bridge financing				—			—			40,000
	Parent company debt issue costs				—			(900	)		—
	Repayment of bridge financing				—			(26,612	)		—
	Net proceeds from rights offering				395,791			41,021			—
	Funds held in escrow				(6,471	)		—			—
	Proceeds from the exercise of options for common stock				2,984			3,474			—
	Other financing activities, net				(49	)		—			14
Net cash provided by financing activities					392,255			16,983			36,014
Net increase in cash and cash equivalents					16,566			9,383			2,249
Cash and cash equivalents at beginning of year					12,912			3,529			1,280
Cash and cash equivalents at end of year				$	29,478		$	12,912		$	3,529

161

Schedule II — Valuation and Qualifying Accounts

Receivables Valuation and Qualifying Accounts

				Additions
		Balance at		Charged to			Charged to						Balance at
		Beginning		Costs and			Other						End of
		of Period		Expense			Accounts			Deductions			Period
		(Dollars in thousands)
WASTE AND ENERGY SERVICES
	For the year ended December 31, 2005
Allowances deducted in the balance sheet from the assets to which they apply:
Doubtful receivables — current		$	434	$	2,478		$	2,344	(1)	$	1,259		$	3,997
Retention receivables — current			—		—			—			—			—
Doubtful receivables — noncurrent			170		99			—			(5	)		274
Total		$	604	$	2,577		$	2,344		$	1,254		$	4,271
	March 11, through December 31, 2004
Allowances deducted in the balance sheet from the assets to which they apply:
Doubtful receivables — current		$	—	$	733		$	—		$	299		$	434
Retention receivables — current			—		—			—			—			—
Doubtful receivables — noncurrent			—		—			—			(170	)		170
Total		$	—	$	733		$	—		$	129		$	604
OTHER SERVICES
Allowance for premiums and fees receivable
2005		$	128	$	(57	)	$	—		$	(67	)	$	4
2004			462		(40	)		—			(294	)		128
2003			1,623		228			—			(1,389	)		462
Allowance for uncollectible reinsurance on paid losses
2005		$	893	$	81		$	—		$	(16	)	$	958
2004			1,328		(103	)		—			(332	)		893
2003			—		1,328			—			—			1,328
Allowance for uncollectible reinsurance on unpaid losses
2005		$	236	$	60		$	—		$	—		$	296
2004			176		60			—			—			236
2003			116		60			—			—			176

(1)  Acquired with purchase of ARC Holdings

162

Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure

      There were no disagreements with accountants on accounting and financial disclosure.

Item 9A. Controls and Procedures

Disclosure Controls and Procedures.

      Covanta’s management, with the participation of its Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of Covanta’s disclosure controls and procedures, as required by Rule 13a-15(b) and 15d-15(b) under the Securities Exchange Act of 1934 (the “Exchange Act”) as of December 31, 2005. Covanta’s disclosure controls and procedures are designed to reasonably assure that information required to be disclosed by Covanta in reports it files or submits under the Exchange Act is accumulated and communicated to Covanta’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure and is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

      As part of its evaluation described below, Covanta’s management has determined that it has successfully completed the steps necessary to remediate the previously-reported material weakness related to controls over “fresh-start” and other technical accounting areas. Accordingly, Covanta’s management has concluded that Covanta’s disclosure controls and procedures are effective as of December 31, 2005.

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

Changes in Internal Control over Financial Reporting

      During the year ended December 31, 2005, Covanta made the following modifications to its system of internal controls over financial reporting which enhanced its ability to remediate its previously reported material weakness, and provided overall improvement to its existing controls:

•  Appointed a Chief Accounting Officer and hired a Corporate Controller;

•  Hired several professionals filling permanent positions with respect to international accounting, corporate compliance, corporate accounting, external reporting, accounting research and regional controllers;

•  Retained key accounting and finance personnel from ARC Holdings’ headquarters office as well as key accounting personnel from each of the ARC facilities;

•  Retained the services of former accounting personnel of ARC Holdings on a consulting basis to provide transition support during the six months subsequent to the ARC acquisition date;

•  Realigned the combined accounting organization to better focus on critical accounting areas;

•  Increased both group and individual training efforts to ensure proper understanding of key accounting issues;

163

•  Implemented additional review procedures on monthly financial statements, both at a consolidated and facility level; and

•  Strengthened, with respect to domestic and international businesses, the reporting lines to Covanta’s Chief Financial Officer and its new Chief Accounting Officer.

      Impacts of ARC Holdings Acquisition on Internal Controls. Covanta’s acquisition of ARC Holdings is considered material to Covanta’s results of operations, financial position and cash flows. Management continued to evaluate the impact of the acquisition on Covanta’s system of internal controls over financial reporting during the fourth quarter of 2005. Management believes that substantial progress was made in integrating the two businesses and designing an effective system of internal controls for the combined businesses.

164

Management’s Report on Internal Control over Financial Reporting

      The management of Covanta Holding Corporation (“Covanta”) is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f).

      All internal control systems, no matter how well designed, have inherent limitations including the possibility of human error and the circumvention or overriding of controls. Further, because of changes in conditions, the effectiveness of internal controls may vary over time. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Accordingly, even those systems determined to be effective can provide us only with reasonable assurance with respect to financial statement preparation and presentation.

      Covanta’s management has assessed the effectiveness of internal control over financial reporting as of December 31, 2005, following the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control — Integrated Framework. Based on our assessment under the framework in Internal Control — Integrated Framework, Covanta’s management has concluded that our internal control over financial reporting was effective as of December 31, 2005.

      Our independent auditors, Ernst & Young LLP, have issued an attestation report on our assessment of internal control over financial reporting. This report appears on page 166 of this report on Form 10-K for the year ended December 31, 2005.

Anthony J. Orlando

President and Chief Executive Officer

Craig D. Abolt

Senior Vice President and

Chief Financial Officer

March 8, 2006

165

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of Covanta Holding Corporation

      We have audited management’s assessment, included in the accompanying Management Report on Internal Control Over Financial Reporting, that Covanta Holding Corporation maintained effective internal control over financial reporting as of December 31, 2005 based on criteria established in Internal Control— Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Covanta Holding Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit.

      We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

      A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

      Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

      In our opinion, management’s assessment that Covanta Holding Corporation maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Covanta Holding Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on the COSO criteria.

      We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets as of December 31, 2005 and 2004, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2005 of Covanta Holding Corporation and our report dated March 8, 2006 expressed an unqualified opinion theron.

/s/ Ernst & Young LLP

MetroPark, New Jersey

March 8, 2006

166

Item 9B. Other Information

      None.

PART III

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

      Information regarding Covanta Holding Corporation’s executive officers is presented in Item 1. Business of this Annual Report on Form 10-K. Covanta has a Code of Conduct and Ethics for Senior Financial Officers and a Policy of Business Conduct. The Code of Conduct applies to Covanta’s Chief Executive Officer, Chief Financial Officer, Chief Accounting Officer, controller or persons performing similar functions. The Policy of Business Conduct applies to all of Covanta’s, and its subsidiaries’, directors, officers and employees. Both the Code of Conduct and the Policy of Business Conduct are posted on Covanta’s website at www.covantaholding.com on the Corporate Governance page. Covanta will post on its website any amendments to or waivers of its Code of Conduct or Policy of Business Conduct for executive officers or directors, in accordance with applicable laws and regulations. The remaining information called for by this Item 10 is incorporated herein by reference to “Election of Directors,” “Board Structure and Composition — Committees of the Board,” and Security Ownership of certain Beneficial Owners and Management — Section 16(a) Beneficial Ownership Reporting Compliance” in Covanta’s definitive Proxy Statement for the 2006 Annual Meeting of Stockholders to be held on May 31, 2006.

Item 11. EXECUTIVE COMPENSATION

      The information required by Item 11 of Form 10-K is set forth under the heading “Executive Compensation” in Covanta’s definitive Proxy Statement for the 2006 Annual Meeting of Stockholders to be held on May 31, 2006 and such information set forth under such heading is incorporated herein by this reference thereto.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

      The information required by Item 12 of Form 10-K with respect to directors, executive officers and certain beneficial owners is set forth under the heading “Security Ownership of Certain Beneficial Owners and Management” in Covanta’s definitive Proxy Statement for the 2006 Annual Meeting of Stockholders to be held on May 31, 2006 and such information set forth under such heading is incorporated herein by this reference thereto.

167

Equity Compensation Plans

      The following table sets forth information regarding the number of securities which could be issued upon the exercise of outstanding options, the weighted average exercise price of those options in the 2004 and 1995 Stock Incentive Plans and the number of securities remaining for future issuance under the 2004 Stock Incentive Plans. Upon adoption of the 2004 Stock Incentive Plans, Covanta terminated any future issuances under the 1995 Plan. Covanta does not have any equity compensation plans that have not been approved by its security holders.

			Weighted Average		Number of Securities Remaining
	Number of Securities to		Exercise Price of		Available for Future Issuance
	be Issued Upon Exercise		Outstanding		Under Equity Compensation
	of Outstanding Options,		Options, Warrants		Plans (Excluding Securities
	Warrants and Rights		and Rights		Reflected in Column a)
Plan category	(A)		(B)		(C)
Equity Compensation Plans Approved By Security Holders		1,243,208	$	7.41		4,756,792	(1)
Equity Compensation Plans Not Approved By Security Holders		N/A		N/A		N/A
TOTAL		1,243,208	$	7.41		4,756,792

(1)  Of the 4,756,792 shares that remain available for future issuance, 3,355,545 are currently reserved for issuance under Covanta’s equity compensation plans.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      The information required by Item 13 of Form 10-K is set forth under the heading “Certain Relationships and Related Transactions” in Covanta’s definitive Proxy Statement for the 2006 Annual Meeting of Stockholders to be held on May 31, 2006 and such information set forth under such heading is incorporated herein by this reference thereto.

Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

      The information required by Item 14 of Form 10-K is set forth under the heading “Independent Auditor Fees” in Covanta’s definitive Proxy Statement for the 2006 Annual Meeting of Stockholders to be held on May 31, 2006 and such information set forth under such heading is incorporated herein by this reference thereto.

PART IV

Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

      (a) Documents filed as part of this report:

      (1) Consolidated Financial Statements of Covanta Holding Corporation:

      Included in Part II of this Report:

Consolidated Statement of Operations for the years ended December 31, 2005, 2004 and 2003

Consolidated Balance Sheet as of December 31, 2005 and 2004

Consolidated Statement of Cash Flows for the years ended December 31, 2005, 2004 and 2003

Consolidated Statement of Stockholders’ Equity for the years ended December 31, 2005, 2004 and 2003

Notes to Consolidated Financial Statements, for the years ended December 31, 2005, 2004 and 2003

      Report of Ernst & Young LLP, Independent Auditors, on the consolidated financial statements of Covanta Holding Corporation for the years ended December 31, 2005, 2004 and 2003

168

      (2) Financial Statement Schedules of Covanta Holding Corporation:

      Included in Part II of this report:

      Schedule I — Condensed Financial Information of Registrant

      Schedule II — Valuation and Qualifying Accounts

      Included as Exhibit F in this Part IV:

      Separate financial statements of fifty percent or less owned persons. See Appendix F-1 through F-24.

      All other schedules are omitted because they are not applicable, not significant or not required, or because the required information is included in the financial statement notes thereto.

      (3) Exhibits:

EXHIBIT INDEX

Exhibit No.			Description
Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession.
	2	.1†	Investment and Purchase Agreement by and between Covanta Holding Corporation and Covanta Energy Corporation dated as of December 2, 2003 (incorporated herein by reference to Exhibit 2.1 of Covanta Holding Corporation’s Current Report on Form 8-K dated December 2, 2003 and filed with the SEC on December 5, 2003, as amended by Covanta Holding Corporation’s Current Report on Form 8-K/ A dated December 2, 2003 and filed with the SEC on January 30, 2004).
	2	.2†	Note Purchase Agreement by and between Covanta Holding Corporation and the Purchasers named therein dated as of December 2, 2003 (incorporated herein by reference to Exhibit 2.2 of Covanta Holding Corporation’s Current Report on Form 8-K dated December 2, 2003 and filed with the SEC on December 5, 2003, as amended by Covanta Holding Corporation’s Current Report on Form 8-K/ A dated December 2, 2003 and filed with the SEC on January 30, 2004).
	2	.3†	Amendment to Investment and Purchase Agreement by and between Covanta Holding Corporation and Covanta Energy Corporation dated February 23, 2004 (incorporated herein by reference to Exhibit 2.3 of Covanta Holding Corporation’s Current Report on Form 8-K dated March 10, 2004 and filed with the SEC on March 11, 2004).
	2	.4†	First Amendment to Note Purchase Agreement and Consent by and among Covanta Holding Corporation and D.E. Shaw Laminar Portfolios, L.L.C., SZ Investments, L.L.C. and Third Avenue Trust, on behalf of The Third Avenue Value Fund Series, dated as of February 23, 2004 (incorporated herein by reference to Exhibit 2.4 of Covanta Holding Corporation’s Current Report on Form 8-K dated March 10, 2004 and filed with the SEC on March 11, 2004).
	2	.5†	Stock Purchase Agreement among Covanta ARC Holdings, Inc., the Sellers party thereto and Covanta Holding Corporation dated as of January 31, 2005 (incorporated herein by reference to Exhibit 2.1 of Covanta Holding Corporation’s Current Report on Form 8-K dated January 31, 2005 and filed with the SEC on February 2, 2005).

169

Exhibit No.			Description
Articles of Incorporation and By-Laws.
	3	.1†	Amended and Restated Certificate of Incorporation of Covanta Holding Corporation, as amended (incorporated herein by reference to Exhibit 3.1 of Covanta Holding Corporation’s Report on Form 10-Q for the period ended September 30, 2005 and filed with the SEC on November 9, 2005).
	3	.2†	Amended and Restated Bylaws of Covanta Holding Corporation, as amended and effective October 5, 2004 (incorporated herein by reference to Exhibit 3.1 of Covanta Holding Corporation’s Current Report on Form 8-K dated September 7, 2004 filed with the SEC on September 9, 2004).
Instruments Defining Rights of Security Holders, Including Indentures.
	4	.1†	Specimen certificate representing shares of Covanta Holding Corporation’s common stock (incorporated herein by reference to Exhibit 4.1 of Covanta Holding Corporation’s Amendment No. 3 to Registration Statement on Form S-1 filed with the SEC on December 19, 2005).
	4	.2†	Registration Rights Agreement among Covanta Holding Corporation and the other signatories thereto dated January 31, 2005 (incorporated herein by reference to Exhibit 10.1 of Covanta Holding Corporation’s Current Report on Form 8-K dated January 31, 2005 and filed with the SEC on February 2, 2005).
	4	.3†	Registration Rights Agreement dated November 8, 2002 among Covanta Holding Corporation and SZ Investments, L.L.C. (incorporated herein by reference to Exhibit 10.6 of Covanta Holding Corporation’s Annual Report on Form 10-K for the year ended December 27, 2002 and filed with the SEC on March 27, 2003).
	4	.4†	Registration Rights Agreement between Covanta Holding Corporation, D.E. Shaw Laminar Portfolios, L.L.C., SZ Investments, L.L.C., and Third Avenue Trust, on behalf of The Third Avenue Value Fund Series, dated December 2, 2003 (incorporated herein by reference to Exhibit 4.1 of Covanta Holding Corporation’s Current Report on Form 8-K dated December 2, 2003 and filed with the SEC on December 5, 2003).
	4	.5†	MSW Energy Holding LLC and MSW Energy Finance Co., Inc., and each of the Guarantors named therein, Series A and Series B 81/2% Senior Secured Note Due 2010 Indenture, dated as of June 25, 2003, by and among MSW Energy Holding LLC, MSW Energy Finance Co., Inc. and Wells Fargo Bank Minnesota, National Association, as Trustee (incorporated herein by reference to Exhibit 4.1 of MSW Energy Holding LLC’s Registration Statement on Form S-4 filed with the SEC on September 23, 2003).
	4	.6†	Supplemental Indenture, dated as of July 11, 2003, by and among MSW Energy Hudson LLC, MSW Energy Holding LLC, MSW Energy Finance Co., Inc. and Wells Fargo Bank Minnesota, National Association, as Trustee (incorporated herein by reference to Exhibit 4.2 of MSW Energy Holding LLC’s Registration Statement on Form S-4 filed with the SEC on September 23, 2003).
	4	.7†	Form of Series A and Series B 81/2% Senior Secured Note Due 2010 (incorporated herein by reference to Exhibit 4.1 of MSW Energy Holding LLC’s Registration Statement on Form S-4 filed with the SEC on September 23, 2003).
	4	.8†	MSW Energy Holding II LLC and MSW Energy Finance Co. II, Inc., and each of the Guarantors named therein, Series A and Series B 73/8% Senior Secured Note Due 2010 Indenture, dated as of November 24, 2003, by and among MSW Energy Holding II LLC, MSW Energy Finance Co. II, Inc. and Wells Fargo Bank Minnesota, National Association, as Trustee (incorporated herein by reference to Exhibit 4.1 of MSW Energy Holding II LLC’s Registration Statement on Form S-4 filed with the SEC on February 10, 2004).
	4	.9†	Supplemental Indenture, dated as of December 12, 2003, by and among UAE Ref-Fuel II Corp., MSW Energy Holding II LLC, MSW Energy Finance Co. II, Inc. and Wells Fargo Bank Minnesota, National Association, as Trustee (incorporated herein by reference to Exhibit 4.2 of MSW Energy Holding II LLC’s Registration Statement on Form S-4 filed with the SEC on February 10, 2004).
	4	.10†	Form of Series A and Series B 73/8% Senior Secured Note Due 2010 (incorporated herein by reference to Exhibit 4.10 of Covanta Holding Corporation’s Amendment No. 3 to Registration Statement on Form S-1 filed with the SEC on December 19, 2005).

170

Exhibit No.			Description
	4	.11†	Form of Warrant Offering Agreement between Wells Fargo Bank, National Association and Covanta Holding Corporation (incorporated herein by reference to Exhibit 4.11 of Covanta Holding Corporation’s Amendment No. 3 to Registration Statement on Form S-1 filed with the SEC on December 19, 2005).
	4	.12	Indenture dated as of May 1, 2003, by and between Covanta ARC LLC and Wachovia Bank, National Association as Trustee and Securities Intermediary.
	4	.13	First Supplemental Indenture dated as of May 1, 2003, by and among Covanta ARC LLC and Wachovia Bank, National Association as Trustee and Securities Intermediary.
	4	.14	Specimen copy of Covanta ARC LLC 6.26% Senior Notes due 2015.
Material Contracts.
	10	.1†	Equity Commitment for Rights Offering between Covanta Holding Corporation and SZ Investments L.L.C. dated February 1, 2005 (incorporated herein by reference to Exhibit 10.2 of Covanta Holding Corporation’s Current Report on Form 8-K dated January 31, 2005 and filed with the SEC on February 2, 2005).
	10	.2†	Equity Commitment for Rights Offering between Covanta Holding Corporation and EGI-Fund (05-07) Investors, L.L.C. dated February 1, 2005 (incorporated herein by reference to Exhibit 10.3 of Covanta Holding Corporation’s Current Report on Form 8-K dated January 31, 2005 and filed with the SEC on February 2, 2005).
	10	.3†	Equity Commitment for Rights Offering between Covanta Holding Corporation and Third Avenue Trust, on behalf of The Third Avenue Value Fund Series dated February 1, 2005 (incorporated herein by reference to Exhibit 10.4 of Covanta Holding Corporation’s Current Report on Form 8-K dated January 31, 2005 and filed with the SEC on February 2, 2005).
	10	.4†	Equity Commitment for Rights Offering between Covanta Holding Corporation and D.E. Shaw Laminar Portfolios, L.L.C. dated February 1, 2005 (incorporated herein by reference to Exhibit 10.5 of Covanta Holding Corporation’s Current Report on Form 8-K dated January 31, 2005 and filed with the SEC on February 2, 2005).
	10	.5†	Letter Agreement between Covanta Holding Corporation and D.E. Shaw Laminar Portfolios, L.L.C. dated January 31, 2005 (incorporated herein by reference to Exhibit 10.6 of Covanta Holding Corporation’s Current Report on Form 8-K dated January 31, 2005 and filed with the SEC on February 2, 2005).
	10	.6†	Investment and Purchase Agreement by and between Covanta Holding Corporation and Covanta Energy Corporation, dated December 2, 2003 (incorporated herein by reference to Exhibit 2.1 of Covanta Holding Corporation’s Current Report on Form 8-K dated December 2, 2003 and filed with the SEC on December 5, 2003), as amended by that certain Amendment to the Investment and Purchase Agreement, made and entered into on February 23, 2004, by and between the same parties (incorporated herein by reference to Exhibit 2.3 of Covanta Holding Corporation’s Current Report on Form 8-K dated March 10, 2004 and filed with the SEC on March 11, 2004).
	10	.7†	Note Purchase Agreement by and among Covanta Holding Corporation, SZ Investments, L.L.C., Third Avenue Trust, on behalf of The Third Avenue Value Fund Series, and D. E. Shaw Laminar Portfolios, L.L.C. dated December 2, 2003 (incorporated herein by reference to Exhibit 2.2 of Covanta Holding Corporation’s Current Report on Form 8-K dated December 2, 2003 and filed with the SEC on December 5, 2003), as amended by that certain First Amendment to Note Purchase Agreement and Consent, made and entered into as of February 23, 2004, by and among the same parties (incorporated herein by reference to Exhibit 2.4 of Covanta Holding Corporation’s Current Report on Form 8-K dated March 10, 2004 and filed with the SEC on March 11, 2004).
	10	.8†	Letter Agreement by and between Covanta Holding Corporation and D.E. Shaw Laminar Portfolios, L.L.C. dated December 2, 2003 (incorporated herein by reference to Exhibit 10.1 of Covanta Holding Corporation’s Current Report on Form 8-K dated December 2, 2003 and filed with the SEC on December 5, 2003).
	10	.9†	Letter Agreement by and between Covanta Holding Corporation and Equity Group Investments, L.L.C. dated December 1, 2003 (incorporated herein by reference to Exhibit 10.2 of Covanta Holding Corporation’s Current Report on Form 8-K dated December 2, 2003 and filed with the SEC on December 5, 2003).

171

Exhibit No.			Description
	10	.10†	Tax Sharing Agreement, dated as of March 10, 2004, by and between Covanta Holding Corporation, Covanta Energy Corporation, and Covanta Power International Holdings, Inc. (incorporated herein by reference to Exhibit 10.25 of Covanta Holding Corporation’s Annual Report on Form 10-K for the year ended December 31, 2003 and filed with the SEC on March 15, 2004).
	10	.11†	Corporate Services and Expenses Reimbursement Agreement, dated as of March 10, 2004, by and between Covanta Holding Corporation and Covanta Energy Corporation (incorporated herein by reference to Exhibit 10.26 of Covanta Holding Corporation’s Annual Report on Form 10-K for the year ended December 31, 2003 and filed with the SEC on March 15, 2004).
	10	.12†	Management Services and Reimbursement Agreement, dated March 10, 2004, among Covanta Energy Corporation, Covanta Energy Group, Inc., Covanta Projects, Inc., Covanta Power International Holdings, Inc., and certain Subsidiaries listed therein (incorporated herein by reference to Exhibit 10.30 of Covanta Holding Corporation’s Annual Report on Form 10-K for the year ended December 31, 2003 and filed with the SEC on March 15, 2004).
	10	.13†*	Covanta Energy Savings Plan, as amended by December 2003 amendment (incorporated herein by reference to Exhibit 10.25 of Covanta Holding Corporation’s Annual Report on Form 10-K for the year ended December 31, 2004 and filed with the SEC on March 16, 2005).
	10	.14†*	Covanta Holding Corporation Equity Award Plan for Employees and Officers, as amended (incorporated herein by reference to Exhibit 10.1 of Covanta Holding Corporation’s Report on Form 10-Q for the period ended September 30, 2005 and filed with the SEC on November 9, 2005).
	10	.15†*	Covanta Holding Corporation Equity Award Plan for Directors (incorporated herein by reference to Exhibit 4.3 of Covanta Holding Corporation’s Registration Statement on Form S-8 filed with the SEC on October 7, 2004).
	10	.16†*	Form of Covanta Holding Corporation Stock Option Agreement for Employees and Officers (incorporated herein by reference to Exhibit 10.5 of Covanta Holding Corporation’s Current Report on Form 8-K dated October 5, 2004 and filed with the SEC on October 7, 2004).
	10	.17†*	Form of Covanta Holding Corporation Restricted Stock Award Agreement (incorporated herein by reference to Exhibit 10.4 of Covanta Holding Corporation’s Current Report on Form 8-K dated October 5, 2004 and filed with the SEC on October 7, 2004).
	10	.18†*	Covanta Holding Corporation 1995 Stock and Incentive Plan (as amended effective December 12, 2000 and as further amended effective July 24, 2002) (incorporated herein by reference to Appendix A to Covanta Holding Corporation’s Proxy Statement filed with the SEC on June 24, 2002).
	10	.19†*	Employment Agreement, dated October 5, 2004, by and between Anthony J. Orlando and Covanta Projects, Inc., Covanta Energy Corporation and Covanta Holding Corporation (incorporated herein by reference to Exhibit 10.1 of Covanta Holding Corporation’s Current Report on Form 8-K dated October 5, 2004 and filed with the SEC on October 7, 2004).
	10	.20†*	Employment Agreement, dated October 5, 2004, by and between Craig D. Abolt and Covanta Projects, Inc., Covanta Energy Corporation and Covanta Holding Corporation (incorporated herein by reference to Exhibit 10.2 of Covanta Holding Corporation’s Current Report on Form 8-K dated October 5, 2004 and filed with the SEC on October 7, 2004).
	10	.21†*	Employment Agreement, dated October 5, 2004, by and between Timothy J. Simpson and Covanta Projects, Inc., Covanta Energy Corporation and Covanta Holding Corporation (incorporated herein by reference to Exhibit 10.3 of Covanta Holding Corporation’s Current Report on Form 8-K dated October 5, 2004 filed with the SEC on October 7, 2004).
	10	.22†*	Employment Agreement, dated as of April 27, 2004, by and between Covanta Holding Corporation and Jeffrey R. Horowitz (incorporated herein by reference to Exhibit 10.1 of Covanta Holding Corporation’s Registration Statement on Form S-3/ A filed with the SEC on August 20, 2004).
	10	.23†*	Form of Covanta Holding Corporation Amendment to Stock Option Agreement for Employees and Officers (incorporated herein by reference to Exhibit 10.1 of Covanta Holding Corporation’s Current Report on Form 8-K dated March 18, 2005 and filed with the SEC on March 24, 2005).
	10	.24†*	Covanta Holding Corporation Amendment to Stock Option Agreement (incorporated herein by reference to Exhibit 10.1 of Covanta Holding Corporation’s Current Report on Form 8-K dated May 25, 2005 and filed with the SEC on May 26, 2005).

172

Exhibit No.			Description
	10	.25†	Credit Agreement, dated as of June 24, 2005, among Covanta Energy Corporation, Covanta Holding Corporation, as a guarantor, certain subsidiaries of Covanta Energy Corporation, as guarantors, various lenders, Credit Suisse, Cayman Islands Branch, as Joint Lead Arranger and Co-Syndication Agent, Goldman Sachs Credit Partners, L.P., as Joint Lead Arranger, Co-Syndication Agent, Administrative Agent and Collateral Agent, JPMorgan Chase Bank, as Co-Documentation Agent, Revolving Issuing Bank and a Funded LC Issuing Bank, UBS Securities LLC, as Co-Documentation Agent, UBS AG, Stamford Branch, as a Funded LC Issuing Bank, and Calyon New York Branch, as Co-Documentation Agent (incorporated herein by reference to Exhibit 10.1 of Covanta Holding Corporation’s Current Report on Form 8-K dated June 24, 2005 and filed with the SEC on June 30, 2005).
	10	.26†	Second Lien Credit and Guaranty Agreement, dated as of June 24, 2005, among Covanta Energy Corporation, Covanta Holding Corporation, as a guarantor, certain subsidiaries of Covanta Energy Corporation, as guarantors, various lenders, Credit Suisse, Cayman Islands Branch, as Joint Lead Arranger, Co-Syndication Agent, Administrative Agent, Collateral Agent and Paying Agent, and Goldman Sachs Credit Partners L.P., as Joint Lead Arranger and Co-Syndication Agent (incorporated herein by reference to Exhibit 10.2 of Covanta Holding Corporation’s Current Report on Form 8-K dated June 24, 2005 and filed with the SEC on June 30, 2005).
	10	.27†	First Lien Pledge and Security Agreement between each of Covanta Energy Corporation and the other Grantors Party thereto and Goldman Sachs Credit Partners L.P., as Collateral Agent, dated as of June 24, 2005 (incorporated herein by reference to Exhibit 10.3 of Covanta Holding Corporation’s Current Report on Form 8-K dated June 24, 2005 and filed with the SEC on June 30, 2005).
	10	.28†	Parity Lien Pledge and Security Agreement, dated as of June 24, 2005, between each of Covanta Energy Corporation and the other Grantors Party thereto and Credit Suisse, Cayman Islands Branch, as Collateral Agent (incorporated herein by reference to Exhibit 10.4 of Covanta Holding Corporation’s Current Report on Form 8-K dated June 24, 2005 and filed with the SEC on June 30, 2005).
	10	.29†	First Lien Pledge Agreement, dated as of June 24, 2005, between Covanta Holding Corporation and Goldman Sachs Credit Partners L.P., as Collateral Agent (incorporated herein by reference to Exhibit 10.5 of Covanta Holding Corporation’s Current Report on Form 8-K dated June 24, 2005 and filed with the SEC on June 30, 2005).
	10	.30†	Parity Lien Pledge Agreement, dated as of June 24, 2005, between Covanta Holding Corporation and Credit Suisse, Cayman Islands Branch, as Collateral Agent (incorporated herein by reference to Exhibit 10.6 of Covanta Holding Corporation’s Current Report on Form 8-K dated June 24, 2005 and filed with the SEC on June 30, 2005).
	10	.31†	Intercreditor Agreement, dated as of June 24, 2005, among Covanta Energy Corporation, Goldman Sachs Credit Partners L.P., as Collateral Agent for the First Lien Claimholders, Credit Suisse, Cayman Islands Branch, as Administrative Agent for the Second Lien Credit Claimholders and as Collateral Agent for the Parity Lien Claimholders (incorporated herein by reference to Exhibit 10.7 of Covanta Holding Corporation’s Current Report on Form 8-K dated June 24, 2005 and filed with the SEC on June 30, 2005).
	10	.32†	Amendment No. 1 to Tax Sharing Agreement, dated as of June 24, 2005, by and between Covanta Holding Corporation, Covanta Energy Corporation and Covanta Power International Holdings, Inc., amending Tax Sharing Agreement between Covanta Holding Corporation, Covanta Energy Corporation and Covanta Power International Holdings, Inc. dated as of March 10, 2004 (incorporated herein by reference to Exhibit 10.8 of Covanta Holding Corporation’s Current Report on Form 8-K dated June 24, 2005 and filed with the SEC on June 30, 2005).
	10	.33†*	Employment Agreement, dated October 5, 2004, by and between John Klett and Covanta Energy Corporation (incorporated herein by reference to Exhibit 10.7 of Covanta Energy Corporation’s Current Report on Form 8-K dated October 5, 2004 and filed with the SEC on October 7, 2004).

173

Exhibit No.			Description
	10	.34†	10.35 Rehabilitation Plan Implementation Agreement, dated January 11, 2006, by and between John Garamendi, Insurance Commissioner of the State of California, in his capacity as Trustee of the Mission Insurance Company Trust, the Mission National Insurance Company Trust and the Enterprise Insurance Company Trust, on the one hand, and Covanta Holding Corporation, on the other hand (incorporated herein by reference to Exhibit 10.1 of Covanta Holding Corporation’s Current Report on Form 8-K dated March 2, 2006 and filed with the SEC on March 6, 2006).
	10	.35†	10.36 Amendment to Agreement Regarding Closing (Exhibit A to the Rehabilitation Plan Implementation Agreement), dated January 10, 2006, by and between John Garamendi, Insurance Commissioner of the State of California, in his capacity as Trustee of the Mission Insurance Company Trust, the Mission National Insurance Company Trust, and the Enterprise Insurance Company Trust, on the one hand, and Covanta Holding Corporation, on the other hand (incorporated herein by reference to Exhibit 10.2 of Covanta Holding Corporation’s Current Report on Form 8-K dated March 2, 2006 and filed with the SEC on March 6, 2006).
	10	.36†	10.37 Latent Deficiency Claims Administration Procedures Agreement (Exhibit B to the Rehabilitation Plan Implementation Agreement), dated January 11, 2006, by and between John Garamendi, Insurance Commissioner of the State of California, in his capacity as Trustee of the Mission Insurance Company Trust, the Mission National Insurance Company Trust and the Enterprise Insurance Company Trust, on the one hand, and Covanta Holding Corporation on the other hand (incorporated herein by reference to Exhibit 10.3 of Covanta Holding Corporation’s Current Report on Form 8-K dated March 2, 2006 and filed with the SEC on March 6, 2006).
List of Subsidiaries.
	21	.1†	List of Subsidiaries (incorporated herein by reference to Exhibit 21.1 of Covanta Holding Corporation’s Amendment No. 3 to Registration Statement on Form S-1 filed with the SEC on December 19, 2005).
Consents of Experts and Counsel.
	23	.1	Consent of Independent Registered Public Accounting Firm of Covanta Holding Corporation and Subsidiaries: Ernst & Young LLP
	23	.2	Consent of Independent Registered Public Accounting Firm of Quezon Power, Inc.: Sycip Gorres Velayo & Co., a member practice of Ernst & Young Global
Rule 13a-14(a)/15d-14(a) Certifications.
	31	.1	Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes Oxley Act of 2002 (pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended).
	31	.2	Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes Oxley Act of 2002 (pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended).
Section 1350 Certifications.
	32	.1	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 from the Chief Executive Officer of Covanta Holding Corporation.
	32	.2	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 from the Chief Financial Officer of Covanta Holding Corporation.

†  Not filed herewith, but incorporated herein by reference.

*  Management contract or compensatory plan or arrangement.

      Pursuant to paragraph 601(b)(4)(iii)(A) of Regulation S-K, the registrant has omitted from the foregoing list of exhibits, and hereby agrees to furnish to the Securities and Exchange Commission, upon its request, copies of certain instruments, each relating to long-term debt not exceeding 10% of the total assets of the registrant and its subsidiaries on a consolidated basis.

      (b) Exhibits: See list of Exhibits in this Part IV, Item 15(a)(3) above.

      (c) Financial Statement Schedules: See Part IV, Item 15(a)(2) above.

174

SIGNATURES

      Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

COVANTA HOLDING CORPORATION

(Registrant)

By:  /s/ Anthony J. Orlando

          Anthony J. Orlando

President and Chief Executive Officer

Date: March 14, 2006

      Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Name	Title	Date
/s/ Anthony J. Orlando Anthony J. Orlando	President and Chief Executive Officer and Director (Principal Executive Officer)	March 14, 2006
/s/ Craig D. Abolt Craig D. Abolt	Senior Vice President and Chief Financial Officer (Principal Financial Officer)	March 14, 2006
/s/ Thomas E. Bucks Thomas E. Bucks	Vice President and Chief Accounting Officer (Principal Accounting Officer)	March 14, 2006
/s/ Samuel Zell Samuel Zell	Chairman of the Board	March 14, 2006
/s/ David M. Barse David M. Barse	Director	March 14, 2006
/s/ Ronald J. Broglio Ronald J. Broglio	Director	March 14, 2006
/s/ Peter C. B. Bynoe Peter C. B. Bynoe	Director	March 14, 2006
/s/ Richard L. Huber Richard L. Huber	Director	March 14, 2006
/s/ William C. Pate William C. Pate	Director	March 14, 2006
/s/ Robert S. Silberman Robert S. Silberman	Director	March 14, 2006

175

Name	Title	Date
/s/ Jean Smith Jean Smith	Director	March 14, 2006
/s/ Clayton Yeutter Clayton Yeutter	Director	March 14, 2006

176

Assurance And Advisory

Business Services

Quezon Power, Inc.

Consolidated Financial Statements

December 31, 2005 and 2004

and Years Ended

December 31, 2005, 2004 and 2003

(In United States Dollars)

and

Report of Independent Auditors

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Management Committee of Quezon Power, Inc.

      We have audited the accompanying consolidated balance sheets of Quezon Power, Inc. (incorporated in the Cayman Islands, British West Indies) and subsidiary as of December 31, 2005 and 2004, and the related consolidated statements of operations, changes in stockholders’ equity and cash flows for each of the three years ended December 31, 2005. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

      We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

      In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Quezon Power, Inc. and subsidiary as of December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the three years ended December 31, 2005 in conformity with U.S. generally accepted accounting principles.

      As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for asset retirement obligation in 2003.

Makati City, Philippines

February 14, 2006

SGV & Co is a member practice of Ernst & Young Global

F-2

QUEZON POWER, INC.

CONSOLIDATED BALANCE SHEETS

			December 31
			2005		2004
ASSETS
Current Assets
Cash			$	35,939,993	$	39,404,181
Accounts receivable — net of allowance for bad debts of $ — in 2005 and $8,485,146 in 2004 (Notes 9 and 11)				41,698,703		33,283,177
Fuel inventories				12,104,570		7,740,902
Spare parts				13,793,870		11,997,603
Due from affiliated companies (Note 7)				469,312		697,470
Prepaid expenses and other current assets				4,182,879		7,016,139
Prepaid input value-added taxes — net (Note 4)				9,074,191		—
		Total Current Assets		117,263,518		100,139,472
Property, Plant and Equipment — net (Notes 3, 6 and 9)				675,212,269		685,735,745
Deferred Financing Costs — net (Note 6)				21,758,848		27,376,966
Deferred Income Taxes (Note 4)				9,531,174		9,340,567
Prepaid Input Value-Added Taxes — net (Note 4)				—		9,611,838
			$	823,765,809	$	832,204,588
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Short-term notes payable (Note 5)			$	11,666,667	$	—
Accounts payable and accrued expenses (Notes 9 and 11)				64,211,536		38,331,623
Due to affiliated companies (Note 7)				348,836		352,462
Current portion of (Note 6):
	Long-term loans payable			41,005,046		40,002,310
	Bonds payable			7,525,000		6,450,000
Income taxes payable (Note 4)				121,675		70,824
		Total Current Liabilities		124,878,760		85,207,219
Long-term Loans Payable — net of current portion (Note 6)				215,747,657		256,752,703
Bonds Payable — net of current portion (Note 6)				182,750,000		190,275,000
Asset Retirement Obligation (Note 2)				4,053,639		3,481,098
Minority Interest				6,604,434		6,371,565
Stockholders’ Equity (Note 8)				289,731,319		290,117,003
			$	823,765,809	$	832,204,588

See accompanying Notes to Consolidated Financial Statements.

F-3

QUEZON POWER, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

	Years Ended December 31
	2005			2004			2003
OPERATING REVENUES (Note 9)	$	245,570,990		$	214,865,088		$	217,869,232
OPERATING EXPENSES
Fuel costs		68,022,825			40,822,798			36,002,310
Operations and maintenance		32,048,502			36,770,262			29,479,164
Depreciation and amortization		18,557,511			19,263,376			18,776,557
General and administrative		16,069,798			16,768,912			18,095,761
		134,698,636			113,625,348			102,353,792
INCOME FROM OPERATIONS		110,872,354			101,239,740			115,515,440
OTHER INCOME (CHARGES)
Interest income		1,169,215			731,751			702,954
Foreign exchange gain — net		182,650			105,899			94,789
Interest expense (Notes 5 and 6)		(37,079,185	)		(39,502,726	)		(42,321,405	)
Amortization of deferred financing costs		(5,618,118	)		(6,362,934	)		(6,995,001	)
Other charges — net		(950,363	)		(409,779	)		(281,928	)
		(42,295,801	)		(45,437,789	)		(48,800,591	)
INCOME BEFORE INCOME TAX, MINORITY INTEREST AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE		68,576,553			55,801,951			66,714,849
BENEFIT FROM (PROVISION FOR) INCOME TAX(Note 4)
Current		(338,975	)		(216,786	)		(220,889	)
Deferred		190,607			(465,018	)		2,005,684
		(148,368	)		(681,804	)		1,784,795
INCOME BEFORE MINORITY INTEREST AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE		68,428,185			55,120,147			68,499,644
MINORITY INTEREST		(1,604,489	)		(1,292,540	)		(1,606,129	)
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE		66,823,696			53,827,607			66,893,515
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE — net of benefit from income tax — deferred, branch profits remittance tax and minority interest amounting to $166,657, $52,060 and $7,083, respectively (Note 2)		—			—			(295,004	)
NET INCOME	$	66,823,696		$	53,827,607		$	66,598,511

See accompanying Notes to Consolidated Financial Statements.

F-4

QUEZON POWER, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

				Years Ended December 31
				2005			2004			2003
CASH FLOWS FROM OPERATING ACTIVITIES
Net income				$	66,823,696		$	53,827,607		$	66,598,511
Adjustments to reconcile net income to net cash provided by operating activities:
	Depreciation and amortization				18,557,511			19,263,376			18,776,557
	Amortization of deferred financing costs				5,618,118			6,362,934			6,995,001
	Minority interest				1,604,489			1,292,540			1,606,129
	Accretion on asset retirement obligation				226,801			182,600			167,508
	Loss (gain) on disposal of property, plant and equipment				1,915			—			(16,793	)
	Unrealized foreign exchange loss (gain) — net				(220,092	)		(182,117	)		88,480
	Deferred income taxes				(190,607	)		465,018			(2,005,684	)
	Cumulative effect of change in accounting principle				—			—			295,004
	Changes in operating assets and liabilities:
		Decrease (increase) in:
			Accounts receivable		(8,357,875	)		(3,233,753	)		(4,319,426	)
			Fuel inventories		(4,363,668	)		(4,927,484	)		3,860,655
			Spare parts		(1,796,267	)		(4,134,891	)		(615,794	)
			Prepaid expenses and other current assets		2,827,170			(1,275,504	)		2,230
			Prepaid input value-added taxes		537,647			(3,586,180	)		(2,577,989	)
		Increase in:
			Accounts payable and accrued expenses		25,953,692			10,996,927			2,716,764
			Income taxes payable		50,851			16,359			54,465
Net cash from operating activities					107,273,381			75,067,432			91,625,618
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of property, plant and equipment					39,299			—			16,806
Additions to property, plant and equipment					(7,729,509	)		(3,337,655	)		(1,124,883	)
Net cash used in investing activities					(7,690,210	)		(3,337,655	)		(1,108,077	)
CASH FLOWS FROM FINANCING ACTIVITIES
Cash received from short-term notes payable				$	23,333,333		$	—		$	—
Net changes in accounts with affiliated companies					166,182			(1,979,103	)		1,298,863
Cash dividends					(67,209,380	)		(75,849,060	)		(20,658,400	)
Payments of:
	Short-term notes payable				(11,666,666	)		—			—
	Term loan				(35,389,726	)		(35,389,726	)		(35,389,726	)
	Bonds payable				(6,450,000	)		(6,450,000	)		(5,375,000	)
	Long-term loans payable				(4,612,584	)		(3,208,757	)		(2,206,018	)
Minority interest					(1,371,620	)		(1,547,940	)		(496,000	)
Net cash used in financing activities					(103,200,461	)		(124,424,586	)		(62,826,281	)
EFFECT OF EXCHANGE RATE CHANGES ON CASH					153,102			64,339			30,916
NET INCREASE (DECREASE) IN CASH					(3,464,188	)		(52,630,470	)		27,722,176
CASH AT BEGINNING OF YEAR					39,404,181			92,034,651			64,312,475
CASH AT END OF YEAR				$	35,939,993		$	39,404,181		$	92,034,651
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
	Interest			$	37,360,460		$	39,694,095		$	40,819,139
	Income taxes				288,124			200,427			166,424
Noncash investing and financing activity:
	Revision for estimated cash flows of asset retirement obligation				345,740			—			—
	Recognition of asset retirement obligation				—			—			2,747,564

See accompanying Notes to Consolidated Financial Statements.

F-5

QUEZON POWER, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

For the Years Ended December 31, 2005, 2004 and 2003

			Additional
	Capital Stock		Paid-in		Retained
	(Note 8)		Capital		Earnings			Total
Balance at December 31, 2002	$	1,001	$	207,641,266	$	58,556,078		$	266,198,345
Cash dividends		—		—		(20,658,400	)		(20,658,400	)
Net income for the year		—		—		66,598,511			66,598,511
Balance at December 31, 2003		1,001		207,641,266		104,496,189			312,138,456
Cash dividends		—		—		(75,849,060	)		(75,849,060	)
Net income for the year		—		—		53,827,607			53,827,607
Balance at December 31, 2004		1,001		207,641,266		82,474,736			290,117,003
Cash dividends		—		—		(67,209,380	)		(67,209,380	)
Net income for the year		—		—		66,823,696			66,823,696
Balance at December 31, 2005	$	1,001	$	207,641,266	$	82,089,052		$	289,731,319

See accompanying Notes to Consolidated Financial Statements.

F-6

QUEZON POWER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Business

     (a)  Organization

      Quezon Power, Inc. (the Company; formerly Ogden Quezon Power, Inc.), an exempted company with limited liability, was incorporated in the Cayman Islands, British West Indies on August 4, 1995 primarily: (i) to be a promoter, a general or limited partner, member, associate, or manager of any general or limited partnership, joint venture, trust or other entity, whether established in the Republic of the Philippines or elsewhere and (ii) to engage in the business of power generation and transmission and in any development or other activity related thereto; provided that the Company shall only carry on the business for which a license is required under the laws of the Cayman Islands when so licensed under the terms of such laws. The Philippine Branch (the Branch) was registered with the Philippine Securities and Exchange Commission on March 15, 1996 to carry out the Company’s business in the Republic of the Philippines to the extent allowed by law including, but not limited to, developing, designing and arranging financing for a 470-megawatt (net) base load pulverized coal-fired power plant and related electricity transmission line (the Project) located in Quezon Province, Republic of the Philippines. In addition, the Branch is responsible for the organization and is the sole general partner of Quezon Power (Philippines), Limited Co. (the Partnership), a limited partnership in the Philippines. The Partnership is responsible for financing, constructing, owning and operating the Project.

      The Branch is the legal and beneficial owner of (i) the entire general partnership interest in the Partnership representing 21% of the economic interest in the Partnership and (ii) a limited partnership interest representing 77% of the economic interest in the Partnership. The remaining 2% economic interest in the Partnership is in the form of a limited partnership interest held by PMR Limited Co. (PMRL). The accompanying financial statements include the consolidated results of the Company and the Partnership.

      Ultimately, 100% of the aggregate capital contributions of the Company to the Partnership were indirectly made by Quezon Generating Company, Ltd. (QGC), a Cayman Islands limited liability company, and Covanta Power Development — Cayman, Inc. (CPD; formerly Ogden Power Development — Cayman, Inc.), an indirect wholly owned subsidiary of Covanta Energy Group, Inc. (formerly Ogden Energy Group, Inc.), a Delaware corporation. The shareholders of QGC are QGC Holdings, Ltd. and Global Power Investment, L.P. (GPI), both Cayman Islands companies. QGC Holdings, Ltd. was a wholly owned subsidiary of InterGen N.V. (formerly InterGen), a joint venture between Bechtel Enterprises, Inc. (Bechtel) and Shell Generating Limited (Shell). In August 2005, Shell and Bechtel completed the sale of InterGen N.V. and 10 of its power plants including the Quezon Project to a partnership between AIG Highstar Capital II, L.P. and Ontario Teachers’ Pension Plan. The ultimate economic ownership percentages among QGC, CPD and PMRL in the Partnership are 71.875%, 26.125% and 2%, respectively.

      The equity commitment of the Company, up to $207.7 million, was made pursuant to an equity contribution agreement and is supported by letters of credit provided by ABN AMRO. These letters of credit were obtained with the financial backing of InterGen N.V. and Covanta Corporation (formerly Ogden Corporation). PMRL does not have any equity funding obligation.

     (b)  Allocation of Earnings

      Each item of income and loss of the Partnership for each fiscal year (or portion thereof) shall be allocated 21% to the Company, as a general partner; 77% to the Company, as a limited partner; and 2% to PMRL, as a limited partner.

     (c)  The Project

      The Project is a 470-megawatt (net) base load pulverized coal-fired electricity generation facility and related transmission line. The Project receives substantially all of its revenue from a 25-year take-or-pay Power Purchase Agreement (PPA) and a Transmission Line Agreement (TLA) with the Manila Electric Company (Meralco). Construction of the Project commenced in December 1996 and the Project started commercial operations on May 30, 2000. The total cost of the Project was $895.4 million.

F-7

QUEZON POWER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

     (d)  Principal Business Risks

      The principal risks associated with the Project include operating risks, dependence on one customer (Meralco), environmental matters, permits, political and economic factors and fluctuations in currency.

      The risks associated with operating the Project include the breakdown or failure of equipment or processes and the performance of the Project below expected levels of output or efficiency due to operator fault and/or equipment failure. Meralco is subject to regulation by the Energy Regulatory Commission (ERC) with respect to sales charged to consumers. In addition, pursuant to the Philippine Constitution, the Philippine government at any time may purchase Meralco’s property upon payment of just compensation. If the Philippine government was to purchase Meralco’s property or the ERC ordered any substantial disallowance of costs, Meralco would remain obligated under the PPA to make the firm payments to the Partnership. Such purchase or disallowance, however, could result in Meralco being unable to fulfill its obligations under the PPA, which would have an adverse material effect on the ability of the Partnership to meet its obligations under the credit facilities [see Notes 6, 9(a), 9(b) and 11(e)].

2. Summary of Significant Accounting Policies

Basis of Presentation

      The consolidated financial statements of the Company include the financial position and results of operations of the Partnership and have been prepared in conformity with U.S. generally accepted accounting principles.

Principles of Consolidation

      The consolidated financial statements include the accounts of the Company and the Partnership, a 98%-owned and controlled limited partnership. All significant intercompany transactions have been eliminated.

Use of Estimates

      The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

Accounts Receivable

      Accounts receivables are recognized and carried at original invoice amount less an allowance for any uncollectible amounts. An estimate for doubtful accounts is made when collection of the full amount is no longer probable.

Inventories

      Fuel inventories and spare parts are valued at the lower of cost or market value, net of any provision for inventory losses. Cost is determined using the moving average cost method.

Property, Plant and Equipment

      Property, plant and equipment are carried at cost less accumulated depreciation and amortization. Cost includes the fair value of asset retirement obligation, capitalized interest and amortized deferred financing costs incurred in connection with the construction of the Project. Capitalization of interest and amortization of deferred financing costs ceased upon completion of the Project.

F-8

QUEZON POWER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets. The estimated useful lives of the assets are as follows:

Category	Number of Years
Power plant		50
Transmission lines		25
Others		3 to 5

      The cost of routine maintenance and repairs is charged to income as incurred while significant renewals and betterments are capitalized. When assets are retired or otherwise disposed of, both the cost and related accumulated depreciation and amortization are removed from the accounts; and any resulting gain or loss is credited or charged to current operations.

Deferred Financing Costs

      Deferred financing costs represent the costs incurred to obtain project financing and are amortized, using the effective interest rate method, over the term of the related loans.

Derivative Instruments and Hedging Activities

      The Company accounts for derivative instruments and hedging activities under Statement of Financial Accounting Standards (SFAS) No. 133 (subsequently amended by SFAS No. 138 and No. 149), Accounting for Derivative Instruments and Hedging Activities. This statement, as amended, establishes certain accounting and reporting standards requiring all derivative instruments to be recorded as either assets or liabilities measured at fair value. Changes in derivative fair values are recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting treatment for qualifying hedges allows a derivative’s gains and losses to offset related results on the hedged item in the statement of operations and requires the Company to formally document, designate and assess the effectiveness of transactions that receive hedge accounting. The Company periodically reviews its existing contracts to determine the existence of any embedded derivatives. As of December 31, 2005 and 2004, there are no significant embedded derivatives that exist.

Prepaid Input Value-Added Taxes

      Prepaid input value-added taxes (VAT) represent VAT imposed on the Partnership by its suppliers for the acquisition of goods and services required under Philippine taxation laws and regulations.

      The input VAT is recognized as an asset and will be used to offset the Partnership’s current VAT liabilities [see Notes 4 and 1l(a)]. Excess input VAT, if any, will be claimed as tax credits. Input taxes are stated at their estimated net realizable values.

Revenue Recognition

      Revenue is recognized when electric capacity and energy are delivered to Meralco [see Note 9(a)]. Commencing on the Commercial Operations Date and continuing throughout the term of the PPA, the Partnership receives payment, net of penalty obligation for each kilowatt hour (kWh) of shortfall deliveries, consisting of a Monthly Capacity Payment, Monthly Operating Payment and Monthly Energy Payment as defined in the PPA.

      Revenue from transmission lines consists of Capital Cost Recovery Payment (CCRP) and the Transmission Line Monthly Operating Payment as defined in the TLA. Transmission Line Monthly Operating Payment is recognized as revenue in the period it is intended for.

F-9

QUEZON POWER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Income Taxes

      The Partnership is registered with the Philippine Board of Investments as a pioneer enterprise under a statutory scheme designed to promote investments in certain industries (including power generation). As such, the Partnership benefits from a six-year income tax holiday starting on January 1, 2000. During 2004, the Partnership was able to move the effective date of its income tax holiday period to May 30, 2000, coinciding with the start of commercial operations. Under the present Philippine taxation laws, a corporate income tax rate of 35% is levied against Philippine taxable income effective November 1, 2005 and 30% starting January 1, 2009 (see Note 4). Prior to November 1, 2005, the corporate income tax rate was 32%. Net operating losses can be carried forward for three immediately succeeding years.

      The Partnership accounts for corporate income taxes in accordance with SFAS No. 109, Accounting for Income Taxes, which requires an asset and liability approach in determining income tax liabilities. The standard recognizes deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial reporting bases of assets and liabilities and their related tax bases. Deferred tax assets and liabilities are measured using the tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets and deferred tax liabilities that will reverse during the income tax holiday period are not recognized.

      The Company is not subject to income taxes as a result of the Company’s incorporation in the Cayman Islands. However, the Philippine branch profit remittance tax of 15% will be levied against the total profit applied or earmarked for remittance by the Branch to the Company.

Functional Currency

      The functional currency of the Company and the Partnership has been designated as the U.S. dollar because borrowings under the credit facilities are made and repaid in U.S. dollars. In addition, all major agreements are primarily denominated in U.S. dollars or are U.S. dollar linked. Consequently, the consolidated financial statements and transactions of the Company and the Partnership have been recorded in U.S. dollars.

Valuation of Long-lived Assets

      Long-lived assets are accounted for in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-lived Assets. The Partnership periodically evaluates its long-lived assets for events or changes in circumstances that might indicate that the carrying amount of the assets may not be recoverable. The Partnership assesses the recoverability of the assets by determining whether the amortization of such long-lived assets over their estimated lives can be recovered through projected undiscounted future cash flows. The amount of impairment, if any, is measured based on the fair value of the assets. For the years ended December 31, 2005, 2004 and 2003, no such impairment was recorded in the accompanying consolidated statements of operations.

Asset Retirement Obligation

      Effective January 1, 2003, the Partnership adopted SFAS No. 143, Accounting for Asset Retirement Obligations. Previous to this date, the Partnership had not been recognizing amounts related to asset retirement obligations. The Partnership recognizes asset retirement obligations in the period in which they are incurred if a reasonable estimate of a fair value can be made. In estimating fair value, the Partnership did not use a market risk premium since a reliable estimate of the premium is not obtainable given that the retirement activities will be performed many years into the future and the Partnership has insufficient information on how much a third party contractor would charge to assume the risk that the actual costs will change in the future. The associated asset retirement costs are capitalized as part of the carrying amount of the Power plant.

      On May 30, 2000, the Project started commercial operations. The Partnership recognized the fair value of decommissioning and dismantlement cost of the Power plant and the corresponding liability for asset

F-10

QUEZON POWER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

retirement in 2003. The cost was capitalized as part of the cost basis of the Power plant and the Partnership depreciates it on a straight-line basis over 50 years.

      On January 1, 2005, the Partnership revised its estimate of asset retirement obligation to reflect an increase in the marketplace rates of labor, overhead and materials. This change in estimate resulted in a charge to income for the year ended December 31, 2005 amounting to $29,936, net of related benefit from income tax of $12,830. The charge to income resulted from the increase in depreciation and accretion expenses as a result of the revision in the estimated cash flow. No payments of asset retirement obligation were made in 2005 and 2004.

      The following table describes all changes to the Partnership’s asset retirement obligation liability as of December 31, 2005 and 2004:

	2005		2004
Asset retirement obligation at beginning of year	$	3,481,098	$	3,298,498
Revision in the estimated cash flows of asset retirement obligation		345,740		—
Accretion expense for the year		226,801		182,600
Asset retirement obligation at end of year	$	4,053,639	$	3,481,098

Impact of Recently Issued Accounting Standard

      In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections. SFAS No. 154 replaces APB Opinion No. 20, Accounting Changes, and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements, and changes the requirements for the accounting for and reporting of a change in accounting principle. SFAS No. 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes, unless impracticable, retrospective application as the required method for reporting a change in accounting principle in the absence of explicit transition requirements specific to the newly adopted accounting principle. SFAS No. 154 also provides guidance for determining whether retrospective application of a change in accounting principle is impracticable and for reporting a change when retrospective application is impracticable. The correction of an error in previously issued financial statements is not an accounting change. However, the reporting of an error correction involves adjustments to previously issued financial statements similar to those generally applicable to reporting an accounting change retrospectively. This Statement shall be effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Partnership does not expect the adoption of SFAS No. 154 to have a material effect on its results of operations or financial condition.

3. Property, Plant and Equipment

	2005		2004
Power plant	$	688,172,245	$	680,241,476
Transmission lines		86,593,717		86,593,717
Furniture and fixtures		4,083,459		4,061,433
Transportation equipment		319,266		336,602
Leasehold improvements		184,033		184,033
		779,352,720		771,417,261
Less accumulated depreciation and amortization		104,140,451		85,681,516
	$	675,212,269	$	685,735,745

      Approximately $99.0 million of interest on borrowings and $11.8 million of amortization of deferred financing costs have been capitalized as part of the cost of property, plant and equipment and depreciated over

F-11

QUEZON POWER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

the estimated useful life of the Power plant. No interest on borrowings and amortization of deferred financing costs were capitalized to property, plant and equipment in 2005, 2004 and 2003 since the Project started commercial operations on May 30, 2000.

      Total depreciation and amortization related to property, plant and equipment charged to operations amounted to $18,557,511, $19,263,376 and $18,776,557 in 2005, 2004 and 2003, respectively.

4. Income Taxes

      The significant components of the Company’s deferred tax assets and liabilities at December 31, 2005 and 2004 are as follows:

		2005			2004
Deferred tax assets:
	Deferred financing cost	$	9,762,369		$	9,027,394
	Capitalized unrealized foreign exchange losses		3,883,992			3,081,554
	Asset retirement obligation		398,262			313,173
Valuation allowance on capitalized foreign exchange losses			(3,883,992	)		(3,081,554	)
			10,160,631			9,340,567
Deferred tax liability:
	Excess of tax over book depreciation		629,457			—
		$	9,531,174		$	9,340,567

      Deferred income tax provision is provided for the temporary differences in financial reporting of deferred financing costs, capitalized unrealized foreign exchange losses, accretion and depreciation expenses related to asset retirement obligation and the excess of tax over book depreciation. Under accounting principles generally accepted in the U.S., the deferred financing costs were treated as a deferred asset and amortized, using the effective interest rate method, over the lives of the related loans. For Philippine income tax reporting purposes, deferred financing costs and foreign exchange losses are capitalized and depreciated as part of the cost of property, plant and equipment except for the depreciation of capitalized unrealized foreign exchange losses which is not deductible under the Philippine tax base.

      Income from nonregistered operations of the Partnership is not covered by its income tax holiday incentives. The current provision for income tax in 2005 and 2004 pertains to income tax due on interest income from offshore bank deposits and certain other income.

      The Partnership provided for a full valuation allowance on deferred tax assets pertaining to capitalized unrealized foreign exchange losses in view of a pending revenue regulation of the Philippine Bureau of Internal Revenue (BIR) on the use of functional currency other than the Philippine peso which may result in the write-off of these amounts. The revenue regulation has not yet been finalized as of February 14, 2006.

F-12

QUEZON POWER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      A reconciliation of the statutory income tax rate to the effective income tax rates as a percentage of income before income taxes is as follows:

		2005			2004			2003
Statutory income tax rate			32.5	%		32.0	%		32.0	%
Tax effects of:
	The Company’s operations		5.5			5.4			5.6
	Change in valuation allowance		1.2			5.5			—
	Change in tax rate		1.0			—			—
	Partnership’s operations under income tax holiday		(40.0	)		(42.0	)		(40.3	)
	Others		—			0.3			—
Effective tax rates			0.2	%		1.2	%		(2.7	)%

      Republic Act No. 9337 (RA) was recently enacted into law effective November 1, 2005 amending various provisions in the existing 1997 National Internal Revenue Code of the Philippines. Among the reforms introduce by the said RA are as follows:

•  Increase in the corporate income tax rate from 32% to 35%, with a reduction thereof to 30% beginning January 1, 2009;

•  Expanded the scope of transactions subject to VAT which includes the sale of generated power;

•  Grant of authority to the Philippine President to increase the 10% value added tax (VAT) rate to 12% effective January 1, 2006, subject to compliance with certain economic conditions;

•  Revised invoicing and reporting requirements for VAT; and

•  Provided thresholds and limitation on the amount of VAT credits that can be claimed.

      Due to the enactment of the RA, the effective statutory income tax rate as of December 31, 2005 is at 32.5%. The deferred income tax assets and liabilities as of December 31, 2005 were measured using the appropriate corporate income tax rate on the year it is expected to be reversed or settled. Also, the prepaid input VAT is classified as current assets starting 2005 in view of the inclusion of the sale of generated power as one of the transactions subject to VAT. Previously, sale of generated power was zero-rated [see Note 1 l(a)].

5. Notes Payable

      The Partnership entered into a $15 million Credit Facility Agreement with Banco de Oro Universal Bank (CFA) for the general working capital requirements of the Partnership. The Partnership drew down on this facility in May 2005 and November 2005.

      The outstanding balances of these drawdowns are as follows:

	Amount
	Outstanding		Interest Rate	Term
May 2005 drawdown	$	3,333,334	LIBOR plus a margin of 2%	Due in 2 equal monthly installments on January 13, 2006 and February 13, 2006
November 2005 drawdown		8,333,333	At market rates	September 12, 2006
	$	11,666,667

6. Debt Financing Agreements

      The Partnership was financed through the collective arrangement of the Common Agreement, Eximbank-Supported Construction Credit Facility, Trust Agreement, Uninsured Alternative Credit Agreement, Indenture, Bank Notes, Bank Letters of Credit, Bonds, Interest Hedge Contracts, Eximbank Political

F-13

QUEZON POWER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Risk Guarantee, OPIC Political Risk Insurance Policy, Eximbank Term Loan Agreement, Intercreditor Agreement, Side Letter Agreements, Security Documents and Equity Documents.

      The Common Agreement contains affirmative and negative covenants including, among other items, restrictions on the sale of assets, modifications to agreements, certain transactions with affiliates, incurrence of additional indebtedness, capital expenditures and distributions and collateralization of the Project’s assets. The debt is collateralized by substantially all of the assets of the Partnership and a pledge of certain affiliated companies’ shares of stock. The Partnership has complied with the provisions of the debt financing agreements, in all material respects, or has obtained a waiver for noncompliance from the lenders [see Notes 1l(c) and (d)].

     (a)  Term Loan Agreement

      The debt financing agreements contemplated that the outstanding principal amount of the Eximbank-Supported Construction Loans will be repaid on the Eximbank Conversion Date with the proceeds of a loan from Eximbank under the Eximbank Term Loan.

      Under the Eximbank Term Loan Agreement, Eximbank was to provide for a $442.1 million direct term loan, the proceeds of which could only be used to refinance the outstanding Eximbank-Supported Construction Credit Facility and to pay the Eximbank Construction Exposure Fee to Eximbank. This term loan, which would have had interest at a fixed rate of 7.10% per annum, would have had a 12-year term and would have been amortized in 24 approximately equal semi-annual payments during such term.

      In April 2001, in lieu of the Eximbank Term Loan, the Partnership availed of the alternative refinancing of the Eximbank-Supported Construction Loans allowed under the Eximbank Option Agreement through an Export Credit Facility guaranteed by Eximbank and financed by Private Export Funding Corporation (PEFCO). Under the terms of the agreement, PEFCO established credit in an aggregate amount of $424.7 million which bears interest at a fixed rate of 6.20% per annum and payable under the payment terms identical with the Eximbank Term Loan. Upon compliance of the conditions precedent as set forth in the Term Loan Agreement, the PEFCO Term Loan was drawn and the proceeds were applied to the Eximbank-Supported Construction Loans.

      Amendments to the Omnibus Agreement were made to include, among other things, PEFCO as a party to the Agreement in the capacity of a lender.

      Annual future amortization payments for the next five years ending December 31 are as follows:

2006	$	35,389,726
2007		35,389,726
2008		35,389,726
2009		35,389,726
2010		35,389,726
and thereafter		70,779,452

     (b)  Uninsured Alternative Credit Agreement

      The Uninsured Alternative Credit Agreement provides for the arrangement of Construction Loans, Refunding Loans and Cost Overrun Loans (collectively, the Uninsured Alternative Credit Facility Loans) as well as the issuance of the PPA Letter of Credit and the Coal Supply Letter of Credit.

      In July 1997, the Partnership terminated commitments in excess of $30 million in respect of the Construction Loans in connection with the issuance of the bonds. The Construction Loan; will have a seven-year term and will be amortized in 14 semi-annual payments during such term commencing on January 15, 2001. Interest will accrue at a rate equal to LIBOR plus a margin of 2.75% to 3.25%.

F-14

QUEZON POWER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      As of December 31, 2005 and 2004, approximately $9.0 million and $13.6 million, respectively, were outstanding with respect to the Construction Loans. Annual future amortization payments for the next two years ending December 31 are as follows:

2006	$	5,615,320
2007		3,409,301

      There were no outstanding balances at December 31, 2005 and 2004 for the Refunding Loans and Cost Overrun Loans.

     (c)  Trust and Retention Agreement

      The Trust and Retention Agreement provides, among others, for (i) the establishment, maintenance and operation of one or more U.S. dollar and Philippine peso accounts into which power sales revenues and other project-related cash receipts of the Partnership will be deposited and from which all operating and maintenance disbursements, debt service payments and equity distributions will be made; and (ii) the sharing by the lenders on a pari passu basis of the benefit of certain security.

     (d)  Bonds Payable

      Bonds payable represents the proceeds from the issuance of the $215.0 million in aggregate principal amount of the Partnership’s 8.86% Senior Secured Bonds Due 2017 (the Series 1997 Bonds). The interest rate is 8.86% per annum and is payable quarterly on March 15, June 15, September 15 and December 15 of each year (each, a Bond Payment Date), with the first Bond Payment Date being September 15, 1997. The principal amount of the Series 1997 Bonds is payable in quarterly installments on each Bond Payment Date occurring on or after September 15, 2001 with the Final Maturity Date on June 15, 2017. The proceeds of the Series 1997 Bonds were applied primarily by the Partnership to the payment of a portion of the development, construction and certain initial operating costs of the Project.

      The Series 1997 Bonds are treated as senior secured obligations of the Partnership and rank pari passu in right of payment with all other credit facilities, as well as all other existing and future senior indebtedness of the Partnership (other than a working capital facility of up to $15.0 million), and senior in right of payment to all existing and future indebtedness of the Partnership that is designated as subordinate or junior in right of payment to the Series 1997 Bonds. The Series 1997 Bonds are subject to redemption by the Partnership in whole or in part, beginning five years from the date of issuance, at par plus a make-whole premium, calculated using a discount rate equal to the applicable U.S. Treasury rate plus 0.75%.

      Annual future amortization payments for the next five years ending December 31 are as follows:

2006	$	7,525,000
2007		10,750,000
2008		12,900,000
2009		12,900,000
2010		12,900,000
And thereafter		133,300,000

7. Related Party Transactions

      Due to the nature of the ownership structure, the majority of the transactions were among the Company, the Partnership and the Partners, their affiliates or related entities.

F-15

QUEZON POWER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The following approximate amounts were paid to affiliates of the Partners for the operation and maintenance and management of the Project under the agreements discussed in Note 9:

	2005		2004		2003
Covanta	$	29,524,335	$	40,564,370	$	18,483,011
InterGen		1,599,178		2,400,924		1,731,011

      As of December 31, 2005 and 2004, the net amounts due from affiliated companies related to costs and expenses incurred and cash advanced by the Project were $120,476 and $345,008, respectively.

8. Capital Stock

		2005				2004
		Number of				Number of
		Shares		Amount		Shares		Amount
Class A, $0.01 par value:
	Authorized		1,000,000				1,000,000
	Issued		26,151	$	262		26,151	$	262
Class B, $0.01 par value:
	Authorized		1,000,000				1,000,000
	Issued		2,002		20		2,002		20
Class C, $0.01 par value:
	Authorized		1,000,000				1,000,000
	Issued		71,947		719		71,947		719
Class D, $0.01 par value:
	Authorized		10				10
	Issued		10		—		10		—
				$	1,001			$	1,001

      Class A and Class C shares have an aggregate 100% beneficial economic interest and 98% voting interest in the Company divided among the holders of the Class A and Class C shares. Class B shares have a 2% voting interest in the Company. On October 18, 2004, the shareholders of the Company entered into a Third Amended and Restated Development and Shareholders Agreement (D&S Agreement) to, among others, add GPI as party to the D&S Agreement as a shareholder and holder of newly issued Class D shares. Class D shares have no economic interest, no right to dividends and other distributions and no voting rights other than the power to appoint a director and an alternate director.

9. Commitments and Contingencies

      The Partnership has entered into separate site lease, construction, energy sales, electric transmission, coal supply and transportation, operations and maintenance and project management agreements.

      In connection with the construction and operation of the Project, the Partnership is obligated under the following key agreements:

     (a)  PPA

      The Partnership and Meralco are parties to the PPA, as amended on June 9, 1995, and on December 1, 1996. The PPA provides for the sale of electricity from the Partnership’s Generation Facility to Meralco. The term extends 25 years from the Commercial Operations Date, defined in the PPA as the date designated in writing by the Partnership to Meralco as the date on which the Power plant has been completed, inspected, tested and is ready to commence operations. As disclosed in Note l(c), the Commercial Operations Date occurred on May 30, 2000.

F-16

QUEZON POWER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The PPA provides that commencing on the Commercial Operations Date, the Partnership is required to deliver to Meralco, and Meralco is required to take and pay for, in each year commencing on the Commercial Operations Date and ending on each anniversary thereof (each such year, a Contract Year), a minimum number of kWhs of net electrical output (NEO). The Partnership’s delivery obligations are measured monthly and annually.

      The PPA provides that commencing on the Commercial Operations Date and continuing throughout the term of the PPA, Meralco will pay to the Partnership on each calendar month a monthly payment consisting of the following: (i) a Monthly Capacity Payment, (ii) a fixed Monthly Operating Payment, (iii) a variable Monthly Operating Payment and (iv) a Monthly Energy Payment. Under the PPA, Meralco is allowed to make all of its payments to the Partnership in Philippine pesos. However, the Monthly Capacity Payment, the Monthly Energy Payment and portions of the Monthly Operating Payments are denominated in U.S. dollars and the Philippine peso amounts are adjusted to reflect changes in the foreign exchange rates.

      Under the terms of the PPA, the Partnership is obligated to provide Meralco with the PPA Letter of Credit for $6.5 million. The PPA Letter of Credit serves as security for the performance of the Partnership’s obligation to Meralco pursuant to the PPA.

      The Plant did not meet its monthly delivery obligations to Meralco from May 2000 through the third quarter of 2001. Under the existing PPA, Meralco is obligated to make full Monthly Capacity Payments and Monthly Fixed Operating Payments, notwithstanding plant availability. However, in the event of a shortfall of required deliveries during a monthly billing period, the Partnership is required to make a payment to Meralco for each kWh of shortfall which reimburses Meralco for a portion of the Monthly Capacity Payment and Monthly Fixed Operating Payment.

      In mid-2001, Meralco requested that the Partnership renegotiate amendments of certain terms of the PPA including an increase in the amount of shortfall payments made to Meralco when the Project is unable to meet certain performance standards. Meralco was also seeking compensation for prior plant performance shortfalls that exceeded the amounts to which it is entitled under the shortfall payment rules of the existing PPA. The Partnership rejected the payment of any compensation related to past performance in excess of contracted shortfall payments. However, the Partnership agreed in principle to give Meralco a rebate over approximately six years of not more than $40 million. Also during 2001, Meralco withheld payments of approximately $10.8 million ($2.3 million of which was otherwise payable to Meralco as shortfall penalties in accordance with the existing PPA). A provision had already been provided in the financial statements for the remaining $8.5 million.

      On February 22, 2002, the Partnership and Meralco signed Amendment No. 3 to the PPA (Original Amendment) that was to become effective following approval of the ERC and the Partnership’s lenders but with retroactive effect and signed a Settlement and Release Agreement (SRA) to become effective at the same time as the Original Amendment. Those agreements contained provisions relating to the rebate and the Partnership’s payment to Meralco of an amount equal to $8.5 million in consideration of Meralco’s agreement to execute and perform the SRA, among other changes to the PPA risk allocations.

      In 2003, Meralco indicated to the Partnership that Meralco intended to negotiate certain “refinements” to the terms of the Original Amendment. Meralco formally withdrew its petition for the approval of the Original Amendment from the ERC on March 5, 2003. The Partnership does not believe that the Original Amendment and the SRA will ever become effective.

      During the course of discussions with Meralco since 2003, the Partnership and Meralco agreed to remove the rebate from the PPA and instead administer a reduction of the tariff payable under the TLA from December 26, 2003 through its remaining term [see Note 9(b)] resulting in a combined amendment agreement (Amendment Agreement). This Amendment Agreement contains, among others, the proposed amendments to the PPA and the TLA and incorporates the terms of the SRA. The Partnership had intended to agree to a retroactive effective date of the Amendment Agreement of December 26, 2003, following the

F-17

QUEZON POWER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

satisfaction of conditions precedent and completion requirements, including the approval by the ERC, if required, and the Partnership’s lenders.

      As the Partnership had been recording the lower of the income that would have been recognized under the existing PPA and the amendments to the PPA, the December 31, 2004 financial statements reflected revenues which are lower by $5.6 million compared with what would have been recognized under the existing PPA. The $5.6 million represented the net effect as of year-end 2004 of the provisions of the Amendment Agreement pertaining to rebates and other adjustments on energy and variable operating fees pertaining to Meralco taking on the dispatch risk.

      In May 2005, Meralco requested the Partnership to consider possible alternatives to certain provisions contemplated under the Amendment Agreement, particularly those relating to adjustments on energy and variable operating fees. As of February 14, 2006, the discussions are still ongoing.

      Meralco’s request prompted a reevaluation by the Partnership of the provisions to be recognized as a result of the renegotiations of the existing PPA. As a result of this reevaluation, the Partnership recognized additional contingency to reflect Management’s best estimate of the probable loss from the Amendment Agreement. This best estimate amounting to approximately $11.9 million as of December 31, 2005 relates to the rebates under the TLA.

      The existing PPA and the existing TLA remain effective and are the agreements under which Meralco and the Partnership operate, subject to predictive evaluations of agreements in principle that may become effective later but with retroactive effect. Any amendments to either of them would be subject to lender, BOD and appropriate regulatory approvals as required by the agreements and regulations affecting Meralco and the Partnership. In the event that these approvals are not obtained, the existing PPA and TLA remain effective until completion of all requirements for any amendments.

     (b)  TLA

      Pursuant to the PPA and the TLA dated as of June 13,1996 (as amended on December 1, 1996; the TLA) between the Partnership and Meralco, the Partnership accepted responsibility for obtaining all necessary rights-of-way for, and the siting, design, construction, operation and maintenance of, the Transmission Line. The construction of the Transmission Line was part of the Engineering, Procurement and Construction Management (EPCM) Contractor’s scope of work under the EPCM Contracts. Meralco is obligated to pay all costs and expenses incurred by the Partnership in connection with the siting, design, construction, operation and maintenance of the Transmission Line (including unforeseen cost increases, such as those due to new regulations or taxes) through the payment of periodic transmission charges.

      The term of the TLA will extend for the duration of the term of the PPA, commencing on the date of execution of the TLA and expiring on the 25th anniversary of the Commercial Operations Date. The term of the TLA is subject to renewal on mutually acceptable terms in conjunction with the renewal of the term of the PPA. Under the TLA, Meralco is obligated to make a Monthly CCRP and a Monthly Operating Payment to the Partnership.

      In its order dated March 20, 2003, the ERC disallowed Meralco from collecting from its consumers a portion of the Partnership’s CCRP amounting to approximately $646,000 per month pending the ERC’s thorough review of these charges. Consequently, at Meralco’s request, the Partnership agreed to defer the collection of this portion of the CCRP until the ERC resolved the issue or until the Partnership notified Meralco otherwise.

F-18

QUEZON POWER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      In its order dated September 20, 2004, the ERC rendered a decision with regard to Meralco’s application to collect from its consumers, transmission line costs charged by the Partnership in accordance with the TLA. The order contained, among others, the following:

      1) Recovery of $60.7 million of transmission line costs out of the total $88.8 million actual costs incurred by the Partnership. The portion disallowed by ERC amounting to $28.1 million is composed mainly of schedule extension costs.

      2) Reduction of annual CCRP to be recovered by Meralco from its consumers. Annual recoverable payments were reduced from $13.2 million to $9.0 million to reflect the amount disallowed by the ERC.

      As a result, recoverable payments billed by Meralco to its consumers were reduced to reflect the amount disallowed by the ERC.

      In a letter dated November 5, 2004, Meralco agreed to the Partnership’s proposal dated October 22, 2004 where the Partnership agreed to continue to defer collection from Meralco of the amounts finally disallowed by the ERC, which amounted to about $6.7 million as of September 30, 2004. Meralco, on the other hand, reduced the amounts deferred on each monthly CCRP from $646,000 to $350,000 and make catch-up payments on the $5.6 million representing the difference between the previously deferred amounts and the final disallowance. Of the $5.6 million, $2.0 million was paid by Meralco in 2004 while the remaining balance was settled in 2005.

      Upon the effectiveness of any amendments to the TLA in connection with adjustments to the tariff payable to the Partnership, the outstanding deferred amount would be credited with the tariff adjustment amount. The outstanding deferred amount totaled $11.9 million and $7.4 million as of December 31, 2005 and 2004, respectively.

     (c)  Coal Supply Agreements

      In order to ensure that there is an adequate supply of coal to operate the Generation Facility, the Partnership has entered into two coal supply agreements (CSA) with the intent to purchase approximately 70% of its coal requirements from PT Adaro Indonesia (Adaro) and the remainder of its coal requirements from PT Kaltim Prima Coal (Kaltim Prima, and together with Adaro, the Coal Suppliers). The agreement with Adaro (the Adaro CSA) will continue to be in effect until October 1, 2022. If the term of the Coal Cooperation Agreement between Adaro and the Ministry of Mines and Energy of the Government of the Republic of Indonesia is extended beyond October 1, 2022, the Partnership may elect to extend the Adaro CSA until the earlier of the expiration of the PPA or the expiration of the extended Coal Cooperation Agreement, subject to certain conditions. The agreement with Kaltim Prima (the Kaltim Prima CSA) has a scheduled termination date 15 years after the Commercial Operations Date. The Partnership may renew the Kaltim Prima CSA for two additional five-year periods by giving not less than one year prior written notice. The second renewal period will be subject to the parties agreeing to the total base price to be applied during that period.

      Under the CSA, the Partnership is subject to minimum take obligation of 900,000 Metric Tonnes (MT) for Adaro and 360,000 MT for Kaltim Prima.

      The Partnership was not able to meet the minimum take obligations for Adaro by 42,963 MT in 2005 and by 336,000 MT in 2004. However, the Partnership was able to secure waivers from Adaro for these shortfalls.

      In 2003, the Partnership and its coal suppliers started discussions on the use of an alternative to the Australian-Japanese benchmark price, which is the basis for adjusting the energy-base price under the Partnership’s CSA. During 2003, the Partnership and Adaro agreed in principle to use the six-month rolling average of the ACR Asia Index with a certain discount as the new benchmark price applied retroactively to April 1, 2003. Accordingly, adjustments to effect the change in energy-base price were recorded in 2003. On November 18, 2004, the Adaro CSA has been amended to reflect the change in the benchmark price.

F-19

QUEZON POWER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      During 2004, Adaro charged the Partnership $789,000 for demurrage charges pertaining to certain shipments from 1999 to 2004. In 2005, after completing its review of the billed charges, the Partnership paid and Adaro accepted a total of $587,000 as demurrage charges pertaining to the shipments from 1999 to 2004.

      With respect to Kaltim Prima, the Partnership had, in principle, negotiated a price covering shipments from April 2005 up to March 2006. Based on this price, the Partnership has recognized an estimated liability of $2.3 million in the 2005 financial statements. The Project is continuing its evaluation of the coal market and its discussions with Kaltim Prima on the appropriate benchmark price.

     (d)  Operations and Maintenance Agreement

      The Partnership and Covanta Philippines Operating, Inc. (the Operator; formerly Ogden Philippines Operating, Inc.), a Cayman Islands corporation and a wholly owned subsidiary of Covanta Projects, Inc. (CPI; formerly Ogden Projects, Inc.), a subsidiary of CEGI, have entered into the Plant Operation and Maintenance Agreement dated December 1, 1995 (as amended, the O&M Agreement) under which the Operator assumed responsibility for the operation and maintenance of the Project pursuant to a cost-reimbursable contract. CPI, pursuant to an O&M Agreement Guarantee, guarantees the obligations of the Operator. The initial term of the O&M Agreement extends 25 years from the Commercial Operations Date. Two automatic renewals for successive five year periods are available to the Operator, provided that (i) the PPA has been extended; (ii) no default by the Operator exists; and (iii) the O&M Agreement has not been previously terminated by either party. The Partnership is obligated to compensate the Operator for services under the O&M Agreement, to reimburse the Operator for all reimbursable costs one month in advance of the incurrence of such costs and to pay the Operator a base fee and certain bonuses. In certain circumstances, the Operator could be required to pay liquidated damages depending on the operating performance of the Project, subject to contractual limitations. Beginning on Provisional Acceptance, as defined, the Partnership is obligated to pay the Operator a monthly fee of $160,000, subject to escalation.

      Under the O&M Agreement, the Operator may earn a bonus as a result of: (i) higher than expected NEO generated during the year, (ii) the Operator’s contributions to the community, and (iii) reductions in operating costs below budget. The target NEO is defined as the lesser of (a) MGEQ and (b) the average NEO achieved over the immediately preceding two contract years and adjusted to consider significant non-recurring events and significant maintenance activities undertaken other than the annual major maintenance.

      In late 2003, operational issues were noted in an operations and maintenance audit of the Generation Facility by R.W. Beck, the independent engineer, commissioned by Eximbank. These issues triggered requests from lenders that the issues be addressed and that certain governance adjustments be made to the O&M Agreement and charter documents of the Company. Following negotiations among various project participants, in October 2004, the O&M Agreement was amended, with the concurrence of required lenders.

      Significant changes to the amended O&M Agreement include, among others, changes in the terms concerning material breach of the O&M Agreement; introduction of Surviving Service Fees to the Operator in case the agreement is pre-terminated; changes in the methodology for computing additions or reduction in fees when NEO is greater or less than the MGEQ of each contract year; and introduction of Banked Hours that can be applied to future reductions in fees or exchanged for cash subject to a 5 year expiration period. The adjustments in Operator’s fee, including the cash value of all Banked Hours accrued during a contract year, shall not exceed $1 million, adjusted pursuant to an escalation index. Amendments in the O&M Agreement have a retroactive effect beginning December 26, 2003. On October 18, 2004, the Partnership received all the necessary approvals including that of the lenders and implemented the amended O&M Agreement.

      Further to those amendments and pre-amendment efforts, the Partnership and its partners have taken proactive steps to address the issues raised by the independent engineer and as a result, remedial efforts to address these issues have been applied and are currently being applied by the Operator. A recent audit by the independent engineer has indicated that most of the operating issues have been resolved.

F-20

QUEZON POWER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      In connection with the amendment of the O&M Agreement and resolution of issues between the Partnership and the Operator, on behalf of the Partnership, the BOD of the Company approved, on March 18, 2004, the payment to the Operator of $1.3 million in fees that were not paid during the 2002 and 2003 calendar years, and on June 9, 2004, a payment in lieu of a bonus, amounting to $1.8 million.

     (e)  Management Services Agreement

      The Partnership has entered into the Project Management Services Agreement, dated as of September 20, 1996 (as amended, the Management Services Agreement), with InterGen Management Services (Philippines), Ltd. (as assignee of International Generating Company, Inc.), an affiliate of InterGen N.V., (the Manager), pursuant to which, the Manager is providing management services for the Project. Pursuant to the Management Services Agreement, the Manager nominates a person to act as a General Manager of the Partnership, and, acting on behalf of the Partnership, to be responsible for the day-to-day management of the Project. The initial term of the Management Services Agreement extends for a period ending 25 years after the Commercial Operations Date, unless terminated earlier, with provisions for extension upon mutually acceptable terms and conditions. InterGen N. V., pursuant to a Project Management Services Agreement Guarantee dated as of December 10, 1996, guarantees the obligations of the Manager.

      The Partnership is obligated to pay the Manager an annual fee equal to $400,000 subject to escalation after the first year relative to an agreed-upon index payable in 12 equal monthly installments.

      Similar to the O&M Agreement, amendments to the Management Services Agreement were made in 2004. Significant changes to the Management Services Agreement include, among others, amendments to the duties of the Manager, General Manager, rights of the Partnership, acting through the BOD of the Company, to audit the Manager’s procedures and past practices, changes in termination provisions and the introduction of a Surviving Management Fee in case the agreement is pre-terminated. Similar to the O&M Agreement, the amendments to the Management Services Agreement have a retroactive effect beginning December 26, 2003. These amendments were likewise approved on October 18, 2004.

     (f)  Project Site Lease, Transmission Line Site Lease and Foreshore Lease Agreements

      Due to Philippine legal requirements that limit the ownership interests in real properties and foreshore piers and utilities to Philippine nationals and in order to facilitate the exercise by Meralco of its power of condemnation should it be obligated to exercise such powers on the Partnership’s behalf, Meralco owns the Project Site and leases the Project Site to the Partnership. Meralco has also agreed in the Foreshore Lease Agreement dated January 1, 1997, as amended, to lease from the Philippine government the foreshore property on which the Project piers were constructed, to apply for and maintain in effect the permits necessary for the construction and operation of the Project piers and to accept ownership of the piers.

      The Company has obtained rights-of-way for the Transmission line for a majority of the sites necessary to build, operate and maintain the Transmission line. Meralco has agreed, pursuant to a letter agreement dated December 19, 1996, that notwithstanding the provisions of the TLA that anticipates that Meralco would be the lessor of the entire Transmission Line Site, Meralco will only be the Transmission Line Site Lessor with respect to rights-of-way acquired through the exercise of its condemnation powers.

      The Company, as lessor, and the Partnership, as lessee, have entered into the Transmission Line Site Leases, dated as of December 20, 1996, with respect to real property required for the construction, operation and maintenance of the Transmission line other than rights-of-way to be acquired through the exercise of Meralco’s condemnation powers.

      The initial term of each of the Project Site Leases and each of the Transmission Line Site Leases (collectively, the Site Leases) extends for the duration of the PPA, commencing on the date of execution of such Site Lease and expiring 25 years following the Commercial Operations Date. The Partnership has the

F-21

QUEZON POWER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

right to extend the term of any Site Lease for consecutive periods of five years each, provided that the extended term of such Site Lease may not exceed 50 years in the aggregate.

     (g)  Community Memorandum of Agreement

      The Partnership has entered into a Community Memorandum of Agreement (MOA) with the Province of Quezon, the Municipality of Mauban, the Barangay of Cagsiay and the Department of Environmental and Natural Resources (DENR) of the Philippines. Under the MOA, the Partnership is obligated to consult with local officials and residents of the Municipality and Barangay and other affected parties about Project related matters and to provide for relocation and compensation of affected families, employment and community assistance funds. The funds include an electrification fund, development and livelihood fund and reforestation, watershed, management health and/or environmental enhancement fund. Total estimated amount to be contributed by the Partnership over the 25-year life and during the construction period is approximately $16 million. In accordance with the MOA, a certain portion of this amount will be in the form of advance financial assistance to be given during the construction period.

      In addition, the Partnership is obligated to design, construct, maintain and decommission the Project in accordance with existing rules and regulations. The Partnership deposited the amount of P5.0 million (about $94,000) to an Environmental Guarantee Fund for rehabilitation of areas affected by damage in the environment, monitoring compensation for parties affected and education activities.

10. Fair Value of Financial Instruments

      The required disclosures under SFAS No. 107, Disclosure about Fair Value of Financial Instruments, follow:

      The financial instruments recorded in the consolidated balance sheets include cash, accounts receivable, accounts payable and accrued expenses, due from (to) affiliated companies and debt. Because of their short maturity, the carrying amounts of cash, accounts receivable, due from (to) affiliated companies, notes payable and accounts payable and accrued expenses approximate fair value.

      Long-term debt — Fair value was based on the following:

Debt Type	Fair Value Assumptions
Term loan	Estimated fair value is based on the discounted value of future cash flows using the applicable risk free rates for similar types of loans adjusted for credit risk.
Bonds payable	Estimated fair value is based on the discounted value of future cash flows using the latest available yield percentage of the Partnership’s bonds prior to balance sheet dates.
Other variable rate loans	The carrying value approximates fair value because of recent and frequent repricing based on market conditions.

      Following is a summary of the estimated fair value (in millions) as of December 31, 2005 and 2004 of the Partnership’s financial instruments other than those whose carrying amounts approximate their fair values:

	2005		2004
Term loan — $247.7 in 2005 and $283.1 in 2004	$	224.6	$	251.2
Bonds payable — $190.3 in 2005 and $196.7 in 2004		184.7		183.2

F-22

QUEZON POWER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

11. Other Matters

     (a)  Electric Power Industry Reform Act (EPIRA)

      Republic Act No. 9136, the EPIRA, and the covering Implementing Rules and Regulations (IRR) provides for significant changes in the power sector, which include among others:

      (i) The unbundling of the generation, transmission, distribution and supply and other disposable assets of a company, including its contracts with independent power producers and electricity rates;

      (ii) Creation of a Wholesale Electricity Spot Market; and

      (iii) Open and non-discriminatory access to transmission and distribution systems.

      The law also requires public listing of not less than 15% of common shares of generation and distribution companies within 5 years from the effectivity date of the EPIRA. It provides cross ownership restrictions between transmission and generation companies and between transmission and distribution companies and a cap of 50% of its demand that a distribution utility is allowed to source from an associated company engaged in generation except for contracts entered into prior to the effectivity of the EPIRA.

      There are also certain sections of the EPIRA, specifically relating to generation companies, which provide for:

      (i) a cap on the concentration of ownership to only 30% of the installed capacity of the grid and/or 25% of the national installed generating capacity; and

      (ii) VAT zero-rating of sale of generated power (see Note 4).

      The Partnership is in the process of complying with the applicable provisions of the EPIRA and its IRR.

     (b)  Clean Air Act

      The Clean Air Act and the related IRR contain provisions that have an impact on the industry as a whole, and to the Partnership in particular, that need to be complied with within 44 months from the effectivity date or by July 2004. Based on the assessment made on the Partnership’s existing facilities, the Partnership believes it complies with the provisions of the Clean Air Act and the related IRR.

     (c)  Insurance Coverage Waiver

      The Partnership was able to improve insurance coverage for the April 2005 to March 2006 insurance coverage period. However, the insurance coverage amounts required by the lenders under the debt financing agreements still have not been met due to market unavailability on commercially reasonable terms, based on determinations of the Partnership’s insurance advisor and the lenders’ insurance advisor. Consequently, the Partnership requested, and was granted by the lenders, a waiver of certain insurance requirements. The latest waiver received by the Partnership is effective until March 31, 2006, the end of the current insurance coverage period.

     (d)  PPA Default Waiver

      Section 5.1(d) of the Common Agreement provides for, among others, the prompt billing and collection from Meralco for energy sold and services rendered by the Project pursuant to the PPA and the TLA. In this regard, the Partnership was in default under the financing documents as a result of the withholding by Meralco of its payment obligations under the PPA amounting to $8.5 million [see Note 9(a)]. To address this default, the Partnership sought, and successfully obtained, a consent from its lenders to permit the Partnership to waive, on an interim basis, the timely payment by Meralco of the withheld amount. The lenders granted the consent, subject to conditions, and the Partnership issued an interim waiver to Meralco in November 2002. The waiver is in effect until the amendment to the PPA becomes effective. The key condition to that consent required that the Partnership hold back from distributions cash in excess of the reserve requirements of the

F-23

QUEZON POWER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

financing agreements, originally equal to approximately $20.5 million. In November 2004, the Partnership sought, and successfully obtained, lender consent to reduce the hold back amount to $10.5 million.

      In 2005, the BOD elected to, in accordance with the project financing agreements, write-off the $8.5 million withheld amount as an adjustment to receivables in the ordinary course of business. As a result of this action and the Project having met all the milestone specified by the Project lenders, the Partnership sought, and successfully obtained, lender consent to release the remaining balance in 2005.

     (e)  Impact of the Decision of the Supreme Court (SC) of the Philippines

      On November 15, 2002, the Third Division of the SC rendered a decision ordering Meralco, the largest power distribution company in the country, to refund to its customers $0.003/kWh (P0.167/kWh) starting with Meralco’s billing cycles beginning February 1994 or correspondingly credit this in their favor for future consumption. The SC sustained the then Energy Regulatory Board’s (now known as the ERC) disallowance of income tax as an operating expense, which resulted in Meralco’s rate of return exceeding 12%, the maximum allowed.

      Meralco filed a Motion for Reconsideration with the SC but the SC denied it with finality on April 30, 2003 ordering Meralco to refund to its consumers the excess charges in electricity billings beginning February 1994. This refund amounted to about $536 million (P30 billion) up to April 30, 2003. As of December 31, 2005, the amounts processed for refund stand at approximately $214 million (P15 billion).

      Meralco implemented the refund in four phases in such a way that would first satisfy Meralco’s obligations to its more numerous, but smaller and mainly residential, customers, who account for Meralco’s lower income accounts. Meralco commenced refund for Phases 1 to III from 2003 to 2005.

      Meralco has set a January 2006 target for commencing Phase IV-A of its refund program. The first batch of applications were being processed as of December 26, 2005 for post-dated checks and this will be reflected in the January 2006 billing period of the customers. They have also started delivery of notices to Phase IV-B customers although a sharp drop in the turn-out of the applications was noted. Payments would be retroactive in case of a delay in the processing of the refund’s last phase. Phase IV covers $322 million (P18 billion) refund for Meralco’s big commercial and industrial customers. If Meralco is unable to generate resources to satisfy its refund obligations, it may not meet its obligations under the PPA [see Note l(d)].

F-24 EX-4.12 2 c03133exv4w12.htm INDENTURE

Exhibit 4.12

EXECUTION COPY

AMERICAN REF-FUEL COMPANY LLC

and

WACHOVIA BANK, NATIONAL ASSOCIATION

as Trustee and Securities Intermediary

INDENTURE

Dated as of May 1,2003

Senior Notes

TABLE OF CONTENTS

	Page
ARTICLE 1 DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION		1
SECTION 1.1 Construction		1
SECTION 1.2 Definitions		2
SECTION 1.3 Compliance Certificates and Opinions		20
SECTION 1.4 Form of Documents Delivered to Trustee		21
SECTION 1.5 Notices, Etc. to Trustee		21
SECTION 1.6 Notices to Holders; Waiver		22
SECTION 1.7 Conflict with Trust Indenture Act		23
SECTION 1.8 Effect of Headings and Table of Contents		23
SECTION 1.9 Successors and Assigns		23
SECTION 1.10 Severability Clause		23
SECTION 1.1 1 Benefits of Indenture		23
SECTION 1.12 Governing Law		23
SECTION 1.13 Legal Holidays		23
SECTION 1.14 Execution in Counterparts		24
ARTICLE 2 THE NOTES		24
SECTION 2.1 Form of Note to Be Established by Series Supplemental Indenture		24
SECTION 2.2 Form of Trustee’s Authentication		24
SECTION 2.3 Amount; Issuable in Series		24
SECTION 2.4 Authentication and Delivery of Notes		26
SECTION 2.5 Form		27
SECTION 2.6 Execution of Notes		27
SECTION 2. 7 Temporary Notes		28
SECTION 2.8 Registration; Restrictions on Transfer and Exchange		28
SECTION 2.9 Mutilated, Destroyed, Lost and Stolen Notes		30
SECTION 2.10 Payment of Principal and Interest; Principal and Interest Rights Preserved		31
SECTION 2.1l Persons Deemed Owners		32
SECTION 2.12 Cancellation		32
SECTION 2.13 Dating of Notes; Computation of Interest		33
SECTION 2.14 Source of Payments Limited; Rights and Liabilities of the Company		33
SECTION 2.15 Allocation of Principal and Interest		33
SECTION 2.16 Parity of Notes		33
SECTION 2.1 7 CUSIP Numbers		33
ARTICLE 3 APPLICATION OF PROCEEDS FROM SALE OF NOTES		34
SECTION 3.1 Application of Proceeds from Sale of Notes		34
- ii -

	Page
ARTICLE 4 COVENANTS OF THE COMPANY		34
SECTION 4.1 Payment of Principal, Premium and Interest		34
SECTION 4.2 Financial Statements and Other Information		34
SECTION 4.3 Existence; Conduct of Business		35
SECTION 4.4 Compliance with Laws and Contractual Obligations		36
SECTION 4.5 Maintenance of Properties; Insurance		36
SECTION 4.6 Payment of Taxes and Claims		36
SECTION 4.7 Books and Records; Inspection Rights		36
SECTION 4.8 Indebtedness		36
SECTION 4.9 Liens		37
SECTION 4.10 Prohibition on Sale of Assets		37
SECTION 4.1l Modifications of Certain Documents		38
SECTION 4.12 Prohibition on Fundamental Changes		38
SECTION 4.13 Maintenance of Tax Status		38
SECTION 4.14 Restricted Payments		38
SECTION 4.15 Equity Contribution Agreement		38
SECTION 4.16 Rule 144A Information		39
SECTION 4.17 Additional Collateral		39
ARTICLE 5 REDEMPTION OF NOTES		39
SECTION 5.1 Optional Redemption; Redemption Price		39
SECTION 5.2 Mandatory Redemption; Selection of Notes to Be Redeemed; Redemption Price		39
SECTION 5.3 Election or Requirement to Redeem; Notice to Trustee		40
SECTION 5.4 Notice of Redemption		41
SECTION 5.5 Notes Payable on Redemption Date		41
SECTION 5.6 Notes Redeemed in Part		42
ARTICLE 6 DEBT SERVICE RESERVE ACCOUNTS		42
SECTION 6.1 Senior Notes Debt Service Reserve Account		42
SECTION 6.2 Securities Account; Securities Intermediary		45
SECTION 6.3 Security Interest		47
SECTION 6.4 Investment of Funds		47
SECTION 6.5 Shared Collateral Account		47
ARTICLE 7 EVENTS OF DEFAULT AND REMEDIES		48
SECTION 7.1 Events of Default		49
SECTION 7.2 Acceleration of Maturity; Rescission and Annulment		51
SECTION 7.3 Trustee May File Proofs of Claim; Appointment of Trustee as Attorney-in-Fact in Judicial Proceedings		52
SECTION 7.4 Trustee May Enforce Claims Without Possession of Notes		52
SECTION 7.5 Application of Money Collected		53
SECTION 7.6 Limitation on Suits		53
SECTION 7.7 Unconditional Right of Holders to Receive Principal, Premium and Interest		54
SECTION 7.8 Restoration of Rights and Remedies		54
SECTION 7.9 Rights and Remedies Cumulative		54
- iii -

	Page
SECTION 7.10 Delay or Omission Not Waiver		54
SECTION 7.11 Control by Holders		54
SECTION 7.12 Waiver of Past Defaults		55
SECTION 7.13 Undertaking for Costs		55
SECTION 7.14 Waiver of Stay or Extension Laws		56
ARTICLE 8 CONCERNING THE TRUSTEE		56
SECTION 8.1 Certain Rights and Duties of Trustee		56
SECTION 8.2 Trustee Not Responsible for Recitals, Etc		58
SECTION 8.3 Trustee and Others May Hold Notes		58
SECTION 8.4 Moneys Held by Trustee or Paying Agent		58
SECTION 8.5 Compensation of Trustee and Its Lien		58
SECTION 8.6 Right of Trustee to Rely on Officers’ Certificates and Opinions of Counsel		59
SECTION 8.7 Persons Eligible for Appointment As Trustee		59
SECTION 8.8 Resignation and Removal of Trustee; Appointment of Successor		59
SECTION 8.9 Acceptance of Appointment by Successor Trustee		61
SECTION 8.10 Merger, Conversion or Consolidation of Trustee		61
SECTION 8.1 1 Maintenance of Offices and Agencies		62
SECTION 8.12 Reports by Trustee		64
SECTION 8.13 Trustee Risk		64
SECTION 8. 14 Appointment of Co-Trustee		64
ARTICLE 9 CONCERNING THE HOLDERS		65
SECTION 9.1 Acts of Holders		65
SECTION 9.2 Notes Owned by Company and Affiliates Deemed Not Outstanding		66
ARTICLE 10 HOLDERS’ MEETINGS		67
SECTION 10.1 Purposes for Which Holders’ Meetings May Be Called		67
SECTION 10.2 Company and Holders May Call Meeting		67
SECTION 10.3 Persons Entitled to Vote at Meeting		67
SECTION 10.4 Determination of Voting Rights; Conduct and Adjournment of Meeting		68
SECTION 10.5 Counting Votes and Recording Action of Meeting		68
ARTICLE 1 1 SUPPLEMENTAL INDENTURES		69
SECTION 11.1 Supplemental Indentures Without Consent of Holders		69
SECTION 11. 2 Supplemental Indenture with Consent of Holders		70
SECTION 11.3 Execution of Supplemental Indentures		71
SECTION 11.4 Effect of Supplemental Indentures		72
SECTION 11.5 Conformity with Trust Indenture Act		72
SECTION 11.6 Reference in Notes to Supplemental Indentures		72
ARTICLE 12 SATISFACTION AND DISCHARGE		72
SECTION 12.1 Satisfaction and Discharge of Notes		72
SECTION 12.2 Satisfaction and Discharge of Indenture		73
- iv -

	Page
SECTION 12.3 Application of Trust Money		74
SECTION 12.4 Return of Moneys Held by Trustee and Unclaimed for Three Years		74
ARTICLE 13 DEFEASANCE		75
SECTION 13.1 Defeasance		75
SECTION 13.2 Conditions to Defeasance		75
ARTICLE 14 COLLATERAL DOCUMENTS		77
SECTION 14.1 Collateral and Security and Pledge Agreements		77
SECTION 14.2 Maintenance of Liens		78
SECTION 14.3 Action by the Trustee		79
ARTICLE 15 POSSESSION, USE AND RELEASES OF PROPERTY; WITHDRAWAL OF TRUST MONEYS		80
SECTION 15.1 Possession and Use of Property; Dispositions without Release		80
SECTION 15.2 Releases		81
SECTION 15.3 Release of Lien on Equity Interests of Subsidiaries		83
SECTION 15.4 No Impairment of Continuing Security		83
SECTION 15.5 Purchaser Protected		83
SECTION 15.6 “Trust Moneys”		84
SECTION 15.7 Powers Exercisable Notwithstanding Event of Default		84
SECTION 15.8 Powers Exercisable by Trustee or Receiver		84
SECTION 15.9 Investment of Moneys		84
ARTICLE 16 LIMITATION ON LIABILITY		85
SECTION 16.1 Limitation on Liability		85
- v -

SCHEDULES:
	Schedule A	Permitted Liens
	Schedule B	Purchased Intercompany Debt
	Schedule C	Leases

 - vi -

          INDENTURE dated as of May 1, 2003 between AMERICAN REF-FUEL COMPANY LLC, a Delaware limited liability company (the “Company”) and Wachovia Bank, National Association, a national banking association, as trustee (the “Trustee”).

WITNESSETH:

          WHEREAS, the Company intends from time to time to authorize the creation of its bonds, debentures, notes or other evidences of indebtedness to be issued in one or more series (the “Notes”) up to such principal amount or amounts as may from time to time be authorized in accordance with the terms of this Indenture (as hereinafter defined); and the Company has duly authorized the execution and delivery of this Indenture to secure the Notes and to provide for the authentication and delivery thereof by the Trustee; and

          WHEREAS, all things necessary to make the Notes, when executed by the Company and authenticated and delivered by the Trustee as in this Indenture provided, the valid, binding and legal obligations of the Company, and to constitute these presents a valid indenture and agreement according to its terms, have been done;

          NOW, THEREFORE, for and in consideration of the premises and of the covenants herein contained and of the purchase of the Notes by the holders thereof, it is mutually covenanted and agreed, for the benefit of the parties hereto and the equal and proportionate benefit of all Holders (as hereinafter defined) of the Notes, as follows:

ARTICLE 1

DEFINITIONS AND OTHER PROVISIONS
OF GENERAL APPLICATION

          SECTION 1.1 Construction. For all purposes of this Indenture (and for all purposes of any other Financing Document (as hereinafter defined) or any other instrument or agreement that incorporates provisions of this Indenture by reference), except as otherwise expressly provided or unless the context otherwise requires:

          (1) the terms defined in this Article have the meanings assigned to them in this Article and include the plural as well as the singular;

          (2) all other terms used herein that are defined in the Trust Indenture Act (as hereinafter defined), either directly or by reference therein, have the meanings assigned to them therein;

          (3) except as otherwise expressly provided herein, (i) all accounting terms used herein shall be interpreted, (ii) all financial statements and all certificates and reports as to financial matters required to be delivered to the Trustee hereunder shall be prepared and (iii) all calculations made for the purposes of determining compliance with this

American Ref-Fuel Company LLC Indenture

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Indenture shall (except as otherwise expressly provided herein) be made in accordance with, or by application of, GAAP (as hereinafter defined);

          (4) all references in this Indenture (including the Appendices and Schedules hereto) to designated “Articles”, “Sections” and other subdivisions are to the designated Articles, Sections and other subdivisions of this Indenture;

          (5) the words “herein”, “hereof” and “hereunder” and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision;

          (6) unless the context clearly indicates otherwise, pronouns having a masculine or feminine gender shall be deemed to include the other;

          (7) unless otherwise expressly specified, any agreement, contract or document defined or referred to herein shall mean such agreement, contract or document as in effect as of the date hereof, as the same may thereafter be amended, supplemented or otherwise modified from time to time in accordance with the terms of this Indenture and the other Financing Documents and shall include any agreement, contract, instrument or document in substitution or replacement of any of the foregoing entered into in accordance with the terms of this Indenture and the other Financing Documents;

          (8) any reference to any Person (as hereinafter defined) shall include its permitted successors and assigns in accordance with the terms of this Indenture and the other Financing Documents and, in the case of any Governmental Authority (as hereinafter defined), any Person succeeding to its functions and capacities;

          (9) unless the context clearly requires otherwise, references to “Law” (as hereinafter defined) or to any particular Law shall include Laws or such particular Law as in effect at each, every and any of the times in question, including any amendments, replacements, supplements, extensions, modifications, consolidations, restatements, revisions or reenactments thereto or thereof, and whether or not in effect at the date of this Indenture; and

          (10) unless the context clearly indicates to the contrary, all references in this Indenture to “this Indenture”, the “benefits of this Indenture”, the “Lien of this Indenture”, or phrases of similar import shall be deemed to include reference to the Collateral Documents (as hereinafter defined) to the extent that reference to the Collateral Documents is not expressly made.

          SECTION 1.2 Definitions.

          “Acceptable Bank” means any commercial bank or other financial institution which (a) is organized under the laws of the United States of America or any political subdivision thereof, or under the laws of Canada, Japan or any country that is a member of the European Union, (b) has combined capital, surplus and undivided profits of at least $500,000,000 and (c) has outstanding long-term senior unsecured, unguaranteed indebtedness

American Ref-Fuel Company LLC Indenture

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which is rated “A” or better by S&P and “A2” or better by Moody’s (or an equivalent rating by another nationally recognized statistical rating organization of similar standing if either such corporation is not in the business of rating long-term unsecured bank indebtedness, as the case may be).

          “Act” when used with respect to any Holder, shall have the meaning set forth in Section 9.1.

          “Adjusted Cash Flow Available for Fixed Charges” means, for any period the sum (without duplication) of: (a) Distributions received by the Company from each of its consolidated Subsidiaries, and (b) other cash income received by the Company during such period, minus (c) any expenses paid by the Company during such period (other than for Fixed Charges), plus (d) amounts actually paid by each consolidated Subsidiary of the Company during such period in respect of Recourse Debt, minus or plus, as applicable (e) Distributions and other cash income described in the foregoing clauses (a) and (b) that are attributable to extraordinary gains or other non-recurring items described in clause (c) of the definition of “EBITDA,” plus (f) funds received by the Company during such period with respect to Intercompany Loans and minus (g) funds advanced to or incurred during such period by any Subsidiary as Intercompany Loans.

          “Administrative Agent” means the Administrative Agent under the Bank Credit Facility.

          “Affiliate” with respect to any Person, means any other Person directly or indirectly controlling or controlled by, or under direct or indirect common control with, such Person. For purposes of this definition, the term “control” (including the correlative meanings of the terms “controlled by” and “under common control with”), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management policies of such Person, whether through the ownership of voting securities or by contract or otherwise. In any event, any Person that owns directly or indirectly 10% or more of securities having ordinary voting power for the election of directors or other governing body of another Person or 10% or more other ownership interests of such other Person will be deemed to control such other Person.

          “Authenticating Agent” means any Person acting as Authenticating Agent hereunder pursuant to Section 8.11.

          “Authorized Agent” means any Paying Agent, Authenticating Agent or Security Registrar or other agent appointed by the Trustee in accordance with this Indenture to perform any function that this Indenture authorizes the Trustee or such agent to perform.

          “Authorized Newspaper” means The Wall Street Journal or, if such publication is not published at least five days per calendar week, a newspaper published in English at least once a day for at least five days in each calendar week and of general circulation in The City of New York, State of New York. If it shall be impractical in the opinion of the Trustee to make any publication of any notice required hereby in an Authorized Newspaper, any publication or other notice in lieu thereof shall constitute a sufficient publication of such notice.

American Ref-Fuel Company LLC Indenture

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          “Authorized Representative” of any Person means the person or persons authorized to act on behalf of such entity by its chief executive officer, president, chief operating officer, chief financial officer or any vice president or its board of directors or any other governing body of such entity.

          “Authorized Signatory” means any officer of the Trustee or any other individual who shall be duly authorized by appropriate corporate action on the part of the Trustee to authenticate Notes.

          “Bank Credit Facility” means the credit facility pursuant to the Amended and Restated Credit Agreement dated as of May 1, 2003, among the Company, Citicorp North America, Inc, and each of the lenders named therein, together with the related documents thereto (including any guarantees, security agreements, assignments, mortgages and other security documents executed pursuant thereto), consisting on the date hereof of a revolving credit facility, in each case as such agreement may be subsequently amended (including any amendment and restatement thereof), supplemented, replaced, refinanced or otherwise modified from time to time pursuant to any one or more successive debt facilities.

          “Board of Directors” means the Company’s Board of Directors or any committee of such Board of Directors duly authorized to act under this Indenture.

          “Board Resolution” means a copy of a resolution certified by the secretary or an assistant secretary of the Company to have been adopted by the Board of Directors of the Company and to be in full force and effect on the date of such certification.

          “Business Day” means a day which is neither a legal holiday nor a day on which banking institutions (including, without limitation, the members of the Federal Reserve System) are authorized or required by law, regulation or executive order to close in The City of New York.

          “Capital Stock” means (a) in the case of a corporation, corporate stock, (b) in the case of an association or business entity, any and all shares, interests, participations, rights or other equivalents (however designated) of corporate stock, (c) in the case of a partnership or limited liability company, partnership or membership interests (whether general or limited) and (d) any other interest or participation that confers on a Person the right to receive a share of the profits and losses of, or distributions of property of, the issuing Person.

          “Cash Equivalents” means (a) securities issued or directly and fully guaranteed or insured by the United States of America or any agency or instrumentality thereof (provided, that the full faith and credit of the United States of America is pledged in support thereof); (b) time deposits and certificates of deposit of any Acceptable Bank and commercial paper issued by any such bank (or by the parent corporation thereof), and commercial paper issued by any financial institution or other such person, in each case rated at least A-2 or the equivalent thereof by S&P or at least P-2 or the equivalent thereof by Moody’s; (c) repurchase agreements with a bank or trust company or recognized securities dealer having capital and surplus in excess of $500,000,000 for direct obligations issued by or fully guaranteed by the United States of America on which the Company shall have a perfected first priority security interest (subject to

American Ref-Fuel Company LLC Indenture

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no other Liens) and having, on the date of purchase thereof, a fair market value of at least 100% of the amount of repurchase obligations; (d) guaranteed investment contracts entered into with financial institutions in the ordinary course of business rated at least A or better by S&P and A2 or better by Moody’s; and (e) interests in money market mutual funds which invest solely in assets or securities of the type described in subparagraphs (a), (b), (c) or (d) hereof; and in the case of each of (a), (b), (c) and (d) maturing within one year after the date of acquisition.

          “Cash Flow Coverage Ratio” means the ratio, on a cash basis, for any period of determination of (a) Adjusted Cash Flow Available for Fixed Charges to (b) Fixed Charges (in each case, calculated on a pro forma basis to take into account the acquisition of any person during such period for which audited financial statements are available and any Recourse Debt the Company incurs in connection with such acquisition).

          “Certificated Notes” has the meaning set forth in Section 2.5.

          “Collateral” means, subject to Section 6.5(d), the Debt Service Reserve Accounts and all property and interests in property now owned or hereafter acquired in or upon which a Lien has been or is purported or intended to have been granted to the Trustee pursuant to the Collateral Documents.

          “Collateral Agency and Intercreditor Agreement” means the Collateral Agency and Intercreditor Agreement, dated May 1, 2003 between the Trustee and Collateral Agent and the Administrative Agent.

          “Collateral Agent” means Wachovia Bank, National Association in its capacity as such under the Collateral Agency and Intercreditor Agreement, the Security Agreement and each of the Pledge Agreements.

          “Collateral Documents” means the Collateral Agency and Intercreditor Agreement, the Security Agreement, each of the Pledge Agreements and the other documents and instruments granting or purporting to grant a Lien on Collateral securing the Notes.

          “Company” has the meaning set forth in the first paragraph of this Indenture.

          “Company Order” means a written request or order signed in the name of the Company by one of its Authorized Representatives or by its treasurer, secretary, or one of its assistant treasurers or assistant secretaries.

          “Company’s Obligations” has the meaning set forth in Section 16.1.

          “Corporate Trust Office” means the principal office of the Trustee or Security Registrar at which the corporate trust business of the Trustee or Security Registrar, as the case may be, shall at any particular time be principally administered, which at the time of the execution of this Indenture is, in each case, located at 21 South Street, Morristown, New Jersey 07960.

          “Covenant Defeasance” has the meaning set forth in Section 13.1.

American Ref-Fuel Company LLC Indenture

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          “Custodian” has the meaning set forth in Section 2.5.

          “Debt Service Reserve Accounts” means collectively, the Senior Notes Debt Service Reserve Account and the Shared Collateral Account.

          “Debt Service Reserve Letter of Credit” means one or more irrevocable direct pay letters of credit available for the purpose of drawing to pay principal and interest on the Notes in an amount up to the Senior Notes Debt Service Reserve Requirement and any extensions thereof or any substitute letter of credit therefor in the stated amount contained in such extension or substitute and permitting draws thereon as contemplated by Section 6.1, in each case:

     (i) issued to the Trustee (for the benefit of the Holders) by an Acceptable Bank;

     (ii) expiring on the first to occur of (a) the date on which the stated amount thereof is drawn down to zero, (b) the date on which the Trustee returns the letter of credit to the issuer thereof for cancellation and (c) the expiration date specified in such letter of credit, which expiration shall not be earlier than 364 days after the date such letter of credit was issued;

     (iii) providing for the amount thereof to be made available in full to the Trustee in multiple drawings conditioned only upon the presentation of a sight draft accompanied by the applicable certificate in the form attached to such letter of credit; and

     (iv) with respect to which the Company certifies in an Officers’ Certificate that any reimbursement obligation of the Company related to such letter of credit which constitutes Indebtedness of the Company, is Subordinated Indebtedness.

          “Default” means an event or condition that, with the giving of notice, lapse of time or failure to satisfy certain specified conditions, or any combination thereof, could become an Event of Default if not cured or remedied.

          “Derivative Agreement” means any interest rate swap, cap, collar, floor, forward, option, put, call or other agreement, arrangement or security however denominated, entered into in order to hedge interest rate fluctuations on all or a portion of the Indebtedness of the Company or any of its Restricted Subsidiaries or to provide debt management by changing payments to be made by the Company or its Restricted Subsidiaries with respect to all or a portion of any Indebtedness with a goal of achieving lower interest costs or reducing interest rate risk and not for speculative purposes. Any Derivative Agreement of the Company or any of its Restricted Subsidiaries shall provide that the rights of the Company’s or Restricted Subsidiaries’, as applicable, counterparty to the payment of any settlement amount from the Company or any of its Restricted Subsidiaries, as applicable, upon early termination of any Derivative Agreement (or any transaction thereunder) shall be subordinated in right of payment to the rights of the holders of the Notes.

          “Distribution” means, in respect of any Person, (i) any payment of any dividends or other distributions with respect to the Equity Interests in such Person (except distributions in Equity Interests), (ii) any payment of principal and interest on Intercompany Loans and (iii) any

American Ref-Fuel Company LLC Indenture

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purchase, redemption or other acquisition or retirement for value of any Equity Interest in such Person unless made contemporaneously from the net proceeds of the sale of other Equity Interests.

          “Distribution Compliance Period” has the meaning assigned to such term in Regulation S.

          “Duke/UAE” means Duke/UAE Ref Fuel LLC, a Delaware limited liability company.

          “EBITDA” means, with respect to any Person for any period, the (a) income (or loss) before interest and taxes of such Person, plus (b) to the extent deducted in determining such income (or loss), depreciation, amortization and other similar non-cash charges and reserves, minus (or plus, as applicable) (c) to the extent recognized in determining such income (or loss), extraordinary gains (or losses), restructuring charges or other non-recurring items (including payments with respect to such Person’s employee long term incentive plan), plus (d) to the extent described in determining such income (or loss), lease payment obligations.

          “Environmental Approvals” means Governmental Approvals required under applicable Environmental Laws.

          “Environmental Laws” means any and all Laws (as well as obligations, duties and requirements relating thereto under common law) relating to: (i) noise, emissions, discharges, spills, releases or threatened releases of pollutants, contaminants, environmentally regulated materials, materials containing environmentally regulated materials, or hazardous or toxic materials or wastes into ambient air, surface water, groundwater, watercourses, publicly or privately-owned treatment works, drains, sewer systems, wetlands, septic systems or onto land surface or subsurface strata; (ii) the use, treatment, storage, disposal, handling, manufacture, processing, distribution, transportation, or shipment of environmentally regulated materials, materials containing environmentally regulated materials or hazardous and/or toxic wastes, material, products or by-products (or of equipment or apparatus containing environmentally regulated materials); (iii) pollution or the protection of human health, the environment or natural resources or (iv) zoning and land use.

          “Equity Interests” means Capital Stock and all warrants, options or other rights to acquire Capital Stock (but excluding any debt security that is convertible into, or exchangeable for, Capital Stock).

          “ERISA” means the Employee Retirement Income Security Act of 1974, as amended and in effect from time to time.

          “Event of Default” means any event or condition specified as such in Section 7.1 hereof that shall have continued for the applicable period of time, if any, therein designated.

          “Excess Cash Flow” means, with respect to any Person, the amount determined in any fiscal year of such Person equal to such Person’s Revenues less (a) operating expenses, (b) capital expenditures, (c) payments of debt service of such Person or in respect of any third-

American Ref-Fuel Company LLC Indenture

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party (including any payments of principal, premiums and interest) and (d) taxes paid by such Person, all as determined on a consolidated basis.

          “Exchange Act” means the Securities Exchange Act of 1934, as amended and in effect from time to time.

          “Federal Bankruptcy Code” means Title 11 of the United States Code, as amended and in effect from time to time.

          “Financing Documents” means this Indenture, any Series Supplemental Indenture, the Notes and the Collateral Documents.

          “First Supplemental Indenture” means the First Supplemental Indenture dated as of May 1, 2003 between the Trustee and the Company.

          “Fixed Charges” means, with respect to the Company for any period, all amounts payable in respect of Recourse Debt during such period.

          “GAAP” means accounting principles generally accepted in the United States consistently applied on a basis consistent with the principles, methods, procedures and practices employed in the preparation of the Company’s audited financial statements, including, without limitation, those set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as may be approved by a significant segment of the accounting profession.

          “Global Notes” means a Note in global form that evidences all or part of the Notes of any series and is authenticated and delivered to, and registered in the name of, the Registered Depositary for such securities or a nominee thereof.

          “Good Faith Contest” means the contest of an item if such item is diligently contested in good faith by appropriate proceedings timely instituted and adequate reserves are established if required by and in accordance with GAAP with respect to the contested item.

          “Governmental Approvals” means any authorization, consent, approval, order, license, franchise, ruling, permit, certification, waiver, exemption, filing or registration by or with any Governmental Authority (including, without limitation, Environmental Approvals, zoning variances, special exceptions and non-conforming uses) relating to the construction, ownership, operation or maintenance of the Operating Facilities or to the execution, delivery or performance of any Financing Document.

          “Governmental Authority” means any nation, state, sovereign or government, any federal, regional, state, municipal, local or political subdivision thereof or any department, commission, board, bureau, agency, instrumentality, judicial or administrative body or other entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government.

American Ref-Fuel Company LLC Indenture

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          “Holder” means a Person in whose name a Note is registered in the Security Register.

          “Indebtedness” of any Person means, without duplication, (a) all obligations of such Person for borrowed money or with respect to deposits or advances of any kind, (b) all obligations of such Person evidenced by bonds, debentures, notes or similar instruments, (c) all obligations of such Person under conditional sale or other title retention agreements relating to property acquired by such Person, (d) all obligations of such Person in respect of the deferred purchase price of property or services (excluding trade and other accounts payable incurred in the ordinary course of business so long as such trade accounts payable are payable or invoiced and paid within 90 days of the date the respective goods are delivered or the respective services are rendered), (e) all Indebtedness of others secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien on property owned or acquired by such Person, whether or not the Indebtedness secured thereby has been assumed, (f) all Indebtedness of any other Person guaranteed by such Person or for which such Person shall otherwise (including payments pursuant to any keepwell, makewell or similar arrangement) become directly or indirectly liable (but, with respect to any guaranty of, or other arrangement to support, the performance of any other Person, only to the extent that the performance obligation covered by such guaranty or other support has been reduced to a monetary amount, claim or judgment), (g) all Lease Obligations of such Person, (h) all obligations, contingent or otherwise, of such Person as an account party or issuer in respect of letters of credit or the like and (i) all obligations, contingent or otherwise, of such Person in respect of bankers’ acceptances. The Indebtedness of any Person shall include the Indebtedness of any other entity (including any partnership in which such Person is a general partner) to the extent such Person is liable therefor as a result of such Person’s ownership interest in or other relationship with such entity, except to the extent the terms of such Indebtedness provide that such Person is not liable therefor.

          “Indenture” means this instrument entered into by the Company and the Trustee.

          “Independent Engineer” means R. W. Beck, Inc., Framingham, Massachusetts, or any other independent consulting engineer of nationally recognized competence in the waste-to-energy field appointed by the Company.

          “Initial Notes” means the Notes issued by the Company on the Issue Date under the First Supplemental Indenture.

          “Intercompany Loans” means any Indebtedness incurred in the ordinary course of business consistent with practices of the Company and its Subsidiaries prior to the Issue Date in connection with the Company’s cash management program (including Purchased Intercompany Debt) (i) by any Subsidiary of the Company and owing to the Company or (ii) by the Company and owing to any Subsidiary of the Company.

          “Issue Date” means May 9, 2003, the date of initial issuance of the Initial Notes issued under this Indenture.

American Ref-Fuel Company LLC Indenture

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          “Law” means any constitutional provision, law, statute, rule, regulation, ordinance, treaty, order, decree, judgment, decision, certificate, holding, injunction, Governmental Approval, consent or other requirement of any Governmental Authority, enforceable at law or in equity, along with the interpretation and administration thereof by any Governmental Authority charged with the interpretation or administration thereof.

          “Lease Obligations” means, without duplication, (a) any Indebtedness represented by obligations under a lease that is required to be capitalized for financial reporting purposes, (b) the present value, determined using a discount rate equal to the incremental borrowing rate (as defined in Statement of Financial Accounting Standards No. 13) of the Person incurring such obligations, of rent obligations under leases that are not required to be capitalized for financial reporting purposes but that otherwise constitute “financial leases”, “synthetic leases” or “full payout” leases, and (c) the leases described on Schedule C to this Indenture; provided, that, the Lease Obligations referred to in clauses (a) and (b) above have an initial term in excess of one year and represent Indebtedness in excess of $500,000.

          “Legal Defeasance” has the meaning set forth in Section 13.1.

          “Lien” means any mortgage, pledge, security interest, encumbrance, lien or charge of any kind (including, without limitation, any conditional sale or other title retention agreement or lease in the nature thereof, any sale with recourse against the seller or any affiliate of the seller, or any agreement to give any security interest).

          “Majority Holders” means, in the case of the Notes or any series of Notes, the holders of more than 50% in aggregate principal amount of the Notes or any series of Notes, as the case may be, then Outstanding.

          “Mandatory Redemption Account” has the meaning given to such term in Section 5.3.

          “Material Adverse Effect” means a material adverse effect on (a) the Company’s business, assets, operations, prospects or condition, financial or otherwise, (b) the Company’s ability to perform any of its obligations under any Financing Document to which the Company is a party, which obligations are material to the Company or (c) the material rights available to the holders or the Trustee, as representative of the holders.

          “Member” means Duke/UAE which at the date of this Indenture is the sole holder of an equity interest in the Company, and any future member or equity holders of the Company.

          “Moody’s” means Moody’s Investors Service, Inc. or any successor thereto.

          “Net Cash Proceeds” means, with respect to any sale of assets, issuance of debt or other extraordinary event, in each case, the cash proceeds of such sale, issuance or event received by or otherwise legally available to be distributed to the Company, in the form of dividends or otherwise, net of any debt required to be prepaid upon such sale, issuance or other event, transaction costs and expenses and taxes (calculated, in the case of income taxes, on a stand-alone basis) incurred in connection with such sale, issuance or other event.

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          “New York UCC” means the Uniform Commercial Code as in effect from time to time in the State of New York.

          “Non-Recourse Debt” means Indebtedness of any Subsidiary of the Company that is not Recourse Debt.

          “Notes” shall have the meaning set forth in the preamble to this Indenture.

          “Obligations” shall have the meaning set forth in Section 13.2.

          “Officers’ Certificate” means a certificate of Authorized Representatives of the Company signed by (a) the chief executive officer, the president or any vice president of the Company and (b) the chief financial officer, the treasurer or any assistant treasurer of the Company.

          “Operating Facilities” means the Company’s waste-to-energy facilities located in: (a) Hempstead, New York, (b) Newark, New Jersey, (c) Preston, Connecticut, (d) Niagara Falls, New York; (e) Rochester, Massachusetts and (f) Chester, Pennsylvania and at any time, any other waste-to-energy facilities and the related equipment, facility site and real property owned by the Company at such time and, in each case, the business and activities related thereto.

          “Opinion of Counsel” means a written opinion of counsel for any Person expressly referred to herein which may include, without limitation, counsel for the Company, whether or not such counsel is an employee of the Company.

          “Outstanding”, when used with respect to Notes or any principal amount thereof, means, as of the date of determination, all Notes theretofore authenticated and delivered under this Indenture, except:

     (i) Notes theretofore canceled by the Trustee or delivered to the Trustee for cancellation;

     (ii) Notes or portions thereof for whose redemption money in the necessary amount has been theretofore deposited in trust with the Trustee; provided that if such Notes are to be redeemed prior to the maturity thereof, notice of such redemption has been duly given pursuant to Article 5 or provision therefor satisfactory to the Trustee has been made;

     (iii) Notes or portions thereof deemed to have been paid within the meaning of Section 12.1;

     (iv) Notes as to which defeasance has been effected pursuant to Article 13;

     (v) Notes which have been paid pursuant to Section 2.9 or that have been exchanged for other Notes or Notes in lieu of which other Notes have been authenticated and delivered pursuant to this Indenture other than any Notes in respect of which there shall have been presented to the Trustee proof satisfactory to it that such Notes are held

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by a protected purchaser in whose hands such Notes constitute valid obligations of the Company; and

     (vi) Notes not deemed Outstanding in accordance with Section 9.2.

          “Paying Agent” means any Person acting as Paying Agent hereunder pursuant to Section 8.11.

          “Permitted Investments” means investments in securities or other instruments constituting Cash Equivalents.

          “Permitted Liens” means:

     (a) Liens in the Company’s favor;

     (b) Liens imposed by law for taxes, assessments or governmental charges that are not yet delinquent and remain payable without penalty or that are being contested in good faith by appropriate proceedings;

     (c) carriers’, warehousemen’s, mechanics’, materialmen’s, repairmen’s and other like Liens imposed by law, arising in the ordinary course of business and securing obligations that are not overdue by more than 45 days or are being contested in good faith by appropriate proceedings;

     (d) pledges and deposits made by the Company in the ordinary course of business in compliance with workers’ compensation, unemployment insurance and other social security laws or regulations or other statutory obligations;

     (e) pledges, cash deposits or rights of set-off to secure the performance of bids, tenders, trade contracts, leases, statutory obligations, surety and appeal bonds, performance bonds, government contracts and other obligations of a like nature (other than for payment obligations of borrowed money), in each case in the ordinary course of business;

     (f) judgment Liens in respect of judgments that do not give rise to an Event of Default;

     (g) easements, zoning restrictions, rights-of-way and similar charges or encumbrances on real property imposed by law or arising in the ordinary course of business that do not secure any monetary obligations and do not materially detract from the value of the affected property or interfere with the Company’s ordinary conduct of business;

     (h) Liens that are incidental to the Company’s business in the ordinary course, are not for borrowing money and are not material, taken as a whole, to the Company’s business;

     (i) Liens created or granted pursuant to the Collateral Documents;

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     (j) other existing Liens as identified on Schedule A to this Indenture;

     (k) Liens existing on property at the time of its acquisition by the Company; provided that any such Lien shall not extend to or cover any property or assets other than such item of property or assets and any improvements on such item;

     (1) Liens to secure purchase money indebtedness not exceeding the cost of the property involved; provided that any such Lien shall not extend to or cover any property or assets other than such item of property or assets and any improvements on such item;

     (m) Liens created to extend, renew, replace, or refinance any of the Company’s Indebtedness that is secured by Permitted Liens; provided that any such Lien shall not extend to or cover any property or assets other than such item of property or assets and any improvements on such item extended, renewed, replaced or refinanced and which do not secure Indebtedness in excess of that extended, renewed, replaced or refinanced;

     (n) involuntary Liens, so long as the Company is working diligently to resolve the problem and during such time the Lien does not result in a Material Adverse Effect, as certified by the Company to the Trustee;

     (o) Liens incurred or deposits made in the ordinary course of business in connection with workers’ compensation, unemployment insurance and other types of social security;

     (p) Liens on any facilities, equipment or other property of the Company in favor of the United States of America or any State, or any department, agency, instrumentality or political subdivision thereof (including the Commonwealth of Puerto Rico and the United States Virgin Islands), in connection with the issuance of industrial revenue bonds or on any equipment or other property designed primarily for the purpose of air or water pollution control; provided that any such Lien on such facilities, equipment or other property shall not apply to any of the Company’s other assets;

     (q) Liens arising from Indebtedness incurred by the Company for the sole purpose of funding capital expenditures required in connection with compliance with applicable law;

     (r) Liens under the Bank Credit Facility as in effect on the Issue Date and other such Liens under the Bank Credit Facility that are not materially more restrictive (in terms of, without limitation, the amount secured by such Lien and the scope of such Lien) or burdensome to the holders of Notes than such Liens permitted by the Bank Credit Facility; and

     (s) Liens arising pursuant to any agreement that extends, refinances, renews or replaces agreements imposing Liens on the Company on the Issue Date, which encumbrances or restrictions are no less favorable in any material respect to the holders of Notes than those encumbrances or restrictions that are then in effect pursuant to the agreements that are being extended, refinanced, renewed or replaced.

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          “Permitted Subordinated Indebtedness” means Indebtedness of the Company that (a) does not require any payments other than pursuant to payments permitted by Section 4.14 of this Indenture, (b) has a market interest rate, (c) is subordinate and junior in right of payment to all amounts due or that become due on the Notes and (d) is created pursuant to an instrument enforceable by the holders of the Notes (or the Trustee on their behalf) that contains subordination provisions effecting, at minimum, the following: (1) that holders of Notes shall be entitled to receive payment in full in cash of all amounts on such Notes before any holder of Permitted Subordinated Indebtedness is entitled to receive any payment on account of the Indebtedness and other obligations under any agreement governing such Permitted Subordinated Indebtedness (other than as permitted by Section 4.14 of this Indenture), (2) that unless and until all amounts on the Notes have been paid in cash in full, such holder of Permitted Subordinated Indebtedness will not (i) ask, demand, sue for, take or receive from the Company, by set-off or in any other manner, or (ii) seek any other remedy allowed at law or in equity against the Company for breach of the Company’s obligations under any agreement governing such Permitted Subordinated Indebtedness, (3) that in the event of any insolvency or bankruptcy proceedings, and any receivership, liquidation, reorganization or other similar proceedings in connection therewith, relative to the Company or to its creditors, as such, or to its property, and in the event of any proceedings for voluntary liquidation, dissolution or other winding up of the Company, whether or not involving insolvency or bankruptcy, then the holders of the Notes shall be entitled to receive payment in full of all amounts constituting Notes before the holder of such Permitted Subordinated Indebtedness is entitled to receive, or make any demand for, any payment on account of the such Indebtedness, and to that end the holders of Notes shall be entitled to receive for application in payment thereof any payment or distribution of any kind or character, whether in cash or property or securities, and (4) that if any payment or distribution of any character, whether in cash, securities or other property, in respect of such Permitted Subordinated Indebtedness (other than as permitted by Section 4.14 of this Indenture) shall (despite such subordination provisions) be received by any such holder of Permitted Subordinated Indebtedness before all Notes shall have been paid in full in cash, such payment or distribution shall be held in trust for the benefit of, and shall be paid over or delivered to, the holders of Notes (or their representatives), and to holders of any other Indebtedness to which such Permitted Subordinated Indebtedness is similarly subordinated, ratably according to the respective aggregate amounts remaining unpaid thereon, to the extent necessary to pay all Notes, and all such other Indebtedness, in full.

          “Person” means any natural person, corporation, limited liability company, trust, joint venture, association, company, partnership, Governmental Authority or any other entity.

          “Place of Payment”, when used with respect to the Notes of any series means the office or agency maintained pursuant to Section 8.11 and such other place or places, if any, where the principal of, and premium, if any, and interest on the Notes of such series are payable as specified herein or in any Series Supplemental Indenture setting forth the terms of the Notes of such series.

          “Pledge Agreements” means each of the Amended and Restated Pledge Agreements dated as of May 1, 2003 between the Grantor named therein and the Collateral Agent.

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          “Predecessor Notes”, with respect to any particular Note, means any previous Note evidencing all or a portion of the same debt as that evidenced by such particular Note; for the purposes of this definition, any Note authenticated and delivered under Section 2.9 in lieu of a lost, destroyed or stolen Note shall be deemed to evidence the same debt as the lost, destroyed or stolen Note.

          “Projected Cash Flow Coverage Ratio” means, at any time of determination thereof, a projection of the ratio, on a cash basis, of (a) the Adjusted Cash Flow Available for Fixed Charges to (b) Fixed Charges, for each fiscal period of the Company for which such ratio is determined, from the date of determination for which such calculation is required to the date of maturity of the Notes of such series for which the ratio is determined, prepared by the Company in good faith based upon assumptions consistent in all material respects with the Company’s and its Subsidiaries’ historical operating results and the Company’s good faith projections of future revenues and expenses, Indebtedness and future distributions in light of the then existing or reasonably expected regulatory and market environment in the market in which the Company and its Subsidiaries operate. For purposes of determining the Projected Cash Flow Coverage Ratio for any period, variable rate payments on Indebtedness (including under any Derivative Agreement) during such period will be assumed to accrue at a rate equal to the higher of (i) the rate in effect on the date of determination of the Projected Cash Flow Coverage Ratio and (ii) the average applicable rate that was in effect under such Indebtedness during the 12 months preceding such date of determination or, if the Indebtedness was not outstanding or the Derivative Agreement was not effective during the 12 months preceding such date of determination, the rate that would have been in effect during such period as determined on a reasonable basis by the Company. Whenever this Indenture provides for the determination of a Projected Cash Flow Coverage Ratio for a specified period, the Projected Cash Flow Coverage Ratio will be set forth in an Officers’ Certificate filed with the Trustee, accompanied by pro forma financial statements for such period, stating that, based upon reasonable investigation and review, the Projected Cash Flow Coverage Ratio is based on the criteria set forth in the preceding sentence, as certified in an Officers’ Certificate of the Company to the Trustee.

          “Property” means any interest in any kind of property or asset, whether real, personal or mixed, or tangible or intangible.

          “Purchase Money Indebtedness” of any Person means any obligations of such Person or any of its subsidiaries to any seller or any other person incurred or assumed in connection with the purchase of real or personal property to be used in the business of such person or any of its subsidiaries within 180 days of such purchase.

          “Purchased Intercompany Debt” means subordinated notes issued by American Ref-Fuel Company of Hempstead, American Ref-Fuel Company of Essex County, American Ref-Fuel Company of Niagara, L.P. and American Ref-Fuel Company of Southeastern Connecticut, as set forth on Schedule B to this Indenture.

          “QIB” shall have the meaning given to such term in Section 2.8 hereof.

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          “Rating Agencies” means Moody’s and S&P or another nationally recognized statistical rating organization of similar standing if any of the foregoing corporations are no longer in the business of rating the securities of the Company.

          “Recourse Debt” means (i) the Company’s Indebtedness for which the Company is directly obligated, and (ii) the Company’s guarantees of the Indebtedness of any Person.

          “Redemption Date” has the meaning set forth in Section 5.3.

          “Redemption Price” means, with respect to any Note Outstanding on any Redemption Date, an amount equal to the principal amount of such Note Outstanding on such date, plus interest accrued and unpaid to but excluding such Redemption Date.

          “Refinancing Indebtedness” means any refinancing by the Company or any Restricted Subsidiary of Indebtedness incurred in accordance with Section 4.8 of this Indenture (other than pursuant to clauses (b), (d) and (f) of Section 4.8) reduced by the amount of any scheduled amortization payments or mandatory prepayments actually paid or permanent reductions thereon, in each case that does not (1) result in an increase in the aggregate principal amount of Indebtedness of such Person as of the date of such proposed refinancing (plus the amount of any premium required to be paid under the terms of the instrument governing such Indebtedness and plus the amount of reasonable expenses incurred by the Company in connection with such refinancing) or (2) create Indebtedness with (A) a Weighted Average Life to Maturity that is less than the Weighted Average Life to Maturity of the Indebtedness being refinanced or (B) a final maturity earlier than the final maturity of the Indebtedness being refinanced; provided that (x) if such Indebtedness being refinanced is Indebtedness solely of the Company, then such Refinancing Indebtedness shall be Indebtedness solely of the Company, (y) if such Indebtedness being refinanced is subordinate or junior to the Notes, then such Refinancing Indebtedness shall be subordinate to the Notes at least to the same extent and in the same manner as the Indebtedness being refinanced and (z) no Intercompany Loans may be refinanced under this definition of Refinancing Indebtedness.

          “Registered Depositary” means The Depository Trust Company, having a principal office at 55 Water Street, New York, New York 10041-0099, together with any Person succeeding thereto by merger, consolidation or acquisition of all or substantially all of its assets, including substantially all of its securities payment and transfer operations.

          “Regular Record Date”, for any Note of a series for the Scheduled Payment Date of any installment of principal thereof or payment of interest thereon, means the 15^th day (whether or not a Business Day) next preceding such Scheduled Payment Date, or any other date specified for such purpose in the form of Note of such series attached to the Series Supplemental Indenture relating to the Notes of such series.

          “Regulation S” means Regulation S promulgated under the Securities Act, as amended and in effect from time to time and any successor regulation.

          “Related Person” has the meaning set forth in Section 16.1.

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          “Responsible Officer”, when used with respect to the Trustee, means any officer in the Corporate Trust Office (or any successor group of the Trustee) including any vice president, assistant vice president, assistant treasurer or any other officer of the Trustee customarily performing functions similar to those performed by the persons who at the time shall be such officers, respectively, or to whom any corporate trust matter is referred because of his knowledge and familiarity with the particular subject.

          “Restricted Payments” means (a) distributions by the Company on, or in respect of, its Equity Interests (in cash, securities, property or obligations) and (b) other payments or distributions on account of, or the setting apart of money for a sinking or other analogous fund for, or the purchase, redemption, retirement or other acquisition of, (i) Subordinated Indebtedness or (ii) any Equity Interest in the Company, or any subsidiary of the Company that is not wholly owned by the Company, or of any warrants, options or other rights to acquire any such Equity Interest.

          “Restricted Subsidiary” means any Subsidiary of the Company that is not an Unrestricted Subsidiary.

          “Revenues” means, with respect to the Company, for any period, the sum of all revenues of the Company in respect of its operations under any contract or agreement or otherwise.

          “Rule 144A” means Rule 144A promulgated under the Securities Act, as amended and in effect from time to time.

          “S&P” means Standard & Poor’s Ratings Group or any successor thereto.

          “Scheduled Payment Date” means, with respect to any Note of a series or any installment of principal thereof or payment of interest thereon, the date specified in such Note (or in the Series Supplemental Indenture relating to such series) as the fixed date on which such Note or such installment of principal or payment of interest is due and payable.

          “SEC” means the Securities and Exchange Commission of the United States.

          “Securities Act” means the Securities Act of 1933, as amended and in effect from time to time.

          “Security Agreement” means the Amended and Restated Security Agreement, Pledge and Assignment, dated as of May 1, 2003 among the Company, as grantor, Citibank, N.A, as exiting collateral agent and the Collateral Agent.

          “Security Register” has the meaning set forth in Section 2.8.

          “Security Registrar” means any Person acting as Security Registrar pursuant to Sections 2.8 and 8.11.

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          “Senior Debt” means the Company’s Indebtedness under the Notes or any other Indebtedness (whether secured or unsecured) that ranks equal with the Notes.

          “Senior Notes Debt Service Reserve Account” means the account of such name established and maintained in accordance with Section 6.1.

          “Senior Notes Debt Service Reserve Requirement” means, as of any time an amount that shall equal the greater of (a) 50% of the next twelve months’ interest expense and scheduled principal repayment or (b) 100% of the next six months’ interest expense and scheduled principal repayment, on the Notes that have the benefit of the Senior Notes Debt Service Reserve Account.

          “Series Supplemental Indenture” means any indenture supplemental to this Indenture entered into by the Company and the Trustee which establishes, in accordance with this Indenture, the title, form and terms of the Notes of one or more series; and “Series Supplemental Indentures” means each and every Series Supplemental Indenture.

          “Shared Collateral Account” means the account of such name established and maintained in accordance with Section 6.5.

          “Shared Collateral Account Requirement” means an amount that shall initially on the Issue Date equal 50% of all amounts payable by the Company as interest expense, commitment fees and letter of credit fees, mandatory scheduled payments (whether designated as payments or prepayments) and principal and sinking fund payments in respect of Recourse Debt of the Company (other than payments on the Notes or under the Bank Credit Facility) during the next succeeding four fiscal quarters of the Company.

          “Significant Affiliate” means each Subsidiary or other Affiliate of the Company (i) in which the Company’s direct and indirect equity in the assets of which represents at least 10% of the consolidated assets of the Company and its subsidiaries or (ii) in which the Company’s direct and indirect equity in the EBITDA from which exceeds 10% of the EBITDA of the Company and its consolidated subsidiaries (measured in each case on a pro forma basis for the most recently completed fiscal year).

          “Special Record Date” for the payment of any defaulted principal or interest means a date fixed by the Trustee pursuant to Section 2.10.

          “Subordinated Indebtedness” means any of the Company’s Indebtedness that is subordinated in rights and remedies to Senior Debt.

          “Subsidiary” means, with respect to any Person, (a) any corporation, association or other business entity of which more than 50% of the total voting power entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by such Person or one or more of the other subsidiaries of that Person (or a combination thereof) and (b) any partnership (i) the sole general partner or the managing general partner of which is such Person or a

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subsidiary of such Person or (ii) the only general partners of which are such Person or one or more subsidiaries of such Person (or any combination thereof).

          “Tax” means, with respect any Person, any tax (whether income, gross receipts, documentary, sales, stamp, registration, issue, capital, property, excise or otherwise), duty, levy, impost, fee, charge or withholding directly or indirectly imposed, assessed, levied or collected by or for the account of any Governmental Authority.

          “Trust Indenture Act” or “TIA” means the Trust Indenture Act of 1939, as amended, as in force at the date as of which this Indenture was executed (or, with respect to any supplemental indenture, the date as of which such supplemental indenture was executed).

          “Trustee” means the person named as the “Trustee” in the first paragraph of this Indenture and its successors and assigns, and any corporation resulting from or surviving any consolidation or merger to which it or its successors and assigns may be a party, or any successor to all or substantially all of its corporate trust business, provided that any such successor or assign or surviving corporation shall be eligible for appointment as trustee pursuant to Section 8.7, until a successor Trustee shall have become the Trustee hereunder pursuant to the applicable provisions of this Indenture, and thereafter means such successor Trustee.

          “Uniform Commercial Code” or “UCC” means the Uniform Commercial Code as in effect from time to time in the State of New York or any other jurisdiction the laws of which control the creation or perfection of security interests under the Collateral Documents.

          “United States” means the United States of America.

          “Unrestricted Subsidiary” means (i) any Subsidiary of the Company (other than Subsidiaries of the Company on the Issue Date) that at the time of determination shall be designated an Unrestricted Subsidiary by the Company’s Board of Directors but only to the extent that such Subsidiary:

     (a) has no Indebtedness or other obligations for which the Company has any obligation to make payment or otherwise support;

     (b) is not party to any agreement, contract, arrangement or understanding with the Company or any Restricted Subsidiary unless the terms of any such agreement, contract, arrangement or understanding are no less favorable to the Company or such Restricted Subsidiary than those that might be obtained at the time from Persons who are not Affiliates of the Company;

     (c) is a Person with respect to which neither the Company nor any of the Restricted Subsidiaries has any direct or indirect obligation (a) to subscribe for additional Equity Interests or (b) to maintain or preserve such Person’s financial condition or to cause such Person to achieve any specified levels of operating results; and

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     (d) has not guaranteed or otherwise directly or indirectly provided credit support for any Indebtedness of the Company or any of the Company’s Restricted Subsidiaries;

provided that a Subsidiary shall not fail to constitute an Unrestricted Subsidiary solely because the Company or any Restricted Subsidiary has (i) agreed to maintain a minimum equity ownership of such Subsidiary or (ii) agreed to use “good industry practices” with regard to their control of such Subsidiaries’ activities.

          “Weighted Average Life to Maturity” means, when applied to any Indebtedness at any date, the number of years obtained by dividing (a) the then outstanding aggregate principal amount of such Indebtedness into (b) the sum of the total of the products obtained by multiplying (i) the amount of each then remaining installment, sinking fund, serial maturity or other required payment of principal, including payment at final maturity, in respect thereof, by (ii) the number of years (calculated to the nearest one-twelfth) which will elapse between such date and the making of such payment.

          SECTION 1.3 Compliance Certificates and Opinions. Except as otherwise expressly provided by this Indenture, upon any application or request by the Company to the Trustee that the Trustee take any action under any provision of this Indenture, the Company shall furnish to the Trustee an Officers’ Certificate stating that all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with and, if so requested by the Trustee, an Opinion of Counsel stating that in the opinion of such counsel all such conditions precedent, if any, have been complied with, except that in the case of any particular application or request as to which the furnishing of documents is specifically required by any provision of this Indenture relating to such particular application or request, no additional certificate or opinion need be furnished.

          Every certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture shall include:

     (a) a statement that each individual signing such certificate or opinion has read such covenant or condition;

     (b) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based;

     (c) a statement that, in the opinion of each such individual, such examination or investigation has been made as is necessary to enable such individual to express an informed opinion as to whether or not such covenant or condition has been complied with; and

     (d) a statement as to whether, in the opinion of each such individual, such condition or covenant has been complied with.

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     With the delivery of this Indenture, the Company is furnishing to the Trustee, and from time to time thereafter may furnish, an Officers’ Certificate identifying and certifying the incumbency and specimen signatures of the Authorized Representatives of the Company. Until the Trustee receives a subsequent Officers’ Certificate, the Trustee shall be entitled to conclusively rely on the last such Officers’ Certificate delivered to it for purposes of determining the Authorized Representatives of the Company.

          SECTION 1.4 Form of Documents Delivered to Trustee. In any case where several matters are required to be certified by, or covered by an opinion of, any specified Person, it is not necessary that all such matters be certified by, or covered by the opinion of, only one such Person, or that they be so certified by only one document, but one such Person may certify or give an opinion with respect to some matters and one or more other such Persons as to other matters, and any such Person may certify or give an opinion as to such matters in one or several documents.

          Any certificate of an officer of the Company may be based, insofar as it relates to legal matters, upon a certificate or opinion of, or representations by, counsel, unless such officer knows or has reason to believe that the certificate or opinion or representations with respect to the matters upon which such officer’s certificate is based are erroneous or otherwise inaccurate. Any such certificate or Opinion of Counsel may be based, insofar as it relates to factual matters, upon a certificate of, or representations by, an Authorized Representative of the Company stating that the information with respect to such factual matters is in the possession of the Company, unless such counsel knows that the certificate or representations with respect to such matters are erroneous.

          Any Opinion of Counsel stated to be based on the opinion of other counsel shall be accompanied by a copy of such other opinion.

          Where any Person is required to make, give or execute two or more applications, requests, consents, certificates, statements, opinions or other instruments under this Indenture, they may, but need not, be consolidated and form one instrument.

          SECTION 1.5 Notices, Etc. to Trustee. Any Act of Holders or other document required or permitted by this Indenture shall be deemed to have been made or given, as applicable, only if such notice is in writing and delivered personally, or by registered or certified first-class United States mail with postage prepaid and return receipt requested, or made, given or furnished in writing by confirmed telecopy or facsimile transmission, or by prepaid courier service to the appropriate party as set forth below:

Trustee:	Wachovia Bank, National Association
	21 South Street
	Morristown, NJ 07690
	Attention: Paul O’Brien
	Telecopier No.: 973-682-4531
	Telephone No.: 973-898-7168

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With Copies to:	McCarter & English
	300 Park Avenue
	New York, NY 10022
	Attention: Peter Twombly, Esq.
	Telecopier No.: 212-609-6921
	Telephone No.: 212-609-6800
Company:	American Ref-Fuel Company LLC
	155 Chestnut Ridge Road
	Montvale, NJ 07645
	Attention: Joanne Pagliuca
	Telecopier No.: 201-690-4836
With Copies to:	LeBoeuf, Lamb, Greene & MacRae, L.L.P.
	125 West 55th Street
	New York, NY 10019
	Attention: Brian Betancourt, Esq.
	Telecopier No.: 212-424-8500

Any party may change its address by giving notice of such change in the manner set forth herein. Any notice given to a party by mail or by courier shall be deemed delivered upon receipt thereof (unless the party refuses to accept delivery, in which case the party shall be deemed to have accepted delivery upon presentation). Any notice given to a party by telecopy or facsimile transmission shall be deemed effective on the date it is actually sent to the intended recipient by confirmed telecopy or facsimile transmission to the telecopier number specified above.

          SECTION 1.6 Notices to Holders; Waiver. Where this Indenture provides for notice to Holders of any event, such notice shall be sufficiently given (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, to each Holder, at its address as it appears in the Security Register, not later than the latest date, if any, and not earlier than the earliest date, if any, prescribed for the giving of such notice. Where this Indenture provides for notice, such notice may be waived in writing by the Person entitled to receive such notice, either before or after the event, and such waiver shall be the equivalent of such notice. Waivers of notice by Holders shall be filed with the Trustee, but such filing shall not be a condition precedent to the validity of any action taken in reliance upon such waiver. In any case where notice to Holders is given by mail, neither the failure to mail such notice, nor any defect in any notice so mailed, to any particular Holder shall affect the sufficiency of such notice with respect to other Holders, and any notice that is mailed in the manner herein provided shall be conclusively presumed to have been duly given.

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          SECTION 1.7 Conflict with Trust Indenture Act. If any provision hereof limits, qualifies or conflicts with another provision hereof which is required to be included in this Indenture by any of the provisions of the Trust Indenture Act, such required provision shall control. If any provision of this Indenture modifies or excludes any provision of the Trust Indenture Act that may be so modified or excluded, the latter provision shall be deemed, for purposes of this Indenture, to be so modified or excluded, as the case may be.

          SECTION 1.8 Effect of Headings and Table of Contents. The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof.

          SECTION 1.9 Successors and Assigns. All covenants, agreements, representations and warranties in this Indenture by the Trustee and the Company shall bind and, to the extent permitted hereby, shall inure to the benefit of and be enforceable by their respective successors and assigns, whether so expressed or not.

          SECTION 1.10 Severability Clause. In case any provision in this Indenture or in the Notes shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby.

          SECTION 1.11 Benefits of Indenture. Nothing in this Indenture or in the Notes, expressed or implied, shall give to any Person, other than the parties hereto and their successors hereunder and the Holders, any benefit or any legal or equitable right, remedy or claim under this Indenture.

          SECTION 1.12 Governing Law. THIS INDENTURE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED ENTIRELY WITHIN THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW THEREOF TO THE EXTENT THE APPLICATION OF SUCH PRINCIPLES WOULD CAUSE THE APPLICATION OF THE LAWS OF ANY OTHER JURISDICTION.

          SECTION 1.13 Legal Holidays. In any case where the Redemption Date or the Scheduled Payment Date of any Note or of any installment of principal thereof or payment of interest thereon, or any date on which any defaulted interest is proposed to be paid, shall not be a Business Day, then (notwithstanding any other provision of this Indenture or such Note) payment of interest and/or principal, and/or premium, if any, need not be made on such date, but may be made on the next succeeding Business Day with the same force and effect as if made on the Redemption Date or on the Scheduled Payment Date, or on the date on which the defaulted interest is proposed to be paid, and, except as provided in any Series Supplemental Indenture setting forth the terms of such Note, if such payment is timely made, no interest shall accrue for the period from and after such Redemption Date or Scheduled Payment Date, or date for the payment of defaulted interest, as the case may be, to the date of such payment.

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          SECTION 1.14 Execution in Counterparts. This instrument may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument.

ARTICLE 2

THE NOTES

          SECTION 2.1 Form of Note to Be Established by Series Supplemental Indenture. The Notes of each series shall be substantially in the form (not inconsistent with this Indenture, including Section 2.5 hereof) established in the Series Supplemental Indenture relating to the Notes of such series.

          SECTION 2.2 Form of Trustee’s Authentication. The Trustee’s certificate of authentication on all Notes shall be in substantially the following form:

          This Note is one of the Notes referred to in the within-mentioned Indenture.

as Trustee
By
	Authorized Signatory
Dated:

          SECTION 2.3 Amount; Issuable in Series. The aggregate principal amount of Notes that may be authenticated and delivered under this Indenture is unlimited, provided that this Section 2.3 shall not be deemed to in any way supersede the restrictions set forth in Section 4.8.

          The Notes may be issued in one or more series. There shall be established in one or more Series Supplemental Indentures, prior to the issuance of Notes of any series:

     (a) the title of the Notes of such series (which shall distinguish the Notes of such series from all other Notes) and the form or forms of Notes of such series;

     (b) any limit upon the aggregate principal amount of the Notes of such series that may be authenticated and delivered under this Indenture (except for Notes authenticated and delivered upon registration of transfer of, or in exchange for, or in lieu of, other Notes of such series pursuant to Section 2.7, 2.8, 2.9, 5.6 or 11.6 and except for Notes that, pursuant to the last paragraph of Section 2.4 hereof, are deemed never to have been authenticated and delivered hereunder);

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     (c) the date or dates on which the principal of the Notes of such series is payable, the amounts of principal payable on such date or dates and the Regular Record Date for the determination of Holders to whom principal is payable; and the date or dates on or as of which the Notes of such series shall be dated, if other than as provided in Section 2.13(a);

     (d) the rate or rates at which the Notes of such series shall bear interest, or the method by which such rate or rates shall be determined, the date or dates from which such interest shall accrue, the interest payment dates on which such interest shall be payable and the Regular Record Date for the determination of Holders to whom interest is payable; and the basis of computation of interest, if other than as provided in Section 2.13(b);

     (e) if other than as provided in Section 8.11, the place or places where (i) the principal of, premium, if any, and interest on Notes of such series shall be payable, (ii) Notes of such series may be surrendered for registration of transfer or exchange and (iii) notices and demands to or upon the Company in respect of the Notes of such series and this Indenture may be served;

     (f) the price or prices at which, the period or periods within which and the terms and conditions upon which Notes of such series may be redeemed, in whole or in part, at the option of the Company;

     (g) the obligation, if any, of the Company to redeem, purchase or repay Notes of such series pursuant to any sinking fund or analogous provision or at the option of a Holder thereof and the price or prices at which and the periods or periods within which and the terms and conditions upon which Notes of such series shall be redeemed, purchased or repaid, in whole or in part, pursuant to such obligations;

     (h) if other than in minimum denominations of $100,000 and any integral multiple of $1,000 in excess thereof, the denominations in which Notes of such series shall be issuable;

     (i) the restrictions or limitations, if any, on the transfer or exchange of the Notes of such series including, without limitation, with respect to Notes to be sold outside of the United States pursuant to Regulation S or any other exemption from registration under the Securities Act;

     (J) the obligation, if any, of the Company to file a registration statement with respect to the Notes of such series or to exchange the Notes of such series for Notes registered pursuant to the Securities Act;

     (k) any trustees, authenticating or paying agents, warrant agents, transfer agents or registrars with respect to the Notes of such series, if other than as set forth herein;

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     (1) any addition to or change in the Events of Default which applied to any such Notes of such series and any change in the right of the Trustee or the requisite Holders of such series to declare the principal amount thereof due and payable pursuant to Section 7.2 hereof, and any addition to or change in the covenants set forth in Article IV which applies to the Holders of such series;

     (m) any other terms of such series (which terms shall not be inconsistent with the provisions of this Indenture); and

     (n) if applicable, CUSIP Numbers with respect thereto.

          SECTION 2.4 Authentication and Delivery of Notes. Subject to Section 2.3, at any time and from time to time after the execution and delivery of this Indenture, the Company may deliver Notes of any series executed by the Company to the Trustee for authentication, together with a Company Order for the authentication and delivery of such Notes, and the Trustee shall thereupon authenticate and make available for delivery such Notes in accordance with such Company Order, without any further action by the Company. No Note shall be secured by or entitled to any benefit under this Indenture or be valid or obligatory for any purpose unless there appears on such Note a certificate of authentication, in the form provided for herein, executed by the Trustee by the manual signature of any Authorized Signatory, and such certificate upon any Notes shall be conclusive evidence, and the only evidence, that such Note has been duly authenticated and delivered thereunder. In authenticating such Notes and accepting the additional responsibilities under this Indenture in relation to such Notes, the Trustee shall be entitled to receive, and (subject to Section 8.1) shall be fully protected in relying upon:

     (a) an executed Series Supplemental Indenture with respect to the Notes of such series;

     (b) an Officers’ Certificate of the Company (i) certifying as to Board Resolutions of the Company by or pursuant to which the terms of the Notes of such series were established, (ii) certifying that all conditions precedent under this Indenture to the Trustee’s authentication and delivery of such Notes have been complied with and (iii) certifying that the terms of the Notes of such series are not inconsistent with the terms of this Indenture as then and theretofore supplemented;

     (c) an Opinion of Counsel to the effect that (i) the form or forms and the terms of such Notes have been established by a Series Supplemental Indenture as permitted by Sections 2.1 and 2.3 in conformity with the provisions of this Indenture and (ii) the Notes of such series, when authenticated and made available for delivery by the Trustee and issued by the Company in the manner and subject to any conditions specified in such Opinion of Counsel, will constitute legal, valid and binding obligations of the Company, enforceable against the Company in accordance with their terms, except as enforceability (A) may be limited by applicable bankruptcy, insolvency, reorganization, moratorium and other similar laws affecting the enforcement of creditors’ rights and remedies generally and (B) is subject to general principles of equity (regardless of whether enforceability is considered in a proceeding in equity or at law); and

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     (d) such other documents and evidence with respect to the Company as the Trustee may reasonably request.

          Prior to the authentication and delivery of a series of Notes, the Trustee shall also receive such other funds, accounts, documents, certificates, instruments or opinions as may be required by the related Series Supplemental Indenture.

          Notwithstanding the foregoing, if any Note shall have been authenticated and delivered hereunder but never issued or sold by the Company, and the Company shall deliver such Note to the Trustee for cancellation as provided in Section 2.12 together with a written statement (which need not comply with Section 1.2 and need not be accompanied by an Opinion of Counsel) stating that such Note has never been issued or sold by the Company, for all purposes of this Indenture such Note shall be deemed never to have been authenticated and delivered hereunder and shall never have been or be entitled to the benefits hereof.

          SECTION 2.5 Form. The Notes of each series shall be in registered form and may have such letters, numbers or other marks of identification and such legends or endorsements printed, lithographed, engraved, typewritten or photocopied thereon, as may be required to comply with the rules of any securities exchange upon which the Notes of any such series are to be listed (if any) or to conform to any usage in respect thereof, or as may, consistently herewith, be prescribed by the Board of Directors of the Company or by the Authorized Representative executing such Notes, such determination by said Authorized Representative to be evidenced by its signing the Notes.

          The Notes may be issued in the form of (a) definitive certificated Notes in physical form (“Certificated Notes”) or (b) one or more Global Notes. Certificated Notes shall be registered in the name or names of such Persons and for the principal amounts as the Company may request. Notes issued in the form of a Global Note shall be registered in the name of the Registered Depositary or its nominee and shall represent the beneficial interests of Persons purchasing the Notes. In the event any of the Notes are issued in a transaction under Rule 144A of the Securities Act, any such Person shall purchase such Notes in transactions complying with Rule 144A under the Securities Act. The Trustee, as custodian (“Custodian”), will act as custodian of each Global Note for the Registered Depositary or appoint a sub-custodian to act in such capacity. So long as the Registered Depositary or its nominee is the registered owner of the Global Note, it shall be considered the Holder of the Notes represented thereby for all purposes hereunder and under the Global Note. None of the Company, the Trustee or any Paying Agent shall have any responsibility or liability for any aspect of the records relating to or payments made by the Registered Depositary on account of beneficial interests in the Global Note. Interests in the Global Note shall be transferred on the Registered Depositary’s book-entry settlement system.

          SECTION 2.6 Execution of Notes. The Notes shall be executed on behalf of the Company by one or more of its Authorized Representatives. The signature of any such officer on the Notes may be manual or facsimile.

          Notes bearing the manual or facsimile signatures of any individual who was, at the time such signature was affixed, the proper officer of the Company shall bind the Company,

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notwithstanding that such individual has ceased to hold such office prior to the authentication and delivery of such Notes or did not hold such offices at the date of such Notes.

          SECTION 2.7 Temporary Notes. Pending the preparation of definitive Notes of any series pursuant to Section 2.8, the Company may execute, and upon Company Order the Trustee shall authenticate and make available for delivery, temporary Notes of such series that are printed, lithographed, typewritten, photocopied or otherwise produced, in any denomination, substantially of the tenor of the definitive Notes in lieu of which they are issued and with such appropriate insertions, omissions, substitutions and other variations as the Authorized Representative executing such Notes may determine, as evidenced by their execution of such Notes.

          If temporary Notes of any series are issued, the Company will cause definitive Notes of such series to be prepared without unreasonable delay. After the preparation of definitive Notes of such series, the temporary Notes of such series shall be exchangeable for definitive Notes of such series upon surrender of the temporary Notes of such series at the Place of Payment, without charge to the Holder. Upon surrender for cancellation of any one or more temporary Notes of any series, the Company shall execute, and the Trustee shall authenticate and make available for delivery, in exchange therefor, definitive Notes of such series of authorized denominations and of like tenor and aggregate principal amount. Until so exchanged, such temporary Notes of any series shall in all respects be entitled to the same benefits under this Indenture as definitive Notes of such series.

          SECTION 2.8 Registration; Restrictions on Transfer and Exchange. (a) The Company shall cause to be kept at the Corporate Trust Office of the Security Registrar a register which, subject to such reasonable regulations as the Company may prescribe, shall provide for the registration of Notes and for the registration of transfers and exchanges of Notes. This register and, if there shall be more than one Security Registrar, the combined registers maintained by all such Security Registrars, are herein sometimes referred to as the “Security Register”. The Trustee is hereby appointed the initial Security Registrar for the purpose of registering Notes and transfers and exchanges of Notes as herein provided. Upon any resignation or removal of the Security Registrar, the Company shall promptly appoint a successor, or in the absence of such appointment, assume the duties of such Security Registrar.

          If a Person other than the Trustee is appointed by the Company as Security Registrar, the Company will give the Trustee prompt written notice of the appointment of a Security Registrar and of the location, and any change in the location of the Security Register, and the Trustee shall have the right to inspect the Security Register at all reasonable times and to obtain copies thereof, and the Trustee shall have the right to rely upon such Security Register as to the names and addresses of the Holders of the Notes and the principal amounts and numbers of such Notes.

          (b) Unless otherwise provided in a Series Supplemental Indenture, any Global Note shall be exchanged for Certificated Notes, without coupons, and delivered to and registered in the name of Persons named by the Registered Depositary, rather than to the nominee for the Registered Depositary, if (i) the Company advises the Trustee in writing that the Registered Depositary is no longer willing or able to discharge properly its responsibilities as Registered

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Depositary with respect to the Notes, or that the Registered Depositary has ceased to be a clearing agency registered under the Exchange Act, and, in either case, and the Company is unable to appoint a qualified successor within 60 days thereafter (ii) the Company, at its option, elects to terminate the book-entry system through the Registered Depositary with respect to the Notes and cause issuance of Certificated Notes or (iii) after the occurrence and continuation of an Event of Default, beneficial owners holding interests representing an aggregate principal amount of Notes of more than 50% of the Notes represented by a Global Note advise the Trustee through the Registered Depositary in writing that the continuation of a book-entry system through the Registered Depositary with respect to such Notes is no longer in such owners’ best interests.

          Upon the occurrence of any of the events in clauses (i) through (iii) of the preceding paragraph, the Trustee shall, by forwarding any notice received from the Company to the Registered Depositary, be deemed to have notified all Persons who hold a beneficial interest in the Global Note through participants in the Registered Depositary or indirect participants through participants in the Registered Depositary of the availability of Certificated Notes. Upon surrender by the Registered Depositary of the Global Note and receipt of instructions for
re-registration, the Security Registrar will exchange such Global Note for an equal aggregate principal amount of Certificated Notes in the name or names of the beneficial owners (or any nominee) thereof and cause the same to be delivered thereto.

          Neither the Company nor the Trustee will be liable for any delay by the Registered Depositary or any participant or indirect participant in identifying the beneficial owners of the related Notes and each such person may conclusively rely on, and will be protected in relying on, instructions from the Registered Depositary for all purposes (including with respect to the registration and delivery, and the respective principal amounts, of the Notes to be issued).

          Any Note issued or transferred to an institutional accredited investor which is not a “qualified institutional buyer” (as defined in Rule 144A; a “QIB”) will be issued as a Certificated Note.

          After the expiration of the Distribution Compliance Period pursuant to Regulation S of the Securities Act applicable to such securities, at the option of the beneficial owner, beneficial interests in Global Notes of any series may be exchanged in whole or in part for Certificated Notes of the same series to be registered in the name of such beneficial owner, of authorized denominations and of like tenor, maturity, interest rate and aggregate principal amount, upon prior written notice to the Trustee by or on behalf of the Registered Depositary and surrender of the Notes to be exchanged at any office or agency maintained for such purpose pursuant to Section 8.11. Whenever any Notes are so surrendered for exchange, the Company shall execute, and the Trustee shall authenticate and make available for delivery, the Notes which the beneficial owner making the exchange is entitled to receive. The Company shall execute and deliver to the Trustee, on the Issue Date and from time to time thereafter, for safekeeping and subsequent authentication, a stock of definitive registered Certificated Notes of each series in such quantities as the Company, after consultation with the Trustee, determines to be sufficient to permit the issuance of Certificated Notes and the exchanges contemplated by this Section.

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          All Notes issued upon any registration of transfer or exchange of Notes shall be the valid obligations of the Company, evidencing the same debt, and entitled to the same security and benefits under this Indenture and, if any, the Collateral Documents, as the Notes surrendered upon such registration of transfer or exchange.

          Every Note presented or surrendered for registration of transfer or exchange shall be duly endorsed, or be accompanied by a written instrument of transfer in form satisfactory to the Company and the Security Registrar or any transfer agent, duly executed by the Holder thereof or such Holder’s attorney duly authorized in writing.

          No service charge shall be required of any Holders participating in any transfer or exchange of Notes in respect of such transfer or exchange, but the Security Registrar may require payment of a sum sufficient to cover any Tax that may be imposed in connection with any transfer or exchange of Notes, other than exchanges pursuant to Section 2.7, 5.6 or 11.6 not involving any transfer.

          The Security Registrar shall not be required (a) to issue, register the transfer of or exchange any Note of any series during a period beginning at the opening of business 15 days before the day of the mailing of a notice of redemption of Notes of such series selected for redemption under Section 5.2 and ending at the close of business on the day of such mailing or (b) to issue, register the transfer of or exchange any Note so selected for redemption in whole or in part, except the unredeemed portion of any Note redeemed in part.

          SECTION 2.9 Mutilated, Destroyed, Lost and Stolen Notes. If (a) any mutilated or defaced Note is surrendered to the Trustee, or the Company and the Security Registrar and the Trustee receive evidence to their satisfaction of the destruction, loss or theft of any Note, and (b) there is delivered to the Company, the Security Registrar and the Trustee evidence to their satisfaction of the ownership and authenticity thereof, and such security or indemnity as may be required by them to save each of them harmless, then, in the absence of notice to the Company, the Security Registrar or the Trustee that such Note has been acquired by a protected purchaser, the Company shall execute and upon the Company’s request the Trustee shall authenticate and make available for delivery, in exchange for or in lieu of any such mutilated, destroyed, lost or stolen Note, a new Note of the same series and of like tenor, interest rate and principal amount, bearing a number not then outstanding and registered in the same manner. If, after the delivery of such new Note, a bona fide purchaser of the original Note in lieu of which such new Note was issued presents for payment such original Note, the Company and the Trustee shall be entitled to recover such new Note from the Person to whom it was delivered or any Person taking therefrom, except a bona fide purchaser, and shall be entitled to recover upon the security or indemnity provided therefor to the extent of any loss, damage, cost or expenses incurred by the Company or the Trustee in connection therewith.

          Notwithstanding the foregoing, in case any such mutilated, destroyed, lost or stolen Note has become or is imminently due to become due and payable, the Company, upon satisfaction of the conditions set forth in clauses (a) and (b) of the preceding paragraph may, instead of issuing a new Note, pay such Note.

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          Upon the issuance of any new Note under this Section 2.9, the Company may require the payment of a sum sufficient to cover any Tax that may be imposed in relation thereto and any other expenses connected therewith.

          Every new Note issued pursuant to this Section 2.9 in lieu of any mutilated, destroyed, lost or stolen Note shall constitute an original additional contractual obligation of the Company, whether or not the mutilated, destroyed, lost or stolen Note shall be at any time enforceable by anyone, and shall be entitled to all the security and benefits of this Indenture and the other Collateral Documents equally and proportionately with any and all other Notes duly issued hereunder.

          The provisions of this Section 2.9 are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Notes.

          SECTION 2.10 Payment of Principal and Interest; Principal and Interest Rights Preserved. Principal or interest on any Note that is payable, and punctually paid or duly provided for, on any Scheduled Payment Date shall be paid to the Person in whose name that Note (or one or more Predecessor Notes) is registered at the close of business on the Regular Record Date for such principal or interest. Payment of principal of and interest on the Notes of any series shall be made at the Place of Payment, or by check or in another manner or manners if so provided in the Series Supplemental Indenture relating to such series of Notes, except for the final installment of principal payable with respect to a Note, which shall be payable as provided in Section 5.5 (in the case of Notes redeemed) or payable upon presentation and surrender of such Note at the Place of Payment.

          Any principal of or interest on any Note of any series that is payable, but is not punctually paid or duly provided for, on any Scheduled Payment Date of an installment of principal or payment of interest shall forthwith cease to be payable to the Holder on the relevant Regular Record Date and such defaulted principal or interest may be paid by the Company, at its election in each case, as provided in paragraph (a) or paragraph (b) below:

     (a) The Company may elect to make payment of all or any portion of such defaulted principal or interest to the Persons in whose names the Notes of such series (or their respective Predecessor Notes) in respect of which principal or interest is in default are registered at the close of business on a Special Record Date for the payment of such defaulted principal or interest, which shall be fixed in the following manner. The Company shall notify the Trustee and the Paying Agent in writing of the amount of defaulted principal or interest proposed to be paid on each Note of such series and the date of the proposed payment, and concurrently there shall be deposited with the Trustee an amount of money equal to the aggregate amount proposed to be paid in respect of such defaulted principal or interest or there shall be made arrangements acknowledged by the Trustee for such deposit prior to the date of the proposed payment, such money when deposited to be held in trust for the benefit of the Persons entitled to such defaulted principal or interest as provided in this paragraph. Thereupon, the Trustee shall fix a Special Record Date for the payment of such defaulted principal or interest (together with other amounts payable with respect to such defaulted principal or interest) which shall

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not be more than 15 nor less than 10 days prior to the date of the proposed payment and not less than 10 days after the receipt by the Trustee of the notice of the proposed payment. The Trustee shall promptly notify the Company and the Security Registrar of such Special Record Date and, in the name and at the expense of the Company, shall cause notice of the proposed payment of such defaulted principal or interest and the Special Record Date therefor to be mailed, first-class postage prepaid, to each Holder of a Note of such series at such Holder’s address as it appears in the Security Register, not less than 10 days prior to such Special Record Date. Notice of the proposed payment of such defaulted principal or interest and the Special Record Date therefor having been mailed as aforesaid, such defaulted principal or interest shall be paid to the Persons in whose names the Notes of such series (or their respective Predecessor Notes) are registered on such Special Record Date and shall no longer be payable pursuant to the following paragraph (b).

     (b) The Company may make, or cause to be made, payment of any defaulted principal or interest (together with other amounts payable with respect to such defaulted interest) in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Notes in respect of which principal or interest is in default may be listed, and, upon such notice as may be required by such exchange, if, after notice given by the Company to the Trustee of the proposed payment pursuant to this paragraph, such payment shall be deemed reasonable by the Trustee.

          Subject to the foregoing provisions of this Section 2.10, each Note delivered under this Indenture upon registration of transfer of or in exchange for or in lieu of any other Note shall carry the rights to interest accrued and unpaid, and to accrue, which were carried by such other Note.

          SECTION 2.11 Persons Deemed Owners. Subject to Section 2.10, prior to due presentment of a Note for registration of transfer, the Person in whose name any Note is registered shall be deemed to be the owner of such Note for the purpose of receiving payment of principal of, and premium, if any, and interest on, such Note and for all other purposes whatsoever, whether or not such Note be overdue, regardless of any notice to anyone to the contrary.

          SECTION 2.12 Cancellation. All Notes surrendered for payment, redemption, credit against any sinking fund payment or registration of transfer or exchange or deemed lost or stolen shall, if surrendered to any Person other than the Trustee, be delivered to the Trustee for cancellation and may not be reissued or sold. The Company may at any time deliver to the Trustee for cancellation any Notes previously authenticated and delivered hereunder which the Company may have acquired in any manner whatsoever. All Notes so delivered shall be promptly canceled by the Trustee. No Notes shall be authenticated in lieu of or in exchange for any Notes canceled as provided in this Section, except as expressly permitted by this Indenture. All canceled Notes held by the Trustee shall be disposed of by the Trustee in accordance with its standard policy.

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          SECTION 2.13 Dating of Notes; Computation of Interest. (a) Except as otherwise provided in the Series Supplemental Indenture relating to any series of Notes, each Note of such series shall be dated the date of its authentication.

          (b) Except as otherwise provided in the Series Supplemental Indenture relating to any series of Notes, interest on the Notes of such series shall be computed on the basis of a 360-day year consisting of twelve 30-day months.

          SECTION 2.14 Source of Payments Limited; Rights and Liabilities of the Company. All payments of principal and premium, if any, and interest to be made in respect of the Notes and this Indenture shall be made only from the payments from the revenues of the Company, the Collateral and the income and proceeds received by the Trustee therefrom. Each Holder, by its acceptance of a Note, agrees that (a) it will look solely to the revenues of the Company, the Collateral and the income and proceeds received by the Trustee therefrom to the extent available for distribution to such Holder as herein provided or provided in the Collateral Documents, (b) none of the Members, or any of their respective past, present or future shareholders, partners, officers or directors or other related Persons (other than the Company), or the Trustee shall be personally or otherwise liable to any Holder, nor shall any of the Members, or any of their respective past, present or future members, partners, officers or directors or other related Persons (other than the Company), be personally or otherwise liable to the Trustee, for any amounts payable under any Note or for any liability under this Indenture or any other Financing Document, except as provided therein, and (c) recourse shall be otherwise limited in accordance with Section 16.1.

          SECTION 2.15 Allocation of Principal and Interest. Except as otherwise provided in Section 5.6, each payment of principal of and premium, if any, and interest on each Note shall be applied, first, to the payment of accrued but unpaid interest on such Note (as well as any interest on overdue principal or, to the extent permitted by applicable Law, overdue interest) to the date of such payment, second, to the payment of the principal amount of and premium, if any, on such Note then due (including any overdue installment of principal) thereunder, and third, the balance, if any, to the payment of the principal amount of such Note remaining unpaid.

          SECTION 2.16 Parity of Notes. All Notes of a series issued and outstanding hereunder shall rank on a parity with each other Note of the same series and with all Notes of each other series. Except as provided in a Series Supplemental Indenture and the Collateral Documents, each Note of a series shall be secured equally and ratably by this Indenture and the other Collateral Documents with each other Note of the same series and with all Notes of each other series, without preference, priority or distinction of any one thereof over any other by reason of difference in time of issuance or otherwise and each Note of a series shall be entitled to the same benefits and security in this Indenture and the other Collateral Documents as each other Note of the same series and with all Notes of each other series.

          SECTION 2.17 CUSIP Numbers. The Company in issuing the Notes may use “CUSIP” numbers (if then generally in use), and, if so, the Trustee shall use “CUSIP” numbers in notices of redemption as a convenience to Holders; provided that any such notice may state that no representation is made as to the correctness of such numbers either as printed on the Notes or

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as contained in any notice of a redemption and that reliance may be placed only on the other identification numbers printed on the Notes, and any such redemption shall not be affected by any defect in or omission of such numbers. The Company will promptly notify the Trustee of any change in the “CUSIP” numbers.

ARTICLE 3

APPLICATION OF PROCEEDS
FROM SALE OF NOTES

          SECTION 3.1 Application of Proceeds from Sale of Notes. Promptly upon receipt by the Company of the proceeds from the sale of Notes, the Company shall apply such proceeds as required by the terms, if any, of the Series Supplemental Indenture pursuant to which they were issued.

ARTICLE 4

COVENANTS OF THE COMPANY

          The Company hereby covenants and agrees that so long as this Indenture is in effect and any Notes remain Outstanding, except as provided in a Series Supplemental Indenture with respect to Notes issued thereunder:

          SECTION 4.1 Payment of Principal, Premium and Interest. The Company shall duly and punctually pay or cause to be paid the principal of, premium, if any, and interest on each of the Notes at the time and place and in the manner provided in the Notes and this Indenture.

          SECTION 4.2 Financial Statements and Other Information. For so long as the Notes are Outstanding, the Company shall furnish to the Trustee:

     (a) within 90 days after the end of the Company’s fiscal year, the Company’s audited consolidated balance sheet and related statements of operations, shareholders’ or members’ equity and cash flows as of the end of and for such year, setting forth in each case in comparative form the figures for the previous fiscal year, all reported on by the Company’s independent public accountants of recognized national standing to the effect that such consolidated financial statements present fairly in all material respects the Company’s and its subsidiaries’ financial condition and results of operations on a consolidated basis in accordance with accounting principles generally accepted in the United States of America, consistently applied;

     (b) within 60 days after the end of each of the first three quarters of the Company’s fiscal year, the Company’s unaudited consolidated balance sheet and related statements of operations, shareholders’ or members’ equity and cash flows, setting forth in

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each case in comparative form the figures for (or, in the case of the balance sheet, as of the end of) the corresponding period or periods of the previous fiscal year, all certified by an authorized representative of the Company as presenting fairly in all material respects the Company’s and its subsidiaries’ financial condition and results of operations on a consolidated basis in accordance with accounting principles generally accepted in the United States of America, consistently applied, subject to normal year-end audit adjustments and the absence of footnotes;

     (c) concurrently with any delivery of financial statements under clause (a) or (b) of this Section 4.2, an officer’s certificate signed by the Company’s principal executive officer, principal financial officer or principal accounting officer (i) certifying as to whether, to the best knowledge of the signer thereof, a Default or Event of Default has occurred and, if a Default or Event of Default has occurred, specifying the details thereof and any action taken or proposed to be taken with respect thereto, and (ii) stating whether any change in generally accepted accounting principles or in the application thereof has occurred since the date of the most recent prior audited financial statements delivered pursuant to clause (a) of this Section 4.2 or delivered to Holders on or prior to the closing date of the issuance of the Notes, as applicable, and, if any such change has occurred, specifying the effect of such change on the financial statements accompanying such certificate;

     (d) promptly after the same become publicly available, copies, if any, of all periodic and other reports, proxy statements and other materials filed by the Company with the SEC, or any Governmental Authority succeeding to any or all of the functions of said commission, or with any national securities exchange, or distributed by the Company to Members generally, as the case may be;

     (e) promptly after receiving notice of the same, notice of any material litigation or material governmental or environmental proceedings against the Company; and

     (f) promptly following any request therefor, such other information regarding the Company’s operations, business affairs and financial condition, or compliance with the terms of this Indenture and the other Financing Documents, as the Trustee or Majority Holders of any series of Notes may reasonably request.

          Delivery of such reports, information and documents to the Trustee is for informational purposes only and the Trustee’s receipt of such shall not constitute constructive notice of any information contained therein or determinable from information contained therein, including the Company’s compliance with any of its covenants hereunder (as to which the Trustee is entitled to rely exclusively on Officers’ Certificates).

          SECTION 4.3 Existence; Conduct of Business, (a) So long as any Notes are Outstanding, the Company shall do or cause to be done all things necessary to preserve, renew and keep in full force and effect the Company’s existence as a limited liability company organized under the laws of the United States or a political subdivision thereof and all things reasonably necessary to preserve, renew and keep in full force and effect the rights, licenses,

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permits, privileges and franchises material to the conduct of the Company’s business as then conducted; provided that the foregoing will not prohibit any merger, consolidation, liquidation or dissolution permitted under Section 4.12(a).

          SECTION 4.4 Compliance with Laws and Contractual Obligations. The Company shall comply and shall cause each of its Subsidiaries to comply with all laws, rules, regulations and orders of any governmental authority (including Environmental Laws and ERISA matters) and all contractual obligations applicable to the Company or its property, except where the failure to do so, individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect.

          SECTION 4.5 Maintenance of Properties; Insurance The Company shall and shall cause each of its Subsidiaries to (a) keep and maintain all property material to the conduct of its business in good working order and condition, ordinary wear and tear excepted; provided, however, that nothing in this covenant will prevent the Company from disposing of any asset (subject to compliance with Section 4.10 and 4.12) or from discontinuing the operation or maintenance of any of such material properties if such discontinuance is, as determined by the Company, in good faith, desirable in the conduct of the Company’s business and could not reasonably be expected to have a Material Adverse Effect on the Company; and (b) maintain, with financially sound and reputable insurance companies, insurance with respect to the Operating Facilities in such amounts and against such risks as are customarily maintained by companies engaged in the same or similar businesses operating in the same or similar locations.

          SECTION 4.6 Payment of Taxes and Claims. The Company shall and shall cause each of its Subsidiaries to pay its obligations, including tax liabilities, before they become delinquent or in default unless they are then the subject of a Good Faith Contest or except where nonpayment could not reasonably be expected to have a Material Adverse Effect.

          SECTION 4.7 Books and Records; Inspection Rights. The Company shall and shall cause each of its Subsidiaries to keep proper books of record and account in which full, true and correct entries are made of all dealings and transactions in relation to the Company’s business and activities. The Company will permit the Trustee or its representative, upon reasonable prior notice, to visit and inspect the Company’s properties, to examine and make extracts from the Company’s books and records, and to discuss the Company’s affairs, finances and condition with the Company’s officers and independent accountants, all at such reasonable times during normal business hours and as often as reasonably requested.

          SECTION 4.8 Indebtedness. The Company shall not, and shall not permit its Restricted Subsidiaries to create, incur or assume any Indebtedness other than (without duplication) (a) the Notes issued on the Issue Date; (b) Indebtedness under the Bank Credit Facility; provided, that such Indebtedness, consisting on the Issue Date of revolving credit loans and letters of credit and other similar instruments (with letters of credit deemed to have a principal amount outstanding equal to the maximum potential liability of the Company and its Restricted Subsidiaries thereunder), shall not at any time exceed $75,000,000 in aggregate outstanding principal amount; (c) Indebtedness existing on the Issue Date (other than pursuant to clauses (a) and (b) of this Section); (d) Purchase Money Indebtedness not exceeding the cost of the property being financed with such Indebtedness and that does not extend to any property

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other than the property being financed; (e) Indebtedness incurred in the ordinary course of business not exceeding $5,000,000 in the aggregate; (f) Intercompany Loans; (g) Refinancing Indebtedness; (h) Indebtedness of the Company or its Restricted Subsidiaries under Derivative Agreements; (i) additional unsecured Indebtedness of the Company that constitutes Permitted Subordinated Indebtedness; (j) Indebtedness incurred in connection with any modification of any of the Operating Facilities required in connection with compliance with applicable laws; provided that, in the case of this clause (j) at the time such additional Indebtedness is incurred, the Projected Cash Flow Coverage Ratio for each fiscal year from the time of such modification until maturity of the Notes of the series for which such ratio is being calculated is equal to or greater than 1.1 to 1.0; (k) any other Indebtedness; provided, that, in the case of Indebtedness incurred pursuant to this clause (k), (1) the Projected Cash Flow Coverage Ratio of the Company for each fiscal year from the time of the incurrence of such Indebtedness until maturity of the Notes of the series for which such ratio is being calculated is equal to or greater than 2.25 to 1.00, as certified to the Trustee in a certificate of the Independent Engineer, (2) the additional Indebtedness to be incurred does not and is not expected to result in a Material Adverse Effect, as certified to the Trustee in an Officers’ Certificate and (3) the Company has delivered to the Trustee written confirmation from the Rating Agencies that the issuance of such Indebtedness will not result in a downgrade of the then current ratings on the Notes of any series entitled to the benefit of the Collateral; and (1) project Indebtedness that is Non-Recourse Debt and that relates to any new acquisition or development with respect to activities not prohibited by Section 4,12(b) hereof. Notwithstanding the foregoing sentence, the Company or any Restricted Subsidiary may create, incur or assume any Indebtedness if prior to the time any such Indebtedness is incurred, the Company has delivered to the Trustee written confirmation from the Rating Agencies that, taking into account the issuance of such Indebtedness, the ratings on the Notes would be at least as high as the ratings on the Initial Notes on the Issue Date.

          SECTION 4.9 Liens. The Company shall not create, incur, assume or permit to exist any Lien of any kind upon any of the Company’s property or assets whether now owned or hereafter acquired, other than Permitted Liens, unless the Company provides that the Notes will be secured equally and ratably with, or prior to, such Liens.

          SECTION 4.10 Prohibition on Sale of Assets. The Company shall not and shall cause each of its Subsidiaries not to sell, lease or otherwise dispose of any assets other than (a) sales, leases and dispositions in the ordinary course of business; (b) any sales or dispositions of surplus, obsolete or worn-out equipment; (c) sales of properties and assets as an entirety as described under Section 4.12; (d) sales of assets to comply with governmental regulations; (e) sales of Unrestricted Subsidiaries; (f) sales of assets the Net Cash Proceeds from which are used to repay Indebtedness as described under Section 5.2; (g) any other sale, lease or other disposition; provided, in each case, that after giving effect to such sale, lease or disposition, such sale, lease or disposition will not result in a Material Adverse Effect; and (h) sales, leases or other dispositions of assets in connection with which the Rating Agencies have affirmed the ratings on the Notes (following public announcement of such sale, lease or other disposition and following such sale, lease or other disposition) to be at least as high as the ratings on the Initial Notes on the Issue Date.

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          SECTION 4.11 Modifications of Certain Documents. Without the prior consent of the Trustee or the Majority Holders of any series of Notes affected thereby, the Company shall not agree or consent to any termination, modification, supplement, replacement or waiver of any Financing Document, unless such termination, modification, supplement, replacement or waiver could not, individually or collectively with all other such terminations, modifications, supplements, replacements and waivers, reasonably be expected to have a Material Adverse Effect.

          SECTION 4.12 Prohibition on Fundamental Changes. (a) Mergers, Consolidations, Disposal of Assets, Etc. The Company shall not merge into or consolidate with any other Person, or permit any other Person to merge into or consolidate with the Company, or sell, transfer, lease or otherwise dispose of (in one transaction or in a series of transactions) all or substantially all of the Company’s assets (in each case, whether now owned or hereafter acquired), or liquidate or dissolve, except that the Company may merge with, or transfer all or substantially all of the Company’s assets to, another Person if: (a) no Default or Event of Default has occurred or is continuing before or after the transaction; and (b) the Company is the surviving entity or the surviving entity is a person organized under the laws of the United States or a state thereof or is allowed to conduct business in the United States and assumes all Indenture and other relevant Financing Document obligations, and after giving effect to the transaction, no Default or Event of Default has occurred and no Material Adverse Effect has occurred.

     (b) Lines of Business. The Company and its Restricted Subsidiaries shall not engage to any material extent in any business other than the business of, or invest in a business not engaged principally in, the development, ownership or operation of electric power generating facilities, waste-to-energy facilities, cogeneration facilities, waste handling and disposal and businesses and operations related thereto (including power and waste marketing).

          SECTION 4.13 Maintenance of Tax Status. The Company shall not voluntarily take any action to cause the Company to be subject to taxation as a separate entity for federal income tax purposes.

          SECTION 4.14 Restricted Payments. The Company shall not make, or agree to pay or make, directly or indirectly, any Restricted Payment, unless, at the time of and after giving effect to such Restricted Payment (a) no Default or Event of Default shall have occurred and be continuing or would occur as a consequence of such Restricted Payment; (b) the Debt Service Reserve Account(s) are funded up to the amounts required by this Indenture; (c) the Cash Flow Coverage Ratio for the preceding rolling four fiscal quarters for which the Company has financial statements available is equal to or greater than 1.75 to 1.00; (d) the Projected Cash Flow Coverage Ratio for the succeeding rolling four fiscal quarters of the Company (beginning with the fiscal quarter in which such Restricted Payment is proposed) is equal to or greater than 1.75 to 1.00 and (e) the Company certifies to the Trustee that a Material Adverse Effect will not occur as a result of making such Restricted Payment.

          SECTION 4.15 Equity Contribution Agreement. The Company shall cause the Equity Contribution Agreement to remain in full force and effect; provided that the foregoing will not prohibit the Equity Contribution Agreement not remaining in full force and effect if the rating assigned to the Notes by S&P and Moody’s is not downgraded from the rating assigned to

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the Initial Notes on the Issue Date by either S&P or Moody’s as a result of (whether solely or in combination with other events) the Equity Contribution Agreement not being in full force and effect.

          SECTION 4.16 Rule 144A Information. At any time when the Company is not subject to Section 13 or 15(d) of the Exchange Act, upon the request of a Holder, the Company shall promptly furnish to such holder or to a prospective purchaser of a Note designated by such Holder, as the case may be, the information required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act in order to permit compliance by such Holder with Rule 144A in connection with the resale of such Note by such holder.

          SECTION 4.17 Additional Collateral. If after the Issue Date, the Company shall directly or indirectly create, form, acquire, incorporate or otherwise permit to exist any Subsidiaries that were not in existence on the Issue Date, the Company shall, and shall cause each of the Restricted Subsidiaries that, directly or indirectly, hold any Equity Interests in any such Subsidiary to, (a) execute and file, as applicable, any and all further Collateral Documents and other instruments required under applicable law, as shall be necessary to effectuate a first- priority Lien, subject only to Permitted Liens, upon all Equity Interests the Company or any of Restricted Subsidiaries hold in such Subsidiary, for the benefit of the holders of Notes, unless such Lien cannot be effectuated under applicable law and (b) deliver an opinion of counsel reasonably satisfactory to the Trustee that such Collateral Documents are valid, binding and enforceable obligations; provided, that this covenant shall not apply to (i) any Equity Interests in any Subsidiary with Excess Cash Flow of less than $2,000,000 in each of its fiscal years, (ii) that portion of such Equity Interests that are subject to a Lien at the time of any creation, acquisition, or incorporation of any Subsidiary and which Liens were not created in contemplation of a Person becoming a Subsidiary of the Company or (iii) any Equity Interests that secure Non-Recourse Debt.

ARTICLE 5

REDEMPTION OF NOTES

          SECTION 5.1 Optional Redemption; Redemption Price. The Company at its option, may, at any time, redeem the Notes of any series, in whole or in part at the Redemption Price plus any premium set forth in the related Series Supplemental Indenture. Redemption of Notes of any series shall be made in accordance with the terms of such Notes and, to the extent that this Article does not conflict with such terms, the succeeding sections of this Article.

          SECTION 5.2 Mandatory Redemption; Selection of Notes to Be Redeemed; Redemption Price.

          (a) Unless otherwise provided in a Series Supplemental Indenture, Outstanding Notes shall be redeemed in whole or in part in accordance with this Section 5.2(a), prior to maturity, at the Redemption Price if the Company or any of its Subsidiaries receive Net Cash Proceeds from (a) the sale of assets held directly or indirectly by the Company or its

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Restricted Subsidiaries, other than in the ordinary course of business or (b) any (i) condemnation or casualty loss or damage or other governmental taking of any of the Company’s assets or those of the Restricted Subsidiaries, or (ii) restructuring of power, steam sales, waste processing or disposal service, or other material contracts, in either case of (a) or (b) above in any transaction or series of related transactions in excess of $5,000,000 unless either: (1) all of the Net Cash Proceeds the Company received by virtue of (a) and (b) above are reinvested or segregated for reinvestment in the same or a related line of the Company’s business within 270 days of receipt of such Net Cash Proceeds or (2) the Company certifies to the Trustee in an Officers’ Certificate that such sale of assets and/or extraordinary events referred to in (a) and/or (b) above, as the case may be, could not reasonably be expected to have a Material Adverse Effect at the time of such sale or event and following the application of the proceeds thereof.

          Any such redemption will be on a pro rata basis between the Notes required to be redeemed and amounts required to be paid under the Bank Credit Facility due to such sale or event and, with respect to the Notes to be redeemed, shall be paid on a pro rata basis.

          (b) Upon any redemption of the Notes in accordance with this Section 5.2, the scheduled principal amortization of the Notes of a series shall be reduced by an amount equal to the product of (x) the scheduled principal amortization of the Notes of such series then in effect multiplied by (y) a fraction, the numerator of which is equal to the principal amount of the Outstanding Notes of such series to be redeemed and the denominator of which is the principal amount of the Outstanding Notes of such series immediately prior to such redemption.

          (c) Except as otherwise specified in the Series Supplemental Indenture relating to the Notes of a series, if less than all the Notes of such series are to be redeemed pursuant to Section 5.2(a), the Notes of such series shall be redeemed ratably by the Trustee from the Outstanding Notes of such series not previously called for redemption in whole.

          (d) For all purposes of this Indenture, unless the context otherwise requires, all provisions relating to the redemption of Notes shall relate, in the case of any Notes redeemed or to be redeemed only in part, to the portion of the principal amount of such Notes that has been or is to be redeemed.

          SECTION 5.3 Election or Requirement to Redeem: Notice to Trustee. The requirement or election of the Company to redeem any Notes shall be evidenced by a Company Order. If the Company has elected or is required to redeem any Notes, the Company shall, at least 30 days but not more than 60 days prior to the date upon which notice of redemption is required to be given to the Holders pursuant to Section 5.4 hereof (unless a shorter period shall be satisfactory to the Trustee), deliver to the Trustee a Company Order specifying the date on which such redemption shall occur (the “Redemption Date”) as determined in accordance with this Article 5, the series and principal amount of Notes to be redeemed and evidence that the moneys necessary for such redemption will be delivered to the Trustee not later than the Business Day prior to the Redemption Date. Upon receipt of any such Company Order with respect to a mandatory redemption, the Trustee shall establish a non-interest bearing special purpose trust account (the “Mandatory Redemption Account”) into which shall be deposited by the Company not later than one Business Day prior to the Redemption Date, immediately available amounts to be held by the Trustee and applied to the redemption of such Notes. As

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collateral security for the prompt and complete payment and performance when due of all its obligations with respect to the Notes and under this Indenture, the Company has pledged, assigned, hypothecated and transferred to the Trustee for the benefit of the Holders a Lien on and security interest in and to the Mandatory Redemption Account. The Mandatory Redemption Account shall at all times be in the exclusive possession of, and under the exclusive dominion and control of, the Trustee. In the case of any optional redemption of Notes prior to the expiration of any restriction on such redemption provided in the terms of such Notes, the Series Supplemental Indenture relating thereto or elsewhere in this Indenture, the Company shall furnish the Trustee with an Officers’ Certificate and Opinion of Counsel evidencing compliance with such, restriction.

          SECTION 5.4 Notice of Redemption. Except as otherwise specified in the Series Supplemental Indenture relating to the Notes of a series to be redeemed, notice of redemption shall be given to the Holders of Notes of such series to be redeemed at least 30 days (unless a shorter period shall be satisfactory to the Trustee) but not more than 60 days prior to the Redemption Date. All notices of redemption shall state:

     (a) the Redemption Price;

     (b) the Redemption Date;

     (c) if less than all of the Outstanding Notes of any series are to be redeemed, the portion of the principal amount of each Note of such series to be redeemed in part, and a statement that, on and after the Redemption Date, upon surrender of such Note, a new Note or Notes of such series in principal amount equal to the remaining unpaid principal amount thereof will be issued;

     (d) that on the Redemption Date, interest thereon will cease to accrue on and after said date;

     (e) the Place or Places of Payment where such Notes are to be surrendered for payment of the Redemption Price; and

     (f) that the deposit by the Company with the Trustee of an amount of immediately available funds to pay the Notes to be redeemed in full is a condition precedent to the redemption.

          Notice of redemption of Notes to be redeemed shall be given by the Company or, at the Company’s request, by the Trustee in the name and at the expense of the Company.

          SECTION 5.5 Notes Payable on Redemption Date. Notice of redemption having been given as aforesaid, and the conditions, if any, set forth in such notice having been satisfied, the Notes or portions thereof so to be redeemed shall, on the Redemption Date become due and payable, and from and after such date such Notes or portions thereof shall cease to bear interest. Upon surrender of any such Note for redemption in accordance with such notice, an amount in respect of such Note or portion thereof shall be paid as provided therein; provided, however, that any payment of interest on any Note the Scheduled Payment Date of which is on or prior to the

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Redemption Date shall be payable to the Holder of such Note or one or more Predecessor Notes, registered as such at the close of business on the related Regular Record Date according to the terms of such Note and subject to the provisions of Section 2.10.

          SECTION 5.6 Notes Redeemed in Part. Any Note that is to be redeemed only in part shall be surrendered at a Place of Payment therefor (with, if the Company or the Trustee so requires, due endorsement by, or a written instrument of transfer in form satisfactory to the Company and the Trustee duly executed by, the Holder thereof or its attorney duly authorized in writing), and the Company shall execute, and the Trustee shall authenticate and make available for delivery to the Holder of such Note without service charge, a new Note or Notes of the same series, of any authorized denomination requested by such Holder and of like tenor and in aggregate principal amount equal to and in exchange for the remaining unpaid principal amount of the Note so surrendered.

ARTICLE 6

DEBT SERVICE RESERVE ACCOUNTS

SECTION 6.1 Senior Notes Debt Service Reserve Account.

          (a) Establishment of the Senior Notes Debt Service Reserve Account. The Company hereby establishes with the Trustee at the Trustee’s Corporate Trust Office a special, segregated and irrevocable collateral account (the “Senior Notes Debt Service Reserve Account”). The Senior Notes Debt Service Reserve Account shall be maintained at all times until none of the Notes created by this Indenture, the First Supplemental Indenture and any other Series Supplemental Indenture (unless each Series Supplemental Indenture in respect of Notes that remain Outstanding provides that Notes of a series under such Series Supplemental Indentures shall not be entitled to share in the Collateral constituting the Senior Notes Debt Service Reserve Account) remain Outstanding. All amounts from time to time held in the Senior Notes Debt Service Reserve Account shall be held in the name of the Trustee for the benefit of the Holders entitled to such Collateral. Except as expressly provided in this Indenture, the Company shall not have any right to withdraw funds from the Senior Notes Debt Service Reserve Account. All amounts on deposit in the Senior Notes Debt Service Reserve Account shall constitute a part of the Collateral and shall not constitute payment of any Notes until applied for such payment as provided in this Indenture. The Company hereby irrevocably authorizes the Trustee to withdraw funds from the Debt Service Reserve Account in accordance with this Section 6.1.

          (b) Deposits in Senior Notes Debt Service Reserve Account.

     (i) On the Issue Date and within 30 days following the end of each fiscal quarter following the Issue Date, the Company shall deposit in the Senior Notes Debt Service Reserve Account (A) cash; (B) Cash Equivalents; (C) one or more Debt Service Reserve Letters of Credit or (D) any combination thereof in an amount equal to the

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amount necessary to satisfy the then applicable Senior Notes Debt Service Reserve Requirement.

     (ii) The amount on deposit in the Senior Notes Debt Service Reserve Account, shall, at any time be deemed to be equal to the aggregate amount of cash on deposit therein at such time, plus the aggregate fair market value of all Permitted Investments on deposit therein at such time, plus the amount available to be drawn or demanded under all Debt Service Reserve Letters of Credit held by the Trustee at such time.

     (c) Draws on the Senior Notes Debt Service Reserve Account.

     (i) If on any Scheduled Payment Date, the Paying Agent shall have received from or on behalf of the Company funds that are insufficient to pay in full the total amount of principal, premium, if any and interest then due on the Notes entitled to the benefit of the Lien on the Senior Notes Debt Service Reserve Account, then (upon notice thereof by the Paying Agent to the Trustee specifying the amount of such insufficiency) the Trustee shall transfer, using the cash and Permitted Investments on deposit in the Senior Notes Debt Service Reserve Account, to the accounts of the Holders of such Notes an amount equal to such insufficiency or, if less, the portion of such insufficiency that can be covered by withdrawals from the Senior Notes Debt Service Reserve Account.

     (ii) If on any date on or prior to the maturity date of the Notes of any series on which the Trustee is or would be required to make transfers from the Senior Notes Debt Service Reserve Account pursuant to the foregoing clause (i) the cash and Permitted Investments on deposit in or credited to the Senior Notes Debt Service Reserve Account are insufficient to make such transfers in full, the Trustee shall draw on or demand payment under any Debt Service Reserve Letter of Credit then in its possession and selected by the Trustee in an amount equal, when added to all amounts paid under each other Debt Service Reserve Letter of Credit on such date, to such insufficiency (or such lesser amount as may then be available to be drawn or demanded under all such Debt Service Reserve Letters of Credit) and shall transfer the amount so drawn or paid under such Debt Service Reserve Letters of Credit to the Holders of the Notes entitled to the benefit of the Lien on the Senior Notes Debt Service Reserve Account.

     (iii) Unless the Trustee shall have been notified that an Event of Default shall have occurred and is continuing or could result therefrom, if on the last Business Day of any fiscal quarter of the Company (x) the aggregate amount of cash on deposit in the Senior Notes Debt Service Reserve Account plus the aggregate amount then available to be drawn under all Debt Service Reserve Letters of Credit theretofore delivered to the Trustee exceeds (y) the Senior Notes Debt Service Reserve Requirement at such time, then not more than two Business Days following receipt of the written request of the Company delivered to the Trustee, the Trustee shall (1) transfer from the Senior Notes Debt Service Reserve Account to the Company cash in an amount equal to such excess or (2) reduce the amount available to be drawn on or demanded under such Debt Service Reserve Letters of Credit in an amount equal to such excess (or shall surrender Debt Service Reserve Letters of Credit in exchange for replacement Debt Service Reserve Letters of Credit so that the amount described in clause (x) of this subclause (iii) above is

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equal to the Senior Notes Debt Service Reserve Requirement, if duly tendered by the Company) or (3) any combination of the foregoing actions described in clauses (1) and (2) of this subclause (iii).

     (iv) Upon any release of any funds from the Senior Notes Debt Service Reserve Account (other than pursuant to subclauses (i), (ii) and (iii) of this clause (c)), the Company shall promptly pay such funds back into the Senior Notes Debt Service Reserve Account.

     (d) Debt Service Reserve Support Instruments.

     (i) Thirty days prior to the expiration of any Debt Service Reserve Letter of Credit furnished to the Trustee in accordance with the requirements of Section 6.1 (a), (b) and (c) (or if such day is not a Business Day, the immediately preceding Business Day), if such Debt Service Reserve Letter of Credit has not been renewed, extended or replaced by another letter of credit from an Acceptable Bank in the required amount or replaced by cash deposited in the Senior Notes Debt Service Reserve Account in the required amount, the Trustee shall draw on such Debt Service Reserve Letter of Credit in an amount equal to the maximum amount available to be drawn under the expiring Debt Service Reserve Letter of Credit (less any excess of the aggregate cash in the Senior Notes Debt Service Reserve Account over the Senior Notes Debt Service Reserve Requirement). The Trustee shall deposit the moneys received from the issuer of such Debt Service Reserve Letter of Credit in payment of such draw in the Senior Notes Debt Service Reserve Account.

     (ii) In the event that at any time the issuing financial institution in respect of any Debt Service Reserve Letter of Credit furnished to the Trustee in accordance with the requirements of Section 6.1 (a), (b) and (c) fails to qualify as an Acceptable Bank, the Company shall cause all Debt Service Reserve Letters of Credit issued by such issuing bank to be replaced with a Debt Service Reserve Letter of Credit from an Acceptable Bank cash or cash equivalents deposited in the Senior Notes Debt Service Reserve Account in an amount at least equal to the available amount of the Debt Service Reserve Letters of Credit being replaced. If any such Debt Service Reserve Letter of Credit is not so replaced within the earlier of (x) 30 days following notice by the Trustee to the Company of the failure of such issuing financial institution to qualify as an Acceptable Bank, (y) the date that such Debt Service Reserve Letter of Credit is required to be drawn by the Trustee pursuant to the preceding paragraphs and (z) 30 days following the end of any fiscal quarter of the Company, then in each case, the Trustee shall draw either the maximum amount under such ineligible Debt Service Reserve Letter of Credit or the amount that is necessary to make up the full Senior Notes Debt Service Reserve Requirement, whichever is less. The Trustee will then deposit those amounts in the Senior Notes Debt Service Reserve Account.

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          SECTION 6.2 Securities Account; Securities Intermediary.

          (a) Acceptance of Appointment of Securities Intermediary for the Senior Notes Debt Service Reserve Account. Wachovia Bank, National Association hereby agrees to act as securities intermediary as that term is defined in Section 8-l02(a)(14) of the New York UCC (in such capacity, the “Securities Intermediary”) under this Indenture in respect of the Senior Notes Debt Service Reserve Account.

          (b) Senior Notes Debt Service Reserve Account. The Securities Intermediary hereby agrees and confirms that (i) the Securities Intermediary has established the Senior Notes Debt Service Reserve Account, (ii) the Senior Notes Debt Service Reserve Account is and will be maintained as a “securities account” (within the meaning of Section 8-501 of the New York UCC), (iii) the Trustee is the “entitlement holder” (within the meaning of Section 8-102(a)(7) of the New York UCC) in respect of the “financial assets” (within the meaning of Section 8-102(a)(9) of the New York UCC) credited to the Senior Notes Debt Service Reserve Account, (iv) all property delivered to the Securities Intermediary for deposit to the Senior Notes Debt Service Reserve Account will be held by the Securities Intermediary and promptly credited to the Senior Notes Debt Service Reserve Account by an appropriate entry in its records in accordance with this Indenture, (v) all “financial assets” (within the meaning of Section 8-102(a)(9) of the New York UCC) in registered form or payable to or to the order and credited to the Senior Notes Debt Service Reserve Account shall be registered in the name of, payable to or to the order of, or indorsed to, the Securities Intermediary or in blank, or credited to another securities account maintained in the name of the Securities Intermediary, and in no case will any financial asset credited to the Senior Notes Debt Service Reserve Account be registered in the name of, payable to or to the order of, or indorsed to, the Company except to the extent the foregoing have been subsequently indorsed by the Company to the Securities Intermediary or in blank, and (vi) the Securities Intermediary shall not change the name or account number of the Senior Notes Debt Service Reserve Account without the prior written consent of the Trustee.

          (c) Financial Assets Election. The Securities Intermediary agrees that each item of property (including any cash, security, instrument or obligation, share, participation, interest or other property whatsoever) credited to the Senior Notes Debt Service Reserve Account shall be treated as a “financial asset” within the meaning of Section 8-102(a)(9) of the New York UCC.

          (d) Entitlement Orders. No Other Control Agreement, No Other Liens. The Company agrees that the Securities Intermediary may, and the Securities Intermediary agrees that it shall, comply with any orders if originated by the Trustee without further consent by the Company or any other Person. In the event that the Securities Intermediary receives conflicting entitlement orders from the Trustee and the Company or any other Person, the Securities Intermediary shall comply with the entitlement orders originated by the Trustee. The Securities Intermediary shall not execute and deliver, or otherwise become bound by, any agreement under which the Securities Intermediary agrees with any Person other than the Trustee to comply with entitlement orders originated by such Person relating to the Senior Notes Debt Service Reserve Account or the security entitlements with respect thereto that are the subject of this Indenture or any Series Supplemental Indenture. The Securities Intermediary shall not grant any Lien in any

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financial asset that is the subject of any security entitlement to the Senior Notes Debt Service Reserve Account that is the subject of this Indenture or any Series Supplemental Indenture.

          (e) Subordination of Lien; Waiver of Setoff. In the event that the Securities Intermediary has or subsequently obtains by indenture, operation of law or otherwise a Lien or security interest in the Senior Notes Debt Service Reserve Account or any security entitlement credited thereto, the Securities Intermediary agrees that such lien or security interest shall be subordinate to the lien and security interest of the Trustee. The financial assets standing to the credit of the Senior Notes Debt Service Reserve Account will not be subject to deduction, setoff, banker’s lien, or any other right in favor of any Person other than the Trustee (except that the face amount of any checks that have been credited to the Senior Notes Debt Service Reserve Account but are subsequently returned unpaid because of uncollected or insufficient funds may be deducted from the Senior Notes Debt Service Reserve Account).

          (f) No Other Agreements. None of the Securities Intermediary or the Trustee or the Company has entered into any agreement with respect to the Senior Notes Debt Service Reserve Account or any financial assets credited to the Senior Notes Debt Service Reserve Account other than this Indenture and the other Financing Documents. The Securities Intermediary has not entered into any agreement with the Company or any other Person purporting to limit or condition the obligation of the Securities Intermediary to comply with entitlement orders originated by the Trustee in accordance with Section 6.2(d). In the event of any conflict as to such obligation between this Indenture and any other Financing Document or any other agreement now existing or hereafter entered into, the terms of this Indenture shall prevail.

          (g) Notice of Adverse Claims. Except for the claims and interest of the Trustee and the Company to and in the Senior Notes Debt Service Reserve Account, the Securities Intermediary does not know of any claim to, or interest in, the Senior Notes Debt Service Reserve Account or in any financial asset credited thereto. If any Person asserts any lien, encumbrance or adverse claim (including any writ, garnishment, judgment, warrant of attachment, execution or similar process) against the Senior Notes Debt Service Reserve Account or in any financial asset credited thereto, the Securities Intermediary will promptly notify the Trustee and the Company.

          (h) Rights and Powers of the Trustee. The rights and powers granted by the Securities Intermediary to the Trustee have been granted in order to perfect its lien and security interests in the Senior Notes Debt Service Reserve Account, are powers coupled with an interest and will be affected by neither the bankruptcy of the Company nor the lapse of time.

          (i) Choice of Law. Each Series Supplemental Indenture and the Senior Notes Debt Service Reserve Account (including all security entitlements relating thereto) shall be governed by the law of the State of New York. Regardless of any provision in any Series Supplemental Indenture, for purposes of the UCC, the “securities intermediary’s jurisdiction” of the Securities Intermediary with respect to the Senior Notes Debt Service Reserve Account is the State of New York.

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          SECTION 6.3 Security Interest. As collateral security for the prompt and complete payment and performance when due of the Notes, the Company hereby pledges, assigns, hypothecates and transfers to the Trustee for the benefit of the Trustee and the Holders (except to the extent that a Series Supplemental Indenture provides that Holders of Notes of a series under such Series Supplemental Indenture shall not be entitled to share in the Collateral constituting the Senior Notes Debt Service Reserve Account), and hereby grants to the Trustee for the benefit of the Trustee and the Holders (except with respect to Holders under a Series Supplemental Indenture to the extent that a Series Supplemental Indenture provides that Holders of Notes of a series under such Series Supplemental Indenture shall not be entitled to share in the Collateral constituting the Senior Notes Debt Service Reserve Account), a lien on and security interest in and to (i) the Senior Notes Debt Service Reserve Account and (ii) all property credited thereto, including, but not limited to, cash, investments, securities and security entitlements at any time on deposit in or credited to the Senior Notes Debt Service Reserve Account, including all income or gain earned thereon and all security entitlements with respect to any of the foregoing. The Senior Notes Debt Service Reserve Account shall at all times be in the exclusive possession of and under the exclusive domain and control of the Trustee.

          SECTION 6.4 Investment of Funds. Monies held in the Senior Notes Debt Service Reserve Account created pursuant to this Indenture shall be invested and reinvested in Permitted Investments at the written direction of an Authorized Representative of the Company to the Trustee; provided, however, that the Trustee shall not cause investment of such monies at any time when the maturity of any of the Notes has been accelerated and provided, further, that at any time after the occurrence and during the continuance of an Event of Default, the Trustee may, but is not obligated to, (and, if instructed in writing by the Majority Holders of all Notes of all series as to which the Event of Default applies, shall) in its (or their) discretion at any time and from time to time elect to liquidate any such Permitted Investments (in an amount necessary to cure such Event of Default) and apply or cause to be applied the proceeds thereof to the payment of the principal of, premium, if any, and interest on the Notes. Such investments shall mature in such amounts and have maturity dates or be subject to redemption at the option of the holder thereof on or prior to maturity as needed for the purposes of such funds. Any profit realized from investments of the Senior Notes Debt Service Reserve Account shall be deposited in the Senior Notes Debt Service Reserve Account and any loss shall be charged to the Senior Notes Debt Service Reserve Account. In no event shall the Trustee or the Securities Intermediary be liable for the selection of Permitted Investments or for investment losses incurred thereon. Neither the Trustee nor the Securities Intermediary shall have liability in respect of losses incurred as a result of the liquidation of any Permitted Investment prior to its stated maturity or the failure of the Company to provide timely written investment direction, except to the extent such losses were due to gross negligence or bad faith on the part of the Trustee or the Securities Intermediary. Neither the Trustee nor the Securities Intermediary shall have any obligation to invest or reinvest any amounts held hereunder in the absence of a written investment direction of an Authorized Representative of the Company.

          SECTION 6.5 Shared Collateral Account.

          (a) Establishment of the Shared Collateral Account in the Security Agreement. On or before the Issue Date, the Company shall have established, in addition to the

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Senior Notes Debt Service Reserve Account, a second special and segregated collateral account pursuant to the terms of the Security Agreement (the “Shared Collateral Account”). The Shared Collateral Account shall be maintained at all times until none of the Notes created by this Indenture, the First Supplemental Indenture and any other Series Supplemental Indenture (unless each Series Supplemental Indenture in respect of Notes that remain Outstanding provides that Notes of a series under such Series Supplemental Indenture shall not be entitled to share in the Collateral constituting the Shared Collateral Account) remain Outstanding, unless the Company elects to terminate such account pursuant to Section 6.5(d) below. All amounts from time to time held in the Shared Collateral Account shall be held in the name of the Collateral Agent for the benefit of the Holders entitled to such Collateral and such other Persons as provided in the Collateral Documents. Except as expressly provided in this Indenture and in the Collateral Documents, the Company shall not have any right to withdraw funds from the Shared Collateral Account. All amounts on deposit in the Shared Collateral Account shall constitute a part of the Collateral and shall not constitute payment of any Notes until applied for such payment as provided in this Indenture and the Collateral Documents. Subject to Section 6.5(d) hereof, the Company hereby irrevocably authorizes the Trustee to withdraw funds from the Shared Collateral Account in accordance with this Indenture and the Collateral Documents.

          (b) Deposits in Shared Collateral Account. On the Issue Date the Company shall deposit in the Shared Collateral Account an amount equal to the amount necessary to satisfy the Shared Collateral Account Requirement. Thereafter, subject to section 6.5(d) below, the Company shall fund the Shared Collateral Account at such times, in such amounts and in the manner set forth in the Security Agreement and the other Collateral Documents.

          (c) Draws on the Shared Collateral Account. The Collateral Agent is hereby authorized to transfer amounts on deposit in the Shared Collateral Account in accordance with the provisions of the Security Agreement and the other Collateral Documents.

          (d) Termination of Shared Collateral Account. In the event that there are no commitments outstanding under the Bank Credit Facility the Company will no longer be required to maintain the Shared Collateral Account and, if the Company elects not to maintain such account by delivering an Officers’ Certificate to the Trustee stating that there are no commitments outstanding under the Bank Credit Facility and that the Company has elected not to maintain the Shared Collateral Account, the Shared Collateral Account shall be immediately released to the Company (including all amounts therein) and shall no longer form part of the Collateral or be subject to the Lien of the Notes secured thereby; provided, that the release of such Lien and release of the Shared Collateral Account shall not become effective if any commitments remain outstanding under the Bank Credit Facility prior to the payment in full of all the Notes that have the benefit of the Shared Collateral Account.

ARTICLE 7

EVENTS OF DEFAULT AND REMEDIES

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     SECTION 7.1 Events of Default. Except as otherwise provided in a Series Supplemental Indenture with respect to a series of Notes issued thereunder, the term “Event of Default” shall mean any of the following events (whatever the reason for such event and whether it shall be voluntary or involuntary or come about or be affected by operation of law, or be pursuant to or in compliance with any applicable Law), and any such event shall continue to be an Event of Default if and for so long as it shall not have been remedied:

     (1) default in the payment of principal of or premium, if any, on any Notes, when the same becomes due and payable at maturity, upon acceleration, redemption or otherwise;

     (2) default in the payment of interest on any Notes, as and when the same becomes due and payable, and such default continues for a period of 30 days or more;

     (3) default in the performance or observance in any material respect of any other term, covenant, or obligation of the Company under this Indenture or any other Financing Document, not otherwise expressly defined as an Event of Default, and the continuance of such default for more than 60 days (which period may be extended for an additional 30 days so long as the Company is continuing during such period diligently to pursue a cure for such default) after the earliest to occur of (a) actual knowledge of an executive officer of the Company of such default, (b) the time at which an executive officer of the Company should reasonably have had knowledge of such default or (c) notice from the Trustee or the holders of not less than 25% of the Notes or any series of such default;

     (4) default or defaults under one or more agreements, instruments, mortgages, notes, debentures or other evidences of Indebtedness under which the Company or any of its Significant Affiliates then have outstanding Indebtedness in excess of $5,000,000, individually or in the aggregate, and such default or defaults have resulted (a) from a failure to pay such amounts at maturity or (b) in the acceleration of the maturity of such Indebtedness and such acceleration has not been annulled or rescinded;

     (5) an involuntary proceeding is commenced or an involuntary petition is filed seeking (a) liquidation, reorganization or other relief in respect of the Company or its Significant Affiliates or the Company’s or its Significant Affiliates’ debts, or of a substantial part of the Company’s or its Significant Affiliates’ assets, under any federal, state or foreign bankruptcy, insolvency, receivership or similar law now or hereafter in effect or (b) the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for the Company or any of its Significant Affiliates or for a substantial part of the Company’s or its Significant Affiliates’ assets, and, in any such case, such proceeding or petition continues undismissed for a period of 90 or more days or an order or decree approving or ordering any of the foregoing is entered;

     (6) the Company or any Significant Affiliate (a) voluntarily commences any proceeding or file any petition seeking liquidation, reorganization or other relief under any federal, state or foreign bankruptcy, insolvency, receivership or similar law now or hereafter in effect, (b) consents to the institution of, or fails to contest in a timely and

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appropriate manner, any proceeding or petition described in clause (5) above, (c) applies for or consents to the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for itself or for a substantial part of the Company’s or its Significant Affiliates’ assets, (d) files an answer admitting the material allegations of a petition filed against the Company or any Significant Affiliate in any such proceeding, (e) makes a general assignment for the benefit of creditors or (f) takes any action for the purpose of effecting any of the foregoing;

     (7) the Company shall become unable, admits in writing its inability or fails generally to pay its debts as they become due;

     (8) one or more judgments, decrees or orders for the payment of money in an aggregate amount in excess of $5,000,000 is rendered against the Company or any of its Significant Affiliates and the same remains undischarged or unpaid for a period of 60 consecutive days during which execution is not effectively stayed, unless the Company or a Significant Affiliate of the Company is contesting such judgments, decrees or orders in good faith by appropriate proceedings;

     (9) the Company is merged, consolidated, sold, terminated, dissolved or liquidated (as a matter of law or otherwise), except in a transaction permitted by Section 4.12;

     (10) the Liens created by the Collateral Documents do not at any time constitute valid and perfected Liens on the collateral intended to be covered thereby (to the extent perfection by filing, registration, recordation or possession is possible and is required in this Indenture or in the Collateral Documents) in favor of the Trustee, free and clear of all Liens other than Permitted Liens, or, except for expiration in accordance with its terms, any of the Collateral Documents for whatever reason are terminated or cease to be in full force and effect, or the enforceability thereof is contested by the Company or any of the Company’s members;

     (11) either (a) any Financing Document is declared in a final non-appealable judgment to be unenforceable against the Company or the Company shall have expressly repudiated its obligations thereunder and such default has continued unremedied for a period of five days or more; or (b) the Company shall be in breach of Section 4.15;

     (12) any representation, warranty, certification or statement made by the Company in any Financing Document or in any certificate, financial statement or other document delivered to the Trustee pursuant to any Financing Document proves to have been incorrect in any material respect when made (or deemed made) and such misrepresentation continues to remain incorrect for 60 days after the earlier of (a) the Company’s actual knowledge of such incorrectness and (b) the giving of written notice of such incorrectness to the Company by the Trustee or any holder of Notes;

     (13) any enforcement action is taken against the Collateral by any Person pursuant to the Collateral Agency and Intercreditor Agreement.

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          SECTION 7.2 Acceleration of Maturity; Rescission and Annulment. If an Event of Default described in paragraph (1) or (2) of Section 7.1 occurs and is continuing with respect to Notes of any series, then and in each and every such case, unless the principal of all the Notes of such series shall have already become due and payable, either the Trustee or the Holders of not less than 33¹/³% in aggregate principal amount of the Notes of such series then Outstanding hereunder, or, in the event of any Event of Default described in paragraph (3), (4), (8), (9), (10), (11), (12) or (13) of Section 7.1, the Majority Holders of Notes of such series then outstanding hereunder, by notice in a writing to the Company (and to the Trustee if given by Holders), may declare the principal amount of all the Notes of such series then Outstanding and all accrued interest thereon to be due and payable immediately, and upon any such declaration the same shall become and shall be immediately due and payable, notwithstanding anything to the contrary contained in this Indenture or in the Notes, and the Trustee may proceed to enforce all remedies available to the Trustee under this Indenture, the Notes of such series and the Collateral Documents (subject to the Collateral Agency and Intercreditor Agreement) and the other documents to which the Trustee is a party or as are available under applicable law. If an Event of Default described in paragraph (5), (6) or (7) of Section 7.1 occurs and is continuing, then and in each and every such case, the principal amount of the Notes then Outstanding and all accrued interest thereon shall, without any notice to the Company or any other act on the part of the Trustee or any Holder of the Notes, become and be immediately due and payable, notwithstanding anything to the contrary contained in this Indenture or in the Notes and the Trustee may proceed to enforce all remedies available to the Trustee under this Indenture, the Notes of such series and the Collateral Documents (subject to the Collateral Agency and Intercreditor Agreement) and the other documents to which the Trustee is a party or as are available under applicable law.

          At any time after such declaration of acceleration has been made with respect to the Notes of any series and before a judgment or decree for payment of the money due has been obtained by the Trustee as hereinafter in this Article provided, the Majority Holders of the Notes of such series, by written notice to the Company and the Trustee, may rescind and annul such declaration and its consequences if:

          (i) there shall have been paid to or deposited with the Trustee a sum sufficient to pay

     (A) all overdue interest on the Notes of such series, plus

     (B) the unpaid principal of and premium on any outstanding Notes of such series that have become due other than by such declaration of acceleration, plus interest thereon at the respective rates provided in the Notes of such series for late payments of principal or premium, plus

     (C) to the extent that payment of such interest is lawful, interest upon overdue interest at the respective rates provided in the Notes for late payments of interest, plus

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     (D) all sums paid or advanced by the Trustee hereunder and the reasonable compensation, expenses, disbursements, and advances of the Trustee, its agents and counsel, and

     (ii) all Defaults and Events of Default, other than the nonpayment of the principal of the Notes that has become due solely by such acceleration, have been cured or waived as provided in Section 7.12.

     No such rescission shall affect any subsequent default or impair any right consequent thereon.

     SECTION 7.3 Trustee May File Proofs of Claim: Appointment of Trustee as Attorney-in-Fact in Judicial Proceedings. In case of pendency in any receivership, insolvency, bankruptcy, liquidation, readjustment, reorganization or any other judicial proceedings relating to the Company or any obligor on the Notes or the property of the Company or of such other obligor or their creditors, the Trustee (irrespective of whether the principal of the Notes shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether the Trustee shall have made any demand on the Company for payment of overdue principal or interest) shall be entitled and empowered by intervention in such proceedings or otherwise:

     (i) to file and prove a claim for the whole amount of principal (and premium, if any) and interest owed and unpaid in respect of the Notes and to file such other papers or documents as may be necessary and advisable in order to have the claims of the Trustee (including any claim for the reasonable compensation expenses, disbursements and advances of the Trustee, its agents and counsel and all other amounts due the Trustee under Section 7.5) and of the Holders allowed in such judicial proceeding, and

     (ii) to collect and receive any moneys or other property payable or deliverable on any such claims and to distribute same;

and any receiver, assignee, trustee, liquidator or sequestrator in any such judicial proceeding is hereby authorized by each Holder to make such payment to the Trustee and in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay to the Trustee any amount due to it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 7.5.

          Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Notes or the rights of any Holder thereof, or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding.

          SECTION 7.4 Trustee May Enforce Claims Without Possession of Notes. All rights of action and claims under this Indenture or the Notes of any series may be prosecuted and enforced by the Trustee without the possession of any of the Notes of such series or the production thereof in any proceeding relating thereto, and any such proceeding instituted by the

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Trustee shall be brought in its own name as trustee of an express trust, and any recovery of judgment shall, after provision for the payment of the reasonable compensation, expenses, disbursements and advances of the Trustee, its agent and counsel, be for the ratable benefit of the Holders of the Notes of the series in respect of which such judgment has been recovered.

          SECTION 7.5 Application of Money Collected. Any money collected by the Trustee with respect to a series of Notes pursuant to this Article shall be applied in the following order, at the date or dates fixed by the Trustee and, in case of the distribution of such money on account of principal (or premium, if any) or interest, upon presentation of the Notes of such series and the notation thereon of the payment if only partially paid and upon surrender thereof if fully paid:

          FIRST: To the payment of all amounts due the Trustee under Section 8.5.

          SECOND: To the payment of the amounts then due and unpaid upon the Notes of that series for principal (and premium, if any) and interest, in respect of which or for the benefit of which such money has been collected, ratably among Notes within each series and among the series, without preference or priority of any kind, according to the amounts due and payable on such Notes for principal (and premium, if any) and interest, respectively.

          THIRD: To the Company or its order, any remainder.

          SECTION 7.6 Limitation on Suits. Holders of the Notes of any series may not enforce their rights under the Notes of such series or this Indenture except as provided in this Indenture. Subject to the provisions of this Indenture relating to the duties of the Trustee, the Trustee is under no obligation to exercise any of its rights or powers under this Indenture, and may refuse to perform any duty or exercise any such rights or powers unless it shall have been offered reasonable indemnity. No holder of any Note of any series has any right to institute any proceeding with respect to this Indenture or the Notes or for the appointment of a receiver or Trustee, or for any other remedy under this Indenture, unless:

     (a) such Holder has previously given written notice to the Trustee of a continuing Event of Default with respect to Notes of such series;

     (b) the Holders of not less than 25% in aggregate principal amount of then Outstanding Notes of such series shall have made written request to the Trustee to institute proceedings in respect of such Event of Default in its own name as Trustee hereunder;

     (c) such Holder or Holders have offered to the Trustee reasonable indemnity satisfactory to it against the costs, expenses and liabilities to be incurred in compliance with such request;

     (d) the Trustee for 60 days after its receipt of such notice, request and offer of indemnity has failed to institute any such proceeding; and

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     (e) no direction inconsistent with such written request has been given to the Trustee during such 60-day period by the Majority Holders of such series;

it being understood and intended that no one or more Holders of Notes of such series shall have any right in any manner whatever by virtue of, or by availing of, any provision of this Indenture to affect, disturb or prejudice the rights of any other Holders of Notes of such series, or to obtain or to seek to obtain priority or preference over any other such Holders or to enforce any right under this Indenture, except in the manner herein provided and for the equal and proportionate benefit of all the Holders of all Notes of such series.

          SECTION 7.7 Unconditional Right of Holders to Receive Principal, Premium and Interest. Notwithstanding any other provisions in this Indenture, the Holder of any Note shall have the right, which is absolute and unconditional, to receive payment of the principal of, premium, if any, and interest on such Note on the respective maturities expressed in such Note (or, in the case of redemption or other required prepayment, on the Redemption Date or prepayment date, as the case may be) and to institute suit for the enforcement of any such payment, and such right shall not be impaired without the consent of such Holder.

          SECTION 7.8 Restoration of Rights and Remedies. If the Trustee or any Holder has instituted any proceeding to enforce any right or remedy under this Indenture and such proceeding has been discontinued or abandoned for any reason, then and in every such case the Company, the Trustee and the Holders shall, subject to any determination in such proceeding, be restored severally and respectively to their former positions hereunder, and thereafter all rights and remedies of the Trustee and the Holders shall continue as though no such proceeding had been instituted.

          SECTION 7.9 Rights and Remedies Cumulative. Except as otherwise provided in the last paragraph of Section 2.9, no right or remedy herein conferred upon or reserved to the Trustee or to the Holders is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy.

          SECTION 7.10 Delay or Omission Not Waiver. No delay or omission of the Trustee or of any Holder of any Note to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default or an acquiescence therein. Every right and remedy given by this Article or by law to the Trustee or to the Holders may be exercised from time to time, and as often as may be deemed expedient, by the Trustee or by the Holders, as the case may be. No waiver of any Event of Default, whether by the Trustee or by the Holders, shall extend to or shall affect any subsequent Event of Default or shall impair any remedy or right consequent thereon.

          SECTION 7.11 Control by Holders. The Majority Holders of the Notes of any series then Outstanding shall have the right to require the Trustee to proceed to enforce this Indenture and, to the extent such series of Notes are secured by the Collateral, to take any and all action under the Collateral Documents and the sale of the Collateral and, to the extent permitted

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by law, to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on the Trustee with respect to the Notes; provided that

     (a) the Trustee shall have the right to decline to follow any such direction if the Trustee, being advised by counsel, determines that the action so directed may not lawfully be taken or could conflict with this Indenture or if the Trustee in good faith shall, by a Responsible Officer, determine that the proceedings so directed could involve it in personal liability or it reasonably believes it will not adequately be indemnified against the costs, expenses and liabilities which might be incurred by it in complying with its request or be unjustly prejudicial to the Holders not taking part in such direction, and

     (b) the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction.

          SECTION 7.12 Waiver of Past Defaults. The Majority Holders of any series may on behalf of the Holders of all the Notes of such series waive any past default hereunder with respect to such series and its consequences, except a default not theretofore cured

     (a) in the payment of the principal of, premium, if any, or interest on any Note of such series, or in the payment of any sinking fund or purchase fund or analogous obligation with respect to the Notes of such series, or

     (b) in respect of a covenant or provision hereof which under Article 11 cannot be modified or amended without the consent of the Holder of each Outstanding Note of such series.

          Upon any such waiver, such default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured, for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other default or impair any right consequent thereon.

          SECTION 7.13 Undertaking for Costs. All parties to this Indenture agree, and each Holder of any Note by its acceptance thereof shall be deemed to have agreed, that any court may in its discretion require, in any suit for the enforcement of any right or remedy under this Indenture, or in any suit against the Trustee for any action taken or omitted by it as Trustee, the filing by any part litigant in such suit of an undertaking to pay the costs of such suit, and that such court may in its discretion assess reasonable costs, including reasonable attorneys’ fees and expenses, against any party litigant in such suit, having due regard to the merits and good faith of the claims or defenses made by such party litigant; but the provisions of this Section shall not apply to any suit instituted by the Trustee, to any suit instituted by any Holder, or group of Holders, holding in the aggregate more than 10% in principal amount of then Outstanding Notes of any series to which the suit relates, or to any suit instituted by any Holder for the enforcement of the payment of the principal of (or premium, if any) or interest on any Note on or after the respective maturities expressed in such Note (or, in the case of redemption or other prepayment, on or after the Redemption Date or prepayment date).

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          SECTION 7.14 Waiver of Stay or Extension Laws. The Company covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of this Indenture; and the Company (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law, and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted.

ARTICLE 8

CONCERNING THE TRUSTEE

          SECTION 8.1 Certain Rights and Duties of Trustee. The Trustee, prior to the occurrence of an Event of Default and after curing or waiving all Events of Default that may have occurred, undertakes to perform only such duties as are specifically set forth in this Indenture and no implied covenants or obligations shall be read into this Indenture against the Trustee. In case an Event of Default has occurred (which has not been cured or waived) the Trustee shall exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in their exercise, as a prudent man would exercise or use under the circumstances in the conduct of his own affairs.

     Except as otherwise provided in Section 315 of the Trust Indenture Act:

     (a) The Trustee may conclusively rely and shall be fully protected in acting, or refraining from acting, upon any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, bond, debenture or other paper or document (whether in its original or facsimile form) reasonably believed by it to be genuine and to have been signed or presented by the proper party or parties; but in the case of any such certificates or opinions which by the provisions hereof are specifically required to be furnished to the Trustee, the Trustee shall be under a duty to examine the same to determine whether or not they substantially conform to the requirements of this Indenture but need not verify the contents thereof.

     (b) Any request, direction, order or demand of the Company mentioned herein shall be sufficiently evidenced by an Officers’ Certificate (unless other evidence in respect thereof be herein specifically prescribed); and any resolution of the Board of Directors shall be evidenced to the Trustee by a copy thereof certified by the secretary or an assistant secretary of the Company.

     (c) The Trustee shall be under no obligation to exercise any of the trusts or powers vested in it by this Indenture, and may refuse to perform any duty or exercise any such rights or powers unless it shall have been offered reasonable security or indemnity to its satisfaction against the costs, expenses and liabilities which may reasonably be incurred therein or thereby.

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     (d) The Trustee shall not be liable for any action taken, suffered or omitted by it in good faith and reasonably believed by it to be authorized or within the discretion or rights or powers conferred upon it by this Indenture or with respect to any action it takes or omits to take in good faith in accordance with a direction received by it from Holders holding a sufficient percentage of Notes to give such direction as permitted by this Indenture.

     (e) Prior to the occurrence of an Event of Default with respect to any series of Notes hereunder and after the curing or waiving of all Events of Default with respect to such series of Notes the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, approval, appraisal, bond, debenture or other paper or document with respect to such series of Notes unless requested in writing so to do by the Majority Holders of such series; provided that, if the payment within a reasonable time to the Trustee of the reasonable costs, expenses or liabilities likely to be incurred by it in the making of such investigation is, in the opinion of the Trustee, not reasonably assured to the Trustee by the security afforded to it by the terms of this Indenture, the Trustee may require reasonable indemnity satisfactory to it against such expenses or liabilities as a condition to so proceeding. The reasonable expense of every such investigation shall be paid by the Company or, if paid by the Trustee, shall be repaid by the Company upon demand.

     (f) The Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents, attorneys, custodians or nominees and the Trustee shall not be responsible for any misconduct or negligence on the part of any agent, attorney, custodian or nominee appointed with due care by it hereunder or under any Collateral Document.

     (g) The Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer or Responsible Officers of the Trustee unless it shall be proved that the Trustee was negligent in ascertaining the pertinent facts.

     (h) The Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with any direction of the Company given under this Indenture.

     (i) The Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, entitlement order, approval or other paper or document.

     (j) The Trustee shall have no obligation to invest and reinvest any cash held pursuant to this Indenture in the absence of timely and specific written investment direction from the Company. In no event shall the Trustee be liable for the selection of investments or for investment losses incurred thereon. The Trustee shall have no liability in respect of losses incurred as a result of the liquidation of any investment prior to its stated maturity or the failure of the Company to provide timely written investment direction.

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          None of the provisions contained in this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur personal financial liability in the performance of any of its duties or in the exercise of any of its rights or powers.

          The Trustee may consult with counsel of its own selection and the written advice or opinion of counsel shall be full and complete authorization and protection in respect of any action taken or omitted by it hereunder in good faith and in accordance with such written advice or opinion of counsel.

          SECTION 8.2 Trustee Not Responsible for Recitals, Etc. The recitals contained herein and in the Notes, except the Trustee’s certificate of authentication, shall be taken as the statements of the Company and the Trustee assumes no responsibility for the correctness of the same. The Trustee makes no representations as to the validity or sufficiency of this Indenture, the Collateral or of the Notes. The Trustee shall not be accountable for the use or application by the Company of any of the Notes or of the proceeds of such Notes.

          SECTION 8.3 Trustee and Others May Hold Notes. The Trustee or any Paying Agent or Security Registrar or any other Authorized Agent of the Trustee, or any Affiliate thereof, in its individual or any other capacity, may become the owner or pledgee of Notes and may otherwise deal with the Company, or any other obligor on the Notes with the same rights it could have if it were not Trustee, Paying Agent, Security Registrar or such other Authorized Agent.

          SECTION 8.4 Moneys Held by Trustee or Paying Agent. All moneys received by the Trustee or any Paying Agent shall, until used or applied as herein provided, be held in trust for the purposes for which they were received, but, other than the Debt Service Reserve Accounts and the Mandatory Redemption Account, need not be segregated from other funds except to the extent required by law. Neither the Trustee nor any Paying Agent shall be under any liability for interest on any moneys received by it hereunder except such as it may agree in writing with the Company to pay thereon.

          SECTION 8.5 Compensation of Trustee and Its Lien. For so long as any of the Notes shall remain outstanding, the Company covenants and agrees to pay to the Trustee (all references in this Section 8.5 to the Trustee shall be deemed to apply to the Trustee in its capacities as Trustee, Paying Agent and Security Registrar) from time to time, and the Trustee shall be entitled to, reasonable compensation for all services rendered by it hereunder (which shall be agreed to from time to time by the Company and the Trustee and which shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust), and, except as herein otherwise expressly provided, the Company will pay or reimburse the Trustee upon its request for all expenses and disbursements incurred or made by the Trustee in accordance with any of the provisions of this Indenture (including the reasonable compensation and the reasonable expenses, advances and disbursements of its counsel and of all persons not regularly in its employ) except any such expense or disbursement as may arise from its gross negligence or bad faith. The Company also covenants and agrees to indemnify the Trustee for, defend, and hold harmless the Trustee and its officers, directors, employees, representatives and agents from and against, any and all loss, liability, claim, damage or expense (including legal fees and expenses) incurred without gross negligence or bad faith on the part of the Trustee or

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any of its employees, officers or agents, arising out of or in connection with the acceptance or administration of the trust or trusts hereunder and this Indenture, including liability which the Trustee may incur as a result of failure to withhold, pay or report Taxes with respect to any amounts payable with respect to the Notes and including the costs and expenses of defending itself against any claim or liability in the premises and including, without limitation, any loss, liability, claim, damage or expense relating to or arising out of any Environmental Law. The obligations of the Company under this Section shall constitute additional Indebtedness hereunder. In no event shall the Trustee be liable for special, indirect or consequential loss or damages whatsoever (including, but not limited to lost profits), even if the Trustee has been advised of the likelihood of such damage and regardless of the form of action taken.

          The obligations of the Company under this Section 8.5 shall survive payment in full of the Notes, the resignation or removal of the Trustee and the termination of this Indenture.

          When the Trustee or any predecessor Trustee incurs expenses or renders services in connection with the performance of its obligations hereunder (including its services as paying agent, if so appointed by the Company) after an Event of Default specified in Section 7.1(5), (6), (7) or (8) occurs, the expenses and compensation for such services are intended to constitute expenses of administration under applicable bankruptcy, insolvency or other similar United States Federal or state law to the extent provided in Section 503(b)(5) of the Federal Bankruptcy Code.

          SECTION 8.6 Right of Trustee to Rely on Officers’ Certificates and Opinions of Counsel. Before the Trustee acts or refrains from acting with respect to any matter contemplated by this Indenture, it may require an Officer’s Certificate of the Company or an Opinion of Counsel, which shall conform to the provisions of Section 1.3. The Trustee shall not be liable for any action it takes or omits to take in good faith in reliance on such certificate or opinion except as set forth in this Article 8.

          SECTION 8.7 Persons Eligible for Appointment As Trustee. There shall at all times be a Trustee hereunder which shall at all times be a corporation which complies with the eligibility requirements of the Trust Indenture Act, having a combined capital and surplus of at least $100,000,000. If such corporation publishes reports of condition at least annually, pursuant to law or to the requirements of a supervising or examining authority referred to in Section 310(a) of the Trust Indenture Act, then for the purposes of this Section 8.7, the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. In case at any time the Trustee shall cease to be eligible in accordance with this Section 8.7, the Trustee shall resign immediately in the manner and with the effect specified in Section 8.8.

          SECTION 8.8 Resignation and Removal of Trustee, Appointment of Successor.

          (a) The Trustee, or any trustee hereafter appointed, may at any time resign by giving written notice to the Company and by giving notice of such resignation to the Holders of Notes in the manner provided in Section 1.5.

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          (b) In case at any time any of the following shall occur with respect to the Notes:

    (1) the Trustee shall fail to comply with the provisions of Section 310(b) of the Trust Indenture Act, after written request thereafter by the Company or by any Holder who has been a bona fide Holder of a Note or Notes for at least six months,

    (2) the Trustee shall cease to be eligible under Section 8.7 and shall fail to resign after written request therefor by the Company or by any Holder of a Note or Notes, or

    (3) the Trustee shall become incapable of acting, or shall be adjudged bankrupt or insolvent, or a receiver of the Trustee or of its property shall be appointed, or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation;

then, in any such case, (A) the Company may remove the Trustee, and appoint a successor trustee by written instrument, in duplicate, executed by order of the Board of Directors of the Company, or (B) subject to the requirements of Section 315(e) of the Trust Indenture Act, any Holder who has been a bona fide Holder of a Note or Notes for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. Such court may thereupon after such notice, if any, as it may deem proper and prescribe, remove the Trustee and appoint a successor Trustee.

          (c) The Holders of a majority in aggregate principal amount of the Notes at the time Outstanding may at any time remove the Trustee and appoint a successor Trustee by delivering to the Trustee so removed, to the successor Trustee so appointed and to the Company, written evidence of the action taken by the Holders, provided that unless a Default or Event of Default shall have occurred and be continuing, the Company shall consent to such actions (such consent not to be unreasonably withheld); and provided, further that if a Default or Event of Default shall have occurred and be continuing the Company shall, without further action by the Company, be deemed to have consented to such actions.

          (d) If the Trustee shall resign, be removed, or become incapable of acting or if a vacancy shall occur in the office of Trustee for any cause, the Company shall promptly appoint a successor Trustee by written instrument, in duplicate, executed by order of the Board of Directors of the Company, one copy of which instrument shall be delivered to the former Trustee and one copy to the successor Trustee. If no successor Trustee shall have been so appointed and have accepted such appointment pursuant to Section 8.9 within 30 days after the mailing of such notice of resignation or removal, the former Trustee may petition at the expense of the Company any court of competent jurisdiction for the appointment of a successor Trustee, or any Holder who has been a bona fide Holder of a Note or Notes for at least six months may, subject to the requirements of Section 315(e) of the Trust Indenture Act, on behalf of himself and all others similarly situated, petition any such court for the appointment of a successor Trustee. Such court may thereupon after such notice, if any, as it may deem proper and prescribe, appoint a successor Trustee.

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          (e) Any resignation or removal of the Trustee and any appointment of a successor Trustee pursuant to this Section shall become effective only upon acceptance of appointment by the successor Trustee as provided in Section 8.9.

          SECTION 8.9 Acceptance of Appointment by Successor Trustee. Any successor Trustee appointed under Section 8.8 shall execute, acknowledge and deliver to the Company and to its predecessor Trustee an instrument accepting such appointment hereunder, and thereupon the resignation or removal of the predecessor Trustee shall become effective and such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts, duties and obligations with respect to such series of its predecessor Trustee hereunder, with like effect as if originally named as Trustee herein; but, nevertheless, on the written request of the Company or of the successor Trustee, the Trustee ceasing to act shall, upon payment of any such amounts then due it pursuant to the provisions of Section 8.5, execute and deliver an instrument transferring to such successor Trustee all the rights, powers and trusts with respect to such series of the Trustee so ceasing to act. Upon request of any such successor Trustee, the Company shall execute any and all instruments in writing for more fully and certainly vesting in and confirming to such successor Trustee all such rights and powers. Any Trustee ceasing to act shall, nevertheless, retain a lien upon all property or funds held or collected by such Trustee to secure any amounts then due it pursuant to Section 8.5.

          No successor Trustee shall accept appointment as provided in this Section unless at the time of such acceptance such successor Trustee shall with respect to such series be eligible under Section 8.7.

          Upon acceptance of appointment by a successor Trustee, the Company shall give notice of the succession of such Trustee hereunder to the Holders of Notes in the manner provided in Section 1.6. If the Company fails to give such notice within 10 days after acceptance of appointment by the successor Trustee, the successor Trustee shall cause such notice to be given at the expense of the Company.

          SECTION 8.10 Merger, Conversion or Consolidation of Trustee. Any Person into which the Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any Person succeeding to all or substantially all the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder without the execution or filing of any paper or any further act on the part of any of the parties hereto, provided that such successor Trustee shall be qualified under the Trust Indenture Act and eligible under the provisions of Section 8.7 hereof and Section 310(a) of the Trust Indenture Act.

          In case at the time such successor to the Trustee shall succeed to the trusts created by this Indenture, any of the Notes shall have been authenticated but not delivered, any such successor to the Trustee may adopt the certificate of authentication of any predecessor Trustee and deliver such Notes so authenticated and, in case at that time any of the Notes shall not have been authenticated, any successor to the Trustee may authenticate such Notes either in the name of any predecessor hereunder or in the name of the successor trustee, and in such cases such certificate shall have the full force which it is anywhere in the Notes or in this Indenture, provided that the certificate of the Trustee shall have; provided that the right to adopt the

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certificate of authentication of any predecessor Trustee or the authenticate Notes in the name of any predecessor Trustee shall apply only to its successor or successors by merger, conversion or consolidation.

          SECTION 8.1l Maintenance of Offices and Agencies.

          (a) There shall at all times be maintained at least one Place of Payment as shall be specified for the Notes of any series in the related Series Supplemental Indenture, where such Notes may be presented or surrendered for registration of transfer or exchange and for payment of principal, premium, if any, and interest. Such office shall be initially:

Wachovia Bank, National Association
21 South Street
Morristown, NJ 07690

Notices and demands to or upon the Trustee in respect of the Notes or this Indenture may be served at the Corporate Trust Office. Written notice of the location of each of such other office or agency and of any change of location thereof shall be given by the Company to the Trustee and by the Trustee to the Holders in the manner specified in Section 1.5. In the event that no such office or agency shall be maintained or no such notice of location or of change of location shall be given, presentations, surrenders and demands may be made and notices may be served at the Corporate Trust Office.

          (b) There shall at all times be a Security Registrar and a Paying Agent hereunder. In addition, at any time when any Notes remain Outstanding, the Trustee may appoint an Authenticating Agent or Agents with respect to the Notes of one or more series which shall be authorized to act on behalf of the Trustee to authenticate Notes of such series issued upon original issuance, exchange, registration of transfer or partial redemption thereof or pursuant to Section 2.9, and Notes so authenticated shall be entitled to the benefits of this Indenture and shall be valid and obligatory for all purposes as if authenticated by the Trustee hereunder (it being understood that wherever reference is made in this Indenture to the authentication and delivery of Notes by the Trustee or the Trustee’s certificate of authentication, such reference shall be deemed to include authentication and delivery on behalf of the Trustee by an Authenticating Agent and a certificate of authentication executed on behalf of the Trustee by an Authenticating Agent). If an appointment of an Authenticating Agent with respect to the Notes of one or more series shall be made pursuant to this Section 8.1l(b), the Notes of such series may have endorsed thereon, in addition to the Trustee’s certificate of authentication, an alternate certificate of authentication in substantially the following form:

          This Note is one of the series of Notes referred to in the within-mentioned Indenture.

		,
	Trustee
By
	Authenticating Agent

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By
	Authorized Signatory

          Any Authorized Agent shall be a bank or trust company, shall be a Person organized and doing business under the laws of the United States or any State thereof, with a combined capital and surplus of at least $100,000,000, and shall be authorized under such laws to exercise corporate trust powers, subject to supervision by United States Federal or state authorities. If such Authorized Agent publishes reports of its condition at least annually, pursuant to law or to the requirements of the aforesaid supervising or examining authority, then for the purposes of this Section 8.11, the combined capital and surplus of such Authorized Agent shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time an Authorized Agent shall cease to be eligible in accordance with the provisions of this Section 8.11, such Authorized Agent shall resign immediately in the manner and with the effect specified in this Section 8.11.

          The Trustee at its office specified in Section 1.4, is hereby appointed as Paying Agent and Security Registrar hereunder.

          (c) Any Paying Agent (other than the Trustee) from time to time appointed hereunder shall execute and deliver to the Trustee an instrument in which said Paying Agent shall agree with the Trustee, subject to the provisions of this Section 8.11, that such Paying Agent will:

          (i) hold all sums held by it for the payment of principal of, and premium, if any, and interest on Notes in trust for the benefit of the Persons entitled thereto until such sums shall be paid to such Persons or otherwise disposed of as herein provided;

          (ii) give the Trustee within five days thereafter notice of any default by any obligor upon the Notes in the making of any such payment of principal, premium, if any, or interest; and

          (iii) at any time during the continuance of any such default, upon the written request of the Trustee, forthwith pay to the Trustee all sums so held in trust by such Paying Agent.

          Notwithstanding any other provision of this Indenture, any payment required to be made to or received or held by the Trustee may, to the extent authorized by written instructions of the Trustee, be made to or received or held by a Paying Agent in the Borough of Manhattan, the City of New York, for the account of the Trustee.

          (d) Any Person into which any Authorized Agent may be merged or converted or with which it may be consolidated, or any Person resulting from any merger, consolidation or conversion to which any Authorized Agent shall be a party, or any corporation succeeding to the corporate trust business of any Authorized Agent, shall be the successor of such Authorized Agent hereunder, if such successor Person is otherwise eligible under this Section 8.11, without the execution or filing of any paper or any further act on the part of the parties hereto or such Authorized Agent or such successor Person.

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          (e) Any Authorized Agent may at any time resign by giving written notice of resignation to the Trustee and the Company. The Company may, and at the request of the Trustee shall, at any time, terminate the agency of any Authorized Agent by giving written notice of such termination to the Authorized Agent and to the Trustee. Upon the resignation or termination of an Authorized Agent or in case at any time any such Authorized Agent shall cease to be eligible under this Section 8.11 (when, in either case, no other Authorized Agent performing the functions of such Authorized Agent shall have been appointed), the Company shall promptly appoint one or more qualified successor Authorized Agents approved by the Trustee to perform the functions of the Authorized Agent which has resigned or whose agency has been terminated or who shall have ceased to be eligible under this Section 8.11. The Company shall give written notice of any such appointment to all Holders as their names and addresses appear on the Security Register.

          SECTION 8.12 Reports by Trustee. On or before May 15 in every year, so long as any Notes are Outstanding hereunder, the Trustee shall transmit to the Holders a brief report, dated as of the preceding December 31, to the extent required by Section 313 of the Trust Indenture Act in accordance with the procedures set forth in said Section. A copy of such report at the time of its mailing to Holders shall be filed with the SEC and each stock exchange, if any, on which any Notes are listed. The Company shall promptly notify the Trustee if any series of Notes become listed on any stock exchange, and the Trustee shall comply with Section 313(d) of the Trust Indenture Act.

          SECTION 8.13 Trustee Risk. None of the provisions contained in this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur personal financial liability in the performance of any of its duties or in the exercise of any of its rights or powers, if it shall have reasonable ground for believing that the repayment of such funds or liability is not reasonably assured to it. Whether or not expressly provided herein, every provision of this Indenture relating to the conduct or affecting the liability of or affording protection to the Trustee shall be subject to Section 8.1 and the requirements of the Trust Indenture Act.

          SECTION 8.14 Appointment of Co-Trustee. It is the purpose of this Indenture that there shall be no violation of any law of any jurisdiction, denying or restricting the right of banking corporations or associations to transact business as Trustee in such jurisdiction. It is recognized that in case of litigation under this Indenture or any Financing Document, and in particular in case of the enforcement of any such document on default, or in case the Trustee deems that by reason of any present or future law of any jurisdiction it may not exercise any of the powers, rights or remedies herein granted to the Trustee or hold title to the properties, in trust, as herein granted, or take any other action which may be desirable or necessary in connection therewith, it may be necessary that the Trustee appoint an additional individual or institution as a separate or co-trustee. The following provisions of this Section 8.14 are adopted to these ends.

          In the event that the Trustee appoints an additional individual or institution as a separate or co-trustee, each and every remedy, power, right, claim, demand, cause of action, immunity, estate, title, interest and lien expressed or intended by this Indenture to be exercised by or vested in or conveyed to the Trustee with respect thereto shall be exercisable by and vested

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in such separate or co-trustee but only to the extent necessary to enable such separate or co-trustee to exercise such powers, rights and remedies specified by the Trustee, and every covenant and obligation necessary to the exercise thereof by such separate or co-trustee shall run to and be enforceable by either of them.

          Should any instrument in writing be required by the separate trustee or co-trustee so appointed by the Trustee for more fully and certainly vesting in and confirming to him or it such properties, rights, powers, trusts, duties and obligations, any and all such instruments in writing shall, on request, be executed, acknowledged and delivered by the Company. In case any separate trustee or co-trustee, or a successor to either, shall die, become incapable of acting, resign or be removed, all the estates, properties, rights, powers, trusts, duties and obligations of such separate trustee or co-trustee, so far as permitted by law, shall vest in and be exercised by the Trustee until the appointment of a new trustee or successor to such separate trustee or co-trustee.

ARTICLE 9

CONCERNING THE HOLDERS

          SECTION 9.1 Acts of Holders.

          (a) Any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be given or taken by Holders (collectively, an “Act” of such Holders, which term also shall refer to the instruments or record evidencing or embodying the same) may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Holders in person or by an agent duly appointed in writing or, alternatively, may be embodied in and evidenced by the record of Holders of Notes voting in favor thereof, either in person or by proxies duly appointed in writing, at any meeting of Holders of Notes duly called and held in accordance with the provisions of Article 10, or a combination of such instruments and any such record. Except as herein otherwise expressly provided, such action shall become effective when such instrument or instruments or record, or both, are delivered to the Trustee, and when it is specifically required herein, to the Company. Proof of execution of any such instrument or of a writing appointing any such agent shall be sufficient for any purpose of this Indenture and (subject to Section 8.1) conclusive in favor of the Trustee and the Company, if made in the manner provided in this Section 9.1. The record of any meeting of Holders of Notes shall be proved in the manner provided in Section 10.5.

          (b) The fact and date of the execution by any Person of any such instrument or writing may be proved by the certificate of any public or other officer of any jurisdiction authorized to take acknowledgments of deeds or administer oaths that the Person executing such instrument acknowledged to such officer the execution thereof, or by an affidavit of a witness to such execution sworn to before any such notary or other such officer, and where such execution is by an officer of a corporation or association or of a Company, on behalf of such corporation, association or Company, such certificate or affidavit shall also constitute sufficient proof of such Person’s authority. The fact and date of the execution of any such instrument or writing, or the

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authority of the Person executing the same, may also be proved in any other manner which the Trustee deems sufficient.

          (c) The principal amount and serial numbers of Notes held by any Person, and the date or dates of holding the same, shall be proved by the Security Register and the Trustee shall not be affected by notice to the contrary.

          (d) Any Act by the Holder of any Note (i) shall bind every future Holder of the same Note and the Holder of every Note issued upon the transfer thereof or the exchange therefor or in lieu thereof, whether or not notation of such action is made upon such Note, and (ii) shall be valid notwithstanding that such Act is taken in connection with the transfer of such Note to any other Person, including the Company or any Affiliate thereof.

          (e) Until such time as written instruments shall have been delivered with respect to the requisite percentage of principal amount of Notes for the Act contemplated by such instruments, any such instrument executed and delivered by or on behalf of a Holder of Notes may be revoked with respect to any or all of such Notes by written notice by such Holder (or its duly appointed agent) or any subsequent Holder (or its duly appointed agent), proven in the manner in which such instrument was proven unless such instrument is by its terms expressly irrevocable.

          (f) Notes of any series authenticated and delivered after any Act of Holders may, and shall if required by the Company, bear a notation in form approved by the Company as to any action taken by such Act of Holders. If the Company shall so determine, new Notes of any series so modified as to conform, in the opinion of the Company, to such action, may be prepared and executed by the Company and authenticated and delivered by the Trustee in exchange for outstanding Notes of such series.

          The Company may, but shall not be obligated to, fix a record date for the purpose of determining the Holders entitled to sign any instrument evidencing or embodying an Act of the Holders. If a record date is fixed, those Persons who were Holders at such record date (or their duly appointed agents), and only those Persons, shall be entitled to sign any such instrument evidencing or embodying an Act of Holders or to revoke any such instrument previously signed, whether or not such Persons continue to be Holders after such record date. No such instrument shall be valid or effective if signed more than 90 days after such record date, and may be revoked as provided in paragraph (e) above.

          SECTION 9.2 Notes Owned by Company and Affiliates Deemed Not Outstanding. In determining whether the Holders of the requisite aggregate principal amount of Notes have concurred in any request, demand, authorization, direction, notice, consent and waiver or other act under this Indenture, Notes which are owned by the Company, any of its Subsidiaries or any other Affiliate of the Company or any of its Subsidiaries shall be disregarded and deemed not to be Outstanding for the purpose of any such determination except that in determining whether the Trustee shall be protected in relying on any such request, demand, authorization, direction, notice, consent or waiver or other act, only Notes for which a Responsible Officer of the Trustee has received written notice of such ownership as conclusively evidenced by the Security Register shall be so disregarded. The Company shall furnish the

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Trustee, upon its reasonable request, with a list of such Affiliates. Notes so owned which have been pledged in good faith may be regarded as Outstanding for the purposes of this Section 9.2 if the pledgee shall establish to the satisfaction of the Trustee that the pledgee has the right to vote such Notes and that the pledgee is not the Company or a Subsidiary of the Company or any Affiliate of the Company or any such Subsidiary. Subject to the provisions of Section 315 of the Trust Indenture Act, in case of a dispute as to such right, any decision by the Trustee, taken upon the advice of counsel, shall be full protection to the Trustee.

ARTICLE 10

HOLDERS’ MEETINGS

          SECTION 10.1 Purposes for Which Holders’ Meetings May Be Called. A meeting of Holders may be called at any time and from time to time pursuant to this Article 10 for any of the following purposes:

          (a) to give any notice to the Company or to the Trustee, or to give any directions to the Trustee, or to waive or to consent to the waiving of any default hereunder and its consequences, or to take any other action authorized to be taken by Holders pursuant to Article 7;

          (b) to remove the Trustee and appoint a successor Trustee pursuant to Article 8;

          (c) to consent to the execution of an indenture or indentures supplemental hereto pursuant to Section 11.2; or

          (d) to take any other action authorized to be taken by or on behalf of the Holders of any specified aggregate principal amount of the Notes under any other provision of this Indenture or under applicable law.

          SECTION 10.2 Company and Holders May Call Meeting. In case the Company, pursuant to a Board Resolution, or the Holders of at least 10% in aggregate principal amount of the Notes of any series then Outstanding shall have requested the Trustee to call a meeting of Holders of such series, by written request setting forth in general terms the action proposed to be taken at the meeting, and the Trustee shall not have made the mailing of the notice of such meeting within 20 days after receipt of such request, then the Company or the Holders of such Notes in the amount above specified may determine the time and the place in the Borough of Manhattan, The City of New York, for such meeting and may call such meeting to take any action authorized in Section 10.1 by giving notice thereof to the Company or all such other Holders as the case may be, or as set forth in Section 10.1.

          SECTION 10.3 Persons Entitled to Vote at Meeting. To be entitled to vote at any meeting of Holders a person shall be (a) a Holder of one or more Notes with respect to which such meeting is being held or (b) a person appointed by an instrument in writing as proxy for the Holder or Holders of such Notes by a Holder of one or more such Notes. The only persons who

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shall be entitled to be present or to speak at any meeting of Holders shall be the persons entitled to vote at such meeting and their counsel and any representatives of the Trustee and its counsel and any representatives of the Company and its counsel.

          SECTION 10.4 Determination of Voting Rights; Conduct and Adjournment of Meeting. Notwithstanding any other provisions of this Indenture, the Trustee may make such reasonable regulations as it may deem advisable for any meeting of Holders, in regard to proof of the holding of Notes and of the appointment of proxies, and in regard to the appointment and duties of inspectors of votes, the submission and examination of proxies, certificates and other evidence of the right to vote, and such other matters concerning the conduct of the meeting as it shall think fit. Such regulations may provide that written instruments appointing proxies, regular on their face, may be presumed valid and genuine without the proof specified in Section 9.1 or other proof. Except as otherwise permitted or required by any such regulations, the holding of Notes shall be proved in the manner specified in Section 9.1 and the appointment of any proxy shall be proved in the manner specified in said Section 9.1 or by having the signature of the person executing the proxy witnessed or guaranteed by any bank, banker, trust company or firm satisfactory to the Trustee.

          The Company or the Holders calling the meeting, as the case may be, shall appoint a temporary chairman. A permanent chairman and a permanent secretary of the meeting shall be elected by vote of the Holders of a majority in aggregate principal amount of the Notes represented at the meeting and entitled to vote.

          Subject to the provisions of Section 9.2, at any meeting each Holder or proxy shall be entitled to one vote for each $1,000 principal amount of Notes held or represented by him; provided, however, that no vote shall be cast or counted at any meeting in respect of any Note challenged as not Outstanding and ruled by the chairman of the meeting to be not Outstanding. The chairman of the meeting shall have no right to vote other than by virtue of Notes held by him or instruments in writing as aforesaid duly designating him as the person to vote on behalf of other Holders. Any meeting of Holders duly called pursuant to Section 10.2 may be adjourned from time to time, and the meeting may be held as so adjourned without further notice. At any meeting, the presence of persons holding or representing Notes with respect to which such meeting is being held in an aggregate principal amount sufficient to take action upon the business for the transaction of which such meeting was called shall be necessary to constitute a quorum; but, if less than a quorum be present, the persons holding or representing a majority of the Notes represented at the meeting may adjourn such meeting with the same effect, for all intents and purposes, as though a quorum had been present.

          SECTION 10.5 Counting Votes and Recording Action of Meeting. The vote upon any resolution submitted to any meeting of Holders of a series shall be by written ballots on which shall be subscribed the signatures of the Holders of Notes of such series or of their representatives by proxy and the serial numbers and principal amounts of the Notes of such series held or represented by them. The permanent chairman of the meeting shall appoint two inspectors of votes who shall count all votes cast at the meeting for or against any resolution and who shall make and file with the secretary of the meeting their verified written reports in duplicate of all votes cast at the meeting. A record in duplicate of the proceedings of each

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meeting of Holders shall be prepared by the secretary of the meeting and there shall be attached to said record the original reports of the inspectors of votes on any vote by ballot taken thereat and affidavits by one or more persons having knowledge of the facts setting forth a copy of the notice of the meeting. The record shall show the serial numbers of the Notes voting in favor of or against any resolution. The record shall be signed and verified by the affidavits of the permanent chairman and secretary of the meeting and one of the duplicates shall be delivered to the Company and the other to the Trustee to be preserved by the Trustee, the latter to have attached thereto the ballots voted at the meeting.

          Any record so signed and verified shall be conclusive evidence of the matters therein stated.

ARTICLE 11

SUPPLEMENTAL INDENTURES

          SECTION 11.1 Supplemental Indentures Without Consent of Holders. Without the consent of the Holders of any Notes, the Company, when authorized by a Board Resolution (a copy of which shall be delivered to the Trustee), and the Trustee, at any time and from time to time, may enter into one or more indentures supplemental hereto in form satisfactory to the Trustee or enter into any consent with respect to the Collateral Documents for any of the following purposes:

     (a) to establish the form and terms of Notes of any series permitted by Sections 2.1 and 2.3; or

     (b) to evidence the succession of another entity to the Company and the assumption by any such successor of the covenants of the Company herein contained; or

     (c) to evidence the succession of a new Trustee hereunder pursuant to Section 8.9; or

     (d) to add to the covenants of the Company such further covenants, restrictions, conditions or provisions as the Board of Directors shall consider to be for the protection of the Holders of Notes, and to make the occurrence, or the occurrence and continuance of a default in any such additional covenants, restrictions, conditions or provisions an Event of Default permitting the enforcement of all or any of the several remedies provided in this Indenture as herein set forth; provided that in respect of any such additional covenant, restriction, condition or provision such supplemental indenture may provide for a particular period of grace after default (which period may be shorter or longer than that allowed in the case of other defaults) or may provide for immediate enforcement upon such an Event of Default or may limit the remedies available to the Trustee due solely to such an Event of Default or may limit the right of the Holders of a majority in aggregate principal amount of the Notes to waive such an Event of Default; or

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     (e) to convey, transfer and assign to the Trustee properties or assets to secure the Notes, and to correct or amplify the description of any property at any time subject to this Indenture, any Series Supplemental Indenture or the Collateral Documents or to assure, convey and confirm unto the Trustee any property subject or required to be subject to this Indenture, any Series Supplemental Indenture or the Collateral Documents; or

     (f) to modify, eliminate or add to the provisions of this Indenture or any Series Supplemental Indenture to such extent as shall be necessary to qualify, requalify or continue the qualification of this Indenture (including any supplemental indenture) under the Trust Indenture Act, or under any similar United States Federal statute hereafter enacted, and to add to this Indenture such other provisions as may be expressly permitted by the Trust Indenture Act, excluding, however, the provisions referred to in Section 316(a)(2) of the Trust Indenture Act as in effect at the date as of which this instrument was executed or any corresponding provision in any similar United States Federal statute hereafter enacted; or

     (g) to permit or facilitate the issuance of Notes in certificated or uncertificated form; or

     (h) to change or eliminate any provision of this Indenture, any Series Supplemental Indenture or the Collateral Documents; provided, however, that if such change or elimination shall adversely affect the interests of the Holders of Notes of any series, such change or elimination shall not become effective with respect to such series; or

     (i) to cure any ambiguity or to correct or supplement any provision in this Indenture, any Series Supplemental Indenture or the Collateral Documents that is incorrect; or

     (j) to provide for the issuance of exchange securities for the Notes; provided that such action shall not adversely affect the interests of the Holders of Notes of any series in any material respect.

          SECTION 11.2 Supplemental Indenture with Consent of Holders. With the consent of the Majority Holders of Notes of all series then Outstanding, considered as one class, by Act of said Holders delivered to the Company and the Trustee, the Company, when authorized by a Board Resolution (a copy of which shall be delivered to the Trustee), may, and the Trustee, subject to Sections 11.3 and 11.4, shall, enter into an indenture or indentures supplemental hereto for the purpose of adding any mutually agreeable provisions to or changing in any manner or eliminating any of the provisions of, this Indenture; provided, however, that if there shall be Notes of more than one series Outstanding hereunder and if a proposed supplemental indenture shall directly affect the rights of the Holders of one or more, but less than all, of such series, then the consent only of the Holders of not less than a majority in aggregate principal amount of the Outstanding Notes of all series so directly affected, considered as one class, shall be required; and provided, further, that no such supplemental indenture shall, without the consent of the Holder of each Outstanding Note directly affected thereby,

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     (a) change any Scheduled Payment Date, or the dates or circumstances of payment of premium, if any on any Note, or change the principal amount thereof or the interest thereon or any premium payable upon the redemption thereof, or change the place of payment where, or the coin or currency in which, any Note or the premium, if any, or the interest thereon is payable, or impair the right to institute suit for the enforcement of any such payment of principal or interest on or after the Scheduled Payment Date for such payment (or, in the case of redemption, on or after the Redemption Date) or such payment of premium, if any, on or after the date such premium becomes due and payable in respect of such Notes; or

     (b) except to the extent expressly permitted by this Indenture or any of the Collateral Documents, permit the creation of any Lien prior to or, except as contemplated by Section 4.9, pari passu with the Lien of the Collateral Documents with respect to any of the Collateral, terminate the Lien of the Collateral Documents on any Collateral or, if a Holder of Notes of a series is entitled to the benefits thereof, deprive any Holder of the security afforded by the Lien of the Collateral Documents; or

     (c) reduce the percentage in principal amount of the Outstanding Notes, the consent of whose Holders is required for any such supplemental indenture, or the consent of whose Holders is required for any waiver of compliance with certain provisions of this Indenture or certain defaults hereunder and their consequences provided for in this Indenture; or

     (d) modify any of the provisions of Section 7.12 or of this Section 11.2.

          A supplemental indenture that changes or eliminates any covenant or other provision of this Indenture, a Series Supplemental Indenture or any Collateral Document which has expressly been included solely for the benefit of one or more particular series of Notes, or which modifies the rights of the Holders of Notes of such series with respect to such covenant or other provision, shall be deemed not to affect the rights under this Indenture of the Holders of Notes of any other series.

          Upon receipt by the Trustee of Board Resolutions and such other documentation as the Trustee may reasonably require and upon the filing with the Trustee of evidence of the Act of said Holders, the Trustee shall join in the execution of such supplemental indenture or other instrument, as the case may be, subject to the provisions of Sections 11.3 and 11.4.

          It shall not be necessary for any Act of Holders under this Section to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such Act shall approve the substance thereof.

          SECTION 11.3 Execution of Supplemental Indentures. In executing, or accepting the additional trusts created by any Series Supplemental Indenture or other supplemental indenture permitted by this Article 11 or the modifications thereby of the trusts created by this Indenture, the Trustee shall be entitled to receive, and (subject to Section 8.1) shall be fully protected in relying upon, an Opinion of Counsel stating that the execution of such supplemental indenture is authorized or permitted by this Indenture and all conditions precedent

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to the execution of such supplemental indenture have been met. The Trustee may, but shall not be obligated to, enter into any such supplemental indenture which the Trustee reasonably believes would adversely affect the Trustee’s own rights, duties or immunities under this Indenture or otherwise.

          SECTION 11.4 Effect of Supplemental Indentures. Upon the execution of any supplemental indenture under this Article 11, this Indenture shall be modified in accordance therewith, and such supplemental indenture shall form a part of this Indenture for all purposes; and every Holder of Notes theretofore or thereafter authenticated and delivered hereunder shall be bound thereby.

          SECTION 11.5 Conformity with Trust Indenture Act. Every supplemental indenture executed pursuant to this Article 11 shall conform to the requirements of the Trust Indenture Act as then in effect.

          SECTION 11.6 Reference in Notes to Supplemental Indentures. Notes authenticated and delivered after the execution of any supplemental indenture pursuant to this Article 11 may, and shall if required by the Company, bear a notation in form approved by the Company as to any matter provided for in such supplemental indenture; and, in such case, suitable notation may be made upon Outstanding Notes after proper presentation and demand. If the Company shall so determine, new Notes so modified as to conform, in the opinion of the Company and the Trustee, to any such supplemental indenture may be prepared and executed by the Company and authenticated and delivered by the Trustee in exchange for Outstanding Notes.

ARTICLE 12

SATISFACTION AND DISCHARGE

          SECTION 12.1 Satisfaction and Discharge of Notes. Except as otherwise provided with respect to the Notes of any series in the Series Supplemental Indenture relating thereto, the Notes of such series shall, on or prior to the Scheduled Payment Date with respect to the final installment of principal thereof or the Redemption Date for such Notes, be deemed to have been paid for all purposes of this Indenture, and the entire Indebtedness of the Company in respect thereof shall be deemed to have been satisfied and discharged, upon satisfaction of the following conditions:

     (a) the Company shall have irrevocably deposited or caused to be deposited with the Trustee, in trust, money in an amount which shall be sufficient to pay when due the principal of and premium, if any, and interest due and to become due on the Notes of such series on and prior to the Scheduled Payment Date with respect to the final installment of principal thereof or the Redemption Date for such Notes;

     (b) if any such deposit of money shall have been made prior to the Scheduled Payment Date with respect to the final installment of principal or the Redemption Date of

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such Notes, the Company shall have delivered to the Trustee a Company Order stating that such money shall be held by the Trustee, in trust;

     (c) in the case of redemption of Notes, the Company Order with respect to such redemption pursuant to Article 5 shall have been given to the Trustee; and

     (d) there shall have been delivered to the Trustee an Opinion of Counsel to the effect that such satisfaction and discharge of the Indebtedness of the Company with respect to the Notes of such series shall not be deemed to be, or result in, a taxable event with respect to the Holders of such series for purposes of United States federal income taxation unless the Trustee shall have received documentary evidence that each Holder of such series either is not subject to, or is exempt from, United States federal income taxation.

Upon satisfaction of the aforesaid conditions with respect to the Notes of any series, the Trustee shall, upon receipt of a Company Order, execute proper instruments acknowledging satisfaction and discharge of the series of Notes.

          In the event that Notes which shall be deemed to have been paid as provided in this Section 12.1 do not mature and are not to be redeemed within the 60-day period commencing on the date of the deposit with the Trustee of moneys, the Company shall, as promptly as practicable, give a notice, in the same manner as a notice of redemption with respect to such Notes, to the Holders of such Notes to the effect that such Notes are deemed to have been paid and the circumstances thereof.

          Notwithstanding the satisfaction and discharge of any Notes as aforesaid, the obligations of the Company and the Trustee in respect of such Notes under Sections 2.8, 2.9, 2.10 and 8.5 and this Article 12 shall survive such satisfaction and discharge.

          SECTION 12.2 Satisfaction and Discharge of Indenture. This Indenture, and any Series Supplemental Indenture with respect to a series of Notes (except as provided therein), shall upon Company Order cease to be of further effect with respect to any series of Notes (except as hereinafter expressly provided), and the Trustee, at the expense of the Company, shall execute proper instruments acknowledging satisfaction and discharge of this Indenture, when:

     (a) either

     (i) all Notes theretofore authenticated and delivered (other than (A) Notes which have been destroyed, lost or stolen and which have been replaced or paid as provided in Section 2.9 and (B) Notes deemed to have been paid in accordance with Section 12.1) have been delivered to the Trustee for cancellation; or

     (ii) all Notes not theretofore delivered to the Trustee for cancellation (other than Notes that have been lost or stolen or that have been replaced or paid as provided in Section 2.9) shall be deemed to have been paid in accordance with Section 12.1;

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     (b) all other sums due and payable under this Indenture, any Series Supplemental Indenture and the Notes have been paid; and

     (c) the Company has delivered to the Trustee an Officers’ Certificate and an Opinion of Counsel, each stating that all conditions precedent herein provided for relating to the satisfaction and discharge of this Indenture have been complied with.

Upon satisfaction of the aforesaid conditions, the Trustee shall, upon receipt of a Company Order, execute proper instruments acknowledging satisfaction and discharge of this Indenture and take all other action reasonably requested by the Company to evidence the termination of any and all Liens created by or with respect to this Indenture.

          Notwithstanding the satisfaction and discharge of this Indenture as aforesaid, the obligations of the Company and the Trustee under Sections 2.8, 2.9, 2.10 and 8.5 and this Article 12 shall survive.

          Upon satisfaction and discharge of this Indenture as provided in this Section 12.2, the Trustee shall assign, transfer and turn over to or upon the order of the Company, any and all money, securities and other property then held by the Trustee for the benefit of the Holders, other than money deposited with the Trustee pursuant to Section 12.1 (a) and interest and other amounts earned or received thereon.

          SECTION 12.3 Application of Trust Money. Subject to Section 12.4, the money deposited with the Trustee pursuant to Section 12.1 shall not be withdrawn or used for any purpose other than, and shall be held in trust for, the payment of the principal of and premium, if any, and interest on the Notes or portions of principal amount thereof in respect of which such deposit was made.

          SECTION 12.4 Return of Moneys Held by Trustee and Unclaimed for Three Years. Any moneys deposited with or paid to the Trustee for the payment of the principal of, premium, if any or interest on any Note of any series and not applied but remaining unclaimed for three years after the latest date upon which such principal, premium, if any or interest shall have become due and payable, shall, upon the written request of the Company and unless otherwise required by mandatory provisions of applicable escheat or abandoned or unclaimed property law, be repaid to the Company by the Trustee, and any Holder of the Notes of such series shall, unless otherwise required by mandatory provisions of applicable escheat or abandoned or unclaimed property laws, thereafter look only to the Company for any payment which such Holder may be entitled to collect, and all liability of the Trustee with respect to such moneys shall thereupon cease; provided, however, that the Trustee or such paying agent, before being required to make any such repayment with respect to moneys deposited with it for any payment shall, at the expense of the Company cause to be published once, in an Authorized Newspaper in the Borough of Manhattan, The City of New York, notice that such moneys remain and that, after a date specified therein, which shall not be less than 30 days from the date of such publication, any unclaimed balance of such moneys then remaining will be repaid to the Company.

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ARTICLE 13

DEFEASANCE

          SECTION 13.1 Defeasance.

          (a) Subject to Sections 13.1(b) and 13.2, and except as provided in any Series Supplemental Indenture with respect to a series of Notes thereunder, the Company at any time may terminate (i) all its obligations under this Indenture, any Series Supplemental Indenture with respect to the Notes of such series, the Notes of a series and the Collateral Documents (a “Legal Defeasance”) or (ii) any of its covenants, other than its obligation to make payments on the Notes pursuant to Section 2.10 and 4.1 (a “Covenant Defeasance”). With respect to any Covenant Defeasance, except as specified in clause (ii) of the preceding sentence, the remainder of this Indenture and the Notes, shall be unaffected thereby. The Company may exercise a Legal Defeasance notwithstanding the prior exercise of a Covenant Defeasance. If the Company exercises a Legal Defeasance, payment of the Notes may not be accelerated due to an Event of Default. Upon satisfaction of the conditions set forth herein and on demand of the Company, the Trustee (x) shall acknowledge in writing the discharge of the obligations terminated by the Company, (y) shall execute documents and deliver such instruments in writing as shall be required to reconvey, release, assign and deliver to the Company any and all of the Trustee’s interest in the Collateral, the right, title and interest in and to any and all rights conveyed, assigned or pledged to the Trustee or otherwise subject to this Indenture, except amounts required to be paid to the Trustee under this Indenture for payment of the Notes, and (z) shall turn over to the Company or to any such person, body or authority as may be entitled to receive the same all balances then held by it hereunder. Covenant Defeasance, as effected hereby, means that the Company may omit to comply with and shall have no liability in respect of any term, condition or limitation set forth under any of the covenants in this Indenture except as set forth hereinabove, whether directly or indirectly by reason of any reference elsewhere herein to any such covenant or Section or to any other provision herein or in any other document.

          (b) Notwithstanding Section 13.1 (a) above, the obligations of the Company pursuant to Sections 2.8, 2.9, 2.10, 8.5 and this Article 13 shall survive until the Notes have been paid in full in cash. Thereafter, the obligations of the Company pursuant to Section 8.5 shall survive.

          SECTION 13.2 Conditions to Defeasance. Either the Legal Defeasance or the Covenant Defeasance may be exercised only if:

     (a) The Company shall have irrevocably deposited in trust with the Trustee (i) cash in an amount which, when added to any other moneys held by the Trustee and available for such payment, would be sufficient to pay (A) the principal of, and any premium and interest on, all Notes issued hereunder and under any Series Supplemental Indenture when due, whether on any Scheduled Payment Date or upon redemption or otherwise, and (B) all other sums payable hereunder and under any Series Supplemental Indenture, (ii) non-callable direct obligations of, or obligations guaranteed by, the United States, maturing on or before the date or dates when the payments specified in clause (i) above shall become due, the principal amount of which and the interest thereon, when

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due, is or will be, in the aggregate, sufficient to make all such payments or (iii) any combination of such cash and such obligations (the “Obligations”) specified in (ii) above, the aggregate amount of which and interest thereon, when due, are or will be sufficient to make all the payments specified in clause (i) above, and such deposit shall not cause the Trustee to have a conflicting interest as defined in and for the purposes of the Trust Indenture Act;

     (b) The Company shall have delivered to the Trustee a certificate from a nationally recognized firm of independent accountants expressing their opinion that the deposited cash and/or the Obligations without any reinvestment thereof will provide cash at such times and in such amounts as will be sufficient to pay principal of, and any premium and interest on, all Outstanding Notes when due, whether on any Scheduled Payment Date or upon redemption or otherwise;

     (c) The Company shall have delivered to the Trustee an Opinion of Counsel to the effect that (i) all preference periods applicable to the defeasance trust have expired under any applicable bankruptcy, insolvency, reorganization or similar laws affecting creditors’ rights generally, (ii) the defeasance trust resulting from the deposit does not constitute, or is qualified as, a regulated investment company under the Investment Company Act of 1940, as amended, and (iii) the Holders shall have a perfected security interest under applicable law in the Obligations so deposited with customary assumptions and qualifications;

     (d) No Default or Event of Default shall have occurred and be continuing on the date of such deposit or insofar as Events of Default from bankruptcy or insolvency events are concerned, at any time in the period ending on the 123rd day after the date of deposit;

     (e) Such Legal Defeasance or Covenant Defeasance, as the case may be, shall not result in a breach or violation of or constitute a Default under this Indenture, or any other material agreement or instrument to which the Company is a party or by which the Company is bound;

     (f) In the case of a Legal Defeasance, the Company shall have delivered to the Trustee an Opinion of Counsel confirming that (i) the Company has received from, or there has been published by, the Internal Revenue Service a ruling or (ii) since the date of this Indenture there has been a change in the applicable United States Federal income tax law, in either case to the effect that, and based thereon such Opinion of Counsel shall confirm that, none of the Holders of Notes of any series will recognize income, gain or loss for United States Federal income tax purposes as a result of such Legal Defeasance and such Holders will be subject to United States Federal income tax on the same amounts, in the same manner and at the same times as could have been the case if such Legal Defeasance had not occurred;

     (g) In the case of a Covenant Defeasance, the Company shall have delivered to the Trustee an Opinion of Counsel reasonably acceptable to the Trustee confirming that none of the Holders of any series will recognize income, gain or loss for United

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States Federal income tax purposes as a result of such Covenant Defeasance and such Holders will be subject to United States Federal income tax on the same amounts, in the same manner and at the same times as could have been the case if such Covenant Defeasance had not occurred; and

     (h) The Company shall have delivered to the Trustee an Officers’ Certificate and Opinion of Counsel, each stating that all conditions precedent provided for relating to either the Legal Defeasance or the Covenant Defeasance, as the case may be, have been complied with.

          Neither the Obligations nor moneys deposited with the Trustee pursuant to this section shall be substituted, withdrawn, reinvested or used for any purpose other than, and shall be segregated and held in trust for the payment of the principal of, and premium, if any and interest on, the Notes; provided that any moneys deposited with or paid to the Trustee for the payment of principal or interest on the Notes and not applied but remaining unclaimed for three years after the date upon which such principal or interest shall have become due and payable, shall be applied in accordance with Section 12.4.

ARTICLE 14

COLLATERAL DOCUMENTS

          SECTION 14.1 Collateral and Security and Pledge Agreements.

          (a) On the Issue Date, the Company and the Trustee will enter into the Collateral Documents and other similar instruments or documents as shall be necessary to create, perfect and make enforceable Liens upon the Property subject to the Lien of the Security Agreement, the Pledge Agreements and the Collateral Documents as provided in the Collateral Documents, in order that the Trustee shall enjoy, for the benefit of the Trustee and, except as otherwise provided in any Series Supplemental Indenture with respect to the Notes of any series issued thereunder, the Holders, a Lien on all of the Collateral referred to in the Collateral Documents.

          (b) The Trustee and the Company hereby acknowledge and agree that the Trustee holds the Collateral in trust for the benefit of the Trustee and, except as otherwise provided in any Series Supplemental Indenture with respect to the Notes of any series issued thereunder, the Holders, in each case pursuant to the terms of this Indenture and the Collateral Documents and the Company, pursuant to this Indenture as well as the Collateral Documents, hereby grants to the Trustee for the ratable benefit of the Holders entitled to the benefit of the Collateral Documents and the Collateral a security interest in the Collateral. Each Holder, by accepting a Note, except as otherwise provided in any Series Supplemental Indenture with respect to the Notes of any series issued thereunder to the extent that the Holders of such Notes have elected not to be subject to the Collateral Documents and not to be entitled to security in the Collateral, shall be deemed to have agreed to all the terms and provisions of the Collateral

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Documents; provided, however, that if any provisions of the Collateral Documents limit, qualify or conflict with the duties imposed by the TIA, when applicable, the TIA shall control.

          (c) As among the Holders entitled to security in the Collateral, the Collateral shall be held for the equal and ratable benefit of such Holders without preference, priority or distinction of any thereof over any other.

          (d) The Trustee is hereby authorized and directed to enter into each of the Collateral Documents contemplated hereby and to perform all of the obligations of the Trustee thereunder, including but not limited to, appointing the Collateral Agent under the Collateral Agency and Intercreditor Agreement and the Company acknowledges the same.

          SECTION 14.2 Maintenance of Liens.

          (a) Subject to the provisions of this Indenture, the Company shall take or cause to be taken all action required to maintain, preserve and protect the Liens on the Collateral granted by this Indenture and the Collateral Documents, including causing any Collateral Document, instruments of further assurance and all amendments or supplements thereto, to be promptly recorded, registered and filed and at all times to be kept recorded, registered and filed, and will execute and file statements and cause to be issued and filed statements, all in such manner and in such places and at such times as are prescribed in the Collateral Documents or in this Indenture and as may be required by law fully to preserve and protect the rights of the Holders and the Trustee under this Indenture and the Collateral Documents to the Collateral.

          Without limiting the generality of the foregoing, if after the Issue Date the Company or any of its Restricted Subsidiaries shall create, incur, assume or otherwise cause or suffer to exist or become effective any Lien of any kind upon any of its Property securing the Bank Credit Facility (which Property is not already subject to the Lien of the Collateral Documents or to perfection thereunder), the Company shall, or shall cause such Restricted Subsidiary to, as the case may be, (i) execute and file, as applicable, any and all further Collateral Documents and other instruments required under applicable law, upon substantially the same terms as the Collateral Documents securing the Bank Credit Facility, as shall be necessary to effectuate a Lien subject to the Bank Credit Facility and the Permitted Liens referred to in clauses (b), (c), (d), (e), (f), (g), (i), (o), (p) and (q) of the definition of such term in Section 1.2 hereof upon such Property for the benefit of the Holders (unless such Holders were not at such time entitled to security in the Collateral), unless such Lien cannot be effectuated under applicable law and (ii) deliver an Opinion of Counsel reasonably satisfactory to the Trustee that such Collateral Documents are valid, binding and enforceable obligations.

          (b) The Company shall, from time to time promptly pay and discharge all recording or filing fees, charges and taxes relating to the filing or registration of this Indenture and the Collateral Documents, any amendments thereto and any other instruments of further assurance.

          (c) The Company shall furnish to the Trustee:

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     (i) without limiting the documents otherwise to be delivered on the Issue Date, promptly after the execution and delivery of this Indenture, the Collateral Documents, each amendment or supplement to a Collateral Document or other instrument of further assurance, an Opinion or Opinions of Counsel stating that, in the opinion of such counsels, this Indenture, the Collateral Documents, any such amendment or supplement to a Collateral Document and other instruments of further assurance have been properly recorded, endorsed, registered and filed, or have been received by the applicable governmental authority for recording, filing or registration, to the extent necessary to make effective and perfect the Liens intended to be created by this Indenture and the Collateral Documents and reciting the details of such action or referring to prior Opinions of Counsel in which such details are given, or stating that, in the opinion of such counsel, no such action is necessary to make such Liens effective;

     (ii) on or before January 1 in each year beginning with January 1, 2004, (A) an Opinion or Opinions of Counsel, dated as of a date not earlier than 30 days prior to such date, either stating that, in the opinion of such counsels, such action has been taken with respect to the recording, registering, filing, re-recording, re-registering and re-filing of this Indenture, the Collateral Documents, of all amendments or supplements to the Collateral Documents, financing statements, continuation statements or other instruments of further assurances as is necessary to maintain the Lien of this Indenture and the Collateral Documents (including any additional Collateral pursuant to Section 4.17 hereof) and reciting the details of such action or referring to prior Opinions of Counsel in which such details are given, or stating that, in the opinion of such counsel, no such action is necessary to maintain such Lien and (B) an Officers’ Certificate, dated as of a date not earlier than 30 days prior to such date, stating that all fees required to be paid under each Collateral Document have been paid; and

     (iii) from time to time, notice of any recording, registration, filing, payment or other action taken in accordance with the provisions of Section 11.02(a) hereof, in each case as promptly as practicable after taking any such action.

          The Company will comply with Section 314(b) of the TIA.

          (d) The Company will not, and will not permit any Subsidiary thereof to, take or omit to take any action which action or omission might or would have the result of impairing the Lien with respect to the Collateral, and the Company shall not, and shall not permit any Subsidiary thereof to, grant to any Person other than the Trustee, for the benefit of the Trustee and the Holders entitled thereto, any interest whatsoever in any of the Collateral, except as expressly permitted under this Indenture and the Collateral Documents, provided that nothing herein shall be deemed to prohibit any amendment, modification or supplement of this Indenture or any Collateral Document in connection with the release by the Trustee of any Lien upon any Property of the Company or any Restricted Subsidiary thereof that is the subject of a sale or other disposition permitted hereunder, to the extent such release is permitted pursuant to Article 15 hereof.

          SECTION 14.3 Action by the Trustee. In addition to Section 7.3 and subject to the provisions of the Collateral Documents, the Trustee, acting at the written direction of the

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Holders of Notes secured by the Collateral, shall have power to institute and maintain such suits and proceedings as the Trustee reasonably may deem expedient to prevent any impairment of the Collateral by any acts which are in violation of the terms of the Collateral Documents, and such suits and proceedings as the Trustee reasonably may deem expedient to preserve or protect its interests and the interests of the Holders in the Collateral; provided, that nothing contained in this Section 14.3 shall be deemed to be a waiver of any right which the Company would otherwise have with respect to the defense of any such suit or proceeding.

ARTICLE 15

POSSESSION, USE AND RELEASES OF PROPERTY;
WITHDRAWAL OF TRUST MONEYS

          SECTION 15.1 Possession and Use of Property; Dispositions without Release. Subject to other applicable provisions of this Indenture and any Series Supplemental Indenture, and so long as no Event of Default exists, the Company shall be entitled, except as herein otherwise expressly provided, (i) to possess, use and enjoy the Collateral, except money and securities which are expressly required to be deposited with the Trustee; and (ii) to receive, use and dispose of the tolls, rents, revenues, issues, income, products and profits of the Collateral, and to exercise any and all rights under and with respect to the Collateral and to enforce the performance hereof. Subject to other applicable provisions of this Indenture and any Series Supplemental Indenture, and so long as no Event of Default exists, the Company shall have the right, at any time and from time to time, without any release from or consent by the Trustee,

     (a) to sell or dispose of, free from the Lien of the Collateral Documents, any part of the Collateral consisting of inventory, or consisting of machinery, equipment, furniture, apparatus, tools or implements, materials or supplies, structures or portions or components thereof or other similar Property which may have become obsolete or unfit for use or which is no longer useful, necessary or profitable in the conduct of the business of the Company, and no purchaser of any such Property shall be bound to inquire into any question affecting the right of the Company to sell or otherwise dispose of the same free from the Lien of the Collateral Documents;

     (b) to modify, amend, supplement, cancel, release or replace any leases, rights of way, agreements or contracts subject to the Lien of the Collateral Documents; provided that any modified, amended or substituted leases, rights of way, agreements or contracts shall forthwith become subject to the Lien of the Collateral Documents to the same extent as those previously existing;

     (c) in compliance with the Collateral Documents, to surrender or modify any franchise, license or permit which it may own or under which it may be operating;

     (d) to alter, repair, replace, change the location or position of and add to its structures, machinery, equipment and other fixtures and appurtenances; provided, however, that no change shall be made in the location of any such Property subject to the

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Lien of the Collateral Documents which removes such Property into a jurisdiction in which the Collateral Documents, or appropriate certificates or statements with respect thereto, have not been recorded or filed in the manner and to the extent required by law to preserve the Lien of the Collateral Documents on such Property;

     (e) to grant rights of way and easements over or in respect of any Property owned by the Company and subject to the Lien of the Collateral Documents, provided that such grant will not have a Material Adverse Effect; and/or

     (f) to cut and remove, and to permit others to cut and remove, trees or timber, and to take and permit others to take sand, gravel, rock or earth from any land subject to the Lien of the Collateral Documents.

     The Trustee shall, from time to time, execute any written instrument to confirm any action taken by the Company under this Section, upon receipt by the Trustee of a request for the same, together with an Officers’ Certificate stating that the action so to be confirmed was duly taken in conformity with a designated provision of this Section, and an Opinion of Counsel stating that said action was duly taken by the Company in conformity with said provision and that the execution of such written instrument is appropriate to confirm such action under this Section.

     SECTION 15.2 Releases. The Company shall have the right, subject to other applicable provisions of this Indenture and any Series Supplemental Indenture, at any time and from time to time, to sell or dispose of any part of the Collateral (except cash and other personal Property held by, or required to be deposited or pledged with, the Trustee hereunder and except contracts and contract rights which are subject to the Lien of the Collateral Documents), and the Trustee shall, from time to time, release Property so sold or disposed of or subject to purchase money Indebtedness from the Lien of the Collateral Documents, but only upon receipt by and deposit with the Trustee of the following:

     (a) a resolution of the Board of Directors of the Company requesting such release and describing the Property to be released;

     (b) an Officers’ Certificate dated not more than 30 days prior to the application for such release, and unless one of the officers signing the same is an engineer, appraiser or other expert and shall so state, signed also by an engineer, appraiser or other expert, setting forth in substance as follows:

     (1) that the Company has sold or disposed of or proposes to sell or dispose of the Property so requested to be released;

     (2) either

     (A) that the Property to be released is no longer necessary in the conduct of the Company’s business or other Property acquired or to be acquired in substitution therefor is as well suited to the needs of the Company’s business; or

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     (B) that such sale or disposition has been or is to be made in lieu and in reasonable anticipation of the taking of such Property by the exercise of a power of eminent domain or a similar right or power; or

     (C) that such sale has been or is to be made in connection with a transaction permitted by Sections 4.9, 4.10, 4.11 and 4.12 and any other applicable provision of this Indenture or a Series Supplemental Indenture;

     (3) whether

     (A) the aggregate of the fair value of the Property to be released and the fair value of all other Property released since the commencement of the then current calendar year (as previously certified to the Trustee) is 10% or more of the aggregate principal amount of all Notes at the time Outstanding, and whether

     (B) the fair value of the Property to be released is at least $25,000 and at least 1% of the aggregate principal amount of all Notes at the time Outstanding,

and, if the conditions described in both preceding clauses (A) and (B) are present, that an independent engineer’s, appraiser’s or other expert’s certificate as to the fair value of the Property to be released will be furnished under subsection (c) of this Section;

     (4) the fair value at the date of the certificate, in the opinion of the engineer, appraiser or other expert, of the Property to be released; except that it shall not be necessary under this clause to state the fair value of any Property whose fair value is certified in an independent engineer’s, appraiser’s or other expert’s certificate under subsection (c);

     (5) whether an Event of Default has occurred and is continuing and if so, describing the nature of such Event of Default; and

     (6) that no Material Adverse Effect with respect to the Company could be reasonably expected to occur as a result of the release of the Property;

     (7) that, in the opinion of the signers, the proposed release will not impair the security under the Collateral Documents in contravention of the provisions thereof;

     (8) that the proposed release will not result in a Default or Event of Default under this Indenture or any Series Supplemental Indenture;

     (c) in case it shall be stated pursuant to clause (3) of the foregoing subsection (b) that the certificate of an independent engineer, appraiser or other expert will be furnished under this subsection, such certificate, dated not more than 30 days

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prior to the application for such release, stating the fair value, in said engineer’s, appraiser’s or other expert’s opinion, of the Property to be released, and stating also that, in the opinion of said engineer, appraiser or other expert the proposed release will not impair the security under the Collateral Documents in contravention of the provisions thereof; and

          (d) an Opinion of Counsel stating that the instruments which have been or are therewith delivered to the Trustee conform to the requirements of the Collateral Documents and this Indenture, including this Section 15.2 and that the Property in question may be lawfully released from the Lien of the Collateral Documents.

          SECTION 15.3 Release of Lien on Equity Interests of Subsidiaries.

          (a) So long as no Default or Event of Default has occurred and is continuing, in the event that, following the Issue Date and the delivery of the Officers’ Certificate described in paragraph (b) below, (i) any of the Company’s Subsidiaries incurs Non-Recourse Debt, (ii) such Non-Recourse Debt requires the pledge of any Equity Interests of such Subsidiary to secure such Non-Recourse Debt and (iii) such Equity Interests have previously been made subject to the Lien of this Indenture and the Collateral Documents in accordance with Section 4.17 of this Indenture, then the Equity Interests of such Subsidiary required to be pledged shall be released from the Lien created by this Indenture and the Collateral Documents in accordance with the provisions of this Indenture, the Collateral Documents and the TIA, such release to be effective as of the date such Equity Interests are pledged to secure such Non-Recourse Debt.

          (b) Upon the request of the Company pursuant to an Officers’ Certificate certifying that all conditions precedent under paragraph (a) and this Indenture, the Trustee shall execute, deliver or acknowledge any necessary or proper instruments of termination and release (prepared by the Company) reasonably required to effect the release of any Equity Interests forming part of the Collateral as provided in paragraph (a) above.

          SECTION 15.4 No Impairment of Continuing Security. The release of any Collateral from the Lien of this Indenture, any Series Supplemental Indenture and the Collateral Documents in accordance with the terms of this Indenture and of the Collateral Documents shall not be deemed to impair the Liens of this Indenture and the Collateral Documents as to any Collateral not so released.

          SECTION 15.5 Purchaser Protected. No purchaser in good faith of Property purporting to be released herefrom or from the Collateral Documents shall be bound to ascertain the authority of the Trustee to execute the release or to inquire as to the existence of any conditions herein prescribed for the exercise of such authority; nor shall any purchaser or grantee of any Property or rights permitted by this Article to be sold, granted or otherwise disposed of by the Company, be under any obligation to ascertain or inquire into the authority of the Company to make any such sale, grant or other disposition. Any release executed by the Trustee under this Article shall be sufficient for the purposes of this Indenture and shall constitute a good and valid release of the Property therein described from the Lien hereof.

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          SECTION 15.6 “Trust Moneys”. Any release of any item of the Collateral in accordance with the foregoing provisions of this Article 15 shall also be deemed to be a release of the proceeds of such Collateral unless such proceeds are required to be deposited with the Trustee in accordance with any other provisions hereof or of any Collateral Document. All moneys (except moneys deposited by the Company in satisfaction of any interest payment obligation or sinking fund, mandatory redemption or analogous obligation with respect to payment of principal) if any, required to be paid to the Trustee the disposition of which is not elsewhere herein otherwise specifically provided for (all such moneys being herein sometimes called “Trust Moneys”) shall be held by the Trustee as a part of the Collateral, may be withdrawn by the Company, and shall be paid or applied by the Trustee, from time to time as provided in Sections 15.6 through 15.8 and the Collateral Documents.

          SECTION 15.7 Powers Exercisable Notwithstanding Event of Default. In case an Event of Default shall have occurred and be continuing, the Trustee shall not be required to grant any release or take any other action under any of the sections of this Article except with the consent of the Majority Holders who have an interest in the Collateral.

          SECTION 15.8 Powers Exercisable by Trustee or Receiver. In case the Collateral (other than cash and other personal Property held by, or required to be deposited or pledged with, the Trustee hereunder) shall be in the possession of a receiver or trustee lawfully appointed, the powers in this Article conferred upon the Company with respect to releases and the withdrawal or application of Trust Moneys may be exercised by such receiver or trustee, in which case a written request or order signed by said receiver or trustee shall be deemed the equivalent of any resolution of the Board of Directors of the Company required by this Article, and a certificate signed by such receiver or trustee shall be deemed the equivalent of any required Officers’ Certificate. If the Trustee shall be in possession of the Collateral under any provision of this Indenture, such powers may be exercised by the Trustee in the discretion of the Trustee.

          SECTION 15.9 Investment of Moneys. Any Trust Moneys shall be invested or reinvested in Permitted Investments at the written direction of an Authorized Representative of the Company to the Trustee; provided, however, that the Trustee shall not cause investment of such monies at any time when the maturity of any of the Notes has been accelerated and provided, further, that at any time after the occurrence and during the continuance of an Event of Default, the Trustee may, but is not obligated to, (and, if instructed in writing by the Majority Holders of Outstanding Notes of all series shall) in its (or their) discretion at any time and from time to time elect to liquidate any such Permitted Investments (in an amount necessary to cure such Event of Default) and apply or cause to be applied the proceeds thereof to the payment of the principal of and interest on the Notes in the manner specified in the Collateral Documents. Such investments shall mature in such amounts and have maturity dates or be subject to redemption at the option of the holder thereof on or prior to maturity as needed for the purposes of such funds. Any profit realized from investments of Trust Moneys shall be held and applied as additional Trust Moneys. In no event shall the Trustee or the Securities Intermediary be liable for the selection of Permitted Investments or for investment losses incurred thereon. Neither the Trustee nor the Securities Intermediary shall have liability in respect of losses incurred as a result of the liquidation of any Permitted Investment prior to its stated maturity or the failure of the Company to provide timely written investment direction, except to the extent such losses were

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due to the gross negligence or bad faith on the part of the Trustee or the Securities Intermediary. Neither the Trustee nor the Securities Intermediary shall have any obligation to invest or reinvest any amounts held hereunder in the absence of written investment direction.

ARTICLE 16

LIMITATION ON LIABILITY

          SECTION 16.1 Limitation on Liability. Notwithstanding anything to the contrary contained in this Indenture or the Notes or the Collateral Documents, the liability and obligation of the Company to perform and observe and make good the obligations contained in this Indenture and the Notes and the Collateral Documents and to pay the Indebtedness issued hereunder in accordance with the provisions of this Indenture and the Notes (such liability and obligation being herein referred to as the “Company’s Obligations”), or any part thereof, or any claim based thereon or otherwise in respect thereof shall not (except as expressly provided in the last paragraph of this Section 16.1) be enforced by any action or proceeding wherein damages or any money judgment or any deficiency judgment or any judgment establishing any personal obligation or liability shall be sought, collected or otherwise obtained against any Member, any parent of a Member or any past, present or future partner, officer, director, shareholder, incorporator, Affiliate or related Person of any Member or the Company (each such Member, parent of a Member and past, present or future partner, officer, director or shareholder, incorporator, Affiliate or related Person being herein referred to as a “Related Person”), and (except as expressly provided in the last paragraph of this Section 16.1) each of the Trustee, the Holders and any Person acting on behalf of the Trustee or the Holders, for itself and its successors and assigns, irrevocably waives any and all right to sue for, seek or demand any such damages, money judgment, deficiency judgment or personal judgment against any Related Person under or by reason of or in connection with the Company’s Obligations, or any part thereof, or any claim based thereon or otherwise in respect thereof and (except as expressly provided in the last paragraph of this Section 16.1) agrees to look solely to the Company and Collateral held under or in connection with the Collateral Documents for the enforcement of the Company’s Obligations.

          Nothing contained in this Section 16.1 shall be construed (i) as preventing the Trustee, the Holders and any Person acting on behalf of the Trustee or the Holders from naming the Company or a Related Person in any action or proceeding brought by the Trustee, the Holders and any Person acting on behalf of the Trustee or the Holders to enforce and to realize upon or the Collateral purported to be provided by such Related Persons under or in connection with the Collateral Documents so long as no judgment, order, decree or other relief in the nature of a personal or deficiency judgment or otherwise establishing any personal obligation under or by reason of or in connection with the Company’s Obligations, or any part thereof, or any claim based thereon or otherwise in respect thereof shall be asked for, taken, entered or enforced against any Related Person, in any such action or proceeding, (ii) as modifying, qualifying or affecting in any manner whatsoever the Lien and security interests created by this Indenture and the Collateral Documents and the other Financing Documents or the enforcement thereof by the Holders or the Trustee or any Person acting on behalf of the Holders or the Trustee, (iii) as

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modifying, qualifying or affecting in any manner whatsoever the personal recourse undertakings, obligations and liabilities of any Person (including, without limitation, any Related Person) under any capital contribution agreement, any guaranty of payment, completion guaranty or any guaranty or indemnification agreement now or hereafter executed and delivered to the Trustee, the Holders or any Person acting on behalf of the Trustee or the Holders in connection with the transactions contemplated by this Indenture or (iv) as modifying, qualifying or affecting in any manner whatsoever the personal recourse liability of any Related Person, or any other Person for fraud or willful misrepresentation or any wrongful misappropriation or diversion of any portion of the Collateral.

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          IN WITNESS WHEREOF, the parties have caused this Indenture to be duly executed by their respective officers thereunto duly authorized as of the day and year first above written.

AMERICAN REF-FUEL COMPANY LLC
By:	/s/ Michael J. Gruppuso
	Name:	Michael J. Gruppuso
	Title:	Vice President Chief financial Officer

WACHOVIA BANK, NATIONAL ASSOCIATION, as Trustee
By:	/s/ Paul O’Brien
	Name:	PAUL O’BRIEN
	Title:	Assistant Vice President

WACHOVIA BANK, NATIONAL ASSOCIATION, as Securities Intermediary
By:	/s/ Paul O’Brien
	Name:	PAUL O’BRIEN
	Title:	Assistant Vice President

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SCHEDULE A

Permitted Liens

None.

American Ref-Fuel Company LLC Indenture

SCHEDULE B

PURCHASED INTERCOMPANY DEBT

1.	Subordinated Note(s) of American Ref-Fuel Company of Essex County, L.P. dated April 1,1990 in the amount of $32,120,102.92 held by Duke/UAE Essex LLC.
2.	Subordinated Note(s) of American Ref-Fuel Company of Hempstead, L.P. dated October 1, 1989 in the amount of $14,669,702.85 held by Duke/UAE Hempstead LLC.
3.	Subordinated Note(s) of American Ref-Fuel Company of Niagara, L.P. dated August 9,1993 and dated May 5, 1993 in the aggregate amount of $21,972,322.98 held by Duke/UAE Niagara LLC.
4.	Subordinated Note(s) of American Ref-Fuel Company of Southeastern Connecticut dated September 1, 1992 in the amount of $11,361,940.19 held by Duke/UAE SECONN LLC.

SCHEDULE C

Leases

Amended and Restated Lease Agreement, dated as of April 30, 1997, among Fleet National Bank, American Ref-Fuel Company of Delaware, L.P., and Delaware Resource Management, Inc.

American Ref-Fuel Company LLC Indenture

EX-4.12

exv4w12

EX-4.13

Exhibit 4.13

EXECUTION COPY

FIRST SUPPLEMENTAL INDENTURE

dated as of May 1,2003

to

INDENTURE

dated as of May 1, 2003

among

AMERICAN REF-FUEL COMPANY LLC

and

WACHOVIA BANK, NATIONAL ASSOCIATION,
as Trustee and Securities Intermediary

TABLE OF CONTENTS

	Page
ARTICLE I DEFINITIONS	2
ARTICLE II THE TERMS OF THE NOTES	3
SECTION 2.1. Terms of 6.26% Senior Notes Due 2015	3
SECTION 2.2. Denominations	4
SECTION 2.3. Interest and Principal	4
SECTION 2.4. Redemption; Repurchase	5
SECTION 2.5. Restrictions on Transfer and Exchange of Initial Notes	5
ARTICLE III APPLICATION OF PROCEEDS FROM SALE OF NOTES	8
ARTICLE IV DEBT SERVICE RESERVE ACCOUNTS	9
ARTICLE V COVENANTS OF THE COMPANY	9
SECTION 5.1. Financial Statements and Other Information	9
SECTION 5.2. Other Covenants	9
ARTICLE VI COLLATERAL	9
ARTICLE VII MISCELLANEOUS	9
SECTION 7.1. Execution of Supplemental Indenture	9
SECTION 7.2. Concerning the Trustee	9
SECTION 7.3. Counterparts	10
SECTION 7.4. GOVERNING LAW	10
EXHIBITS:
Exhibit A — Form of Transferor Certificate
Exhibit B — Form of Institutional Accredited Investor Transferee Compliance Letter
Exhibit C — Form of Regulation S Transfer Certificate
SCHEDULES
Schedule 1-A — Form of Definitive Note
Schedule 1-B — Form of Global Note

i

          FIRST SUPPLEMENTAL INDENTURE, dated as of May 1, 2003 (this “First Supplemental Indenture”), among AMERICAN REF-FUEL COMPANY LLC, a Delaware limited liability company, (together with its successors and assigns, the “Company”), its executive office and mailing address being at 155 Chestnut Ridge Road, Montvale, NJ 07645 and Wachovia Bank, National Association, a national banking association (the “Trustee”), its corporate trust office and mailing address being at 21 South Street, Morristown, New Jersey 07690, to the Indenture dated as of May 1, 2003 (the “Original Indenture”) between the Company and the Trustee.

          WHEREAS, the Company and the Trustee have heretofore executed and delivered the Original Indenture to provide for the issuance from time to time of bonds, debentures, notes or other evidences of indebtedness to be issued in one or more series;

          WHEREAS, Sections 2.1, 2.3 and 11.1 of the Original Indenture provide, among other things, that the Company and the Trustee may enter into indentures supplemental to the Original Indenture for, among other things, the purpose of establishing the designation, form, terms and provisions of Notes of any series as permitted by Sections 2.1, 2.3 and 11.1 of the Original Indenture;

          WHEREAS, the Company (i) desires the issuance of one series of Notes to be designated as hereinafter provided and (ii) has requested the Trustee to enter into this First Supplemental Indenture for the purpose of establishing the designation, form, terms and provisions of the Notes;

          WHEREAS, all action on the part of the Company necessary to authorize the issuance of the Notes under the Original Indenture and this First Supplemental Indenture (the Original Indenture, as supplemented by this First Supplemental Indenture, being hereinafter called the “Indenture”) has been duly taken; and

          WHEREAS, all acts and things necessary to make the Notes, when executed by the Company and authenticated and delivered by the Trustee as provided in the Original Indenture, the legal, valid and binding obligations of the Company, and to constitute these presents a valid and binding supplemental indenture according to its terms, have been done and performed, and the execution of this First Supplemental Indenture and the creation and issuance under the Indenture of said Notes have in all respects been duly authorized, and the Company, in the exercise of the legal right and power vested in it, executes this First Supplemental Indenture and proposes to create, execute, issue and deliver the Notes.

          NOW, THEREFORE, THIS FIRST SUPPLEMENTAL INDENTURE WITNESSETH:

          That, in order to establish the designation, form, terms and provisions of, and to authorize the authentication and delivery of, said Notes, and in consideration of the acceptance of the Notes by the Holders thereof and of other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows:

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ARTICLE I

DEFINITIONS

          (a) Capitalized terms used herein and not otherwise defined herein shall have the respective meanings ascribed thereto in the Original Indenture.

          (b) Each capitalized term defined herein shall relate only to the Senior Notes due 2015, and no other series of Notes issued by the Company. For all purposes of this First Supplemental Indenture, except as otherwise expressly provided or unless the context otherwise requires, the following terms shall have the following respective meanings (such meanings shall apply equally to both the singular and plural forms of the respective terms):

          “Additional Notes” has the meaning assigned to such term in Section 2.1 (a) of this First Supplemental Indenture.

          “Distribution Compliance Period” has the meaning assigned to such term in Regulation S.

          “Initial Notes” means, the 6.26% Senior Notes due 2015 being issued by the Company under the original Indenture and this First Supplemental Indenture.

          “Institutional Accredited Investor” shall have the meaning ascribed thereto in Section 2.1(b) hereof.

          “Institutional Accredited Investor Note” means a Note registered in the name of, or in the name of a nominee of, an Institutional Accredited Investors.

          “Issue Date” means May 9, 2003, the date on which the Initial Notes are first issued and sold hereunder.

          “Make-Whole Premium” means an amount equal to the excess, if any, of (i) the present value of all interest and principal payments scheduled to become due after the date of the optional redemption by the Company in respect of the Notes being redeemed (such present value to be determined on the basis of a discount rate equal to the sum of (a) the Treasury Rate and (b) 50 basis points over (ii) the outstanding principal amount of the Senior Notes. “Treasury Rate” means the yield to maturity at the time of computation of U.S. Treasury securities with a final maturity (as compiled and published in the most recent Federal Reserve Statistical Release H.15(519) (or any successor release) which has become publicly available in New York at least two business days prior to the redemption date (or, if such Statistical Release is no longer published, any publicly available source or similar market data)) most nearly equal to the remaining average life on the redemption date of the Notes being redeemed, provided, however, that if the period from the redemption date to the maturity date of the series of Senior Notes being redeemed is less than one year, the weekly average yield on actively traded U.S. Treasury securities adjusted to a constant maturity of one year will be used.

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          “Non-U.S. Person” has the meaning assigned to such term in Regulation S.

          “QIB” shall have the meaning given to such term in Section 2.1 (b) hereof.

          “Regulation S” means Regulation S promulgated under the Securities Act, as amended and in effect from time to time and any successor regulation.

          “Regulation S Global Note” means one or more Notes deposited with a custodian for, and registered in the name of a nominee of, the Registered Depositary, interest in which will be held for the benefit of purchasers of the Notes in offshore transactions under Regulation S.

          “Resale Restriction Termination Date” means the period of two years after the later of the original issue date of a Restricted Security and the last date on which the Company or any affiliate of the Company was the owner of such Restricted Security (or any predecessor of such Restricted Security).

          “Restricted Securities” shall have the meaning given to such term in Section 2.5 hereof.

          “Rule 144A Global Note” means the one or more Notes deposited with a custodian for, and registered in the name of a nominee of, the Registered Depositary, interests in which will be held for the benefit of U.S. purchasers of bonds who are QIBs under Rule 144A.

ARTICLE II

THE TERMS OF THE NOTES

          SECTION 2.1. Terms of 6.26% Senior Notes Due 2015.

          (a) There is hereby created one series of Notes designated the 6.26% Senior Notes Due 2015, in the aggregate principal amount which on the Issue Date may not exceed $275,000,000 (the “Initial Notes”). The Company may, following the Issue Date in compliance with the Original Indenture and this First Supplemental Indenture create and issue Notes hereunder that will have the same terms and form part of the same series as the Initial Notes (the “Additional Notes”). The Initial Notes and any Additional Notes may forthwith be executed by the Company and delivered to the Trustee for authentication and delivery by the Trustee in accordance with the provisions of Section 2.4 of the Original Indenture.

          (b) The Initial Notes and any Additional Notes, if any, (i) if issued to Persons that are institutional “accredited investors” meeting the requirements of Rule 501 (a)(1), (2), (3) or (7) under the Securities Act (each, an “Institutional Accredited Investor”) that are not QIBs (as defined below), shall be issued in certificated definitive form, substantially in the form of Schedule 1-A hereto, registered in the name of the purchaser thereof and (ii) (A) if issued to “qualified institutional buyers” (as defined in Rule 144A; each, a “QIB”) in reliance on Rule 144A or (B) if issued in offshore transactions to Non-U.S. Persons in reliance on

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Regulation S, shall be issued in the form of one or more Global Notes substantially in the form of Schedule 1-B hereto, shall be deposited on behalf of the purchasers of the Initial Notes represented thereby with the Trustee (at its respective address for notices set forth in Section 1.4 of the Original Indenture), as custodian for the Registered Depositary, shall be registered in the name of the Registered Depositary or a nominee of the Registered Depositary and the aggregate principal amount of Initial Notes so issued may from time to time be increased or decreased by adjustments made on the records of the Trustee and the Registered Depositary or its nominee.

          (c) The Initial Notes and any Additional Notes shall have and be subject to such other terms as provided in the Indenture.

          (d) The first sentence of the first paragraph of all such form of Initial Notes and Additional Notes shall read in its entirety as follows:

“AMERICAN REF-FUEL COMPANY LLC, a Delaware limited liability company (hereinafter called the “Company”, which term includes any successor or assign under the Indenture referred to below), for value received hereby promises to pay to Cede & Co., or its registered assigns, the outstanding Principal Amount hereof after subtracting the aggregate principal amount of any definitive certificated Notes issued in exchange for a portion or portions hereof, such payment to be made in semiannual installments on June 30 and December 31 of each year (commencing December 31, 2003) and ending on the final Scheduled Payment Date set forth above, each such installment to be in the amount and payable on the date set forth on Annex A attached hereto (provided that the portion of the Principal Amount remaining unpaid on the final Scheduled Payment Date, together with all interest accrued thereon, shall in any and all cases be due and payable on the final Scheduled Payment Date), and to pay interest on the unpaid portion of the Principal Amount at the interest rate set forth above from the most recent Scheduled Payment Date to which interest has been paid or duly provided for or, if no interest has been paid or duly provided for, from the issue date, set forth above, semiannually on June 30 and December 31 in each year (commencing December 31, 2003) until the Principal Amount is paid in full or payment thereof is duly provided for.”;

          SECTION 2.2. Denominations. Each Note created hereby shall be issued in fully registered form without coupons in minimum denominations of $100,000 and integral multiples of $1,000 in excess thereof.

          SECTION 2.3. Interest and Principal. Each Note created hereby shall bear interest on the unpaid principal amount thereof from time to time outstanding at the rate of interest set forth in the forms of such series attached hereto. The principal amount of each Note created hereby shall be due and payable in installments as set forth in the form of Note attached hereto.

          Payment of principal of and interest on each Note created hereby shall be made (a) if the Company so elects, by check mailed to the Holder at his or her registered address or (b) otherwise as provided in Section 2.10 of the Original Indenture or the Notes; provided that the final installment of principal payable with respect to each Note created hereby shall be

American Ref-Fuel Company Supplemental Indenture

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payable as provided in Section 5.5 of the Original Indenture (in the case of any such Note redeemed) or payable upon presentation and surrender of each such Note at the Place of Payment.

          SECTION 2.4. Redemption; Repurchase.

          (a) Optional Redemption. Subject to the provisions of Section 5.1 of the Original Indenture, Notes created hereby are subject to optional redemption under the conditions and on the terms set forth in the Original Indenture at a price equal to the Redemption Price plus the
Make-Whole Premium.

          (b) Mandatory Redemption. Subject to the provisions of Section 5.2 of the Original Indenture, Notes created hereby are subject to mandatory redemption under the conditions and on the terms set forth in the Original Indenture.

          SECTION 2.5. Restrictions on Transfer and Exchange of Initial Notes.

          (a) Initial Notes and Additional Notes in definitive form, all Rule 144A Global Notes and all beneficial interests in one or more Rule 144A Global Notes, and all Notes issued upon registration of transfer of, or in exchange for, any such Notes, shall be restricted securities (within the meaning of Rule 144 under the Securities Act; hereinafter, collectively, “Restricted Securities”) and shall be subject to the restrictions on transfer provided in the legend set forth on the Restricted Securities. The Holder of each Restricted Security, by such Holder’s acceptance thereof, agrees to be bound by such restrictions on transfer. All Restricted Securities shall bear the legend set forth on the face of the Restricted Securities.

          Institutional Accredited Investors that are not QIBs may hold interests in the Initial Notes and Additional notes only in definitive certificated form as Certificated Notes. Any beneficial interest in a Global Note that is a Restricted Security and is transferred to an Institutional Accredited Investor which is not a QIB will be delivered in the form of a Certificated Note and will cease to be an interest in such Global Note.

          Unless determined otherwise by the Company in accordance with applicable law, each such Rule 144A Global Note and all Certificated Notes, upon transfer or exchange of beneficial interests in a Rule I44A Global Note will bear the legend set forth on the face of the Restricted Securities.

          Each Holder of a Certificated Note or a beneficial interest in a Global Note that is a Restricted Security will be deemed to have represented and agreed to offer, sell, pledge or otherwise transfer such Notes or beneficial interest only in accordance with the legend set forth on the face of the Restricted Securities.

          Upon the transfer, exchange or replacement of Certificated Notes bearing the legend, or upon request for removal of the legend on a Certificated Note, the Trustee will deliver Notes that do not bear such legend if the Trustee has been provided evidence satisfactory to the

American Ref-Fuel Company Supplemental Indenture

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Company (which may include an Opinion of Counsel) that neither the legend nor the restrictions on transfer set forth therein are required to ensure compliance with the Securities Act.

          Subject to the restrictions on transfer and exchange set forth herein and in the Original Indenture, the holder of any Note may transfer or exchange such Note in whole or in part (in a principal amount equal to the minimum authorized denomination or any greater amount which is an integral multiple of $1,000 or a lesser amount if the holder is transferring or exchanging all of the Notes held by such holder) by surrendering it at the Corporate Trust Office of the Trustee or at the office of the transfer agent, together with (a) an executed instrument of assignment and transfer substantially in the form set forth in Exhibit A to this First Supplemental Indenture (in the case of a transfer) or a written request for exchange (in the case of exchange) and (b) additional certifications and evidence that such transfer or exchange is in compliance with the Securities Act and the restrictions on transfer set forth in such Note as may be required pursuant to the terms of this First Supplemental Indenture.

          Upon surrender of a Certificated Note for transfer or exchange with the appropriate documentation, or notification of a request for transfer or exchange of a beneficial interest in a Global Note for a definitive Note or Notes, subject to the restrictions described herein and in the Original Indenture, the Trustee will, within five Business Days of such request if made at the Corporate Trust Office of the Trustee, or within 10 Business Days if made at the office of a transfer agent (other than the Trustee), authenticate and deliver at the Corporate Trust Office of the Trustee or the office of the transfer agent, as the case may be, to the transferee (in the case of transfer) or Holder (in the case of exchange) or send by first class mail at the risk of the transferee (in the case of transfer) or Holder (in the case of exchange) to such address as the transferee or Holder, as applicable, may request, a definitive Note or Notes, as the case may require, for a like aggregate principal amount and in such authorized denomination or denominations as may be requested. The presentation for transfer or exchange of any definitive Note will not be valid unless made at the Corporate Trust Office of the Trustee or at the office of a transfer agent by the registered holder in person or by a duly authorized attorney-in-fact. The Security Registrar is not required (a) to issue, register the transfer of or exchange any Initial Notes of any series during a period beginning at the opening of business 15 days before the day of the mailing of a notice of redemption of Notes of such series selected for redemption and ending at the close of business on the day of such mailing or (b) to issue, register the transfer of or exchange any Initial Note selected for redemption in whole or in part except the unredeemed portion of any Initial Note selected for redemption in part. No service charge will be required of any Holder participating in any transfer or exchange of Notes in respect of such transfer or exchange, but, with certain exceptions, payment may be required of any tax or other governmental charges that may be imposed in connection therewith.

          (b) The following provisions shall apply with respect to any proposed transfer of a Rule 144A Global Note or a beneficial interest therein or an Institutional Accredited Investor Note prior to the expiration of the Resale Restriction Termination Date:

          (i) a transfer of a Rule 144A Global Note or a beneficial interest therein or an Institutional Accredited Investor Note to a QIB shall be made upon the

American Ref-Fuel Company Supplemental Indenture

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representation of the transferee that it is purchasing the Note for its own account or an account with respect to which it exercises sole investment discretion and that it and any such account is a QIB and is aware that the sale to it is being made in reliance on Rule 144A and acknowledges that it has received such information regarding the Company as the transferee has requested pursuant to Rule 144A or has determined not to request such information and that it is aware that the transferor is relying upon its foregoing representations in order to claim the exemption from registration provided by Rule 144A;

          (ii) a transfer of a Rule 144A Global Note or a beneficial interest therein or an Institutional Accredited Investor Note to an Institutional Accredited Investor shall be made upon receipt by the Trustee or its agent of a certificate substantially in the form set forth in Exhibit B annexed hereto from the proposed transferee and, if requested by the Company or the Trustee, the delivery of an opinion of counsel, certifications and/or other information satisfactory to each of them; and

          (iii) a transfer of a Rule 144A Global Note or a beneficial interest therein or an Institutional Accredited Investor Note to a Non-U.S. Person shall be made upon receipt by the Trustee or its agent of a certificate substantially in the form set forth in Exhibit C annexed hereto from the proposed transferee and, if requested by the Company or the Trustee, the delivery of an opinion of counsel, certifications and/or other information satisfactory to each of them.

          (c) The following provisions shall apply with respect to any proposed transfer of a Regulation S Global Note prior to the expiration of the Distribution Compliance Period:

          (i) a transfer of a Regulation S Global Note or a beneficial interest therein to a QIB shall be made upon the representation of the transferee that it is purchasing the Note for its own account or an account with respect to which it exercises sole investment discretion and that it and any such account is a QIB and is aware that the sale to it is being made in reliance on Rule 144A and acknowledges that it has received such information regarding the Company as the transferee has requested pursuant to Rule 144A or has determined not to request such information and that it is aware that the transferor is relying upon its foregoing representations in order to claim the exemption from registration provided by Rule 144A;

          (ii) a transfer of a Regulation S Global Note or a beneficial interest therein to an Institutional Accredited Investor shall be made upon receipt by the Trustee or its agent of a certificate substantially in the form set forth in Exhibit B annexed hereto from the proposed transferee and, if requested by the Company or the Trustee, the delivery of an opinion of counsel, certifications and/or other information satisfactory to each of them; and

          (iii) a transfer of a Regulation S Global Note or a beneficial interest therein to a Non-U.S. Person shall be made upon receipt by the Trustee or its agent of a certificate substantially in the form set forth in Exhibit C annexed hereto from the

American Ref-Fuel Company Supplemental Indenture

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proposed transferee and, if requested by the Company or the Trustee, the delivery of an opinion of counsel, certifications and/or other information satisfactory to each of them.

          Prior to or on the expiration of the Distribution Compliance Period, beneficial interests in a Regulation S Global Note may only be held through Morgan Guaranty Trust Company of New York, Brussels Office, as operator of the Euroclear System (“Euroclear”) or Clearstream Luxembourg, a société anonyme (“Clearstream”) (as indirect participants in the Registered Depositary) or another agent member of Euroclear and Clearstream acting for and on behalf of them, unless exchanged for interests in the Rule 144A Global Note in accordance with the certification requirements hereof. During the Distribution Compliance Period, interests in the Regulation S Global Note, if any, may be exchanged for interests in the Rule 144A Global Note or for definitive Certificated Notes only in accordance with the certification requirements described in this Section 2.7.

          After the expiration of the Distribution Compliance Period, interests in the Regulation S Global Note may be transferred without requiring the certification set forth in Exhibit C annexed hereto or any additional certification.

          As used in the preceding two paragraphs of this Section 2.5, the term “transfer” encompasses any sale, transfer or other disposition of any Notes referred to herein except for transfers from any Holder to an Affiliate of such Holder; provided, that such transferring Holder shall deliver a letter to the Trustee stating that the transferee is an Affiliate of such Holder. The Trustee shall be entitled to rely on and be fully protected in its reliance on such letter.

ARTICLE III

APPLICATION OF PROCEEDS
FROM SALE OF NOTES

          Promptly upon receipt by the Company of the proceeds from the sale of the Initial Notes, the Company shall apply such proceeds (i) to repay certain existing Indebtedness of the Company incurred under bank facilities, (ii) fund the Debt Service Reserve Accounts, and (iii) pay certain costs incurred in connection with the issuance of the Initial Notes. The remaining proceeds will be used by the Company for general corporate purposes.

American Ref-Fuel Company Supplemental Indenture

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ARTICLE IV

DEBT SERVICE RESERVE ACCOUNTS

          The Notes issued under this First Supplemental Indenture shall have the benefit of the Debt Service Reserve Accounts detailed in the Original Indenture and such accounts shall constitute Collateral securing the Notes issued hereunder as, and to the extent, specified in the Original Indenture.

ARTICLE V

COVENANTS OF THE COMPANY

          The Company hereby covenants and agrees that so long as any Initial Notes or Additional Notes remain Outstanding:

          SECTION 5.1. Financial Statements and Other Information. The Trustee shall furnish to each of the Rating Agencies all of the information furnished to it by the Company under Section 4.2 of the Original Indenture upon receipt of such information.

          SECTION 5.2. Other Covenants. The Notes issued under this First Supplemental Indenture shall be entitled to the covenants of the Company set forth in the Original Indenture.

ARTICLE VI

COLLATERAL

          The Notes issued under this First Supplemental Indenture shall have the benefit of and be secured by the Collateral and shall be entitled to the benefit of Articles 6, 14 and 15 of the Original Indenture and the Collateral Documents.

ARTICLE VII

MISCELLANEOUS

          SECTION 7.1. Execution of Supplemental Indenture. This First Supplemental Indenture is executed and shall be construed as an indenture supplemental to the Original Indenture and, as provided in the Original Indenture, this First Supplemental Indenture forms a part thereof.

          SECTION 7.2. Concerning the Trustee. The recitals contained herein and in the Notes of each series created hereby, except with respect to the Trustee’s certificates of authentication, shall be taken as the statements of the Company and the Trustee assumes no

American Ref-Fuel Company Supplemental Indenture

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responsibility for the correctness of same. The Trustee makes no representations as to the validity or sufficiency of this First Supplemental Indenture or of the Notes of each series created hereby.

          SECTION 7.3. Counterparts. This First Supplemental Indenture may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original, but all such counterparts shall together constitute but one of the same instrument.

          SECTION 7.4. GOVERNING LAW. THIS FIRST SUPPLEMENTAL INDENTURE AND EACH NOTE OF THE SERIES CREATED HEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW THEREOF TO THE EXTENT THE APPLICATION OF SUCH PRINCIPLES WOULD CAUSE THE APPLICATION OF THE LAWS OF ANY OTHER JURISDICTION.

American Ref-Fuel Company Supplemental Indenture

          IN WITNESS WHEREOF, the parties have caused this First Supplemental Indenture to be duly executed by their respective officers thereunto duly authorized as of the day and year first above written.

AMERICAN REF-FUEL COMPANY LLC
By:	/s/ Michael J. Groppuso
	Name:	Michael J. Groppuso
	Title:	Vice President Chief Financial Officer
WACHOVIA BANK, NATIONAL ASSOCIATION as Trustee
By:	/s/ Paul O’Brien
	Name:	PAUL O’BRIEN
	Title:	Assistant Vice President
WACHOVIA BANK, NATIONAL ASSOCIATION,   as Securities Intermediary
By:	/s/ Paul O’Brien
	Name:	PAUL O’BRIEN
	Title:	Assistant Vice President

American Ref-Fuel Company Supplemental Indenture

EXHIBIT A

[Form of Transferor Certificate]

CERTIFICATE TO AMERICAN REF-FUEL COMPANY LLC
AND TRUSTEE

6.26% SERIES NOTES DUE 2015

          This is to certify that as of the date hereof with respect to U.S. $ [ ] principal amount of the above-captioned securities presented or surrendered on the date hereof (the “Surrendered Notes”) for registration of transfer or for exchange where the securities issuable upon such exchange are to be registered in a name other than that of the undersigned Holder (each such transaction being a “transfer”), the undersigned Holder (as defined in the Indenture) of the Surrendered Notes represents and certifies for the benefit of American Ref-Fuel Company LLC and Wachovia Bank, National Association, as Trustee, that the transfer of Surrendered Notes associated with such transfer complies with the restrictive legend set forth on the face of the Surrendered Notes for the reason checked below:

o The Surrendered Notes are being transferred to a person whom we reasonably believe is a “qualified institutional buyer” (as defined in Rule 144A under the Securities Act of 1933) (a “QIB”) that purchases for its own account or for the account of a QIB to whom notice is given that the resale, pledge or transfer is being made in reliance on Rule 144A under the Securities Act; or

o The Surrendered Notes are being transferred to an institution that is an “accredited investor” meeting the requirements of Rule 501(a)(1), (2), (3) or (7) under the Securities Act that is acquiring the Surrendered Notes for investment purposes and not for distribution;¹ or

o The transfer of the Surrendered Notes complies with Rule 144 under the Securities Act;² or

o The transfer of the Surrendered Notes complies with another applicable exemption from the registration requirements of the Securities Act.²

Capitalized terms used herein, but not defined herein, shall have the meaning assigned to such terms in the Indenture dated as of May 1, 2003 between the Company and Wachovia Bank, National Association, as trustee (in such capacity, together with its successors and assigns, the “Trustee”) for the Holders, as amended by the First Supplemental Indenture dated as of May 1, 2003 (the “First Supplemental Indenture”) between the Company and the Trustee (the “Indenture”).

[Name of Holder]
 

Dated:                     ,           

[To be dated the date of presentation or surrender]

1.	These transfers require that the transferee deliver a letter substantially in the form of Exhibit B to the First Supplemental Indenture dated as of May 1, 2003 and may also require an opinion of counsel.
2.	These transfers may require an opinion of counsel.

American Ref-Fuel Company Supplemental Indenture

EXHIBIT B

[Form of Institutional Accredited
Investor Transferee Compliance Letter]

              , 2003

Citigroup Global Markets Inc.
As Representative of the Initial Purchasers
c/o Citigroup Global Markets Inc.
388 Greenwich Street
New York, New York 10013

American Ref-Fuel Company LLC
155 Chestnut Ridge Road
Montvale, New Jersey 07645

Re: Purchase of US$                     principal amount of 6.26% Senior Notes due 2015 (the “Securities”) of American Ref-Fuel Company LLC (the “Company”)¹

Ladies and Gentlemen:

          In connection with our purchase of the Securities we confirm that:

1.	We understand that the Securities are not being and will not be registered under the Securities Act of 1933, as amended (the “Act”), and are being sold to us in a transaction that is exempt from the registration requirements of the Act.
2.	We acknowledge that (a) neither the Company, nor the Initial Purchasers (as defined in the Offering Memorandum dated April 30, 2003 relating to the Securities (the “Final Memorandum”)) nor any person acting on behalf of the Company or the Initial Purchasers has made any representation to us with respect to the Company or the offer or sale of any Securities; and (b) any information we desire concerning the Company and the Securities or any other matter relevant to our decision to purchase the Securities (including a copy of the Final Memorandum) is or has been made available to us.
3.	We have such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of an investment in the Securities, and we are (or any account for which we are purchasing under parapaph 4 below is) an institutional “accredited investor” (within the meaning of Rule 501 (a)(1), (2), (3) or (7) of Regulation D under the Act) able to bear the economic risk of investment in the Securities.
4.	We are acquiring the Securities for our own account (or for accounts as to which we exercise sole investment discretion and have authority to make, and do make, the statements contained in this

¹ Each U.S. purchaser, or account for which each U.S. purchaser is acting, should purchase at least US $250,000 of Securities.

American Ref-Fuel Company Supplemental Indenture

2

	letter) and not with a view to any distribution of the Securities, subject, nevertheless, to the understanding that the disposition of our property will at all times be and remain within our control.
5.	We understand that (a) the Securities will be in registered form only and that any certificates delivered to us in respect of the Securities will bear a legend substantially to the following effect:

“These Securities have not been registered under the Securities Act of 1933. Further offers or sales of these Securities are subject to certain restrictions, as set forth in the Offering Memorandum dated April 30, 2003 relating to these Securities.

and (b) the Company has agreed to reissue such certificates without the foregoing legend only in the event of a disposition of the Securities in accordance with the provisions of paragraph 6 below (provided, in the case of a disposition of the Securities in accordance with paragraph 6(f) below, that the legal opinion referred to in such paragraph so permits), or at our request at such time as we would be permitted to dispose of them in accordance with paragraph 6(a) below.

6. We agree that in the event that at some future time we wish to dispose of any of the Securities, we will not do so unless such disposition is made in accordance with any applicable securities laws of any state of the United States and:

(a) the Securities are sold in compliance with Rule 144(k) under the Act; or

(b) the Securities are sold in compliance with Rule 144A under the Act; or

(c) the Securities are sold in compliance with Rule 904 of Regulation S under the Act; or

(d) the Securities are sold pursuant to an effective registration statement under the Act; or

(e) the Securities are sold to the Company or an affiliate (as defined in Rule 501(b) of Regulation D) of the Company; or

(f) the Securities are disposed of in any other transaction that does not require registration under the Act, and we theretofore have furnished to the Company or its designee an opinion of counsel experienced in securities law matters to such effect or such other documentation as the Company or its designee may reasonably request.

Very truly yours,
By
	(Authorized Officer)

American Ref-Fuel Company Supplemental Indenture

EXHIBIT C

[Form of Regulation S Transfer Certificate]

[date]

American Ref-Fuel Company LLC
155 Chestnut Ridge Road
Montvale, NJ 07645
Attention: Joanne Pagliuca

Wachovia Bank. National Association
21 South Street
Morristown, New Jersey 07690

Attention: Paul O’Brien

Dear Ladies and Gentlemen:

          In connection with our proposed purchase of $                     aggregate principal amount of 6.26% Senior Notes Due 2015 (the “Notes”) of American Ref-Fuel Company LLC, a Delaware corporation (the “Company”), we confirm that:

(a)	the offer of the Notes was not made to a person in the United States;
(b)	either (i) at the time the buy order was originated, the transferee was outside the United States or we and any person acting on our behalf reasonably believed that the transferee was outside the United States or (ii) the transaction was executed in, on or through the facilities of a designated off-shore securities market and neither we nor any person acting on our behalf knows that the transaction has been pre-arranged with a buyer in the United States;
(c)	no directed selling efforts have been made in the United States in contravention of the requirements of Rule 903(b) or Rule 904(b) of Regulation S, as applicable; and
(d)	the transaction is not part of a plan or scheme to evade the registration requirements of the Securities Act.

              In addition, if the sale is made during a Distribution Compliance Period and the provisions of Rule 903(c)(3) or Rule 904(c)( 1) of Regulation S are applicable thereto, we confirm that such sale has been made in accordance with the applicable provisions of Rule 903(c)(3) or Rule 904(c)(1), as the case may be.

             The Company and the Trustee are entitled to rely upon this letter and are irrevocably authorized to produce this letter or a copy hereof to any interested party in any administrative or legal proceedings or official inquiry with respect to the matters covered hereby. Terms used in this certificate have the meanings set forth in Regulation S.

American Ref-Fuel Company Supplemental Indenture

2

Very truly yours,

[Name of Transferor]

By:
	Authorized Signature	Signature Medallion Guarantee

American Rcf-Fuel Company Supplemental Indenture

Schedule 1-A to First
Supplemental Indenture to
American Ref-Fuel Company LLC Indenture

[ Form of face of definitive 6.26% Senior Notes Due 2015]

AMERICAN REF-FUEL COMPANY LLC 6.26% SENIOR NOTE DUE 2015

          THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR THE SECURITIES LAWS OF ANY STATE OR OTHER JURISDICTION. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, SUCH REGISTRATION.

          THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER SUCH SECURITY, PRIOR TO THE DATE (THE “RESALE RESTRICTION TERMINATION DATE”) WHICH IS TWO YEARS AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF AND THE LAST DATE ON WHICH THE COMPANY OR ANY AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS SECURITY (OR ANY PREDECESSOR OF SUCH SECURITY), ONLY (A) TO THE COMPANY, (B) PURSUANT TO A REGISTRATION STATEMENT THAT HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE SECURITIES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A, TO A PERSON IT REASONABLY BELIEVES IS A “QUALIFIED INSTITUTIONAL BUYER” AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) PURSUANT TO OFFERS AND SALES THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATIONS UNDER THE SECURITIES ACT, (E) TO AN INSTITUTIONAL “ACCREDITED INVESTOR” WITHIN THE MEANING OFRULE 501(a)(l), (2), (3) OR (7) UNDER THE SECURITIES ACT THAT IS AN INSTITUTIONAL INVESTOR ACQUIRING THE SECURITY FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL ACCREDITED INVESTOR, IN EACH CASE IN A MINIMUM PRINCIPAL AMOUNT OF THE SECURITIES OF $250,000, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO OR FOR OFFER OR SALE IN CONNECTION WITH ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT OR (F) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE COMPANY’S AND THE TRUSTEE’S RIGHTS PRIOR TO ANY SUCH OFFER. SALE OR TRANSFER PURSUANT TO CLAUSES (D), (E) OR (F) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF THE HOLDER AFTER THE RESALE RESTRICTION TERMINATION DATE.

No.	CUSIP NUMBER
	029204 AA 2

American Ref-Fuel Company Supplemental Indenture

2

Principal Amount	Final Scheduled Payment Date	Issue Date
$[                     ]	December 31,2015	[     ], 2003

REGISTERED HOLDER:	[                      ]
PRINCIPAL AMOUNT:	[                      ] Dollars
INTEREST RATE:	6.26%

          AMERICAN REF-FUEL COMPANY LLC, a Delaware limited liability company (hereinafter called the “Company”, which term includes any successor or assign under the Indenture referred to below), for value received hereby promises to pay to [           ], or its registered assigns, the outstanding Principal Amount hereof, such payment to be made in semiannual installments on June 30 and December 31 of each year (commencing December 31, 2003) and ending on the final Scheduled Payment Date set forth above, each such installment to be in the amount and payable on the date set forth on Annex A attached hereto (provided that the portion of the Principal Amount remaining unpaid on the final Scheduled Payment Date, together with all interest accrued thereon, shall in any and all cases be due and payable on the final Scheduled Payment Date), and to pay interest on the unpaid portion of the Principal Amount at the interest rate set forth above from the most recent Scheduled Payment Date to which interest has been paid or duly provided for or, if no interest has been paid or duly provided for, from the issue date set forth above, semiannually on June 30 and December 31 in each year (commencing December 31, 2003), until the Principal Amount is paid in full or payment thereof is duly provided for. Any installment of principal and, to the extent permitted by applicable law, any payment of interest not punctually paid or duly provided for shall continue to bear interest at a rate equal to the interest rate set forth above. The principal and interest so payable, and punctually paid or duly provided for, at any Scheduled Payment Date shall, as provided in the Indenture, be paid to the Person in whose name this Note (or one or more Predecessor Notes) is registered in the Security Register at the close of business on the Regular Record Date for such payment of principal and interest, which shall be June 15 or December 15, as the case may be (whether or not a Business Day), next preceding such Scheduled Payment Date. Any such principal and interest that is payable, but is not so punctually paid or duly provided for at any Scheduled Payment Date, shall forthwith cease to be payable to the Holder hereof on such Regular Record Date, and may be paid to the Person in whose name this Note (or one or more Predecessor Notes) is registered at the close of business on a Special Record Date for the payment of such defaulted principal and interest (together with any other amounts payable with respect to such principal and interest), to be fixed by the Trustee, notice of which shall be given to the Holder hereof not less than 10 days prior to such Special Record Date, or may be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which this Note may be listed, and upon such notice as may be required by such exchange, all as more fully provided in the Indenture. Payments of principal of and interest on this Note shall be made (i) if the Company so elects, by check mailed to the Holder at his or her registered address or (ii) otherwise, at the Place of Payment; provided, that the final installment of principal payable with respect to this Note shall be made as provided in Section 5.5 of the Original Indenture (in the event this Note is redeemed) or shall be made upon presentation and surrender of this Note at the Place of Payment. All payments in respect of this Note shall be made in such coin or currency of the United States of America as at the time of payment is legal tender for payment of debts.

          Whenever any amount to be paid hereunder is stated to be due on a day that is not a Business Day. such amount shall be payable on the next succeeding Business Day and if such payment is timely made, no interest shall accrue for the period from and after the day on which such payment was

American Ref-Fuel Company Supplemental Indenture

3

due. Interest payments for this Note will be computed and paid on the basis of a 360-day year consisting of twelve 30-day months.

          Reference is made to the further provisions of this Note set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place.

          Unless the certificate of authentication hereon has been executed by the Trustee by manual signature, this Note shall not be entitled to any benefit under the Indenture, or be valid or obligatory for any purpose.

          IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed.

AMERICAN REF-FUEL COMPANY LLC
By
	Name:
	Title:

American Ref-Fuel Company Supplemental Indenture

4

CERTIFICATE OF AUTHENTICATION

          This Note is one of the Notes referred to in the within-mentioned Indenture.

WACHOVIA BANK, NATIONAL ASSOCIATION
as Trustee

By:
	Authorized Signatory

American Ref-Fuel Company Supplemental Indenture

5

[Form of reverse of definitive 6.26% Senior Notes Due 2015]

AMERICAN REF-FUEL COMPANY LLC

6.26% SENIOR NOTE DUE 2015

          This Note is one of an authorized issue of Notes of the Company known as its 6.26% Senior Notes Due 2015 (the “Notes”). The Notes are issued under the Indenture dated as of May 1, 2003 (the “Original indenture”) among the Company and Wachovia Bank. National Association, as trustee (in such capacity, together with its successors in such capacity, the ‘Trustee”), as supplemented by the First Supplemental Indenture dated as of May 1, 2003 (the “First Supplemental Indenture”) among the Company and the Trustee (the Original Indenture, as so supplemented, and as the same may be amended, modified and further supplemented, the “Indenture”). All capitalized terms used herein, unless otherwise defined herein, shall have the meanings ascribed to them in the Indenture.

          All Notes of any series issued and Outstanding under the Indenture rank on a parity with each other Note of the same series and with all Notes of each other series. Reference is hereby made to the Indenture for a description of the nature and extent of the Notes and the respective rights, limitations of rights, duties and immunities thereunder of the Holders and of the Trustee and the Company in respect of the Notes and the terms upon which the Notes are made and are to be authenticated and delivered.

          The principal of and interest on this Note are secured by assets subject to the Lien of the Indenture and the Collateral Documents, and all payments of principal and interest shall be made in accordance with the terms of the Indenture. Each Holder, by acceptance of this Note, hereby acknowledges and agrees that (a) subject to the terms of the Indenture, it will look solely to the revenues of the Company, the Collateral and the income and proceeds received by the Trustee therefrom to the extent available for distribution to such Holder as herein provided or provided in the Collateral Documents, (b) neither the Member, nor any of its past, present or future officers, partners, directors or members or other Related Persons, nor the Trustee shall be personally or otherwise liable to any Holder, nor shall the Member, nor any of its past, present or future officers, partners, directors or members or other Related Persons, be personally or otherwise liable to the Trustee for any amounts payable under any Note or for any liability under the Indenture or any other Financing Document, except as provided in the Original Indenture and (c) recourse for any such amounts payable shall be otherwise limited in accordance with Section 2.14 and Section 16.1 of the Original Indenture.

          The obligations of the Company to pay the principal of and interest on the Notes when due as herein prescribed are absolute and unconditional and no provision of this Note or the Indenture shall alter or impair such obligations.

          The Notes are subject to and have the benefits of the Collateral Documents pursuant to which the rights of the parties in respect of the Collateral will be exercised by the Trustee in accordance with the Collateral Documents.

          The Indenture permits, with certain exceptions, as therein provided, the amendment thereof and the modification of the rights and obligations of the Company and the rights of the Holders under the Indenture. The Indenture also contains provisions permitting the Holders of specified percentages in aggregate principal amount of the Notes to waive compliance by the Company with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any Act (as such term is defined in the Indenture), including, but not limited to, such a consent, waiver or direction by the Holder of this Note shall be conclusive and binding upon the Holder and upon all future Holders of

American Ref-Fuel Company Supplemental Indenture

6

this Note and the Holder of every Note issued upon the transfer hereof or the exchange herefor or in lieu hereof whether or not notation of such Act is made upon this Note.

          This Note is one of the series designated on the face hereof, initially limited to $275,000,000 in aggregate principal amount as provided in the First Supplemental Indenture.

          This Note and all Notes issued or to be issued in a series created under the First Supplemental Indenture are redeemable in whole or in part at the option of the Company in accordance with Section 5.1 of the Original Indenture, on not less than 30 nor more than 60 days’ notice, at a redemption price equal to the principal amount thereof plus unpaid and accrued interest plus the Make-Whole Premium.

          The Notes are, under certain conditions, subject to mandatory redemption in whole or in part as set forth in Section 5.2 of the Original Indenture. Notice of any redemption of Notes will be given at least 30 days but not more than 60 days before the Redemption Date to each Holder at its address as it appears in the Security Register.

          Notes (or portions thereof as aforesaid) for the redemption of which provision is made in accordance with the Indenture shall cease to bear interest from and after any Redemption Date.

          The Indenture contains provisions for, upon compliance by the Company with certain conditions set forth in the Indenture, the defeasance of (a) the entire indebtedness of this Note and (b) certain restrictive covenants and agreements.

          The unpaid portion of the Principal Amount, together with any interest accrued and unpaid thereon and all other amounts due hereunder, if any, may become due and payable upon the occurrence and continuation of any Event of Default, but only as provided in the Indenture.

          Definitive Certificated Notes are issuable only as registered Notes in minimum denominations of $250,000 and integral multiples of $1,000 in excess thereof. Global Notes are issuable only as registered Notes in minimum denominations of $ 100,000 and any integral multiples of $1,000 in excess thereof. As provided in, and subject to the provisions of, the Indenture, Notes are exchangeable at the option of the Holder thereof for other Notes of the same series, of authorized denomination and of like tenor, maturity, interest rate and aggregate principal amount, to be registered in the name of such Holder, upon surrender thereof by such Holder at any office or agency maintained for such purpose pursuant to the Indenture.

          No service charge will be required of any Holder participating in any such transfer or exchange of Notes in respect of such transfer or exchange, but the Security Registrar may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith.

          Prior to due presentment of this Note for registration of transfer, the person in whose name this Note is registered shall be deemed to be the owner and holder hereof for the purpose of receiving payment as herein provided and for all other purposes whether or not this Note be overdue regardless of any notice to anyone to the contrary.

          THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW THEREOF TO THE EXTENT THE

American Ref-Fuel Company Supplemental Indenture

7

APPLICATION OF SUCH PRINCIPLES WOULD CAUSE THE APPLICATION OF THE LAWS OF ANY OTHER JURISDICTION.

American Ref-Fuel Company Supplemental Indenture

8

ANNEX A TO
6.26% SENIOR NOTE DUE 2015

          The following table sets forth the date of each semiannual installment of the aggregate principal to be paid on all Notes of this series on each such date:

	Principal Amount
Principal Payment Dates	Payable on Series A Notes
December 3 1,2003	$	16,000,000
June 30, 2004		5,700,000
December 31,2004		13,300,000
June 30, 2005		6,000,000
December 31,2005		14,000,000
June 30, 2006		8,400,000
December 31, 2006		19,600,000
June 30, 2007		8,100,000
December 31,2007		18,900,000
June 30, 2008		10,500,000
December 31,2008		24,500,000
June 30, 2009		3,900,000
December 31,2009		9,100,000
June 30, 2010		1,200,000
December 31,2010		2,800,000
June 30, 2011		11,700,000
December 31,2011		27,300,000
June 30, 2012		5.400,000
December 31,2012		12,600,000
June 30, 2013		1,200,000
December 31,2013		2,800,000
June 30, 2014		7,800,000
December 31,2014		18,200,000
June 30, 2015		7,800,000
December 31,2015		18,200,000
TOTAL	$	275,000,000

American Ref-Fuel Company Supplemental Indenture

9

ABBREVIATIONS

          The following abbreviations when used in the inscription on the face of this instrument shall be construed as though they were written out in full according to applicable laws or regulations:

TEN COM	—	as tenants in common
TEN ENT	—	as tenants by the entireties
JT TEN	—	as joint tenants with right of survivorship and not as tenants in common

UNIF GIFT MIN ACT
	(Cust)  (Minor)
	under Uniform Gift to Minors Act
	(State)

Additional abbreviations may also be used though
not in the above list

American Ref-Fuel Company Supplemental Indenture

10

          FOR VALUE-RECEIVED the undersigned hereby sell(s), assign(s) and transfer(s) unto

Identifying Number of Assignee

(Please print or typewrite name and address,
including zip code of Assignee)

the within Note and all rights thereunder, hereby irrevocably constituting and appointing ______ attorney to transfer said Note on the books of the Company, with full power of substitution in the premises.

Dated:                                                            

NAME:

NOTICE: The signature to this assignment must correspond with the name as written upon the first page of the within instrument in every particular, without alteration or enlargement or any change whatsoever.

American Ref-Fuel Company Supplemental Indenture

11

Schedule 1-B to First
Supplemental Indenture

[Form of face of Global Note for 6.26% Senior Notes Due 2015]

AMERICAN REF-FUEL COMPANY LLC
6.26% SENIOR NOTE DUE 2015

          [Insert in Rule 144A Global Notes — THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR THE SECURITIES LAWS OF ANY STATE OR OTHER JURISDICTION. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, SUCH REGISTRATION.

          THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER SUCH SECURITY, PRIOR TO THE DATE (THE “RESALE RESTRICTION TERMINATION DATE”) WHICH IS TWO YEARS AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF AND THE LAST DATE ON WHICH THE COMPANY OR ANY AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS SECURITY (OR ANY PREDECESSOR OF SUCH SECURITY), ONLY (A) TO THE COMPANY, (B) PURSUANT TO A REGISTRATION STATEMENT THAT HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE SECURITIES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A, TO A PERSON IT REASONABLY BELIEVES IS A “QUALIFIED INSTITUTIONAL BUYER” AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A. (D) PURSUANT TO OFFERS AND SALES THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION S UNDER THE SECURITIES ACT, (E) TO AN INSTITUTIONAL “ACCREDITED INVESTOR” WITHIN THE MEANING OF RULE 501 (a)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT THAT IS AN INSTITUTIONAL INVESTOR ACQUIRING THE SECURITY FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL ACCREDITED INVESTOR, IN EACH CASE IN A MINIMUM PRINCIPAL AMOUNT OF THE SECURITIES OF $250,000, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO OR FOR OFFER OR SALE IN CONNECTION WITH ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT OR (F) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE COMPANY’S AND THE TRUSTEE’S RIGHTS PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO CLAUSES (D), (E) OR (F) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF THE HOLDER AFTER THE RESALE RESTRICTION TERMINATION DATE.]

American Ref-Fuel Company Supplemental Indenture

12

          [Insert in Regulation S Global Notes — THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND ACCORDINGLY, MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES OR TO OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCE. BY ITS ACQUISITION HEREOF, THE HOLDER (1) REPRESENTS THAT IT IS NOT A U.S. PERSON AND IS ACQUIRING THIS SECURITY IN AN OFFSHORE TRANSACTION, (2) BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER SUCH SECURITY, PRIOR TO THE DATE (THE “RESALE RESTRICTION TERMINATION DATE”) WHICH IS TWO YEARS AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF AND THE LAST DATE ON WHICH THE COMPANY OR ANY AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS SECURITY (OR ANY PREDECESSOR OF SUCH SECURITY), ONLY (A) TO THE COMPANY, (B) PURSUANT TO A REGISTRATION STATEMENT THAT HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE SECURITIES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT (“RULE 144A”), TO A PERSON IT REASONABLY BELIEVES IS A “QUALIFIED INSTITUTIONAL BUYER” AS DEFINED IN RULE 144A THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) PURSUANT TO OFFERS AND SALES THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION S UNDER THE SECURITIES ACT, (E) TO AN INSTITUTIONAL “ACCREDITED INVESTOR” WITHIN THE MEANING OF RULE 501(a)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT THAT IS AN INSTITUTIONAL INVESTOR ACQUIRING THE SECURITY FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL ACCREDITED INVESTOR. IN EACH CASE IN A MINIMUM PRINCIPAL AMOUNT OF THE SECURITIES OF $250,000, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO OR FOR OFFER OR SALE IN CONNECTION WITH ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT OR (F) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE COMPANY’S AND THE TRUSTEE’S RIGHTS PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO CLAUSES (D), (E) OR (F) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM AND IN THE CASE OF THE FOREGOING CLAUSE (E), A CERTIFICATE OF TRANSFER (A FORM OF WHICH MAY BE OBTAINED FROM THE COMPANY OR THE TRUSTEE) COMPLETED AND DELIVERED BY THE TRANSFEROR TO THE COMPANY AND THE TRUSTEE. THIS LEGEND WILL BE REMOVED AFTER 40 CONSECUTIVE DAYS BEGINNING ON AND INCLUDING THE LATER OF (A) THE DAY ON WHICH THE SECURITIES ARE OFFERED TO PERSONS OTHER THAN DISTRIBUTORS (AS DEFINED IN REGULATION S) AND (B) THE DATE OF THE CLOSING OF THE ORIGINAL OFFERING. AS USED HEREIN. THE TERMS “OFFSHORE TRANSACTION”, “UNITED STATES” AND “U.S. PERSON” HAVE THE MEANINGS GIVEN TO THEM BY REGULATION S UNDER THE SECURITIES ACT.]

          UNLESS THIS SECURITY IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY (“DTC”) TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY SECURITY ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER REPRESENTATIVE OF DTC AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT HEREON IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC). ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS

American Ref-Fuel Company Supplemental Indenture

13

WRONGFUL SINCE THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.

          TRANSFERS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES OF CEDE & CO. OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR’S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN THE INDENTURE.

American Ref-Fuel Company Supplemental Indenture

14

No.	[CUSIP] [ISIN] NUMBER
	[   ]

Principal Amount	Final Scheduled Payment Date	Issue Date
$275,000,000	December 31, 2015	[     ], 2003

REGISTERED HOLDER:	CEDE & CO.
PRINCIPAL AMOUNT:	275,000,000 Dollars
INTEREST RATE:	6.26%

          AMERICAN REF-FUEL COMPANY LLC, a Delaware limited liability company (hereinafter called the “Company”, which term includes any successor or assign under the Indenture referred to below), for value received hereby promises to pay to Cede & Co., or its registered assigns, the outstanding Principal Amount hereof after subtracting the aggregate principal amount of any definitive Notes issued in exchange for a portion or portions hereof, such payment to be made in semiannual installments on June 30 and December 31 of each year (commencing December 31, 2003) and ending on the final Scheduled Payment Date set forth above, each such installment to be in the amount and payable on the date set forth on Annex A attached hereto (provided that the portion of the Principal Amount remaining unpaid on the final Scheduled Payment Date, together with all interest accrued thereon, shall in any and all cases be due and payable on the final Scheduled Payment Date), and to pay interest on the unpaid portion of the Principal Amount at the interest rate set forth above from the most recent Scheduled Payment Date to which interest has been paid or duly provided for or, if no interest has been paid or duly provided for, from the issue date set forth above, semiannually on June 30 and December 31 in each year (commencing December 31, 2003), until the Principal Amount is paid in full or payment thereof is duly provided for. Any installment of principal and, to the extent permitted by applicable law, any payment of interest not punctually paid or duly provided for shall continue to bear interest at a rate equal to the interest rate set forth above. The principal and interest so payable, and punctually paid or duly provided for, at any Scheduled Payment Date shall, as provided in the Indenture, be paid to the Person in whose name this Note (or one or more Predecessor Notes) is registered in the Security Register at the close of business on the Regular Record Date for such payment of principal and interest, which shall be June 15 or December 15, as the case may be (whether or not a Business Day), next preceding such Scheduled Payment Date. Any such principal and interest that is payable, but is not so punctually paid or duly provided for at any Scheduled Payment Date, shall forthwith cease to be payable to the Holder hereof on such Regular Record Date, and may be paid to the Person in whose name this Note (or one or more Predecessor Notes) is registered at the close of business on a Special Record Date for the payment of such defaulted principal and interest (together with any other amounts payable with respect to such principal and interest), to be fixed by the Trustee, notice of which shall be given to the Holder hereof not less than 10 days prior to such Special Record Date, or may be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which this Note may be listed, and upon such notice as may be required by such exchange, all as more fully provided in the Indenture. This being a Global Note (as that term is defined in the Indenture) deposited with DTC acting as depository, and registered in the name of Cede & Co. a nominee of DTC, Cede & Co., as holder of record of this Note shall be entitled to receive payment of principal and interest, other than principal and interest due at the final Scheduled Payment Date, by wire transfer of immediately available funds. Payment of the final

American Ref-Fuel Company Supplemental Indenture

15

installment of principal payable with respect to this Note shall be made as provided in Section 5.5 of the Original Indenture (in the event this Note is redeemed) or shall be made upon presentation and surrender of this Note at the Place of Payment. All payments in respect of this Note shall be made in such coin or currency of the United States of America as at the time of payment is legal tender for payment of debts.

          Whenever any amount to be paid hereunder is stated to be due on a day that is not a Business Day, such amount shall be payable on the next succeeding Business Day and if such payment is timely made, no interest shall accrue for the period from and after the day on which such payment was due. Interest payments for this Note will be computed and paid on the basis of a 360-day year consisting of twelve 30-day months.

          Reference is made to the further provisions of this Note set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place.

          Unless the certificate of authentication hereon has been executed by the Trustee by manual signature, this Note shall not be entitled to any benefit under the Indenture, or be valid or obligatory for any purpose.

          IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed.

AMERICAN REF-FUEL COMPANY LLC
By
	Name:
	Title:

American Ref-Fuel Company Supplemental Indenture

16

CERTIFICATE OF AUTHENTICATION

          This Note is one of the Notes referred to in the within-mentioned Indenture.

WACHOVIA BANK, NATIONAL ASSOCIATION,
as Trustee
By:
	Authorized Signatory

American Ref-Fuel Company Supplemental Indenture

17

[Form of reverse of Global Note for
6.26% Senior Notes Due 2015]

AMERICAN REF-FUEL COMPANY LLC
6.26% SENIOR NOTE DUE 2015

          This Note is one of an authorized issue of Notes of the Company known as its 6.26% Senior Notes Due 2015 (the “Notes”). The Notes are issued under the Indenture dated as of May 1, 2003 (the “Original Indenture”) among the Company and Wachovia Bank, National Association, as trustee (in such capacity, together with its successors in such capacity, the “Trustee”), as supplemented by the First Supplemental Indenture dated as of May 1, 2003 (the “First Supplemental Indenture”) among the Company and the Trustee (the Original Indenture, as so supplemented, and as the same may be amended, modified and further supplemented, the “Indenture”). All capitalized terms used herein, unless otherwise defined herein, shall have the meanings ascribed to them in the Indenture.

          All Notes of any series issued and Outstanding under the Indenture rank on a parity with each other Note of the same series and with all Notes of each other series. Reference is hereby made to the Indenture for a description of the nature and extent of the Notes and the respective rights, limitations of rights, duties and immunities thereunder of the Holders and of the Trustee and the Company in respect of the Notes and the terms upon which the Notes are made and are to be authenticated and delivered.

          The principal of and interest on this Note are secured by assets subject to the Lien of the Collateral Documents, and all payments of principal and interest shall be made in accordance with the terms of the Indenture. Each Holder, by acceptance of this Note, hereby acknowledges and agrees that (a) subject to the terms of the Indenture, it will look solely to the revenues of the Company, the Collateral and the income and proceeds received by the Trustee therefrom to the extent available for distribution to such Holder as herein provided or provided in the Collateral Documents, (b) neither the Member, nor any of its past, present or future officers, partners, directors or members or other Related Persons, nor the Trustee shall be personally or otherwise liable to any Holder, nor shall the Member, nor any of its past, present or future officers, partners, directors or members or other Related Persons, be personally or otherwise liable to the Trustee for any amounts payable under any Note or for any liability under the Indenture or any other Financing Document, except as provided in the Original Indenture and (c) recourse for any such amounts payable shall be otherwise limited in accordance with Section 2.14 and Section 16.1 of the Original Indenture.

          The obligations of the Company to pay the principal of and interest on the Notes when due as herein prescribed are absolute and unconditional and no provision of this Note or the Indenture shall alter or impair such obligations.

          The Notes are subject to and have the benefits of the Collateral Documents pursuant to which the rights of the parties in respect of the Collateral will be exercised by the Trustee in accordance with the Collateral Documents.

          The Indenture permits, with certain exceptions, as therein provided, the amendment thereof and the modification of the rights and obligations of the Company and the rights of the Holders under the Indenture. The Indenture also contains provisions permitting the Holders of specified percentages in aggregate principal amount of the Notes to waive compliance by the Company with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any Act (as such term is defined in the Indenture), including, but not limited to, such a consent, waiver or direction by the Holder of this Note shall be conclusive and binding upon the Holder and upon all future Holders of

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this Note and the Holder of every Note issued upon the transfer hereof or the exchange herefor or in lieu hereof whether or not notation of such Act is made upon this Note.

          This Note is one of the series designated on the face hereof, limited to $275,000,000 in aggregate principal amount as provided in the First Supplemental Indenture.

          This Note and all Notes issued or to be issued in a series created under the First Supplemental Indenture are redeemable in whole or in part at the option of the Company in accordance with Section 5.1 of the Original Indenture, on not less than 30 nor more than 60 days’ notice, at a redemption price equal to the principal amount thereof plus unpaid and accrued interest plus the Make-Whole Premium.

          The Notes are, under certain conditions, subject to mandatory redemption in whole or in part as set forth in Section 5.2 of the Original Indenture. Notice of any redemption of Notes will be given at least 30 days but not more than 60 days before the Redemption Date to each Holder at its address as it appears in the Security Register.

          Notes (or portions thereof as aforesaid) for the redemption of which provision is made in accordance with the Indenture shall cease to bear interest from and after any Redemption Date.

          The Indenture contains provisions for, upon compliance by the Company with certain conditions set forth in the Indenture, the defeasance of (a) the entire indebtedness of this Note and (b) certain restrictive covenants and agreements.

          The unpaid portion of the Principal Amount together with any interest accrued and unpaid thereon and all other amounts due hereunder, if any, may become due and payable upon the occurrence and continuation of any Event of Default, but only as provided in the Indenture.

          Definitive Certificated Notes are issuable only as registered Notes in minimum denominations of $250,000 and integral multiples of $1,000 in excess thereof. Global Notes are issuable only as registered Notes in minimum denominations of $100,000 and any integral multiples of $1,000 in excess thereof. As provided in, and subject to the provisions of, the Indenture, Notes are exchangeable at the option of the Holder thereof for other Notes of the same series, of authorized denomination and of like tenor, maturity, interest rate and aggregate principal amount, to be registered in the name of such Holder, upon surrender thereof by such Holder at any office or agency maintained for such purpose pursuant to the Indenture.

          No service charge will be required of any Holder participating in any such transfer or exchange of Notes in respect of such transfer or exchange, but the Security Registrar may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith.

          Prior to due presentment of this Note for registration of transfer, the person in whose name this Note is registered shall he deemed to be the owner and holder hereof for the purpose of receiving payment as herein provided and for all other purposes whether or not this Note be overdue regardless of any notice to anyone to the contrary.

          THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW THEREOF TO THE EXTENT THE

American Ref-Fuel Company Supplemental Indenture

19

APPLICATION OF SUCH PRINCIPLES WOULD CAUSE THE APPLICATION OF THE LAWS OF ANY OTHER JURISDICTION.

American Ref-Fuel Company Supplemental Indenture

20

ABBREVIATIONS

          The following abbreviations when used in the inscription on the face of this instrument shall be construed as though they were written out in full according to applicable laws or regulations:

TEN COM	—	as tenants in common
TEN ENT	—	as tenants by the entireties
JT TEN	—	as joint tenants with right of survivorship and not as tenants in common

UNIF GIFT MIN ACT
	(Cust) (Minor)
	under Uniform Gift to Minors Act
	(State)

Additional abbreviations may also be used though
not in the above list

American Ref-Fuel Company Supplemental Indenture

21

          FOR VALUE-RECEIVED the undersigned hereby sell(s), assign(s) and transfer(s) unto

Social Security Number or Other

Identifying Number of Assignee

(Please print or typewrite name and address,

including zip code of Assignee)

the within security and all rights thereunder, hereby irrevocably constituting and appointing                     attorney to transfer said security on the books of the Company, with full power of substitution in the premises.

Dated:
	NAME:

NOTICE: The signature to this assignment must correspond with the name as written upon the first page of the within instrument in every particular, without alteration or enlargement or any change whatsoever.

American Ref-Fuel Company Supplemental Indenture

22

ANNEX A TO
6.26% SENIOR NOTE DUE 2015

          The following table sets forth the date of each semiannual installment of the aggregate principal to be paid on all Notes of this series on each such date:

	Principal Amount
Principal Payment Dates	Payable on Series A Notes
December 31, 2003	$	16,000,000
June 30, 2004		5,700,000
December 31, 2004		13,300,000
June 30, 2005		6,000,000
December 31, 2005		14,000,000
June 30, 2006		8,400,000
December 31, 2006		19,600,000
June 30, 2007		8,100,000
December 31, 2007		18,900,000
June 30, 2008		10,500,000
December 31, 2008		24,500,000
June 30, 2009		3,900,000
December 31, 2009		9,100,000
June 30, 2010		1,200,000
December 31, 2010		2,800,000
June 30, 2011		11,700,000
December 31, 2011		27,300,000
June 30, 2012		5,400,000
December 31, 2012		12,600,000
June 30, 2013		1,200,000
December 31, 2013		2,800,000
June 30, 2014		7,800,000
December 31, 2014		18,200,000
June 30, 2015		7,800,000
December 31, 2015		18,200,000
TOTAL	$	275,000,000

American Ref-Fuel Company Supplemental Indenture

23

ANNEX B TO
6.26% SENIOR NOTE DUE 2015

Exchanges of portions of this Global Note for Certificated Notes:

	Principal Amount of
	Definitive Securities Issued in	Remaining Principal
	Exchange for a Portion of this	Amount of this Global	Notation made
Date	Global Security	Security	by

American Ref-Fuel Company Supplemental Indenture

EX-4.14

Exhibit 4.14

     THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND ACCORDINGLY, MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES OR TO OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCE. BY ITS ACQUISITION HEREOF, THE HOLDER (1) REPRESENTS THAT IT IS NOT A U.S. PERSON AND IS ACQUIRING THIS SECURITY IN AN OFFSHORE TRANSACTION, (2) BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER SUCH SECURITY, PRIOR TO THE DATE (THE “RESALE RESTRICTION TERMINATION DATE”) WHICH IS TWO YEARS AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF AND THE LAST DATE ON WHICH THE COMPANY OR ANY AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS SECURITY (OR ANY PREDECESSOR OF SUCH SECURITY), ONLY (A) TO THE COMPANY, (B) PURSUANT TO A REGISTRATION STATEMENT THAT HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE SECURITIES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT (“RULE 144A”), TO A PERSON IT REASONABLY BELIEVES IS A “QUALIFIED INSTITUTIONAL BUYER” AS DEFINED IN RULE 144A THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) PURSUANT TO OFFERS AND SALES THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION S UNDER THE SECURITIES ACT (E) TO AN INSTITUTIONAL “ACCREDITED INVESTOR” WITHIN THE MEANING OF RULE 501(a)(l), (2), (3) OR (7) UNDER THE SECURITIES ACT THAT IS AN INSTITUTIONAL INVESTOR ACQUIRING THE SECURITY FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL ACCREDITED INVESTOR, IN EACH CASE IN A MINIMUM PRINCIPAL AMOUNT OF THE SECURITIES OF $250,000, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO OR FOR OFFER OR SALE IN CONNECTION WITH ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT OR (F) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE COMPANY’S AND THE TRUSTEE’S RIGHTS PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO CLAUSES (D), (E) OR (F) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM AND IN THE CASE OF THE FOREGOING CLAUSE (E), A CERTIFICATE OF TRANSFER (A FORM OF WHICH MAY BE OBTAINED FROM THE COMPANY OR THE TRUSTEE) COMPLETED AND DELIVERED BY THE TRANSFEROR TO THE COMPANY AND THE TRUSTEE. THIS LEGEND WILL BE REMOVED AFTER 40 CONSECUTIVE DAYS BEGINNING ON AND INCLUDING THE LATER OF (A) THE DAY ON WHICH THE SECURITIES ARE OFFERED TO PERSONS OTHER THAN DISTRIBUTORS (AS DEFINED IN REGULATION S) AND (B) THE DATE OF THE CLOSING OF THE ORIGINAL OFFERING. AS USED HEREIN, THE TERMS “OFFSHORE TRANSACTION”, “UNITED STATES” AND “U.S. PERSON” HAVE THE MEANINGS GIVEN TO THEM BY REGULATION S UNDER THE SECURITIES ACT.

     UNLESS THIS SECURITY IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY (“DTC”) TO THE

COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY SECURITY ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER REPRESENTATIVE OF DTC AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT HEREON IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL SINCE THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.

TRANSFERS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES OF CEDE & CO. OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR’S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN THE INDENTURE.

AMERICAN REF-FUEL COMPANY LLC
6.26% SENIOR NOTE DUE 2015

No. A002	CUSIP NUMBER
	U02928 AA 4
	ISIN NUMBER
	USU02928AA48

Principal Amount	Final Scheduled Payment Date	Issue Date
$0	December 31, 2015	May 9, 2003

REGISTERED HOLDER:	CEDE & CO.
PRINCIPAL AMOUNT:	0 Dollars
INTEREST RATE:		6.26	%

     AMERICAN REF-FUEL COMPANY LLC, a Delaware limited liability company (hereinafter called the “Company”, which term includes any successor or assign under the Indenture referred to below), for value received hereby promises to pay to Cede & Co., or its registered assigns, the outstanding Principal Amount hereof after subtracting the aggregate principal amount of any definitive Notes issued in exchange for a portion or portions hereof, such payment to be made in semiannual installments on June 30 and December 31 of each year (commencing December 31, 2003) and ending on the final Scheduled Payment Date set forth above, each such installment to be in the amount and payable on the date set forth on Annex A attached hereto (provided that the portion of the Principal Amount remaining unpaid on the final Scheduled Payment Date, together with all interest accrued thereon, shall in any and all cases be due and payable on the final Scheduled Payment Date), and to pay interest on the unpaid portion of the Principal Amount at the interest rate set forth above from the most recent Scheduled Payment Date to which interest has been paid or duly provided for or, if no interest has been paid or duly provided for, from the issue date set forth above, semiannually on June 31 and December 31 in each year (commencing December 31, 2003), until the Principal Amount is paid in full or payment thereof is duly provided for. Any installment of principal and, to the extent permitted by applicable law, any payment of interest not punctually paid or duly provided for shall continue to bear interest at a rate equal to the interest rate set forth above. The principal and interest so payable, and punctually paid or duly provided for, at any Scheduled Payment Date shall, as provided in the Indenture, be paid to the Person in whose name this Note (or one or more Predecessor Notes) is registered in the Security Register at the close of business on the Regular Record Date for such payment of principal and interest, which shall be June 15 or December 15, as the case may be (whether or not a Business Day), next preceding such

Scheduled Payment Date. Any such principal and interest that is payable, but is not so punctually paid or duly provided for at any Scheduled Payment Date, shall forthwith cease to be payable to the Holder hereof on such Regular Record Date, and may be paid to the Person in whose name this Note (or one or more Predecessor Notes) is registered at the close of business on a Special Record Date for the payment of such defaulted principal and interest (together with any other amounts payable with respect to such principal and interest), to be fixed by the Trustee, notice of which shall be given to the Holder hereof not less than 10 days prior to such Special Record Date, or may be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which this Note may be listed, and upon such notice as may be required by such exchange, all as more fully provided in the Indenture. This being a Global Note (as that term is defined in the Indenture) deposited with DTC acting as depository, and registered in the name of Cede & Co. a nominee of DTC, Cede & Co., as holder of record of this Note shall be entitled to receive payment of principal and interest, other than principal and interest due at the final Scheduled Payment Date, by wire transfer of immediately available funds. Payment of the final installment of principal payable with respect to this Note shall be made as provided in Section 5.5 of the Original Indenture (in the event this Note is redeemed) or shall be made upon presentation and surrender of this Note at the Place of Payment. All payments in respect of this Note shall be made in such coin or currency of the United States of America as at the time of payment is legal tender for payment of debts.

     Whenever any amount to be paid hereunder is stated to be due on a day that is not a Business Day, such amount shall be payble on the next succeeding Business Day and if such payment is timely made, no interest shall accrue for the period from and after the day on which such payment was due. Interest payments for this Note will be computed and paid on the basis of a 360-day year consisting of twelve 30-day months.

     Reference is made to the further provisions of this Note set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place.

     Unless the certificate of authentication hereon has been executed by the Trustee by manual signature, this Note shall not be entitled to any benefit under the Indenture, or be valid or obligatory for any purpose.

     IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed.

AMERICAN REF-FUEL COMPANY LLC
By	/s/ Michael J.Gruppuse
	Name:  Michael J.Gruppuse
	Title:    Vice President
	Chief Financial Officer

CERTIFICATE OF AUTHENTICATION

     This Note is one of the Notes referred to in the within-mentioned Indenture.

WACHOVIA BANK, NATIONAL ASSOCIATION
     as Trustee

By:
	Authorized Signatory

AMERICAN REF-FUEL COMPANY LLC
6.26% SENIOR NOTE DUE 2015
(REVERSE OF SECURITY)

     This note is one of an authorized issue of Notes of the Company known as its 6.26% Senior Notes Due 2015 (the “Notes”). The Notes are issued under the Indenture dated as of May 1, 2003 (the “Original Indenture”) among the Company and Wachovia Bank, National Association, as trustee (in such capacity, together with its successors in such capacity, the “Trustee”), as supplemented by the First Supplemental Indenture dated as of May 1, 2003 (the “First Supplemental Indenture”) among the Company and the Trustee (the Original Indenture, as so supplemented, and as the same may be amended, modified and further supplemented, the “Indenture”). All capitalized terms used herein, unless otherwise defined herein, shall have the meanings ascribed to them in the Indenture.

     All Notes of any series issued and Outstanding under the Indenture rank on a parity with each other Note of the same series and with all Notes of each other series. Reference is hereby made to the Indenture for a description of the nature and extent of the Notes and the respective rights, limitations of rights, duties and immunities thereunder of the Holders and of the Trustee and the Company in respect of the Notes and the terms upon which the Notes are made and are to be authenticated and delivered.

     The principal of and interest on this Note are secured by assets subject to the Lien of the Collateral Documents, and all payments of principal and interest shall be made in accordance with the terms of the Indenture Each Holder, by acceptance of this Note, hereby acknowledges and agrees that (a) subject to the terms of the Indenture, it will look solely to the revenues of the Company, the Collateral and the income and proceeds received by the Trustee therefrom to the extent available for distribution to such Holder as herein provided or provided in the Collateral Documents, (b) neither the Member, nor any of its past, present or future officers, partners, directors or members or other Related Persons, nor the Trustee shall be personally or otherwise liable to any Holder, nor shall the Member, nor any of its past, present or future officers, partners, directors or members or other Related Persons, be personally or otherwise liable to the Trustee for any amounts payable under any Note or for any liability under the Indenture or any other Financing Document, except as provided in the Original Indenture and (c) recourse for any such amounts payable shall be otherwise limited in accordance with Section 2.14 and Section 16.1 of the Original Indenture.

     The obligations of the Company to pay the principal of and interest on the Notes when due as herein prescribed are absolute and unconditional and no provision of this Note or the Indenture shall alter or impair such obligations.

     The Notes are subject to and have the benefits of the Collateral Documents pursuant to which the rights of the parties in respect of the Collateral will be exercised by the Trustee in accordance with the Collateral Documents.

     The Indenture permits, with certain exceptions, as therein provided, the amendment thereof and the modification of the rights and obligations of the Company and the

rights of the Holders under the Indenture. The Indenture also contains provisions permitting the Holders of specified percentages in aggregate principal amount of the Notes to waive compliance by the Company with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any Act (as such term is defined in the Indenture), including, but not limited to, such a consent, waiver or direction by the Holder of this Note shall be conclusive and binding upon the Holder and upon all future Holders of this Note and the Holder of every Note issued upon the transfer hereof or the exchange herefor or in lieu hereof whether or not notation of such Act is made upon this Note.

     This Note is one of the series designated on the face hereof, limited to $275,000,000 in aggregate principal amount as provided in the First Supplemental Indenture.

     This Note and all Notes issued or to be issued in a series created under the First Supplemental Indenture are redeemable in whole or in part at the option of the Company in accordance with Section 5.1 of the Original Indenture, on not less than 30 nor more than 60 days’ notice, at a redemption price equal to the principal amount thereof plus unpaid and accrued interest plus the Make-Whole Premium.

     The Notes are, under certain conditions subject to mandatory redemption in whole or in part as set forth in Section 5.2 of the Original Indenture. Notice of any redemption of Notes will be given at least 30 days but not more than 60 days before the Redemption Date to each Holder at its address as it appears in the Security Register.

     Notes (or portions thereof as aforesaid) for the redemption of which provision is made in accordance with the Indenture shall cease to bear interest from and after any Redemption Date.

     The Indenture contains provisions for, upon compliance by the Company with certain conditions set forth in the Indenture, the defeasance of (a) the entire indebtedness of this Note and (b) certain restrictive covenants and agreements.

     The unpaid portion of the Principal Amount, together with any interest accrued and unpaid thereon and all other amounts due hereunder, if any, may become due and payable upon the occurrence and continuation of any Event of Default, but only as provided in the Indenture.

     Definitive Certificated Notes are issuable only as registered Notes in minimum denominations of $250,000 and any integral multiples of S1,000 in excess thereof. Global Notes are issuable only as registered Notes in minimum denominations of $100,000 and any integral multiples of $1,000 in excess thereof. As provided in, and subject to the provisions of, the Indenture, Notes are exchangeable at the option of the Holder thereof for other Notes of the same series, of authorized denomination and of like tenor, maturity, interest rate and aggregate principal amount, to be registered in the name of such Holder, upon surrender thereof by such Holder at any office or agency maintained for such purpose pursuant to the Indenture.

     No service charge will be required of any Holder participating in any such transfer or exchange of Notes in respect of such transfer or exchange, but the Security Registrar

may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith.

     Prior to due presentment of this Note for registration of transfer, the person in whose name this Note is registered shall be deemed to be the owner and holder hereof for the purpose of receiving payment as herein provided and for all other purposes whether or not this Note be overdue regardless of any notice to anyone to the contrary.

     THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW THEREOF TO THE EXTENT THE APPLICATION OF SUCH PRINCIPLES WOULD CAUSE THE APPLICATION OF THF LAWS OF ANY OTHER JURISDICTION.

ABBREVIATIONS

     The following abbreviations when used in the inscription on the face of this instrument shall be construed as though they were written out in full according to applicable laws or regulations:

TEN COM	—	as tenants in common
TEN ENT	—	as tenants by the entireties
JT TEN	—	as joint tenants with right of survivorship and not as tenants in common

UNIF GIFT MIN ACT
	(Cust) (Minor)

under Uniform Gift to Minors Act

(State)                                              

Additional abbreviations may also be used though not in the above list

     FOR VALUE-RECEIVED the undersigned hereby sell(s), assign(s) and transfer(s) unto

Social Security Number or Other

Identifying Number of Assignee

(Please print or typewrite name and address, including zip code of Assignee)

the within security and all rights thereunder, hereby irrevocably constituting and appointing            attorney to transfer said security on the books of the Company with full power of substitution in the premises.

Dated:
	NAME:

NOTICE: The signature to this assignment must correspond with the name as written upon the first page of the within instrument in every particular, without alteration or enlargement or any change whatsoever.

ANNEX A TO
6.26% SENIOR NOTE DUE 2015

     The following table sets forth the date of each semiannual installment of the aggregate principal to be paid on all Notes of this series on each such date:

	Principal Amount
Principal Payment Dates	Payable on Series A Notes
December 31, 2003	$	16,000,000
June 30, 2004		5,700,000
December 31 , 2004		13,300,000
June 30, 2005		6,000,000
December 31 , 2005		14,000,000
June 30, 2006		8,400,000
December 3l, 2006		19,600,000
June 30, 2007		8,100,000
December 31, 2007		18,900,000
June 30, 2008		10,500,000
December 31, 2008		24,500,000
June 30, 2009		3,900,000
December 31, 2009		9,100,000
June 30, 2010		1,200,000
December 31, 2010		2,800,000
June 30, 2011		11,700,000
December 31, 2011		27,300,000
June 30, 2012		5,400,000
December 31, 2012		12,600,000
June 30, 2013		1,200,000
December 31, 2013		2,800,000
June 30, 2014		7,800,000
December 31, 2014		18,200,000
June 30, 2015		7,800,000
December 31, 2015		18,200,000
TOTAL	$	275.000.000

ANNEX B TO
6.26% SENIOR NOTE DUE 2015

Exchanges of portions of this Global Note for Certificated Notes:

	Principal Amount of
	Definitive Securities Issued	Remaining Principal	Notation made
Date	in Exchange for a Portion	Amount of this Global	by
	of this Global Security	Security

EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in the following Registration Statements:

(1)	Registration Statement (Form S-8 No. 333-86004) pertaining to the 1995 Stock and Incentive Plan as amended effective December 12, 2000,
(2)	Registration Statement (Form S-8 No. 333-115365) pertaining to the 1995 Stock and Incentive Plan as amended effective December 12, 2000 and as further amended effective July 24, 2002,
(3)	Registration Statement (Form S-8 No. 333-119609) pertaining to the Covanta Holding Corporation (formerly “Danielson Holding Corporation”) Equity Award Plan for Directors of Covanta Holding Corporation,
(4)	Registration Statement (Form S-8 No. 333-130046) pertaining to the registration of an additional 2,000,000 shares of common stock as a result of an increase in the number of shares of Common Stock issuable under the Company’s Equity Award Plan for Employees and Officers, and
(5)	Registration Statement (Form S-3 No. 333-117730) pertaining to the resale of 17,711,491 shares of common stock

of our reports dated March 8, 2006, with respect to the (1) consolidated financial statements and schedules of Covanta Holding Corporation, and (2) Covanta Holding Corporation management’s assessment of the effectiveness of internal control over financial reporting at Covanta Holding Corporation, and the effectiveness of internal control over financial reporting at Covanta Holding Corporation included in this Annual Report (Form 10-K) for the year ended December 31, 2005.

/s/ Ernst & Young LLP  

MetroPark, New Jersey
March 8, 2006

EX-23.2

Exhibit 23.2

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in the following Registration Statements:

1.	Registration Statement (Form S-8 No. 333-86004) pertaining to the 1995 Stock and Incentive Plan as amended effective December 12, 2000,
2.	Registration Statement (Form S-8 No. 333-115365) pertaining to the 1995 Stock and Incentive Plan as amended effective December 12, 2000 and as further amended effective July 24, 2002,
3.	Registration Statement (Form S-8 No. 333-119609) pertaining to the Covanta Holding Corporation (formerly “Danielson Holding Corporation”) Equity Award Plan for Employees and Officers and the Covanta Holding Corporation Equity Award Plan for Directors of Covanta Holding Corporation,
4.	Registration Statement (Form S-8 No. 333-130046) pertaining to the registration of an additional 2,000,000 shares of common stock as a result of an increase in the number of shares of Common Stock issuable under the Company’s Equity Award Plan for employees and Officers, and
5.	Registration Statement (Form S-3 No. 333-117730) pertaining to the resale of 17,711,491 shares of common stock

of our report dated February 14, 2006, with respect to the consolidated balance sheets of Quezon Power, Inc. as of and for the years ended December 31, 2005 and 2004, and the related consolidated statements of operations, changes in stockholders equity and cash flows for each of the three years ended December 31, 2005 included in Covanta Holding Corporation’s Annual Report (Form 10-K) for the year ended December 31, 2005, filed with the Securities and Exchange Commission.

/s/ Sycip Gorres Velayo & Co.
a member Practice of Ernst & Young Global

Makati City, Philippines
March 14, 2006

EX-31.1

Exhibit 31.1

Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

      I, Anthony J. Orlando, certify that:

      1. I have reviewed this Annual Report on Form 10-K of Covanta Holding Corporation;

      2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

      3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

      4. Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have:

      (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

      (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

      (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

      (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s fourth fiscal quarter ended December 31, 2005 that has materially affected, or is reasonably likely to materially affect the registrant’s internal control over financial reporting.

      5. Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

      (a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

      (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

/s/ Anthony J. Orlando

Anthony J. Orlando

President and Chief Executive Officer

Date: March 14, 2006

177 EX-31.2 8 c03133exv31w2.htm CERTIFICATION OF CFO

Exhibit 31.2

Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

      I, Craig D. Abolt, certify that:

      1. I have reviewed this Annual Report on Form 10-K of Covanta Holding Corporation;

      2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

      3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

      4. Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have:

      (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

      (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

      (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

      (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s fourth fiscal quarter ended December 31, 2005 that has materially affected, or is reasonably likely to materially affect the registrant’s internal control over financial reporting; and

      5. Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

      (a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

      (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

/s/ Craig D. Abolt

Craig D. Abolt

Senior Vice President and Chief Financial Officer

Date: March 14, 2006

178 EX-32.1 9 c03133exv32w1.htm CERTIFICATION OF CEO

Exhibit 32.1

Certification Of Periodic Financial Report Pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002

      In connection with the Annual Report on Form 10-K for the period ended December 31, 2005 of Covanta Holding Corporation (the “Company”) as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Anthony J. Orlando, as President and Chief Executive Officer of the Company, hereby certifies, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge:

      (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934;

      (2) the information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company; and

      This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

      A signed original of this written statement has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

/s/ Anthony J. Orlando

Anthony J. Orlando

President and Chief Executive Officer

Date: March 14, 2006

179 EX-32.2 10 c03133exv32w2.htm CERTIFICATION OF CFO

Exhibit 32.2

Certification Of Periodic Financial Report Pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002

      In connection with the Annual Report on Form 10-K for the period ended December 31, 2005 of Covanta Holding Corporation (the “Company”) as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Craig D. Abolt, as Senior Vice President and Chief Financial Officer of the Company, hereby certifies, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge:

      (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934;

      (2) the information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company; and

      This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

      A signed original of this written statement has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

/s/ Craig D. Abolt

Craig D. Abolt

Senior Vice President and Chief Financial Officer

Date: March 14, 2006

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M3$9` G',B"/,B$7,B&?,B(G,B*/,AQ3)J+_,B0',F2/,F4',B-7$$A```[ ` end -----END PRIVACY-ENHANCED MESSAGE-----

EX-31.2

exv31w2

EX-32.1

exv32w1

EX-32.2

exv32w2