8-K/A

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K/A

Amendment No. 1 to

CURRENT REPORT PURSUANT
TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of Report (Date of earliest event reported): April 7, 2005

DANIELSON HOLDING CORPORATION

(Exact name of Registrant as Specified in Its Charter)

Delaware	1-6732	95-6021257
(State or Other Jurisdiction of Incorporation)	(Commission File Number)	(I.R.S. Employer Identification No.)

40 Lane Road
Fairfield, New Jersey  07004

(Address of principal executive offices) (Zip Code)

(973) 882-9000

(Registrant’s telephone number, including area code)

(Former name or former address, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12(b))

¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

TABLE OF CONTENTS

Unaudited Pro Forma Condensed Combined Financial Statements

Unaudited Consolidated Statements of Operations

EXPLANATORY NOTE:

     This Form 8-K/A amends the Form 8-K filed on April 7, 2005 (the “Original Filing”) by Danielson Holding Corporation (“Danielson”) in connection with the acquisition of all of the outstanding stock of American Ref-Fuel Holdings Corp. (“Ref-Fuel”). This amendment is being filed to: (i) amend Exhibit 99.1 of the Original Filing in response to comments from the Securities and Exchange Commission as well as to update the information therein to March 31, 2005; and (ii) amend Exhibit 99.2 to provide unaudited consolidated statements of operations, balance sheets, statements of stockholders’ equity and statements of cash flows for Ref-Fuel and Subsidiaries, as of March 31, 2005 and for the three months then ended.

Item 8.01. Other Events.

     In connection with the agreement by Danielson to acquire all of the outstanding stock of Ref-Fuel, Danielson is filing the following (1) Unaudited Pro Forma Condensed Combined Financial Statements for the year ended December 31, 2004 and as of and for the three months ended March 31, 2005 based on the historical financial statements of Danielson, Covanta Energy Corporation (“Covanta”), Ref-Fuel and Ref-Fuel Holdings LLC and gives effect to the acquisition of Covanta and the proposed acquisition of Ref-Fuel and the related financings, which are attached as Exhibit 99.3 hereto and incorporated herein by reference, and (2) Unaudited Consolidated Financial Statements for Ref-Fuel and Subsidiaries, as of March 31, 2005 and December 31, 2004 and for the three months ended March 31, 2005 and March 31, 2004, which are attached as Exhibit 99.4 hereto and incorporated herein by reference.

Item 9.01. Financial Statements and Exhibits.

(a)   Financial Statements of Business Acquired – Unaudited Consolidated Financial Statements for Ref-Fuel and Subsidiaries as of March 31, 2005 and December 31, 2004 and for the three months ended March 31, 2005 and March 31, 2004 are attached hereto as Exhibit 99.4.

(b)	Pro Forma Financial Information – Unaudited Pro Forma Condensed Combined Financial Statements for the year ended December 31, 2004 and as of and for the three months ended March 31, 2005 based on the historical financial statements of Danielson, Covanta, Ref-Fuel and Ref-Fuel Holdings LLC are attached hereto as Exhibit 99.3.
(c)	Exhibits -

Exhibit No.	Exhibit
23.1	Consent of Independent Registered Public Accounting Firm of American Ref-Fuel Holdings Corp. and Subsidiaries dated April 5, 2005 by PricewaterhouseCoopers LLP for their report dated March 15, 2005.*
23.2	Consent of Independent Registered Public Accounting Firm of American Ref-Fuel Holdings Corp. and Subsidiaries dated April 5, 2005 by PricewaterhouseCoopers LLP for their report dated June 30, 2004.*
23.3	Consent of Independent Registered Public Accounting Firm of American Ref-Fuel Holdings Corp. and Subsidiaries dated April 5, 2005 by KPMG LLP.*
23.4	Consent of Independent Registered Public Accounting Firm of Ref-Fuel Holdings LLC and Subsidiaries dated April 5, 2005 by PricewaterhouseCoopers LLP for their report dated March 15, 2005.*
23.5	Consent of Independent Registered Public Accounting Firm of Ref-Fuel Holdings LLC and Subsidiaries dated April 5, 2005 by PricewaterhouseCoopers LLP for their report dated March 29, 2004.*
99.2	Consolidated Financial Statements for Ref-Fuel and Subsidiaries and Ref-Fuel Holdings LLC and Subsidiaries as of December 31, 2004 and 2003 and for the year ended December 31, 2004, the period from December 12, 2003 through December 31, 2003 and the period from January 1, 2003 through December 12, 2003 and the year ended December 31, 2002.*
99.3	Unaudited Pro Forma Condensed Combined Financial Statements for the year ended December 31, 2004 and as of and for the three months ended March 31, 2005 based on the historical financial statements of Danielson, Covanta, Ref-Fuel and Ref-Fuel Holdings LLC.
99.4	Unaudited Consolidated Financial Statements for Ref-Fuel and Subsidiaries as of March 31, 2005 and December 31, 2004 and for the three months ended March 31, 2005 and March 31, 2004.

*Previously filed as an exhibit to Danielson’s Form 8-K filed on April 7, 2005.

SIGNATURES

     Pursuant to the requirements 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.

Date: May 11, 2005

DANIELSON HOLDING CORPORATION
(Registrant)

By: /s/ Craig D. Abolt

Name: Craig D. Abolt
Title:   Senior Vice President and Chief Financial Officer

DANIELSON HOLDING CORPORATION

EXHIBIT INDEX

Exhibit No.	Exhibit
99.3	Unaudited Pro Forma Condensed Combined Financial Statements for the year ended December 31, 2004 and as of and for the three months ended March 31, 2005 based on the historical financial statements of Danielson, Covanta, Ref-Fuel and Ref-Fuel Holdings LLC.
99.4	Unaudited Consolidated Financial Statements for Ref-Fuel and Subsidiaries as of March 31, 2005 and December 31, 2004 and for the three months ended March 31, 2005 and March 31, 2004.

EX-99.3

Exhibit 99.3

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

     The following unaudited pro forma condensed combined financial statements for the year ended December 31, 2004 and as of and for the quarter ended March 31, 2005 are based on the historical financial statements of Danielson Holding Corporation (“Danielson”), Covanta Energy Corporation (“Covanta”), American Ref-Fuel Holdings Corp. (“Ref-Fuel”) and Ref-Fuel Holdings LLC and give effect to the acquisition of Covanta and the proposed acquisition of Ref-Fuel and related financings. The unaudited pro forma condensed statements of combined operations are presented as if the transactions discussed below occurred on January 1, 2004 and are adjusted for events that are (1) directly attributable to the transactions, (2) expected to have continuing impact and (3) factually supportable. The unaudited pro forma condensed balance sheet is presented as if the transactions discussed below occurred on March 31, 2005 and is adjusted for events that are (1) directly attributable to the transactions and (2) factually supportable.

     On January 31, 2005, Danielson entered into a stock purchase agreement (the “Purchase Agreement”) with Ref-Fuel, an owner and operator of waste-to-energy facilities in the northeast United States, and Ref-Fuel’s stockholders (the “Selling Stockholders”) to purchase 100% of the issued and outstanding shares of Ref-Fuel capital stock. Under the terms of the Purchase Agreement, Danielson will pay $740 million in cash for the stock of Ref-Fuel and will assume debt of Ref-Fuel. After the transaction is completed, Ref-Fuel will be a wholly-owned subsidiary of Covanta.

     The acquisition is expected to close when all of the closing conditions to the Purchase Agreement have been satisfied or waived. These closing conditions include the receipt of approvals, clearances and the satisfaction of all waiting periods as required under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (“HSR Act”) and as required by certain governmental authorities such as the Federal Energy Regulatory Commission (“FERC”) and other applicable regulatory authorities. Danielson has been notified of the termination of the waiting period under the HSR Act and of the approval of the transaction by FERC. Other closing conditions of the transaction include Danielson’s completion of debt financing and an equity rights offering, as further described below. While it is anticipated that all of the applicable conditions will be satisfied, there can be no assurance as to whether or when all of those conditions will be satisfied or, where permissible, waived.

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

Covanta Transactions

•   Danielson purchased Covanta on January 1, 2004, pursuant to an investment and purchase agreement (the “Investment and Purchase Agreement”) for an assumed aggregate purchase price of $47.5 million which includes the cash purchase price of $29.8 million, approximately $6.4 million for professional fees and other costs incurred in connection with the acquisition, and an estimated fair value of $11.3 million for Danielson’s commitment to sell up to 3 million shares of its common stock at $1.53 per share to certain creditors of Covanta.

•   All shares associated with the acquisition of Covanta are considered issued and outstanding as of January 1, 2004, including 5.1 million of contingently returnable shares to the bridge lenders (“Bridge Shares”), 8.75 million shares that resulted from the conversion of a part of the convertible bridge loan and 27.4 million shares issued in connection with the pro rata rights offering to all Danielson Stockholders.

•   Covanta emerged from bankruptcy on January 1, 2004 simultaneous with Danielson’s purchase of Covanta. Accordingly, a purchase price allocation of fair values to the assets acquired and liabilities assumed has been performed at the assumed date of acquisition in conformity with Statement of Financial Accounting Standards (SFAS) No. 141 “Business Combinations” and SFAS No. 109 “Accounting for Income Taxes”. In addition to purchase price allocation adjustments, Covanta’s assumed emergence from Chapter 11 proceedings on January 1, 2004 resulted in a new reporting entity and adoption of fresh-start accounting as of

1 

that date, in accordance with AICPA Statement of Position (SOP) 90-7, “Financial Reporting by Entities in Reorganization Under Bankruptcy Code”.

•   The new debt structure of Covanta that was in place on March 10, 2004 upon Covanta’s emergence from bankruptcy was assumed to be refinanced in connection with the acquisition of Ref-Fuel as of January 1, 2004 as more fully described below.

Ref-Fuel Transactions

•   The pro forma financial information has been prepared assuming the probable acquisition of Ref-Fuel by Danielson for an assumed aggregate purchase price of $2,211 million which includes the cash purchase price of $740 million, assumed debt of $1,451 million at its estimated fair value, and estimated direct transaction costs and restructuring charges of $20 million related to the acquisition.

•   At January 1, 2004, proceeds of $398 million from the issuance and shareholder exercise of rights to purchase Danielson’s common stock (the “Ref-Fuel Rights Offering”) are used to finance the transaction. In the Ref-Fuel Rights Offering, Danielson’s existing stockholders will be issued rights to purchase Danielson’s stock on a pro rata basis, with each holder entitled to purchase approximately 0.9 shares of Danielson’s common stock at an exercise price of $6.00 per full share for each share of Danielson’s common stock then held. Assuming a full participation in the Ref-Fuel Rights Offering, an additional 66,377,000 shares were assumed issued and outstanding as of January 1, 2004 (based on the factor of 0.9 applied to 73,752,000 shares outstanding near the time of this filing).

•   The consummation of a debt financing package to finance the transaction, refinance the existing recourse debt of Covanta, and provide additional liquidity for Covanta (“Debt Financing Package”) is assumed to have occurred as of January 1, 2004. The financing consists of two tranches, each of which will be secured by pledges of the stock of Covanta’s subsidiaries that has not otherwise been pledged, guarantees from certain of Covanta’s subsidiaries and all other available assets of Covanta’s subsidiaries. The first tranche, a first priority senior secured bank facility, is expected to be comprised of a funded $250 million term loan facility, a $100 million revolving credit facility and a $340 million letter of credit facility. The revolving credit facility and the letter of credit facility will be available for Covanta’s needs in connection with its domestic and international businesses, including the existing businesses of Ref-Fuel. The second tranche is expected to be a second priority senior secured funded $425 million term loan facility, $212.5 million of which may be replaced by fixed rate notes within 120 days after the closing of the financing without premium or penalty.

2 

•   The April 30, 2004 “Equalization Transactions” and the ownership changes that occurred on August 31, 2004 between and among Ref-Fuel and its owners are assumed to have taken place on January 1, 2004.

•   The current project and other debt of Ref-Fuel subsidiaries will not be refinanced in connection with the acquisition, except for the assumed repurchase of the MSW II notes with an outstanding principal amount of $225 million at a price equal to 101% plus accrued and unpaid interest. Danielson’s existing commitments from Goldman Sachs Credit Partners and Credit Suisse First Boston provide sufficient financing for any such repurchases. In addition, existing revolving credit and letter of credit facilities of American Ref-Fuel Company LLC (the parent of each Ref-Fuel project company) will be cancelled and replaced with new facilities at the Covanta level. Danielson will incur additional fees on the notes repurchased, plus additional transaction costs relating to such repurchases. The amount of such additional fees and transaction costs will depend on whether and to what extent any such repurchases are required.

     The unaudited pro forma condensed combined financial information should be read in conjunction with:

•   accompanying notes to the unaudited pro forma condensed combined financial statements;

•   Covanta’s separate historical financial statements (i) as of and for the year ended December 31, 2004 included in Covanta’s Annual Report on Form 10-K, as amended, and (ii) as of and for the quarter ended March 31, 2005 included in Covanta’s Quarterly Report on Form 10-Q;

•   Danielson’s separate historical financial statements (i) as of and for the year ended December 31, 2004 included in Danielson’s Annual Report on Form 10-K, as amended, and (ii) as of and for the quarter ended March 31, 2005 included in Danielson’s Quarterly Report on Form 10-Q; and

•   Ref-Fuel’s separate historical financial statements (i) as of and for the year ended December 31, 2004 included in Danielson’s Form 8-K filed on April 7, 2005, and (ii) as of and for the quarter ended March 31, 2005 included in this Form 8-K/A.

•   The unaudited pro forma condensed combined financial information is provided for informational purposes only and is not necessarily indicative of the results of operations or financial position of the combined companies that would have occurred had the transactions been consummated on January 1, 2004, nor is it indicative of future operating results or financial position. The unaudited pro forma condensed combined financial statements do not give consideration to expense savings or asset dispositions and are based upon currently available information and upon certain assumptions that management believes are reasonable under the circumstances. The adjustments made to the financial statements are based upon the preliminary work of Danielson and its consultants. Since the Ref-Fuel transactions have not been consummated, the allocation of purchase price to Ref-Fuel is preliminary and subject to change as additional information and analysis is obtained and as more detailed valuation studies are completed. Based upon this preliminary purchase price allocation, the excess of purchase price over the net assets acquired, or goodwill, is approximately $353.7 million. The actual amounts that will be recorded based upon Danielson’s final assessment of fair values may differ substantially from the information presented in these pro forma condensed financial statements, particularly with respect to the purchase price allocation between tangible and intangible assets and the amount of goodwill recorded.

•   Danielson and its external valuation consultants used a blend of the income and cost valuation approaches to determine the fair values for Ref-Fuel’s property, plant and equipment. Relatively greater weight was placed on the income approach, consistent with the methodologies previously used by Danielson to value the assets of Covanta upon its emergence from bankruptcy. The income approach determines the present value of estimated income over the remaining life of the specific asset or business using a discount rate appropriate for the related risk.

•   Danielson and its external valuation consultants based estimates of future energy prices on recent market information and trends. In some cases, these prices are higher then those previously used by Ref-Fuel and its valuation consultants in determining fair values pursuant to a prior valuation of Ref-Fuel as of December 12, 2003. Use of higher estimates of future energy prices has the impact of allocating higher values to Ref-Fuel’s property, plant and equipment and reduces the values allocated to the contractual intangible assets. Higher future energy prices result in lower values for contracts with fixed pricing, resulting in lower fair values ascribed to contract-related intangible assets. Conversely, the value of future benefits of ownership of the business would be higher, resulting in higher fair values ascribed to property, plant and equipment.

3 

Unaudited pro forma condensed combined balance sheet (dollars in thousands)
As of March 31, 2005

	Danielson		American		Pro				Pro
	Holding		Ref-Fuel		forma				forma
	Corp.		Holdings Corp.		adjustments				combined
ENERGY SERVICES ASSETS
Cash and cash equivalents	$	58,012	$	57,610	$	(32,000	)	l	$	83,622
Marketable securities available for sale		4,100								4,100
Restricted funds held in trust		121,525		46,734						168,259
Restricted funds for emergence costs		24,476								24,476
Receivables, net		112,146		68,241						180,387
Unbilled service receivables		56,650								56,650
Deferred income taxes		14,747		9,806						24,553
Other current assets		52,514		16,140		(1,500	)	l		67,154
Current assets		444,170		198,531		(33,500	)			609,201
Property, plant and equipment, net		814,110		1,185,048		599,191		q		2,598,349
Service and energy contracts and other intangible assets, net		173,108		526,445		(142,340	)	q		557,213
Goodwill				123,984		229,739		m		353,723
Restricted funds held in trust		123,918		92,389						216,307
Investments in and advances to investees and joint ventures		67,784								67,784
Unbilled service receivables		95,799								95,799
Other assets		61,305		11,755		33,000		n		112,810
						6,750		t
Total Energy Services assets		1,780,194		2,138,152		692,840				4,611,186
PARENT COMPANY AND INSURANCE ASSETS
Cash and cash equivalents		20,384								20,384
Investments in fixed maturity debt securities and equity securities		57,345								57,345
Reinsurance recoverable on paid and unpaid losses, net of allocations		19,540								19,540
Deferred income taxes		18,083								18,083
Other assets		12,535								12,535
Total Parent Company and Insurance assets		127,887		—		—				127,887
Total assets	$	1,908,081	$	2,138,152	$	692,840			$	4,739,073
ENERGY SERVICES LIABILITIES
Accounts payable and accrued liabilities		124,322		74,602		10,500		o		209,424
Current portion of recourse debt		113		20,000						20,113
Current portion of project debt		114,719		55,713		4,465		q		174,897
Accrued emergence costs		24,476								24,476
Other current liabilities		14,167								14,167
Current liabilities		277,797		150,315		14,965				443,077
Long-term recourse debt		313,891		903,325		13,269		q		1,591,685
						361,200		n
Long-term project debt		799,259		459,768		(5,982	)	q		1,253,045
Deferred taxes		116,406		156,584		169,455		r		442,445
Other liabilities		98,281		219,963		(6,871	)	q		311,373
Total Energy Services liabilities		1,605,634		1,889,955		546,036				4,041,625
PARENT COMPANY AND INSURANCE LIABILITIES
Unpaid losses and loss adjustment expenses		61,190								61,190
Other liabilities		10,355								10,355
Total Parent Company and Insurance liabilities		71,545		—		—				71,545
Minority interests		83,825		701						84,526
Total stockholders’ equity		147,077		247,496		146,804		p		541,377
Total liabilities and stockholders’ equity	$	1,908,081	$	2,138,152	$	692,840			$	4,739,073

4

Unaudited pro forma condensed statement of combined operations (in thousands, except per share data)
for the three months ended March 31, 2005

	Danielson			American			Pro				Pro
	Holding			Ref-Fuel			forma				forma
	Corp.			Holdings Corp			adjustments				combined
REVENUES
Energy:
Service revenues	$	111,458		$	64,639		$	(1,758	)	h	$	174,339
Energy and steam sales		58,788			32,388			14,764		h		105,940
Other		690			3,204							3,894
		170,936			100,231			13,006				284,173
Insurance and other:
Net earned premiums		3,471										3,471
Net investment income		487										487
Net other income		43										43
		4,001			—			—				4,001
COSTS AND EXPENSES
Energy:
Plant operating expenses		119,496			52,794							172,290
Depreciation and amortization		16,320			16,736			13,006		h		49,554
								3,492		q
Net interest on project debt		9,633						7,460		i		17,408
								315		t
Selling, general and administrative		12,402			12,420							24,822
Other		(617	)		1,386							769
		157,234			83,336			24,273				264,843
Insurance and other:
Net losses and loss adjustment		2,307										2,307
Other		1,437										1,437
		3,744			—			—				3,744
Operating earnings		13,959			16,895			(11,267	)			19,587
Interest income		779			1,233							2,012
Interest expense		(10,321	)		(21,472	)		7,460		i		(30,559	)
								10,560		j
								(16,447	)	k
								(339	)	q
Other income, net		3,718			360							4,078
Earnings before minority interests, income taxes and equity earnings		8,135			(2,984	)		(10,033	)			(4,882	)
Minority interests		(1,550	)		(37	)						(1,587	)
Tax benefit (expense)		(2,742	)		1,259			4,070		s		2,587
Equity in income (loss) of unconsolidated subsidiaries		6,460										6,460
Net Earnings	$	10,303		$	(1,762	)	$	(5,963	)		$	2,578
Earnings per common share
Basic	$	0.14									$	0.02
Diluted	$	0.13									$	0.02
Weighted average common shares outstanding
Basic		72,964						66,377				139,341
Diluted		77,072						69,077				146,149

5

Unaudited pro forma condensed statement of combined operations (in thousands, except per share data)
for the year ended December 31, 2004

	Jan 1 to			Jan 1 to			Jan 1 to			Jan 1 to			Jan 1 to
	Dec 31, 2004			Mar 10, 2004			Mar 10, 2004			Dec 31, 2004			Apr 30, 2004
	Danielson			Covanta			Deconsolidation			American			Ownership Changes			Pro				Pro
	Holding			Energy			of Covanta			Ref-Fuel			of Ref-Fuel			forma				forma
	Corp.			Corp.			Entities (a)			Holdings Corp			Entities (g)			adjustments				combined
REVENUES
Energy:
Service revenues	$	374,622		$	89,867		$	(5,282	)	$	194,950		$	89,496		$	(7,171	)	h	$	736,482
Energy and steam sales		181,074			53,307			(535	)		93,188			41,566			59,770		h		428,370
Other		1,506			58						10,506			6,475							18,545
		557,202			143,232			(5,817	)		298,644			137,537			52,599				1,183,397
Insurance and other:
Net earned premiums		17,998																			17,998
Net investment income		2,405																			2,405
Net other income		465																			465
		20,868			—			—			—			—			—				20,868
COSTS AND EXPENSES
Energy:
Plant operating expenses		354,542			100,774			(3,632	)		116,089			73,322							641,095
Depreciation and amortization		52,632			13,426			(786	)		45,154			22,842			(12,640	)	b		199,168
																	8,598		c
																	3,375		d
																	52,599		h
																	13,968		q
Net interest on project debt		32,586			13,407			(1,045	)								(3,419	)	e		75,785
																	1,263		t
																	32,993		i
Selling, general and administrative		38,076			7,597			(322	)		30,216			15,031							90,598
Other		(832	)		(2,234	)		116			1,765			342							(843	)
		477,004			132,970			(5,669	)		193,224			111,537			96,737				1,005,803
Insurance and other:
Net losses and loss adjustment		12,861																			12,861
Other		10,850																			10,850
		23,711			—			—			—			—			—				23,711
Operating earnings		77,355			10,262			(148	)		105,420			26,000			(44,138	)			174,751
Interest income		1,858			935						2,967			1,022							6,782
Interest expense		(43,739	)		(6,142	)		6			(69,219	)		(21,626	)		32,993		i		(125,666	)
																	53,213		j
																	(65,788	)	k
																	(5,364	)	q
Other income, net											303			122							425
Reorganization items					(58,282	)											58,282		f		-
Fresh start adjustments					(399,063	)											399,063		f		-
Gain on extinguishment of debt					510,680												(510,680	)	f		-
Earnings before equity earnings minority interests, income taxes and discontinued operations		35,474			58,390			(142	)		39,471			5,518			(82,419	)			56,292
Minority interests		(6,869	)		(2,511	)					(12,283	)		11,372							(10,291	)
Tax benefit (expense)		(11,535	)		(30,240	)					(17,818	)					33,699		s		(25,894	)
Equity in income (loss) of unconsolidated subsidiaries		17,024			3,924			142			6,148			(6,148	)						21,090
Net earnings	$	34,094		$	29,563		$	—		$	15,518		$	10,742		$	(48,720	)		$	41,197
Earnings per common share
Basic	$	0.54																		$	0.30
Diluted	$	0.52																		$	0.29
Weighted average common shares outstanding
Basic		63,469															75,477				138,946
Diluted		65,742															78,460				144,202

6

Note 1: BASIS OF PRESENTATION

Danielson

     As required by the Investment and Purchase Agreement, Covanta filed a proposed plan of reorganization, proposed plan of liquidation for specified non-core businesses, and the related draft disclosure statement, each reflecting the transactions contemplated under the Investment and Purchase Agreement, with the Bankruptcy Court of the Southern District of New York (the “Bankruptcy Court”). On March 5, 2004, the Bankruptcy Court confirmed the proposed plans (the “Reorganization Plan”). Under the terms of the Investment and Purchase Agreement, Danielson acquired 100% of Covanta’s equity on March 10, 2004. The results of operations from Covanta are included in Danielson’s consolidated results of operations from March 10, 2004.

     The aggregate purchase price was $47.5 million which included the cash purchase price of $29.8 million, approximately $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 Danielson’s commitment to sell up to 3 million shares of its common stock at $1.53 per share to certain creditors of Covanta.

     The pro forma financial information has been prepared based upon the allocation of values to Covanta’s assets acquired and liabilities assumed at the pro forma date of acquisition, in conformity with Statement of Financial Accounting Standards (SFAS) No. 141 “Business Combinations” and SFAS No. 109 “Accounting for Income Taxes”. Final fair value determinations of the tangible and intangible assets were made by management based on anticipated discounted cash flows using currently available information. Management’s estimate of the fair value of long-term debt was based on the new principal amounts of recourse debt that was part of the reorganized capital structure of Covanta upon emergence. Management’s estimate of the fair value of project debt was based on market information available to Covanta. Covanta engaged valuation consultants to review its valuation methodology which concluded in the first quarter of 2005.

     The following depicts the summary balance sheet of Covanta after the final purchase price allocation as of March 10, 2004 (dollars in thousands):

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 acquired	$	1,808,511
Net assets acquired	$	47,525

The acquired intangible assets of $191.9 million primarily related to service on publicly-owned waste-to-energy projects and energy contracts, with an appropriate 17-year weighted average useful life. However, many such contracts have remaining lives that are significantly shorter.

Ref-Fuel

     The following table summarizes the preliminary allocation of values to the assets acquired and liabilities assumed at the pro forma date of acquisition of March 31, 2005. Since the Ref-Fuel transactions have not been consummated, the allocation of purchase price to Ref-Fuel is preliminary and subject to change as additional information and analysis is obtained. Danielson is in the process of performing the valuation studies necessary to finalize the fair values of the assets and liabilities of Ref-Fuel and the related allocation of purchase price. Danielson expects that adjustments to preliminary fair values may include those relating to:

•   property, plant, and equipment, intangibles, goodwill and debt, all of which may change based on consideration of additional analysis by Danielson 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.

7 

     The following depicts the summary balance sheet of Ref-Fuel after the preliminary purchase price allocation as of March 31, 2005 (dollars in thousands):

Purchase price
Cash	$	740,000
Debt assumed		1,450,558
Estimated direct transaction costs		9,250
Estimated restructuring charges		10,500
Total	$	2,210,308

Preliminary purchase price allocation
Tangible assets less liabilities assumed	$	1,971,920
Intangible assets, net		211,405
Goodwill		353,723
Deferred tax liability		(326,039	)
Minority interest		(701	)
Total preliminary purchase price allocation	$	2,210,308

Note 2: PRO FORMA ADJUSTMENTS

Adjustments for the Covanta Transactions

a.	The “Deconsolidation of Covanta Entities” column of the unaudited pro forma condensed statements of combined operations pertains to six of Covanta’s subsidiaries which had not reorganized or filed a liquidation plan under Chapter 11 of the United States Bankruptcy Code as of March 10, 2004. For the 2004 pro forma period presented, these entities were not consolidated because Covanta did not control these debtors or the ultimate outcome of their respective Chapter 11 cases. The subsidiaries related to the Tampa Bay desalination and Lake County waste-to-energy projects emerged from Chapter 11 on August 6, 2004 and December 14, 2004, respectively, when they were reconsolidated.
b.	To reverse Covanta’s historical depreciation and amortization expense, for the period January 1, 2004 to March 10, 2004.
c.	To include pro forma depreciation expense based on fair values assigned to Covanta’s property, plant and equipment for the period January 1, 2004 to March 10, 2004. The weighted average remaining useful life of property, plant and equipment acquired in the Covanta acquisition was approximately 19 years, consisting principally of energy facilities and buildings with a weighted average remaining useful life of approximately 21 years, and machinery and equipment with a weighted average remaining useful life of approximately 13 years.
d.	To include pro forma amortization expense based on fair values assigned to Covanta’s acquired intangible assets for the period January 1, 2004 to March 10, 2004, primarily service agreements on publicly owned waste-to-energy projects.
e.	To reverse Covanta’s historical amortization of bond issuance costs ($0.8 million) on outstanding project debt and include pro forma amortization of the premium on project debt ($2.6 million) based on fair values assigned to Covanta’s project debt, for the period January 1, 2004 to March 10, 2004.
f.	To remove historical reorganization items, fresh-start adjustments and the gain on extinguishment of debt resulting from Covanta’s bankruptcy proceedings. Since the pro forma condensed statement of combined operations has been prepared on the basis that Covanta’s

8 

emergence from bankruptcy and the business combination with Danielson both occurred on January 1, 2004, these items have been removed, as these transactions to effect Covanta’s reorganization would have been completed and these items would have been recorded prior to January 1, 2004.

Adjustments for the Ref-Fuel Transactions

g.	On April 30, 2004, Ref-Fuel entered into a series of transactions (“Equalization Transactions”) that changed its ownership structure. As a result of the Equalization Transactions, Ref-Fuel gained control of MSW Energy Holdings LLC, together with MSW Energy Holdings II LLC (a wholly-owned subsidiary of Ref-Fuel) on a combined basis, which owned substantially all interests in Ref-Fuel Holdings LLC. Ref-Fuel Holdings LLC is a holding company with a 100% membership interest in American Ref-Fuel Company LLC, which through subsidiaries, owns and operates six waste-to-energy facilities in the United States. As a result of the Equalization Transactions, Ref-Fuel has effective control of Ref-Fuel Holdings LLC, and therefore began consolidating its results of operations from May 1, 2004.
	The “Ownership Changes of Ref-Fuel Entities” column of the unaudited pro forma condensed statement of combined operations for the year-ended December 31, 2004 pertains to entities that were not consolidated by Ref-Fuel until ownership interests changed effective April 30, 2004 (the Equalization Transactions described above). Ref-Fuel reported its 50% share of earnings from its investment in Ref-Fuel Holdings LLC under the equity method from January 1, 2004 to April 30, 2004 (four month period) and consolidated such operations from May 1, 2004 to December 31, 2004 (eight month period). In addition, as a result of the Equalization Transactions, Ref-Fuel obtained a 0.01% interest and was named managing member of MSW Energy Holdings LLC and began consolidating its operations as of April 30, 2004. On August 31, 2004, in another transaction, Ref-Fuel acquired the 99.99% non-managing interests in MSW Energy Holdings LLC. As a result, Ref-Fuel owned 100% of the interests in MSW Energy Holdings LLC after that date.
	This column reverses the impact of accounting under the equity method for the investment in Ref-Fuel Holdings LLC for the four month period ended April 30, 2004, and reflects the results of operations as if they had been consolidated as of January 1, 2004. In addition, this column reflects the results of operations for MSW Energy Holdings LLC as if Ref-Fuel had owned a 100% interest in MSW Energy Holdings LLC as of January 1, 2004, which includes reversing the minority interest relating to MSW Energy Holdings LLC for the period of May 1, 2004 through August 31, 2004.
h.	In conjunction with a prior ownership change, Ref-Fuel’s energy and waste disposal revenue contracts were recorded at fair value as of December 12, 2003. Fair value adjustments for below-market contracts (primarily waste disposal) were amortized as an increase to Service Revenues. Fair value adjustments for the above-market contracts (primarily energy) were amortized as a decrease to Energy Revenues. The pro forma adjustments reclassify such amortization and record the net impact as amortization expense, consistent with Danielson’s presentation.
i.	To conform to Danielson’s accounting policy of classifying interest expense on nonrecourse project debt as an operating expense.

9 

j.   To reverse historical interest expense (including letter of credit fees) associated with recourse debt and unfunded credit facilities refinanced with the Debt Financing Package, the net proceeds from the Ref-Fuel Rights Offering and to reverse interest expense related to the $40 million, 9% interest senior notes contributed by Ref-Fuel’s members as a result of the August 31, 2004 transactions (dollars in thousands).

	Annual		Quarter
	2004		2005
Covanta recourse debt (January 1 to March 10, 2004)	$	6,142	$	—
Danielson recourse debt (January 1 to December 31, 2004)		9,033		—
Covanta recourse debt and credit facilities (March 11 to December 31, 2004)		34,706		10,320
Ref-Fuel credit facilities		932		240
Ref-Fuel senior notes		2,400		—
Total	$	53,213	$	10,560

k. To include pro forma interest expense based on the Debt Financing Package (dollars in thousands):

					Annual		Quarter
	Principal	Rate			2004		2005
Borrowings:
First Lien Facility	$250,000		6.25	%	$	15,625	$	3,906
Second Lien Facility	425,000		8.25	%		35,063		8,766
Total Borrowings	$675,000				$	50,688	$	12,672
Available for letters of credit and revolving credit:
Letter of credit availability under First Lien Facility	$340,000		3.00	%	$	10,200	$	2,550
Revolving credit facility*	100,000		0.50	%		500		125
Total unfunded	$440,000				$	10,700	$	2,675
Amortization of Debt Financing Package financing costs						4,400		1,100
Total					$	65,788	$	16,447

(*) Available for up to $75 million of letters of credit as an alternative to borrowings. This facility remains unused.

          Interest rates under the Debt Financing Package are based on the three month London InterBank Offering Rate (“LIBOR”) plus an additional percentage based on commitments from Goldman Sachs Credit Partners and Credit Suisse First Boston, which percentages are tied to Danielson’s credit ratings. The rates used to determine the pro forma adjustments above were selected with regard to Danielson’s current credit ratings and the three month LIBOR rate of 3.25% as of May 9, 2005. Each 1/8 percentage point change in the rates would impact earnings before taxes by $1.3 million for the annual period ended December 31, 2004 and $0.3 million for the quarterly period ended March 31, 2005.

l. To record the difference between the following sources and uses of cash (dollars in thousands):

First Lien Facility	$	250,000
Second Lien Facility		425,000
Ref-Fuel Rights Offering		398,300
Proceeds from MSW II Notes Refinancing		225,000
Total sources	$	1,298,300
Cash consideration	$	740,000
Covanta recourse debt		313,800
Estimated transaction costs		42,500
Redemption of MSW II Notes		227,250
MSW II Notes Refinancing costs		6,750
Total uses	$	1,330,300
Cash payment	$	32,000

     In addition to the estimated transaction costs of $42.5 million, approximately $1.5 million was paid as of March 31, 2005 and other current assets have been adjusted accordingly for pro forma purposes.

10

m.	To record the difference between (i) historical goodwill of Ref-Fuel ($124.0 million) and (ii) goodwill resulting from the acquisition of Ref-Fuel based on the preliminary purchase price allocation ($353.7 million).
n.	To reverse $313.8 million of post-emergence Covanta recourse debt and include $675 million under the Debt Financing Package, of which $212.5 million may be replaced by fixed rate notes within 120 days after the closing of the financing without premium or penalty. To record related financing costs of $33 million amortized over 7.5 years based on the average terms of the new facilities.
o.	Management has begun to assess and formulate plans to eliminate certain costs of the combined organization. These assessments are still in process. Based on a preliminary analysis, costs of approximately $10.5 million have been accrued for severance and benefit costs related to Ref-Fuel employees. The accrued costs have been considered part of the purchase price. This pro forma adjustment is reflected in the unaudited pro forma condensed combined balance sheet as of March 31, 2005. This adjustment is not reflected in the unaudited pro forma condensed statements of combined operations, as the adjustment is non-recurring in nature. This estimate is preliminary and subject to change based on management’s further assessments.
p.	Adjustments to stockholders’ equity (dollars in thousands):

Proceeds from Ref-Fuel Rights Offering, net of transaction costs of $4,000	$	394,300
To eliminate historical Ref-Fuel stockholders’ equity		(247,496	)
Total	$	146,804

q.   To record the difference between the preliminary estimates of the fair values and the historical amounts of Ref-Fuel’s assets and debt that will be assumed by Danielson, and the related impacts on depreciation, amortization, and interest expense. Contract-related assets (classified as intangible assets) are attributable to revenue arrangements for which the contractual rates are greater than the market

11

rates on the assumed date that Danielson acquired Ref-Fuel. Contract-related liabilities (classified as Other Liabilities) are attributable to revenue arrangements for which contractual rates are less than the market rates on the assumed date Danielson acquired Ref-Fuel. Since Danielson is in the process of performing the valuation studies necessary to finalize the fair values and related allocation of purchase price, the adjustments are preliminary and subject to change as additional information and analysis are obtained (dollars in thousands):

	Historical		Preliminary		Balance			Life		Expense Increase (Decrease)
	Balance		Fair Value		Adjustment			(Yrs)		Annual			Quarter
Property, plant and equipment	$	1,185,048	$	1,784,239	$	599,191			20	$	29,960		$	7,490
Intangible assets:
Service and energy contracts		479,489		337,149		(142,340	)		10		(14,234	)		(3,559	)
Non-amortizable intangibles		46,956		46,956		—			N/A		N/A			N/A
Service and energy contracts and other intangibles		526,445				(142,340	)				(14,234	)		(3,559	)
Other liabilities:
Waste contracts and operating lease		155,122		172,700		17,578			10		(1,758	)		(439	)
Other		64,841		40,392		(24,449	)		N/A		N/A			N/A
Other liabilities, net		219,963				(6,871	)				(1,758	)		(439	)
Net impact on depreciation and amortization										$	13,968		$	3,492
Debt, current and noncurrent balances		1,438,806		1,450,558		11,752				$	(10,847	)	$	(2,712	)
Reverse historical premium amortization											16,211			3,051
Net impact on interest expense										$	5,364		$	339

Other adjustments

r.	To record estimated deferred income taxes at an assumed 41% combined federal and state tax rate associated with the pro forma adjustments for the fair value of debt ($4.9 million asset), property, plant and equipment ($245.7 million liability), intangible assets ($61.0 million asset), other temporary differences ($5.5 million liability) and estimated utilization of an additional $45 million of Danielson net operating loss tax carryforwards from the inclusion of Ref-Fuel in Danielson’s consolidated income tax return ($15.8 million asset using the federal tax rate of 35%).
s.	To record the estimated income tax effects associated with the pro forma adjustments to pre-tax income other than item (g) to arrive at a blended assumed effective tax rate of 46% and 53% for the combined company for the year ended December 31, 2004 and the quarter ended March 31, 2005, respectively.
t.	To record the impact of an assumed refinancing of the MSW II notes with New MSW II Notes, as described in Note 5. The estimated refinancing costs are based on 3% of the face amount of the notes and approximate $6.8 million.

(dollars in thousands)	Annual			Quarter
Historical MSW II interest expense at 7.375%	$	16,594		$	4,148
New MSW II Notes interest at 8.125%		(18,282	)		(4,570	)
Amortization of historical MSW II financing costs		1,389			348
Amortization of refinancing fees		(964	)		(241	)
Net (increase) in interest expense	$	(1,263	)	$	(315	)

Note 3: EARNINGS PER SHARE

     The pro forma basic income (loss) per common share data has been computed using average number of shares of common stock of Danielson, par value $0.10 per share outstanding during the relevant period, adjusted on a pro forma basis for the following:

•   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 quarter ended March 31, 2005 have been adjusted, as necessary, to reflect the following equity transactions, as if they occurred on January 1, 2004, the issuance of; (i) 5.1 million of Bridge Shares, (ii) 27.4 million shares in connection with a pro rata rights offering to all Danielson stockholders on May 18, 2004, (iii) 8.75 million shares pursuant to the conversion of approximately $13.4 million in principal amount of Danielson Convertible notes and (iv) 66.4 million shares associated with the Ref-Fuel Rights Offering. In addition, diluted earnings per share and the 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 quarter ended March 31, 2005 have been adjusted, as necessary, to reflect the following additional equity transactions, as if they occurred on January 1, 2004; (i) Danielson’s commitment to sell up to 3 million shares of its common stock at $1.53 per share to certain creditors of Covanta and (ii) an additional 2.7 million shares to such creditors in such offering.

12

Note 4: PENSION COST

     At March 10, 2004, the amount of acquired Covanta unfunded pension liability totaled $18.5 million, net of previously recorded amounts. The $18.5 million was recorded as a liability in the successor’s opening balance sheet. Covanta’s historical net periodic pension and postretirement benefit costs for the periods March 11, 2004 through December 31, 2004, January 1, 2004 through March 10, 2004, and for the year ended December 31, 2003, amounted to $7.6 million, $1.8 million and $8.8 million, respectively for pension costs; and amounted to $0.6 million, $0.3 million and $2.0 million, respectively for post-retirement benefit costs. Covanta’s net periodic and postretirement benefit costs for three months ended March 31, 2005 amounted to $2.0 million and $0.2 million, respectively.

Note 5: POTENTIAL ADDITIONAL FINANCING

     The current project and other debt of Ref-Fuel subsidiaries is not intended to be refinanced in connection with the acquisition. Under certain conditions, existing note holders of two subsidiaries of Ref-Fuel, MSW Energy Holdings LLC (“MSW I”) and MSW Energy Holdings II LLC (“MSW II”), may require that such notes be repurchased by those subsidiaries at a price equal to 101% of their principal amount plus accrued and unpaid interest. The outstanding principal amount of the MSW I notes is $200 million, while the outstanding principal amount of the MSW II notes is $225 million. Whether any or all of these notes will be tendered for repurchase will depend upon market conditions prevailing immediately prior to the closing date for such repurchases, which may be between 30 to 120 days after the closing of Danielson’s acquisition of Ref-Fuel.

     Danielson has assumed in these unaudited pro forma condensed combined financial statements, based in part on the current trading price of the notes, that all of the MSW II notes, and none of the MSW I notes, are required to be repurchased. If some or all of the note holders of MSW I notes were to require their notes to be repurchased, Danielson would incur additional fees and transaction costs, as well as additional annual interest expense. If all of the MSW I notes were repurchased along with all of the MSW II notes, Danielson estimates that based upon discussions with its financial advisors, the maximum amount of such additional fees and transaction costs on the MSW I refinancing would be approximately $6.0 million, and estimates the maximum amount of such additional annual interest expense would be approximately $1.0 million on an annual basis. This incremental $1.0 million of interest expense on the MSW I notes assumes a refinanced interest rate of 9%.

     The interest rate on the MSW II refinancing is assumed to be 8.125%. If the MSW I and MSW II notes are both required to be refinanced in full, and if the refinanced interest rate on the MSW II notes was 9%, Danielson would incur approximately $2.0 million of additional interest expense.

     Danielson has existing commitments from Goldman Sachs Credit Partners and Credit Suisse First Boston to provide financing sufficient to repurchase all or a portion of such notes. Danielson can provide no assurance as to whether any such repurchases will occur, the principal amount of any such repurchases, whether it could successfully finance such repurchases, or that the above estimates of maximum cost and expense will not be exceeded.

13

EX-99.4

EX-99.4

American Ref-Fuel Holdings Corp.
and Subsidiaries

Consolidated Financial Statements
As of March 31, 2005 and December 31, 2004 and for the
three months ended March 31, 2005 and March 31, 2004

American Ref-Fuel Holdings Corp. and Subsidiaries

Index to Consolidated Financial Statements

	Page(s)
Consolidated Balance Sheets		1
Consolidated Statements of Operations and Comprehensive Income		2
Consolidated Statements of Stockholders’ Equity		3
Consolidated Statements of Cash Flows		4
Notes to Consolidated Financial Statements		5-16

American Ref-Fuel Holdings Corp. and Subsidiaries

Consolidated Balance Sheets (Unaudited, in Thousands)

	March 31,			December 31,
	2005			2004
Assets
Current assets:
Cash and cash equivalents	$	57,610		$	88,945
Restricted cash and cash equivalents		46,734			73,103
Receivables, net of allowance of $1,317 and $1,491		68,241			72,027
Income tax receivable		9,806			4,338
Prepaid expenses and other current assets		16,140			12,846
Total current assets		198,531			251,259
Restricted cash and cash equivalents		92,389			90,971
Property, plant and equipment, net		1,185,048			1,187,178
Intangible assets, net		526,445			542,877
Goodwill		123,984			123,984
Other assets		11,755			4,806
Total assets	$	2,138,152		$	2,201,075
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable and accrued liabilities	$	52,899		$	48,879
Current portion of long-term debt		75,713			87,184
Accrued interest		21,703			22,115
Total current liabilities		150,315			158,178
Long-term debt, less current portion		1,363,093			1,383,829
Deferred income taxes		156,584			149,419
Other liabilities		219,963			224,649
Total liabilities		1,889,955			1,916,075
Commitments and contingencies (Note 13)
Minority interest in consolidated subsidiary		701			742
Stockholders’ equity:
Common stock, Class A, 263,987 of $0.001 par value authorized, issued and outstanding		1			1
Additional paid-in capital		300,306			300,306
Accumulated deficit		(52,811	)		(16,049	)
Total stockholders’ equity		247,496			284,258
Total liabilities and stockholders’ equity	$	2,138,152		$	2,201,075

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

1

American Ref-Fuel Holdings Corp. and Subsidiaries

Consolidated Statements of Operations and Comprehensive Income (Unaudited, in Thousands)

	Three Months Ended			Three Months Ended
	March 31, 2005			March 31, 2004
Revenues
Waste disposal and related services	$	64,639		$	—
Energy		32,388			—
Other		3,204			—
Total net revenues		100,231			—
Expenses
Operating		52,794			—
Depreciation and amortization		16,736			—
General and administrative		12,420			496
Loss on asset retirements		1,386			—
Total operating costs and expenses		83,336			496
Operating income (loss)		16,895			(496	)
Interest income		1,233			103
Interest expense		(21,472	)		(6,384	)
Equity in net earning of unconsolidated subsidiaries		—			4,218
Minority interest in net income of subsidiaries		(37	)		—
Other, net		360			—
(Loss) before income taxes		(3,021	)		(2,559	)
Benefit for income taxes		1,259			1,368
Loss from continuing operations		(1,762	)		(1,191	)
Discontinued operations:
Income from discontinued operations net of income tax expense of $0 and $2,261 respectively		—			2,351
Income from discontinued operations		—			2,351
Net (loss) income	$	(1,762	)	$	1,160

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

2

American Ref-Fuel Holdings Corp. and Subsidiaries

Consolidated Statements of Stockholders’ Equity (Unaudited, in Thousands)

									Accumulated
	Common Stock –		Additional paid-in			Retained Earnings			comprehensive income			Total stockholders’
	Class A		capital			(Deficit)			(loss)			equity
Balance at January 1, 2004	$	1		$	123,908	$	994		$	—		$	124,903
Unrealized gain on investment from the consolidation of Ref-Fuel Holdings		—			—		—			211			211
Contribution of Senior Notes		—			40,000		—			—			40,000
Equity contributed in the August 31 Transactions		—			136,398		—			—			136,398
Comprehensive income		—			—		21,107			(211	)		20,896
Dividends paid		—			—		(38,150	)		—			(38,150	)
Balance at December 31, 2004		1			300,306		(16,049	)		—			284,258
Net loss		—			—		(1,762	)		—			(1,762	)
Dividends paid		—			—		(35,000	)		—			(35,000	)
Balance at March 31, 2005	$	1	$		300,306	$	(52,811	)	$	—		$	247,496

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

3

American Ref-Fuel Holdings Corp. and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited, in Thousands)

	Three Months			Three Months
	Ended March 31,			Ended March 31,
	2005			2004
Cash flows from operating activities:
Net (loss) income	$	(1,762	)	$	1,160
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization		26,471			484
Deferred income taxes		7,165			(207	)
Revenue contract levelization		328			—
Interest on loss contracts		547			—
Loss on asset retirements		1,386			—
Earnings from equity investments		—			(4,218	)
Distributions from equity investments		—			24,000
Minority interests in net income of subsidiaries		37			—
Changes in assets and liabilities:
Receivables		3,786			(101	)
Prepaid expenses and other current assets		(3,294	)		(2,420	)
Other long-term assets		(6,901	)		—
Accounts payable, and other current liabilities		4,020			(1,785	)
Income taxes receivable		(5,468	)		2,888
Accrued interest		(412	)		1,291
Other accrued liabilities		(1,915	)		(133	)
Net cash provided by operating activities		23,988			20,959
Cash flows from investing activities:
Capital expenditures		(17,076	)		(160	)
Payments from (to) restricted cash investments		24,951			(40	)
Proceeds from sale of equipment		1,036			—
Net cash provided by (used in) investing activities		8,911			(200	)
Cash flows from financing activities:
Payments on long-term debt		(29,156	)		(3,460	)
Payment of debt issuance costs		—			(75	)
Distributions to minority shareholders in consolidated subsidiaries		(78	)		(19,175	)
Dividends paid		(35,000	)		—
Net cash used in financing activities		(64,234	)		(22,710	)
Net decrease in cash and cash equivalents		(31,335	)		(1,951	)
Cash and cash equivalents at beginning of period		88,945			17,537
Cash and cash equivalents at end of period	$	57,610		$	15,586

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

4

American Ref-Fuel Holdings Corp. and Subsidiaries

Notes to Consolidated Financial Statements

1. Organization and Basis of Presentation

American Ref-Fuel Holdings Corp. (Holdings Corp.), formerly known as United American Energy Holdings Corp., and subsidiaries (collectively, the Company) is engaged in the business of acquiring, developing, owning and managing waste and energy-related businesses in the United States. The Company has had investments in and/or manages waste-to-energy facilities, transfer stations, landfills, electric-generating facilities and steam cogeneration facilities.

On December 12, 2003, Holdings Corp. completed a merger with MSW Merger, a Delaware limited liability company, pursuant to an agreement and plan of merger dated August 22, 2003 with Holdings Corp. becoming the surviving entity (the MSW Transaction). Prior to the MSW Transaction, the Company primarily derived its revenue from: (i) the sale of electrical energy and capacity, thermal energy and waste disposal services; (ii) earnings on equity investments; and (iii) providing operating and management services to various energy businesses for fixed and variable fees. Following the MSW Transaction, the Company sold several of its operating subsidiaries to a wholly-owned subsidiary of Delta Power Company, LLC (Delta) on December 15, 2003. As of December 31, 2003, the Company had a 50% equity ownership in Ref-Fuel Holdings LLC (Ref-Fuel Holdings), through its ownership of MSW Energy Holdings II LLC (MSW Energy Holdings II), and 100% ownership of UAE Mecklenburg Cogeneration LP, a coal-fired facility in Clarksville, VA (the Mecklenburg Facility). The Company sold the Mecklenburg Facility on August 18, 2004 (see Note 3). As a result of these transactions, the Company’s primary business is the ownership, operation and development of waste-to-energy facilities.

As a result of a series of transactions known as the Equalization Transactions, which were consummated on April 30, 2004, affiliates of Credit Suisse First Boston Private Equity, Inc. and AIG Global Investment Corp. (collectively the Control Group) beneficially own 60% and 40%, respectively, of the equity interests in the Company. Holdings Corp. owned a 0.01% managing member interest in MSW Energy Holdings LLC (MSW Energy Holdings).

The Equalization Transactions also resulted in Holdings Corp. assuming full control of the management and operations of Ref-Fuel Holdings through its interests in the MSW Energy Holdings II and MSW Energy Holdings. The other 50% interest in Ref-Fuel Holdings is owned directly and indirectly by MSW Energy Holdings. As a result of the Equalization Transactions, the Company has effective control of Ref-Fuel Holdings, and is therefore consolidating its results of operations and cash flows for the period from May 1, 2004.

On August 31, 2004, the Company and several private equity funds (the DLJMB Funds), each of which is managed by entities affiliated with Credit Suisse First Boston Private Equity, Inc. (CSFB Private Equity), and several investment funds (the Highstar Funds) managed by AIG Global Investment Corp. (AIGGIC) effected a series of transactions that resulted in Holdings Corp. becoming the indirect parent of MSW Energy Holdings (the August 31 Transactions).

American Ref-Fuel Company LLC (American Ref-Fuel, ARC, or ARC LLC), a wholly-owned subsidiary of Ref-Fuel Holdings, owns partnerships that develop, own and operate waste-to-energy facilities, which combust municipal solid waste and produce energy in the form of electricity and steam. Through such partnerships, American Ref-Fuel owns or controls six waste-to-energy facilities located in the northeastern United States (the ARC operating facilities). The ARC operating facilities derive revenue principally from disposal or tipping fees received for accepting waste and from the sale of electricity and steam produced by those facilities. ARC subsidiaries include: (a) American Ref-Fuel Company (Ref-Fuel Management); (b) TransRiver Marketing Company, L.P. (TransRiver); (c) American Ref-Fuel Company of Hempstead (Hempstead); (d) American Ref-Fuel Company of Essex County (Essex); (e) American Ref-Fuel Company of Southeastern Connecticut (Seconn); (f) American Ref-Fuel Company of Niagara, L.P. (Niagara); (g) American Ref-Fuel Company of Semass, L.P. (Ref-Fuel Semass); (h) American Ref-Fuel Operations of Semass, L.P. (Semass Operator); and (i) American Ref-Fuel Company of Delaware Valley, L.P. (Delaware Valley) (collectively referred to as the American Ref-Fuel Partnerships).

5

American Ref-Fuel Holdings Corp. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

On February 1, 2005, the Control Group announced that they have signed a definitive agreement to sell Holdings Corp. to Danielson Holding Corporation (Danielson) (the Sale). Danielson will pay $740 million in cash for the equity of Holdings Corp. and will assume the consolidated net debt of Holdings Corp. Notice of early termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 was obtained on March 21, 2005. Federal Energy Regulatory Commission approval was obtained on March 29, 2005 and pending the required financing, the transaction is expected to close in the second quarter of 2005. In connection with the Sale, costs relating to transaction expenses, severance, employment contracts, the Option Modification Agreement (see Note 12), Long-Term Incentive Plans, housing subsidies, lease termination and other related items are estimated to be between $50 million and $70 million.

The accompanying condensed consolidated financial statements are unaudited. In the opinion of management, such statements include all adjustments, including normal recurring accruals and adjustments, necessary for a fair presentation of the results for the period presented. The accounting policies followed during interim periods reported are in conformity with accounting principles generally accepted in the United States of America; however, certain information and footnote disclosures normally included in financial statements have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. These consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s annual financial statements for the year ended December 31, 2004, included on the Current Report on Form 8-K of MSW Energy Holdings LLC and MSW Energy Holdings II LLC, filed on March 31, 2005. The Company believes that the disclosures included are adequate and provide sufficient information. The results of operations for the interim periods are not necessarily indicative of the results that might be expected for future interim periods or for a full year.

2. Summary of significant accounting policies

Principles of consolidation

The accompanying consolidated financial statements include the accounts of Holdings Corp., its wholly-owned subsidiaries including MSW Energy Holdings LLC, MSW Energy Holdings II LLC, and Ref-Fuel Holdings. Prior to the Equalization Transactions, the Company’s investment in Ref-Fuel Holdings was accounted for using the equity method of accounting. As a result of the Equalization Transactions and the associated acquisition of MSW Energy Holdings, the Company has effective control of Ref-Fuel Holdings and MSW Energy Holdings and as of April 30, 2004, is consolidating their results of operations, cash flows, and balance sheets. All significant intercompany transactions and balances have been eliminated in consolidation. The minority interests shown relate to Duke Energy’s 0.2% interest in Ref-Fuel Holdings.

Reclassifications

Certain reclassifications have been made to the prior periods to conform to the current periods’ presentation.

Use of estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management of the Company to make estimates and assumptions that affect (a) the reported amounts of assets and liabilities at the date of the financial statements; (b) the disclosures of contingent assets and liabilities at the date of the financial statements; and (c) the reported amounts of revenues and expenses recognized during the reporting period. Significant estimates include the estimated lives of long-lived assets, allowances for doubtful accounts receivable, estimated useful lives and fair value adjustments of net tangible and intangible assets, liabilities for self-insurance and certain landfill liabilities. Such estimates may be subsequently revised as necessary when additional information becomes available. Actual results could differ from those estimates.

6

American Ref-Fuel Holdings Corp. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

Equity method investment

Investments are accounted for using the equity method of accounting if the investment gives the Company the ability to exercise significant influence, but not control, over an investee. Significant influence is generally deemed to exist if the Company 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.

The Company’s investment in Ref-Fuel Holdings was accounted for using the equity method of accounting prior to the Equalization Transactions. As a result, the accompanying consolidated results of operations include the Company’s share of net earnings in “Equity in net earnings of unconsolidated subsidiaries” for the three months ended March 31, 2004.

Income Taxes

The Company accounts for income taxes under the asset and liability method. The provision for income taxes includes deferred income taxes resulting from items reported in different periods for income tax and financial statement purposes. Deferred income tax assets and liabilities represent the expected future tax consequences of the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The effects of changes in tax rates on deferred income tax assets and liabilities are recognized in the period that includes the enactment date. A valuation allowance is provided when necessary to reduce deferred tax assets to amounts expected to be realized.

Quarterly income taxes are calculated in accordance with the interim financial reporting requirements as set forth in Accounting Principles Board Opinion No. 28. Such Opinion considers interim quarterly periods as an integral part of the annual period, with interim quarterly tax periods reflecting the estimated annual effective tax rate.

Revenue Recognition

The Company recognizes revenue from two major sources: waste disposal services and energy production. Revenue from waste disposal services is recognized as waste is received, and revenue from energy production is recognized as the energy is delivered.

Stock-Based Compensation

The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards (FAS) No. 123, Accounting for Stock-Based Compensation, (FAS 123) as amended by FAS No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure – an Amendment of FAS No. 123, concerning certain transition and disclosure provisions, but applies the intrinsic value recognition provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for stock-based compensation plans of the Company.

On December 16, 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 123(R), “Share-Based Payment” (FAS 123(R)). FAS 123(R); revises FAS 123 and requires companies to expense the fair value of employee stock options and other forms of stock-based compensation. This requirement represents a change from our current practice. On April 14, 2005, the SEC announced that FAS 123(R) is now effective for public companies for annual, rather than interim, periods that begin after June 15, 2005. The Company is reviewing FAS 123(R), and currently assessing the impact to the financial statements. In compliance with the SEC requirements, the Company will adopt FAS 123(R) as of January 1, 2006.

3. Discontinued Operations

Mecklenburg Transaction. The Company entered into an agreement to sell the Mecklenburg Facility to Virginia Electric and Power Company (Virginia Power). On August 18, 2004, the Company consummated the sale of the Mecklenburg Facility to Virginia Power. The cash received as a result of the sale was $42.5 million (with cash on the balance sheet as of the date of sale of $14.5 million). No gain or loss resulted from this sale.

7

American Ref-Fuel Holdings Corp. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

Summarized results of operations:

Operating results of discontinued operations for the three months ended March 31, 2004, related to the sale of the Mecklenburg Facility is as follows (unaudited, in thousands):

	Three Months Ended
	March 31, 2004
Revenue	$	13,825
Income before income taxes	$	4,612
Income tax expense		(2,261	)
Income from discontinued operations	$	2,351

4. Equity Investments

Summarized statement of operations information for Ref-Fuel Holdings is as follows (unaudited, in thousands):

	For the Three
	Months Ended
	March 31, 2004
Revenues	$	102,105
Operating income		18,758
Net earnings		8,802
Company’s equity in net earnings		4,218

Pro Forma Information
The following results represent the unaudited pro forma results as if the Equalization Transactions and the August 31 Transactions had occurred on January 1, 2004. These results are presented for informational purposes only, and are not necessarily indicative of the actual results that would have resulted had the Equalization Transactions and the August 31 Transactions actually occurred on January 1, 2004 (unaudited, in thousands):

	Pro Forma
	For the Three
	Months Ended
	March 31, 2004
Revenues
Waste disposal and related services	$	65,321
Energy		31,658
Other		5,126
Total net revenues		102,105
Expenses
Operating		54,621
Depreciation and amortization		17,371
General and administrative		11,329
Loss on asset retirements		522
Operating income		18,262
Interest income		843
Interest expense		(17,218	)
Minority interests in net income of subsidiaries		(18	)
Other income, net		138
Net income before taxes		2,007
Provision for income taxes		(823	)
Net income	$	1,184

8

American Ref-Fuel Holdings Corp. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

5. Property, Plant and Equipment

A summary of property, plant and equipment is as follows (unaudited, in thousands):

	Useful Life	March 31, 2005			December 31, 2004
Plant and equipment	2-50 years	$	1,207,766		$	1,206,558
Land			3,813			3,813
Leasehold improvements	Up to 17 years		5,575			5,575
Landfill	13 years		17,768			17,768
Spare parts			12,282			12,282
Construction in progress			13,365			6,244
Total property, plant and equipment			1,260,569			1,252,240
Accumulated depreciation			(75,521	)		(65,062	)
Property, plant and equipment, net		$	1,185,048		$	1,187,178

6. Intangible Assets

A summary of intangible assets is as follows (unaudited, in thousands):

	Useful Life	March 31,			December 31,
		2005			2004
Energy contracts	5-18 years	$	525,125		$	525,125
Waste contracts	5 years		23,600			23,600
Financing costs	6 years		17,652			17,652
Emissions credits	Indefinite		43,377			43,377
Other intangibles	Indefinite		3,579			3,579
			613,333			613,333
Accumulated amortization			(86,888	)		(70,456	)
Intangible assets, net		$	526,445		$	542,877

9

American Ref-Fuel Holdings Corp. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

7. Accounts payable and other accrued liabilities

Accounts payable and accrued liabilities consist of the following (unaudited, in thousands):

	March 31, 2005		December 31, 2004
Accounts payable	$	34,613	$	25,933
Compensation liabilities		7,237		11,237
Incentive plan accruals		3,975		3,569
Current amount due under Duke Agreement		2,500		2,500
Other		4,574		5,640
Total	$	52,899	$	48,879

8. Debt

The following is a summary of long-term debt by obligor (unaudited, in thousands):

				Final		March 31,			December 31,
	Interest Rate			Maturity		2005			2004
MSW Energy Holdings Senior Note		8.50	%		2010	$	200,000		$	200,000
MSW Energy Holdings II Senior Note		7.38	%		2010		225,000			225,000
							425,000			425,000
ARC LLC-supported debt
Senior Notes		6.26	%		2015		240,000			240,000
Niagara Series 2001A		5.45%-5.625	%		2015		165,010			165,010
Seconn Corporate Credit Bonds		5.50%-6.45	%		2022		43,500			43,500
Hempstead Corporate Credit Bonds		5.00	%		2010		42,670			42,670
ARC LLC-supported debt							491,180			491,180
Other debt
Hempstead project debt		4.625%-5.00	%		2009		114,543			114,543
Essex project debt		5.248%-7.375	%		2020		96,496			96,496
Seconn project debt		5.125%-5.50	%		2015		50,602			50,602
Semass Series 2001A		5.50%-5.625	%		2016		134,345			134,345
Semass Series 2001B		5.25%-5.50	%		2010		75,250			104,385
							471,236			500,371
Other obligations							252			273
Total debt at par value							1,387,668			1,416,824
Unamortized debt premium, net							51,138			54,189
Current portion							(75,713	)		(87,184	)
Total long-term debt obligations						$	1,363,093		$	1,383,829

10

American Ref-Fuel Holdings Corp. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

9. Other liabilities

Other liabilities consist of the following (unaudited, in thousands):

	Amortization	March 31,			December 31,
	Period	2005		2004
Waste contracts acquired	9-17 years	$	117,493		$	120,276
Operating lease acquired	14 years		37,629			38,453
Duke liability	16 years		23,169			22,622
Energy contract levelization	12 years		24,451			24,123
Landfill liabilities	13 years		11,305			10,699
Deferred revenue	8-20 years		5,193			5,113
Incentive plan accruals			723			3,333
Other			—			30
		$	219,963		$	224,649

10. Income Taxes

The components of the provision for income taxes, for the three months ended March 31, 2005 and 2004 consist of the following (unaudited, in thousands):

	For the Three			For the Three
	Months Ended			Months Ended
	March 31, 2005			March 31, 2004
Current benefit	$	(8,424	)	$	(83	)
Deferred provision		7,165			1,451
	$	(1,259	)	$	1,368

The Company has federal net operating loss carryforwards of approximately $1.3 million at of December 31, 2004, which expire between 2021 and 2024 and state net operating loss carryforwards of approximately $22.7 million, which have various expiration dates. The Company had federal capital loss carryforwards of approximately $22.4 million in at December 31, 2004 related to the disposal of certain subsidiaries, which have been offset by a valuation allowance. Such capital losses can only be offset by future capital gains. The capital loss carryforwards expire beginning in the year 2008.

11. Operational and other agreements

The ARC operating facilities operate under various long-term service agreements, the terms of which extend from 2009 through 2020. These service agreements require the projects to provide disposal services for waste delivered by counterparties to these agreements at prices determined by various formulas contained in such agreements.

Hempstead, Essex, Seconn, Ref-Fuel Semass, Delaware Valley and Niagara operate under various long-term service agreements, the terms of which extend from 2009 through 2020. These service agreements require the projects to provide disposal services for waste delivered by counterparties to these agreements at prices

11

American Ref-Fuel Holdings Corp. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

determined by various formulas contained in such agreements. Duke and Allied Waste Industries, Inc. (Allied) are each obligated to fund one-half of certain cash shortfalls and other liabilities of Essex arising out of operating the project, including certain environmental claims. Essex and ARC LLC entered into agreements with Duke and Allied requiring Essex and ARC LLC to reimburse, indemnify and defend Duke and Allied from any liability in respect to these obligations.

With respect to the Delaware Valley facility, ARC LLC has guaranteed amounts payable by Delaware Valley pursuant to certain agreements. ARC LLC guarantees through 2006 the obligations of Delaware Valley under its service agreement with the Delaware County Solid Waste Authority. In conjunction with the acquisition of the facility, ARC LLC also provides an indemnity to the sellers of the facility from post-acquisition environmental damages as a result of remedial action for releases or threatened releases of hazardous substances at the facility.

In order to provide ARC LLC with an additional source of funds to meet calls on its project support obligations, MSW Energy Holdings II and the Company entered into the Equity Contribution Agreement pursuant to which each of them have agreed to provide up to $50 million in equity capital to ARC LLC.

12. Stock Option Plans

On August 11, 2004, the Board of Directors of the Company, adopted the 2004 Stock Option Plan (the SOP), effective January 1, 2004, as further modified on September 16, 2004. The SOP was designed to link the interests of officers of the Company and other senior management of Ref-Fuel Holdings to the interests of the Company’s shareholders through the granting of options to purchase stock. During 2004, the Company granted 13,199 options to the executive officers of Ref-Fuel Holdings under the SOP. Options awarded under the SOP vest over a period of four years and expire ten years from the date of grant, unless a triggering event (as defined in the agreement) has not occurred during the option period.

On January 31, 2005, in conjunction with the Sale, as discussed in Note 1, the Board of Directors and optionees under the SOP adopted an Option Modification Agreement (OMA). Under the terms of the OMA, immediately prior to the Sale, the SOP plan will be canceled in exchange for a cash payment. The cash payment is calculated as the value of all outstanding options granted or ungranted but authorized under the terms of the SOP, together with certain amounts due and anticipated under other long term compensation plans.

A summary of the Holdings Corp.’s stock options held by Senior Management for the three months ended March 31, 2005 and the year ended December 31, 2004, is as follows:

			Weighted average
			exercise price
	Shares		(As of Date of Grant)
Options outstanding:
January 1, 2004		—	$	—
Granted		13,199		1,189.51
Exercised		—		—
Forfeited or terminated		—		—
Purchased by MSW Merger		—		—
Balance at December 31, 2004 and March 31, 2005		13,199

12

American Ref-Fuel Holdings Corp. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

The weighted average fair value of the options was $133.24 and $132.30 per share at March 31, 2005 and December 31, 2004, respectively. The fair value of the stock options at March 31, 2005 and December 31, 2004 is an estimate on the date of grant that is calculated using the minimum value option pricing model with the following assumptions:

Expected life (years)	3
Expected dividend	—
Risk-free interest rate	3.9	%

The Company applies the recognition provisions of Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its stock-based compensation plans. No compensation cost has been recognized for the stock option plan. Set forth as follows are the Company’s net income presented both as reported and pro forma, as if compensation cost had been determined consistent with the provisions of FAS No. 123 for the three months ended March 31, 2005 (in thousands):

	Three Months Ended
	March 31, 2005
Net loss, as reported	$	(1,762	)
Add: stock-based compensation expense included in reported net income, net of taxes		—
Less: stock-based compensation expense included using fair value method, net of taxes		(1,759	)
Pro forma net loss	$	(3,521	)

The effects of applying FAS No. 123 in this pro forma disclosure are not necessarily indicative of future amount.

13. Commitments and Contingencies

Environmental and Regulatory Risk

The Company operates in an environmentally sensitive industry and is subject to extensive federal, state and local laws and regulations adopted for the protection of the environment. The laws and regulations primarily applicable to the Company are those related to discharge of emissions into the air and management of solid waste but can also include those related to water use, discharges to water, wetlands preservation and hazardous waste management. Certain of these laws have extensive and complex requirements relating to obtaining construction and operating permits, monitoring, record keeping and reporting. While management believes that it is in substantial compliance with permits and other applicable environmental laws relating to the Company, its facilities, from time to time, may not be in full compliance with all such laws.

Noncompliance with environmental laws and regulations can result in the imposition of civil or criminal fines or penalties. In some instances, environmental laws also may impose clean-up or other remedial obligations in the event of a release of pollutants or contaminants into the environment. The Company incurs operating costs and capital expenditures related to various environmental protection and monitoring programs. Such expenditures have not had a material adverse effect on the Company’s consolidated financial position or results of operations. However, federal, state and local regulatory

13

American Ref-Fuel Holdings Corp. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

authorities may consider proposals to restrict or tax certain emissions, which proposals, if adopted, could impose additional costs on the operation of the Company.

Future Mercury Regulation at the Essex Facility. On December 6, 2004 the New Jersey Department of Environmental Protection (NJDEP) promulgated regulations applicable to the Essex facility that will make mercury emission requirements more stringent. Specifically, the new regulations increase the required removal efficiency to 85% removal on January 3, 2006 and 95% removal on January 3, 2012 versus the current 80% removal, while retaining the alternative limit of 28 micrograms per cubic meter. As a result of the new regulations, there is an increased risk that emission exceedances will occur and therefore an increased probability that additional controls will ultimately be required to prevent such exceedances. ARC believes that the new requirements may at a minimum result in increased operating costs due to increased use of activated carbon in the current control equipment. It is also possible that the regulations will require the installation of additional pollution control equipment such as compact hybrid particulate collector units, a device similar to a baghouse. Management estimates that the cost of the installation of such additional pollution control equipment, if required, would be approximately $38 million. The Essex service agreement provides a mechanism for a pass-through to the Port Authority of New York and New Jersey of the majority of any additional capital and operating costs that may be required. We cannot currently determine the likelihood of additional operating and/or capital costs being incurred in connection with these changes in regulation, or the total of any such costs.

Lower Passaic River Study. In August 2004, USEPA notified Essex that it was potentially liable under CERCLA Section 107(a) for response actions in the Lower Passaic River Study Area (LPRSA), a 17 mile stretch of river in northern New Jersey. Essex is one of at least 52 Potentially Responsible Parties (PRPs) named thus far. USEPA alleges that hazardous substances found in the LPRSA were being released from the Essex site, which abuts the river. USEPA’s notice letter states that Essex may be liable for costs related to a proposed $10 million study of the Lower Passaic River 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 that its contribution will be determined to be de minimus; however, it is not possible at this time to predict that outcome with certainty or to estimate Essex’s liability for the study or any eventual natural resource damage.

Landfill Agreements
Semass Partnership, a subsidiary of Ref-Fuel Semass, has a waste management agreement (the WMA) dated May 25, 1982, as amended, with the Carver, Marion, Wareham Regional Refuse Disposal District (CMW). The WMA allows Semass Partnership to utilize a portion of a landfill (the CMW Landfill), which CMW leases from Wankinco River, Inc. (Wankinco).

In March 1990, the Semass Partnership, CMW and Wankinco entered into an agreement related to the CMW Landfill, as amended (the Settlement Agreement), which requires, among other things, the Semass Partnership to make annual deposits into an environmental protection trust fund (the Fund) in lieu of obtaining environmental impairment liability insurance for the CMW Landfill. The Semass Partnership is required under the Settlement Agreement to deposit $500,000 annually into the Fund, payable in equal quarterly installments. Certain additional deposits are required subject to the availability of cash in accordance with the Loan Agreement. The Semass Partnership’s obligation to make deposits into the Fund ceases when the Fund reaches a balance of $20.0 million unless the fund limit is increased by agreement of the parties, or absent such agreement, by arbitration, wherein it is determined the fund limit needs to be increased to adequately protect against environmental damage. Wankinco by letter dated March 29, 2005, and pursuant to its rights under the Settlement Agreement described above, has requested a re-evaluation of the Fund limit and an increase of such limit to $29.7 million. Management believes that the $20.0 million fund limit is adequate for this purpose. Proceeds from the Fund are to be used primarily for

14

American Ref-Fuel Holdings Corp. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

remediation of the CMW Landfill in the event of environmental damage. The Semass Partnership and Wankinco are each entitled to receive one-half of the balance of the Fund upon final closure of the CMW Landfill and receipt of required governmental approvals. During the first quarter of 2005 and the year ended December 31, 2004, the Semass Partnership made the required quarterly deposits into the Fund and charged operations for one-half of the deposits into the Fund, representing one-half of the balance of the Fund which will be disbursed to Wankinco upon final closure of the CMW Landfill. Additional charges to operations may be required in future years if any disbursements are required from the Fund to remediate any environmental damages. To date, management is not aware of any such environmental damages. As of March 31, 2005 and December 31, 2004, the balance in the Fund is approximately $15.2 million and $14.0 million, respectively, and is included in restricted cash and long-term investments. A corresponding liability, representing approximately one-half of the deposits and related earnings in the Fund, is included in other long-term liabilities.

Other Matters

The Company is involved in various claims or litigation in the ordinary course of business. Management believes that the ultimate resolution of these matters, either individually or in the aggregate, will not have a material adverse effect on the future results of operations, cash flows or financial position of the Company.

The Company is required to provide financial assurance to government agencies under applicable environmental and procurement regulations relating to the landfill operations and waste disposal contract. Performance bonds to secure the obligations, of which $23.0 million in surety bonds was outstanding as of March 31, 2005 and December 31, 2004, satisfy these financial requirements.

14. Supplemental Disclosure of Cash Flow Information

Depreciation and amortization expense included in the Statement of Cash Flows consists of the following (unaudited, in thousands):

		Three Months Ended			Three Months Ended
Asset / liability	Statement of operations	March 31, 2005			March 31, 2004
Property, plant and equipment	Depreciation and amortization	$	16,736		$	484
Energy contracts	Energy revenues		14,764			—
Long-term waste contracts	Waste disposal and related services		(1,758	)		—
Lease	Operating expenses (rent expense)		(824	)		—
Debt	Interest expense		(2,409	)		—
Deferred revenue	Waste disposal and related
	services revenues and energy revenues		(38	)		—
Total		$	26,471		$	484

15

American Ref-Fuel Holdings Corp. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

15. Subsequent Events (unaudited)

On April 28, 2005, in connection with the Sale, Moody’s Investors Service issued a ratings action downgrading approximately $1.1 billion of debt securities issued by the Company and its subsidiaries or associated with the ARC projects. The ratings action may require ARC LLC, pursuant to the term of certain guarantee agreements, to issue letters of credit or provide other support for a maximum of $42.4 million, in connection with these guarantees.

In addition, on April 29, 2005, Standard & Poor’s Ratings Service (Standard & Poor’s) announced that following the pending acquisition of American Ref-Fuel Holdings Corp. by Covanta Energy Corporation (a subsidiary of Danielson Holding Corporation), the credit rating on the Company’s 8.50% Series B Senior Secured Notes due 2010 (the Company Notes) will be lowered to `BB-`, the rating on the 7.375% Series B Senior Secured Notes due 2010 will remain at `BB-`, and the rating on ARC and the debt related to the ARC projects will be lowered to `BB+`. The outlook on the ratings will be stable.

As a result of these rating actions, the Company may be required to offer to buy back the Company Notes upon consummation of the acquisition for a price equal to 101% of the principal amount of the notes, plus any accrued and unpaid interest, and liquidated damages, if any.

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