UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

Commission file number 1-6732

Covanta Holding Corporation

(Exact name of registrant as specified in its charter)

(973) 882-9000

(Registrant’s telephone number including area code)

Danielson Holding Corporation

(Former name, former address, and former fiscal year if changed since last report)

     Indicate by checkmark 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 checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).     Yes þ          No o

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

      The number of shares of the registrant’s Common Stock outstanding as of the last practicable date.

COVANTA HOLDING CORPORATION AND SUBSIDIARIES

FORM 10-Q QUARTERLY REPORT

For the Quarter Ended September 30, 2005

Cautionary Note Regarding Forward-Looking Statements

      Certain statements in the Quarterly Report on Form 10-Q 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 1 of Covanta’s Annual Report on Form 10-K, as amended, for the year ended December 31, 2004 and in other securities filings by Covanta.

      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 Quarterly Report on Form 10-Q 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.

PART I. FINANCIAL INFORMATION

COVANTA HOLDING CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

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

COVANTA HOLDING CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

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

COVANTA HOLDING CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

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

COVANTA HOLDING CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

For The Nine Months Ended September 30, 2005

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

COVANTA HOLDING CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

      On September 20, 2005, Danielson Holding Corporation changed its name to Covanta Holding Corporation (“Covanta” or the “Company”). 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 more significant 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 Corp., formerly known as American Ref-Fuel Holdings Corp., and its subsidiaries (“Ref-Fuel”), which Covanta Energy acquired on June 24, 2005 (the “Acquisition Date”). See Note 3. Acquisitions and Dispositions of the Notes to the Condensed Consolidated Financial Statements (“Notes”) for a description of these acquisitions. Covanta has changed the names of the Ref-Fuel subsidiaries such that they will conduct business under the Covanta name.

      Covanta Energy and its domestic subsidiaries, including Ref-Fuel, engage in the waste-to-energy, waste disposal, water and independent power production 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, 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. Three of Covanta Energy’s subsidiaries, which relate to Covanta Energy’s Warren County, New Jersey project, did not reorganize with Covanta Energy but have since filed a plan of reorganization and expect to emerge from bankruptcy in December 2005. Accordingly, Covanta does not include these subsidiaries as consolidated subsidiaries in these Condensed Consolidated Financial Statements. Covanta Energy’s investment in these subsidiaries is recorded using the cost method effective from March 10, 2004. For additional information regarding these three Covanta Energy subsidiaries, see Note 17. Commitments and Contingent Liabilities of the Notes.

      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 in California.

      The accompanying unaudited condensed consolidated financial statements of Covanta have been prepared in accordance with the instructions to Form 10-Q. As permitted by the rules and regulations of the Securities and Exchange Commission (the “SEC”), the financial statements contain certain condensed financial information and exclude certain footnote disclosures normally included in audited consolidated financial statements prepared in accordance with United States generally accepted accounting principles (“GAAP”). In the opinion of management, the accompanying financial statements contain all adjustments, including normal recurring accruals, necessary to fairly present the accompanying financial statements. For

COVANTA HOLDING CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

further information, refer to the consolidated financial statements and footnotes thereto included in Covanta’s Annual Report on Form 10-K, as amended, for the year ended December 31, 2004. Operating results for the interim period are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2005.

      The condensed consolidated financial statements include the accounts of Covanta. Companies in which Covanta has significant influence are accounted for using the equity method. Those companies in which Covanta owns less than 20% are accounted for using the cost method. Certain prior period amounts, including various revenues and expenses, have been reclassified in the condensed consolidated financial statements to conform to the current period presentation. All intercompany transactions and balances have been eliminated.

      In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123R”), which replaces SFAS No. 123 “Accounting for Stock-Based Compensation” (“SFAS No. 123”) and supersedes Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”). SFAS No. 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 No. 123, will no longer be an alternative to financial statement recognition.

      Under SFAS No. 123R, Covanta must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used at date of adoption. The transition methods include prospective and retroactive adoption methods. Under the retroactive method, prior periods may be restated either as of the beginning of the year of adoption or for all periods presented. The 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 No. 123R, while the retroactive method would record compensation expense for all unvested stock options and restricted stock beginning with the first period restated.

      In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (“SAB No. 107”) regarding the SEC’s interpretation of SFAS No. 123R and the valuation of share-based payments for public companies. In April 2005, the SEC modified the initial dates for mandatory adoption to the first annual period beginning on or after June 15, 2005. The extended adoption dates are optional and registrants are permitted to adopt SFAS No. 123R earlier. Covanta is required to adopt SFAS No. 123R beginning on January 1, 2006. Covanta is evaluating the requirements of SFAS No. 123R and SAB No. 107. Covanta has not yet determined the method of adoption or the effect of adopting SFAS No. 123R, and it has not determined whether the adoption will result in amounts that are similar to the current pro forma disclosures required by SFAS No. 123.

      In March 2005, the FASB issued FIN No. 47, “Accounting for Conditional Asset Retirement Obligations, an interpretation of FASB Statement No. 143” (“FIN No. 47”), which requires an entity to recognize a liability for the fair value of a conditional asset retirement obligation when incurred if the liability’s fair value can be reasonably estimated. FIN No. 47 is effective for fiscal years ending after December 15, 2005. Covanta is currently evaluating the effect that the adoption of FIN No. 47 will have on its consolidated results of operations and financial condition but does not expect the adoption to have a material impact on Covanta condensed consolidated financial statements.

COVANTA HOLDING CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      On January 31, 2005, Covanta entered into a stock purchase agreement with Ref-Fuel, the owner and operator of six waste-to-energy facilities in the northeastern United States, and Ref-Fuel’s stockholders. On June 24, 2005, Covanta, through its wholly-owned subsidiary Covanta Energy, purchased 100% of the issued and outstanding shares of Ref-Fuel capital stock. Under the terms of the stock purchase agreement, Covanta paid $747 million in cash and transaction costs for the stock of Ref-Fuel and assumed the consolidated net debt of Ref-Fuel 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 Ref-Fuel was financed by a combination of debt and equity as described below. Immediately after the transaction was completed, Ref-Fuel became a wholly-owned subsidiary of Covanta Energy.

      Covanta’s acquisition of Ref-Fuel 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 Ref-Fuel. 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 Ref-Fuel.

      As part of the Ref-Fuel 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 11. Credit Arrangements and 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 Ref-Fuel, 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 “Ref-Fuel 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 $395.9 million ($400 million gross proceeds, net of $4.1 million of expenses) and issued 66,673,004 shares of common stock.

      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 (“TAVF”), and D. E. Shaw Laminar Portfolios, L.L.C. (“Laminar”), representing ownership, at the time of the Ref-Fuel Rights Offering, of approximately 40.4% of Covanta’s outstanding common stock, committed to participate in the Ref-Fuel 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

COVANTA HOLDING CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

commitments, which in the aggregate was $2.8 million. 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 Ref-Fuel in order to provide such stockholders with liquidity.

      The $2.2 billion preliminary purchase price was comprised of the following (in millions of dollars):

      The preliminary purchase price included acquisition related restructuring charges of $9.1 million which were recorded as a liability and assumed in the Ref-Fuel acquisition, and consisted primarily of severance and related benefits, and the costs of vacating duplicate facilities. As of September 30, 2005, the restructuring liability was $8.5 million.

COVANTA HOLDING CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The following table summarizes the preliminary allocation of values to the assets acquired and liabilities assumed at the Acquisition Date in conformity with SFAS No. 141, “Business Combinations” and SFAS No. 109, “Accounting for Income Taxes.” The allocation of purchase price to Ref-Fuel 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 Ref-Fuel and the related allocation of purchase price, and expects adjustments to the preliminary fair values which may include those related to:

      The acquired intangible assets of $269.4 million relate to favorable energy and waste contracts, and a favorable leasehold interest with an approximate 10 year average useful life. In its initial purchase price allocation as of June 24, 2005, goodwill of $298.1 million was recorded to reflect the excess of cost over the preliminary fair value of acquired net assets. As of September 30, 2005, goodwill was $292.8 million which reflected adjustments to the carrying value of project debt by $12.1 million, a fair value adjustment related to a service agreement of $2.5 million, a deferred tax adjustment of $3.8 million and various other liability adjustments of $0.5 million as part of Covanta’s ongoing purchase accounting true-up.

COVANTA HOLDING CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      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.

      In addition to the purchase price allocation adjustments, Covanta Energy’s emergence from Chapter 11 proceedings on March 10, 2004 resulted in Covanta Energy becoming a new reporting entity and adoption of fresh start accounting as of that date, in accordance with AICPA Statement of Position (“SOP”) 90-7, “Financial Reporting by Entities in Reorganization Under the Bankruptcy Code”. The following table summarizes the final allocation of values to the assets acquired and liabilities assumed at March 10, 2004 in conformity with SFAS No. 141 and SFAS No. 109 (in thousands of dollars):

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

COVANTA HOLDING CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The results of operations from Covanta Energy and Ref-Fuel 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 the three and nine months ended September 30, 2005 and 2004, as if the acquisitions of Covanta Energy and Ref-Fuel were consummated on the same terms at January 1, 2004 (in thousands, except per share amounts):

      In connection with the acquisition of Ref-Fuel, Covanta Energy incurred integration costs of $1.0 million and $3.0 million for the quarter and nine months ended September 30, 2005, respectively, 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 $2.7 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 $0.6 million was paid to remaining CPIH executives, in the second quarter of 2005, as incentive payments from existing contractual obligations relating to CPIH debt repayment in connection with the Ref-Fuel acquisition.

      Covanta had investments in the marine services business, the largest of which was 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’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 16. 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

COVANTA HOLDING CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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.

      Stock-based compensation cost is measured using the intrinsic value based method of accounting prescribed by APB No. 25 for the directors and employees of Covanta and its subsidiaries. Pro forma net income and earnings per share are disclosed below as if the fair value based method of accounting under SFAS No. 123 had been applied to all stock-based compensation awards (in thousands of dollars, except per share amounts).

      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 No. 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 the first nine months of 2005 was $0.8 million. The purpose of the acceleration was to permit officers and employees who held the options to exercise their options and participate in the Ref-Fuel 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 No. 25 and authoritative interpretations, when the vesting provisions are modified, Covanta is only 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 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.

COVANTA HOLDING CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      On July 7, 2005, the Compensation Committee of the Board of Directors, under the equity award plan for employees, 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 equity award plan for directors. 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.

      Per share data is based on the weighted average number of Covanta’s par value $0.10 per share common stock outstanding during the relevant period. Basic earnings per share are calculated using only the average number of outstanding shares of common stock. Diluted earnings per share computations, as calculated under the treasury stock method, include the average number of shares of additional outstanding common stock issuable for stock options, restricted stock, rights and convertible notes whether or not currently exercisable. Prior periods were restated to reflect the impact of the Ref-Fuel Rights Offering and the 9.25% Offering described in Note 13. Stockholders Equity of the Notes.

COVANTA HOLDING CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      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 condensed consolidated financial statements. Total pass through costs for three and nine months ended September 30, 2005 were $12.3 million and $41.9 million, respectively. Total pass through costs for the three month period ended September 30, 2004 and for the period March 11, 2004 through September 30, 2004 were $11.9 million and $24.8 million, respectively.

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

      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.

      Electricity and steam sales included lease income from the international business of $23.3 million and $20.7 million for the three months ended September 30, 2005 and 2004, respectively and $74.4 million and $48.3 million for the nine months ended September 30, 2005 and for the period March 11, 2004 through September 30, 2004, respectively.

      Equity in net income from unconsolidated investments was $9.4 million and $20.0 million for the three and nine months ended September 30, 2005. Equity in net income from unconsolidated investments was $7.6 million and $13.2 million for the three and nine months ended September 30, 2004.

      See Note 3. Acquisitions and Dispositions of the Notes for information regarding Covanta’s investment in Marine Services.

COVANTA HOLDING CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      Equity in net income from unconsolidated investments primarily relates to Covanta Energy’s 26.7% investment in Quezon Power, Inc. in the Philippines (“Quezon”). The unaudited results of operations from Quezon was as follows (in thousands of dollars):

      As of March 10, 2004, Covanta Energy’s waste and energy contracts were recorded at their fair market values, in accordance with SFAS No. 141, based upon discounted cash flows from the service contracts and the “above 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 17 years. However, many of such contracts have remaining lives that are significantly shorter.

      As of June 25, 2005, Ref-Fuel’s 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 No. 141, based upon discounted cash flows attributable to the “above market” portion of these contracts and assets using currently available information. Amortization was calculated by the straight-line method over the remaining contract lives which range from four to fifteen years for waste and energy contracts and twenty four years for the lease interest.

      Intangible assets consisted of the following (in thousands of dollars):

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The following table details the amount of the actual/estimated amortization expense associated with intangible assets included or expected to be included in Covanta’s statement of operations for each of the years indicated (in thousands of dollars):

     Goodwill

      In connection with the Ref-Fuel acquisition, Covanta Energy recorded $292.8 million of goodwill as of September 30, 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 Ref-Fuel acquisition in accordance with the provisions of SFAS No. 142. Goodwill has an indefinite life and is not amortized but will be reviewed under the provisions of SFAS No. 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.

      Other noncurrent liabilities consisted of the following (in thousands of dollars):

      As of June 25, 2005, Ref-Fuel’s waste and service contracts were recorded at their fair market values, in accordance with SFAS No. 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.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

     Credit Facilities

      Long-term debt is presented below (in thousands of dollars):

      As part of the Ref-Fuel acquisition, Covanta Energy entered into new financing arrangements which are guaranteed by Covanta and certain subsidiaries of Covanta Energy described more fully below. The proceeds of the new financing arrangements were used to fund the acquisition of Ref-Fuel, 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 financing arrangements are comprised of the following:

COVANTA HOLDING CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The First Lien Term Loan Facility has a mandatory annual amortization, paid in equal quarterly installments beginning September 30, 2005, through the date of maturity in annual amounts set forth in the following schedule (in thousands of dollars):

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

      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. 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 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 16. Financial Instruments of the Notes.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

      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:

      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.

      The Credit Facilities require Covanta Energy to furnish the lenders with periodic financial, operating and other information. In addition, these facilities further restrict, without consent of its lenders, Covanta Energy’s ability to, among other things:

COVANTA HOLDING CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      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:

      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:

      Upon the consummation of the Ref-Fuel acquisition, Covanta Energy assumed the existing consolidated debt of Ref-Fuel and its subsidiaries. This assumed debt included certain notes issued by non-project subsidiaries of Ref-Fuel described below, as of the Acquisition Date.

COVANTA HOLDING CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      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 Ref-Fuel. 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 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 Energy.

      Deferred financing costs on the condensed consolidated balance sheet represent capitalizable costs incurred by Covanta in connection with the acquisition of Ref-Fuel 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 straight-line method, which approximates the effective interest method.

      Covanta records its interim tax provision based upon its estimated effective tax rates for the full year.

      Covanta files a Federal consolidated income tax return with its eligible subsidiaries. Covanta’s Federal consolidated income tax return also includes the taxable results of certain grantor trusts. The trusts were established pursuant to a prior court approved reorganization of certain present and former insurance subsidiaries of Covanta. These trusts are not consolidated with Covanta for financial statement purposes.

      Covanta’s 2004 Federal consolidated income tax return excluded the results of CPIH since its operations did not qualify for consolidation under the applicable tax laws. Effective July 31, 2005, CPIH is includable in the Covanta’s Federal consolidated return. Covanta’s Federal consolidated tax return will include the results of Ref-Fuel after June 24, 2005 (the date of acquisition).

      Covanta had net operating losses (“NOLs”) estimated to be $516 million for Federal income tax purposes as of the end of 2004. The NOLs will expire in various amounts from December 31, 2005 through December 31, 2023, if not used. The Internal Revenue Service (“IRS”) has not audited any of Covanta’s tax returns. There can be no assurance that Covanta would prevail if the IRS were to challenge the use of the NOLs.

      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%

COVANTA HOLDING CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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.

      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.

      Covanta has received preliminary information which raises the possibility that it may recognize taxable income in connection with the conclusion of the administration of the grantor trusts. However, after reviewing the preliminary information, Covanta determined that it was insufficient to warrant inclusion of taxable income in its 2004 tax filing based on such preliminary information. Covanta is in discussions with the representatives of the grantor trusts in order to obtain additional information regarding the potential amount of includible taxable income and to clarify the treatment of certain liabilities and the manner of distributions to claimsholders in insolvency proceedings.

      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’s provision for income taxes in the condensed consolidated statements of operations also includes certain state and other taxes. Tax filings for these jurisdictions do not consolidate the activity of the grantor trusts referred to above and reflect preparation on a separate company basis. For further information, reference is made to Note 25 of the Notes to the Consolidated Financial Statements included in Covanta’s Annual Report on Form 10-K, as amended, for the year ended December 31, 2004.

      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. As of September 30, 2005, there were approximately 141.2 million shares of common stock issued and outstanding.

      Covanta is expected to complete its previously announced 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 reorganization, at a purchase price of $1.53 per share which Covanta is required to complete in order to satisfy its obligations as the sponsor of Covanta Energy’s Reorganization Plan (the “9.25% Offering”). This 9.25% Offering will be made solely to holders of the $100 million of principal amount of 9.25% debentures due 2022 issued by Covanta Energy who voted in favor of the Reorganization Plan on January 12, 2004 or were authorized to participate by the Bankruptcy Court. Covanta executed a letter agreement with Laminar on January 31, 2005 pursuant to which Covanta agreed that if the 9.25% Offering did not close prior to commencement of the Ref-Fuel Rights Offering, that it would revise the terms of the 9.25% Offering so that participants in the 9.25% Offering are offered up to 2.7 million additional shares of Covanta’s common stock at the same $6.00 per share purchase price as in the Ref-Fuel Rights Offering. Covanta filed a registration statement with the SEC to register the 9.25% Offering, which registration statement has not been declared effective. Since the 9.25%

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Offering was not commenced prior to the Ref-Fuel Rights Offering, Covanta will amend and restructure the 9.25% Offering in accordance with its agreement.

      Given the significance of the Covanta Energy and Ref-Fuel 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 into one reportable segment called Other Services. Covanta currently has two reportable business segments — Waste and Energy Services and Other Services.

      Waste and Energy Services develops, constructs, owns and operates 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 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 Covanta’s Annual Report on Form 10-K, as amended, for the year ended December 31, 2004. Segment results are shown below (in thousands of dollars):

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The acquisition of Ref-Fuel substantially increased the assets in the Waste and Energy Services segment. Identifiable assets were as follows (in thousands of dollars).

      Net periodic defined pension benefit expense for Covanta Energy were as follows (in thousands of dollars):