Covanta Holding (CVA) 8-K Unaudited Pro Forma Condensed Consolidated Statement of Operations

Exhibit 99.1

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

     The following unaudited pro forma condensed consolidated statement of operations for the fiscal year ended December 31, 2005 is based on the historical financial statements of Covanta Holding Corporation (“Covanta”) and the unaudited historical financial statements of Covanta ARC Holdings, Inc. (“ARC Holdings”) and its subsidiaries. The unaudited pro forma condensed consolidated statement of operations is presented as if the acquisition of ARC Holdings by Covanta, through its wholly-owned subsidiary Covanta Energy Corporation (“Covanta Energy”), occurred on January 1, 2005 adjusted for events that are (1) directly attributable to the transaction, (2) expected to have continuing impact, and (3) factually supportable.

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

• The accompanying notes to the unaudited pro forma condensed consolidated statement of operations,

• Covanta’s separate historical financial statements as of and for the year ended December 31, 2005 contained in Covanta’s Annual Report on Form 10-K filed on March 14, 2006 with the Securities and Exchange Commission, and

• ARC Holdings’ historical condensed consolidated statement of operations for the year ended December 31, 2005 included in this Exhibit 99.1.

Covanta Holding Corporation
Fiscal Year Ended December 31, 2005
Unaudited Pro Forma Consolidated Statement of Operations
In Thousands of Dollars

	Covanta			ARC Holdings			Pro Forma					Pro Forma
	Jan. 1-Dec. 31, 2005			Jan. 1 - June 24, 2005			Adjustments			ADJ		Consolidated
OPERATING REVENUES
Waste and service revenues	$	638,503		$	148,792		$	1,860			A	$	789,155
Energy and steam sales		322,770			79,660			—					402,430
Other operating revenues		17,490			—			—					17,490
Total operating revenues		978,763			228,452			1,860					1,209,075
OPERATING EXPENSES
Plant operating expenses		557,490			103,617			3,136			B		664,243
Depreciation and amortization expense		124,925			57,032			2,807			B		184,764
Net interest expense on project debt		52,431			13,964			1,102			B		67,497
Other operating expenses		11,015			519			—					11,534
General and administrative expenses		69,629			52,133			(41,675	)		C		79,363
								(724	)		B
California Grantor Trust Settlement		10,342			—			—					10,342
Restructuring charges		2,765			—			(2,765	)		C		—
Acquisition-related charges		3,950			—			(3,950	)		C		—
Total operating expenses		832,547			227,265			(42,069	)				1,017,743
Operating income		146,216			1,187			43,929					191,332
Investment income		6,129			1,225			—					7,354
Interest expense		(89,973	)		(26,368	)		28,944			D		(121,304	)
								(37,860	)		E
								3,953			B
Gain on derivative instruments, ACL warrants		15,193			—			—					15,193
Total other expenses		(68,651	)		(25,143	)		(4,963	)				(98,757	)
Income before income tax expense, minority interests and equity in net income from unconsolidated investments		77,565			(23,956	)		38,966					92,575
Income tax (expense) benefit		(34,651	)		6,033			(13,041	)		F		(41,659	)
Minority interests		(9,197	)		(56	)		—					(9,253	)
Equity in net income from unconsolidated investments		25,609			—			—					25,609
NET INCOME (LOSS)	$	59,326		$	(17,979	)	$	25,925				$	67,272
Earnings Per share of Common Stock:
Basic	$	0.49										$	0.48
Diluted	$	0.46										$	0.46
Weighted Average Shares of Common Stock
Basic		122,209						17,787					139,996
Diluted		127,910						17,787					145,697

NOTE 1: BASIS OF PRESENTATION

     The following table summarizes the preliminary allocation of values to the assets acquired and liabilities assumed as of June 24, 2005 (the “Acquisition Date”) of ARC Holdings, in conformity with Statement of Financial Accounting Standards (“SFAS”) No. 141 “Business Combinations” and SFAS No. 109 “Accounting for Income Taxes.” The allocation of purchase price to ARC Holdings is preliminary and subject to change as additional information and analysis is obtained. Covanta is in the process of refining the valuation studies provided to finalize the fair values of the assets and liabilities of ARC Holdings and the related allocation of purchase price. Covanta expects that adjustments to the preliminary fair values may include those related to:

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

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

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

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

      The acquired intangible assets of $287.4 million relate to favorable energy and waste contracts and a favorable leasehold interest with an approximate ten-year average useful life. In the 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 December 31, 2005, approximately $255.9 million of goodwill was recorded, which represented the total consideration paid in excess of the fair value of net tangible and intangible assets acquired in accordance with SFAS No. 142 “Goodwill and Other Intangibles.” As a result

of Covanta’s review of the preliminary allocation of the purchase price, Covanta made certain adjustments subsequent to the Acquisition Date. This change reflects adjustments to the carrying values of property plant and equipment (net increase of $71.5 million); intangible assets (net increase of $18.0 million); project debt (net decrease of $10.0 million); intermediate debt (increase of $12.0 million); a change in other liabilities relating to an increase in a contract liability ($12.7 million) and a net decrease in closure and post-closure liabilities related to a landfill asset ($3.9 million); a fair value adjustment related to a service agreement (decrease of $2.5 million); and a deferred tax adjustment (increase of $30.0 million), as part of the ongoing purchase accounting review.

NOTE 2: PRO FORMA ADJUSTMENTS

Adjustments for the ARC Holdings Transactions
A.	To record additional waste and service revenues prior to the Acquisition Date as a result of conforming debt service revenue recognition at ARC Holdings subsidiaries to Covanta Energy’s debt service revenue recognition policy, which policy has been implemented by ARC Holdings since the Acquisition Date.
B.	To record the difference between the preliminary estimates of the fair values and the historical amounts of ARC Holdings’ assets and debt assumed by Covanta on the Acquisition Date and the related impacts on depreciation, amortization, net interest expense on project debt and interest expense as if the acquisition had occurred on January 1, 2005. The fair value of contract related assets (classified as intangible assets, net) were attributable to revenue arrangements for which the contractual rates were greater than the market rates and have an approximate ten year weighted-average remaining useful life. The fair value of contract related liabilities (classified as other liabilities) were attributable to revenue arrangements for which contractual rates were less than the market rates and have an approximate 14 year weighted-average remaining useful life.
C.	Represents costs related to ARC Holdings’ officers that were terminated in connection with the transaction as well as transaction related costs incurred by ARC Holdings as follows (in thousands of dollars):

	Fiscal Year Ended
	Dec. 31, 2005
Transaction costs	$	12,150
Executive severance		25,730
Executive compensation		3,795
	$	41,675

	Additionally, Covanta’s December 31, 2005 financial statements reflect charges of $2.8 million and $4.0 million related to restructuring and integration expenses, respectively.
D.	Covanta entered into new credit arrangements (the “Credit Facilities”) as part of the ARC Holdings acquisition which were assumed to have occurred as of January 1, 2005 on a pro forma basis.

To reverse historical interest expense (including letter of credit fees) associated with recourse debt and unfunded credit facilities refinanced with the new Credit Facilities, and the net proceeds from a rights offering undertaken by Covanta during the second quarter of 2005 as part of the financing of the ARC Holdings acquisition (in thousands of dollars):

	Fiscal Year Ended
	Dec. 31, 2005
Covanta Energy recourse debt and credit facilities	$	28,352
ARC Holdings credit facilities		592
Total	$	28,944

E. To include pro forma interest expense based on the new Credit Facilities from January 1 through June 24, 2005 (in thousands of dollars):

						Fiscal Year Ended
	Principal		Rate			Dec. 31, 2005
Credit Facilities:
First Lien Facility	$	275,000		7.58	%	$	10,424
Second Lien Facility		100,000		10.087	%		5,041
Second Lien Facility		60,000		9.77	%		2,932
Second Lien Facility		240,000		9.78	%		11,736
Total Borrowings	$	675,000				$	30,133
Available for letters of credit and revolving credit:	$	340,000		3	%	$	5,100
Letter of credit availability under First Lien Facility
Revolving credit facility*		100,000		0.5	%		250
Total unfunded	$	440,000				$	5,350
Amortization of Credit Facilities financing costs							2,377
Total						$	37,860

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

Interest rates under the new Credit Facilities are based on the one or three-month London InterBank Offering Rate (“LIBOR”), plus a margin of 3.00% for the First Lien Facility and 5.50% for the Second Lien Facility. The rates used to determine the pro forma adjustments above were selected with regard to Covanta’s current credit ratings and the one-month LIBOR rate of 4.58% used for the February through March 2006 payment period. A1/8 percentage point change in interest rates would result in a $0.9 million change in earnings before income taxes for the year ended December 31, 2005.

F.

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

Covanta ARC Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(In thousands of dollars)

	For the Period			For the Period
	From June 25,			From January 1,
	through			through
	December 31, 2005			June 24, 2005
Operating revenues:
Waste disposal and related services revenues	$	169,479		$	148,792
Electricity and steam sales		89,075			79,660
Total operating revenues		258,554			228,452
Operating expenses:
Plant operating expenses		103,203			103,617
Depreciation and amortization expense		58,907			57,032
Net interest expense on project debt		15,074			13,964
General and administrative expenses		8,738			52,133
(Gain) loss on asset disposition		(381	)		519
Total operating expenses		185,541			227,265
Operating income		73,013			1,187
Other income (expense):
Interest income		1,601			1,225
Interest expense		(25,521	)		(26,368	)
Minority interests in net income of subsidiary		(79	)		(56	)
Net income (loss) before taxes		49,014			(24,012	)
Income tax (provision) benefit		(20,423	)		6,033
Net income (loss)	$	28,591		$	(17,979	)