UPDATE 1-Covanta to settle incinerator lawsuit against Harrisburg, Pa.

Wed Jun 26, 2013 5:11pm EDT

June 26 (Reuters) - Covanta Energy Corp has reached a tentative settlement with the receiver for the cash-strapped city of Harrisburg, Pennsylvania, on a lawsuit that threatened to upend the city's recovery plan.

The company said in an email to Reuters on Wednesday that it agreed in principle on a settlement with the city and other stakeholders. The deal was aired during a court hearing on Monday. Covanta Energy is a subsidiary of Covanta Holding Corp

Harrisburg is now at least $340 million in debt - some reports put the figure at $370 million - thanks largely to the municipal bonds it guaranteed to finance upgrades to its waste-to-energy trash incinerator.

The roots of the lawsuit stretch back to 2007, when the city hired Covanta to complete the incinerator upgrades. As part of that contract, Covanta agreed to advance nearly $22 million to the Harrisburg Authority, which must be repaid.

The city had guaranteed the authority's obligations. Covanta sued in 2010 when it did not receive repayment from the city.

Harrisburg's state-appointed receiver, William Lynch, is overseeing a recovery plan for Pennsylvania's distressed capital city, including the sale of the incinerator and other city assets.

Lynch had said that a recent move by Covanta to win judgment in its 2010 lawsuit could push the city into bankruptcy by moving Covanta ahead of other creditors and disrupting out-of-court negotiations to resolve the city's debt problem.

Lynch does not dispute that the city so far owes $1.9 million. But he said in a recent court document that with its bid to win judgment in the lawsuit, Covanta was "attempting to move to the front of the line" of creditors.

Negotiation, rather than litigation, is "more efficient for everyone," said Lynch spokesman Cory Angell on Wednesday. "They seem to be working with us, and we appreciate that."

Covanta would not provide details of the settlement, which has yet to be finalized in writing with the Dauphin County Court of Common Pleas.