The Waste Credit Governance Committee was scheduled to meet to discuss the financial reporting from the Energy from Waste Plant, the risk register, and the committee's work plan. The committee was also scheduled to note an update on the contract extension with Mercia Waste Management (MWM).

Energy from Waste Plant Reporting Requirements

The committee was scheduled to discuss the reporting requirements for the Energy from Waste Plant in Hartlebury. Worcestershire County Council and Herefordshire District Council provided a total of £163.50m to the borrower for the purposes of constructing the plant. According to the agenda, the loan relating to Facility B has been extended for a further five years, with the final repayment scheduled for 11 January 2029, to be repaid with a single bullet payment from the councils.

The report pack included a recommendation that the committee note and comment on:

• The main categories of reports or information that the Borrower must regularly produce, including the Historic Annual Debt Service Cover Ratio (HADSCR), the Projected Annual Debt Service Cover Ratio (PADSCR), and the Loan Life Cover Ratio before distributions (LLCR).
• The update on the agreed contract extension with Mercia Waste Management (MWM).

According to the report pack, as is standard with facility agreements of this nature, the Borrower is required to report periodically to Lenders on their compliance with certain requirements. One particular requirement is the ratios required to be measured under the Senior Term Loan Facility Agreement (STLFA) at each calculation date (30 June / 31 December).

The report pack states that these ratios are a financial covenant¹ imposed by Lenders (in this case the council's as Lenders) as a monitoring mechanism to provide early warning of project distress and potential Borrower default on their repayment obligations. The ratios provide a measure of the project's historic and future performance in relation to its ability to service current and upcoming debt liabilities.

The required ratios are:

• Historic Annual Debt Service Cover Ratio (ADSCR): A historic periodic measure used to assess the projects ability to service its current debt obligation over the preceding 12 month period, based on actual cash flows.
• Projected ADSCR: A forecasted periodic measure used to assess the projects ability to service its upcoming debt obligations of the proceeding 12 month period, based on forecast cash flows.
• Loan Life Cover Ratio (LLCR): A forecasted measure used to assess the projects ability to repay the outstanding loan from future cash flows over the remaining life of the loan, based on longer term forecast cash flows

The report pack notes that on 9 December 2021, a report was provided to Cabinet seeking negotiation to enter into a Variation with Mercia to put into effect their proposals for extending the duration of the Waste Management Services Contract for a period of five years until 11 January 2029 which also involved extending the existing loan by a further 5 years.

According to the report pack, as part of the due diligence undertaken for the extension proposal, KPMG reviewed the ability of MWM to meet the financial ratios on the basis of the additional 5-year loan period. The final KPMG report concluded that the ratios were forecast to be higher than the default, lock-up and minimum resulting in compliant levels of performance and was circulated to committee members on 11 January 2023.

The report pack also included the following appendices:

• Appendix 1 The Historic Annual Debt Service Cover Ratio (ADSCR) The Projected Annual Debt Service Cover Ratio (PADSCR) The Loan Life Cover Ratio before distributions (LLCR)
• Appendix 2 - Ratio Compliance Certificate
• Appendix 3 - the Senior Term Loan Facility Agreement (STFLA) Assurance Statement Mercia

The report pack also notes that until recently, Mercia Waste Management (MWM) was part of an operating group headed by FCC Servicios Medio Ambiente (FCC) and Urbaser UK. On 10 June 2024, FCC completed the purchase of Urbaser's UK business. The proposed transaction was first announced in December 2023. The team at MWM have engaged with Worcestershire County Council officers throughout the regulatory assessment period. In addition, Worcestershire County Council have taken legal advice regarding the strength of the remaining operating guarantee from FCC as well as potential impact of Worcestershire County Council and Herefordshire County Council as lenders regarding the loan facility. This legal advice was supported by an independent review undertaken by KPMG. Worcestershire County Council is satisfied that the independent review confirms that FCC is of adequate financial standing and capacity to act as Guarantor for the Waste Management Service Contract.

Risk Register

The committee was scheduled to consider the risks set out in the Risk Register and whether to report any matters to the council.

According to the report pack, the committee will need to review the risks being borne as a result of the funding provided by the council to Mercia and consider whether the risks being borne by the council, as lender, are reasonable and appropriate having regard to the risks typically assumed by long term senior funders to waste projects in the United Kingdom and best banking practice.

The report pack states that a Risk Register was established which set out the unmitigated and mitigated risks associated with the loan arrangements and that the three remaining risks have been substantially mitigated and are green.

The three remaining risks listed in the risk register are:

• Weakening of Mercia Waste Management parent company guarantee due to the acquisition of Urbaser's UK business to FCC Servicios Medio Ambiente
• Default of loan repayments by borrower to lenders due to SPV (Mercia) or HZI falling into administration.
• Impact of extension of contract with Mercia Waste Management by the County on the ability of company to repay the loan

Work Plan

The committee was scheduled to note and comment on the work plan attached as an appendix. The updated work plan included budget information, Short Term Loan Facility Agreement (STLFA) Assurance Statement, ratio analysis update and risk register update. These items were scheduled to be discussed in future meetings in Q2, Q3 and Q4 2025 and Q1 2026.