Severn Trent

Annual Report and Accounts 2007

Contents

Quick read

Group financial statements

1

Focused activities
Group financial highlights for 2006/07

2 What we do

44 Independent auditors’ report 

45 Consolidated income statement

Overview and facts about our businesses

46 Consolidated balance sheet

Direction

47 Consolidated cash flow statement

4

6

8

Chairman’s statement
Sir John Egan comments on Severn Trent’s results,
performance, corporate responsibility and outlook

Group Chief Executive’s review
Strategic overview and operational performance

Focus on water
Our strategy and performance measures 
for Severn Trent Water

48 Consolidated statement of recognised income 

and expense

49 Notes to the group financial statements

Company financial statements

89 Independent auditors’ report

90 Company balance sheet

Performance review

10 Water and Sewerage

Performance information for Severn Trent Water 
in 2006/07, KPIs and progress on its Ofwat targets 
for 2006-10

90 Company statement of total recognised gains 

and losses

91  Notes to the company financial statements

Other information

16 Water Technologies and Services

99 Five year summary

Comparisons on profit and loss, net assets, 
dividends and share price

100 Information for shareholders

Financial calendar, shareholder analysis 
and company information

Performance information for Water Technologies 
and Services and an overview of its increasing 
presence in growth markets

18 Corporate responsibility

Overview of our corporate responsibility programme,
business ethics, environmental impacts and health
and safety

20 Financial review

Overview of Severn Trent’s results, financial position
and cash flows

Governance

24 Board of directors

Biographical details of the directors

26 Directors’ report

29 Corporate governance report

Role of the board, board committees, internal control
and risk management

34 Directors’ remuneration report

Directors’ emoluments, pensions and 
service agreements

Cautionary statement
This document contains certain ‘forward looking statements’ with respect
to Severn Trent’s financial condition, results of operations and business
and certain of Severn Trent’s plans and objectives with respect to these
items.

Forward looking statements are sometimes, but not always, identified by
their use of a date in the future or such words as ‘anticipates’, ‘aims’,
‘due’, ‘could’, ‘may’, ‘should’, ‘expects’, ‘believes’, ‘intends’, ‘plans’,
‘targets’, ‘goal’ or ‘estimates’. By their very nature forward looking
statements are inherently unpredictable, speculative and involve risk and
uncertainty because they relate to events and depend on circumstances
that will occur in the future.
There are a number of factors that could cause actual results and
developments to differ materially from those expressed or implied by
these forward looking statements. These factors include, but are not
limited to, changes in the economies and markets in which the group
operates; changes in the regulatory and competition frameworks in which
the group operates; the impact of legal or other proceedings against or
which affect the group; and changes in interest and exchange rates.

All written or verbal forward looking statements, made in this document
or made subsequently, which are attributable to Severn Trent or any
other member of the group or persons acting on their behalf are
expressly qualified in their entirety by the factors referred to above.
Severn Trent does not intend to update these forward looking statements.
This document is not an offer to sell, exchange or transfer any securities
of Severn Trent Plc or any of its subsidiaries and is not soliciting an offer
to purchase, exchange or transfer such securities in any jurisdiction.
Securities may not be offered, sold or transferred in the United States
absent registration or an applicable exemption from the registration
requirements of the US Securities Act of 1933 (as amended).

Severn Trent Plc
Severn Trent Plc is a public limited company listed on the
London Stock Exchange and registered in England and
Wales with company number 2366619. This is the Annual
Report and Accounts for the year ended 31 March 2007.

More information on Severn Trent Plc can be found on our
website at www.severntrent.com

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> special dividend of £575 million paid 

to shareholders in October 2006

> improved balance sheet efficiency 

following payment of special dividend

> no dilution of dividend per share as 

a result of Biffa demerger

> sale of non core activities, including 

US Laboratories, Aquafin and Property

> overhead costs to fall by £6-10 million 

over next 12 months 

> gearing to move to 60% of Regulated 

Capital Value

> dividends to increase by 3% above 

inflation to 2010

Group turnover £m

Group profit before tax £m

2007

2006

1,480.2

2007

325.5

1,455.3
+1.7%

2006

177.8

Group profit* £m

Earnings* per share pence

2007

2006

* before tax, exceptional items and IAS 39 fair value 

adjustments (see income statement)

252.0

2007

230.2
+9.5%

2006

* from continuing operations before exceptional items, 

IAS 39 fair value adjustments and deferred tax (see note 14)

Final dividend pence

Total shareholder return

2007

2006

38.68

31.97

+21.0%

250
225
200
175
150
125
100
75
50
25
0

)
£
(

e
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l

+83.1%

82.4

71.4
+15.4%

31-03-02
Severn Trent Plc 

31-03-03

FTSE 100 Index

31-03-04

31-03-05

31-03-06

31-03-07

This graph shows the value at 31 March 2007, of £100 invested in Severn Trent on 
31 March 2002 compared with the value of £100 invested in the FTSE 100 Index. 
The other points plotted are the values at intervening financial year ends.

Severn Trent 1

 
 
What we do

Severn Trent Plc is a FTSE 
100 group focused on water. 
It serves over 3.7 million
household and business
customers in England and
Wales and provides water 
and waste water solutions 
in the UK and overseas.

Group turnover
£1,480.2m
8,372 employees

The water industry in England and Wales invests more than £3 billion 
a year and employs over 27,000 people. There are ten water and
sewerage companies in England and Wales and sixteen water supply
companies. Severn Trent Plc is the second largest water company listed 
on the London Stock Exchange. 

Coverage

Severn Trent Water’s region
stretches from mid Wales to
Rutland and from the Bristol
Channel to the Humber. We deliver
nearly 2 billion litres of water 
a day to homes and businesses
through 46,000 km of pipes. 
A further 54,000 km of sewers
take waste water away to over 
1,000 sewage works.

The regulatory framework 
Ofwat sets annual price limits for each water company. The current
price limits were set in 2004 for the period 2005-10 (the ‘AMP4’
period). They will next be set in 2009.

Each water company has to submit an annual return (the ‘June 
Return’) to Ofwat covering its activities. This is the primary source 
of regulatory information and enables Ofwat to monitor and compare
the performance of the companies.

Water quality in England and Wales is regulated by the Drinking 
Water Inspectorate; river pollution and flooding is regulated by 
the Environment Agency.

2 Severn Trent Annual Report and Accounts 2007

Turnover
£1218.1m
80.3%
of group turnover

5,289 employees

Severn Trent Water provides high quality water and sewerage services 
to over 3.7 million household and business customers, in England 
and mid Wales.

Key strengths 
> lower tariff levels compared to other water companies
> drinking water and waste water quality significantly above average
> strong management team with clear and focused strategy
> sustained commitment to corporate responsibility

For further information visit www.stwater.co.uk

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Turnover
£288.9m
19.0%
of group turnover

2,984 employees

Water Technologies and Services is one of the world’s leading suppliers
of water and waste water treatment solutions. Headquartered in the US,
it has a growing presence in the Middle East, Europe and Asia. It has
three main businesses: Water Purification, Operating Services and
Analytical Services.

Key strengths
> strong brand recognition
> market leadership in disinfection, filtration and arsenic removal – 

all growing markets

> continually expanding product and technology base
> good track record of organic growth and cost control

For further information visit www.severntrentservices.com

Severn Trent 3

 
Chairman’s statement

Sir John Egan
Chairman

I am pleased to report on a year of significant
restructuring for the Severn Trent group 
of companies which allows us to implement 
our focus on water business strategy.

4 Severn Trent Annual Report and Accounts 2007

I am pleased to report on a year of significant restructuring for the
Severn Trent group of companies which allows us to implement our
focus on water business strategy.

In June 2006 the board announced its intention to restructure Severn
Trent. Biffa Plc was successfully demerged on 9 October 2006, the sale
of Severn Trent Property was completed on 6 November 2006 and the
sale of US Laboratories was concluded at the end of December 2006.

In addition, group balance sheet efficiency has been improved by 
the payment on 20 October 2006 of a £575 million special dividend 
to shareholders.

As previously announced, the board intends to maintain group debt at
around the target 60% of regulated capital value, and to continue to
increase dividends by 3% above the rate of inflation at least up to 2010,
the remainder of the regulatory review period.

The current market capitalisation of the smaller and focused Severn
Trent at £3.5 billion is greater than it was at the end of 2004.
Shareholders have received a demerged Biffa worth £1.1 billion and
have received a special dividend of £575 million.

Severn Trent Water’s customers’ top priority is the safety and reliability
of their drinking water and we have a strong track record on this. 
We have consistently achieved 99.9% compliance with water quality
standards since 1997, which represents one of the best compliance
records in our industry.

Over and above these basic requirements, management is developing
detailed plans for fundamental improvements across all areas of 
the business as outlined in the review by our Group Chief Executive,
Colin Matthews.

Group results
Overall, Severn Trent has delivered a positive performance in 2006/07,
with group profit from continuing operations before tax, IAS 39 fair value
adjustments and exceptional items at £252 million and group profit from
continuing operations before tax was £325.5 million, an increase of 83.1%.

In line with our declared policy, the board is proposing a final dividend 
of 38.68 pence (31.97 pence) to be paid on 3 August 2007. This would
give a total dividend for the year, excluding the special dividend paid 
on 20 October 2006, of 61.45 pence per ordinary share, an increase 
of 20.2%.

Corporate responsibility
When I was invited to join the Severn Trent Plc board and became its
Chairman I did not know the full extent of the challenges which the
board and new incoming management team were to uncover and the
immense commitment of time and energy which has been needed to
manage these issues.

There is no point in dwelling unduly on the 2000 to 2004 era to apportion
blame or responsibility as this does not help customers or shareholders.

There is, however, every point in me stating here on behalf of the board
and management team that we have already accepted the responsibility
for making things right.

I believe that you will see from the considerable work outlined in this
annual report what we have achieved so far – and the considerable work
that we are determined still to do.

We are waiting to learn from Ofwat and the Serious Fraud Office the
conclusion of investigations into reporting irregularities made to Ofwat
by Severn Trent Water.

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We are continuing to co-operate fully to restore confidence in Severn
Trent Water going forward and we acknowledge that further amends may
be made to customers, depending on the outcome of the investigations.

In response to Ofwat’s interim report of March 2006 concerning
allegations of false reporting made against Severn Trent Water in 2004,
we have already credited customer accounts and altered bills
appropriately for subsequent years.

We have taken and will continue to take, all actions we think appropriate
to ensure the maintenance of both high ethical and professional
standards and resilient and effective controls throughout our companies.

Our new strategy on corporate responsibility (CR) is to support the new
management team’s drive for excellence by achieving high standards on
a range of CR issues.

Those issues include: climate change; the local environment; engagement
with local communities; health and safety; business ethics, diversity and
investing in people. Further details of our CR strategy, values and action
plans are set out on the Severn Trent website (www.severntrent.com).

To be effective, a company’s CR strategy must be fully integrated with its
core business planning. The strategic and organisational change that
took place within Severn Trent in 2006/07 has reinforced this. 

As described later in this Annual Report, Severn Trent Water has
determined 20 critical success factors and adopted 20 KPIs, by which it
will measure performance and set targets. Many of these indicators link
directly to Severn Trent Water’s CR strategy – for example, the KPIs on
health and safety, leakage, net energy use, pollution incidents and
employee motivation. This ensures that CR is entrenched at the very
core of Severn Trent’s activities. 

In addition, Severn Trent’s Corporate Responsibility Committee, a board
committee, has introduced a more structured approach to reviewing 
all areas of our CR performance. 

Take climate change for example. This has risen up the political and
public agenda in 2006/07. We welcome this. Severn Trent Water has
been engaged in planning for the changing climate for a number of
years. We have built a leading reputation in this area with key
stakeholders such as the Carbon Trust.

Severn Trent Water’s work on climate change focuses on two main
aspects: mitigating our impact on climate change, and adapting to it. In
turn, mitigation has two main aspects: energy efficiency initiatives and
in-house renewable energy production, primarily biogas combined heat
and power (CHP). The effects of our work in both these areas are
reflected in our KPI on net energy use.

Board, management and staff
The board of Severn Trent Plc continually reviews its management plans
to ensure orderly succession and continuity of leadership.

After a year of great strategic change, Chief Executive Colin Matthews is
reshaping the group to focus on water aided by Tony Wray, Managing
Director of Severn Trent Water, who is concentrating on improving
Severn Trent Water day to day operations. As the priority switches more
and more to implementing the improvement plans announced by Mr
Matthews, the two roles will combine.

The board therefore wishes to provide clarity and confidence to
customers, employees and shareholders that there will be a smooth
leadership transition in due course from Mr Matthews to Mr Wray
particularly now that detailed preparations are underway to achieve an
appropriate regulatory settlement for 2010 to 2015.

It is expected that the consideration of the two roles into one leading to
the appointment of Mr Wray as Chief Executive and the retirement of Mr
Matthews from the board and the company will take place around the
end of 2007.

Martin Bettington, Managing Director of Biffa Plc, stood down from
Severn Trent Plc when Biffa was demerged in October. I thank him for
his tremendous contribution to Severn Trent in helping to grow Biffa to
the point where it is now an independent FTSE 250 company valued at
more than £1 billion.

Marisa Cassoni stood down from the board in October after 5 years as a
non-executive director. I thank her for her contribution, particularly her
membership of the Audit, Remuneration and Nominations Committees.

Rachel Brydon Jannetta stood down from the board in December 2006
on completion of the sale of the US Laboratories, our US analytical
environmental testing firm, to TestAmerica Holdings. As President and
CEO of Severn Trent Laboratories, she made a significant contribution to
Severn Trent during her 11 years with the company and the last two
years on the board during a period of significant change.

As part of our strategy of focusing on water, all the current executive
and non-executive directors of Severn Trent Plc now hold similar
positions on the board of Severn Trent Water Limited. Since March
2007 the boards of directors of Severn Trent Plc and Severn Trent 
Water Limited have been identical.

We have carried out rigorous board effectiveness reviews with the help
of independent consultants, which have generated a number of actions
to secure improvements to board performance.

I would also like to pay a special tribute to our committed staff whose
performance in a year of exceptional challenge and change has been
outstanding, ensuring we continue to achieve our business goals.

Investment proposition
Severn Trent is a high quality business whose investment programme
drives strong growth prospects. The management team has a clear and
focused strategy and is engaged in the single minded pursuit of higher
standards as the means to achieve both higher levels of customer
satisfaction and sustained strong financial returns to shareholders.

Outlook
The outlook for the coming year is one of significant improvement, with
our plans indicating that we will meet the Ofwat determination for
operating costs in 2007/08. This improvement is driven by the fall in
energy prices (with prices now fixed for 2007/08, our total energy costs
will be around £17 million lower than 2006/07), and the delivery of
efficiency savings of £5 million through the implementation of our
improvement plans.

Our plans encompass the medium and longer term, in some cases
extending beyond the end of the current AMP4 period. Delivering
sustained improvement will result in cost efficiencies being realised, 
but will necessitate investment to succeed.

With the exception of any unforeseen variation in commodity prices
(principally energy), we expect that the achievement of our plans 
will enable us to deliver around £30 million of cost efficiencies over 
the last two years of the AMP4 period, which represents around 3%
annual outperformance against the Ofwat determination for operating
costs, without affecting our ability to deliver the 6% efficiency on the
capital programme.

Severn Trent 5

Group Chief Executive’s review

Colin Matthews
Group Chief
Executive

The successful transformation of the group 
into a focused water company has enabled 
the senior executive team to devote a
substantial amount of its time to operational
improvement in our core water business.

6 Severn Trent Annual Report and Accounts 2007

Introduction
We believe that to satisfy our customers and be cost effective we must
raise professional standards across the entire business. Other industries
have demonstrated that higher quality and continuous improvement
leads to lower costs.

There is every reason why Severn Trent in particular and the water
industry in general, can do the same. This is the best, probably the only
way, to satisfy customers, regulators, employees and shareholders.

Safety is a prime example of the principle we are pursuing. Our
performance improved in the year, which is welcome, but we can make
more progress. The skills and attention to detail which achieve higher
standards of safety are the same as those we need to improve our
environmental impact.

Moreover, as we achieve higher safety standards our operations will
become more cost effective. There is no trade off between higher
standards and profits – they are closely aligned.

Operational improvement
With the demerger of Biffa and the sale of the US Laboratories
completed by the end of 2006, the group’s senior executive team has
concentrated on operational improvement. 

The group already has clear strengths – for example, Severn Trent
Water’s consistent attainment of high water quality standards. In order
to satisfy our customers and deliver continuing growth for shareholders,
we need to improve continuously in all areas.

Therefore, in 2006/07 we examined every aspect of Severn Trent
Water’s current performance. We benchmarked it against companies in
the water and sewerage sector and also in other sectors. We identified
major opportunities for improvement and we drew up detailed action
plans for achieving those improvements. 

We have identified 20 critical success factors against which we will
measure our performance and progress. We have chosen these with
great care, because they represent what we believe are the key concerns
for customers, regulators, employees and shareholders. These 20
factors will be represented by 20 KPIs. In all but two cases, we have
defined our actual performance based on our benchmarking exercise
and we propose to use these as a basis for assessing our performance
going forward. For each indicator, we will set ourselves ambitious targets
for the coming years, and have drawn up action plans for achieving
them. Some improvements will be effected relatively quickly; others are
longer term, going beyond the current AMP4 period.

We have completed the integration of the head office and Severn Trent
Water teams and now have one executive team focused on our core
water activities. As a result of this integration, we expect to reduce our
recurring overhead costs by between £6 million and £10 million over
the coming 12 months.

Over the next five years, we expect staffing levels (permanent and
agency) in Severn Trent Water to be reduced by around 600 posts. Our
plans indicate around 130 of this total being achieved in the financial
year 2007/08. We expect to incur around £24 million of restructuring
costs over the remaining three years of the AMP4 period, with around
£8 million being incurred in 2007/08.

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We have changed the divisional structure. In place of our previous
‘functional’ structure, which had distinct teams working on planning,
engineering and operations, we have created integrated teams, one
focused on clean water, one focused on waste water and one focused on
customer relations. 

Like the integration of Plc and Water teams, this new structure will raise
standards and drive greater efficiency. It also aligns the organisation
with the processes that matter to our customers.

In the following pages of this report, we describe those KPIs and our
current position on them. In future years, we will continue to measure
and report progress against the targets for each indicator.

Safety
At Severn Trent health and safety is vitally important to us as a
company. In 2006/07 (ex Biffa, Property and US laboratories) our
health and safety performance was 24% better than the previous year:
there were 7.1 RIDDOR incidents per 1,000 employees, compared to
9.3 in 2005/06. We reached our target for the year, but the figures are
still too high. We aim to improve continuously in this area.

We devote huge attention to health and safety for two reasons. It is
vitally important at a very personal level, because every safety incident
and every day lost has a human impact. But it is also critical at
business level. The skills and attention to detail that achieve higher
safety standards are the same as those that achieve higher operational
and environmental standards and productivity.

Therefore, as our operations achieve higher safety standards, they will
also achieve greater operational efficiency. Far from trading off higher
safety standards against profit goals, we pursue both together.

Our stakeholders’ priorities
I have said that the KPIs represent the key concerns for our stakeholders.
In 2006/07 two concerns in particular have dominated our relations
with many stakeholders: leakage and customer service.

Our leakage increased in the prior year 2005/06. As we announced in
this last year, 2006/07, we devoted greater resources to leakage
management. We employed more people, invested in new leak
detection technology, fixed 37,000 leaks, 8,000 more than the previous
year and invested almost £20 million more than the previous year. 
This effort has reduced our leakage this year but it was not until the
month of March 2007 that we attained a monthly level of leakage
commensurate with our Ofwat annual target. Therefore, notwithstanding
this reduction, we believe that we will not attain the annual average
target level of leakage.

We have kept Ofwat fully informed of our progress and we are in the
process of finalising and verifying our leakage data for submission in
our annual June Return, which will be submitted in a few weeks. In due
course we will be discussing with Ofwat our ongoing plans and
commitments to maintain our progress in reducing leakage.

Reducing leakage will remain a priority in 2007/08 and we are
determined to maintain the good progress we have made in the second
half of 2006/07. We are in a good position going into this new year.

On customer service too, I am pleased to report good progress. We
recruited and trained more staff and fixed problems with our IT billing
system. Again, by the end of this year, this work was showing
encouraging results. In the last quarter of the financial year, we were
once again approaching the levels of service that our customers and
regulators expect from us.

Water Technologies and Services
This business now comprises our Water Purification, Operating Services
and UK Laboratories businesses. It produced good results in 2006/07.

We made a number of disposals in the 2006/07 financial year, and one
acquisition following the year end. We sold our stake in Aquafin NV to
the Flemish government for £29.6 million. We also sold our Pipeline
Products and Services assets to ADS LLC and we sold our Aztec
instrumentation product line to ABB Limited. On 11 May 2007, we
acquired the assets of United Kingdom based Quay Technologies
Limited for £1.9 million plus potential additional consideration of up 
to £5.1 million tied to future earnings. Quay Technologies Limited
manufactures a proprietary ultraviolet technology for use in water 
and waste water disinfection.

These transactions enable us to concentrate on our core strengths, and
on higher margin and higher growth areas. We have a twofold strategy
for achieving organic growth in these areas. First, we are expanding our
existing technologies into new geographical markets and secondly, we
are taking new technologies into our existing markets.

Outlook
In 2007/08 we expect to make good progress in Severn Trent Water 
on the AMP4 contract and on our own improvement plans. We have
demanding targets in our capital programme, in water and waste
quality, in customer service and in other areas. We intend to achieve
those targets cost effectively, providing value for our shareholders.

We also have to invest to meet longer term targets: the requirements 
of the Water Framework Directive; the challenges of adapting to climate
change and reducing our own carbon footprint.

The investment in reaching those targets, in process improvements and
in higher standards will go hand in hand with operational efficiency and
improvement. So as we implement those investments for the AMP4
period and beyond, we are confident they will lead to higher levels of
customer satisfaction as well as strong financial performance.

The provision of water and waste water services requires operational
and investment planning over the long term. We are working with
internal experts and external stakeholders to identify and understand
the key challenges we face over the next 25 years, ranging from obvious
ones like climate change and carbon footprinting, to more industry
specific ones like separation of surface water or catchment degradation
and the impact they could have on our assets and their ability to 
deliver the service customers expect. This work will establish the 
context for our short and medium term planning processes and also
inform our Strategic Direction statement for Ofwat by the end of this
calendar year. We will continually update this long term planning
process in future years.

Severn Trent 7

Our strategy

Our strategy takes into account the needs of
many different stakeholders. Our plans for
higher standards will help us satisfy the
expectations of all the different groups. For
example, greater operational efficiency will help
us keep charges to customers low, meet our
regulators’ standards and targets, create a safe
and motivating environment for our employees,
and produce good returns for shareholders.

Our goal is to have highest standards, lowest
charges and great people. Phase one of
achieving that goal was to restructure the group
so we could focus on water. With that done, 
we have moved into phase two – the drive to
achieve higher standards and continuous
improvement in all we do.

Higher
standards

Continuous 
improvement

Greater 
efficiency

Radical plans for improvement
Over and beyond these basic requirements, management is fully
engaged in implementing plans for fundamental improvement across
all areas of the business. The successful execution of these
improvement activities will radically change our business over a period
of years.

We have already effected organisational improvements. In addition to
the integration of the head office and Severn Trent Water Executive
teams we have changed the divisional structure in Severn Trent Water.
In place of our previous ‘functional’ structure, which had distinct teams
working on planning, engineering and operations, we have created
integrated teams, one focused on clean water, one focused on waste
water and one focused on customer relations. This new structure is
designed to raise standards and drive greater efficiency. It also aligns
the organisation with the processes that matter to our customers.

During 2006/07 we examined every aspect of Severn Trent Water’s
current performance. We benchmarked it against companies in the
water and sewerage sector, and also in other sectors. The benchmarking
exercise was detailed and thorough. We used a range of publicly
available and internally generated data to identify the population that
we should compare ourselves to. This process involved a number of
judgements being exercised to ensure that we used appropriately
comparable data points for each measure.

We have identified 20 critical success factors against which we will
measure our performance and progress. We have chosen these
indicators with great care, because they represent what we believe are
the key concerns for our customers, regulators, employees and
shareholders. These 20 factors will be represented by 20 KPIs. In all but
two cases, we have defined our actual performance based on our
benchmarking exercise and we propose to use these as a basis for
assessing our performance going forward. Two KPIs are new (first time
job resolution and capital process quality) and we need time to assess
our current performance and define our objectives. For all other KPIs,
we have shown where our starting point is on a relative scale based on
the results of our benchmarking exercise.

For each indicator, we have set ourselves ambitious targets for the
coming years, and drawn up action plans for achieving them. Some
improvements will be effected relatively quickly and easily; others are
longer term, going beyond the current AMP4 period.

The table on the next page sets out our actual performance for the
period under review. Based on our benchmarking exercise, our
performance is shown in one of three categories, of what we consider to
be lower quartile performance, upper quartile performance or median
(representing 2nd and 3rd quartile performance).

8 Severn Trent Annual Report and Accounts 2007

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Key performance indicators

Key area

Objective

Basis

Measure

Performance
Lower quartile

Median

Upper quartile

Employee

Provide a safe working environment

MAT 

Lost time incidents per 100,000 hrs worked1

Develop a confident and productive workforce

Annual
Survey

Employee motivation2

Customer

Provide a high quality product

MAA

Water quality (mean zonal compliance)3,4

Quality interaction with the customer

MAT

Customer written complaints per 1,000 properties3

19.06

MAT

First time call resolution for billing %5

MAT

Unplanned interruptions per 1,000 properties3

6.95

Provide a high standard of operational service

Properties at risk of low pressure per 1,000 properties3,6

Development of a sustainable service

Performance against regulatory obligations5,8

26%

First time job resolution7

To be determined

Financial

Asset base enhancement

MAT

Capex (gross) vs final determination3,9

Capital process quality7

To be determined

Manage trade debt

Debtor days6,9

Management of cost base

MAT

Opex vs final determination £m9

479.1

MAT

Cost to serve per property £10

Environment

Minimise environmental impact

MAT

Pollution incidents per 1,000 properties3,4

Optimise use of resources

MAA

Raw water storage5,6

MAT

Sewer flooding – other causes per 1,000 properties3

MAT

Sewage treatment works – breach of consents3

MAT

Net energy use Kwh/Ml5

Leakage Ml/d – current DMA11

446

37.5

226.93

0.08

0.16

618

0.50

76%

99.98%

80%

0.09

2.7%

0.00%

90%

Notes:
All measures are for the period to 31 March 2007, except as stated.
MAT = Moving Annual total
MAA = Moving Annual Average
1 Actual performance across all employees and agency staff.
2 Performance based on annual all employee survey and quarterly survey of 10% of

5 Actual performance based on internal data.
6 Measure as at 31 March 2007.
7 Measure and relative performance to be determined.
8 Measure for quarter ended 31 March 2007.
9 Actual performance based on audited UK GAAP financial statements for the year

ended 31 March 2007.

permanent employees.

10 Actual performance based on audited UK GAAP financial statements and

3 As reported in June Return to Ofwat. Performance figures are provisional at this

regulatory accounts for the year ended 31 March 2007.

stage as the June Return will be submitted to Ofwat on 15 June 2007.

4 Measure for calendar year to 31 December 2006.

11 DMA leakage performance measured monthly. Month of March 2007 DMA
performance disclosed in table above. Annual measure is MLE leakage 
the calculation of which has not been completed as at 5 June 2007.

It is not statistically realistic to expect any company to be at the top 
of every single league table, but nevertheless, we aim to achieve upper
quartile performance over the next 3 to 5 years. 

Of course, the goal posts will move, as companies in our sector or
elsewhere redefine what upper quartile means, so we expect our target
to move with it.

We will report on these measures in future results announcements.

For a number of KPIs, we have only commenced capturing the data 
and measuring our performance during the current financial year and
therefore corresponding amounts for the previous financial year are 
not available.

For others, the corresponding amounts are available and these are 
as follows;

> Water quality
> Customer written complaints
> Unplanned interruptions
> Properties at risk of low pressure
> Capex vs. final determination
> Debtor days
> Opex vs. final determination
> Cost to serve per property
> Pollution incidents
> Sewer flooding incidents
> Sewage treatment works breach of consents

99.95%
10.04
4.5
0.10
6%
31.76
£446.5m
£219.56
0.11
0.14
0.31%

Severn Trent 9

Performance review

Performance

Turnover
Profit*

2007
£m

2006
£m

1,218.1 1,150.9
400.4

413.0

*Before interest, tax and exceptional items (see note 5)

Turnover in Water and Sewerage
increased by 5.8% in 2006/07, to
£1,218.1 million. Sales prices increased
by 6.58% (including inflation) from 
1 April 2006. The price rise represented
the 7.23% increase allowed by Ofwat, 
less a 0.65% voluntary abatement of K,
previously announced in 2005/06. 

Profit before interest, tax and exceptional
items (PBIT) was up by 3.1% on the
previous year, to £413.0 million as the
higher turnover was partially offset by
cost increases described opposite. 

Health and safety – RIDDORS 
per 1,000 employees

7.1

2007

2006

Water quality %

2006

2005

2004

9.3

99.98

99.95

99.96

10 Severn Trent Annual Report and Accounts 2007

Tony Wray
Managing Director
Severn Trent Water

Financial performance
Turnover in Water and Sewerage increased by 5.8% in 2006/07, to 
£1,218.1 million. Sales prices increased by 6.58% (including inflation)
from 1 April 2006. The price rise represented the 7.23% increase
allowed by Ofwat, less a 0.65% voluntary abatement of K, previously
announced in 2005/06. 

Profit before interest, tax and exceptional items (PBIT) was up by 3.1%
on the previous year, to £413.0 million. A number of factors impacted
PBIT. They included increased energy costs of £23.5 million caused by
rising prices; other increases net of efficiencies in our cost base of
£17.4 million; increase in infrastructure renewals expenditure of £3.6
million and an increase in depreciation charges of £10.1 million
reflecting the growing asset base.

The KPIs covered in the Group Chief Executive’s review are 
referred to here to provide further detail on their use in driving 
our performance improvements.

Our asset base
During the financial year, we invested £103 million (£98m net of grants
received) in maintaining our infrastructure network. Capital expenditure,
excluding spending on infrastructure maintenance, was £399 million.
Gross capital expenditure (including infrastructure maintenance
expenditure) was £502 million.

One KPI, capex (gross) vs final determination, measures our
performance on managing the financial aspects of the delivery of 
our investment programme. This measures the percentage variance
between our capital expenditure and Ofwat’s final determination for
AMP4. This assesses one aspect of performance against our objective 
of delivering services to our customers at the lowest costs. Other KPIs
(most notably the capital process quality measure) will assess our
delivery of high quality services.

Adjusting for minor timing differences and modifications to the AMP4
capital programme (notified to Ofwat through the change control
process) we are on track to deliver this programme over the AMP4
period. We continue to be in line to achieve around 6% efficiencies
compared to Ofwat’s Final Determination for AMP4.

Our cost base
We recognise that managing our operating costs is a key component in
our success. We continued the work started in 2005/06, including
process improvement leading to reducing employee numbers and
removing management layers. 

Two KPIs measure our performance on managing costs. The first
measures the variance between our latest formal forecast of operating
costs and Ofwat’s Final Determination for AMP4. 

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The second indicator is the total cost (including operating costs,
depreciation, infrastructure renewals and third party costs) associated
with serving each customer property. 

Meeting our customers’ expectations
Our customers’ top priority is the safety and reliability of their drinking
water supply and we have a strong track record. We have consistently
achieved 99.9% compliance with water quality standards set by the
Drinking Water Inspectorate (DWI) since 1997, which represents one of
the best compliance records in our industry. 

Water companies and regulators measure water quality in a number of
ways. Our water quality KPI is based on ‘mean zonal compliance’. This
is an overall measure used by the DWI which measures the extent to
which samples taken at customers’ taps comply with all the
requirements of the Water Supply (Water Quality) Regulations 2000. 

The DWI’s performance tables for the 2006 calendar year, which are
based on more than 500,000 tests from samples of Severn Trent Water,
showed that we achieved 99.98% mean zonal compliance. This is an
improvement on our previous year’s performance. 

During 2006/07 we delivered a number of programmes designed to
maintain and improve water quality. They included schemes to secure
compliance with mandatory standards for cryptosporidium and nitrate
reduction. In addition we carried out an extensive and targeted mains
cleaning programme to improve the aesthetic quality of the water 
we supply.

We are continuing to develop drinking water safety plans for our
treatment works and our investment programme for water quality 
in 2007/08 includes further mains cleaning, more nitrate reduction
schemes and lead removal schemes. This will ensure we maintain 
our high levels of water quality throughout our distribution system. 

For water supply to our customers, our KPIs are Ofwat’s DG2 risk of low
pressure and DG3 unplanned interruptions to supply. 

On unplanned interruptions to supply, Ofwat deemed our performance
‘good’ in 2005/06. However, our figures deteriorated in 2006/07,
primarily because of five operational events in the summer of 2006.
This year, using the DG3 definition, around 36,100 properties
experienced unplanned interruptions to supply, compared to around
15,200 in 2005/06. This represents 1.07% of the properties connected
to our network, compared to 0.45% in 2005/06. We have put in place
an action plan to improve performance, focusing on our network assets,
our processes for responding to problems with water supply and our
contingency planning for events such as power outages.

We continued our performance on low pressure in 2006/07, with 314
properties across our entire region at risk of experiencing poor pressure
at year end, compared to 313 properties in 2005/06. This represents
less than 0.01% of the properties we serve.

During 2007/08 we will install several thousand fixed pressure loggers
which will provide much better data on our network enabling us to
improve our performance further. 

The flooding of a home or property with raw sewage, is viewed by most
people as one of the most unpleasant problems our customers may
endure. Overall, for the first two years of the AMP4 programme, we have
been ahead of our Ofwat target in this area. We will continue working to
achieve a net reduction year on year in the number of properties at risk
of flooding from sewers. Our programme of works to reduce
permanently the risk of internal and external flooding will benefit an
estimated 1,600 properties, dependent upon the rate of discoveries of
new properties experiencing flooding and being added to our registers.

In terms of the number of actual sewer flooding incidents, our 2006/07
figures are slightly up on those for 2005/06. Changes in weather
patterns, with increased numbers of storms have been one of the
contributing factors to increases in flooding. 

Our sewer flooding KPI aims to reduce the number of incidents from
blockages, sewer collapses etc over the next five years. There are two
main routes for achieving this reduction. One will be the completion of
schemes already underway, such as the £14 million scheme to alleviate
flooding in Kenilworth. The second is solutions such as routine sewer
cleansing programmes to prevent sewers from blocking.

Interacting with customers
In addition to receiving excellent operational services from us, our
customers expect to interact with us in a satisfactory way. If they have a
query about billing, they expect it to be resolved on their first call. If
they write to us, they expect a quick response to their letter. It is already
well documented that we have not reached high enough customer
service standards in recent years.

In June 2006, Ofwat issued a notice under S22A (4) of the Water
Industry Act, stating its intention to fine Severn Trent Water for failure 
to meet customer service standards under the Guaranteed Standards
Scheme (GSS) for water companies. The notice covered performance
since June 2005. In addition, we are still working and fully co-operating
with Ofwat and Ernst & Young LLP on their independent investigations
into customer service performance and misreporting which includes
performance prior to June 2005. We await the conclusions of those
investigations and details of the financial penalties that will be imposed
on us.

In June 2006 Ofwat also issued a notice under section 203 of the Water
Industry Act requiring further information to be provided about the
misreporting of data and our performance against DG standards and
the GSS scheme. Data for these areas has been provided to Ofwat going
back as far as 1995 and we have answered their detailed questions. 
Our final response was submitted on 31 January 2007. We anticipate
that Ofwat will respond with a further S22A notice of intention to
impose a penalty for misreporting of data since June 2005. 

In the meantime, we have done much to improve current customer
service standards. Many of the customer service failures of 2005/06
were due to the introduction of a major new IT system (TARGET) for
billing customers. We acknowledge that, when introducing that system,
we underestimated the amount of training required to transfer our
contact centre operators to the new system. We also underestimated 
the extent to which any major new IT system is prone to problems. 

Severn Trent 11

 
Performance review
Water and Sewerage continued

During the second half of 2005/06 and the start of 2006/07, these
problems were increasingly apparent to us, our customers and to Ofwat.
In July 2006, the Consumer Council for Water (CCW) issued a report
showing that complaints about Severn Trent Water increased by 54%
during the six months from October 2005 to March 2006. Their report
for the period April 2006 to March 2007 showed a further rise in
complaints of 36%. In 2006/07 we began work on an action plan to fix
IT problems, to recruit 70 additional staff in our billing division and to
extend the training given to contact centre operators. 

The results of that work now show steady improvements. Customer
service performance in the first eight months of 2006/07 remained
unsatisfactory while figures for the final four months, as a result of 
the action plan, were starting to show improvement. 

For customer service performance the first KPI is written customer
complaints per 1,000 properties. This is a new measure for 2006/07. 
In previous years we have tracked DG7, a measure of the response to
written complaints. DG7 performance in 2006/07 was 99.76%
compared with 88.7% in 2005/06. Against the new measure, our
quarter three performance was 25.9 (complaints per 1,000 properties),
recovering to 17.5 in the last quarter, giving performance in the year of
19.06. Whilst both the quality and timeliness of responses have
improved in the year, continuing issues on answering phone calls
caused customers to write in and complain.

Our second KPI on customer service is first time call resolution for
billing contact, which shows the proportion of calls resolved at that
point. As well as giving the best standard of service to customers, first
time call resolution is also the most cost effective for us. This is again a
new measure and whilst we have calculated performance for 2006/07
at 80%, this measure was not tracked in management reports in the
course of the year. During 2006/07 the focus has been on ensuring
compliance with Ofwat’s DG6 (the number of billing contacts received
during the report year and the time taken to respond to them)
standards and improving the quality of call response. 

The training and competency programme for billing staff will continue
in 2007/08 and beyond. Our goal in 2007/08 is to sustain the
improvements we are now seeing, so we once again meet industry
standards in this area. Beyond that, we will set ourselves higher
aspirations of being an industry leader in customer service.

Interaction with customers is not just about how we perform in terms 
of specific figures and measures. It is also about fitting in with different
customers’ ways of life and giving them flexibility in how they contact
us. So, in 2006/07 we redeveloped our website (www.stwater.co.uk) in
order to give customers self service options for dealing with us.
Transactions such as requesting a meter or telling us about a change 
of address can now be done online 24 hours a day, seven days a 
week (24/7), whereas previously customers had to telephone our
contact centre.

The other main area of customer interaction relates to our operational
water and waste water services. We completed a reorganisation of this
process in 2006/07 with the closure of our two 24/7 regional
operational management centres. We have established a new 24/7
customer operations service centre at Coventry in the heart of our
operational area. All customer contacts related to water and waste 
water matters are handled alongside and as part of, our operational
management capability. This enables us to diagnose operational failures
more effectively and promptly and also allows us to use our remote
monitoring systems to keep our customer contact teams better
informed thus providing a higher standard of service on operational
matters. We are working on improving process efficiency to increase
customer satisfaction in order to deliver first time job resolution for 
field and network problems.

We are encouraged that in the first six month period since establishing
the new centre (October 2006 to March 2007) we have improved by
13% to 72% the number of customers who, through our service
delivery survey, have told us we have met or exceeded their
expectations. We are confident that these results demonstrate we can
make further sustainable improvements to operational customer service
in 2007/08 and beyond.

Our New Connections department manages, from application to
delivery, the connection of customers to water and waste water services.
In 2006/07 we have worked closely with developers and customers to
understand how we can improve our service to them and make
interaction with us easier. Consequently, we have changed our
organisation design, introduced new web based applications and
improved our performance on water service connections completed
within 21 working days from 45% to 81%. We are aiming to build on
these improvements through 2007/08. 

We also have customers who, on receipt of a bill, either cannot or will
not pay. This directly impacts our trade debtors and our financial
performance. We have therefore introduced the debtor days KPI as the
measure by which our performance will be tracked and benchmarked.

Assuming that our year on year billing and collection performance for
each of our various income streams remains constant, we would expect
our debtor days to increase on an annual basis by approximately two
days. This is due to the continued impact of customers switching from
the unmeasured to measured basis of charge. As measured bills are
sent to customers throughout the year, there will inevitably be a number
of recently issued bills that remain unpaid at year end. The number of
water meters we installed increased by over 65,500 in 2006/07.

Our debtor days performance has deteriorated from 31 days in
2005/06 to 37 days in 2006/07. This deterioration is above the two day
expected increase described above and has been driven by operational
performance issues within our billing and collection processes.

We intend to position ourselves within the upper quartile of industry
performance by 2011/12. This is to be delivered through a stepped
performance improvement in our billing and collection activities. In
particular, we will improve the performance of our billing contact centre,
reduce our current work in progress backlogs and introduce further
billing system improvements.

12 Severn Trent Annual Report and Accounts 2007

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Minimising our environmental impact
One of our KPIs in this area measures our compliance with the
discharge consents for our sewage treatment works. We have a good
history of performance in this area, although a poorly performing
sewage works at Stratford-upon-Avon reduced our overall performance
figures for 2005 (based on calendar year). In 2006 with that specific
problem remedied, our compliance levels were excellent and we
achieved a compliance rate of over 99.99%. This level of compliance 
is amongst the best to be found in the industry.

Another KPI which relates to our environmental impact is the number 
of pollution incidents; more specifically the number of Environment
Agency reported category 1, 2 and 3 pollution incidents. The total
number of such pollution incidents was 530 in 2006 calendar year,
which was lower than 2005 but still too high. Of the total recorded, two
were of the most severe in category 1, and eight were category 2. This
performance is comparable with the industry averages using the 
2005 data.

Within the total number of pollution incidents, 98% (520) were category
3 incidents which are classified as having a very limited and localised
environmental impact. This particular aspect of performance was
similar to our 2005 performance (519), placing us in the lower quartile
for the industry. We have taken positive steps to make significant
improvements in developing an action plan to deliver pollution
reductions during the current year and through to the end of the
current AMP period. The plan is linked to our proactive and reactive
work on the sewerage network. Whilst we only have the first quarter
performance for 2007 the results are encouraging, showing a decrease
of almost 35% for category 3 incidents compared to the first quarter 
of March 2006.

We have also instigated a number of projects which include initiatives to
raise customer awareness around the impact of depositing fats, oils and
greases into the sewerage system. Significant numbers of our sewer
blockages are caused by fat build up which in turn contribute to the
number of pollution incidents and floodings. We have a plan to educate
customers about the potential problems of pouring fat down sinks and
drains, part of which is the offer of the provision and distribution of free
‘fat traps’. These are small containers to hold cooled fat for easy
disposal with household waste. We raised awareness of this initiative
through our Source magazine which accompanied all of our annual bills
distributed in February and March 2007.

Across the region we have a number of large scale construction and
upgrade projects at a number of sewage treatment works. These
upgrades are already underway, as part of our AMP4 capital programme
and when completed will result in environmental improvements. We are
pleased to report that work is currently on schedule.

Developing a sustainable service for customers
Serving customers also means looking after their long term interests as
well as their immediate concerns. Our main aim is to ensure that we are
maintaining the serviceability of our assets. This means carrying out the
work necessary to make sure their water and sewerage systems deliver
reliable service in the future for customers and the environment. It takes
into consideration aspects like the condition and deterioration of a
company’s above ground and below ground water and sewerage assets.
The most recent Ofwat assessment shows that we have a stable
serviceability across our asset base.

Improving the delivery of our capital programme
We will aim continuously to improve the delivery of our capital
programme. We are in the process of developing a KPI that will 
measure the quality of our Capex delivery.

The AMP4 contract for 2005-10 includes a capital investment
programme of approximately £2.7 billion. This includes:

> more than £400 million on maintaining water supplies
> £150 million on improving drinking water quality
> around £850 million on maintaining and improving river quality
> more than £350 million improving sewers and dealing with sewer 

flooding, and

> more than £260 million to reduce leakage

In the two years to date we have mobilised 2,852 projects of which
1,616 have been completed. We have invested just short of £200
million on our water production and distribution service with the focus
on improving levels of service to customers, upgrading our treatment
works and distribution network. We have invested over £250 million on
sewerage services, with a focus on repairing our aging sewers,
maintaining and upgrading our sewage treatment works to meet tighter
quality standard and we are exploring ways of exploiting our by
products to generate electricity. In addition we have invested £50
million on our support services to improve customer service and
business services.

This year capital expenditure, net of grants and contributions, excluding
spending on infrastructure maintenance of £98 million, was £365
million for the year. Adjusting for the changes to the programme, to be
agreed with Ofwat through the change control process and for timing,
differences, we are on track to deliver approximately 6% efficiencies
over and above the final determination. This has been largely driven by
the use of better technologies, better designs and greater delivery
efficiency. It is still early days in AMP4, but we aim to maintain similar
outperformance over the rest of AMP4.

Protecting the environment
The local environment is especially important for a water company. 
How we abstract water, how we manage waste water discharges, how 
we operate over 1,000 sewage treatment sites, how we operate our
54,000km of sewerage network and how we manage resources all have
a huge potential impact on the local environment. We have a
responsibility to minimise that environmental impact and to optimise
our use of resources.

The seriousness with which we take that responsibility is reflected in our
KPIs. Five separate indicators are linked to environmental performance.
They are: breach of consents at sewage treatment works; pollution
incidents; raw water storage; net energy use and leakage. In addition to
measuring our environmental impact, all five indicators provide a sharp
insight into our operational performance.

Severn Trent 13

 
Performance review
Water and Sewerage continued

Optimising our use of resources
Our water supplies are fundamental to our business. Our KPI 
on raw water storage compares the percentage of raw water available 
at our reservoirs against our three year rolling average. 

In 2006/07 our raw water storage levels were good despite a dry
summer. We did not impose a hosepipe ban during the year, and
storage levels at year end were normal for the time of year. 

Net energy use
Our KPI on net energy use measures how much energy (net of
renewable energy generated by us) we consume per megalitre of water
or waste water treated. Since energy costs are a major element of our
cost base – and were especially so in 2006/07 following price rises,
managing energy usage also enables us to manage costs. In addition,
managing energy consumption is an essential element in mitigating 
our environmental impact.

The largest single element of our investment in leakage management is
incurred in our mains renewal programme. The Ofwat Determination for
AMP4 assumed around £184 million of expenditure over 5 years (in
nominal terms). We have already invested around £85 million in the
first two years and we expect to invest a total of around £231 million,
some 26% more than assumed in the Determination, over the whole
AMP4 period on mains renewals alone.

Reducing leakage will remain a priority in 2007/08 and we are
determined to maintain the good progress we have made in the second
half of 2006/07. We are in a good position going into this new year.

Promoting the efficient use of water is important to us. During 2006/07
we continued to adopt a twin track approach for promoting the efficient
use of water with our customers. This included the promotion and
distribution of water saving devices, together with education and the
provision of advice to raise awareness of the need to use water wisely.

In 2006/07 we continued to manage our net energy consumption 
in two principal ways. First, we maintained our renewable energy
production at around 155,000 MWh, this represents 16% of total
electricity used.

Secondly, we manage net energy consumption through energy
efficiency programmes. In 2006/07 we completed on schedule site
energy reviews of our top 407 sites that account for 85% of Severn
Trent Water’s electricity use. The review has resulted in individual Site
Energy Management Plans for 330 sites that include local actions to
improve plant/process optimisation and identify potential ‘spend to
save’ opportunities. The review has identified generic approaches
required to manage energy on the remaining sites; we believe these
plans will enable us to save approximately 10,000 MWh of electricity
during 2007/08.

In forthcoming years, implementation of regulations such as the Urban
Wastewater Directive and the Water Framework Directive will increase
our energy requirements. In order to offset that, we plan to expand our
renewable energy production even further. We are planning a number 
of new opportunities and will continue to work on this in 2007/08 and
beyond. In addition to extending our current CHP biogas production, 
the opportunities we are planning include: biomass energy crops, micro
generation, wind turbines and extending hydro power.

Leakage
This has been a priority for us in 2006/07. We returned disappointing
results in 2005/06 and consequently increased our focus on and
investment in, leakage control. We employed more people in this area,
invested in new technology and in 2006/07 found and fixed 37,000
leaks, 8,000 more than the previous year. 

This effort has reduced our leakage this year but it was not until the
month of March 2007 that we attained a monthly level of leakage
commensurate with our Ofwat annual target. Therefore, notwithstanding
this reduction, we believe that we will not attain the annual average
target level of leakage. We have kept Ofwat fully informed of our
progress and we are in the process of finalising and verifying our
leakage data for submission in our annual June Return, which will be
submitted in a few weeks.

In the report year we have recorded increases in the distribution and
installation of cistern displacement devices, our self audit guides and
water butts. We increased distribution of cistern displacement devices
by 45,622 (47%) and installation by 65,838 (144%). Self audit guide
distribution increased by 15,278 (21%) and water butt distribution by
123 (2%). In addition, the number of pupils attending our education
centres in 2006/07 increased by 3,332 (15%). We have enhanced our
education programme, and commenced three trial projects including 
a household water efficiency trial, school water efficiency trial and a
local government partnership investigating opportunities to promote
water efficiency.

CCW research shows that there is still much work to be done to ensure
our customers are sufficiently engaged with the issue and can make use
of the tools and technology that we make available. Throughout
2007/08 we will continue our efforts to influence the attitudes of our
customers through focused education and awareness activities. In
addition we will continue to build our knowledge of the savings
associated with water efficiency activities to ensure that future plans
provide us with cost effective savings.

Creating a great place to work
We have stressed repeatedly that health and safety is a key priority 
for us. At the business level, it is also an important indicator of quality
at the workplace level, the physical well being of our employees 
is paramount.

In line with our KPI on health and safety, we reported a 20% reduction
in the RIDDOR accident rate per 1,000 employees in 2006/07. This 
was an improvement on our performance from the previous year. In
2007/08 and beyond, we will aim to improve further on our safety
performance and have therefore moved our performance measure from
RIDDORs to the more demanding measure of lost time incidents (LTIs).

For the current year we are targeting a 15% reduction in LTIs. This is 
a broader measure than the measure we used previously as it includes
all injuries that result in time off work, not just the serious longer 
term injuries.

14 Severn Trent Annual Report and Accounts 2007

Behavioural change and individual engagement are important aspects
of improving safety and general business performance. We encourage
our employees to share and debate their ideas about safety, and to put
these ideas into practice. Towards the end of 2005/06 we began to
develop a safety management system called SUSA (Safe and Unsafe
Acts). This is a one to one work based observation and discussion
process in which SUSA trained managers talk regularly with their team
members about the way in which they and their team do their job. 

By the end of March 2007, over 80% of managers had received SUSA
training. The remaining 20% will receive the training in 2007/08 and
there will also be a rolling programme to give SUSA training to new
managers. The target is also for each manager to have at least one
SUSA discussion every week.

A second major initiative to improve safety performance is a safety
process review of all of our water and waste water sites. A survey is
being carried out at each site, with a target completion date of April
2008. Each survey generates an action plan, with some improvements
being made immediately and larger improvements being incorporated
into our capital investment plan.

As well as completing the safety process review, our plans for 2007/08
include setting up a new technical operational function. This team will
independently assess the quality of our operations against technical and
safety best practice. The objective is to bring continuous improvement
to our technical and operational activities and reporting.

The engagement and skills of our workforce are vital ingredients in
making us a leader in our industry. We also need to benchmark that
engagement rather than simply talking about it in abstract terms. 
We have therefore introduced a KPI on employee motivation. Previously,
we used to run an annual employee survey; we have now moved to 
a quarterly survey of 500 randomly selected employees, as well as 
the annual survey of all staff. This gives us an ongoing measure of 
staff morale and motivation, which we can also benchmark against
other organisations. 

Outlook
In the first two years of the AMP4 contract, we have made good
progress on the targets set by Ofwat. Maintaining this progress will
govern our activities for 2007/08 and beyond. In order to meet our
efficiency targets, we will continue to control operating costs, make
process improvements, and manage our capital programme. We will
also continue our work to improve leakage and customer service
performance.

Our ability to achieve significant operational improvements in 2007/08
and to achieve our AMP4 targets will be boosted by the introduction 
of our 20 KPIs. They give us clear year by year targets, as well as
establishing robust action and improvement plans for achieving them.
This will assist both internal and external scrutiny of our activities and
deliver our strategy of focus on water.

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Severn Trent 15

 
Performance review

Performance

Turnover
Profit*

2007
£m

288.9
19.7

2006
£m

299.8
17.1

*Before interest, tax and exceptional items (see note 5)

After adjusting for the disposal of the
Pipeline Services business and the impact
of exchange rate fluctuations, turnover in
Water Technologies and Services was
£292.6 million in 2006/07, up 2.4% on
2005/06 (see below). Turnover in the US
businesses was up by 4% above 2005/06,
while turnover originating from business
units outside the US was essentially even
with last year.

Profit before interest, tax and exceptional
items was £19.7 million, an increase of
15.2%. This was mainly achieved through
greater operating efficiency.

Turnover
Pipeline Services

Exchange rate impact

2007
£m

2006
£m

288.9
(5.1)

299.8
(14.0)

283.8
8.8

285.8
–

292.6

285.8

Growth

2.4%

Health and safety RIDDOR incidents

2006/07

13

2005/06

29

16 Severn Trent Annual Report and Accounts 2007

Len Graziano
President and 
Chief Executive Officer
Water Technologies and
Services

Severn Trent’s Water Technology and Services business is a leading
global supplier of water and waste water treatment solutions. It comprises
three main groups: Water Purification, Operating Services and Analytical
Services. The first two groups are marketed as Severn Trent Services,
while Analytical Services takes in the UK Laboratories business.

We operate at the forefront of new water technology. We are leaders in
our chosen markets of disinfection, filtration, arsenic removal, and in the
UK environmental testing services. We are also a leading provider of
contract operating services for water and waste water plants.

Strategy
Our growth strategy is to focus on our core strengths. Therefore, we
made a number of disposals in the 2006/07 financial year. We sold our
Pipeline Products and Services assets to ADS LLC. At year end we sold
our Aztec instrumentation product line to ABB Limited. We also sold our
stake in Aquafin NV to the Flemish government for £29.6 million.

These disposals leave us free to concentrate on our core strengths and
on higher margin, higher growth areas. We have a twofold strategy for
achieving organic growth in these areas. First, we are expanding our
existing technologies into new geographical markets and secondly, we
are taking new technologies into our existing markets.

In order to achieve the first of these, we are extending our global sales
and distribution network outside the US. This emphasis is reflected in
our new order volume for Water Purification products increasing slightly
above 13% year over year in 2006/07. As regards new technologies, we
acquired a proprietary ultraviolet (UV) technology, Quay Technologies in
May 2007. This will enhance our position in the growing global water
and waste water disinfection treatment market.

The other aspect of our strategy for delivering good returns to
shareholders remains unchanged from previous years. That is, we
continue to focus on cost control, operational efficiency and safety
improvements. We believe the connections between these three aspects
are extremely strong, health and safety improvements go hand in hand
with greater operational efficiency, which itself goes hand in hand with
cost control.

We are therefore pleased to report a much improved health and safety
performance in 2006/07. The number of RIDDOR incidents was down
by over 55% on 2005/06.

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Water Purification
The Water Purification division’s turnover rose by 4.5% to £106 million
and profit before interest and tax increased by 39% on the previous year.

Within this division, Metering Services was a very positive story. In the
UK, demand for domestic water meters is increasing, leading to good
growth in our figures for meter installations and meter supply.

The Water Purification division is product oriented and new technology
is therefore important. Metering Services leads the industry in solid
state electronic metering of domestic premises. We further developed
our position in 2006 with the design and launch of a new concentric
SmartMeter, which is suitable for outdoor installation (our existing
meters were primarily for indoor use). The new meter also has the
capability to help leak detection, clearly an important part of the UK
strategy for water management.

In early 2007 our SM150 and SM250 SmartMeters were the first
domestic electronic powered water meters to be approved under the
new European Union Measuring Instruments Directive (MID). This will
open up the whole European Market to our products for the first time.

The arsenic removal market continues to grow in the US and we have
two strong product offerings: Bayoxide® E33 is a proprietary granular
ferric oxide medium and Bayoxide® E33P is a proprietary pelletized
ferric oxide medium developed by LANXESS for use in Severn Trent
Services SORB 33® and SORB 33® APU arsenic removal systems.
Bayoxide® has been permitted for use by environmental agencies in 
24 states in the US, more than any other arsenic removal technology. 

Outside the US, we continued to win new contracts in the Middle East,
including supplying on site sodium hypochlorite generation systems to
the Abu Dhabi Water and Electricity Authority (ADWEA) and a large
electrochlorination contract in Qatar. We also won a deep bed filtration
contract with a municipality in China and a contract in the UK to supply
Southern Water with filtration equipment for four new waste water
treatment facilities.

Operating Services
This division comprises our Contract Operations business, which 
carries out operating and maintenance contracts in the US, and our
International group, which provides operating management and
consultancy services in Europe and the developing world. These
services include the Coast to Coast Water (C2C) joint venture. This 25
year, £1 billion Private Finance Initiative contract with the UK Ministry of
Defence started in March 2005 and serves some 1,500 sites throughout
the country.

At the start of the year, the Contract Operations market in the US was
relatively soft. However, demand picked up, driven by municipalities’
and governments’ need to comply with regulation and to improve the
performance of water and waste water plants. 

Turnover in Operating Services for the year was up 1% to £146 million
and profit before interest and tax improved 4%.

In terms of contract wins, a highlight was the renewal of our US$72
million contract with the Florida Governmental Utility Authority for five
years. Under the revised contract, we will operate and maintain four
water and wastewater systems for five years, with an additional five year
extension option.

Analytical Services
Year over year, Severn Trent Laboratories UK’s (STL) turnover was 
£32.5 million, up 1%. As a result of the organisation’s continued cost
efficiency programmes, profit was up 15% on the previous year.

During the financial year, STL was successfully awarded new contracts
with both Welsh Water and Severn Trent Water for five and three years
respectively. In June it won a contract to sample and monitor endocrine
disrupting compounds for the National Environment Agency
Demonstration Programme. This is being conducted in England 
and Wales in conjunction with the UK Government and the Water
Industry. STL also saw continued success in the waste water, waste 
and land markets and growth in our applied research and
radiochemistry capabilities.

Outlook
Looking ahead, we believe the market outlook for us is generally positive. 

There are opportunities in our target Water Purification markets for
electro chlorination, on site sodium hypochlorite generation, arsenic
removal, and tertiary treatment services. In particular there are good
opportunities for us to take our existing technology into new
geographical areas. We will continue to focus on selected countries in
the Middle East and in 2007/08 we plan to open a direct sales and
service office in the United Arab Emirates. 

We will also target growth in Asia and Europe. Developments like the 
EU MID approval for our SmartMeter products will create growth
opportunities in 2007/08 and beyond.

There are good commercial opportunities ahead in ballast water
treatment, driven by new International Maritime Organisation
regulations. Severn Trent De Nora’s Balpure system for treating ballast
water has a patent pending in the US and was the first commercial
system to be selected for testing by the US Coast Guard and the US
Environmental Protection Agency. 

In the Operating Services business, we plan to achieve growth through
geographical expansion, both in the US and internationally, especially 
in Europe and particularly in the UK non regulated water sector and 
in Italy.

In Analytical Services, our twin focus will be on utilities and on the
commercial sector. The utilities sector remains important to us, but we
believe there are higher growth opportunities in the commercial sector.
Our existing analytical expertise and reputation in the utilities sector are
directly relevant to those commercial opportunities. So we are well
equipped to grow that side of the business.

In all three areas, we will maintain our cost control and 
efficiency programmes. 

Severn Trent 17

 
Our corporate responsibilities

Severn Trent Plc’s decision to focus on water also shifted the focus of
our corporate responsibility (CR) strategy in 2006/07. Our new strategy
on CR is to support the company’s drive for excellence by achieving the
highest standards on a range of CR subject areas.

Those subjects include: health and safety; climate change; the local
environment; engagement with local communities; business ethics;
diversity; and investing in people. Further details of our CR strategy,
values and action plans are set out on the Severn Trent website
(www.severntrent.com). 

Indicators presented in this CR section have been independently
verified by the external consultants Acona as part of our CR 
verification programme.

Putting CR at the heart of the business
To be effective, a company’s CR strategy must be fully integrated with
its core business planning. The strategic and organisational change that
took place within Severn Trent in 2006/07 has reinforced this. 

As we describe elsewhere in this Annual Report, Severn Trent Water has
adopted 20 KPIs by which it will measure performance and set targets.
Many of these indicators link directly to the company’s CR strategy 
for example, the KPIs on health and safety, leakage, net energy use,
pollution incidents and employee motivation. This ensures that CR is at
the very core of Severn Trent Water’s activities. Additional CR objectives
have been set to ensure focus across all other elements of our CR
strategy. Water Technologies and Services has adopted quarterly CR
KPIs in the areas of health and safety, climate change, the supply chain
and business ethics focusing on its core business.

In addition, the company’s Corporate Responsibility Committee, which
now meets bimonthly, has introduced a more structured approach to
reviewing all areas of our CR performance through the new KPI’s and
objectives.

As several of our core CR issues now appear in the company’s new
KPIs, our progress on them in 2006/07 has already been described
earlier in this report, in the Performance Review. Below we look at other
CR subject areas that have been important to Severn Trent’s activities
and focus in 2006/07.

Environment
We welcome that climate change has risen up the political and public
agenda in 2006/07. Severn Trent Water has been engaged in planning
for a changing climate for a number of years. We have built a leading
reputation in this area with key stakeholders such as the Carbon Trust.
In 2005, we published the Carbon Management report supported by
the Carbon Trust. This year we have worked on updating this to take
into account the changes within the business.

Our work on climate change focuses on two main aspects: mitigating
our impact on climate change; and adapting to it. In turn, mitigation has
two main aspects: energy efficiency initiatives; and in-house renewable
energy production, primarily biogas CHP. The effects of our work in both
these areas are reflected in our KPI on net energy use.

Our work on climate change adaptation involves trying to assess 
how climate change might impact Severn Trent Water’s operations and
strategic development. Water supply and sewer flooding are two areas
of particular importance. 

Key greenhouse gas emissions – Severn Trent Water

Electricity use

Electricity use

353

364

-66

-67

Offset by energy generation

Offset by energy generation

-100
thousand tonnes CO2e

0

2006/07

2005/06

100

200

300

400

Our Water Resources Plan, sets out our water resources investment
programme until 2010 and presents a 25 year development plan to
2030. Whilst we have committed to delivering a 17 Ml/d reduction in
leakage over the AMP4 period, our analysis to 2030 shows there is a
potential need for new strategic water resource developments and
further leakage reductions to counter the effects of climate change on
the supply/demand balance for water. We therefore aim to carry out
work during AMP4 and AMP5 to understand better the climate change
impacts and to plan longer term feasibility studies that will ensure water
supply to our customers at least cost to them, whilst still considering
the longer term social and environmental impact of future increased
water abstraction. A key part of this process will be to continue to
reduce demand and promote water efficiency.

Workplace
Over the past two years we have written much about our work to
strengthen our internal business culture and ethics. This work continued
in 2006/07 making Severn Trent a more open and transparent culture,
where there are no barriers to evaluating performance, whether good 
or bad.

By the end of March 2007, over 550 Severn Trent Water senior and
middle managers had attended a training workshop on ethical decision
making. We designed this programme with the help of the Institute of
Business Ethics. It gives managers a set of principles and tools to deal
with ethical challenges in their day to day work. The next phase is to
extend the training across the organisation, to reach all employees.

Water Technologies and Services has also implemented a business
ethics training program. Employees worldwide attended ‘Ethical
Behaviour at Work’ training which included the Code of Conduct,
Business Ethics and Whistleblowing. US staff were in addition 
involved in ‘Fair Treatment’ training focusing on maintaining an
appropriate workplace.

Another mechanism for improving our business is strengthening the
training we give to new managers. In Severn Trent Water we are now
taking a more individual approach to new manager development and 
in addition to an induction ‘Stepping Into Management’, there are a
variety of modules for managers new to their role.

18 Severn Trent Annual Report and Accounts 2007

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Our employees
Our most important obligation to our employees is to ensure their
safety and this is covered in the KPIs. We also have other obligations to
our workforce. They include: promoting diversity, investing in training,
promoting work life balance; and enabling participation in our
employee share ownership schemes.

Severn Trent Water launched an important development scheme in
2006/07. Developing Talent is a structured and inclusive two year
development programme for people with high potential in the early
stages of their career. Unlike its predecessor, the old graduate scheme,
our new programme is now open to current employees, graduates and
non graduates as well as externally recruited graduates.

We extended the 2006 apprenticeship recruitment campaign and 
saw 1,000 applications for 40 roles. The apprentices chosen joined 
49 other trainees in distribution and sewerage who began their
development programmes earlier in the year. Some of them will 
be the first in the UK to earn qualifications under the proposed 
Water Apprenticeship Framework.

In Water Technologies and Services a training program has been
specially designed to identify ‘tomorrow’s technical experts’. Successful
applicants receive a personal development plan and time to develop
technical capabilities. 

A diverse workforce is important to the success of the company and we
promote this in our working practices. There is always scope to improve
our diversity performance and our measures to do this include:
monitoring diversity profiles; targeted recruitment initiatives; diversity
awareness training; and benchmarking our policies and practices
against best practice organisations. Water Technologies and Services
programs such as Affirmitive Action in North America ensure that
managers have a diverse applicant pool.

Severn Trent Water has positive working relationships with recognised
trade unions. Regular meetings with trade unions provide opportunities
for ongoing dialogue and enhancement of their understanding of the
issues facing our business. 

Marketplace
Severn Trent Water has been working to develop its supply chain
assessment processes in 2005/06 and 2006/07. Significant
contractors/suppliers have been required for some years to provide
information on their health and safety performance and their
environmental qualifications and performance. In 2006 we recognised 
a need to build on that. Therefore, in 2006/07 Severn Trent Water
began developing a new standardised risk based approach to supply
chain assessment, focusing not just on health and safety and
environment, but also on human rights, bribery and corruption. We have
been working with Nottingham Trent University in the development of a
Supply Chain Diploma in Management Studies a first in the Utility
sector. The course participants represent all areas of the supply chain,
both internal and external.

Group health and safety

24% improvement in RIDDOR*
incident rate

2006/07
2005/06

Per
1,000 
employees

7.1
9.3

*RIDDOR – Reportable Injuries, Diseases and Dangerous*Occurrences Regulations

Community
Severn Trent Water’s relationship with the regional community is
another facet of our CR strategy. Our engagement with the community
takes several forms: community investment, community liaison; and
educational initiatives.

Our community investment programme focuses on three areas: 
the natural environment, education; and health and well being. We
continued our work with nine partner charities that operate at a local
and international level.

We also made a substantial grant to the Severn Trent Trust Fund, as in
previous years. This independent charity was established in 1997 to
help customers in genuine financial difficulty apply for help with paying
water and other utility bills. The trust fund helps customers to become
good payers. Our annual funding of the trust is £3.6 million per year. 

Our education programme aims to raise awareness of the importance 
of water and water efficiency. We have continued two main initiatives:
our educational centres and BeSmart, an education programme 
which teaches school children about water efficiency. In 2006/07 
over 25,000 children visited our educational centres, while 46 schools
took part in BeSmart.

Independent research into the two initiatives, commissioned in
2006/07, shows that both are successful in promoting the health
aspects of drinking water and the importance of water efficiency. 
‘It is clear that children that have direct experience of a Severn Trent
Water education initiative are more engaged, active and vocal about
their water behaviours,’ concluded the researchers.

During the year, the BeSmart programme won a West Midlands
Business in the Community Big Tick award for investing in young
people. It also won a Utility Week award for best community initiative.

Severn Trent 19

 
Financial review

Michael McKeon
Group Finance
Director

Financial highlights

Turnover* (£m)
Profit* before interest, tax and exceptionals (£m)
Profit* before interest and tax (£m)
Profit* before tax, exceptionals and IAS 39 (£m)
Profit* before tax (£m)
Earnings* per share before exceptionals, IAS 39 and deferred tax (p)
Earnings* per share (p)
Final dividend (p)
Interim dividend (p)
Total dividend for the year (p)
Total rebased dividend 

*From continuing operations

2007

2006

% change

1,480.2
405.3
430.0
252.0
325.5
82.4
106.1
38.68
22.77
61.45
61.45

1,455.3
393.0
377.3
230.2
177.8
71.4
52.9
31.97
19.16
51.13
57.00

1.7
3.1
14.0
9.5
83.1
15.4
100.6
21.0
18.8
20.2
7.8

Group results 
Group turnover from continuing operations was £1,480.2 million
(£1,455.3 million), an increase of 1.7% over last year. The growth in
turnover was mainly due to the price increases in Severn Trent Water
and organic growth in the Water Purification business partially offset by
the disposal of a small business (Pipeline Services) and a reduction 
in activity in the other businesses.

Profit before interest, tax and exceptional items was up by 3.1% on the
previous year to £413.0 million. Beyond the increase in turnover a
number of factors affected profit before interest, tax and exceptional
items, principally: an increase in energy costs of £24 million, other
increases, net of efficiencies, in our cost base of £17.4 million, increase
in infrastructure renewals expenditure of £3.6 million and an increase in
depreciation charges of £10.1 million reflecting the growing asset base.

Group profit from continuing operations before interest, tax and
exceptional items was up 3.1% to £405.3 million (£393 million).
Beyond the net increase in turnover, the factors affecting profit before
interest and tax were cost increases in Water and Sewerage partially
offset by margin growth in Water Technologies and Services. There was 
a net exceptional gain of £24.7 million (exceptional charge of £15.7
million) – see below. Group profit from continuing operations before
interest and tax was £430.0 million (£377.3 million).

Water and Sewerage
Turnover in Water and Sewerage increased by 5.8% in 2006/07 to
£1,218.1 million. Sales prices increased by 6.58% (including inflation)
from 1 April 2006. The price rise represented the 7.23% increase
allowed by Ofwat, less a 0.65% voluntary abatement previously
announced in 2005/06.

Financial highlights
During the financial year, Severn Trent Water invested £502 million in
fixed assets and maintaining its infrastructure network. Included in this
total was net infrastructure maintenance expenditure of £98.0 million.

Adjusting for minor timing differences and modifications to the AMP4
capital programme (notified to Ofwat through the change control
process) we are on track to deliver this programme over the AMP4
period. We continue to be in line to achieve around 6% efficiencies
compared with Ofwat’s Final Determination for AMP4. 

20 Severn Trent Annual Report and Accounts 2007

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Water Technologies and Services
Turnover in Water Technologies and Services was £288.9 million in
2006/07, down 3.6% on 2005/06. As set out in the table below,
adjusting for the effect of the sale of a small business (Pipeline Services)
and removing the impact of changing exchange rates, turnover rose by
2.4% to £292.6 million. On the same basis, turnover in the US was up 
by 4%. Turnover in the UK and rest of the world was up by around 3.1%
through continued organic growth. Around 43% of Water Technologies
and Services’ turnover arose from customers in the USA.

Earnings per share
Basic earnings per share from continuing and discontinued operations
were 114.7 pence (95.9 pence). Adjusted basic earnings per share
(before exceptional items, IAS 39 fair value adjustments and deferred
tax) were 82.4 pence (71.4 pence), an increase of 15.4%.

Exceptional items
There was a net exceptional gain, on continuing operations, in the year 
to 31 March 2007 of £24.7 million (exceptional charge of £15.7 million)
which comprised:

Turnover
Pipeline Services

Exchange rate impact

31 March
2007
£m

31 March
2006
£m

288.9
(5.1)

283.8
8.8

292.6

299.8
(14.0)

285.8
–

285.8

Water Technologies and Services’ profit before interest, tax and
exceptional items increased by 15.2% to £19.7 million. The
improvement mainly arises from improved margins across all principal
businesses. The impact of changing exchange rates was immaterial.

Corporate and Other
Other Businesses’ turnover was down 82.6% to £10.3 million. Corporate
and Other incurred a loss before interest tax and exceptional items of
£26.3 million (loss of £25.7 million).

Interest and tax
After net interest charges of £153.8 million (£163.9 million) and share 
of results of associates and joint ventures of £0.5 million (£1.1 million),
group profit from continuing operations before tax, exceptional items
and IAS 39 fair value adjustments increased by 9.5% to £252.0 million
(£230.2 million). Group profit from continuing operations before tax was
£325.5 million (£177.8 million).

The total tax charge for the year was £76.9 million (£54.2 million) of
which current tax represented £58.5 million (£61.5 million) and deferred
tax £18.4 million (credit of £7.3 million). Profit for the period from
continuing operations was £248.6 million (£123.6 million).

The effective rate of current tax on continuing businesses, excluding
prior year charges and exceptional items, calculated on profit before tax,
exceptional items and IAS 39 fair value adjustments was 27% (28.7%).
The decrease in effective rate is a result of a lower level of disallowable
expenditure. Going forward we expect the effective current tax rate for
2007/08 to be in the range of 25% to 28%.

Discontinued operations
Discontinued operations generated a profit before tax and exceptional
items of £59.6 million (£88.2 million). After tax charges of £15.2 million
(credit of £11.2 million) and net exceptional charges of £24.4 million
(£nil), net profit attributable to discontinued operations was 
£20 million (£99.4 million).

> a charge of £14.9 million in Severn Trent Water arising from a

programme to restructure and realign the business (£11.9 million
write off of decommissioned assets and £3.0 million restructuring
costs),

> demerger and related costs of £16.7 million (including £7.8 million

arising from the settlement of pension obligations); and

> profit on disposal of property and businesses of £56.3 million,

comprising:

–

–

–

profit of £36.2 million arising from the disposal of properties 
in Severn Trent Water;

profit on disposal of Aquafin NV of £14.7 million; and

profit of £5.4 million from the disposal of Severn Trent
Property and other property assets in Severn Trent Plc.

There were net exceptional charges of £24.4 million (£nil) on
discontinued operations, which comprised:

> profit on disposal of Biffa Belgium of £9.5 million,

> a charge of £31.5 million arising from the impairment of goodwill

relating to US Laboratories; and

> loss on disposal of US Laboratories of £2.4 million

Capital structure and dividend policy
During the year the group reviewed its capital structure and its dividend
policy in the light of the transformation of its business structure and the
focus on water strategy. The greater longer term clarity provided by this
strategy enabled the group to declare its intention to raise gearing, as
defined by net debt to regulated capital value (net debt/RCV), to 60%.
Leading directly from this decision, a special dividend of £575 million
was paid on 20 October 2006. The tighter focus of this new strategy also
allowed the group to declare a new dividend policy to raise dividends by
3% above RPI inflation through to the end of the current AMP period –
31 March 2010.

Severn Trent 21

 
Financial review continued

Cash flow

Continuing Discontinued
£m

£m

2007
£m

2006
£m

Cash generated
from operations
Net capital expenditure
Net interest paid
Tax paid
Other cash flows

486.5
(317.7)
(157.8)
(29.6)
0.8

(17.8)
Free cash flow
Dividends
(739.5)
Acquisitions and disposals 138.0
10.0
Financing

87.5
(33.8)
1.4
(6.4)
0.4

49.1
–
–
–

574.0 
(351.5)
(156.4)
(36.0)
1.2 

31.3 
(739.5)
138.0 
10.0 

758.9 
(395.9)
(180.1)
(68.3)
(0.2)

114.4 
(234.3)
1.3
11.6 

Change in net debt 
from cash flows

(609.3)

49.1

(560.2)

(107.0)

Operating activities generated a net cash inflow of £574.0 million
(£758.9 million). Movements in working capital along with the demerger
of Biffa Plc on 9 October 2006, sale of Biffa Belgium, the US
Laboratories and the Property businesses have resulted in lower group
operating cash flows compared with the previous year. Capital
expenditure net of grants and proceeds from asset sales (principally
surplus properties) £62.2 million (£8.4 million) was £351.5million
(£395.9 million). Net interest paid decreased to £156.4 million (£180.1
million) due to the timing of interest payments on finance leases. Tax
payments also fell compared with the prior year to £36.0 million (£68.3
million) due to refunds received relating to tax paid in prior years.
Dividends paid, including the special dividend of £575 million,
amounted to £739.5 million (£234.3 million). After the receipt of £10.0
million from share options exercised (£11.6 million) and other cash
inflows of £1.2 million (outflow of £0.2 million) net debt increased by
£560.2 million (£107.0 million) from cash flows.

Net debt at 31 March 2006 was £3,127.6 million (£2,961.1 million). 
Year end balance sheet gearing is 73.3% (60.9%). Net debt, expressed
as a percentage of 31 March 2007 Regulatory Capital Value (“RCV”) was
56.4% (56.8%), based on RCV at 31 March 2007 of £5,546 million
(£5,209 million). The group’s net interest charge, excluding IAS 39 fair
value adjustments, was covered 4.2 times (3.8 times) by profit before
interest, tax, depreciation and exceptional items, and 2.6 times (2.3
times) by profit before interest tax and exceptionals.

Pensions
The group has four defined benefit pension schemes, of which the Severn
Trent Pension Scheme (STPS) is by far the largest. Formal actuarial
valuations were undertaken for the STPS and another scheme, the
Severn Trent Senior Staff Pension Scheme (SSPS), as at 31 March 2004.

On the demerger of Biffa Plc the company entered into an agreement
with that company and the trustees of the STPS, the SSPS and the UK
Waste Pension Scheme (UKWPS) whereby the assets and liabilities
relating to Biffa Plc employees in the STPS and the SSPS would be
transferred to the UKWPS with effect from 31 March 2007. The net
deficit relating to Biffa employees at the demerger date was £39 million.
This has been included in the net assets that formed the dividend in
specie on demerger. The reduction in the deficit between the demerger
date and 31 March 2007 has been treated as an exceptional loss on
settlement of £7.8 million.

On an IAS19 basis, the estimated net position (before deferred tax) of all
of the group’s defined benefit pension schemes was a deficit of £135.1
million as at 31 March 2007. This compares with a deficit of £221.9
million as at 31 March 2006. The movement in the deficit arose as a
result of:

> Additional contributions made during the year of £83 million;

> Net deficit of £31.2 million transferred to Biffa Plc as a result of the

demerger;

> Strengthening the actuarial assumption relating to longevity, which
increased the deficit by £60 million, offset by an increase in the
discount rate which reduced the actuarial value of liabilities by £61.7
million;

> Service cost in excess of normal contributions of £27.2 million

resulting from part of the 2006/07 normal contributions having 
been prepaid in 2005/06; and

> Other actuarial losses of £1.9 million

Total cash contributions to the schemes in the year were £97.4 million
(£105.2 million).

The key actuarial assumptions utilised in the valuation were:

Discount rate
Inflation
Expected return on equities
Life expectancy at age 65
For current pensioners
Men (years)
Women (years)

For future pensioners currently aged 45

Men (years)
Women (years)

2007

5.4%
3.0%
8.25%

19.2
22.1

19.9
23.0

2006

4.9%
2.7%
8.0%

18.3
21.0

18.9
21.8

22 Severn Trent Annual Report and Accounts 2007

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On an IAS19 basis, the funding level has improved from around 86% 
at 31 March 2006 to around 91% at 31 March 2007.

As at 31 March 2007 the group’s defined benefit pension schemes had
total assets of approximately £1,365 million, (£1,403 million).

Further details of the group's pension position are contained in note 28
to the accounts.

Dividends
An interim dividend of 22.77p (19.16p) was paid on 24 January 2007.
The board is recommending the payment of a final dividend of 38.68p
(31.97p) to make a total dividend, excluding the special dividend, of
61.45p (51.13p). Following the demerger of Biffa Plc and the share
consolidation that followed, the dividend for the year ended 31 March
2006 was rebased to 57p per share. The total dividend proposed for the
year ended 31 March 2007 represents growth of 7.8% on the rebased
dividend, in line with the board’s previously announced policy.

Treasury management 
The group’s treasury affairs are managed centrally and in accordance
with its Treasury Procedures Manual and Policy Statement. The treasury
operation’s primary role is to manage liquidity, funding, investment and
the group’s financial risk, including risk from volatility in interest and (to
a lesser extent) currency rates and counterparty credit risk. Its activities
are subject to a set of controls commensurate with the magnitude of
the borrowings and investments under its management. The board
determines matters of treasury policy and its approval is required for
certain treasury transactions.

It is the group’s strategy to access a broad range of sources of finance
to obtain both the quantum required and the lowest cost compatible
with the need for continued availability.

The group uses financial derivatives solely for the purposes of managing
risk associated with financing its normal business activities. The group
does not hold or issue derivative financial instruments for financial
trading purposes. The group uses a limited number of currency swaps
and interest rate swaps to redenominate external borrowings into the
currencies and interest rate coupon required for group purposes.

The group’s policy for the management of interest rate risk requires
that no less than 50% of the group’s borrowings should be at fixed
interest rates, or hedged through the use of interest rate swaps or
forward rate agreements. At 31 March 2007, interest rates for some
68% of the group’s net debt of £3,127.6 million were so fixed, at a
weighted average interest rate of 5.7% for a weighted average period of
13.5 years. This policy has been implemented by entering into a
portfolio of long dated interest rate swaps that hedge the group’s
economic exposure to changes in interest rates. However, these swaps
are not designated to particular liabilities and hence do not meet the
criteria for hedge accounting under IAS 39. Consequently the swaps are
revalued at each balance sheet date and the change in fair value is
taken to the income statement as a finance cost. In the year ended 31
March 2007 £52.7 m was credited (£31.5m charged) to net finance
costs in respect of such fair value movements.

The group’s business does not involve significant exposure to foreign
exchange transactions. Cross currency swaps are employed to exchange
foreign currency borrowings for sterling. The group also has
investments in various assets denominated in foreign currencies,
principally the US dollar and the euro. The group’s current policy is to
hedge an element of the currency translation risk associated with
certain foreign currency denominated assets.

The long term credit ratings of Severn Trent Plc and Severn Trent Water
Limited are:

Long term ratings

Moody’s 
Standard & Poor’s

Severn Trent
Water Limited

Severn Trent
Plc 

A2
A

A3 
A–

Further details of the group’s borrowings, investments and financial
instruments are contained in note 20 to the accounts.

Accounting policies and presentation of the financial statements
The Group’s financial statements are prepared in accordance with
International Financial Reporting Standards that have been ratified by
the European Union. There have been no changes in accounting policies
during the year ended 31 March 2007.

Following the demerger of Biffa Plc and the disposal of US Laboratories
the comparative figures have been restated to reclassify these
businesses as discontinued operations. Biffa Belgium, which was also
sold during the year, was already classified as a discontinued operation
in the previous year since it was held for sale at the previous year end.
Severn Trent Property and the former associated company Aquafin NV
do not meet the definition of discontinued operations in IFRS 5 and
hence are included in continuing operations although they too were
sold during the year. 

Exchange rates
Approximately 2% of the group’s profit before interest, tax and
exceptional items and 2% of its operating assets are denominated in US
dollars. The trading results of overseas subsidiaries are translated to
sterling at the average rate of exchange ruling during the year and their
net assets are translated at the closing rate on the balance sheet date.

Supplementary information 
For supplementary information including the group’s preliminary results
presentation, see the Severn Trent website (www.severntrent.com).

Michael McKeon 
Group Finance Director 

Severn Trent 23

 
Board of directors

1

3

2

4

1 Sir John Egan MSc (Econ) BSc (67)*
Sir John Egan joined the board in October 2004 and became Chairman
on 1 January 2005. He is a director of Warwick Castle Park Trust Ltd
and was, until recently, Chairman of Inchcape plc and Harrison
Lovegrove & Co Ltd. Sir John worked in the motor industry until 1990 
at General Motors, Massey Ferguson and British Leyland, rising to
become Chairman and Chief Executive of Jaguar plc. He was Chief
Executive of BAA plc from 1990 to 1999 and Chairman of MEPC from
1998 to 2000. He was also President of the Confederation of British
Industry from 2002 to 2004. Sir John was knighted in the Queen’s
Birthday Honours List in 1986. He is a deputy lieutenant of the 
County of Warwickshire and from September 2007, Chancellor of
Coventry University.

2 Colin Matthews MA CEng MBA (51)
Mr Matthews joined the board in October 2003, becoming Group Chief
Executive on 1 February 2005. He is a non-executive director of Mondi
Ltd and Mondi Plc, currently part of Anglo American Plc. He is a
Chartered Engineer and worked for the (American) General Electric
Company and then for British Airways, first as Director of Engineering,
then as Director of Technical Operations, responsible for all aircraft
maintenance, IT and procurement. Mr Matthews was Group Managing
Director of Transco from 2001 to 2002 and then CEO of Hays Plc from
2002 to 2004.

3 Michael McKeon MA CA (50)
Mr McKeon joined the board on 13 December 2005 as Group Finance
Director. Prior to that, he was Group Finance Director of the buildings
materials group Novar Plc. Mr McKeon worked for Rolls Royce Plc from
1997 to 2000 in various senior roles including Finance Director of the
Aerospace Group. He has extensive international business experience,
having worked overseas for CarnaudMetalbox, Elf Atochem and Price
Waterhouse. Mr McKeon is a Chartered Accountant and a Member of
the Institute of Chartered Accountants of Scotland.

4 Tony Wray BSc(Hons) (45)
Mr Wray joined the board in March 2005. He is Managing Director of
Severn Trent Water Ltd. Prior to that, he was Director of Networks at
Eircom, the Republic of Ireland’s telephone operator. He joined British
Gas in 1983 and held various managerial positions before becoming
Head of Asset Management. In 2000 he moved to Transco, first as
Director of Asset Management, then as National Operations Director,
before being appointed to implement the merger integration of Lattice
(Transco) and National Grid Group into National Grid Transco.

5 John Smith FCCA Hon. FRIBA (49)*
Mr Smith joined the board in November 2003. He is currently Chief
Executive of BBC Worldwide and has held various other senior positions
within the BBC since joining in 1989 including: Finance Director from
1996 to 2006; Director of Finance, Property and Business Affairs from
2000 to 2004; and Chief Operating Officer until 2005. Mr Smith has
held a non-executive directorship with Vickers Plc, was a member 
of the advisory board of Zurich Financial Services UK and was a director
of the Royal Television Society. He also served for three years on the
Accounting Standards Board until November 2004. 

24 Severn Trent Annual Report and Accounts 2007

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5

7

6

8

6 Martin Houston BSc MSc DIC (49)*
Mr Houston joined the board in September 2003. He is Executive 
Vice President and Managing Director of BG Group’s North American,
Caribbean and Global Liquefied Natural Gas business, and a member 
of their Group Executive Committee. He joined BG Group in 1983 and
has held a number of technical and commercial roles with a
predominantly international focus. He is a fellow of the Geological
Society of London.

7 Richard Davey (58)*
Mr Davey joined the board on 1 January 2006. He is non-executive
Chairman of London Capital Holdings Plc and a non-executive director
of Yorkshire Building Society and Amlin Plc. He also served as a non-
executive director of Freeserve Plc from 1999 to 2001 and of Scottish
Widows Fund and Life Assurance Society from 1996 to 2000. The
majority of Mr Davey’s executive career was spent in investment
banking at N M Rothschild & Sons where he served in various roles
including Head of Investment Banking. Prior to that, he worked at
various organisations including Merrill Lynch International Limited and
Exco International Plc.

8 Bernard Bulkin, BS PhD FRSC FRSA FIE (65)*
Dr Bulkin joined the board on 1 January 2006. He is Chairman of AEA
Technology Plc, Chairman of Swedish company Chemrec AB and a non-
executive director of Accelergy Corporation in California. He is also a
Venture Partner at Vantage Point, an international venture capital firm
and a Commissioner on the UK Sustainable Development Commission.
In 2003 he retired as Chief Scientist at BP Plc, where he had worked for
eighteen years.

*Non-executive director

Membership of board and
management committees is as
detailed below:

Board committees
Audit Committee
J B Smith (Chairman)
B Bulkin
R H Davey
F B Smith (Secretary)

Remuneration Committee
R H Davey (Chairman)
B Bulkin
Sir John Egan
M J Houston
F B Smith (Secretary)

Nominations Committee
Sir John Egan (Chairman) 
B Bulkin (c)
R H Davey (c)
M J Houston
C S Matthews
J B Smith (c)
F B Smith (Secretary)

(c) = Core Members

Corporate Responsibility
Committee
B Bulkin (Chairman)
Sir John Egan
C S Matthews 
F B Smith (Secretary)

Management committee
Executive Committee
C S Matthews (Chairman)
A Ballance
C J Ford
P J Gavan
L F Graziano
M J Kane
R S Martin
M J E McKeon
J C O’Sullivan
A J Richmond
S C Smedley
A P Smith
F B Smith
J van den Arend Schmidt
A P Wray

Senior independent 
non-executive director
R H Davey

Group General Counsel 
and Company Secretary
F B Smith

Severn Trent 25

Directors’ report

The directors present their report, together with the audited financial
statements of the group for the year ended 31 March 2007.

Principal activity 
The principal activity of the group is the supply of water and the
treatment and disposal of sewage.

Details of the principal joint venture, associated and subsidiary
undertakings of the group at 31 March 2007 appear in notes 18, 19
and 41 to the financial statements on pages 67, 68 and 88.

Business review
The Chairman’s statement, the Group Chief Executive’s review and the
report and performance reviews for the group’s main businesses on
pages 4 to 23 provide detailed information relating to the group and its
strategy, the operation of its businesses, and the results and financial
position for the year ended 31 March 2007.

Details of the principal risks and uncertainties facing the group are set
out in the corporate governance report on page 33.

All of the above are incorporated by reference in (and shall be deemed
to form part of) this report.

Research and development
Expenditure on research and development including amounts
capitalised as tangible fixed assets related to research and development,
amounted to £4.2 million (2006: £5.4 million).

Treasury management
The disclosures required under the EU Fair Value Directive in relation to
the use of financial instruments by the company are set out in note 20
to the accounts on page 69.

Post balance sheet events
Details of post balance sheet events are set out in note 39 to the group
financial statements. 

Dividends 
An interim dividend of 22.77 pence per ordinary share was paid on 24
January 2007. The directors recommend a final dividend of 38.68
pence per ordinary share to be paid on 3 August 2007 to shareholders
on the register on 29 June 2007. This would bring the total dividend for
2006/07, excluding the special dividend paid on 20 October 2006, to
61.45 pence per ordinary share (2006: 51.13p). The payment of the
final dividend is subject to shareholder approval at the Annual 
General Meeting. 

Directors and their interests
Details of changes to the board during the year and of the directors
offering themselves for reappointment at the Annual General Meeting
are set out on pages 29 and 31 respectively.

Details of directors’ service contracts are set out in the directors’
remuneration report on page 40.

The interests of the directors in the shares of the company are shown
on pages 42 and 43.

Biographies of the directors currently serving on the board are set out
on pages 24 and 25. 

Directors’ responsibilities statement
The directors are responsible for preparing the financial statements. The
directors have chosen to prepare the financial statements for the group
in accordance with International Financial Reporting Standards (IFRS)
and for the company in accordance with United Kingdom Generally
Accepted Accounting Practice (UK GAAP). 

In the case of IFRS financial statements, International Accounting
Standard 1 requires that the financial statements present fairly for each
financial year the company’s financial position, financial performance
and cash flows. Directors are also required to: properly select and apply
accounting policies; present information, including accounting policies,
in a manner that provides relevant, reliable, comparable and
understandable information; provide additional disclosures when
compliance with the specific requirements in IFRS is insufficient to
enable users to understand the impact of particular transactions, other
events and conditions on the entity’s performance; and prepare the
financial statements on a going concern basis unless, having assessed
the ability of the company to continue as a going concern, management
either intends to liquidate the entity or to cease trading, or have no
realistic alternative but to do so.

In the case of UK GAAP financial statements, the directors are required
to prepare financial statements for each financial year that give a true
and fair view of the state of affairs of the company and of the profit or
loss of the company for that period. In preparing the financial
statements, the directors are required to: select suitable accounting
policies and then apply them consistently; make judgements and
estimates that are reasonable and prudent; state whether applicable
accounting standards have been followed, subject to any material
departures disclosed and explained in the financial statements; and
prepare the financial statements on a going concern basis unless it is
inappropriate to presume that the group will continue in business.

The directors are responsible for ensuring that the company keeps
proper accounting records which disclose, with reasonable accuracy, at
any time, the financial position of the company. The directors are also
responsible for: safeguarding the assets of the company and the group;
taking reasonable steps for the prevention and detection of fraud and
other irregularities; the preparation of the report of the directors and
the directors’ remuneration report which comply with the requirements
of the Companies Act 1985; and ensuring the maintenance and
integrity of the corporate and financial information included on the
company’s website. Legislation in the United Kingdom governing the
preparation and dissemination of financial statements may differ from
legislation in other jurisdictions.

Directors indemnities
The company’s Articles of Association provide that directors of the
company shall be indemnified by the company against any costs
incurred by them in carrying out their duties including defending any
proceedings brought against them arising out of their positions as
directors in which they are acquitted or judgement is given in their
favour or relief from any liability is granted to them by the court.

26 Severn Trent Annual Report and Accounts 2007

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Supplier payment policy 
Individual operating companies within the group are responsible for
establishing appropriate policies with regard to the payment of their
suppliers. The companies agree terms and conditions under which
business transactions with suppliers are conducted. It is group policy
that provided a supplier is complying with the relevant terms and
conditions, including the prompt and complete submission of all
specified documentation, payment will be made in accordance with
agreed terms. It is also group policy to ensure that suppliers know 
the terms on which payment will take place when business is agreed.
Details of supplier payment policies can be obtained from the 
individual companies at the addresses shown in note 41 to the 
financial statements on page 88. Trade creditors for the company 
at the year end are estimated as representing 11 days’ purchases 
(2006: nil days’ purchases).

Contributions for political and charitable purposes 
Donations to charitable organisations during the year amounted to
£277,476 (2006: £487,422). The company focuses on the development
of long term partnerships with charities close to its major sites which
reflect the three core aims of promoting the natural environment,
education and building communities. The company is also committed to
supporting WaterAid, the UK’s only major charity dedicated to providing
safe domestic water and sanitation to the world’s poorest people.

The company’s policy is not to make any donations to political parties.
However, the Political Parties Elections and Referendums Act 2000 (the
relevant provisions of which are now contained in Part XA of the
Companies Act 1985) requires certain types of expenditure on political
events to be preapproved by shareholders. At the 2006 Annual General
Meeting, shareholders gave the company authorities to cover such
expenditure until the 2009 Annual General Meeting. Pursuant to those
authorities, during the year ended 31 March 2007 the group incurred
costs of £nil (2006: £6,000).

Substantial shareholdings 
As at 5 June 2007 the company had been notified under the Disclosure
and Transparency Rules of the following major shareholdings:

Barclays plc
Legal & General 
Investment Management Limited 

Number of ordinary
shares of 9717⁄19p each

8,412,304
8,235,812

%

3.61
3.53

Share capital
The company was given authority at its Annual General Meeting in 2006
to make market purchases of ordinary shares up to a maximum number
of 34,909,675 shares. Similar authority will again be sought from
shareholders at this year’s Annual General Meeting. No market
purchases were made by the company during the year ended 31 
March 2007.

Details of movements in share capital are shown in note 30 to the
financial statements on page 80.

Employees 
The average number of employees within the group is shown in note 9
to the financial statements on page 60.

Severn Trent operates a non discriminatory employment policy and full
and fair consideration is given to applications for employment by
disabled persons where they have the appropriate skills and abilities. 
In the event of members of staff becoming disabled every effort is made
to ensure that their employment with the group continues and that
appropriate training adjustments are made. It is the policy of the group
that the training, career development and promotion opportunities 
of disabled persons should, as far as possible, be identical to that of
other employees. 

The group actively encourages employee involvement and consultation
and places emphasis on keeping its employees informed of its activity
and financial performance by way of briefings and publication to staff 
of all relevant information and corporate announcements. The Severn
Trent Sharesave Scheme, an all employee SAYE plan, is offered by the
group on an annual basis and helps to develop employees’ interest in
the company’s performance.

Further details of arrangements relating to employee involvement are
described in the corporate responsibility report on pages 18 to 19.

Auditors
In the case of each of the persons who are directors of the company at
the date when this report was approved:

> so far as each of the directors is aware, there is no relevant audit

information of which the company’s auditors are unaware; and

> each of the directors has taken all the steps that he ought to have
taken as a director to make himself aware of any relevant audit
information and to establish that the company’s auditors are aware
of that information.

Relevant audit information means information needed by the
company’s auditors in connection with preparing their report.

This confirmation is given and should be interpreted in accordance with
the provisions of section 234ZA of the Companies Act 1985.

Deloitte & Touche LLP has indicated its willingness to continue as
auditors, accordingly a resolution to reappoint them will be proposed 
at this year’s Annual General Meeting. 

The reappointment of Deloitte & Touche LLP has been approved by 
the Audit Committee, who will also be responsible for determining 
their audit fee on behalf of the directors.

Accounts of Severn Trent Water Limited 
Regulatory accounts for Severn Trent Water Limited are prepared and
sent to the Water Services Regulatory Authority. A copy of these
accounts will be available from the website of Severn Trent Water
Limited (www.stwater.co.uk) or on written request to the Company
Secretary (at the address given on the back cover). There is no charge
for this publication.

Severn Trent 27

Directors’ report continued

Going concern 
The board has a reasonable expectation that the group and the
company have adequate resources to continue in operational existence
for the foreseeable future. Accordingly the financial statements set 
out on pages 45 to 88 and 90 to 98 have been prepared on the going
concern basis.

Annual General Meeting
The Annual General Meeting of the company will be held at the National
Motorcycle Museum, Coventry Road, Bickenhill, Solihull, West Midlands
B92 0EJ at 11.00am on Tuesday 24 July 2007. The notice convening
the meeting, together with details of the business to be considered and
explanatory notes for each resolution, is distributed separately to
shareholders. It is also available on the company’s website:
www.severntrent.com

By order of the board 

Fiona Smith 
Group General Counsel and Company Secretary
5 June 2007 

28 Severn Trent Annual Report and Accounts 2007

Corporate governance report

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Corporate governance
During the year, and as part of our strategy of focusing on water, all the
current executive and non-executive directors of Severn Trent Plc were
appointed to similar positions on Severn Trent Water Limited. Since
March 2007 the boards of directors of Severn Trent Plc and Severn
Trent Water Limited have been identical.

Severn Trent attaches great significance to the maintenance of good
corporate governance procedures and adherence to best practice
recognising that they play their part in creating a framework which can
provide increased benefits for shareholders.

Compliance statement
This report describes how Severn Trent has applied the principles of
good corporate governance as set out in Section 1 of the Combined
Code on Corporate Governance issued by the Financial Reporting
Council in July 2003 (the “Combined Code”). Apart from the matter
detailed below the company has complied throughout the financial year
ended 31 March 2007 with all of the Combined Code provisions. During
the year, the company decided to take advantage of the relaxations that
will be permitted by the updated version of the Combined Code issued
by the Financial Reporting Council in June 2006 for reporting years
starting on or after 1 November 2006. Accordingly, Sir John Egan was
appointed to the Remuneration Committee on 3 November 2006.

The board 
Board structure
The board consists of a non-executive Chairman, three executive
directors and four non-executive directors. In accordance with the
Combined Code, separate individuals, Sir John Egan and Colin
Matthews, are appointed to the positions of Chairman and Group Chief
Executive respectively. Richard Davey is the senior independent non-
executive director. 

The board has reviewed the status of the non-executive directors and
considers them all to be independent in character and judgement and
within the definition of this term in the Combined Code. The test of
independence is not appropriate in relation to the Chairman.

The Chairman and the non-executive directors contribute external
expertise and experience in areas of importance to the group such as
corporate finance, general finance, corporate strategy, environmental
matters, general management and corporate governance. They also
provide independent challenge and rigour to the board’s deliberations.

Collectively, the board is satisfied it has all of the necessary skills,
experience and qualities to lead the company.

Directors and their interests
The names and biographies of the directors currently serving on the
board are set out on page 24. The following also served as directors
during the year:

> Martin Flower retired from the board as a non-executive director 

on 10 June 2006;

> Marisa Cassoni retired from the board as a non-executive director

on 6 October 2006;

> Martin Bettington retired from the board as an executive director 

on 6 October 2006; and

> Rachel Brydon Jannetta retired from the board as an executive

director on 29 December 2006

The training needs of all directors are kept under review and
appropriate training identified as part of a continuing process.

Details of the directors’ service agreements, emoluments, the interests
of directors and their immediate families in the shares of the company
and in awards or options over such shares granted under the
company’s Long Term Incentive Plans and Sharesave Scheme are
shown in the directors’ remuneration report on pages 34 to 43.

Operation of the board
The board has ultimate responsibility for ensuring that the company is
properly managed and achieves the strategic objectives it sets. It has an
agreed schedule of matters reserved to it, which includes setting long
term strategic and business objectives, overseeing the company’s
internal control systems and ensuring that appropriate resources are 
in place to enable the company to meet its objectives. 

The board meets at least ten times in each calendar year and convenes
additional meetings as and when required. Details of the number of
board and committee meetings and the attendance of the directors at
those meetings are shown on page 31.

The Chairman has prime responsibility for the effective workings of 
the board and agrees the agenda in consultation with the Group Chief
Executive and Company Secretary. Papers, including minutes of board
committees held since the previous board meeting and reports from
each of the executive directors responsible for the group’s operating
businesses or key central functions, are circulated in advance of each
meeting. In addition to the board meetings, the Chairman meets with
the non-executive directors without the executive directors present. 
The non-executive directors, led by the senior independent non-
executive director, also have an annual meeting where there is an
opportunity for them to meet without the Chairman to appraise the
Chairman’s performance.

The Group Chief Executive is responsible for the executive management
of all of the group’s businesses and for implementing board strategy
and policy within approved budgets and timescales. The Group Chief
Executive is supported by the Executive Committee. Membership of the
Executive Committee is shown on page 25 and comprises the executive
directors and senior managers responsible for key central and
operational functions. 

Procedures are in place which allow directors to take independent
professional advice in the course of their duties and all directors have
access to the advice and services of the Company Secretary. Where a
director has a concern over any unresolved business he is entitled to
require the Company Secretary to minute that concern. Should he later
resign over this issue, the Chairman will bring it to the attention of 
the board.

Severn Trent purchases directors and officers’ liability and indemnity
insurance to cover its directors and officers against the costs of
defending themselves in civil proceedings taken against them in that
capacity and in respect of damages resulting from the unsuccessful
defence of any proceedings.

Severn Trent 29

Corporate governance report continued

Board committees
The board has established an effective committee structure to assist in
the discharge of its responsibilities. The terms of reference of the Audit,
Remuneration and Nominations Committees (the “Principal
Committees”) comply with the provisions of the Combined Code and
are available for inspection on the company’s website
(www.severntrent.com) or may be obtained on written request from the
Company Secretary at the address given on the back cover. 

Each of the Principal Committees has reviewed its effectiveness and
terms of reference during the year and any necessary actions have 
been identified and reported to the board.

The membership of all board committees is set out on page 25.

Audit Committee 
The Audit Committee is chaired by John Smith. Its membership
comprises Bernard Bulkin and Richard Davey. Only independent non-
executive directors may serve on the committee. John Smith has been
identified by the board as having recent and relevant financial
experience. 

The committee meets with the group’s external auditors (the “Auditors”)
at least four times a year. By invitation of the committee other
individuals such as the Chairman, Group Chief Executive, Group Finance
Director and Group Director of Internal Audit will normally be in
attendance for all or part of those meetings. The committee and the
Auditors also hold separate meetings without the attendance of
executive management.

In their assessment of the independence of the Auditors, the committee
receives annually in writing details of relationships between the Auditors
and the group, which may bear on the Auditors’ independence and
receives confirmation that they are independent of the group as
required by International Auditing Standard 260. 

The committee annually approves the level of the Auditors’ fees in
respect of the audit of the financial statements of the group and its
subsidiaries at the same time as considering the adequacy of the
Auditors’ proposed audit plan.

A formal policy, which includes fee limits, has been adopted for non
audit services. Any material project work where fees payable to the
Auditors are likely to exceed £100,000 must be approved by the Audit
Committee. Where fees are expected to exceed £500,000 the project
work would normally be the subject of a competitive selection process.
The level of non audit services provided by the Auditors and 
the associated fees are considered annually by the committee, in the
context of the Auditors’ independence, as part of the committee’s
review of the adequacy and objectivity of the audit process. An analysis
of fees payable to the Auditors in respect of audit and non audit
services is provided on page 59.

It is the group’s policy to seek rotation of the Auditors’ principal
engagement partner as a matter of course every five years and of other
key members of the audit team, where deemed appropriate by the
Audit Committee.

The Audit Committee has, throughout the year, monitored the integrity
of the financial statements together with the company’s formal
announcements relating to its financial performance, paying particular
attention to significant reporting judgements contained therein.

The Audit Committee has reviewed risk management and the
effectiveness of the system of internal control during the year ended 
31 March 2007 and has reported to the board on the outcome of 
this review.

The effectiveness of the group’s internal audit function has been
reviewed by the Audit Committee.

The Audit Committee reviews annually the group’s formal whistle
blowing policy that deals with allegations from employees relating to
breaches of the group’s Code of Business Principles and Conduct.

Remuneration Committee 
The Remuneration Committee is chaired by Richard Davey. The other
members of the Committee are Bernard Bulkin, Sir John Egan and
Martin Houston. Only independent, non-executive directors, and the
Chairman, who was considered independent on appointment, may serve
on the committee. Sir John Egan was appointed to the committee on 
3 November 2006. The Group Chief Executive also attends
Remuneration Committee meetings at the invitation of the
Remuneration Committee Chairman. The committee will normally meet
at least four times a year. 

The Remuneration Committee determines, on behalf of the board, the
Severn Trent policy on the remuneration of executive directors and the
Chairman of the board, and is consulted by the Group Chief Executive
regarding remuneration for a number of the group’s senior executives.

Further information on the activities of the Remuneration Committee 
is given in the directors’ remuneration report on pages 34 to 43.

The directors’ remuneration report also describes how the principles of
the Combined Code are applied in respect of remuneration matters and
includes a statement on the company’s policy on directors’ and senior
executives’ remuneration, benefits, share scheme entitlements and
pension arrangements.

A resolution to approve the directors’ remuneration report will be
proposed at the Annual General Meeting.

30 Severn Trent Annual Report and Accounts 2007

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Directors’ interests in contracts
No director had a material interest at any time during the year in any
contract of significance, other than a service contract as shown in the
directors’ remuneration report on page 40, with the company or any 
of its subsidiary undertakings. 

Remuneration
The directors’ remuneration report, which includes a statement on the
company’s policy on directors’ and senior executives’ remuneration, is
set out on pages 34 to 43.

Reappointment
The company’s Articles of Association require all directors to submit
themselves for reappointment at least every three years. This provision
also ensures that, as a minimum, one third of the board of directors,
together with any director appointed since the last Annual General
Meeting, retires each year and, if eligible and so desires, stands for
reappointment at the Annual General Meeting. directors retire on the
basis of their length of service since their last election.

Sir John Egan and Tony Wray are the directors retiring by rotation and
offer themselves for reappointment.

The Nomination Committee has formally reviewed the performance,
contribution and commitment of each of the retiring directors and has
recommended their reappointment to the board.

Performance and effectiveness reviews 
During the year the board, with the help of an outside facilitator, carried
out a formal evaluation of its performance and that of its committees as
well as the individual performance of directors. Each director and the
Company Secretary answered a questionnaire on his/her perception of
the composition, operation and effectiveness of the board and its
committees and on the performance of the Chairmen of the board and
principal committees as well as individual directors. In addition they
were interviewed by the facilitator to explore certain issues in greater
depth and to identify areas requiring improvement. Finally the process
reviewed progress against actions identified in last year’s review. The
conclusion of the evaluation was discussed in detail by the board. 

Nominations Committee 
The Nominations Committee is chaired by Sir John Egan and its
members are the Group Chief Executive and all non-executive directors.
The committee’s core members are Bernard Bulkin, Richard Davey and
John Smith. All other non-executive directors will attend meetings
subject to their availability. Other executive directors, senior
management and external advisors may be invited to attend meetings as
considered appropriate. The Nominations Committee has responsibility
for considering the size, structure and composition of the board of the
company, retirements and appointments of additional and replacement
directors, succession planning and making recommendations so as to
maintain an appropriate balance of skills and experience on the board.
The committee meets at least three times a year. 

No board appointments were made during the year.

Corporate Responsibility Committee 
The Corporate Responsibility Committee is chaired by Bernard Bulkin
and its members are Sir John Egan and Colin Matthews. Other 
executive directors and senior management involved with managing
businesses or formulating policies within the group are regularly invited
to attend committee meetings. The committee’s main responsibility is 
to develop, review and promote policies to further the group’s
environmental values in its business, workplace and community
engagement activities. The committee’s terms of reference may be
viewed on the company’s website (www.severntrent.com). Details of 
the group’s corporate responsibility activities may be found on pages 
18 to 19. 

Meetings
Details of the board and Principal Committees’ meetings attended by
each director during the year are as follows: 

Plc board

Audit Remuneration Nominations

Number of Meetings
Sir John Egan5
M J Bettington1
R S Brydon Jannetta2
B Bulkin6
M L Cassoni3
R H Davey
M C Flower4
M J Houston
C S Matthews
M J E McKeon
J B Smith
A P Wray

13
13
8
9
11
6
11
2
12
13
13
13
13

6
–
–
–
5
3
6
–
–
–
–
6
–

7
2
–
–
3
3
6
2
7
–
–
–
–

5
5
–
–
5
1
5
2
5
–
–
5
–

1 – Resigned 6/10/06
2 – Resigned 29/12/06
3 – Resigned 6/10/06
4 – Resigned 10/6/06
5 – Appointed Remuneration Committee 3/11/06
6 – Appointed Remuneration Committee 3/11/06

Severn Trent 31

Corporate governance report continued

committee. The Internal Audit department provides objective assurance
and advice on risk management and control.

The board confirms that procedures providing an ongoing process for
identifying, evaluating and managing the principal risks faced by the
group, have been in place for the year to 31 March 2007 and up to the
date of the approval of the Annual Report.

Key elements of the group’s processes and procedures are: an
organisation structure with clear lines of accountability; regular,
structured reviews of business risk by senior management; a scheme of
delegated authority; pre-approval of plans, budgets and significant
investments; monthly reporting and monitoring of financial results,
regulatory compliance and other key business measures; and
independent assurance provided by both internal and external auditors.

Work continues to review and improve the system of internal controls
across the group. Any controls weaknesses identified have action plans
to remedy them and those plans are monitored by the Audit Committee
and management team.

Shareholders
Relations with shareholders
The board recognises the importance of representing and promoting
the interests of its shareholders and that it is accountable to
shareholders for the performance and activities of the company.

The annual report and accounts is the principal means of
communicating with shareholders. The company’s website
(www.severntrent.com) contains complete versions of such reports
along with other information relevant to shareholders.

In respect of the company’s Annual General Meeting the board
encourages shareholders to attend and exercise their right to vote. The
notice of meeting and related papers are sent to shareholders at least
20 working days before the meeting. Separate resolutions are proposed
on each substantially separate issue. Details of the proxy votes for and
against each resolution and the number of abstentions are indicated
after the result of the vote on a show of hands.

Shareholders are given the opportunity to meet with the board before
and after the Annual General Meeting. Presentations are made on the
group’s activities and performance prior to the formal business of the
meeting. Shareholders have the opportunity to ask questions of the
board and present their views. The chairmen of the Audit, Remuneration
and Nominations Committees, together with all other directors will
normally attend the Annual General Meeting. 

The company announces its results on a half yearly basis. Presentations
are made to analysts and shareholders following the release of the
interim and year end results. The Group Chief Executive and Group
Finance Director meet shareholders during the year. The Chairman and,
if appropriate, the senior independent non-executive director are
available to meet shareholders if required. The board receives written
feedback following meetings with institutional shareholders.

Internal control
Internal control and risk management
The board has overall responsibility for the group’s system of internal
control and for reviewing its effectiveness. 

The board reviews the effectiveness of the system of internal control,
including financial, operational, compliance and risk management, at
least annually in accordance with the requirements of the Combined
Code and the guidance set out within it. The system of internal control
is reviewed for effectiveness and adequacy.

Such systems can only provide reasonable and not absolute assurance
against material misstatement or loss, as they are designed to manage
rather than eliminate the risk of failure to achieve business objectives. 

The board reviews risk management and the effectiveness of the system
of internal control through the Audit Committee. The board also keep
under review ways in which to enhance the control and audit
arrangements in the group. The Audit Committee receives reports every
six months from the Group Chief Executive on the significant risks faced
by the group, an assessment of the effectiveness of controls over each
of those risks and an action plan to improve controls where this has
been assessed as necessary. Any significant control weaknesses that
have been identified as requiring remedy are also reported to the Audit
Committee. The Auditors also report on significant control issues to this

32 Severn Trent Annual Report and Accounts 2007

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Principal risks
Through its business operations the group is exposed to a number of
commercial risks and uncertainties which could have a material impact
on our businesses, financial condition, operations and reputation, as
well as the value and liquidity of our securities. Not all of these factors
are within our control and, in addition, other factors besides those listed
below may have an adverse effect on the group.

Changes in law or regulation in the countries and types of business 
in which we operate could have an adverse effect on our business 
and operations.
Regulatory decisions in relation to our businesses, e.g. on whether
licences or approvals to operate are renewed, whether market
developments have been satisfactorily implemented, on the level of
permitted revenues for our businesses, whether there has been any
breach of the terms of a licence or an approval, could have an adverse
impact on the results of our operations, cash flows, financial condition
of our businesses and the ability to develop those businesses in 
the future.

The results of our operations depend on a number of factors relating
to business performance, including the ability to outperform
regulatory targets and deliver anticipated cost and efficiency savings.
Earnings from our regulated water business will be affected by our
ability to meet or better our regulatory targets set by Ofwat, the
Environment Agency, Drinking Water Inspectorate and other regulators.
To meet these targets, we must continue to improve management
processes and operational performance. In addition, earnings from a
regulated business also depend on meeting service quality standards
set by regulators. To meet these standards we must improve service
reliability and customer service. If we do not meet these targets and
standards, both our results and our reputation may be adversely
affected and fines could be imposed.

Various government environmental protection and health and safety
laws and regulations govern our businesses. 
These laws and regulations establish, amongst other things, standards
for drinking water and discharges into the environment which affect our
operations. In addition, our businesses are required to obtain various
environmental permissions from regulatory agencies for their operation.
Environmental laws and regulations are complex and change frequently.
These laws and their enforcement have tended to become more
stringent over time, both in relation to their requirements and in the
levels of proof required to demonstrate compliance. While we believe we
have taken account of the future capital and operating expenditure
necessary to achieve and maintain compliance with current and
foreseeable changes in laws and regulations, it is possible that new or
stricter standards could be imposed or current interpretation of existing
legislation amended, which will increase the group’s operating costs 
or capital expenditure by requiring changes and modifications to 
its operations in order to comply with any new environmental laws 
and regulations.

The failure of our assets or our inability to carry out critical 
operations could have a significant impact on our financial position
and our reputation.
We may suffer a major failure in our assets which could arise from a
failure to deliver the capital investment programme for our businesses
or to maintain the health of our systems. Any failure could cause us to
be in breach of a licence or approval and even incidents that do not
amount to a breach could result in adverse regulatory action and
financial consequences, as well as harming our reputation. Severn Trent
Water’s regulated business controls and operates water and sewerage
networks and undertakes maintenance of the associated assets with the
objective of providing a continuous service. The failure of a key asset
could cause a significant interruption to the supply of services, which
may have an adverse effect on the group’s operating results or financial
position. In addition water supplies may, inter alia, be subject to
contamination from the development of naturally occurring compounds
and pollution from man made sources and these may have an adverse
effect on our operating results or financial position. The group could
also be held liable for human exposure to hazardous substances or
other environmental damage. 

In addition, we are subject to other risks which are largely outside our
control, such as the energy costs, impact of climate change, weather or
unlawful acts or third parties, including terrorist attacks, sabotage or other
international acts which may also physically damage our business or
otherwise significantly affect corporate activities and, as a consequence,
affect the results of our operations and our financial position.

External factors could affect the group’s pension schemes and
adversely impact on our financial position.
Pension assets and liabilities (pre tax) of £1,364.6 million and £1,499.7
million are held in the group’s balance sheet as at 31 March 2007.
Movements in equity markets, interest rates and life expectancy could
materially affect the level of surpluses and deficits in the schemes and
could prompt the need for the group to make additional pension
contributions in the future. The key assumptions used to value our
pension liabilities are set out in note 28 on page 77.

The group’s financial position and business results could be adversely
affected if its existing funding arrangements are materially altered.
The main risks faced by the group in its treasury operations relate to
material external changes to current arrangements. In the debt markets,
factors such as borrowing restrictions or changes to credit ratings could
mean we were unable to finance ourselves or be forced to pay too high
a price for that finance. In terms of our borrowings a proportion is
subject to variable interest rates and any increase in those rates could
increase our borrowing costs. In addition we undertake financial
transactions with a number of institutions and we could suffer a
financial loss it any of those counterparts were to fail.

Severn Trent 33

Directors’ remuneration report

This report provides the information required by the Directors’
Remuneration Report Regulations 2002. It also describes how the
principles of the Financial Reporting Council’s Combined Code on
Corporate Governance (the ‘Combined Code’) are applied by the
company in relation to directors’ remuneration and sets out the
remuneration policy for the year ended 31 March 2007 and subject to
ongoing review, the current and forthcoming financial years. 

The Chairman of the board, (prior to his appointment to the
Committee), the Group Chief Executive and the Group Human
Resources Director, Andy Smith (until 31 January 2007) and Sally
Smedley (from 12 February 2007), also attended some meetings to
provide advice and respond to specific questions. Such attendances
specifically excluded any matter concerning their own remuneration.
The Company Secretary acts as secretary to the committee. 

Remuneration Committee
The Remuneration Committee determines, on behalf of the board, the
company’s policy on the remuneration of executive directors and the
Chairman of the board. The committee determines the total
remuneration packages and contractual terms and conditions for these
individuals. The committee is also consulted on the remuneration policy
for the next band of senior executives. The policy framework for
remunerating all senior executives is consistent with the approach taken
for executive directors.

The committee is comprised exclusively of independent non-executive
directors of the company, with the exception of Sir John Egan, the
company Chairman who was independent on his appointment to the
board. The members of the committee during the year were:

> Richard Davey
> Martin Flower
> Bernard Bulkin
> Marisa Cassoni
> Sir John Egan
> Martin Houston

(Chairman from 11/06/06)
(Chairman until 10/06/06)
(from 03/11/06) 
(until 06/10/06)
(from 03/11/06)

With the exception of Sir John Egan, the committee members have no
personal financial interest, other than as shareholders, in the matters to
be decided. As stated above, as company Chairman, Sir John Egan’s
fees are set by the committee and Sir John Egan is not party to this
discussion. The constitution and operation of the committee comply
with the Combined Code except that Sir John Egan’s appointment to
the committee was made in advance of the appropriate reporting period
(as disclosed in the Corporate Governance Report on page 29). In
setting performance related remuneration, the committee has regard 
to the provisions set out in Schedule A to the Combined Code. 

Advisers
To ensure that the company’s remuneration practices are market
competitive, the committee has access to detailed external research on
market data and trends from experienced specialist consultants. 

The committee has received material advice from New Bridge Street
Consultants LLP which have been appointed by the committee for the
purpose of providing this advice. New Bridge Street Consultants LLP, the
principal adviser to the committee, has not provided any other services
to the company.

The committee’s terms of reference can be viewed on the company’s
website at www.severntrent.com or requested from the Company
Secretary (at the address on the back cover). The terms of appointment
for New Bridge Street Consultants LLP are also available on request
from the Company Secretary.

Remuneration policy
The company’s continuing remuneration policy for executive directors is
to provide remuneration in a form and amount which will attract, retain,
motivate and reward high calibre individuals. The remuneration package
is based on the following principles:

> Incentives are aligned with the interests of shareholders and seek 

to reward the creation of long term value;

> Reward elements are designed to reinforce the link between

performance and reward. Performance related elements should
form a significant proportion of the total remuneration package 
and typically comprise at least 50% of total remuneration, if paid 
at the maximum;

> The total remuneration package for on target performance should
be fully competitive, but not excessive, in the relevant market;
> Packages are structured flexibly to meet critical resource needs 

and retain key executives.

Each year, the committee reviews the remuneration policy for executive
directors and other senior executives, taking into account both the
external market and the company’s strategic objectives over the short
and the medium term. In respect of 2007/8, as outlined in greater
detail later in this report, the committee has particularly focussed on
the balance of variable remuneration and the split between short term
and longer term targets.

As a consequence, whilst the committee is satisfied with the
appropriateness of the overall quantum of rewards available, it has
decided that, at least in respect of 2007/8, an increased weighting
should be placed on the annual bonus (with the compulsory deferral of
a proportion of bonus), with a corresponding reduction in the LTIP
award to be made. The reason for this rebalancing reflects the
company’s stated objective of improving operating efficiencies via the
identification of clear, focused KPIs which the committee believes can
best be set and measured over 12 month periods. 

34 Severn Trent Annual Report and Accounts 2007

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Total remuneration package
The chart below shows the expected values of salary, bonus and long
term incentives for target performance for the executive directors. 
The committee considers the mix between fixed and performance pay
to be appropriate.

Chief
Executive

Finance
Director

MD Severn
Trent Water

0%

20%

40%

60%

80%

100%

Salary

Target bonus (cash)

Target bonus (deferred shares)

Expected value of LTIP Awards

Personal shareholdings
The company operates shareholding guidelines under which executive
directors are expected to build and maintain a minimum holding of
shares in the company. The Group Chief Executive is expected to build
and maintain a holding of shares to the value of 1.5 x base salary and
other executive directors 1 x base salary. Executive directors are
expected to retain at least half of the shares they receive through the
Long Term Incentive Plans or other share based plans until they meet
the guideline holdings within five years. If insufficient shares are
awarded within five years then this timescale will be extended. 

Through a variety of share schemes, all employees are encouraged to
hold shares in the company. 

External directorships
Executive directors are encouraged to take on external non-executive
directorships, though normally only one other FTSE 100 appointment.
In order to avoid any conflicts of interest, all such appointments are
subject to the approval of the Nominations Committee. Executive
directors are normally only permitted to retain the fees arising from one
such appointment. None of the executive directors currently hold any
such appointments.

Chairman and other non-executive directors
The remuneration policy for non-executive directors, other than the
Chairman, is determined by the board, within the limits set out in the
Articles of Association.

During the year, Sir John Egan was paid fees of £230,000 for his role as
Chairman. This included £34,500 paid in the form of shares. Sir John is
provided with a company car, but does not participate in any of the
company’s pension arrangements, share or bonus schemes.

Until retiring from the board on 10 June 2006, Martin Flower received
fees of £19,300 for his role as Deputy Chairman. He did not participate
in any of the company’s pension arrangements, share or bonus
schemes nor received benefits in kind. His fees included the premiums
for chairing the Remuneration Committee and being the senior
independent non-executive director.

Remuneration for non-executive directors, other than the Chairman,
comprises an annual fee for acting as a non-executive director of the
company and additional fees for acting as:

> Chairman of a board committee (£15,000 p.a. for the Audit and

Remuneration Committees and £10,000 p.a. for the Corporate
Responsibility Committee);

> Member of a board committee who is not the chairman of that
committee (£3,000 p.a. per committee other than for the
Nominations Committee for which no fee is paid);

> Senior independent non-executive director (£10,000 p.a.).

The company Chairman does not receive any additional fees for
committee memberships.

Save for John Smith, whose total fees are paid directly to his employer,
non-executive directors receive 90% of their total fees in cash and the
remaining 10% is used to purchase shares in the company. A similar
arrangement is in place for the Chairman but with 85% of fees paid in
cash and 15% used to buy shares in the company. The Chairman and
non-executive directors are expected to retain those shares for the
duration of their appointment with the company. Non-executive
directors are not eligible to participate in share or bonus schemes nor 
is any pension provision made.

The non-executive directors do not have service contracts or
consultancy agreements with any group company, but they do have
letters of appointment.

Severn Trent 35

Directors’ remuneration report continued

Remuneration arrangements for executive directors
The remuneration arrangements for executive directors comprise the
following elements:

> Base salary and benefits;
> Annual bonus plan;
> Long Term Incentive Plans;
> Post retirement benefits.

Details of each of the above elements are as follows:

Base salaries and benefits
Base salaries are a fixed cash sum payable monthly. The company’s
policy is to set the salary for each executive director having regard to 
the market median for similar roles in publicly quoted companies of a
comparable size and, so far as practical, undertaking similar activities.
Salaries for individual directors are reviewed annually by the
remuneration committee. From 2007 the remuneration committee
agreed that salary increases will take effect from 1 July in line with the
rest of the business. Salaries are set with reference to individual
performance, experience and contribution, together with developments
in the relevant employment market and internal relativities.

Annual bonus plan 2006/07
Executive directors are eligible for annual bonuses to encourage
improved performance, with financial and non financial targets
established by the committee to align executive directors’ interests with
shareholders. In 2006/07 financial targets comprised profitability (plus
return on capital employed for Martin Bettington and operational
cashflow for Tony Wray). Non financial targets comprised the achievement
of personal objectives and specific targets relating to health and safety
performance. Following the publication of last year’s report, the bonus
arrangements for Tony Wray were amended to bring them in line with
the other senior managers in Severn Trent Water and his non financial
targets include operational performance and customer service measures.

Given the prime importance which the board and the committee place
on health and safety issues, the indicative bonus was adjusted by a
multiplier based on health and safety performance. This could lead to 
an increase or a reduction but, in all cases, was subject to the overall
bonus maximum.

The maximum bonus potential and target composition for executive
directors for 2006/07 is shown below:

Executive directors’ salaries have recently been reviewed for the financial
year 2007/08. They are as follows:

Director

Director

Colin Matthews
Michael McKeon
Tony Wray

Salary wef
July 07

£580,000
£400,000
£300,000

Increase

3.6%
8.1%
9.1%

Colin Matthews
Michael McKeon
Tony Wray
Martin Bettington
Rachel Brydon Jannetta

Financial

53%
47%
28%
100%
100%

Non
financial

27%
23%
42%
50%
50%

Max
bonus
value

80%
70%
70%
150%
150%

The increase for the Group Chief Executive reflects general inflation as
well as the market rate, whilst Tony Wray received a larger increase to
reflect his progression within his role. Michael McKeon joined the
company in December 2005 and, consistent with the company’s
approach for new appointments, did not receive an increase last year. 
He has therefore been awarded a larger than normal increase for 2007,
reflecting a recognition of his contribution, his development with the 
role and the time elapsed since joining the company. 

In 2006/07 there were eight executives immediately below board level
who were paid salaries of between £150,000 and £250,000 per annum.

Salary £000

150-200
201-250

Number of Executives

3
5

The non salary benefits for executive directors comprise the use of
company car or allowance, fuel, private medical insurance, life assurance
and an incapacity benefits scheme. Private medical insurance and some
other benefits may be flexed under the company’s flexible benefits
scheme. As they are flexing within the same value of overall package,
their individual choices are not reflected in the table of directors’
emoluments on page 41.

The actual bonuses awarded by the committee for the year ended 
31 March 2007 are shown in the table of directors’ emoluments on page
41. The following table shows how the split of the bonuses paid in
respect of the year ended 31 March 2007 related to the targets set at
the start of the year:

Achieved
Achieved 
Financial Non financial

Multiplier

Total bonus
paid

Colin Matthews
Michael McKeon
Tony Wray
Martin Bettington
Rachel Brydon Jannetta

53%
47%
10.2%
n/a
78.3%

21.6%
19.0%
10.9%
n/a
50%

1.0
1.0
1.0
n/a
n/a

74.6%
66.0%
21.1%
n/a
128.3%

Martin Bettington left on the demerger of Biffa and, as disclosed in last
year’s report, his maximum bonus potential for 2006/07 was 150%
reflecting his not participating in the company’s LTIP during the year.
The bonus award was not crystallised at demerger.

Rachel Brydon Jannetta left at the date of the sale of the US Laboratories
business on 29 December 2006 and, as disclosed last year, her bonus
potential for 2006/07 was 150% of salary. Her bonus award was
calculated at the date of sale and the value of her bonus award was 96%
of base salary (being 128.3% reduced on a prorated basis for the period
that she worked; 78.3% related to achievement of financial targets,
whilst 50% was awarded for achievement of non financial targets,
including health and safety performance.).

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It is not the committee’s policy to award transaction related bonuses. No
transaction related bonuses were paid to any executive director linked to
the successful demerger of Biffa or the disposal of any business.

Annual bonus payments are not taken into account in calculating
executive directors’ pension entitlements. 

Annual bonus plan 2007/08 
As noted above, the committee has recently undertaken a review of the
balance of performance related remuneration for the executive directors.
As a result the committee concluded that, over the next 2-3 years, it is
important for the executive directors to be focussed on the achievement
of specific strategic goals from year to year, which will be closely linked
to the company’s 20 KPIs and intended to create a strong focus on the
creation of operational efficiencies.

Consequently, for the 2007/8 financial year, the annual bonus
opportunity for all the executive directors has been increased to 120% 
of salary. For the achievement of target performance, 60% of salary 
will be earned compared with 35% in 2006/07 for executive directors
other than the Chief Executive. However, as explained above this 
increase reflects a reweighting of performance pay from longer term
measures to more targeted annual measures and does not reflect a
material increase in total target pay.

Colin Matthews’ package is amended to reflect the fact that he is leaving
the company. His annual bonus maximum for 2007/08 will be 150%
however, he will not be invited to participate in the 2007 LTIP. He will be
set specific personal targets. This approach is consistent with that taken
previously for Rachel Brydon Jannetta and Martin Bettington.

Director

Colin Matthews
Michael McKeon
Tony Wray

% salary
for on target
Bonus Max performance 

150%
120%
120%

75%
60%
60%

In addition, 50% of any bonus paid (with the exception of Colin
Matthews) will be deferred into shares to be held for three years
following payment and subject to continued employment unless the
committee determines it is appropriate to release the shares in ‘good
leaver’ cases.

The bonus outturn will operate on a balanced scorecard of measures,
based on the KPIs outlined earlier. All of the targets are considered by
the board to have an impact on the longer term financial performance 
of the company and a number of them are reported to the Regulator.

The health and safety multiplier will not operate in respect of 2007/8
although the committee reserves the discretion to reduce (but not
increase) bonus payments if health and safety targets are not fully met
or if the company’s overall financial performance is not felt to warrant
the indicative level of bonus.

Consistent with the latest developments in institutional guidelines, the
rules of the annual bonus plan now provide that the committee may
reclaim some or all of the after tax part of any bonuses awarded to
executive directors if it subsequently transpires that the bonus
calculation was based on calculations which are subsequently
demonstrated to be materially incorrect.

Long term incentives
At the 2005 Annual General Meeting, shareholders approved the
introduction of the Long Term Incentive Plan 2005 (LTIP 2005), which
replaced the 1997 Long Term Incentive Plan. Under the LTIP 2005,
annual conditional awards of performance shares may be made to
executive directors and senior staff, up to an annual maximum limit of
shares worth 125% of base salary. 

The number of shares subject to an award will increase to reflect
dividends paid through the performance period on the basis of such
notional dividends being reinvested at the then prevailing share price.
Awards will normally vest as soon as the committee determines that the
performance conditions have been met provided that the participant
remains in employment at the end of the performance period. 

2005 LTIP award
In respect of the 2005 award, 50% will be triggered if the company’s
Total Shareholder Return (TSR) performance is at the median or above
relative to the following group of water and waste companies and other
selected FTSE 100 ‘high’yield’ stocks as follows:

AWG
BOC Group
BT Group
Diageo
Kelda 
National Grid
Northumbrian Water
Pearson

Pennon Group
Rentokil Initial
Scottish & Newcastle
Scottish & Southern Energy
Scottish Power
Shanks Group
Unilever
United Utilities

So far in the performance period AWG and BOC group have both
delisted. The committee has agreed that their TSR performance will be
substituted with that of Compass group and Centrica respectively (the
next highest yield companies in the FTSE 100) with each replacement
being effective from the dates that the original companies delisted.

The remaining 50% of the 2005 awards will be triggered subject to the
satisfaction of group Economic Profit (EP) targets. As explained in
previous years, due to the commercial sensitivity of the EP targets, these
have not been precisely disclosed. However, the committee confirms that
the minimum threshold level of vesting in respect of the water business
over the five year cycle will not be lower than that implied in the most
recent Ofwat determination. For the 2005 awards, EP is calculated by
reference to a post tax rate of return of 7.5%.

For executives below board level in the non water businesses, 25% of
their LTIP awards are dependent upon the TSR target and 75% of their
awards are set by reference to EP targets.

2006 LTIP award
In 2006 the Group Chief Executive received an award of shares worth
125% of base salary with other executive directors receiving up to 100%
(other than Martin Bettington and Rachel Brydon Jannetta who, as
explained previously, did not receive any award in 2006).

Michael McKeon was also entitled to an LTIP award over 36,405 shares
on joining the company as part of the terms negotiated at that time.
These shares were awarded at the same time as the normal 2006 grant
and, as the aggregate award size exceeded 125% of base salary in a
financial year, were made pursuant to the exemption to the Listing Rules
in chapter 9.4.2. All terms were identical to the terms of the normal
2006 LTIP award and the committee confirms that such award was felt
to be necessary to facilitate the recruitment of Mr McKeon and to honour
commitments made to him on recruitment.

Severn Trent 37

Directors’ remuneration report continued

The vesting of awards will be subject to TSR, measured relative to those
companies ranked 51-150 in the FTSE by market capitalisation
(excluding investment trusts). This is felt to be the most suitable
comparator group since the number of comparable regulated utilities
against which to compare the company’s performance is now too small
to enable meaningful analysis. The performance measures remain
unchanged with 25% of awards vesting at median performance, and
100% vesting for performance in the upper quartile.

Performance graph
This graph shows the value, by 31 March 2007, of £100 invested in
Severn Trent Plc on 31 March 2002 compared with the value of £100
invested in the FTSE 100 Index. The FTSE 100 was chosen as the
comparator because the company is a constituent of that index. 

Total shareholder return

250
225
200
175
150
125
100
75
50
25
0

)
£
(

e
u
a
V

l

31-03-02
Severn Trent Plc 

31-03-03

FTSE 100 Index

31-03-04

31-03-05

31-03-06

31-03-07

This graph shows the value, at 31 March 2007, of £100 invested in Severn Trent on 
31 March 2002 compared with the value of £100 invested in the FTSE 100 Index. 
The other points plotted are the values at intervening financial year ends.

All employee share plans
The company offers an all employee SAYE plan on an annual basis and
periodically reviews the use of other all employee incentive vehicles.

Details of the company’s shares that are held in trust on behalf of
participants of certain of the employee share schemes are given on
page 81. In respect of the LTIPs, the company’s policy is to purchase,
and hold in trust, 50% of the total number of shares that could
potentially vest from all outstanding LTIP awards. The requirement 
to purchase shares is calculated, and carried out, shortly after each
annual award. 

In respect of awards made under the company’s Share Incentive Plan,
all the shares taken up by employees at each invitation are purchased
and placed in trust immediately.

The company grants SAYE options over unissued shares, always
operating within the dilution limits contained in the scheme rules.

The committee is satisfied that the overall dilution limits provide
sufficient headroom for all the company’s share schemes.

Vesting of the 2006 awards is wholly dependent on a TSR target over a
fixed three year period beginning on 1 April 2006. There is no retesting
of the condition.

This condition was chosen because the committee considered TSR to
be the most appropriate means of aligning the interests of the
executives with investors through generating superior shareholder
returns, particularly in view of the significant restructuring which
occurred during 2006.

For median TSR levels of performance, 25% of that part of the award
will vest and, for upper quartile TSR levels of performance, 100% of that
part of the award will vest. Vesting between 25% and 100% will be on a
straight line basis between ranking points. In addition, for awards to
vest, the committee must be satisfied that the company’s TSR is
reflective of the company’s underlying performance.

The TSR comparator group for 2006 awards comprises water
companies and FTSE 100 high yield companies (excluding financial and
retail companies or other sectors which might result in an undue bias in
the sample). ‘High yield’ was defined as companies which had an
average gross yield that was greater than base rate minus 1% in the
calendar month preceding 1 April 2006 and their use as comparators
recognises the fact that, at least in part, shareholders choose to invest in
the company for the dividend income it produces. 

After the end of the performance period, the TSR performance
condition will be measured and independently verified by New Bridge
Street Consultants LLP on behalf of the committee.

The comparator group companies for the 2006 LTIP award are:

AWG
BT Group
Centrica
Compass
Kelda
National Grid
Northumbrian Water

Pennon Group
Rentokil Initial
Scottish & Newcastle
Scottish & Southern Energy
Scottish Power
United Utilities

For the 2006 award, where comparator group companies have been
delisted during the course of the performance period, the “proceeds” of
that sale will be reinvested in another company selected from an agreed
list of high yield organisations.

During the performance period, AWG have delisted and therefore will 
be replaced in the comparator group by Unilever from the date of
AWG’s delisting.

2007 LTIP award
As outlined in the policy section above, the committee reviewed the
balance of variable pay for 2007/8, and it has concluded that, whilst it
does not wish to materially alter the overall quantum of remuneration
for the executive directors, it wishes to rebalance performance more
towards focussed, short term targets. Accordingly, it is the committee’s
intention to make LTIP awards of 50% of salary to Michael McKeon and
Tony Wray in 2007. As previously stated, Colin Matthews will not be
invited to participate in the 2007 scheme.

In view of the fact that (i) there has been considerable consolidation
amongst UK listed utilities companies and (ii) the restructuring of the
Group has largely been completed, the committee has reviewed the
performance conditions that will apply to the award to be made 
in 2007.

38 Severn Trent Annual Report and Accounts 2007

 
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Post retirement benefits
Of the current executive directors, Colin Matthews and Tony Wray
participate in the Senior Staff Pension Scheme (as did Martin Bettington
prior to the demerger of Biffa). The scheme is a funded HMRC
registered final salary occupational pension scheme which provides:

> A normal retirement age of 60 years;
> An overall pension at normal retirement age of two thirds of 

final pensionable salary, which for executive directors is defined 
as base salary only, subject to the completion of 20 years’
pensionable service;

> Life cover of 4 x pensionable earnings;
> A pension payable in the event of retirement on grounds of ill health;
> A dependant’s pension on death of two thirds of the 

member’s pension.

Colin Matthews and Tony Wray participate up to the level of the scheme
specific earnings cap (“the Cap”) which in 2006/07 was £108,600.
They are provided with a cash supplement in lieu of pension
entitlement above the Cap at 40% of their respective salaries.

Members’ contributions are payable at the rate of 6% of pensionable
earnings. Early retirement is available after the age of 50 with the
consent of the company. Any pension would be subject to a reduction
that the Trustee considers appropriate, acting on actuarial advice, to
reflect the expected longer payment of the pension. In the event of
incapacity, early retirement is available on an unreduced basis allowing
for pensionable service to age 60.

Under the Trust Deed and Rules, pensions in payment in excess of any
Guaranteed Minimum Pension are guaranteed to increase in line with
price inflation subject to a maximum of 5% each year. In the calculation
of individual cash equivalent transfer values, allowance is made for 
such increases.

As disclosed in last year’s remuneration report, the company reviewed
its pension policy for directors and employees as a result of the
Pensions Act 2004, Finance Act 2004 and the results of the triennial
valuation of two of its main schemes during 2004. As a result of this
review, new executives are offered an allowance, expressed as a
percentage of base salary, to fund their own pension provision. The
individual is able to choose whether the allowance is paid to the
company’s registered defined contribution scheme, taken as cash or
paid to a personal pension arrangement. This reflects the wish of the
committee to remove future exposure to defined benefit schemes for
senior executives.

The new arrangements apply to Michael McKeon at 40% of base salary. 

Directors’ service agreements and letters of appointment
A model service contract was approved by the committee in 2004. 
All current executive directors have signed the model contract and,
accordingly, service agreements for all executive directors have notice
periods of 12 months from either party. They also provide for a
maximum damages payment in the case of redundancy or termination
in breach of the agreement by the company of up to 175% of base
salary which was calculated as a conservative pre-estimate of the value
of salary, fixed benefits and on target bonus.

The reference to 175% is a cap and any damages payments will not be
made automatically but will be subject to both phasing and mitigation
unless, in the circumstances, the committee considers it appropriate to
achieve a clean break through payment of a lump sum in which case it
will require some discount for early payment. Contracts also permit the
committee to take into account a view of the extent of poor
performance on the part of the executive director. Any payment will not
include amounts in respect of awards which have been made under the
company’s LTIPs over which the committee retains discretion. There are
no specific contractual payments or benefits which would be triggered
in the event of a change in control of the company. The committee
believes that the contracts provide as much scope as is feasible to
protect the interests of shareholders when negotiating a termination, at
which time it would address the duty of mitigation.

The service contract for Rachel Brydon Jannetta, who was based in the
US and employed by a US subsidiary, was in the same format as for
other executive directors but modified to reflect prevailing US
employment legislation.

The details relating to Colin Matthews’ termination package have not 
yet been agreed.

Severn Trent 39

Directors’ remuneration report continued

The dates of the current executive directors’ agreements, the dates on which their appointments became effective and the current expiry dates 
of their agreements are as follows:

Executive directors

Colin Matthews
Michael McKeon
Tony Wray

Date of agreement

Effective date

Expiry date

3 June 2004
6 December 2005
19 January 2005

6 September 2004
13 December 2005
7 March 2005

Terminable on 12 months’ notice
Terminable on 12 months’ notice
Terminable on 12 months’ notice

Tony Wray is the subject of reappointment as executive director at the forthcoming AGM.

Details for the executive directors who ceased to serve on the board during the year are as follows:

Executive director

Martin Bettington
Rachel Brydon Jannetta

Date of agreement

10 June 2004
30 June 2004

Effective date

Expiry date

10 June 2004

Terminated on 6 October 2006
1 September 2004 Terminated on 29 December 2006

Rachel Brydon Jannetta left the Board on 29 December 2006 on the disposal of the US Laboratories business. During the sale process notice of
termination of her contract of employment was served, triggering the termination payment provision in her contract of 1.75 times base salary, an
amount of $673,750. In accordance with her contract, it was agreed that the termination payment would be made in twelve monthly instalments
with the proviso that any income she received from alternative employment would be deducted from the payment. Mrs Brydon Jannetta has
subsequently accepted a role within HIG Capital and therefore the salary payments she receives from them are being deducted from the
termination payments in mitigation of the loss.

Mrs Brydon Jannetta also received a bonus of $288,750 for the period from 1 April 2006 to 29 December 2006, the details of which are shown 
on page 36.

The committee agreed that the LTIP award made to Mrs Brydon Jannetta on 5 September 2005 at a share price of £9.75 should vest on 
completion of the sale, subject to achievement of performance conditions and time prorating. The 2005 award vested on 2 March 2007 to the
extent that 49.7% of the shares, being 3,944 shares with a market value of £13.89 each, were released to Mrs Brydon Jannetta.

Mr Martin Bettington transferred with Biffa on the demerger and received no payment by way of compensation for loss of office. The committee
agreed that the LTIP award made to Mr Bettington on 5 September 2005 at a share price of £9.75 should vest on demerger, subject to 
achievement of performance conditions and time prorating. The 2005 award vested on 1 December 2006 to the extent that 59.76% of the 
shares, being 13,944 shares with a market value of £14.55 each, were released to Mr Bettington.

In both cases the 2004 award lapsed as the performance conditions were not met.

In respect of the Chairman and current non-executive directors, the dates on which their appointments took effect and the current expiry dates are
as follows:

Chairman and 
non-executive directors

Sir John Egan
Bernard Bulkin
Richard Davey
Martin Houston
John Smith

Initial appointment

Current appointment

Current expiry date*

1 October 2004
1 January 2006
1 January 2006
1 September 2003
3 November 2003

1 October 2004
1 January 2006
1 January 2006
1 September 2006
3 November 2006

31 December 2007
31 December 2008
31 December 2008
31 August 2009
2 November 2009

*Subject to the requirements of the company’s Articles of Association for the reappointment of directors at Annual General Meetings.

Details for the non-executive directors who retired from the board during the year are as follows:

Non-executive directors

Martin Flower
Marisa Cassoni

Initial appointment

Last appointment

Date retired

11 June 1996
1 September 2001

11 June 2005
1 September 2004

10 June 2006
6 October 2006

It is the normal practice of the company for non-executive directors to serve three three year terms. Non-executive directors have no right to
compensation on the early termination of their appointments.

The text and tables that follow comprise the auditable part of the directors’ remuneration report, being the information required by Part 3 of
Schedule 7A to the Companies Act 1985.

40 Severn Trent Annual Report and Accounts 2007

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Directors’ emoluments

Chairman and other non-executive directors
Sir John Egan (Chairman)
Bernard Bulkin
Marisa Cassoni
Richard Davey
Martin Flower
Martin Houston
John Smith4

Executive directors
Martin Bettington
Rachel Brydon Jannetta
Colin Matthews
Michael McKeon
Tony Wray

Basic salary and fees1

Cash
£000

Shares
£000

Total
£000

195.5
45.9
21.5
57.4
19.3
38.7
55.0

167.9
149.8
557.3
370.0
272.3

34.5
5.1
2.3
6.4
–
4.3
–

–
–
–
–
–

230.0
51.0
23.8
63.8
19.3
43.0
55.0

167.9
149.8
557.3
370.0
272.3

1,950.6

52.6

2,003.2

BIKs2
£000

26.4
–
–
–
–
–
–

11.5
3.0
13.3
9.1
19.5

82.8

Annual
bonus
£000

Other3
£000

Total
2006/07
£000

Total
2005/06
£000

–
–
–
–
–
–
–

–
152.5
417.8
244.1
57.9

872.3

–
–
–
0.9
3.3
–
–

256.4
51.0
23.8
64.7
22.6
43.0
55.0

68.7
109.5
213.7
81.5
70.2

248.1
414.8
1,202.1
704.7
419.9

217.6
8.3
39.1
8.3
101.2
34.0
40.0

409.7
330.7
973.8
264.9
415.3

547.8

3,506.1

2,842.9

1 Included within fees for the non-executive directors are amounts to be received by way of shares rather than cash to encourage participation in line with corporate governance 

best practice. The gross value of the shares is recorded in the table above. Non-executive directors who were either appointed or retired during the year received a time 
apportioned award. The number of shares received by each director was:

Sir John Egan
Marisa Cassoni
Martin Houston
Bernard Bulkin
Richard Davey

Ordinary
shares of

Ordinary
shares of
9717/19p each 655/19p each

746
–
90
154
188

757
98
91
128
167

2 Benefits in kind received by Sir John Egan comprise the use of a company car. Benefits in kind for executive directors comprise the use of a company car, fuel, private medical

insurance, life assurance and an incapacity benefits scheme.

3 Other emoluments include: expenses chargeable to income tax, allowances in lieu of a company car, travel allowances, relocation expenses, telephone allowances, payments made

under the group’s flexible benefit arrangements and amounts paid in lieu of pension contributions. Included in other emoluments are:

> Martin Flower – expenses chargeable to income tax £3,271.
> Richard Davey – expenses chargeable to income tax £946.
> Martin Bettington – amounts received in lieu of pension contributions £67,167 and flexible benefits payments £1,583.
> Rachel Brydon Jannetta – amounts received in lieu of pension contributions £59,422, termination payment £47,057 and allowance in lieu of company car £3,034.
> Colin Matthews – amounts received in lieu of pension contributions £180,560, allowance in lieu of company car £18,000, travel allowance £15,000 and telephone allowance £113.
> Tony Wray – amounts received in lieu of pension contributions £66,560 and flexible benefits payments £3,616.
> Michael McKeon – allowance in lieu of company car £15,000, relocation expenses £60,061 and other expenses chargeable to income tax £6,469. 
4 John Smith’s total fees are paid directly to his employer.

Directors’ pension provisions
The disclosure of pension benefits is made under the requirements of the Listing Rules of the UK Listing Authority (the “Rules”) and also the
requirements of the Directors’ Remuneration Report Regulations 2002 (the “Regulations”). These are shown in separate tables below.

The Rules require information to cover the period during which a director was a board member, whilst the Regulations require information to cover
the financial year. The information below sets out the disclosures required by the Regulations:

Martin Bettington
Colin Matthews
Tony Wray

Service 
completed
in years
(including
transferred
in service
credits)

24
2
2

Accrued
pension at
31.03.07
£pa

166,827
9,293
7,488

Increase 
in accrued
pension
during 
the year
£pa

Increase 
in accrued
pension
during 
the year
(net of 
inflation)1

£pa

Transfer
value of 
accrued 
pension at 
31.03.07
£000

Increase/
(decrease)
in transfer 
value
over the 
year, net 
of directors’
31.03.06 contributions
£000

Transfer 
value of
accrued 
pension at 

£000

112
3,790
3,739

(5,890)
3,592
3,604

2,547.8
114.6
67.3

2,381.3
62.3
31.2

166.5
45.8
29.7

Severn Trent 41

Directors’ remuneration report continued

The information below sets out the disclosures required by the Rules:

Martin Bettington
Colin Matthews
Tony Wray

Accrued pension
at 31.03.07
£pa

166,827
9,293
7,488

Increase in
accrued pension
during the year
£pa

112
3,790
3,739

Increase in
accrued pension
during the year
(net of inflation)1

£pa

(5,890)
3,592
3,604

Transfer
value of increase 
in accrued benefits 
net of directors’ 
contributions2
£000

1.7
40.2
27.1

1 Inflation over the year is measured by reference to the increase in the retail price index between March 2006 and March 2007, or the earlier date of leaving.
2 The transfer values have been calculated in accordance with Actuarial Guidance Note GN11 published by the Institute of Actuaries and Faculty of Actuaries.

The pensions shown above will be provided through the Severn Trent Senior Staff Pension Scheme, the Severn Trent Supplemental Pension 
Scheme and the Severn Trent Pension Scheme.

Contributions amounting to £148,000 were paid to a defined contribution scheme in respect of Michael McKeon.

The directors of the company at 31 March 2007 and their beneficial interests in the shares of the company were as follows:

i) Beneficial holdings

Chairman and other
non-executive directors
Sir John Egan (Chairman)
Bernard Bulkin
Richard Davey
Martin Houston
John Smith

Executive directors
Colin Matthews
Michael McKeon
Tony Wray

At 1 April 2006 
Number of
ordinary
shares of
655/19p each

At 6 October 2006
Number of
ordinary
shares of
655/19p each

At 9 October 2006
Number of
ordinary
shares of
9717/19p each 

At 31 March 2007
Number of
ordinary
shares of
9717/19p each

At • June 2007
Number of
ordinary
shares of
9717/19p each

7,288
–
–
1,403
–

1,059
–
–

8,045
128
167
1,494
–

1,078
–
–

5,363
85
111
996
–

717
–
–

6,109
239
299
1,086
–

717
–
–

6,109
239
299
1,086
–

717
–
–

Following the Extraordinary General Meeting held on 6 October 2006, Severn Trent Plc’s ordinary shares of 655/19p each were consolidated into
ordinary shares of 9717/19p each, on 9 October 2006, on the basis of 2 new shares for every 3 old shares held.

Colin Matthews, Tony Wray and Michael McKeon have further interests in the company’s ordinary shares of 9717/19p each by virtue of having 
received contingent awards of shares under the Severn Trent Plc Long Term Incentive Plan as follows: Colin Matthews on 15 December 2004, 
5 September 2005 and 19 June 2006; Tony Wray on 5 September 2005 and 19 June 2006; and Michael McKeon on 19 June 2006. Further 
details regarding Michael McKeon’s contingent awards are set out on page 37.

The LTIP operates on a three year rolling basis. The Severn Trent Employee Share Ownership Trust is operated in conjunction with the LTIP. 
Awards do not vest until they have been held in trust for three years and specific performance criteria have been satisfied.

Executive directors have a technical interest in 771,717 shares held by the Employee Share Ownership Trust.

42 Severn Trent Annual Report and Accounts 2007

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The details of the performance criteria are explained on pages 37 and 38 of the remuneration report. The individual interests, for the above named
directors and for the directors who left during the year, which represent the maximum aggregate number of shares to which each individual could
become entitled, are as follows:

At 1 April
2006 or
subsequent
date of
appointment
Number of
ordinary
shares of 
655/19p each

77,465
46,022
105,933
–
17,948

Awards
vested
during
year

(13,944)
(3,944)
–
–
–

Market
price at
time of 
vesting
(p)

1455
1389
–
–
–

Gain on 
vesting
(£000)

202.9
54.8
–
–
–

Awards
lapsed
during
year

(63,521)
(42,078)
–
–
–

Awarded
during
year

–
–
56,980
66,523
22,385

At 31 March
2007 or 
earlier date
of leaving
Number of
ordinary
shares of 
9717/19p
each

Nil
Nil
162,913
66,523
40,333

Market
price at
time of
2006
award
(p)

–
–
1178
1178
1178

Martin Bettington
Rachel Brydon Jannetta
Colin Matthews
Michael McKeon
Tony Wray

The awards that lapsed during the year were those that were awarded to Martin Bettington and Rachel Brydon Jannetta on 13 August 2003, 15
December 2004 and the non vesting balance of 5 September 2005. 

The performance period for allocations of shares made in 2004 ended on 31 March 2007. The Remuneration Committee has subsequently
determined, based on the company’s Total Shareholder Return and Economic Profit Targets over the three year performance period, that
participants are not entitled to any vesting of their awards. The 2004 contingent awards of shares are included in the table above.

The 2006 awards were made on 19 June 2006, but are not included in the table above.

No further awards have been made under the LTIP as at 5 June 2007.

ii) Options over ordinary shares

At the start
of the year
or
subsequent
date of
appointment
(No. of
shares)

–
1,136

Exercised
during
the year
(No. of 
shares)

Cancelled
during 
the year 
(No. of 
shares)

–
–

–
–

Granted
during
the year 
(No. of
shares)

1,499
–

At the end 
of the year 
or earlier 
date of 
leaving
(No. of
shares)

1,499
1,136

Year of
grant of 
option

2007
2006

Exercise
price
(p)

Date 
from which
exercisable

Expiry
date

1172 May 2014 Oct 2014
823 May 2009 Oct 2009

Sharesave1

Michael McKeon
Tony Wray

1 The executive directors, in common with all eligible UK employees of the group, are entitled to participate in the company’s Inland Revenue approved Sharesave Scheme. 

The terms and conditions applicable to these options are those provided in that scheme. The options have no performance conditions as such conditions are not permitted by
legislation.

2 No executive share options in respect of executive directors were granted or lapsed during the year. At 31 March 2007 there were 30 other executives participating in the group’s

Share Option Scheme (2006: 145).

3 At the close of business on 31 March 2007 the mid market price of the company’s shares was 1,434p (31 March 2006: 1,117p) and the range during the year was 1,106p to

1,493p.

4 On 9 October 2006 Severn Trent Plc’s ordinary shares of 655⁄19p each were consolidated into ordinary shares of 9717⁄19p each. No adjustment was made to the shares awarded 

under the LTIP or granted under the Sharesave Scheme. LTIP awards will vest over ordinary shares of 9717⁄19p each and Sharesave Options will be exercised over ordinary shares 
of 9717⁄19p each.

Other than the lapse of the 2004 LTIP award, there has been no further change in directors’ interests between 31 March 2007 and the date of 
this report.

Signed on behalf of the board who approved the directors’ remuneration report on 5 June 2007.

Richard Davey
Chairman of the Remuneration Committee

Severn Trent 43

Independent auditors’ report to the members of Severn Trent Plc

We have audited the group financial statements of Severn Trent Plc for the year ended 31 March 2007 which comprise the consolidated income
statement, the consolidated balance sheet, the consolidated cash flow statement, the consolidated statement of recognised income and expense
and the related notes 1 to 41. These group financial statements have been prepared under the accounting policies set out therein. We have also
audited the information in the directors’ remuneration report that is described as having been audited.

We have reported separately on the parent company financial statements of Severn Trent Plc for the year ended 31 March 2007.

This report is made solely to the company’s members, as a body, in accordance with section 235 of the Companies Act 1985. Our audit work has
been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditors’ report and for
no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the
company’s members as a body, for our audit work, for this report, or for the opinions we have formed.

Respective responsibilities of directors and auditors
The directors’ responsibilities for preparing the Annual Report, the directors’ remuneration report and the group financial statements in
accordance with applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union are set out in the
statement of directors’ responsibilities.

Our responsibility is to audit the group financial statements in accordance with relevant legal and regulatory requirements and International
Standards on Auditing (UK and Ireland).

We report to you our opinion as to whether the group financial statements give a true and fair view, whether the group financial statements have
been properly prepared in accordance with the Companies Act 1985 and Article 4 of the IAS Regulation and whether the part of the directors’
remuneration report described as having been audited has been properly prepared in accordance with the Companies Act 1985. We also report to
you whether in our opinion the information given in the directors’ report is consistent with the group financial statements. The information given in
the directors’ report includes that specific information presented in the chairman’s statement, the group chief executive’s review and the
performance review that is cross referred from the business review section of the directors’ report.

In addition we report to you if, in our opinion, we have not received all the information and explanations we require for our audit, or if information
specified by law regarding directors’ remuneration and other transactions is not disclosed.

We review whether the corporate governance statement reflects the company's compliance with the nine provisions of the 2003 Combined Code
specified for our review by the Listing Rules of the Financial Services Authority, and we report if it does not. We are not required to consider
whether the board's statements on internal control cover all risks and controls, or form an opinion on the effectiveness of the group's corporate
governance procedures or its risk and control procedures.

We read the other information contained in the Annual Report as described in the contents section and consider whether it is consistent with the
audited group financial statements. We consider the implications for our report if we become aware of any apparent misstatements or material
inconsistencies with the group financial statements. Our responsibilities do not extend to any further information outside the Annual Report.

Basis of audit opinion
We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit
includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the group financial statements and the part of the
directors’ remuneration report to be audited. It also includes an assessment of the significant estimates and judgements made by the directors in
the preparation of the group financial statements, and of whether the accounting policies are appropriate to the group's circumstances,
consistently applied and adequately disclosed.

We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide 
us with sufficient evidence to give reasonable assurance that the group financial statements and the part of the directors’ remuneration report to
be audited are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated
the overall adequacy of the presentation of information in the group financial statements and the part of the directors’ remuneration report to 
be audited.

Opinion
In our opinion:

> the group financial statements give a true and fair view, in accordance with IFRSs as adopted by the European Union, of the state of the

group's affairs as at 31 March 2007 and of its profit for the year then ended;

> the group financial statements have been properly prepared in accordance with the Companies Act 1985 and Article 4 of the IAS Regulation; 

> the part of the directors' remuneration report described as having been audited has been properly prepared in accordance with the Companies

Act 1985; and

> the information given in the directors’ report is consistent with the group financial statements.

Deloitte & Touche LLP
Chartered Accountants and Registered Auditors 
London, UK
5 June 2007

44 Severn Trent Annual Report and Accounts 2007

Consolidated income statement
For the year ended 31 March 2007

Turnover

Operating costs before exceptional items
Exceptional restructuring costs and termination of operations
Exceptional demerger costs

Total operating costs

Exceptional profit on disposal of property and businesses

Profit before interest, tax and exceptional items
Exceptional items

Profit before interest and tax

Finance income
Finance costs

Net finance costs before fair value movements on treasury instruments
Fair value movements on treasury instruments

Total net finance costs

Share of results of associates and joint ventures

Profit before tax, fair value movements on treasury instruments and exceptional items
Exceptional items
Fair value movements on treasury instruments

Profit on ordinary activities before taxation

Taxation on profit on ordinary activities – current tax

– deferred tax

Total taxation

Profit for the period from continuing operations

Discontinued operations

Profit for the period from discontinued operations

Profit for the period

Attributable to:
Equity holders of the company
Equity minority interests

Earnings per share (pence)
From continuing operations
Basic
Diluted

From continuing and discontinued operations
Basic
Diluted

G
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Notes

2007

£m

2006
(restated)
£m

5,6

1,480.2

1,455.3

8
8

7

8

8

10
10

10

10

8
10

11
11

11

(1,074.9)
(14.9)
(16.7)

(1,062.3)
(7.9)
(7.8)

(1,106.5)

(1,078.0)

56.3

405.3
24.7

–

393.0
(15.7)

430.0

377.3

86.3
(240.1)

(153.8)
48.8

72.9
(236.8)

(163.9)
(36.7)

(105.0)

(200.6)

0.5

1.1

252.0
24.7
48.8

230.2
(15.7)
(36.7)

325.5

177.8

(58.5)
(18.4)

(76.9)

(61.5)
7.3

(54.2)

248.6

123.6

12

20.0

99.4

268.6

223.0

267.1
1.5

268.6

221.6
1.4

223.0

14
14

14
14

106.1
105.1

114.7
113.6

52.9
52.4

95.9
95.1

Severn Trent 45

 
 
Consolidated balance sheet
At 31 March 2007

Non current assets
Goodwill
Other intangible assets
Property, plant and equipment
Interests in joint ventures
Interests in associates
Derivative financial instruments
Available for sale financial assets

Current assets
Inventory
Trade and other receivables
Derivative financial instruments
Cash and cash equivalents

Assets held for sale

Total assets

Current liabilities
Borrowings
Derivative financial instruments
Trade and other payables
Current income tax liabilities
Provisions for other liabilities and charges
Liabilities directly associated with assets classified as held for sale

Non current liabilities
Borrowings
Derivative financial instruments
Trade and other payables
Deferred tax liabilities
Retirement benefit obligations
Provisions for other liabilities and charges

Total liabilities

Net assets

Capital and reserves attributable to the company’s equity shareholders
Called up share capital
Share premium account
Other reserves
Retained earnings

Equity attributable to the company’s equity shareholders
Minority interests

Total equity

Signed on behalf of the board who approved the accounts on 5 June 2007.

Sir John Egan
Chairman

Michael McKeon
Group Finance Director

46 Severn Trent Annual Report and Accounts 2007

Notes

2007
£m

2006
£m

15
16
17
18
19
20
21

22
23
20
24

25
20
26

29

25
20
26
27
28
29

30
31
32
33

33

33

49.1
101.2
5,521.1
0.5
3.4
6.6
0.2

506.3
112.4
5,743.1
9.7 
19.6
3.7
0.5

5,682.1

6,395.3

22.4
387.1
14.1
143.2

566.8

–

54.4
481.5
10.8
142.6

689.3

41.5

6,248.9

7,126.1

(631.8)
(67.1)
(405.1)
(59.0)
(6.7)
–

(808.2)
(114.4)
(540.6)
(48.8)
(30.1)
(28.5)

(1,169.7)

(1,570.6)

(2,639.0)
(56.2)
(188.3)
(891.1)
(135.1)
(32.2)

(2,295.5)
(30.1)
(158.7)
(870.2)
(221.9)
(80.1)

(3,941.9)

(3,656.5)

(5,111.6)

(5,227.1)

1,137.3

1,899.0

228.3
57.5
419.0
429.4

1,134.2
3.1

227.2
48.6
432.4
1,188.2

1,896.4
2.6

1,137.3

1,899.0

Consolidated cash flow statement
For the year ended 31 March 2007

Cash generated from operations
Interest paid
Interest element of finance lease rental payments
Tax paid

Net cash generated from operating activities

Investing activities
Interest received
Dividends received from associates and joint ventures
Net loans advanced to associates and joint ventures
Net cash inflow from available for sale fixed asset investments
Acquisition of subsidiaries net of cash acquired
Cash demerged with Biffa Plc
Proceeds on disposal of subsidiaries net of cash disposed
Proceeds on disposal of associate net of costs
Proceeds on disposal of property, plant and equipment
Purchases of intangible assets
Purchases of property, plant and equipment
Contributions and grants received

Net cash used in investing activities

Financing activities
Dividends paid to shareholders of the parent
Dividends paid to minority interests
Repayments of borrowings
Receipts from sale and lease back transactions
Repayment of obligations under finance leases
New loans raised
Issue of shares

Net cash used in financing activities

Increase in cash and cash equivalents

Net cash and cash equivalents at beginning of the period

Effect of foreign exchange rates

Notes

36

35
35

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2007
£m

574.0
(148.6)
(20.2)
(36.0)

2006
£m

758.9 
(139.4)
(45.1)
(68.3)

369.2

506.1

12.4
1.5
0.5
0.2
–
(21.9)
130.6
29.3
62.2
(21.5)
(427.2)
35.0

4.4
2.7
(2.3)
0.2
(0.3)
–
1.6
–
8.4
(29.6)
(407.5)
32.8

198.9

(389.6)

(739.5)
(1.0)
(789.9)
–
(34.6)
1,418.4
10.0

(234.3)
(0.8)
(500.2)
170.2
(167.7)
648.8
11.6

(136.6)

(72.4)

33.7

110.4

44.1

64.4

(1.0)

1.9 

Net cash and cash equivalents at the end of the period

36

143.1

110.4

Net cash and cash equivalents comprise:

Cash and cash equivalents
Bank overdrafts

Net cash and cash equivalents at the end of the period

36
36

36

143.2
(0.1)

142.6
(32.2)

143.1

110.4

Severn Trent 47

 
 
Consolidated statement of recognised income and expense
For the year ended 31 March 2007

Exchange movement on translation of overseas results and net assets
Exchange differences on hedges of net investment
Tax on exchange differences on foreign currency hedging
Gains on cash flow hedges taken to equity
Deferred tax on gains on cash flow hedges taken to equity
Actuarial (losses)/gains on defined benefit pension schemes
Deferred tax on actuarial losses/gains

Net (expense)/income recognised directly in equity

Transfers
Amounts on cash flow hedges transferred to the income statement in the period
Deferred tax on transfers to income statement

Profit for the period

Total recognised income for the period

Attributable to:
Equity shareholders of the company
Minority interests

2007

£m

(25.5)
6.4
(1.9)
6.2
(1.8)
(14.3)
4.3

2006
(restated)
£m

21.6 
(5.3)
1.8
0.3
(0.1)
26.3
(8.0)

(26.6)

36.6

4.6
(1.4)

4.5
(1.3)

3.2

3.2

268.6

223.0

245.2

262.8

243.7
1.5

245.2

261.4
1.4

262.8

48 Severn Trent Annual Report and Accounts 2007

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Notes to the group financial statements

1 General information
The Severn Trent group has a number of operations. These are described in the segmental analysis in note 5.

Severn Trent Plc is a company incorporated and domiciled in the United Kingdom. The address of its registered office is shown on the back of the
cover of the annual report and accounts.

Severn Trent Plc is listed on the London Stock Exchange.

2 Accounting policies

a) Basis of preparation
The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS), International Accounting
Standards (IAS) and IFRIC interpretations issued and effective and ratified by the European Union as at 31 March 2007 and those parts of the
Companies Act 1985 applicable to companies reporting under IFRS as adopted by the European Union. 

The financial statements have been prepared under the historical cost convention as modified by the revaluation of certain financial assets and
liabilities (including derivative instruments) at fair value.

The preparation of financial statements in conformity with IFRS requires the use of estimates and assumptions that affect the reported amounts 
of assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses for the reporting period.
Although these estimates are based on management’s best knowledge of the amount, event or actions, actual results may ultimately differ 
from those estimates.

The comparative figures for the income statement have been restated to reclassify Biffa Plc and US Laboratories as discontinued operations
following their demerger and disposal respectively.

b) Basis of consolidation
The financial statements include the results of Severn Trent Plc and its subsidiaries, joint ventures and associated undertakings.

Minority interests in the net assets of consolidated subsidiaries are identified separately from the group’s equity therein. Minority interests consist
of the amount of those interests at the date of the original business combination and the minority’s share of changes in equity since that date.
Losses attributable to the minority in excess of the minority’s interest in the subsidiary’s equity are allocated against the interests of the group
except to the extent that the minority has a binding obligation and is able to make an additional investment to cover the losses.

The results of subsidiaries, joint ventures and associated undertakings are included from the date of acquisition or incorporation, and excluded
from the date of disposal. The results of subsidiaries are consolidated where the group has the power to control a subsidiary. The results of joint
venture undertakings are accounted for on an equity basis where the company exercised joint control under a contractual arrangement. The results
of associates are accounted for on an equity basis where the company holding is 20% or more or the company has the power to exercise
significant influence.

All intra group transactions, balances, income and expenses are eliminated on consolidation.

c) Revenue recognition
Revenue represents the fair value of consideration receivable, excluding value added tax, trade discounts and inter company sales, in the ordinary
course of business for goods and services provided.

Revenue is not recognised until the service has been provided to the customer, or the goods to which the sale relates have either been despatched
to the customer or, where they are held on the customer’s behalf, title has passed to the customer.

In respect of long term contracts, revenue is recognised based on the value of work carried out during the year with reference to the total sales
value and the stage of completion of these contracts.

Turnover includes an estimate of the amount of mains water and wastewater charges unbilled at the year end. The accrual is estimated using a
defined methodology based upon a measure of unbilled water consumed by tariff, which is calculated from historical billing information.

Interest income is accrued on a time basis by reference to the principal outstanding and at the effective interest rate applicable. Dividend income
from investments is recognised when the shareholders’ rights to receive payment have been established. Interest and dividend income are included
in finance income.

d) Segmental reporting
Each of the group’s business and geographical segments provide services that are subject to risks and returns that are different from those of the
other business segments.

Severn Trent 49

 
 
Notes to the group financial statements continued

e) Property, plant and equipment
Property, plant and equipment comprises:

Infrastructure assets

i)
Infrastructure assets are included at cost (or deemed cost on transition to IFRS) less accumulated depreciation. The costs of day to day servicing 
of infrastructure components are recognised in the income statement as they arise. Where it is probable that the money spent will cause future
economic benefits to flow to the group, then costs are capitalised. Infrastructure assets are depreciated over their useful economic lives, which 
are as follows:

Impounding reservoirs
Raw water aqueducts
Mains
Sewers

Years

250
250
80-150
150-200

ii) Landfill sites
Landfill sites are included within land and buildings at cost less accumulated depreciation.

The cost of landfill sites includes the cost of acquiring, developing and engineering sites, but does not include interest. The cost of the asset is
depreciated over the estimated life of the site on the basis of the usage of void space.

Following the demerger of Biffa Plc the group no longer holds landfill sites.

iii) Other assets
Other assets are included at cost less accumulated depreciation. Freehold land is not depreciated. Other assets are depreciated over their
estimated economic lives to their residual value, which are principally as follows:

Buildings
Fixed plant and equipment
Vehicles and mobile plant

Years

30-80
2-40
2-15

Assets in the course of construction are not depreciated until commissioned.

Interest costs of debt raised to finance new property, plant and equipment are not included within the cost of those fixed assets, but are expensed
to the income statement as they arise.

f) Leased assets
Where assets are financed by leasing arrangements which transfer substantially all the risks and rewards of ownership of an asset to the lessee
(finance leases), the lower of the fair value of the leased asset or the present value of the minimum lease payments is capitalised as an asset with a
corresponding liability representing the obligation to the lessor. Lease payments are treated as consisting of a capital element and a finance charge,
the capital element reducing the obligation to the lessor and the finance charge being written off to the income statement at a constant rate over
the period of the lease in proportion to the capital amount outstanding. Depreciation is charged over the shorter of the estimated useful life and the
lease period.

Where assets are financed by leasing arrangements where substantially all the risks and rewards of ownership remain with the lessor, these are
classified as operating leases. Rental costs arising under operating leases are expensed on a straight line basis over the term of the lease. Leases of
land are normally treated as operating leases, unless ownership is transferred at the end of the lease.

g) Grants and contributions
Grants and contributions received in respect of non-current assets, including charges made for new connections to the water and sewerage
networks, are treated as deferred income and released to the income statement over the useful economic life of those assets. 

Grants and contributions which are given in compensation for expenses incurred with no future related costs are recognised in the income
statement in the period that they become receivable.

Impairment of non current assets

h)
If the recoverable amount of goodwill, an item of property, plant and equipment, or any other non current asset is estimated to be less than its
carrying amount, the carrying amount of the asset is reduced to its recoverable amount. Where the asset does not generate cash flows that are
independent from other assets, the group estimates the recoverable amount of the cash generating unit to which the asset belongs. Recoverable
amount is the higher of fair value less costs to sell or estimated value in use at the date the impairment review is undertaken. Fair value less costs
to sell represents the amount obtainable from the sale of the assets in an arm’s length transaction between knowledgeable and willing third parties,
less costs of disposal. Value in use represents the present value of future cash flows expected to be derived from a cash generating unit, discounted
using a pre-tax discount rate that reflects current market assessments of the cost of capital of the cash generating unit or asset.

The discount rate used is based on the group’s cost of capital adjusted for the risk profiles of individual businesses.

Goodwill is tested for impairment annually. Impairment reviews are also carried out if there is some indication that an impairment may have
occurred, or, where otherwise required, to ensure that non current assets are not carried above their estimated recoverable amounts.

Impairments are recognised in the income statement.

50 Severn Trent Annual Report and Accounts 2007

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Investments

i)
After initial recognition at cost (being the fair value of the consideration paid), investments which are classified as held for trading or available for
sale are measured at fair value, with gains or losses recognised in income or equity respectively. When an available for sale investment is disposed
of, or impaired, the gain or loss previously recognised in equity is taken to the income statement.

Other investments are classified as held to maturity when the group has the positive intention and ability to hold to maturity. Investments held for
an undefined period are excluded from this classification. Such investments (and those held to maturity) are subsequently measured at amortised
cost using the effective interest rate method, with any gains or losses being recognised in the income statement.

Inventory

j)
Inventory and work in progress is stated at the lower of cost and net realisable value. Cost includes labour, materials, transport and 
attributable overheads.

Development land and properties are included at the lower of cost and net realisable value. Cost includes the cost of acquiring and developing 
the sites. The net realisable value of development land is based upon its value as a serviced site, after taking account of the cost of providing
infrastructure services.

Following the disposal of Severn Trent Property the group no longer holds development land or properties.

k) Cash and cash equivalents
For the purpose of the cash flow statement, cash and cash equivalents include highly liquid investments that are readily convertible to known
amounts of cash and which are subject to an insignificant risk of change in value. Such investments are normally those with less than three
months’ maturity from the date of acquisition and include cash and balances at central banks, treasury bills and other eligible bills, loans and
certificates of deposit. Cash and cash equivalents also include overdrafts repayable on demand.

l) Provisions
Provisions are made where there is a present obligation as a result of a past event, it is probable that there will be an outflow of economic benefits
to settle this obligation and a reliable estimate of this amount can be made. The group’s policy on provisions for specific areas is as follows:

> Landfill restoration costs: Provision for the cost of restoring landfill sites is made over the operational life of each landfill site and charged to

the income statement on the basis of the usage of void space. Following the demerger of Biffa Plc the group no longer holds provisions for
landfill costs.

> Environmental control and aftercare costs: Environmental control and aftercare costs are incurred over the operational life of each landfill site
and may be incurred for a considerable period thereafter. Provision for all such costs is made over the operational life of the site and charged
to the income statement on the basis of the usage of void space. Material environmental control and aftercare costs are discounted by
applying an appropriate discount rate.

> Insurance: Provision is made for claims notified and for claims incurred but which have not yet been notified, based on advice from the

group’s independent insurance advisers.

m) Pension costs
The group operates both defined benefit and defined contribution pension schemes.

Defined benefit pension scheme assets are measured using bid price. Defined benefit pension scheme liabilities are measured at the balance
sheet date by an independent actuary using the projected unit method and discounted at the current rate of return on high quality corporate
bonds of equivalent term and currency to the liability. The increase in the present value of the liabilities of the group’s defined benefit pension
schemes expected to arise from employee service in the period is included in operating costs. The expected return on the scheme’s assets and 
the increase during the period in the present value of the scheme’s liabilities, arising from the passage of time, are included in other finance
income or cost.

Actuarial gains and losses arising from experience adjustments, changes in actuarial assumptions and amendments to pension plans are charged
or credited to equity and recorded in the statement of recognised income and expense.

Costs of defined contribution pension schemes are charged to the income statement in the period in which they fall due.

n) Foreign currency
The results of overseas subsidiary and associated undertakings are translated into the presentational currency of the group, sterling, using average
rates of exchange ruling during the year.

The net investments in overseas subsidiary and associated undertakings are translated into sterling at the rates of exchange ruling at the year end.
Exchange differences thus arising are treated as movements in equity. On disposal of a foreign currency denominated subsidiary, the deferred
cumulative amount recognised in equity since 1 April 2004 relating to that entity is recognised in the income statement under the transitional rule
of IFRS 1.

Exchange differences arising in respect of foreign exchange instruments taken out as hedges of overseas investments are also treated as
movements in equity to the extent that the hedge is effective (see note 20).

All other foreign currency denominated assets and liabilities of the company and its subsidiary undertakings are translated into the relevant
functional currency at the rates of exchange ruling at the year end. Any exchange differences so arising are dealt with through the income
statement. Foreign currency transactions arising during the year are translated into sterling at the rate of exchange ruling on the date of the
transaction. All profits and losses on exchange arising during the year are dealt with through the income statement.

Severn Trent 51

 
 
Notes to the group financial statements continued

o) Research and development
Research expenditure is expensed when it is incurred. Development expenditure is capitalised and written off over its expected useful economic life
where the following criteria are met:

> An asset is created that can be identified;
> It is probable that the asset created will generate future economic benefits; and
> The development cost can be measured reliably.

Expenditure on property, plant and equipment relating to research and development projects is capitalised and written off over the expected useful
life of those assets.

p) Taxation
The tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the income statement because
it excludes items of income and expenses that are taxable in other years and it further excludes items that are never taxable or deductible. The
group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.

Deferred taxation is provided in full, using the liability method, on taxable temporary differences between the tax basis of assets and liabilities and
their carrying amounts in the financial statements. A deferred tax asset is only recognised to the extent it is probable that sufficient taxable profits
will be available in the future to utilise it. Deferred taxation is measured on a non discounted basis using the tax rates and laws that have then been
enacted or substantively enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the
deferred tax liability is settled.

q) Goodwill
Goodwill represents the excess of the fair value of purchase consideration over the fair value of the net assets acquired. Goodwill arising on
acquisition of subsidiaries is included in intangible assets, whilst goodwill arising on acquisition of associates is included in investments in
associates. If an acquisition gives rise to negative goodwill this is credited directly to the income statement. Fair value adjustments based on
provisional estimates are amended within one year of the acquisition, if required, with a corresponding adjustment to goodwill.

Goodwill arising on all acquisitions prior to 1 April 1998 was written off to reserves under UK GAAP and remains eliminated against reserves.
Purchased goodwill arising on acquisitions after 31 March 1998 is treated as an intangible fixed asset.

Goodwill is tested for impairment in accordance with the policy set out above and carried at cost less accumulated impairment losses. Goodwill is
allocated to the cash generating unit that derives benefit from the goodwill for impairment testing purposes.

Where goodwill forms part of a cash generating unit and all or part of that unit is disposed of, the associated goodwill is included in the carrying
amount of that operation when determining the gain or loss on disposal of the operation.

Intangible non current assets

r)
Intangible assets acquired separately are capitalised at cost and when acquired in a business combination are capitalised at fair value at the date 
of acquisition. Following initial recognition, the historical cost model is applied to intangible assets. Amortisation charged on assets with finite lives
is taken to the income statement through operating expenses.

Finite life intangible assets are amortised on a straight line basis over their estimated useful economic lives as follows:

Software
Other assets

Years

3-10
2-20

Intangible assets are reviewed for impairment where indicators of impairment exist.

s) Trade receivables
Trade receivables are measured at fair value on initial recognition and are subsequently measured at amortised cost using the effective interest 
rate method unless there is objective evidence that the asset is impaired, where it is written down to is recoverable amount and the irrecoverable
amount is recognised as an expense.

t) Financial instruments

i) Debt instruments
All loans and borrowings are initially recognised at cost, being the net fair value of the consideration received. After initial recognition, interest
bearing loans and borrowings are subsequently measured at amortised cost using the effective interest rate method. Where a loan or borrowing 
is in a fair value hedging relationship it is remeasured for changes in fair value of the hedged risk at the balance sheet date, with gains or losses
being recognised in the income statement (see below).

Gains and losses are recognised in the income statement when the liabilities are derecognised or impaired, as well as through the 
amortisation process.

ii) Derivative financial instruments and hedging activities
The group uses derivative financial instruments such as cross currency swaps, forward currency contracts and interest rate swaps to hedge its 
risks associated with foreign currency and interest rate fluctuations. Such derivative instruments are initially recorded at cost and subsequently
remeasured at fair value at the balance sheet date. The fair value of cross currency swaps, interest rate swaps and forward currency contracts is
calculated by reference to market exchange rates and interest rates at the period end.

52 Severn Trent Annual Report and Accounts 2007

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In relation to fair value hedges which meet the conditions for hedge accounting, the portion of the gain or loss on the hedging instrument is taken
to the income statement where the effective portion of the hedge will offset the gain or loss on the hedged item (see above).

In relation to cash flow hedges which meet the conditions for hedge accounting, the portion of the gain or loss on the hedging instrument that is
determined to be an effective hedge is recognised directly in equity and the ineffective portion in the income statement. The gains or losses
deferred in equity in this way are recycled through the income statement in the same period in which the hedged underlying transaction or firm
commitment is recognised in the income statement.

Forward currency contracts and foreign currency borrowings are used to hedge net investments in foreign currency denominated operations and
to the extent that they are designated and effective as net investment hedges are matched in equity against changes in value of the related assets.
Any ineffectiveness is taken to the income statement.

For derivatives that do not qualify for hedge accounting, gains or losses are taken directly to the income statement in the period.

Hedge accounting is discontinued when the hedging instrument expires, is sold, terminated or exercised, or no longer qualifies for hedge
accounting. At that date any cumulative gain or loss on the hedging instrument recognised in equity is kept in equity until the forecast transaction
occurs, or transferred to the income statement if the forecast transaction is no longer expected to occur.

Derivatives embedded in other financial instruments or other host contracts are treated as separate derivatives when their risks and 
characteristics are not closely related to those of the host contract and the host contract is not carried at fair value, with gains and losses 
reported in the income statement.

u) Share based payments
The group operates a number of equity settled, share based compensation plans for employees. The fair value of the employee services received in
exchange for the grant is recognised as an expense over the vesting period of the grant.

The fair value of employee services is determined by reference to the fair value of the awards granted calculated using an appropriate pricing
model, excluding the impact of any non market vesting conditions. The number of awards that are expected to vest takes into account non market
vesting conditions including, where appropriate, continuing employment by the group. The charge is adjusted to reflect shares that do not vest as
a result of failing to meet a non market condition.

v) Pre-contract costs
Pre-contract costs are expensed as incurred except where it is probable that the contract will be awarded, in which case they are recognised as an
asset which is written off to the income statement over the life of the contract.

w) Discontinued operations and assets held for sale
Where an asset or group of assets (a disposal group) is available for immediate sale and the sale is highly probable and expected to occur within
one year, then the disposal group is deemed as held for sale. The disposal group is measured at the lower of the carrying amount and fair value
less costs to sell.

Where a group of assets, which comprises operations that can be clearly distinguished operationally and for financial reporting purposes from the
rest of the group (a component), has been disposed of or classified as held for sale and it

> represents a separate major line of business or geographical area of operations; or
> is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations; or
> is a subsidiary acquired exclusively with a view to resale 

then the component is classified as a discontinued operation.

Non current assets classified as held for sale are measured at the lower of carrying amount and fair value less costs to sell. Depreciation is not
charged on such assets.

x) Purchase of own shares
The group balance sheet incorporates the shares held by the Severn Trent Employee Share Ownership Trust (the Trust) and which have not vested
unconditionally by the balance sheet date. These are shown as a deduction from shareholders’ funds until such time as they vest.

y) Trade payables
Trade payables are initially measured at fair value and are subsequently measured at amortised cost, using the effective interest rate method.

z) Exceptional items
Exceptional items are income or expenditure, which individually or, if of a similar type, in aggregate should, in the opinion of the directors, 
be disclosed by virtue of their size or nature if the financial statements are to give a true and fair view.

Severn Trent 53

 
 
Notes to the group financial statements continued

3 New accounting policies and future requirements
The following statements have been issued by the International Accounting Standards Board and are likely to affect future financial statements.

International Financial Reporting Standard 7 ‘Financial instruments: Disclosures’ (IFRS 7) was issued in August 2005 and is required to be
implemented by Severn Trent from 1 April 2007. The standard incorporates the disclosure requirements of IAS 32, which it supersedes and adds
further quantitative and qualitative disclosures in relation to financial instruments.

International Financial Reporting Standard 8 ‘Operating Segments’ (IFRS 8) was issued in November 2006 and is required to be implemented by
Severn Trent from 1 April 2009. The standard requires identification of operating segments based on internal reports that are regularly reviewed by
the chief operating decision maker in order to allocate resources to the segment and assess its performance. The impact of the standard on Severn
Trent’s financial statements is not expected to be significant since the group’s segmental reporting already closely reflects reports regularly
reviewed by the Chief Executive and the board.

IFRIC 11 “Group and Treasury Share Transactions” was issued in November 2006. The interpretation addresses accounting for share based
payments in the separate financial statements of the parent company and its subsidiaries. As such it is not applicable to the consolidated financial
statements of Severn Trent Plc.

IFRIC 12 “Service Concession Arrangements” was issued in November 2006 and is required to be implemented by Severn Trent from 1 April 2008.
The interpretation draws a distinction between two types of services concession arrangement; those where the operator receives a financial asset,
specifically an unconditional contractual right to receive cash or another financial asset from a government body in return for constructing or
upgrading a public sector asset; and those where the operator receives an intangible asset, the right to charge for the use of the public sector asset
that it constructs or upgrades. The interpretation will be applicable to the group’s contracts with the UK Ministry of Defence (“MoD”) and is
expected to result in the recognition of both a financial asset in respect of the right to receive cash in return for upgrading the MoD assets and an
intangible asset arising from the right to provide water and sewerage services.

IAS 23 (revised) was issued in March 2007 and is required to be implemented by Severn Trent from 1 April 2009. The revision to the standard
removes the option of immediately recognising as an expense borrowing costs that are directly attributable to the acquisition, construction or
production of an asset that takes a substantial period of time to get ready for use or sale. Such costs are therefore required to be capitalised as part
of the cost of the asset. The revised standard will require Severn Trent to change its existing policy and is likely to result in a proportion of
borrowing costs that are currently expensed being capitalised in property plant and equipment or intangible assets. The costs will then be
amortised over the expected useful lives of the relevant assets.

The directors assess that the other standards and interpretations issued but not yet effective are not applicable to the group.

4 Significant accounting judgments and key sources of estimation uncertainty
In the process of applying the group’s accounting policies, the group is required to make certain judgments, estimates and assumptions that it
believes are reasonable based on the information available. The more significant judgments and key assumptions and sources of estimation
uncertainty are summarised below:

(a) Goodwill impairment
Determining whether goodwill is impaired requires an estimation of the value in use of the cash generating units (“CGU”) to which goodwill has
been allocated. The value in use calculation requires the group to estimate the future cash flows expected to arise from the CGU and a suitable
discount rate to calculate present value. Details of the assumptions used are set out in note 15 to the financial statements.

(b) Depreciation and carrying amounts of property plant and equipment
Calculating the depreciation charge and hence the carrying value for property, plant and equipment requires estimates to be made of the useful
lives of the assets. The estimates are based on engineering data and the group’s experience of similar assets. Details are set out in note 2 (e). 

(c) Retirement benefit obligations
Determining the amount of the group’s retirement benefit obligations and the net costs of providing such benefits requires assumptions to be
made concerning long term interest rates, inflation, salary and pension increases, investment returns and longevity of current and future
pensioners. Changes in these assumptions could significantly impact the amount of the obligations or the cost of providing such benefits. The
group makes assumptions concerning these matters with the assistance of advice from independent qualified actuaries. Details of the assumptions
made are set out in note 28 to the financial statements.

(d) Tax provisions
Assessing the outcome of uncertain tax positions requires judgments to be made regarding the result of negotiations with and enquiries from tax
authorities in a number of jurisdictions. The assessments made are based on advice from independent tax advisers and the status of ongoing
discussions with the relevant tax authorities.

54 Severn Trent Annual Report and Accounts 2007

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5 Segmental analysis
The group is organised into two main business segments:

Water and Sewerage
Provides water and sewerage services to domestic and commercial customers in England and Wales.

Water Technologies and Services
Provides services and products associated with water, waste water and contaminated land principally in the US, UK and Europe.

Corporate and Other
Following the sale of Severn Trent Property and other property interests, the sole remaining other business is the group’s corporate insurance
company. Henceforth this is reported together with unallocated corporate costs as Corporate and Other in the segmental analysis. All prior year
numbers have been restated for comparative purposes.

The group is also organised into geographical regions, UK, US and Europe. Geographical information is classified by the location of the principal
operations of each business unit.

a) Primary reporting format – business segment

2007

External sales
Inter segment sales

Total sales

Profit before interest, tax 
and exceptional items
Exceptional items (note 8)

Profit before interest and tax

Share of results of associates
and joint ventures

Segment result

Total net finance costs

Profit before tax

Tax

Profit from continuing operations
Profit from discontinued operations (note 12)

Profit for the period

Discontinued operations include:

External sales
Inter segment sales

Total sales

Profit before interest, tax and exceptional items
Exceptional items (note 8)
Share of results of associates and joint ventures

Segment result

Water
Water  Technologies
and
Services
£m

and
Sewerage
£m

Corporate
and Other
£m

Eliminations Consolidated
£m

£m

1,216.3
1.8

262.6
26.3

1.3
9.0

–
(37.1)

1,480.2
–

1,218.1

288.9

10.3

(37.1)

1,480.2

413.0
21.3

19.7
14.7

(26.3)
(11.3)

(1.1)
–

405.3
24.7

434.3

34.4

(37.6)

(1.1)

430.0

–

0.8

(0.3)

–

0.5

434.3

35.2

(37.9)

(1.1)

430.5

(105.0)

325.5

(76.9)

248.6
20.0

268.6

Total
£m

495.4
–

495.4

59.2
(31.5)
0.5

28.2

Waste
Management
£m

US
Laboratories
£m

Eliminations
£m

401.0
3.9

404.9

51.2
–
0.5

51.7

94.4
1.7

96.1

8.0
(31.5)
–

(23.5)

–
(5.6)

(5.6)

–
–
–

–

Severn Trent 55

 
 
Notes to the group financial statements continued

a) Primary reporting format – business segment (continued)

2006

External sales
Inter segment sales

Total sales

Profit before interest, tax 
and exceptional items
Exceptional items (note 8)

Profit before interest and tax

Share of results of associates
and joint ventures

Segment result

Total net finance costs

Profit before tax

Tax

Profit from continuing operations

Profit from discontinued operations (note 12)

Profit for the period

Discontinued operations include:

External sales
Inter segment sales

Total sales

Profit before interest, tax and exceptional items
Share of results of associates and joint ventures

Segment result

Other segment items are:

2007

Capital expenditure 
Depreciation and amortisation

2006

Capital expenditure 
Depreciation and amortisation

56 Severn Trent Annual Report and Accounts 2007

Water
Water  Technologies
and
Services
£m

and
Sewerage
£m

1,148.5
2.4

277.0
22.8

1,150.9

299.8

Corporate
and Other
£m

29.8
29.5

59.3

Eliminations Consolidated
£m

£m

–
(54.7)

1,455.3
–

(54.7)

1,455.3

400.4
(4.8)

17.1
–

(25.7)
(10.9)

1.2
–

393.0
(15.7)

395.6

17.1

(36.6)

1.2

377.3

–

1.6

(0.5)

–

1.1

395.6

18.7

(37.1)

1.2

378.4

(200.6)

177.8

(54.2)

123.6

99.4

223.0

Total
£m

898.1
–

898.1

91.1
1.0

92.1

Waste
Management
£m

US
Laboratories
£m

Eliminations
£m

764.1
6.6

770.7

85.2
1.0

86.2

134.0
0.8

134.8

5.9
–

5.9

–
(7.4)

(7.4)

–
–

–

Water
Water  Technologies
and
Services
£m

and
Sewerage
£m

Corporate
and Other
£m

Eliminations Consolidated
£m

£m

399.5
241.2

6.1
6.6

–
0.3

(4.3)
(3.5)

401.3
244.6

Water
Water  Technologies
and
Services
£m

and
Sewerage
£m

Corporate
and Other
£m

Eliminations Consolidated
£m

£m

335.6
219.7

6.7
6.7

0.2
4.0

(3.3)
(4.2)

339.2
226.2

The segment assets and liabilities are as follows:

2007

Assets
Segment assets
Interests in associates and joint ventures

Group total assets

Liabilities
Segment liabilities

Group total liabilities

2006

Assets
Segment assets
Interests in associates and joint ventures

Assets relating to discontinued operations

Group total assets

Liabilities
Segment liabilities
Liabilities relating to discontinued operations

Group total liabilities

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Water
Water and Technologies
and Services
Sewerage
£m
£m

Eliminations
£m

Unallocated
Corporate
and Other Consolidated
£m

£m

5,894.7
0.5

5,895.2

225.5
3.4

228.9

(16.9)
–

141.7
–

6,245.0
3.9

(16.9)

141.7

6,248.9

6,248.9

(618.7)

(66.3)

–

(4,426.6)

(5,111.6)

(5,111.6)

Water
Water and Technologies
and Services
Sewerage
£m
£m

Eliminations
£m

Unallocated
corporate
and Other Consolidated
£m

£m

5,671.6
0.4

5,672.0

241.3
19.7

261.0

161.0
8.6

(15.9)
–

6,058.0
28.7

169.6 

(15.9)

6,086.7

(653.8)

(77.6)

(4,245.2)

–

1,039.4

7,126.1

(4,976.6)
(250.5)

(5,227.1)

Assets relating to discontinued operations includes interests in associates and joint ventures amounting to £0.6m.

Segment assets comprise goodwill and other intangible assets, property, plant and equipment, inventories, derivatives designated as hedges for
future transactions, receivables and operating cash. Deferred taxation, investments and derivatives designated as hedges of borrowings are all
included in unallocated corporate assets.

Segment liabilities comprise operating liabilities. Taxation and corporate borrowings and related hedging derivatives are all included in unallocated
corporate liabilities.

Severn Trent 57

 
 
Notes to the group financial statements continued

The entire Waste Management segment has been divested and its results are included in discontinued operations in 2006/07. The comparative
figures have been restated to reflect the current year classification. Following the disposal of the US Laboratories business, which is also included 
in discontinued operations in both years, the former Water Purification and Operating Services and Laboratories segments have been reclassified.
The UK Laboratories business, which formerly was included in the Laboratories segment, is now included in the Water Technologies and Services
segment. Prior year figures have been restated to reflect the new classification as follows:

Turnover

Profit before interest, tax and
exceptional items
Exceptional items

Profit before interest and tax
Share of results of associates and joint ventures

Segment result

Segment assets
Interests in associates and joint ventures

Water 
purification
and operating

UK
services  Laboratories

(as previously stated)
£m

267.8

12.0
–

12.0
1.6

13.6

234.0
19.7

253.7

£m

32.0

5.1
–

5.1
–

5.1

25.7
–

25.7

Eliminations

£m

–

–
–

–
–

–

Water
technologies
and services
(restated)
£m

299.8

17.1
–

17.1
1.6

18.7

(18.4)
–

241.3
19.7

(18.4)

261.0

Segment liabilities

(65.8)

(8.2)

(3.6)

(77.6)

b) Secondary reporting format – geographical segments
The group’s turnover from continuing operations analysed by geographical market (by destination) was as follows:

Turnover
UK
US
Europe
Other

Continuing
activities

Discontinued
activities

2007
£m

2006
£m

2007
£m

2006
£m

1,288.8
124.1
33.4
33.9

1,253.2
140.2
36.8
25.1

1,480.2

1,455.3

387.0
94.3
14.1
–

495.4

705.7
134.0
58.4 
–

898.1

The carrying amount of the group’s assets and additions to property plant and equipment analysed by the geographical area in which the assets
are located was as follows: 

UK
US
Europe

Assets relating to discontinued activities

6 Revenue

Water and sewerage services
Other services
Sales of goods
Revenue from long term contracts
Eliminations

Total turnover
Interest receivable (note 10)
Revenue from discontinued operations

Total revenue

58 Severn Trent Annual Report and Accounts 2007

Total assets
based on location

Capital
expenditure

2007
£m

6,103.1
58.6
87.2

2006
£m

5,953.6
67.2
65.9

6,248.9

6,086.7

–

1,039.4

2007
£m

398.3
3.0
–

401.3

39.0

2006
£m

334.9
4.3
–

339.2

87.6

6,248.9

7,126.1

440.3

426.8

2007

£m

1,209.3
217.7
59.5
30.8
(37.1)

1,480.2
5.7
502.8

2006
(restated)
£m

1,137.7
243.6
62.9
65.9
(54.8)

1,455.3
2.3
900.0

1,988.7

2,357.6

7 Operating costs

Wages and salaries (including exceptional restructuring costs £3.0 million (2006: £4.8 million))

Social security costs
Pension costs (including exceptional settlement on demerger £7.8 million (2006: nil))

Total employee costs

Power
Raw materials and consumables
Rates 
Impairment of trade debtors
Service charges
Depreciation of property, plant and equipment
Exceptional write off of decommissioned plant
Amortisation of intangible fixed assets
Hired and contracted services
Operating lease rentals
– land and buildings
– other
Hire of plant and machinery
Research and development expenditure
Profit on disposal of fixed assets
Foreign exchange gains
Water and Sewerage infrastructure maintenance expenditure
Exceptional demerger costs
Other operating costs

Release from deferred income
Own work capitalised

Total operating costs

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2007

£m

2006
(restated)
£m

245.0

253.8

17.3
46.8

20.0
31.2

309.1

305.0

61.7
103.3
57.3
22.7
27.6
203.9
11.9
28.8
129.4

4.8
3.1
5.4
4.2
(0.7)
(0.2)
98.1
8.9
107.6

38.7
105.1
56.5
25.0
27.5
198.5
–
27.7
143.1

5.3
2.9
4.0
3.9
(2.9)
(0.1)
94.5
7.8
111.4

1,186.9
(3.5)
(76.9)

1,153.9
(4.6)
(71.3)

1,106.5

1,078.0

Operating costs include £31.6 million (2006: £15.7 million) of exceptional costs. Further details are given in note 8. The pension costs shown above
include current and past service costs. Other pension costs (interest costs, expected returns on assets and actuarial gains and losses) are included
in finance costs and the statement of recognised income and expense.

During the year the following fees were charged by the auditors in respect of continuing and discontinued activities:

Fees payable to the company’s auditors for the audit of the company’s annual accounts

Fees payable to the company’s auditors and their associates for other services to the group

– The audit of the company’s subsidiaries pursuant to legislation

Total audit fees

– Other services pursuant to legislation
–
Tax services
– Other services

Total non audit fees

2007
£m

0.2

2006
£m

0.1

0.5

0.7

0.1
–
0.3

0.4

1.0

1.1

–
0.2
0.8

1.0

Other services comprises controls reviews £0.1 million and various other services £0.2 million (2006: forensic accounting services £0.3 million,
controls reviews £0.3 million and various other services in total £0.2 million).

Details of directors’ remuneration are set out in the remuneration report on pages 41 to 43.

Severn Trent 59

 
 
Notes to the group financial statements continued

8 Exceptional items
A net exceptional credit of £24.7 million arose in respect of continuing operations and an exceptional charge of £24.4 million arose in respect of
discontinued operations.

The exceptional credit in continuing operations comprised:

> A charge of £14.9 million in water and sewerage arising from a programme to restructure and realign the business including write down of

decommissioned assets £11.9 million and redundancy costs £3 million;

> A charge of £16.7 million in corporate costs, arising from the demerger of Biffa Plc, including £7.8 million relating to the settlement of pension

obligations, and;

> A credit of £56.3 million of which £36.2 million arose from the disposal of properties in Severn Trent Water, £14.7 million arose in Water

Technologies and Services from the disposal of Aquafin and £5.4 million in Corporate and Other businesses from the disposal of Severn Trent
Property and other property assets.

The exceptional charge in discontinued operations comprised:

> A charge of £31.5 million arising from the impairment of goodwill relating to US Laboratories (see note 15);
> A loss of £2.4 million on the sale of US Laboratories; and
> A gain of £9.5 million on the sale of Biffa Belgium.

A net exceptional charge of £15.7 million arose in the year ending 31 March 2006. This comprised:

An exceptional restructuring charge of £7.9 million arose comprising:

> £4.8 million arising in Severn Trent Water as a result of costs associated with a redundancy programme undertaken to meet AMP4 efficiency

targets; and

> a net £3.1 million arising in Systems relating to the cessation of trading with external customers and disposal of the Worksuite and 

CIS operations.

£7.8 million of costs arose relating to the demerger of Biffa and other strategic reviews undertaken.

9 Employee numbers
Average number of employees (including executive directors) during the year (full time equivalent):

By type of business:
Water and Sewerage
Water Technologies and Services
Other Businesses and Corporate

Continuing operations
Discontinued operations

10 Net finance costs

Investment income
Interest receivable on bank deposits
Expected return on defined benefit scheme assets
Other financial income

Finance costs
Interest on bank loans and overdrafts
Interest on other loans
Interest on finance leases

Total borrowing costs
Interest cost on defined benefit obligations
Other financial expenses

Total finance costs
Fair value movements on treasury instruments

Net finance costs

Fair value movements on treasury instruments comprise:
Net gain/(loss) on debt and swaps in fair value hedges
Gain/(loss) arising on revalution of derivatives not in designated hedge accounting relationships
Fair value losses on cash flow hedges transferred from equity

Fair value movements on treasury instruments

60 Severn Trent Annual Report and Accounts 2007

2007

Number

2006
(restated)
Number

5,289
2,984
99

8,372
4,089

5,188
2,966
350

8,504
7,808

12,461

16,312

2007

£m

5.4
80.6
0.3

86.3

(28.4)
(122.6)
(20.2)

(171.2)
(67.5)
(1.4)

(240.1)
48.8

2006
(restated)
£m

1.3
70.6
1.0

72.9

(24.5)
(120.7)
(22.8)

(168.0)
(66.9)
(1.9)

(236.8)
(36.7)

(105.0)

(200.6)

0.7
52.7
(4.6)

48.8

(0.7)
(31.5)
(4.5)

(36.7)

11 Taxation
a) Analysis of tax charge in the year

Current tax
Continuing operations
Current year at 30%
Prior year at 30%

Total current tax relating to continuing operations
Current tax relating to discontinued operations

Total current tax

Deferred tax
Continuing operations
Origination and reversal of temporary differences – current year
Origination and reversal of temporary differences – prior year

Total deferred tax relating to continuing operations
Deferred tax relating to discontinued operations

Total deferred tax

Total tax charge relating to continuing operations
Total tax charge relating to discontinued operations

Total tax charge

G
r
o
u
p
f
i
n
a
n
c
i
a
l

s
t
a
t
e
m
e
n
t
s

2007

£m

2006
(restated)
£m

67.9
(9.4)

58.5
9.2

67.7

35.0
(16.6)

18.4
6.0

24.4

76.9
15.2

92.1

75.8
(14.3)

61.5
(12.7)

48.8

(0.5)
(6.8)

(7.3)
1.5

(5.8)

54.2
(11.2)

43.0

b) Factors affecting the tax charge in the year
The tax expense for the current year is lower than the standard rate of corporation tax in the UK (2007 and 2006: 30%). The differences are
explained below:

Profit on ordinary activities before tax:
Continuing operations
Discontinued operations

Tax at the standard rate of corporation tax in the UK (2007 and 2006: 30%)
Tax effect of share of results of associates and joint ventures
Tax effect of expenditure not deductible in determining taxable profit
Effect of different rates of tax in overseas jurisdictions
Adjustments in respect of prior years

Total tax charge

2007
£m

2006
£m

325.5
35.2

360.7

108.2
0.1
5.9
(0.6)
(21.5)

92.1

177.8
88.2

266.0

79.8
0.3
14.9
(1.3)
(50.7)

43.0

The adjustements in respect of prior years arose as a result of agreeing open computations with the relevant tax authorities and, in 2007, the
recognition of a deferred tax asset of £7.7 million for previously unrecognised tax losses in the USA.

c) Tax charged directly to equity
In addition to the amount charged to the income statement, the following amounts of tax have been charged directly to equity:

Current tax
Tax on exchange differences on foreign currency hedging

Total current tax charged directly to equity

Deferred tax
Tax on actuarial losses/gains
Tax on cash flow hedging
Tax on share based payments

Total deferred tax charged directly to equity

2007
£m

1.9

1.9

(4.3)
3.2
(0.6)

(1.7)

2006
£m

(1.8)

(1.8)

8.0
1.4
(0.8)

8.6

Severn Trent 61

 
 
Notes to the group financial statements continued

12 Discontinued operations
Pursuant to the Group’s strategy to focus on water the following transactions took place during the year:

On 30 June 2006 the Group completed the sale of Biffa Belgium to Veolia Proprete SA for net consideration of £23.7 million;

On 6 October 2006 the Group completed the de-merger of Biffa Plc; and 

On 29 December 2006 the Group completed the sale of Severn Trent Laboratories Inc. to TestAmerica Holdings Inc. for net consideration of 
£77.1 million.

a) Profit from discontinued operations

Turnover 
Operating costs

Profit before interest, tax and exceptional items
Net finance costs
Share of joint ventures and associates

Profit before tax and exceptional items
Tax

Profit after tax

Exceptional impairment of goodwill
Exceptional gain on disposal of discontinued operations
Attributable tax expense

Net profit attributable to discontinued operations

b)  Cash flows from discontinued operations

Net cash flows from operating activities
Net cash flows from investing activities
Net cash flows from financing activities

c) Earnings per share from discontinued operations

2007

£m

495.4
(436.2)

2006
(restated) 

£m

898.1
(807.0)

59.2
(0.1)
0.5

59.6
(15.2)

91.1
(3.9)
1.0

88.2
11.2

44.4

99.4

(31.5)
7.1
–

–
–
–

20.0

99.4

2007

£m

2006
(restated) 

£m

75.3
(26.2)
331.7

380.8

138.6
(83.5)
(9.3)

45.8

Basic earnings per share from discontinued operations
Diluted earnings per share from discontinued operations

13 Dividends
Amounts recognised as distributions to equity holders in the period:

Final dividend for the year ended 31 March 2006/2005
Interim dividend for the year ended 31 March 2007/2006
Special dividend for the year ended 31 March 2007

Proposed final dividend for the year ended 31 March 2007

2007

Weighted
average
number
of shares

Per share
amount

m

pence

232.9
235.1

8.6
8.5

2006

Weighted
average
number
of shares
(restated)
m

231.0
233.0

Per share
amount
(restated)
pence

43.0
42.7

Earnings
(restated)
£m

99.4
99.4

Earnings

£m

20.0
20.0

2007

2006

Pence
per share

31.97
22.77
165.00

219.74

38.68

£m

111.4
52.9
575.2

739.5

90.3

Pence
per share

30.30
19.16
–

49.46

£m

104.8
66.5 
–

171.3

The proposed final dividend is subject to approval by shareholders at the Annual General Meeting and has not been included as a liability in these
financial statements.

On the demerger of Biffa Plc the ordinary share capital of the company was consolidated with the intention that the share price of Severn Trent Plc
shares would be similar before and after the demerger. Two new Severn Trent shares were issued for every three old Severn Trent shares held. The
per share amounts disclosed above in respect of dividends declared before the consolidation are the amounts that were declared on the shares in
issue at the time. They have not been restated for the share consolidation.

62 Severn Trent Annual Report and Accounts 2007

14 Earnings per share
Basic earnings per share are calculated by dividing the earnings attributable to ordinary shareholders by the weighted average number of ordinary
shares in issue during the year, excluding those held in the Severn Trent Employee Share Ownership Trust, which are treated as cancelled.

For diluted earnings per share, the weighted average number of ordinary shares in issue is adjusted to assume conversion of all potentially dilutive
ordinary shares. These represent share options granted to employees where the exercise price is less than the average market price of the
company’s shares during the year.

Basic and diluted earnings per share from continuing operations are calculated on the basis of profit from continuing operations attributable to the
equity holders of the company. The weighted average number of shares for the year ended 31 March 2006 has been restated to reflect the 2 for 3
share consolidation that was approved at the extraordinary general meeting on 6 October 2006.

From continuing operations:

G
r
o
u
p
f
i
n
a
n
c
i
a
l

s
t
a
t
e
m
e
n
t
s

Basic earnings per share
Effect of dilutive options

Diluted earnings per share

From continuing and discontinued operations:

Basic earnings per share
Effect of dilutive options

Diluted earnings per share

2007

Weighted
average
number
of shares

Per share
amount

Earnings

£m

m

pence

247.1
–

247.1

232.9
2.2

235.1

106.1
(1.0)

105.1

2007

Weighted
average
number
of shares

Per share
amount

Earnings

£m

m

pence

267.1
–

267.1

232.9
2.2

235.1

114.7
(1.1)

113.6

2006

Weighted
average
number
of shares
(restated)
m

231.0
2.0

233.0

2006

Weighted
average
number
of shares
(restated)
m

231.0
2.0

233.0

Per share
amount
(restated)
pence

52.9
(0.5)

52.4

Per share
amount
(restated)
pence

95.9
(0.8)

95.1

Earnings
(restated)
£m

122.2
–

122.2

Earnings
(restated)
£m

221.6
–

221.6

Supplementary earnings per share
Supplementary adjusted earnings per share figures are presented for continuing operations. These exclude the effects of deferred tax, fair value
movements on treasury instruments and exceptional items in both 2007 and 2006. The directors consider that the supplementary figures provide
a useful additional indicator of performance.

From continuing operations:

Basic earnings per share
Effect of:
Exceptional restructuring costs 
and termination of operations
Exceptional demerger and related costs
Exceptional profit on disposal 
of property and businesses
Current tax related to exceptional items at 30%
Fair value movements 
on treasury instruments
Deferred tax

2007

Weighted
average
number
of shares

Per share
amount

Earnings

£m

m

pence

2006

Weighted
average
number
of shares
(restated)
m

Per share
amount
(restated)
pence

Earnings
(restated)
£m

247.1

232.9

106.1

122.2

231.0

52.9

14.9
16.7

(56.3)
–

(48.8)
18.4

–
–

–
–

–
–

6.4
7.2

(24.2)
–

(21.0)
7.9

7.9
7.8

–
(2.4)

36.7
(7.3)

–
–

–
–

–
–

3.4
3.4

–
(1.0)

15.9
(3.2)

Adjusted earnings per share before exceptional items, fair value 
movements on treasury instruments and deferred tax

192.0

232.9

82.4

164.9

231.0

71.4

Severn Trent 63

 
 
Notes to the group financial statements continued

14 Earnings per share continued

From continuing operations:
Diluted earnings per share
Effect of:
Exceptional restructuring costs
and termination of operations
Exceptional demerger and related costs
Exceptional profit on disposal
of property and businesses
Current tax related to exceptional items at 30%
Fair value movements
on treasury instruments
Deferred tax

2007

Weighted
average
number
of shares

Per share
amount

Earnings

£m

m

pence

2006

Weighted
average
number
of shares
(restated)
m

Per share
amount
(restated)
pence

Earnings
(restated)
£m

247.1

235.1

105.1

122.2

233.0

52.4

14.9
16.7

(56.3)
–

(48.8)
18.4

–
–

–
–

–

6.3
7.1

(23.9)
–

(20.8)
7.8

7.9
7.8

–
(2.4)

36.7
(7.3)

–
–

–
–

–
–

3.4
3.3

–
(1.0)

15.8
(3.1)

Adjusted diluted earnings per share before exceptional items, 
fair value movements on treasury instruments and deferred tax

192.0

235.1

81.6

164.9

233.0

70.8

15 Goodwill

Cost and net book value
At 1 April
Acquisition of businesses
Impairment of US Laboratories (see below)
Disposal of subsidiaries
Additions
Adjustment to consideration on acquisitions in prior years
Classified as held for sale
Exchange adjustments

At 31 March

2007
£m

2006
£m

506.3
–
(31.5)
(414.1)
–
(0.3)
–
(11.3)

499.1
0.1
–
(0.1)
1.4
–
(2.1)
7.9

49.1

506.3

Goodwill impairment tests
Goodwill is allocated to the group’s cash generating units (CGUs) identified according to country of operation and business segment.

A summary of the goodwill allocation by CGU is presented below:

2007
£m

21.0
9.6
0.2
12.0
6.3

49.1

–
–

49.1

2006
£m

23.8 
10.8
0.2
12.3
6.4

53.5

390.5
62.3

506.3

Water Technologies and Services
Water Purification US
Contract Operations US
UK Services
UK Laboratories
Services Italy

Discontined Operations
Biffa UK
US Laboratories

64 Severn Trent Annual Report and Accounts 2007

The recoverable amount of a CGU is determined using value in use calculations. These calculations use cash flow projections based on financial
budgets approved by management covering a five year period. Cash flows beyond the five year period are extrapolated using an estimated nominal
growth rate stated below. The growth rate does not exceed the long term average growth rate for the economy in which the CGU operates.

Water Technologies and Services

Nominal growth rate
2007
2006
%
%

3.0

3.0

Discount rate

2007
%

11.5

2006
%

11.0

These assumptions have been used for the analysis of each CGU within the business segment. The weighted average growth rates used are
consistent with the forecasts included in industry reports. The discount rates used are pre-tax and reflect specific risks relating to the segment.

On 4 September 2006, the group agreed to sell its US Laboratories business to TestAmerica Holdings Inc for £77.1 million. This resulted in 
an impairment of £31.5 million in the goodwill relating to the US Laboratories business, which was recognised in the group’s interim financial
statements. This transaction was completed on 29 December 2006 (see note 35).

G
r
o
u
p
f
i
n
a
n
c
i
a
l

s
t
a
t
e
m
e
n
t
s

16 Intangible assets

Cost
At 1 April 2005
Acquired in business combination
Additions
Disposals
Classified as held for sale
Reclassifications and transfer
Exchange adjustments

At 1 April 2006
Additions
Disposals
Disposal of subsidiaries
Exchange adjustments

At 31 March 2007

Amortisation
At 1 April 2005
Amortisation for year
Disposals
Classified as held for sale
Reclassifications and transfer
Exchange adjustments

At 1 April 2006
Amortisation for year
Disposals
Disposal of subsidiaries
Exchange adjustments

At 31 March 2007

Net book value
At 31 March 2007

At 31 March 2006

Computer
software
£m

Other
assets
£m

204.2
–
27.8
(14.6)
(1.3)
(3.7)
0.1

212.5
20.3
(9.2)
(2.4)
(0.2)

29.2
0.1
1.2
(1.5)
(0.3)
(9.4)
0.6

19.9
1.2
(0.1)
(3.6)
(0.6)

Total
£m

233.4
0.1
29.0
(16.1)
(1.6)
(13.1)
0.7

232.4
21.5
(9.3)
(6.0)
(0.8)

221.0

16.8

237.8

(98.1)
(27.5)
14.0
1.2
2.0
(0.1)

(108.5)
(27.8)
8.3
1.4
0.1

(9.5)
(1.8)
1.3
0.2
(1.4)
(0.3)

(11.5)
(1.6)
–
2.7
0.3

(107.6)
(29.3)
15.3
1.4
0.6
(0.4)

(120.0)
(29.4)
8.3
4.1
0.4

(126.5)

(10.1)

(136.6)

94.5

104.0

6.7

8.4

101.2

112.4

Other assets primarily comprise capitalised development costs, brands and patents.
Intangible assets include internally generated software of £108.8 million (2006: £112.4 million). Additions during the year totalled £4.7 million 
(2006: £25.4 million).

Severn Trent 65

 
 
Notes to the group financial statements continued

17 Property, plant and equipment

Cost
At 1 April 2005
Acquisition of businesses 
Additions
Disposals 
Reclassifications and transfers 
Classified as held for sale
Exchange adjustments 

At 1 April 2006
Additions 
Disposals 
Disposal/demerger of subsidiaries
Exchange adjustments

Land and
Buildings
£m

2,246.3
–
101.1
(5.7)
23.1
(18.2)
2.4

2,349.0
107.4
(19.7)
(370.2)
(3.9)

Infra-
structure
assets
£m

Fixed plant
and
equipment
£m

Movable
plant
£m

3,609.3
–
80.9
(0.6)
–
–
–

3,689.6
98.3
(1.4)
–
–

2,677.9
0.1
205.2
(68.6)
(19.8)
(62.8)
6.6

2,738.6
213.7
(68.8)
(364.4)
(11.7)

65.1
–
10.6
(13.2)
–
–
1.0

63.5
8.0
(13.0)
–
(0.3)

Total
£m

8,598.6
0.1
397.8
(88.1)
3.3
(81.0)
10.0

8,840.7
427.4
(102.9)
(734.6)
(15.9)

At 31 March 2007

2,062.6

3,786.5

2,507.4

58.2

8,414.7

Depreciation
At 1 April 2005
Charge for year 
Disposals 
Reclassifications and transfers 
Classified as held for sale
Exchange adjustments

At 1 April 2006
Charge for year 
Disposals 
Disposal/demerger of subsidiaries
Exchange adjustments

At 31 March 2007

Net book value
At 31 March 2007

At 31 March 2006

(731.6)
(63.7)
5.6 
(10.0)
14.3 
(1.0) 

(786.4)
(59.6)
13.3
186.3
3.2

(958.4)
(20.5)
0.6
–
–
–

(978.3)
(21.3)
1.4
–
–

(1,238.2)
(176.2)
68.6
2.4
44.0
(5.6)

(1,305.0)
(166.0)
55.3
178.1
9.6

(31.0)
(7.5)
11.2
–
–
(0.6)

(27.9)
(7.6)
11.3
–
–

(2,959.2)
(267.9)
86.0
(7.6)
58.3
(7.2)

(3,097.6)
(254.5)
81.3
364.4
12.8

(643.2)

(998.2)

(1,228.0)

(24.2)

(2,893.6)

1,419.4

2,788.3

1,279.4

34.0

5,521.1

1,562.6

2,711.3

1,433.6

35.6

5,743.1

The carrying amount of property, plant and equipment includes the following amounts in respect of assets held under finance leases.

Net book value
At 31 March 2007

At 31 March 2006 

Land and
Buildings
£m

Infra-
structure
assets
£m

Fixed plant
and
equipment
£m

Movable
plant
£m

–

127.2

185.1

19.3

127.2

232.9

–

–

Total
£m

312.3

379.4

Fixed plant and equipment includes £180.3 million (2005: £225.3 million in respect of assets in the course of construction for which no
depreciation is charged.

66 Severn Trent Annual Report and Accounts 2007

18 Interests in joint ventures

Group’s share of:
Long term assets
Current assets
Current liabilities
Long term liabilities
Amounts due from joint ventures

Group’s share of:
Turnover
Operating costs

Operating profit
Finance costs

Profit before tax
Tax

Profit after tax

G
r
o
u
p
f
i
n
a
n
c
i
a
l

s
t
a
t
e
m
e
n
t
s

2007
£m

2006
£m

0.1
0.9
(0.6)
–
0.1

0.5

1.6
(1.1)

0.5
(0.2)

0.3
(0.1)

0.2

0.9
4.2
(7.1)
–
11.7

9.7

2.9
(1.9)

1.0
(0.4)

0.6
(0.1)

0.5

The joint venture has no significant contingent liabilities to which the group is exposed and the group does not have any significant contingent
liabilities in relation to its interests in the joint venture. The group has no capital commitments in relation to its interests in the joint venture.

Particulars of the group’s joint venture undertaking at 31 March 2007 are:

Cognica Limited

*Held by the group

Nature
of business

Percentage
of share
capital held

A ordinary
shares of £1

B ordinary
shares of £1

Asset Management

50% 100,000*

100,000

The country of incorporation and main operation of the joint venture is Great Britain and it is registered in England and Wales.

Severn Trent 67

 
 
Notes to the group financial statements continued

19 Interests in associates

At 1 April
Additions
Disposals
Share of profits
Dividends receivable
Other movements

At 31 March

Group’s share of:

Total assets
Total liabilities

Turnover

Profit before tax

2007
£m

19.6
–
(15.0)
0.9
(1.5)
(0.6)

3.4

2006
£m

16.3
3.0
–
1.6
(1.5)
0.2

19.6

14.6
(11.2)

330.9
(311.3)

3.4

19.6

24.6

0.9

41.9

1.6

On 7 July 2006 the group sold its interest in Aquafin NV to the Flemish Government for approproximatly £29.6 million.

The associate company has no significant contingent liabilities to which the group is exposed and the group does not have any significant
contingent liabilities in relation to its interest in the associate. The group has no capital commitments in relation to its interests in the associate.

The associate at 31 March 2007 was:

Equity interest

Percentage
of share
capital held

Nature of
business

S.I.I. Societa Consortile per Azioni

19,536,000 of £1

25%

Water and sewerage

The country of incorporation and main operation is Italy.

68 Severn Trent Annual Report and Accounts 2007

20 Financial instruments
The group’s policies in respect of foreign currency and interest rate risk management and the related use of financial instruments, which form part
of these financial statements, are set out below. 

a) Financial liabilities analysed by currency and interest rate after taking account of various currency and interest rate swaps entered into by

G
r
o
u
p
f
i
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a
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c
i
a
l

s
t
a
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e
m
e
n
t
s

the group

At 31 March 2007

Currency

Sterling
Euro
US dollar

Fixed rate borrowings

2007
Total
£m

Non-interest
bearing
liabilities
£m

3,295.2
8.5
2.9

26.1
6.8
2.9

Floating
interest
rate
£m

1,110.6
1.7
–

Fixed
interest
rate
£m

2,158.5
–
–

Weighted
average
interest
rate
%

Weighted
average
period for
which
interest
is fixed
Years

5.7

13.5

Total financial liabilities at 31 March 2007

3,306.6

35.8

1,112.3

2,158.5

At 31 March 2006

Currency

Sterling
Euro
US dollar

Total financial liabilities at 31 March 2006

Fixed rate borrowings

2006
Total
£m

Non-interest
bearing
liabilities
£m

3,112.9
36.4
13.8

3,163.1

43.6
6.7
9.1

59.4

Floating
interest
rate
£m

941.7
29.7
4.7

Fixed
interest
rate
£m

2,127.6
–
–

976.1

2,127.6

Weighted
average
interest
rate
%

Weighted
average
period for
which
interest
is fixed
Years

5.7

14.6

Non-interest bearing liabilities relate to onerous contracts and trade payables. The weighted average period to maturity of the onerous contracts is
4.6 years (1.5 years). Trade payables are all due in under 1 year.

Included in the fixed rate debt above, the group has entered into a number of forward start accruing interest rate swaps. These had an initial
notional value of £19.6 million and commence accreting notional value between 31 March 2007 and 2032. The maximum notional value of these
swaps is £135.0 million. These swaps are floating to fixed and bear fixed interest at between 5.32% and 5.52%.

The group has also entered into £236.0 million of forward start interest rate swaps (floating to fixed) that commence between May 2007 and May
2009. These swaps all terminate in 2010. These interest rate swaps bear interest between 4.54% and 4.87%.

Floating rate sterling denominated borrowings bear interest based on LIBOR, whilst euro denominated borrowings bear interest based on EURIBOR
and dollar borrowings bear interest based on dollar LIBOR.

b)

Investments in interest earning assets analysed by currency after taking account of various currency swaps entered into by the group

Currency

Sterling deposits
Sterling cash at bank 

Sterling assets receive interest based on LIBID.

2007
£m

100.0
43.2

143.2

2006
£m

87.8
54.8

142.6

Of the total £143.2 million interest earning assets, there is £49.6 million of cash held on short term deposit as security for external insurance, as
part of Derwent’s reinsurance obligations. In addition, Severn Trent Water has a total of £1.9 million on short term deposit as security for self
insurance obligations.

Severn Trent 69

 
 
Notes to the group financial statements continued

c) Monetary assets and liabilities by currency, excluding the functional currency

At 31 March 2007

Functional currency of operation
Sterling

At 31 March 2006

Functional currency of operation
Sterling

Net foreign currency monetary assets

US dollar
£m

0.2

Euro
£m

1.0

Other
£m

Total
£m

–

1.2

Net foreign currency monetary assets

US dollar
£m

5.7

Euro
£m

0.7

Other
£m

Total
£m

–

6.4

Net currency gains/(losses) arising from monetary assets/(liabilities) not in the functional currency of an operation are recognised in its income
statement. Those arising from the translation of US dollar and euro functional currency financial statements into sterling are recognised in the
statement of recognised income and expense.

d) Financial liabilities analysed by maturity date

Loans
payable by
instalments
any of which
are payable
after five
years
£m

Overdrafts
£m

Other
repayment
terms
£m

Finance
leases
£m

Other
financial
liabilities
£m

2007
Total
£m

2006
Total
£m

Current financial liabilities 

0.1

1.7

597.3

32.7

33.3

665.1

866.6

Financial liabilities due after one year:
Between one and two years
Between two and five years
After more than five years

Non current financial liabilities 

–
–
–

–

0.1

–
–
35.5

35.5

37.2

213.7
190.6
1,823.4

2,227.7

2,825.0

40.9
105.6
229.3

375.8

408.5

0.3
0.6
1.6

2.5

254.9
296.8
2,089.8

164.5
554.3
1,577.7

2,641.5

2,296.5

35.8

3,306.6

3,163.1

£461.0 million of funding instruments contain certain financial covenants, breach of which can trigger early repayment.

70 Severn Trent Annual Report and Accounts 2007

e) Borrowing facilities
The group has the following undrawn committed borrowing facilities available (all at floating rates).

Expiring within one year
Expiring in more than one, but not more than two years
Expiring in more than two, but not more than five years

G
r
o
u
p
f
i
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a
n
c
i
a
l

s
t
a
t
e
m
e
n
t
s

2007
£m

–
–
500.0

500.0

2006
£m

–
–
500.0

500.0

In addition, the group has a committed facility of £80 million (2006: £80.0 million), of which up to £60 million may be drawn in the form of 
money market borrowings and the balance not utilised by such drawings may be drawn as overdraft. The amount undrawn at the year end was
£47.2 million (2006: £nil).

f) Derivative contracts

Cross currency swaps – hedges of net investment
Cross currency swaps – fair value hedges
Cross currency swaps – not qualifying for hedge accounting
Interest rate swaps – cash flow hedges
Interest rate swaps – not qualifying for hedge accounting

Total

Less non-current portion
Cross currency swap – fair value hedges
Interest rate swap – cashflow hedges

Total

Current portion

Assets
£m

–
3.1
1.2
3.9
12.5

20.7

2.7
3.9

6.6

14.1

2007
Liabilities
£m

Assets
£m

2006
Liabilities
£m

–
(65.3)
–
(0.5)
(57.5)

–
3.1
3.9
0.6
6.9

–
(37.0)
–
(3.0)
(104.5)

(123.3)

14.5

(144.5)

(55.7)
(0.5)

(56.2)

(67.1)

3.1
0.6

3.7

(27.1)
(3.0)

(30.1)

10.8

(114.4)

Interest rate swaps
The notional principal amounts of the outstanding interest rate swaps contracts at 31 March 2007 was £1,273 million (2006: £1,232 million). 
The fixed interest rates vary from 4.38% to 6.45%. The main floating rate is LIBOR.

Included within this are interest rate swaps with a notional value of £1,432 million (2006: £850 million) which do not qualify for hedge accounting.
The group has an ongoing debt requirement and these swaps aim to fix the interest rates paid on a portfolio of variable debt of various terms. As it
is not possible to specifically match these swaps to individual debt instruments, they do not qualify for hedge accounting. 

Cross currency swaps
The notional principal amounts of the outstanding cross currency swap contracts at 31 March 2007 was £491.3 million (2006: £467.6 million).
These swap a variety of currencies into sterling.

Hedge of net investments in foreign entities
During the year the group held a US dollar cross currency swap that was designated as a hedge of net investment in the group’s US subsidiaries.
The swap matured in January 2007 and was not replaced. The foreign exchange gain of £6.4 million (2006: loss of £5.3 million) was recognised 
in hedging reserves in shareholders’ equity.

Severn Trent 71

 
 
Notes to the group financial statements continued

g) Fair values of financial instruments
Financial instruments by category:

Asset/(liability)

Primary financial instruments held or issued to finance the group’s operations
Trade receivables
Short-term deposits
Cash at bank and in hand
Borrowings falling due within one year
Borrowings falling due after more than one year
Provisions for onerous contracts
Trade payables
Derivative financial instruments held to manage the currency and interest rate profile
Interest rate swaps and similar instruments
Currency instrument – cross currency swaps

Total net financial liabilities

Other long term assets 
Other fixed asset investments

2007

2006

Book value
£m

Fair value
£m

Book value
£m

Fair value
£m

181.3
100.0
43.2
(631.8)
(2,639.0)
(3.1)
(32.7)

181.3
100.0
43.2
(603.6)
(2,572.2)
(3.1)
(32.7)

302.6
87.8
54.8
(808.2)
(2,295.5)
(2.2)
(57.3)

302.6
87.8
54.8
(791.2)
(2,468.6)
(2.2)
(57.3)

(41.6)
(61.0)

(41.6)
(61.0)

(100.0)
(30.0)

(100.0)
(30.0)

(3,084.7)

(2,989.7)

(2,848.0)

(3,004.1)

0.2

0.2

0.5

0.5

Where available, market rates have been used to determine fair values. When market prices are not available, fair values have been calculated by
discounting cash flows at prevailing interest rates.

h) Financial risk factors
The group’s activities expose it to a variety of financial risks: market risk (including currency risk), credit risk, liquidity risk and interest rate risk. The
group’s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects
on the group’s financial performance. The group uses derivative financial instruments to hedge certain risk exposures.

Risk management is carried out by a central treasury department (Group Treasury) under policies approved by the board of directors. Group
Treasury identifies, evaluates and hedges financial risks in close co-operation with the group’s operating units. The board provides written principles
for overall risk management, as well as written policies covering specific areas, such as foreign exchange risk, interest rate risk, credit risk, use of
derivative financial instruments and non-derivative financial instruments, and the investment of surplus funds.

(i) Market risk
The group operates internationally and is exposed to foreign exchange risk arising from net investments in foreign operations, primarily with
respect to the US dollar and the euro. In addition, the group has a significant value of foreign currency debt, primarily in US dollars, yen and euros.

Foreign exchange risk arises when transactions are denominated in a currency that is not the entity’s functional currency. To manage the foreign
exchange risk arising from foreign currency debt the group enters into cross currency swaps with external parties.

External foreign exchange contracts are designated at group level and company level as hedges of foreign exchange risk on specific assets,
liabilities or future transactions on a gross basis.

The group’s risk management policy is to hedge 100% of all foreign currency denominated debt.

The group has certain investments in foreign operations whose net assets are exposed to foreign currency translation risk. Currency exposure
arising from the net assets of the group’s foreign operations is managed through borrowings and forward foreign exchange contracts denominated
in the relevant foreign currencies.

(ii) Credit risk
Operationally, the group has no significant concentrations of credit risk. It has policies in place to ensure that sales of products are made to
customers with an appropriate credit history, other than in Severn Trent Water Limited, whose operating licence obliges it to continue to supply
domestic customers even in cases where bills are not paid. 

For financing purposes, derivative counterparties and cash transactions are limited to high credit quality financial institutions. The group has
policies that limit the amount of credit exposure to any one financial institution.

(iii) Liquidity risk
Prudent liquidity risk management implies maintaining sufficient cash balances and the availability of funding through an adequate amount of
committed credit facilities and the ability to close out market positions. Due to the dynamic nature of the underlying businesses, Group Treasury
aims to maintain flexibility in funding by keeping committed credit lines available.

(iv) Cash flow and fair value interest rate risk
The group’s income and operating cash flows are substantially independent of changes in market interest rates.

The group’s interest rate risk arises from long term borrowings. Borrowings issued at variable rates expose the group to cash flow interest rate risk.
Borrowings issued at fixed rates expose the group to fair value interest rate risk. Group policy is to maintain over 50% of its borrowings in fixed rate
instruments. At 31 March 2007 some 69% of the group’s net debt was fixed.

72 Severn Trent Annual Report and Accounts 2007

G
r
o
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f
i
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a
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c
i
a
l

s
t
a
t
e
m
e
n
t
s

The group manages its cash flow interest rate risk by using floating to fixed interest rate swaps. Such interest rate swaps have the economic 
effect of converting borrowings from floating rates to fixed rates. Under the terms of the interest rate swaps, the group agrees with other parties 
to exchange, at specified intervals (mainly semi annually), the difference between fixed contract and floating rate interest rates calculated by
reference to the agreed notional principal amounts. The group has entered into a series of long dated interest rate swaps to hedge future debt.
Economically these act to fix floating rate debt within the group, but do not achieve hedge accounting under the strict criteria of IAS 39. This has
led to a credit of £52.7 million (2006: charge of £31.5 million) in the income statement.

i) Fair value estimation
The fair value of financial instruments traded in active markets (such as trading and available for sale securities) is based on quoted market prices
at the balance sheet date. The quoted market price used for financial assets held by the group is the current bid price.

The fair value of financial instruments that are not traded in an active market (for example, over the counter derivatives) is determined by using
valuation techniques. The group uses a variety of methods and makes assumptions that are based on market conditions existing at each balance
sheet date. Estimated discounted cash flows are used to determine fair value for the debt. The fair value of interest rate swaps is calculated as the
present value of the estimated future cash flows. The fair value of forward foreign exchange contracts is determined using quoted forward exchange
rates at the balance sheet date.

The nominal value less impairment provision of trade receivables and payables are assumed to approximate their fair values. The fair value of
financial liabilities for disclosure purposes is estimated by discounting the future contractual cash flows at the current market interest rate that is
available to the group for similar financial instruments.

21 Available for sale financial assets

Investments in unquoted equity instruments

2007
£m

0.2

2006
£m

0.5

The fair values of the unquoted equity instruments cannot be measured reliably since there is no active market in the instruments. Hence the
investments are held at cost. It is not possible to determine a range of estimates within which the fair values are highly likely to lie.

22 Inventory

Inventory and work in progress
Development land and properties

2007
£m

22.4
–

22.4

2006
£m

34.1
20.3

54.4

Following the disposal of Severn Trent Property the group no longer holds development land and properties.

Severn Trent 73

 
 
Notes to the group financial statements continued

23 Trade and other receivables

Trade receivables
Less provision for impairment of receivables

Trade receivables – net
Receivables from related parties
Corporation tax recoverable
Other amounts receivable
Prepayments and accrued income

The carrying values of trade and other receivables are reasonable approximations of their fair values.

There is no concentration of credit risk with respect to trade receivables.

Prepayments include £8.2 million (2006: £9.6 million) in respect of amounts due from customers for contract work.

24 Cash and cash equivalents

Cash at bank and in hand
Short term bank deposits

2007
£m

256.0
(74.7)

181.3
0.3
–
37.8
167.7

387.1

2006
£m

372.7
(70.1)

302.6
0.3
0.1
12.1
166.4

481.5

2007
£m

43.2
100.0

143.2

2006
£m

54.8
87.8

142.6

Of the £100.0 million of short term bank deposits, £51.5 million is not available for use by the group. Further details are given in note 20 (b).

Cash and bank overdrafts include the following for the purposes of the cash flow statement:

Cash and cash equivalents
Bank overdrafts (note 25)

2007
£m

143.2
(0.1)

2006
£m

142.6
(32.2)

143.1

110.4

74 Severn Trent Annual Report and Accounts 2007

25 Borrowings

Bank overdrafts
Bank loans
Other loans
Obligations under finance leases

Borrowings

The borrowings are repayable as follows:
On demand or within one year (included in current liabilities)

In the second year
In the third to fifth years inclusive
After five years

Included in non current liabilities

The group’s borrowings are denominated in the following currencies after taking account of cross currency swaps:

Sterling
Euro
US dollar

The fair values of the group’s borrowings were:

Bank overdrafts
Bank loans
Other loans
Obligations under finance leases

G
r
o
u
p
f
i
n
a
n
c
i
a
l

s
t
a
t
e
m
e
n
t
s

2007
£m

2006
£m

0.1
462.6
2,399.6
408.5

32.2
381.4
2,201.3
488.8

3,270.8

3,103.7

2007
£m

2006
£m

631.8

808.2

254.6
296.2
2,088.2

163.6
554.2
1,577.7

2,639.0

2,295.5

3,270.8

3,103.7

2007
£m

2006
£m

3,269.1
1.7
–

3,069.4
29.6
4.7

3,270.8

3,103.7

2007
£m

2006
£m

0.1
429.7
2,170.1
408.5

32.2
358.7
2,380.1
488.8

3,008.4

3,259.8

Fair values are based on expected future cash flows discounted using LIBOR forward interest rates related to the expected timing of payments.

Fixed debt has a weighted average interest rate of 5.7% (2006: 5.7%) for a weighted average period of 13.5 years (2006: 14.6 years).

Further details of bank facilities are given in note 20.

Obligations under finance leases are as follows:

Gross obligations under finance leases
Less future finance charges

Present value of lease obligations

2007
£m

2006
£m

588.2
(179.7)

721.6
(232.8)

408.5

488.8

The remaining terms of finance leases ranged from 4 to 25 years at 31 March 2007. Interest terms are set at the inception of the lease, no leases
(2006: 3.4%) were at fixed interest rates. The weighted average effective rate payable on fixed rate leases was 4.3% in 2006. The lease obligations
are secured against the related assets. The fair value of the finance lease obligations is not significantly different from their carrying value.

There were no contingent rents, escalation clauses or material renewal or purchase options. The terms of the finance leases do not impose
restrictions on dividend payments, additional debt or further leasing. 

Severn Trent 75

 
 
Notes to the group financial statements continued

26 Trade and other payables

Current liabilities
Trade payables
Social security and other taxes
Other payables
Accruals and deferred income

Non current liabilities
Deferred income
Other payables
Accrued expenses

2007
£m

2006
£m

32.7
6.7
34.2
331.5

405.1

183.0
–
5.3

188.3

57.3
47.9
39.3
396.1

540.6

151.5
2.7
4.5

158.7

The directors consider that the carrying value of trade payables is not materially different from their fair values.

Accruals and deferred income includes £2.5 million (2006: £3.1 million) in respect of amounts due to customers for contract work.

27 Deferred tax
The following are the major deferred tax liabilities and assets recognised by the group and movements thereon during the current and prior
reporting period.

At 1 April 2005
Charge/(credit) to income
Charge/(credit) to equity
Acquisitions/disposals
Assets held for sale
Exchange differences

At 1 April 2006
Charge/(credit) to income
Charge/(credit) to equity
Acquisitions/disposals
Exchange differences

At 31 March 2007

Accelerated tax 
depreciation
£m

Retirement 
benefit 
obligation
£m

Tax losses
£m

Fair
value of
financial
instruments
£m

921.3 
10.2 
– 
0.1 
– 
– 

931.6 
(8.4)
–
(3.5)
(0.1)

(95.5)
20.9 
8.0 
– 
– 
– 

(66.6)
17.7
(4.3)
12.6
–

(1.2)
0.1 
– 
– 
1.0 
– 

(0.1)
(8.6)
–
0.7
0.3

(21.2)
(11.0)
1.4 
– 
– 
– 

(30.8)
14.7
3.2
–
–

Other
£m

63.5
(26.0)
(0.8)
– 
– 
(0.6)

36.1 
9.0
(0.6)
(12.3)
0.5

Total
£m

866.9 
(5.8)
8.6 
0.1 
1.0 
(0.6)

870.2
24.4
(1.7)
(2.5)
0.7

919.6

(40.6)

(7.7)

(12.9)

32.7

891.1

Certain deferred tax assets and liabilities have been offset. The offset amounts are as follows:

Deferred tax asset to be recovered after more than 12 months
Deferred tax asset to be recovered within 12 months

Deferred tax liability to be recovered after more than 12 months
Deferred tax liability to be recovered within 12 months

2007
£m

(44.8)
(4.7)

(49.5)

937.8
2.8

940.6

891.1

2006
£m

(68.9)
(3.0)

(71.9)

932.8 
9.3 

942.1 

870.2

In addition to the amounts disclosed above, at the balance sheet date the group had unused tax losses of £4.9 million (2006: £33.3 million)
available for offset against future profits. No asset has been recognised for these losses since it is not probable that there will be sufficient taxable
profit available against which the losses can be utilised.

The Chancellor’s budget announced proposed changes to the future rate of corporation tax and industrial buildings allowances that, if enacted in
the Finance Act, will impact the deferred tax pension and future tax charges. The group is currently assessing the likely impact of these changes.

76 Severn Trent Annual Report and Accounts 2007

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28 Retirement benefit schemes
Defined benefit schemes
The group operates a number of defined benefit pension schemes in the UK, covering the majority of UK employees. The defined benefit schemes
are funded to cover future salary and pension increases and their assets are held in separate funds administered by trustees. A formal actuarial
valuation of each scheme is carried out at regular intervals by an independent professionally qualified actuary. Under the defined benefit schemes,
members are entitled to retirement benefits calculated as a proportion (varying between one thirtieth and one eightieth for each year of service) of
their salary for the final year of employment with the group or, if higher, the average of the highest three consecutive years salary in the last ten
years of employment. The final salary sections of all of the pension schemes listed below are closed to new entrants and the age profile of scheme
participants is expected to rise and hence service costs are also expected to rise in the future.

The UK defined benefit schemes and the date of their last formal actuarial valuation are as follows:

UK defined benefit scheme

Date of last formal actuarial valuation

Severn Trent Pension Scheme (“STPS”)*
Severn Trent Senior Staff Pension Scheme (“SSPS”)
Severn Trent Water Mirror Image Pension Scheme

* The STPS is by far the largest of the group’s UK defined benefit schemes.

31 March 2004
31 March 2004
31 March 2006

On the demerger of Biffa Plc the company entered into an agreement with that company and the trustees of the STPS, the SSPS and the UK Waste
Pension Scheme (“UKWPS”) whereby the assets and liabilities relating to Biffa Plc employees in the STPS and the SSPS would be transferred to 
the UKWPS with effect from 31 March 2007. The group has no continuing responsibility for the UKWPS following this agreement. The net deficit
relating to Biffa Plc employees at the demerger date was £39 million. This has been included in the net assets that formed the dividend in specie
on demerger. The reduction in the deficit between the demerger date and 31 March 2007 has been treated as an exceptional loss on settlement of
£7.8 million.

The group has an obligation to pay pension to a number of former employees, whose benefits would otherwise have been restricted by the Finance
Act 1989 earnings cap. Provision for such benefits amounting to £7.5 million (2006: £11.5 million) is included in the retirement benefit obligation.

The major assumptions used in the valuation of the STPS (also the approximate weighted average of assumptions used for the valuations of all
group schemes) were as follows:

Price inflation
Salary increases
Pension increases in payment and deferment
Discount rate
Longevity at age 65 for pensioners retiring now
– men (years)
– women (years)
Longevity at age 65 for pensioners retiring in 20 years
– men (years)
– women (years)

2007

3.0%
4.5%
3.0%
5.4%

19.2
22.1

19.9
23.0

2006

2.7%
4.2%
2.7%
4.9%

18.3
21.0

18.9
21.8

Severn Trent 77

 
 
Notes to the group financial statements continued

Amounts recognised in the income statement in respect of these defined benefit schemes are as follows:

Amounts charged to operating costs
Current service cost
Past service cost
Exceptional settlement

Amounts charged to net finance costs
Interest cost
Expected return on scheme assets

Total amount charged to the income statement

Actuarial gains and losses have been reported in the statement of recognised income and expense.

The amount included in the balance sheet arising from the group’s obligations under defined benefit schemes is as follows:

Present value of defined benefit obligations – funded schemes
Total fair value of assets

Present value of defined benefit obligations – unfunded schemes

Liability recognised in the balance sheet

Movements in the present value of the defined benefit obligation were as follows:

At 1 April
Service cost
Exceptional loss on settlement
Interest cost
Contributions from scheme members
Liabilities transferred to Biffa Plc
Actuarial losses recognised in the statement of recognised income and expense
Benefits paid

At 31 March

Movements in the fair value of the scheme assets were as follows:

At 1 April
Expected return on scheme assets
Contributions from the sponsoring companies
Contributions from scheme members
Assets transferred to Biffa Plc
Actuarial gains and losses recognised in the statement of recognised income and expense
Benefits paid

At 31 March

2007
£m

2006
£m

(41.1)
(0.4)
(7.8)

(49.3)

(73.0)
87.0

14.0

(38.9)
(0.8)
–

(39.7)

(75.4)
79.2

3.8

(35.3)

(35.9)

2007
£m

2006
£m

(1,492.2)
1,364.6

(1,613.3)
1,402.9

(127.6)
(7.5)

(210.4)
(11.5)

(135.1)

(221.9)

2007
£m

2006
£m

1,624.8
41.5
7.8
73.0
7.5
(201.5)
3.7
(57.1)

1,394.4
39.7
–
75.4
10.6
–
152.8
(48.1)

1,499.7

1,624.8 

2007
£m

2006
£m

1,402.9
87.0
97.4
7.5
(162.5)
(10.6)
(57.1)

1,076.9
79.2
105.2
10.6
–
179.1
(48.1)

1,364.6

1,402.9

78 Severn Trent Annual Report and Accounts 2007

The analysis of the assets in the schemes and the expected rates of return were:

Equities
Gilts
Corporate bonds
Property
Cash

Total fair value of assets

G
r
o
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f
i
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a
n
c
i
a
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s
t
a
t
e
m
e
n
t
s

2007

Expected
return

Fair value
of assets
£m

2006

Expected
return

Fair value
of assets
£m

8.25%
4.65%
5.40%
6.55%
5.25%

811.5
248.5
103.2
86.3
115.1

8.00%
4.17%
4.40%
6.20%
3.70%

907.5
261.7
63.5
81.4
88.8

1,364.6

1,402.9

The expected rate of return on scheme assets is based on market expectations at the beginning of the period for returns over the life of the benefit
obligation. For gilts and corporate bonds the expected rates of return are based on market yields at the balance sheet date. For equities, an equity
risk premium has been added to the gilt rate.

The actual return on scheme assets was £76.4 million (2006: £258.3 million).

The estimated amount of contributions expected to be paid to the schemes during the year ending 31 March 2008 is £47 million.

The history of actual and expected performance of pension scheme assets and liabilities is:

Present value of defined benefit obligations
Fair value of scheme assets

Deficit in the schemes

Difference between actual and expected return on scheme assets
Experience adjustments on scheme liabilities

2007
£m

2006
£m

2005
£m

(1,499.7)
1,364.6

(1,624.8)
1,402.9

(1,394.4)
1,076.9

(135.1)

(221.9)

(317.5)

(10.6)
3.7

179.1
(152.8)

37.5
5.7

Defined contribution schemes
The group also operates defined contribution arrangements for certain of its UK and overseas employees. In September 2001, the Severn Trent
Group Pension Scheme (an occupational defined contribution scheme) was established to ensure compliance with stakeholder legislation and to
provide the group with an alternative pension arrangement. This was closed to new entrants on 1 April 2005 and replaced by the Severn Trent
Stakeholder Pension Scheme.

The total cost charged to operating costs of £2.7 million (2006: £4.0 million) represents contributions payable to these schemes by the group at
rates specified in the rules of the schemes. As at 31 March 2007, no contributions (2006: £nil) due in respect of the current reporting period had
not been paid over to the schemes.

29 Provisions

At 1 April 2005
Charged to income statement
Utilisation of provision
Unwinding of discount
Reclassification
Amounts classified as held for sale
Exchange differences

At 1 April 2006
Charged to income statement
Utilisation of provision
Unwinding of discount
Disposal of subsidiaries

At 31 March 2007

Environmental
and landfill
restoration Restructuring
£m

£m

Insurance
£m

Terminated
Onerous
operations
contracts and disposals
£m

£m

77.4
9.8
(12.2)
2.3
(0.8)
(10.0)
0.3

66.8
2.6
(4.0)
1.2
(66.6)

–

13.5
4.0
(9.9)
–
–
–
–

7.6
1.1
(5.4)
–
–

3.3

27.5
10.5
(9.3)
–
–
–
–

28.7
9.0
(8.1)
–
(3.5)

26.1

3.7
–
(1.5)
–
–
–
–

2.2
3.1
(0.5)
–
(1.7)

3.1

–
4.5
–
–
–
–
–

4.5
4.5
(3.1)
–
–

5.9

Other
£m

0.7
1.0
(1.7)
–
0.4
–
–

0.4
0.8
(0.7)
–
–

0.5

Total
£m

122.8
29.8
(34.6)
2.3
(0.4)
(10.0)
0.3

110.2
21.1
(21.8)
1.2
(71.8)

38.9

Severn Trent 79

 
 
Notes to the group financial statements continued

Included in
Current liabilities
Non current liabilities

2007
£m

6.7
32.2

38.9

2006
£m

30.1
80.1

110.2

Environmental and landfill restoration provisions reflect costs to be incurred over the operational life of individual landfill sites and in the case 
of aftercare costs, for up to 30 years thereafter. Further details are explained in note 2 (l). Discounting is applied. Following the disposal of Biffa
Belgium and the demerger of Biffa Plc the group no longer has any landfill operations.

The restructuring provision reflects costs to be incurred in respect of committed programmes.

Derwent Insurance Limited, a captive insurance company, is a wholly owned subsidiary of the group. Provisions for claims are made as set out in
note 2 (l). The associated outflows are estimated to arise over a period of up to five years from the balance sheet date.

The onerous or loss making contract provision relates to specific contractual liabilities either assumed with businesses acquired or arising in
existing group businesses, where estimated future costs are not expected to be recovered in revenues. The associated outflows are estimated to
occur over a period of ten years from the balance sheet date.

Provisions relating to terminated operations and disposals include amounts that it is probable will be paid in respect of claims arising from 
services performed by these businesses; overseas employee tax liabilities and the indemnities described in note 37 (c).

30 Share capital

Total authorised share capital:
346,783,834 ordinary shares of 9717⁄19p (2006: 520,175,751 ordinary shares of 655⁄19p)

Total issued and fully paid share capital:
233,164,566 ordinary shares of 9717⁄19p (2006: 348,093,283 ordinary shares of 655⁄19p)

2007
£m

2006
£m

339.5

339.5

228.3

227.2

On the demerger of Biffa Plc the ordinary share capital of the company was consolidated with the intention that the share price of Severn Trent Plc
shares would be similar before and after the demerger. Two new Severn Trent shares were issued for every three old Severn Trent shares held. 

Changes in share capital were as follows:

Ordinary shares of 655⁄19p
At 1 April 2006
Shares issued at 473p, 536p, 548p, 568p, 592p, 759p, 823p or 831p 
under the group’s Employee Sharesave Scheme
Shares issued at 680.5p, 688p, 720p, 738p, 934p, or 1,005.3p under the group’s Share Option Scheme

At 6 October 2006
Share consolidation

Ordinary shares of 97 17/19p
Shares issued at 473p, 536p, 548p, 568p, 592p, 759p, 823p or 831p 
under the group’s Employee Sharesave Scheme
Shares issued at 680.5p, 688p, 720p, 738p, 934p, or 1,005.3p under the group’s Share Option Scheme

At 31 March 2007

31 Share premium

At 1 April
Employee share option scheme

At 31 March

80 Severn Trent Annual Report and Accounts 2007

Number

£m

348,093,283

227.2

1,062,231
375,725

349,531,239
(116,510,413)

233,020,826

67,837
75,903

0.7
0.2

228.1
–

228.1

0.1
0.1

233,164,566

228.3

2007
£m

48.6
8.9

57.5

2006
£m

38.4
10.2

48.6

32 Other reserves

At 1 April 2005
Total recognised income for the period

At 1 April 2006
Total recognised income for the period

At 31 March 2007 

G
r
o
u
p
f
i
n
a
n
c
i
a
l

s
t
a
t
e
m
e
n
t
s

Capital 

redemption Infrastructure
reserve
£m

reserve
£m

Translation
exchange
reserve
£m

156.1 
– 

156.1 
– 

314.2 
– 

314.2 
– 

(3.8) 
21.6 

17.8 
(25.5)

Hedging
reserve
£m

(57.0) 
1.3 

(55.7)
12.1 

Total
other
reserves
£m

409.5 
22.9

432.4 
(13.4)

156.1

314.2

(7.7)

(43.6)

419.0

The capital redemption reserve arose on the redemption of B shares.

The infrastructure reserve arose on restating infrastructure assets to fair value as deemed cost on transition to IFRS.

The translation reserve arises from exchange differences on translation of the results and financial position of foreign subsidiaries as well as foreign
exchange differences arising from hedges of net investment.

The hedging reserve arises from gains or losses on hedging instruments taken directly to equity under the hedge accounting provisions of IAS 39
and the transition rules of IFRS 1.

33 Movement in shareholders’ equity

At 1 April 2005
Share options and LTIPs
– proceeds from shares issued
– value of employees’ services
Dividends
Deferred tax on items posted directly to equity
Total recognised income for the period

At 1 April 2006
Share options and LTIPs
– proceeds from shares issued
– value of employees’ services
Dividends
Deferred tax on items posted directly to equity
Demerger of Biffa Plc
Total recognised income for the period

Share 
capital
£m

Share
premium
£m

Other
reserves
£m

Retained
earnings
£m

Equity
attributable
to the equity
holders
of Severn 
Trent Plc
£m

Minority
interests
£m

Total
£m

225.8 

38.4 

409.5 

1,116.1 

1,789.8 

1.9 

1,791.7 

1.4 
– 
– 
– 
–

227.2 

1.1 
– 
– 
– 
–
–

10.2 
– 
– 
– 
–

48.6 

8.9 
– 
– 
– 
–
–-

– 
– 
– 
– 
22.9

– 
4.1 
(171.3) 
0.8 
238.5

11.6 
4.1 
(171.3) 
0.8 
261.4

– 
– 
(0.7) 
– 
1.4

11.6 
4.1 
(172.0) 
0.8
262.8 

432.4 

1,188.2 

1,896.4 

2.6 

1,899.0

– 
– 
– 
–
–
(13.4)

– 
3.6 
(739.5) 
0.6 
(280.6)
257.1

10.0
3.6 
(739.5) 
0.6 
(280.6)
243.7

– 
– 
(1.0) 
– 
–
1.5

10.0 
3.6 
(740.5) 
0.6
(280.6)
245.2 

At 31 March 2007

228.3 

57.5 

419.0

429.4 

1,134.2 

3.1 

1,137.3

Retained earnings are stated after deducting £7.3 million (2006: £7.3 million) representing own shares purchased by the Severn Trent Employee
Share Ownership Trust for certain senior employees under the Long Term Incentive Plans (LTIPs). The main features of the LTIPs are set out in the
directors’ remuneration report on pages 37 and 38. Following the demerger, the trust sold its holding of Biffa shares and reinvested the proceeds in
the purchase of Severn Trent shares. At 31 March 2007, the trust held 819,240 shares of 9717⁄19p (2006: 914,894 ordinary shares of 655⁄19p).

The market value of these shares at 31 March 2007 was £11.7 million (2006: £10.2 million).

Severn Trent 81

 
 
Notes to the group financial statements continued

34 Share based payment
The group operates a number of share based remuneration schemes for employees and details of the share awards outstanding during the year
are as follows:

Employee
Sharesave Scheme

Approved Share
Option Scheme

Unapproved Share
Option Scheme

Outstanding at 1 April 2005
Granted during the year
Forfeited during the year
Cancelled during the year
Exercised during the year
Expired during the year

Outstanding at 1 April 2006

Granted during the year
Forfeited during the year
Cancelled during the year
Exercised during the year
Expired during the year

Number 
of share
options

Weighted
average 
exercise
price

6,678,273
1,017,512
(169,511)
(142,669)
(1,652,278)
(16,252)

579p
823p
534p
587p
490p
623p

Number 
of share 
options

424,582
–
(15,528)
–
(155,617)
–

Weighted 
average 
exercise 
price

Number
of share 
options

Weighted
average
exercise
price

766p 1,064,320
–
(23,450)
–
(295,786)
–

–
892p
–
755p
–

5,715,075

641p

253,437

768p

745,084

561,552
(129,177)
(112,999)
(1,124,660)
(24,239)

1,172p
693p
734p
559p
628p

–
(86,656)
–
(115,399)
–

–
695p
–
800p
–

–
(264,860)
–
(329,216)
–

731p
–
784p
–
744p
–

724p

–
691p
–
749p
–

728p

Outstanding at 31 March 2007 

4,885,552

717p

51,382

816p

151,008

The weighted average share price during the period was £13.82 (2006: £10.29).

Share option schemes
The options outstanding at the end of the period are exercisable as shown below:

i) Employee Sharesave Scheme
Under the terms of the Sharesave Scheme, the board may grant those employees who have entered into an Inland Revenue approved Save As You
Earn contract for a period of three, five or seven years, the right to purchase ordinary shares in the company. Options outstanding at 31 March
2007 were as follows:

Date of grant

January 1999
January 2000
January 2001
January 2002
January 2003
January 2004
January 2005
January 2006
January 2007

Normal date

of exercise Option price

Number of shares

2007

2006

2004 or 2006
2003, 2005 or 2007
2004, 2006 or 2008
2005, 2007 or 2009
2006, 2008 or 2010
2007, 2009 or 2011
2008, 2010 or 2012
2009, 2011 or 2013
2010, 2012 or 2014

831p
473p
568p
548p
536p
592p
759p
823p
1,172p

–
28,683
284,939
301,455
85,549
448,188
463,725
500,388
594,156 1,277,674
978,115 1,061,142
979,030 1,086,938
943,247 1,010,607
556,791
–

4,885,552 5,715,075

ii) Approved Share Option Scheme
Under the terms of the Share Option Scheme (formerly the Executive Share Option Scheme), the board has granted directors and other executives
options to purchase ordinary shares in the company. Options outstanding under this scheme at 31 March 2007 were as follows:

Normal date

of exercise Option price

Number of shares

2007

2006

2001-2008
2002-2009
2003-2010
2004-2011
2005-2012
2006-2013

1005p
934p
688p
738p
720p
680.5p

8,956
12,677
14,360
7,722
7,667
–

34,459
35,005
54,335
12,770
22,916
93,952

51,382

253,437

Date of grant

June 1998
June 1999
June 2000
July 2001
June 2002
July 2003

82 Severn Trent Annual Report and Accounts 2007

G
r
o
u
p
f
i
n
a
n
c
i
a
l

s
t
a
t
e
m
e
n
t
s

iii) Unapproved Share Option Scheme
The board has granted executives options to purchase ordinary shares in the company under an unapproved share option scheme. Options
outstanding under this scheme at 31 March 2007 were as follows:

Date of grant

June 1998
June 1999
June 2000
July 2001
June 2002
July 2003

iv) Fair values of awards made in the year

LTIP awards
Sharesave options
Share Incentive Plan (SIP)

Normal date

of exercise Option price

Number of shares

2007

2006

2001-2008
2002-2009
2003-2010
2004-2011
2005-2012
2006-2013

1005p
934p
688p
738p
720p
680.5p

–
5,899
36,758
58,897
49,454
–

21,271
50,989
181,249
107,665
127,459
256,451

151,008

745,084

2007

Number

Fair value 
£m

2006

Number

Fair value
£m

339,564
561,552
1,368

2.1
704,790
1.7 1,017,512
131,475

–

5.6
1.8
1.3

The fair values of the LTIP awards were calculated using the Monte Carlo method. The principal assumptions were as follows:

LTIP award year

Share price at grant date
Number of shares awarded
Number of employees
Vesting period (years)
Expected volatility
Expected life (years)
Expected dividend yield
Proportion of employees expected to cease employment before vesting
Expectation of meeting economic profit performance criteria
Fair value per share (EP scheme/TSR scheme)

2006/07

1178p
339,564
46
3
15%
3
n/a
0%
n/a
604p

2005/06

1017p
704,790
190
3
17%
3
n/a
0%
100%
1017p/468p

2004/05

903p
980,591
231
3
20%
3
6.5%
0%
100%
484p

Details of the basis of the LTIP schemes are set out in the remuneration report on pages 39 to 40.

The fair values of the Sharesave options were calculated using the Black Scholes model. The principal assumptions were as follows:

Scheme year

Scheme type
Share price at grant date
Number of options granted 
Number of employees 
Vesting period (years)
Expected volatility
Option life (years)
Expected life (years)
Risk free rate
Expected dividend yield
Proportion of employees expected to 
cease employment before vesting
Fair value per share – sharesave 

3 year
1428p
343,413
1,420
3
15%
3.5
3.25
5.19%
4.0%

2006/07

5 year
1428p
175,593
511
5
15%
5.5
5.25
5.04%
4.0%

15.0%
295p

17.0%
305p

7 year
1428p
42,546
96
7
15%
7.5
7.25
4.92%
4.0%

13.0%
306p

3 year
1069p
605,633 
1775
3 
17%
3.5 
3.25 
4.31%
6.5%

2005/06

5 year
1069p
346,668 
676
5 
17%
5.5 
5.25 
4.28%
6.5%

7 year
1069p
65,211 
111
7 
17%
7.5 
7.25 
4.24%
6.5%

3 year
979p
619,784 
1,826 
3 
30%
3.5 
3.25 
4.52%
6.5%

2004/05

5 year
979p
461,680 
756 
5 
30%
5.5 
5.25 
4.54%
6.5%

7 year
979p
118,420 
175 
7 
30%
7.5 
7.25 
4.56%
6.5%

15.0%
189p

17.0%
168p

13.0%
149p

15.0%
232p

17.0%
227p

13.0%
216p

The SIP shares are purchased on the open market and vest with the employees immediately and hence the value of the shares purchased is
charged straight to the income statement.

During the period, the group recognised total expenses of £3.6 million (2006: £4.1 million) related to equity settled share based payment transactions.

Volatility is based on historical observations as adjusted for unusual market fluctuations.

Severn Trent 83

 
 
Notes to the group financial statements continued

35 Disposal of subsidiaries

On 30 June 2006 the group sold Biffa Belgium to Veolia Proprete SA, on 3 November the group sold Severn Trent Property Limited to Prologis
Group Holdings Limited and on 29 December the group sold Severn Trent Laboratories Inc. to Test America Holdings Inc.

The net assets at the date of sale were:

Property, plant and equipment
Intangible assets and goodwill
Interests in joint ventures
Inventory
Trade and other receivables
Trade and other payables
Net cash
Current and deferred tax
Provisions

Foreign exchange movements recycled from reserves
Profit/(loss) on disposal

Total consideration

Satisfied by:
Cash

Net cash inflow arising on disposal:
Cash consideration
Cash and cash equivalents disposed of

Biffa
Belgium
£m

Severn 
Trent
Property
£m

Severn
Trent
Laboratories 
Inc.
£m

21.6
2.3
–
0.3
15.0
(15.6)
–
1.4
(10.0)

15.0
(0.8)
9.5

23.7

–
–
7.8
28.6
1.6
(6.2)
–
(2.6)
–

29.2
–
2.7

31.9

Total
£m

52.3
26.7
7.8
33.8
44.2
(30.6)
1.7
(2.1)
(10.0)

123.8
(0.9)
9.8

30.7
24.4
–
4.9
27.6
(8.8)
1.7
(0.9)
–

79.6
(0.1)
(2.4)

77.1

132.7 

23.7

31.9

77.1

132.7 

23.7
–

23.7

31.9
–

31.9

77.1
(2.1)

132.7 
(2.1)

75.0

130.6

The profit on disposal is included in the exceptional costs analysed in note 8. Biffa Belgium and Severn Trent Laboratories Inc. have been classified
as discontinued activities.

The contracts relating to the disposals of Biffa Belgium, Severn Trent Property and Severn Trent Laboratories Inc. included adjustments to the
consideration based on the values of certain assets and liabilities in completion accounts drawn up to the date of disposal. The completion
accounts for Biffa Belgium and Severn Trent Property were agreed with the respective purchasers during the year ended 31 March 2007. The
process of reviewing and agreeing the completion accounts for Severn Trent Laboratories Inc. is ongoing. The consideration included above
represents the directors’ best estimate of the outcome of that process.

On 6 October 2006 the group completed the demerger of Biffa Plc. The net assets of Biffa Plc at the date of demerger were:

Property, plant and equipment
Intangible assets and goodwill
Interests in joint ventures
Inventory
Trade and other receivables
Trade and other payables
Net debt
Pension deficit
Current deferred tax
Provisions

Net assets demerged

Net cash outflow arising on demerger:
Cash and cash equivalents demerged

Biffa
Plc
£m

339.5
391.6
1.1
3.0
157.0
(123.2)
(355.7)
(39.0)
(21.9)
(71.8)

280.6

(21.9)

The demerger of Biffa Plc has been accounted for as a distribution of the Biffa Plc net assets at their carrying values on the date of demerger. 
Biffa Plc has been classified as a discontinued operation.

84 Severn Trent Annual Report and Accounts 2007

36 Cash flow statement

a) Reconciliation of operating profit to operating cash flows

Profit before interest and tax from continuing operations
Profit before interest and tax from discontinued operations

Depreciation of property, plant and equipment
Amortisation of intangible assets
Impairment of goodwill
Pension service cost
Pension contributions
Share based payments charge
Profit on sale of property, plant and equipment
Profit on sale of subsidiaries and associates
Deferred income movement
Provisions for liabilities and charges
Utilisation of provisions for liabilities and charges
(Increase)/decrease in stocks
Increase in debtors
Decrease in creditors

Cash generated from operations
Interest paid
Interest element of finance lease rental payments
Tax paid

Net cash inflow from operating activities

b) Analysis of net cash and cash equivalents

Cash and cash equivalents
Bank overdrafts

c) Non cash transactions
No additions to property, plant and equipment during the year were financed by new finance leases (2006: £0.3 million).

C
o
m
p
a
n
y

f
i
n
a
n
c
i
a
l

s
t
a
t
e
m
e
n
t
s

2007

£m

430.0
34.9

464.9

254.5
29.4
31.5
49.3
(97.4)
3.6
(39.6)
(24.5)
(3.5)
21.1
(21.8)
(4.5)
(92.0)
3.0

574.0
(148.6)
(20.2)
(36.0)

2006
(restated)
£m

377.4
91.0

468.4

267.9
29.3
–
39.7
(105.2)
4.1
(4.3)
–
(3.5)
29.8
(34.6)
13.4
(10.8)
64.7

758.9
(139.4)
(45.1)
(68.3)

369.2

506.1

2007
£m

143.2
(0.1)

2006
£m

142.6
(32.2)

143.1

110.4

Severn Trent 85

 
 
Notes to the group financial statements continued

37 Contingent liabilities

a) Bonds and guarantees
Group undertakings have entered into bonds in the normal course of business. No liability is expected to arise in respect of either bonds or
guarantees.

b) Regulatory matters
In May 2004 an employee of Severn Trent Water raised a number of allegations relating, in particular, to alleged accounting inaccuracies and
regulatory returns. 

On 31 October 2005, as a result of a referral by Ofwat, the Serious Fraud Office (SFO) informed the company that it was undertaking a criminal
investigation into alleged reporting irregularities made to Ofwat by Severn Trent Water Limited between 2000 and 2003. Ofwat had been
conducting its own investigation following the allegations made by the employee of Severn Trent Water. Ofwat began its investigation into the
allegations in January 2005. The matter reported to the SFO concerned data on leakage.

On 7 March 2006 Ofwat published its interim report concerning the allegations of false reporting made against Severn Trent Water in 2004. 

In responding to the report Severn Trent Plc agreed to credit customers’ accounts and reduce future tariffs.

The company also acknowledged that Ofwat may expect further amends to be made to customers. Ofwat has stated that this penalty will be
discussed with Severn Trent Water on completion of the SFO investigation into leakage.

In April 2006 the company announced that the board believed there was prima facia evidence of customer relations data being misstated by
Severn Trent Water in submissions to Ofwat. We are working and fully cooperating with Ofwat and Ernst & Young LLP on their investigations into
this. In June 2006 Ofwat issued a notice under section 22A of the water Industry Act stating its intention to fine Severn Trent Water for failure to
meet customer service standards.

No reliable estimate can currently be made of the amounts that might become payable as a result of the SFO enquiry, Ofwat’s final conclusion in
respect of the allegations of false reporting or its review of customer relations data. Consequently, except as noted above, no provision has been
included in these financial statements in respect of these matters. 

c) Disposal of subsidiaries
The group has given certain guarantees and indemnities in relation to disposals of businesses.

In June 2005 the Flemish Waste Agency (OVAM) instigated an investigation by the Antwerp Examining Magistrate into Biffa Belgium’s waste
recycling operations in connection with the payment of environmental taxes. Although two of the Biffa Belgium companies were indicted by the
Flemish prosecuting authorities on 13 December 2005, the proceedings against these companies have not progressed any further since that date.
Separately, the Nivelles Public Prosecutor issued a claim on 22 November 2006 against Biffa Belgium that may relate to the same matters
investigated in the Flanders region.

No provision has been made for any criminal penalties that might result from this investigation since no reliable estimate can be made of the
amount that might become payable. Pursuant to the sale agreement of 11 May 2006, the group has given an indemnity in relation to certain costs
that may be suffered by the former Biffa Belgium businesses as a result of these proceedings. A provision of £1.5 million has been made in these
financial statements for liabilities that that may result from this indemnity.

Pursuant to the sale agreement of 11 May 2006, the group has given an indemnity in relation to certain costs that may be suffered by the former
Biffa Belgium businesses as a result of these proceedings. A provision of £1.5 million has been made in these financial statements for liabilities 
that may result from this indemnity.

On 5 March 2007 the group received notice of a claim for €23.4 million from Veolia Proprete S.A. alleging breach of warranty in relation to the
disposal of Biffa Belgium. The group considers that there is no basis for this claim and hence no provision has been recorded in the financial
statements in relation to this matter.

The group is not aware of any other liability that is likely to result from these guarantees and indemnities that has not been provided for in these
financial statements.

86 Severn Trent Annual Report and Accounts 2007

38 Financial and other commitments

Investment expenditure commitments
Contracted for but not provided in the financial statements

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2007
£m

2006
£m

242.7

148.5

In addition to these contractual commitments, Severn Trent Water Limited has longer term expenditure plans which include investments to 
achieve improvements in performance mandated by the Director General of Water Services and to provide for growth in demand for water 
and sewerage services.

At the balance sheet date the group had outstanding commitments for future minimum operating lease payments under non cancellable 
operating leases, which fall due as follows:

Within one year
In the second to fifth years inclusive
After more than five years

2007
£m

7.0
17.0
10.0

34.0

2006
£m

19.3
33.6
54.0

106.9

Operating lease payments represent rentals payable by the group for certain of its office properties, plant and equipment.

39 Post balance sheet events
Following the year end the Board of Directors has proposed a final dividend of 38.68 pence per share. Further details of this are shown in note 13.

40 Related party transactions
Transactions between the company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not included in
this note. Transactions between the group and its associates and joint ventures are disclosed below.

a) Trading transactions

Cognica
Detroit Water
SII
Severn Trent De Nora

Sale of goods

Purchase of goods

2007
£m

–
0.2
7.7
–

7.9

2006
£m

–
0.2
9.1
–

9.3

2007
£m

0.1
–
–
–

0.1

2006
£m

0.1
–
–
0.2

0.3

Amounts due
from related parties
2007
2006
£m
£m

Amounts due
to related parties

2007
£m

2006
£m

–
–
9.5
–

9.5

0.1
0.1
11.7
0.2

12.1

–
–
–
–

–

–
–
–
–

–

The related parties are associated and joint ventures in which the group has a participating interest.

b) Remuneration of key management personnel
Key management personnel comprise the executive directors and senior management of Severn Trent Plc, Severn Trent Water, and Severn Trent
Services.

The remuneration of the directors is included within the amounts disclosed below. Further information about the remuneration of individual
directors is provided in the audited part of the Directors’ remuneration report on pages 41 to 43.

Short term employee benefits
Post employment benefits
Termination benefits
Share based payments

2007
£m

6.4
0.8
0.5
0.1

7.8

2006
£m

8.7
1.6
0.3
1.1

11.7

Severn Trent 87

 
 
Notes to the group financial statements continued

41 Principal subsidiary undertakings and their directors 
Details of the principal operating subsidiaries are given below. 
A complete list of subsidiary undertakings is available on request 
to the company and will be filed with the next Annual Return.

Severn Trent Services International Limited 
(formerly Severn Trent Water International Limited)
2308 Coventry Road, Birmingham B26 3JZ
Telephone 0121 722 6000

Directors

L F Graziano
K A A Porritt

R C McPheely
P M Senior

C2C Services Limited
(80% owned)
2308 Coventry Road, Birmingham B26 3JZ
Telephone 0121 722 6000

Directors

W F Earp
B M Horner
W G Weatherdon

A J Handford
R J Phillips
E A Wilson

Severn Trent Laboratories Limited
STL Business Centre, Torrington Avenue
Coventry CV4 9GU
Telephone 024 764 21213

Directors

L F Graziano
K A A Porritt

R C McPheely
P M Senior

Other Businesses
Derwent Insurance Limited
6A Queensway, PO Box 64, Gibraltar
Telephone 00 350 47529
(Insurance company – incorporated and operational in Gibraltar)

Directors

N Feetham
F White

F B Smith

Country of incorporation and main operation is Great Britain and
registration is England and Wales unless otherwise stated.

All subsidiary undertakings are wholly owned unless otherwise
indicated. All shareholdings are in ordinary shares.

All subsidiary undertakings have been included in the consolidation.

As at 5 June 2007

Water and Sewerage
Severn Trent Water Limited
2297 Coventry Road, Birmingham B26 3PU
Telephone 0121 722 4000

Directors

Sir John Egan
B Bulkin
R H Davey
M J Houston

C S Matthews
M J E McKeon
J B Smith
A P Wray

Water Technologies and Services
Severn Trent Services Inc.
Suite 300, 580 Virginia Drive, 
Ft Washington Pennsylvania 19034 2707, USA
Telephone 001 215 646 9201
(Incorporated and operational in the United States of America)

Directors

D L Chester
C S Matthews

L F Graziano

Severn Trent Environmental Services Inc.
Park 10, 16337 Park Row
Houston, Texas 77084, USA
Telephone 001 281 578 4200
(Incorporated and operational in the United States of America)

Directors

D L Chester
K J Kelly

L F Graziano

Severn Trent Services Limited
Park Lane, Minworth, Sutton Coldfield, West Midlands B76 9BL
Telephone 0121 313 2300

Directors

L F Graziano
K A A Porritt

R C McPheely
P M Senior

Severn Trent Water Purification Inc.
3000 Advance Lane, Colmar
Pennsylvania 18915, USA
Telephone 001 215 997 4000
(Incorporated and operational in the United States of America)

Directors

D L Chester
K J Kelly

L F Graziano

Severn Trent Metering Services Limited
Smeckley Wood Close
Chesterfield Trading Estate
Chesterfield S41 9PZ
Telephone 01246 456658

Directors

L F Graziano
K A A Porritt

R C McPheely
P M Senior

88 Severn Trent Annual Report and Accounts 2007

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Independent auditors’ report to the members of Severn Trent Plc

We have audited the parent company financial statements of Severn Trent Plc for the year ended 31 March 2007 which comprise the balance
sheet, statement of total recognised gains and losses and the related notes 1 to 19. These parent company financial statements have been
prepared under the accounting policies set out therein.

We have reported separately on the group financial statements of Severn Trent Plc for the year ended 31 March 2007 and on the information in
the directors’ remuneration report that is described as having been audited. 

This report is made solely to the company’s members, as a body, in accordance with section 235 of the Companies Act 1985. Our audit work has
been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditors’ report and for
no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the
company’s members as a body, for our audit work, for this report, or for the opinions we have formed.

Respective responsibilities of directors and auditors
The directors’ responsibilities for preparing the Annual Report, the directors’ remuneration report and the parent company financial statements in
accordance with applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice) are set out
in the statement of directors’ responsibilities.

Our responsibility is to audit the parent company financial statements and the part of the directors’ remuneration report to be audited in
accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland).

We report to you our opinion as to whether the parent company financial statements give a true and fair view and whether the parent company
financial statements have been properly prepared in accordance with the Companies Act 1985. 

We also report to you whether in our opinion the directors’ report is consistent with the parent company financial statements. The information
given in the directors’ report includes that specific information presented in the chairman’s statement, the group chief executive’s review and 
the performance review that is cross referred from the business review section of the directors’ report.

In addition we report to you if, in our opinion, the company has not kept proper accounting records, if we have not received all the information and
explanations we require for our audit, or if information specified by law regarding directors’ remuneration and other transactions is not disclosed.
We read the other information contained in the Annual Report as described in the contents section and consider whether it is consistent with the
audited parent company financial statements. We consider the implications for our report if we become aware of any apparent misstatements or
material inconsistencies with the parent company financial statements. Our responsibilities do not extend to any further information outside the
Annual Report.

Basis of audit opinion
We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit
includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the parent company financial statements. It also
includes an assessment of the significant estimates and judgements made by the directors in the preparation of the parent company financial
statements, and of whether the accounting policies are appropriate to the company’s circumstances, consistently applied and adequately disclosed.

We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us
with sufficient evidence to give reasonable assurance that the parent company financial statements are free from material misstatement, whether
caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in
the parent company financial statements.

Opinion
In our opinion:

> the parent company financial statements give a true and fair view, in accordance with United Kingdom Generally Accepted Accounting Practice,

of the state of the company’s affairs as at 31 March 2007;

> the parent company financial statements have been properly prepared in accordance with the Companies Act 1985; and

> the information given in the directors’ report is consistent with the parent company financial statements.

Deloitte & Touche LLP
Chartered Accountants and Registered Auditors 
London, UK
5 June 2007

Severn Trent 89

 
 
Company balance sheet
At 31 March 2007

Fixed assets
Tangible fixed assets
Investments in subsidiaries
Derivative financial instruments

Current assets
Debtors
Derivative financial instruments
Short term deposits
Cash at bank and in hand

Creditors: amounts falling due within one year

Net current liabilities

Total assets less current liabilities
Creditors: amounts falling due after more than one year

Net assets

Capital and reserves attributable to the company’s equity shareholders
Called up share capital
Share premium account
Other reserves
Retained earnings

Equity attributable to the company’s equity shareholders

Signed on behalf of the board who approved the accounts on 5 June 2007.

Sir John Egan
Chairman

Michael McKeon
Group Finance Director

Company statement of total recognised gains and losses
For the year ended 31 March 2007

Transfers
Transfers to profit and loss account on cashflow hedges
Deferred tax on transfers to profit and loss account

Profit for the period

Total recognised gains and losses for the period

90 Severn Trent Annual Report and Accounts 2007

Notes

2007
£m

2006
£m

2
3

4

0.1
3,260.9
0.6

5.8
3,670.5
0.7

3,261.6

3,677.0

108.2
1.6
–
498.0

607.8

54.4
3.9
40.0
330.2

428.5

5

(703.9)

(873.5)

(96.1)

(445.0)

3,165.5
(238.3)

3,232.0
(269.9)

6

2,927.2

2,962.1

10
11
12
13

13

228.3
57.5
140.8
2,500.6

227.2
48.6
137.6
2,548.7

2,927.2

2,962.1

2007
£m

2006
£m

3.2
(1.0)

2.2

3.2
(0.8)

2.4

1,402.4

145.4

1,404.6

147.8

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Notes to the company financial statements

1 Accounting policies

a) Basis of accounting
The financial statements have been prepared under the historical cost convention as modified by the revaluation of financial assets and liabilities
(including derivative instruments) at fair value through profit or loss and in accordance with applicable United Kingdom Accounting Standards and
comply with the requirements of the United Kingdom Companies Act 1985 (‘the Act’).

b) Tangible fixed assets and depreciation
Tangible fixed assets are included at cost less accumulated depreciation. Freehold land is not depreciated. Other assets are depreciated on a
straight line basis over their estimated economic lives, which are principally as follows:

Buildings
Vehicles, computers and software

Years

30-60
2-15

c) Leased assets
Where assets are financed by leasing arrangements which transfer substantially all the risks and rewards of ownership of an asset to the lessee
(finance leases), the assets are accounted for as if they had been purchased and the fair values of minimum lease payments are shown as an
obligation to the lessor. Lease payments are treated as consisting of a capital element and a finance charge, the capital element reducing the
obligation to the lessor and the finance charge being written off to the profit and loss account over the period of the lease in proportion to the
capital amount outstanding. Depreciation is charged over the shorter of the estimated useful life and the lease period. All other leases are
accounted for as operating leases. Rental costs arising under operating leases are charged to the profit and loss account on a straight line basis
over the life of the lease.

Impairment of fixed assets and investments

d)
Impairments of fixed assets and investments are calculated as the difference between the carrying value of net assets of income generating units,
including where appropriate investments and goodwill, and their recoverable amounts. Recoverable amount is defined as the higher of net
realisable value or estimated value in use at the date the impairment review is undertaken. Net realisable value represents the net amount that can
be generated through sale of assets. Value in use represents the present value of expected future cash flows discounted on a pre-tax basis, using
the estimated cost of capital of the income generating unit. Impairment reviews are carried out if there is some indication that an impairment may
have occurred, or, where otherwise required, to ensure that goodwill and fixed assets are not carried above their estimated recoverable amounts.
Impairments are recognised in the profit and loss account and, where material, are disclosed as exceptional.

e) Financial instruments
Debt instruments
All loans and borrowings are initially recognised at cost, being the net fair value of the consideration received. After initial recognition, interest-
bearing loans and borrowings are subsequently measured at amortised cost using the effective interest rate method. Where a loan or borrowing 
is in a fair value hedging relationship it is remeasured for changes in fair value of the hedged risk at the balance sheet date with gains or losses
being recognised in the income statement (see below).

Gains and losses are recognised in the profit and loss account when the liabilities are derecognised or impaired, as well as through the 
amortisation process.

Derivative financial instruments and hedging activities
The group uses derivative financial instruments such as cross currency swaps, forward currency contracts and interest rate swaps to hedge its 
risks associated with foreign currency and interest rate fluctuations. Such derivative instruments are initially recorded at cost and subsequently
remeasured at fair value for the reported balance sheet. The fair value of cross currency swaps, interest rate swaps and forward currency contracts
is calculated by reference to market exchange rates and interest rates at the period end.

In relation to fair value hedges which meet the conditions for hedge accounting, the gain or loss on the hedging instrument is taken to the profit
and loss account where the effective portion of the hedge will offset the gain or loss on the hedged item (see above).

In relation to cash flow hedges which meet the conditions for hedge accounting, the portion of the gain or loss on the hedging instrument that is
determined to be an effective hedge is recognised directly in reserves, and the ineffective portion in the profit and loss account. The gains or losses
deferred in reserves in this way are recycled through the profit and loss account in the same period in which the hedged underlying transaction or
firm commitment is recognised in the profit and loss account.

For derivatives that do not qualify for hedge accounting, gains or losses are taken directly to the profit and loss account in the period.

Hedge accounting is discontinued when the hedging instrument expires, is sold, terminated or exercised, or no longer qualifies for hedge
accounting. At that date any cumulative gain or loss on the hedging instrument recognised in reserves is kept in reserves until the forecast
transaction occurs, or transferred to the profit and loss account if the forecast transaction is no longer expected to occur.

Derivatives embedded in other financial instruments or other host contracts are treated as separate derivatives when their risks and characteristics
are not closely related to those of the host contract or the host contract is not carried at fair value with gains and losses reported in the profit and
loss account.

Severn Trent 91

 
 
Notes to the company financial statements continued

Investments 

f)
Investments in subsidiary undertakings are held at historical cost.

After initial recognition at cost (being the fair value of the consideration paid), investments which are classified as held for trading or available for
sale are measured at fair value, with gains or losses recognised in income or equity respectively. When an available for sale investment is disposed
of, or impaired, the gain or loss previously recognised in reserves is taken to the profit and loss account.

Other investments are classified as held to maturity when the group has the positive intention and ability to hold to maturity. Investments held for
an undefined period are excluded from this classification. Such investments (and those held to maturity) are subsequently measured at amortised
cost using the effective interest rate method, with any gains or losses being recognised in the profit and loss account.

g) Share based payments
The company operates a number of equity settled, share based compensation plans for employees. The fair value of the employee services
received in exchange for the grant is recognised as an expense over the vesting period of the grant.

The fair value of employee services is determined by reference to the fair value of the awards granted calculated using a pricing model, excluding
the impact of any non market conditions. The number of awards expected to vest takes into account non market vesting conditions including,
where appropriate, continuing employment by the group. The charge is adjusted to reflect shares that do not vest as a result of failing to meet a
non market based condition.

h) Cash flow statement
The company has taken advantage of the exemption under Financial Reporting Statement 1 ‘Cash flow statements’ and has not produced a cash 
flow statement.

i) Deferred taxation
Deferred taxation is fully provided for in respect of timing differences between the treatment of certain items for taxation and accounting purposes
only to the extent that the group has an obligation to pay more tax in the future or a right to pay less tax in the future. Deferred tax assets are only
recognised to the extent that taxable profits are expected to arise in the future. Material deferred taxation balances arising are discounted by
applying an appropriate risk free discount rate.

j) Pensions
The company participates in the group’s defined benefit and defined contribution pension schemes, details of which are set out in note 28 to the
group financial statements. However, the company is currently unable to identify its share of assets and liabilities relating to the defined benefit
schemes. The pension costs charged against the operating profit are the contributions payable to the scheme in respect of the accounting period 
in respect of the defined benefit and defined contribution schemes.

Land and
buildings
£m

Plant and
equipment
£m

6.7
(6.0)

0.7

2.1
–
(1.4)

0.7

–

4.6

6.2
(2.0)

4.2

5.0
0.3
(1.2)

4.1

0.1

1.2

Total
£m

12.9
(8.0)

4.9

7.1
0.3
(2.6)

4.8

0.1

5.8

2 Tangible fixed assets

Cost
At 1 April 2006
Disposals

At 31 March 2007

Depreciation
At 1 April 2006
Charge for year
Disposals

At 31 March 2007

Net book value
At 31 March 2007

At 31 March 2006

92 Severn Trent Annual Report and Accounts 2007

3 Investments

At 1 April 2006
Additions/loans advanced
Disposals/loans repaid
Dividend in specie received
Dividend in specie paid
Loans exchanged for shares 
Foreign exchange movement

At 31 March 2007

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Subsidiary undertakings
Loans
£m

Shares
£m

Total
£m

1,291.5
3.8
(3.8)
711.3
(711.3)
2.6
–

2,379.0
73.7
(470.8)
–
–
(2.6)
(12.5)

3,670.5
77.5
(474.6)
711.3
(711.3)
–
(12.5)

1,294.1

1,966.8

3,260.9

Details of the principal subsidiaries of the company are given in note 41 of the group financial statements.

The dividend in specie received represents the cost of shares in Biffa Plc which were distributed to the company by its subsidiary, from Severn
Trent Holdings Limited. The dividend in specie paid represents the same shares in Biffa Plc that were transferred to Severn Trent Plc’s shareholders
on demerger.

4 Debtors

Amounts owed by group undertakings
Corporation tax receivable
Deferred tax
Other debtors
Prepayments and accrued income

5 Creditors: amounts falling due within one year

Bank overdrafts
Other loans

Borrowings
Derivative financial instruments
Trade creditors
Amounts due to group undertakings
Other creditors
Taxation and social security
Corporation tax payable
Accrued expenses

2007
£m

94.0
–
9.6
0.9
3.7

108.2

2007
£m

–
551.2

551.2
18.8
0.8
101.3
7.3
0.8
10.0
13.7

703.9

2006
£m

14.2
14.2
17.4
0.8
7.8

54.4

2006
£m

25.9
671.8

697.7
40.3
–
108.4
7.7
0.8
–
18.6

873.5

Severn Trent 93

 
 
Notes to the company financial statements continued

6 Creditors: amounts falling due after more than one year

Borrowings – other loans
Derivative financial instruments
Other creditors

7 Employee costs and auditors’ remuneration

Wages and salaries
Social security costs
Pension costs

Total employee costs

2007
£m

207.4
23.4
7.5

238.3

2007
£m

10.7
0.8
1.0

12.5

2006
£m

244.5
11.7
13.7

269.9

2006
£m

10.8
1.0
4.2

16.0

For details of directors’ remuneration see pages 43 to 45.

Auditors’ fees in respect of the company were £200,000 (2006: £135,000). For full details of the fees paid to the auditors by the group, see note 7
of the group financial statements.

Fees payable to Deloitte & Touche LLP and their associates for non audit services to the company are not required to be disclosed because the
group financial statements are required to disclose such fees on a consolidated basis.

8 Employee numbers
Average number of employees of the company (including executive directors) during the year (full time equivalent) was 73 (2006: 88).

All were based in the United Kingdom.

94 Severn Trent Annual Report and Accounts 2007

9 Borrowings

Bank overdrafts
Other loans

Borrowings

2007
£m

–
758.6

758.6

The company’s borrowings are denominated in the following currencies after taking account of cross currency swaps the company has 
entered into:

Sterling
Euro

The fair values of the company’s borrowings were:

Bank overdrafts
Other loans

2007
£m

758.6
–

758.6

2007
£m

–
711.3

711.3

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2006
£m

25.9
916.3

942.2

2006
£m

916.3
25.9

942.2

2006
£m

25.9
919.4

945.3

Fair values are based on expected future cash flows discounted using LIBOR forward interest rates related to the expected timing of payments.

After taking into account interest and cross currency swaps, 38% of the company’s borrowings are at fixed interest rates (2006: 32%). The
remainder of the company’s debt is held at floating rate. Sterling debt bears interest at LIBOR, US dollar debt bears interest at US dollar LIBOR,
whilst euro debt bears interest at EURIBOR.

Fixed rate debt has a weighted average interest rate of 6.4% (2006: 6.4%) for a weighted average period of 7.2 years (2005: 8.2 years).

Borrowings analysed by maturity date

Borrowings due within one year

Borrowings due after one year:
Between one and two years
Between two and five years
After more than five years

Total borrowings due after one year

2007
£m

2006
£m

529.0

697.7

130.7
53.4
45.5

229.6

758.6

17.4
192.0
35.1

244.5

942.2

Severn Trent 95

 
 
Notes to the company financial statements continued

10 Share capital

Total authorised share capital:
346,783,834 ordinary shares of 9717⁄19p (2006: 520,175,751 ordinary shares of 655⁄19p)

Total issued and fully paid share capital:
233,164,566 ordinary shares of 9717⁄19p (2006: 348,093,283 ordinary shares of 655⁄19p)

2007
£m

2006
£m

339.5

339.5

228.3

227.2

On the demerger of Biffa Plc the ordinary share capital of the company was consolidated with the intention that the share price of Severn Trent Plc
shares would be similar before and after the demerger. Two new Severn Trent shares were issued for every three old Severn Trent shares held. 

Changes in share capital were as follows:

Ordinary shares of 655⁄19p
At 1 April 2006
Shares issued at 473p, 536p, 548p, 568p, 592p, 759p, 823p or 831p
under the group’s Employee Sharesave Scheme
Shares issued at 680.5p, 688p, 720p, 738p, 934p, or 1,005.3p 
under the group’s Share Option Scheme

At 6 October 2006
Share consolidation

Ordinary shares of 9717⁄19p
Shares issued at 473p, 536p, 548p, 568p, 592p, 759p, 823p or 831p 
under the group’s Employee Sharesave Scheme
Shares issued at 680.5p, 688p, 720p, 738p, 934p, or 1,005.3p 
under the group’s Share Option Scheme

At 31 March 2007

11 Share premium

At 1 April
Employee share option schemes

At 31 March

12 Other reserves

At 1 April 2005
Cash flow hedges – transfer to net profit

At 31 March 2006
Cash flow hedges – transfer to net profit
Transfer from profit and loss account
Dividend in specie paid

At 31 March 2007

The capital redemption reserve arose on the repurchase of B shares. This is not distributable.

Number

£m

348,093,283

227.2

1,062,231

375,725

0.7

0.2

349,531,239
(116,510,413)

228.1
–

233,020,826

228.1

67,837

75,903

0.1

0.1

233,164,566

228.3

2007
£m

48.6
8.9

57.5

Capital
redemption
reserve
£m

Hedging
reserve
£m

Special
reserve
£m

156.1
–

156.1
–
–
–

(21.7)
3.2

(18.5)
3.2
–
–

–
–

–

711.3
(711.3)

2006
£m

38.4
10.2

48.6

Total 
other
reserves
£m

134.4
3.2

137.6
3.2
711.3
(711.3)

156.1

(15.3)

–

140.8

96 Severn Trent Annual Report and Accounts 2007

13 Reconciliation of shareholders’ equity

At 1 April 2005
Cash flow hedges
– Transfers to net profit
Share options and LTIPs
– proceeds from shares issued
– value of employees’ services
Net profit for the year
Dividends
Deferred tax on items posted directly to equity

At 31 March 2006
Cash flow hedges
– Transfers to net profit
Share options and LTIPs
– proceeds from shares issued
– value of employees’ services
Net profit for the year
Transfer to special reserve
Dividend in specie paid
Dividends
Deferred tax on items posted directly to equity

C
o
m
p
a
n
y

f
i
n
a
n
c
i
a
l

s
t
a
t
e
m
e
n
t
s

Equity
attributable
to the equity 
holders
of Severn 
Trent Plc 
£m

Share
capital 
£m

Share 
premium 
£m

Other 
reserves 
£m

Retained
earnings
£m

225.8

38.4

134.4

2,570.9

2,969.5

–

1.4
–
–
–
–

227.2

–

1.1
–
–
–
–
–
–

–

3.2

–

3.2

10.2
–
–
–
–

48.6

–

8.9
–
–
–
–
–
–

–
–
–
–
–

–
4.1
145.4
(171.3)
(0.4)

11.6
4.1
145.4
(171.3)
(0.4)

137.6

2,548.7

2,962.1

3.2

–

3.2

–
–
–
711.3
(711.3)
–
–

–
1.4
1,402.4
(711.3)
–
(739.4)
(1.2)

10.0
1.4
1,402.4
–
(711.3)
(739.4)
(1.2)

At 31 March 2007

228.3

57.5

140.8

2,500.6

2,927.2

In previous years £1,221.2 million of the company’s retained profit arose as a result of group restructuring exercises, and is not considered likely 
to be distributable. As permitted by Section 230 of the Companies Act 1985, no profit and loss account is presented for the company.

14 Employee share schemes
For details of employee share schemes and options granted over the shares of the company, see note 34 of the group financial statements.

Under the terms of the Sharesave Scheme, the board may grant those employees who have entered into an Inland Revenue approved Save As You
Earn contract for a period of three, five or seven years, the right to purchase ordinary shares in the company.

Outstanding at 1 April 2006
Granted during the year
Forfeited during the year
Exercised during the year

Outstanding at 31 March 2007 

The weighted average share price during the year was £13.82 (2006: £10.29)

Options outstanding at 31 March 2007 were as follows:

Date of grant

January 2000
January 2001
January 2002
January 2004
January 2005
January 2006
January 2007

Number 
of share
options

11,068 
1,106 
(535)
(2,257)

Weighted
average 
exercise
price

994p
1,172p
1,128p
1,065p

9,382 

1,029p

Normal date

of exercise Option price

Number of shares
2006

2007

2007
2006
2007 or 2009
2009
2008, 2010 or 2012
2009, 2011 or 2013
2010, 2012 or 2014

831p
473p
548p
536p
759p
823p
1,172p

2,688
–
1,614
–
249
3,725
1,106

2,688
2,257
1,614
535
249
3,725
–

9,382

11,068

Severn Trent 97

 
 
Notes to the company financial statements continued

During the period the following LTIP awards, SIP awards and share options have been granted to company employees:

LTIP awards
Sharesave options
Share Incentive Plan (SIP)

2007

Fair value 
£m

1.2
–
–

Number

200,345
7,377
1,368

2006

Number

203,450
20,766
1,900

Fair value 
£m

1.5
–
–

Details of the calculation of the fair value of share awards is given in note 34 of the group financial statements.

The company has charged £1.4 million (2006: £1.1 million) to the profit and loss account in respect of share based payments.

15 Pensions
The company operates a number of defined benefit schemes (being the Severn Trent Pension Scheme, the Severn Trent Water Mirror Image
Pension Scheme and the Severn Trent Senior Staff Pension Scheme). In addition, the group operates an unfunded arrangement for certain
employees whose earnings are above the pension cap.

Further details regarding the operation of these schemes are given in note 28 of the group financial statements.

The company is currently unable to identify its share of the underlying assets and liabilities from the group’s defined benefit schemes, and hence it
continues to account for the cost of contributions as if the schemes were defined contribution schemes.

The pension charge for the year was £1.0 million (2006: £4.2 million).

16 Related party transactions
The company has taken advantage of the exemption under FRS 8 and not disclosed details of transactions with other undertakings within Severn
Trent group of companies.

17 Contingent liabilities
a) Bonds and guarantees
The company has entered into bonds and guarantees in the normal course of business. No liabilities are expected to arise in respect of either the
bonds or guarantees.

b) Bank offset arrangements
The banking arrangements of the company operate on a pooled basis with certain of its subsidiaries undertakings. Under these arrangements
participating companies guarantee each others’ overdrawn balances to the extent of their credit balances, which can be offset against balances of
participating companies.

18 Post balance sheet events
On 6 June 2007 the board of directors proposed a final dividend of 38.68 pence per share.

19 Dividends
For details of the dividends paid and proposed in 2006/07 and 2005/06 see note 13 in the group financial statements.

98 Severn Trent Annual Report and Accounts 2007

Five Year Summary

Continuing operations (IFRS)/Continuing and discontinued (UK GAAP)

Turnover
Profit before interest, goodwill amortisation and exceptional items
Goodwill amortisation

Profit before interest, tax and exceptional items
Net exceptional items
Net interest payable before fair value movements on treasury instruments
Fair value movements on treasury instruments
Results of associates and joint ventures

Profit on ordinary activities before taxation
Current taxation on profit on ordinary activities
Deferred taxation

O
t
h
e
r

i

n
f
o
r
m
a
t
i
o
n

IFRS
2007

£m

1,480.2
405.3
–

405.3
24.7
(153.8)
48.8
0.5

325.5
(58.5)
(18.4)

IFRS
2006
(restated)
£m

1,455.3
393.0
–

393.0
(15.7)
(163.9)
(36.7)
1.1

177.8
(61.5)
7.3

IFRS
2005
(restated)
£m

1,252.3
309.5
–

309.5
(2.3)
(164.1)
–
0.7

143.8
(19.1)
(34.3)

UKGAAP
2004
(restated)
£m

2,015.1
440.6
(29.8)

410.8
11.6
(168.0)
–
–

254.4
(33.3)
(36.3)

UKGAAP
2003

£m

1,852.0
409.8
(25.2)

384.6
(40.8)
(159.4)
–
–

184.4
(24.8)
(59.5)

Profit on ordinary activities after taxation

248.6

123.6

90.4

184.8

100.1

Discontinued (IFRS)

Profit for the period

Net assets employed
Fixed assets
Other net liabilities excluding net debt, retirement benefit 
obligation and provisions
Financial instruments
Retirement benefit obligation
Provisions for liabilities and charges and deferred tax
Net assets held for sale

Financed by
Called up share capital
Reserves

Total shareholders’ funds
Minority shareholders’ interests
Net debt

Statistics
Earnings per share (continuing) (UK GAAP continuing and discontinued)
Adjusted earnings per share
Dividends per share
Dividend cover (before exceptional items and before deferred tax)
Gearing
Ordinary share price at 31 March
Average number of employees – Water and Sewerage

– other

20.0

99.4

67.7

–

–

268.6

223.0

158.1

184.8

100.1

5,675.5

6,391.6

6,290.8

5,803.9

5,480.6

(242.9)
(102.6)
(135.1)
(930.0)
–

(212.2)
(130.0)
(221.9)
(980.4)
13.0

(218.3)
–
(317.5)
(1,010.9)
–

(266.7)
–
–
(572.0)
–

(232.1)
–
–
(523.1)
–

4,264.9

4,860.1

4,744.1

4,965.2

4,725.4

228.3
905.9

1,134.2
3.1
3,127.6

227.2
1,669.2

1,896.4
2.6
2,961.1

225.8
1,621.8

1,847.6
1.9
2,894.6

225.2
1,988.5

2,213.7
2.4
2,749.1

224.4
1,993.2

2,217.6
2.2
2,505.6

4,264.9

4,860.1

4,744.1

4,965.2

4,725.4

106.1p
82.4p
61.45p
1.8
73.3%
1,434p
5,289
7,172

52.9p
70.4p
51.13
1.3
60.9%
1,117p
5,188
11,124

39.0p
52.6p
48.51p
1.2
61.0%
915p
5,106
11,268

80.3p
92.1p
47.04p
1.3
55.4%
761p
4,998
10,795

43.4p
87.2p
45.9p
1.3
53.0%
716p
4,780
9,867

Following the implementation of UITF 38 – ‘Accounting for ESOP Trusts’, the 2004 balance sheet was restated to reflect shares held by the Severn
Trent Employee Share Ownership Trust which have not vested unconditionally at the balance sheet date. The 2003 comparatives have not been
restated for this in the above table.

Gearing has been calculated as net debt divided by the sum of net equity and net debt.

Severn Trent 99

 
Information for Shareholders

Financial calendar and results announcements
Annual General Meeting
24 July 2007, at 11.00am
at the National Motorcycle Museum, Coventry Road, 
Bickenhill, Solihull, West Midlands B92 0EJ

Dividend payments in respect of the year ended 31 March 2007:
Interim dividend – paid 24 January 2007

Proposed final dividend – payable 3 August 2007

The results of the group will normally be published at the following
times:
Interim results for the six months to 30 September

November

Preliminary results for the year to 31 March

Report and accounts for the year to 31 March

June

June

You should also contact the registrar if you would like to have your
dividends paid directly into your bank or building society account.

The registrar’s contact details are:
Telephone helpline: 0870 600 3967
E-mail: severntrent@lloydstsb-registrars.co.uk
Lloyds TSB Registrars, The Causeway, Worthing, 
West Sussex, BN99 6DA

Online communication
Shareview, is operated by Lloyds TSB Registrars and gives you access 
to services over the internet that enable you to check details of your
shareholding at any time. 

You can also elect to receive communications from the company
electronically. You will receive an e-mail notification when the Annual
Report and Notice of Annual General Meeting become available on 
our website. 

Shareholder enquiries
If you have a question about your shareholding in the company you
should contact our registrar, Lloyds TSB Registrars, who are responsible
for making dividend payments and updating the register of
shareholders, including details of changes to addresses and names. 

You can register for both of these services at www.shareview.co.uk.

Company information
The company’s website at www.severntrent.com provides news and
details of the company’s activities, latest results, information on the
share price and links to our businesses’ websites.

Analysis of shareholdings at 31 March 2007

Category

Individual and joint accounts
Other*

Total

Size of Holding

1-499
500-999
1,000-4,999
5,000-9,999
10,000-49,999
50,000-99,999
Over 100,000

Total

Number of
shareholders

% of
shareholders

72,688
5,619

92.82
7.18

Number
of shares 
(millions)

26.5
206.7

% 
of shares

11.37
88.63

78,307

100.00

233.2

100.00

Number of 
shareholders

% of 
shareholders

Number
of shares
(millions)

%
of shares

58,856
13,549
4,920
263
334
114
271

75.16
17.30
6.28
0.34
0.43
0.15
0.34

11.5
9.6
8.3
1.8
8.1
8.0
185.9

4.93
4.11
3.56
0.77
3.47
3.44
79.72

78,307

100.00

233.2

100.00

*Includes insurance companies, nominee companies, banks, pension funds, other corporate bodies, limited and public limited companies

100 Severn Trent Annual Report and Accounts 2007

Cert no. SGS-COC-0620

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Severn Trent Plc
Registered office:
2297 Coventry Road
Birmingham B26 3PU
Telephone: +44 (0)121 722 4000
www.severntrent.com

Registered number: 2366619