Sustainable growth
Annual Report and Accounts 2011
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Severn Trent Plc
Registered office:
Severn Trent Centre
2 St John’s Street
Coventry
CV1 2LZ
Tel: 02477 715000
www.severntrent.com
Registered number: 2366619
www.severntrent.com
Contents
Introduction
Severn Trent Plc Annual Report and Accounts 2011
125
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Overview
1
2
4
6
8
2011 Severn Trent group highlights
Group at a glance
Chairman’s statement
Chief Executive’s review
Our strategy
Business review
10 Severn Trent Water – Performance
16 Severn Trent Services – Performance
20
Looking forward
22 Financial review
Governance
26 Directors’ report
29 Directors’ responsibility statement
30 Board of directors
32 Executive Committee
33 Chairman’s letter
39 Nominations Committee
40 Audit Committee
42 Corporate Responsibility Committee
43 Remuneration Committee
56 Risk and assurance
Group financial statements
59
Independent auditor’s report
60 Consolidated income statement
61 Consolidated statement of comprehensive income
62 Consolidated statement of changes in equity
63 Consolidated balance sheet
64 Consolidated cash flow statement
65 Notes to the group financial statements
Independent auditor’s report
Company financial statements
112
113 Company balance sheet
113 Company statement of total recognised gains and losses
114 Notes to the company financial statements
Other information
122 Five year summary
123 Severn Trent Water – delivering against our KPIs
124
Information for shareholders
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Severn Trent is a FTSE 100
company. Our core business is
water. We provide and treat water
and waste water in the UK and
internationally through our two
complementary businesses –
Severn Trent Water and Severn
Trent Services.
Find out more at our corporate website
www.severntrent.com
Severn Trent Water website
www.stwater.co.uk
Severn Trent Services website
www.severntrentservices.com
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’, ‘will’, ‘could’, ‘may’, ‘should’, ‘expects’,
‘believes’, ‘intends’, ‘plans’, ‘potential’, ‘reasonably possible’, ‘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.
Nothing in this document should be regarded as a profits forecast.
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 2011.
More information on Severn Trent Plc can be found on our
website at www.severntrent.com
Lost investors
During 2009/10 we appointed ProSearch to look for investors
who had failed to keep their details up to date. We have unclaimed
funds waiting to be claimed. Shareholders are reminded that if
they move house they need to contact Equiniti and advise them
of their new address.
Buying and selling shares in the UK
If you wish to buy or sell certificated Severn Trent shares, you will
need to use a stockbroker or high street bank which trades on the
London Stock Exchange. There are also many telephone and
online services available to you. If you are selling, you will need to
present your share certificate at the time of sale. Details of low
cost dealing services may be obtained from www.shareview.co.uk
or 0845 603 7037.
Share price information
Shareholders can find share price information on our website
and in most national newspapers. Ceefax, where available, also
displays share prices that are updated regularly throughout the
trading day. For a real-time buying or selling price, you should
contact a stockbroker.
Gifting your shares
To transfer your shares to another member of your family as a gift,
please request a gift transfer form from Equiniti. The completed
transfer form together with the relevant share certificate(s) should
be returned to Equiniti to record the change in ownership.
If you have a small number of shares and would like to donate
them to charity, please ask Equiniti for a ShareGift (charity
donation scheme) transfer form. ShareGift (registered charity No.
1052686) is an independent charity which provides a free service
for shareholders wishing to dispose charitably of small numbers
of shares, which would cost more to sell than they are worth.
Further information is also available on the ShareGift website at
www.sharegift.org or by telephoning 020 7337 0501.
Shareholder security
Many companies have become aware that their shareholders have
received unsolicited phone calls or correspondence concerning
investment matters. These are typically from overseas based
‘brokers’ who target UK shareholders, offering to sell them what
often turn out to be worthless or high risk shares in US or UK
investments. These operations are commonly known as ‘boiler
rooms’. These ‘brokers’ can be very persistent and extremely
persuasive and the number of instances of this type of fraud has
increased dramatically in recent years. A 2006 survey by the
Financial Services Authority (FSA) has reported that the average
amount lost by investors is around £20,000. It is not just the novice
investor that has been duped in this way: many of the victims had
been successfully investing for several years.
In addition, in the current economic climate, boiler rooms are now
targeting victims who have redundancy money or those who are
not experienced investors, and are asking for smaller sums of
money to be invested.
If you receive any unsolicited investment advice:
• ensure you get the full name of the person and organisation;
• check that they are properly authorised by the FSA before
getting involved by visiting www.fsa.gov.uk/register
• report the matter to the FSA either by calling 0300 500 5000
or visiting www.moneymadeclear.fsa.gov.uk; and
• if the calls persist, hang up.
Please be aware that if you deal with an unauthorised firm, you
will not be eligible to receive payment under the Financial
Services Compensation Scheme. The FSA can be contacted by
completing an online form at www.fsa.gov.uk/pages/doing/
regulated/law alerts/overseas.shtml
Shareholders are advised to be very wary of any unsolicited
advice, offers to buy shares at a discount or offers of free
company reports. Details of any share dealing facilities that the
company endorses will be included in company mailings or on
our website. For more detailed information from the FSA go to
www.moneymadeclear.fsa.gov.uk
Shareholder fraud – tips on protecting your shareholding
To reduce the risk of fraud happening to you please consider the
following:
• ensure all your share certificates and dividend tax vouchers
are kept in a safe place, or consider holding your shares
electronically in CREST via a nominee;
• keep all correspondence from the registrar in a safe place.
Destroy all correspondence showing your personal details
(e.g. shareholder reference number) by shredding;
• if you change your address inform the registrar. If you receive
a letter from the registrar regarding a change of address and
have not recently moved house, please contact them
immediately. You may be a victim of identity theft; and
• know when dividends are paid. Consider having your dividend
paid directly into your bank or building society account, reducing
the risk of cheques being intercepted or lost in the post. If you
change your bank or building society account, inform the
registrar of the details of your new account immediately.
Respond to any letters the registrar sends you about this.
If you have any reason to believe that you may have been the
target of a fraud, or attempted fraud, please contact the registrar
immediately.
Unsolicited mail
The company is legally obliged to make its share register
available to the general public. Consequently some shareholders
may receive unsolicited mail. If you wish to limit the amount of
unsolicited mail you receive please contact:
The Mailing Preference Service (MPS),
Freepost 29 LON20771, London W1E 0ZT
Alternatively, register online at www.mpsonline.org.uk or call the
MPS Registration line on 0845 703 4599.
Share capital history
Information on the company’s share capital history, including the
share capital reorganisation in August 1997 and the demerger of
Biffa Plc, return of capital by payment of a special dividend and
share consolidation in October 2006, is available from the
Investor Centre pages on our website.
Designed and produced by Salterbaxter
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2011 Severn Trent group highlights
Severn Trent Plc Annual Report and Accounts 2011
1
• Good start to AMP5 regulatory period – realising benefits of efficiency
improvement programmes and planned outputs delivered
• Severn Trent Water opex below level allowed in Final Determination
• Self-generated renewables now supplying 22% of Severn Trent Water’s power
requirements
• Real price reduction in first year of new AMP has rebased underlying profitability
• Full year dividend 65.09 pence per share. Dividend for 2011/12 to grow by
7.7%* to 70.10p
• On track to deliver further efficiencies – ambition remains to outperform
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over AMP5
* November 2010 RPI of 4.7%, + 3%
Group turnover £m
£1,711.3m
2011
2010: £1,703.9m
Group profit* £m
£288.6m
2011
2010: £338.4m
* before tax, gains/losses on financial instruments
and exceptional items
Group profit before tax £m
£253.0m
2011
2010: £334.4m
Dividend pence per share
Earnings per share* pence
65.09p
2011
2010: 72.32p
Total shareholder return
105.6p
2011
2010: 122.8p
* before exceptional items, gains/losses
on financial instruments and deferred tax
)
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Severn Trent Plc
FTSE 100 Index
Source: Datastream
Severn Trent Plc
FTSE 100 Index
This graph illustrates the value at 31 March 2011,
of £100 invested in Severn Trent on 31 March
2006 compared with the value of £100 invested
in the FTSE 100 Index. The intermediate points
show the value at intervening financial year ends.
Source: Datastream
2
Severn Trent Plc Annual Report and Accounts 2011
Group at a glance
Severn Trent Water
Find out more on page 10
Severn Trent Water provides
high quality water and
sewerage services to over
3.2 million households and
businesses in the Midlands
and mid-Wales.
Key strengths
• We are committed to the long term
sustainable stewardship of the
business, the environment, customers
and the communities in which we live
and work.
• Our efficiencies and high standards
help us keep our costs low and
generate progressive, sustainable
returns for our shareholders.
• We continually work to improve our
performance and deliver cost and
operational efficiencies against 18 Key
Performance Indicators (KPIs), each
of which is aligned to our long term
strategy.
• Our bills for water and sewerage
combined are the lowest on average in
England and Wales.
• We have one of the lowest reported per
capita consumption rates in the UK.
• We have a strong management team,
a clear business plan and we launched
our long term plans in our 25 year
Strategic Direction Statement in 2007.
Our industry
The water industry in England and Wales
invests more than £3 billion a year and
employs over 27,000 people. There are
currently 10 water and sewerage companies
in England and Wales.
Our sector is facing significant long term
challenges. The privatisation of the industry
just over 20 years ago led to improvements
in services to customers, better quality
drinking water and higher environmental
standards. It also attracted new investment.
Those successes, however, have also had
consequences, such as high levels of debt,
rising prices for customers and increased
carbon emissions. Our proposals for
changes in our industry are helping us to
play a role in shaping the debate. We talk
more about our position and how other
bodies with a stake in our industry are
responding on pages 20 and 21.
Our business
Severn Trent Water is a regulated business.
We work within five year price cycles, with the
prices we charge our customers set at the
beginning of each cycle by our economic
regulator, Ofwat. These five year cycles are
known as Asset Management Plan (AMP)
periods. We have just reached the end of the
first year of AMP5.
Our performance
Every June, all water companies submit
a detailed annual breakdown of their
performance, known as the June Return,
to Ofwat. Ofwat uses this information to
monitor and compare companies’
performance.
As well as being regulated by Ofwat, our
performance is monitored by:
• the Drinking Water Inspectorate (DWI),
which is responsible for making sure we
comply with drinking water quality
regulations.
• the Environment Agency, which controls
water abstraction, river pollution and
flooding.
We also work with the government
(including the Department for Environment,
Food and Rural Affairs (DEFRA) and the
Welsh Assembly government) and other
agencies such as the Consumer Council for
Water (CCWater) and Natural England to
make sure we meet the highest customer
service and environmental standards, while
offering our customers the lowest prices.
Our vision for the future
Our 25 year Strategic Direction Statement
sets out the long term direction and
development of our group for the years
2010–35 (see ‘Our strategy’, page 8).
You can also find the full report on our
website: www.stwater.co.uk/sds
Where we operate in the UK
Our region stretches
across the heart of
the UK, from the
Bristol Channel to
the Humber, and
from mid-Wales to
the East Midlands.
Our physical assets include:
– 46,000 km of water mains
– 126 water treatment works
– 54,000 km of sewers
– 1,026 sewage
treatment works
Drinking water supplied per day
1.8bn litres
Waste water collected per day
1.4bn litres
Employees
5,128
As at 31 March 2011
Turnover £m
2010/11 (up 0.3%)
2011
2010
1,389.8
1,385.3
Split of business
Severn Trent Water
Profit* 2010/11
£503.7m
(down 6.9%)
* before exceptional items, interest and tax
Group at a glance
Severn Trent Services
Find out more on page 16
Severn Trent Plc Annual Report and Accounts 2011
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Number of countries with
operating entity
11
Employees
3,056
As at 31 March 2011
Turnover £m
2010/11 (down 0.1%)
2011
2010
336.1
336.5
Severn Trent Services is one
of the world’s leading suppliers
of water and waste water
treatment solutions.
We are known for continual
innovation, reliability, quality
services and leadership in
our chosen markets.
Key strengths
• Our business has a clear strategy for
growth, which focuses on the growing
global demand for clean water and
safe, efficient waste water treatment.
• We are known for our quality, reliability
and stability.
• We provide operating services to
an increasing number of utilities,
municipalities and commercial
customers in targeted countries.
• We are a leader in high growth
technology markets such as
disinfection, filtration, adsorption and
marine/offshore waste water treatments.
• We have a track record of growth and
efficient operations.
Our industry
The market for water and waste water
products and services is large with
substantial prospects for growth in the areas
we serve. That is because the drivers of the
water and waste water business – water
scarcity, population growth, climate change
and more stringent regulatory requirements
– remain strong.
Our business
Severn Trent Services provides water and
waste water treatment and operating
services to utilities, municipalities and
commercial customers around the world.
We focus on the high growth markets and
geographies where our broad line of
products and services meet the significant
needs of our customers.
We have three principal business streams:
• Operating Services provides contract
operating services to manage and
maintain water and waste water plants
and networks in selected countries
worldwide. We are a leading provider in
the United States and United Kingdom,
one of the few integrated water operators
in Italy and are building a strong presence
in Ireland.
• Water Purification (Products) is one of
the leading global providers of advanced
technologies and integrated solutions for
water and waste water disinfection,
filtration, adsorption and marine/offshore
waste water treatment.
• Analytical Services is a leader in UK
environmental water testing services.
Our performance
We measure our performance against our
Key Strategic Initiatives. We discuss how
these shape our businesses on page 9.
Where we operate
Our activities are focused in four regions
– the Americas, Europe, Middle East and
North Africa (MENA) and Asia Pacific.
Operating Services operates in the US, UK,
Ireland and Italy. Water Purification operates
in all four regions and Analytical Services
operates in the UK.
Severn Trent Services
Profit* 2010/11
£25.7m
(down 10.5%)
* before exceptional items, interest and tax
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Severn Trent Plc Annual Report and Accounts 2011
Chairman’s statement
At the end of my first financial year as
Chairman, I’m pleased to report that we
have made a good start to delivering
our targets for the new AMP5 regulatory
period and are realising the benefits of
our efficiency improvement programmes.
As expected the price reductions at the
start of the five year determination have
reduced profitability below prior years’
levels but from this base Severn Trent
Water has continued to outperform.
For the year, total group turnover was up
0.4% to £1.7 billion. The real price reduction
in the first year of the new AMP has
rebased underlying profitability with group
profit before tax, gains/losses on financial
instruments and exceptional items, down
14.7% to £288.6 million, giving adjusted
earnings per share, excluding deferred tax,
of 105.6p, a 14% decrease on the prior year.
This is a good solid business on track
to perform well and deliver total overall
benefits for shareholders, customers and
the environment.
There remains significant opportunity for
growth in both our Services business and
in delivering further outperformance in
Severn Trent Water.
Andrew Duff, Chairman
Severn Trent Plc Annual Report and Accounts 2011
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I am delighted to find, at Severn Trent, a
strong board of executives, very capably
led by Tony Wray, that is committed to
operational excellence and continuous
improvement. Momentum within the
company is strong and we have the
ambition to be recognised as a top
performer in our sector. I am also grateful to
the management team for the wholehearted
support that they have given to me in my
first year as Chairman.
We have a solid track record of financial
performance and the board is proposing a
final dividend of 39.05p, to be paid on 29
July 2011. This will give a total dividend of
65.09 pence per ordinary share. From this
new base, we will look to grow the dividend
by 3% above RPI each year up to 2014/15.
The single largest profit driver was the
performance of Severn Trent Water, which
continued to outperform with planned
operational expenditure below the level of
the Final Determination.
This improvement in efficiency is a
consequence of the group’s ongoing change
programme, which is resulting in significant
business improvement. One of the most
momentous changes during the year was
the move to our new operating centre in
Coventry, resulting in not only a change
of environment for our people, but a
change to new, more efficient and
innovative, working practices. I’ve yet to
meet a visitor who isn’t impressed by this
truly modern working environment and the
building has created a level of energy and
enthusiasm that is infectious.
The change programme extends beyond
the office to the group’s operations and
processes and includes significant systems
investment. Naturally, as with many
programmes of this size and scale, it comes
with its challenges. But we’re confident we
have embarked upon a course that will allow
us to continue to deliver further efficiencies
throughout the AMP period.
‘ We have the talent, the innovation, the
systems and the resources to continue
to achieve profitable and sustainable
growth for our group whilst also
meeting the needs of our customers
and the environment.’
Andrew Duff,
Chairman
Operational performance during the year
was impacted by the severe winter weather,
placing pressure on our leakage
performance. During the year the number of
unplanned interruptions to customers’ water
supply increased. We have decided to
increase the level of investment in our water
distribution system in order to build even
greater resilience in our infrastructure to
cope with severe weather in future years.
Severe weather notwithstanding however,
we continue to provide some of the highest
standards of customer service in the
industry, with excellent drinking water quality
and a year on year reduction in the number
of properties suffering from sewer flooding.
I am particularly pleased to see the focus
on health and safety within the business.
The personal safety of employees has
always been one of my priorities so I was
pleased to find a strong culture and focus on
safety in the company. Our recent Employee
Engagement survey shows that 95% of our
people say that health and safety is taken
seriously at Severn Trent Water and this is
reflected in the Severn Trent Water Lost
Time Incident (LTI) performance which
remains the best in the sector. Safety is one
issue but the commitment of our employees
is vital to our group’s success and so we are
continuing to invest in the development and
training of our employees and future leaders.
During the year, we made good progress in
protecting our environment and dealing with
waste water whilst continuing to lead the
industry in the production of renewable
energy. Self-generated renewables now
supply 22% of Severn Trent Water’s power
requirements, helping to mitigate our
carbon impact.
Severn Trent Services had a mixed year
with performance falling below expectations.
Although the business made good progress
in reducing its costs and maintains a strong
order book, results were affected by project
delays in our Middle East and North Africa
region and the slowdown in the global
economic environment, impacting public
funded initiatives. Growth and profitability
in our Services business remains a priority
and we are well placed to make progress
on this aim.
As I write this statement it seems likely that
there will be some regulatory change
following the publication of the government’s
White Paper later this year. We intend to
continue to play an active role in regulatory
reform and play an influential role in the
debate about how our industry addresses
the challenges ahead of us in order to
promote sustainable growth. We also want
to make sure that any change strikes the
right balance between delivering value and
security to our customers and reliable
returns to our shareholders. We must get
this right because the investment challenge
over future years means that we must be
able to compete for capital internationally as
the need for infrastructure funding globally
becomes more pressing. You can read
more about our position on page 20 of
this report.
All of this will undoubtedly bring more
challenges but I firmly believe that we have
the talent, the innovation, the systems and
the resources to continue to achieve
profitable and sustainable growth for our
group whilst also meeting the needs of our
customers and the environment.
6
Severn Trent Plc Annual Report and Accounts 2011
Chief Executive’s review
Our strategy of sustainable growth
through a focus on water and waste
water operations in the UK and
internationally, continues to deliver
significant overall value.
In the UK, Severn Trent Water made
a good start to the new five year
regulatory period, performing broadly
in line with expectations.
In a challenging year, I would like to
pay tribute to our people, who
professionally handled both difficult
operational circumstances and
significant internal change.
Our Severn Trent Services business
started the year strongly, but was
affected by the economic slowdown
and political and regulatory uncertainty
in the second half.
Fundamentally, we remain well placed
to deliver our business plan and to
continue to play an active role in shaping
the future of the UK water industry.
Tony Wray, Chief Executive
Severn Trent Plc Annual Report and Accounts 2011
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Business Performance Review
Group profit before interest, tax and
exceptional items is down 7% due to
expected price reductions in the first year
of the AMP period for Severn Trent Water
and a disappointing second half
performance in Severn Trent Services,
in challenging market conditions.
From the new dividend base of 65.09p we
will grow the dividend by 3% above RPI up
to 2014/15.
Underlying financial performance remains
strong and we continued to outperform our
regulatory targets.
Severn Trent Water
With our focus on operational excellence
and continuous improvement, our goal is
to keep prices low and deliver the highest
customer service and environmental
standards.
Overall, we achieved these goals in the past
year. We delivered industry-leading drinking
water quality and reduced the number of
incidents of sewer flooding, one of the
biggest causes of distress to our customers.
Our customers also benefited from the
lowest combined average water and
sewerage bills in England and Wales.
In these straitened times, we’ve carried
on helping customers who have difficulties
paying their bills and as a result we have
also been able to reduce bad debt.
Environmental performance continues to
be strong and we are reinforcing our leading
position in renewable energy generation,
with 22% of Severn Trent Water’s electricity
requirements being met by self-generated
renewables. Some of that was generated
by the UK’s first commercial scale crops to
energy plant, which was opened this year.
Leakage was above target as a result of the
severe winter weather. However, despite
significant operational challenges we
maintained our leakage at the same level as
last year. Unplanned interruptions to supply
also increased during the year.
Steps are in place to improve the resilience
of our water distribution network, but I would
like to pay tribute to our people who, faced
with unprecedented operational challenges,
kept customer supplies running over this
difficult period.
That we are able to work in such a flexible
and responsive way is thanks in part to the
changes we have made to our internal
operations. This year we moved to our new
operating centre, Severn Trent Centre in
Coventry, bringing together under one roof
many teams previously dispersed over
seven older buildings. We have transformed
our technology infrastructure and
implemented the second phase of SAP
which will help us to run our business more
effectively.
Once again, I would like to use this
opportunity to thank our people for the way
they have responded to such a significant
change in technology and ways of working.
Severn Trent Services
The economic environment remained
especially challenging for our Severn Trent
Services business, which started the year
well only to experience a market downturn
in the second half.
While the underlying market is growing and
demand remains strong, projects are being
delayed as project financing has been less
available and slower to obtain. In addition,
political uncertainty in the Middle East, a key
market for our water purification products,
and the moratorium on deep well drilling
in the US, led to lower sales of our highly
successful electrochlorination product line.
In the US, in particular, municipal budget
shortfalls have limited infrastructure
spending on products while driving more
project opportunities for outsourcing in our
Operating Services units.
Looking ahead
At Severn Trent Water, with strong
underlying performance and the right
people, technology and AMP5 contracts
in place, we are well placed to achieve
our business plan and outperform our
regulatory targets.
In Severn Trent Services, the prospects for
long term growth remain good, but the first
half of the coming year is likely to see the
same market conditions that prevailed at the
end of last year. With a good portfolio of
business and products, we are confident
of returning to profitable and sustainable
growth once the public finances start to
recover and the political and regulatory
uncertainty in key markets subside.
In terms of prospects for regulatory and
industry change, Severn Trent remains at
the forefront of industry thinking and our
ideas for a sustainable future for our
industry have been widely published
and well received.
Throughout our operations, our goal
continues to be to deliver long term
sustainable growth. This strategy,
underpinned by a clear focus on customers,
environmental performance, people and
shareholder value will continue.
Total shareholder return
2006–2011
2007 £128
2008 £132
2006 £100
2009 £97
2011 £161
2010 £125
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Severn Trent Plc Annual Report and Accounts 2011
Our strategy
Sustainable growth
Sustainable
We need to strike the right
balance to maintain a healthy
business. We do this by:
Providing high standards of service to
our customers, strong environmental
performance, a fair return for investors
and a great place to work for our people
Running a sustainable business, balancing
the needs of all our stakeholders, along with
the needs of the environment in which our
businesses operate.
Making sure our business is efficiently
financed, with a flexible and sustainable
balance sheet
As well as ensuring we are securely funded
we work to manage our balance sheet
sensibly and keep our credit ratings stable.
We keep our refinancing needs under
constant review to take advantage of
favourable market conditions.
Acting responsibly, operating safely
and doing the right things
The very nature of our business makes
corporate responsibility part and parcel of
our everyday business activities. What we
do affects the environment, local and
regional communities, our people and
society at large. Acting responsibly,
operating safely and doing the right thing
also play important roles in enhancing our
reputation with our stakeholders. It therefore
makes sense to make ethical and
responsible business practices an integral
part of our strategy, incorporated into our
business planning and risk management.
Severn Trent Water
Our vision is to be the best water and waste water company in the
UK. We aim to achieve this by providing the highest standards
and lowest charges and through great people. We focus on four
key areas – customers, environment, people and value.
Customers
Our customers have the lowest, on average,
bills in England and Wales. But keeping
customers satisfied is not just about low
charges and value for money. We also need
to reflect their needs and priorities in our
plans, communicate clearly, keep our
promises and apologise if things go wrong.
Environment
Our operations depend on the environment
in which we operate. Our activities can have
a significant impact and we take our
stewardship of the environment very
seriously, looking for innovative ways to
manage our river catchments, and minimise
pollution and our carbon footprint.
People
Our drive to work safer, better and faster
is the cornerstone of our business
transformation initiatives. Making sure
we have the right processes and systems
in place, underpinned by a strong safety
culture, is a fundamental part of our drive
for operational excellence and continuous
improvement.
Value
The more efficiently we work, the higher
our standards. In turn this improves our
ability to keep our costs low and generate
progressive, sustainable returns which
earns the trust of our shareholders.
Our key focus:
Customers
Environment
People
Value
Delivering quality
services at
prices customers
can afford
Reducing
pollution and our
carbon footprint
Investing in the
right people with
the right skills
Making our
business
attractive to
investors
Key Strategic Intentions
Our strategy is based on
eight Key Strategic Intentions
(KSIs) which reflect what
matters to our customers and
wider stakeholder groups.
We measure our performance
within each KSI against our
18 Key Performance
Indicators (KPIs):
1. Providing a continuous
supply of quality water
2. Dealing effectively with
waste water
3. Responding to customers’
needs
4. Minimising our carbon
footprint
5. Having the lowest possible
charges
6. Having the right skills to
deliver
7. Maintaining investor
confidence
8. Promoting an effective
regulatory regime
Severn Trent Plc Annual Report and Accounts 2011
9
Growth
We create and release value by
focusing on water and waste
water. We achieve this by:
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Growing Severn Trent Water in the
UK through investment in our networks
and services
We are committed to reaching the highest
standards in the industry and to continually
improving our performance in every area of
our business, from the resilience of our
networks to the energy we consume and the
way we interact with our customers. For that
reason the improvement targets we set
ourselves are ambitious, and often more
challenging than our regulatory requirements.
Winning in a changing world –
positioning Severn Trent to capitalise
on opportunities in a new regulatory
framework
Our industry has delivered significant
benefits in the two decades since
privatisation. However, we believe that
changes to the regulatory and policy
framework are now needed in order to make
the industry sustainable. Our strategy of
continually improving our operational and
financial performance, backed by a
significant programme of change, puts us
in a strong position to prosper from future
changes to the way we are regulated.
Deploying our Severn Trent Services
business into new markets
This business operates at the forefront
of the demand for water and waste water
services. We achieve growth in this
business by expanding the scope of our
existing markets, entering new high growth
markets and investing in innovative
technologies.
Developing new treatment technologies
Our research and development teams
investigate treatment technologies to
improve our efficiency and continually
reduce our environmental impacts. By
challenging traditional approaches we are
able to introduce groundbreaking solutions
that require less capital investment and
lower operational costs.
Severn Trent Services
We aim to maintain strong operational performance through
cost control and revenue growth and by capitalising on the
right opportunities for growth in the higher return, unregulated
market sectors.
Severn Trent Services is one of the leading
water and waste water businesses in the
world. To achieve our strategy we focus on:
• Expanding the scope of our operating
services to existing clients around the
world.
• Continuing the geographic expansion
of our products.
• Enhancing products and operations to
improve our effectiveness and efficiency.
• Developing new technologies at the
forefront of water and waste water
solutions.
Operational performance
As a competitive business, it is crucial that
we build on our strengths in order to secure
new business and maintain high levels of
contract renewals in Operating Services.
For our Water Purification (Products)
business this means continuing innovation
to develop high-end products taking
advantage of market opportunities while
staying focused on water. We also aim to
preserve our operational margins through
efficiency gains.
We are always looking for ways to improve
our standards and operate more efficiently.
We achieve this through supply chain cost
reduction in component sourcing and lower
cost locations for engineering and
assembly; and by improving our
environmental and health and safety
performance.
Key Strategic Initiatives
Eight Key Strategic Initiatives
define our strategy and set
out how we intend to achieve
our objectives:
1. Deliver what customers
value
2. Establish long term
contracts and strong sales
channel relationships
3. Expand our global
technology programme
4. Continuously improve
quality, health, safety
and environmental
performance
5. Invest in strategic
partnerships to
supplement organic
growth
6. Optimise processes and
organisational capabilities
7. Continue to build a strong,
coherent and respected
brand
8. Increase employee
engagement
Our challenge is to keep
continually improving how we
engage with our customers.
We need to maintain our
efficiency while making our
customers feel more valued.
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Severn Trent Plc Annual Report and Accounts 2011
Business review
Severn Trent Water
Performance
Underlying improvements in
operational performance were
affected by a challenging
business and economic
environment, together with
the coldest December in
100 years. However, overall
progress remains strong with
significant business change
resulting in the delivery of
planned efficiencies.
Our aim is to deliver the highest standards
and lowest prices for customers and one of
the best standards of drinking water in the
UK. At an average of £298, Severn Trent
Water customers also paid the lowest
average combined water and sewerage bill
in England and Wales over the last year.
For those customers struggling to pay, we
helped to manage their payments, whilst
reducing our own bad debt risk.
The harsh December had a significant
impact on our operations, particularly on
our leakage performance, with a sharp
peak in leakages at the height of the
freeze/thaw events. The severe weather
also meant that our capital programme got
off to a slower start than we had aimed for.
We are particularly pleased with progress
in our work to tackle sewer flooding, one
of the biggest causes of disruption and
distress to our customers. We also halved
the total number of pollution incidents in the
category 1 and 2 bands, with none in the
most serious, category 1 classification.
Our business also underwent change
during the year as we set up to deliver
our ambitious AMP5 programme. Our
streamlined new supply chain is now
in place and major improvements in
technology and ways of working have been
implemented, including the move to a state
of the art operational centre in Coventry.
Customers
Our customers’ combined average water
and sewerage bills are the lowest in
England and Wales and the quality of the
water we provide is amongst the best in the
industry. We also score well on the process
side of dealing with our customers – we
aim to deal with customer issues at first
point of contact. Although we solve
problems efficiently, we need to improve
the way we engage with our customers.
Our challenge is to maintain our
efficiency whilst making our customers
feel more valued.
We worked with customer
focus groups to redesign our
customer bills so they fit our
customers’ needs.
8.2m
We serve 8.2 million people
82p
Average customer pays just
82 pence per day
£298
Lowest combined average water
and sewerage bill in England and
Wales at £298
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Customer experience
We are committed to providing the best
customer experience possible. Ofwat’s
Service Incentive Mechanism (SIM), a new
way of measuring the customer experience,
will help us keep track of our performance.
It measures whether our customers feel
valued when we interact with them, as well
as how well we respond to their telephone
and written communications. The 2010/11
financial year is our first full year of data.
We are using the information we gather to
put together a Customer Experience
programme that covers recruitment, training,
our telephone performance and improving
every single touch point customers have
with Severn Trent.
At times, and especially during the harsh
winter, our customers found it difficult to
contact us as we were inundated with calls
from people with frozen domestic pipes.
This has increased complaints which we
are working hard to resolve.
A continuous supply of quality water
In 2010 we delivered 99.98% overall mean
zonal compliance with DWI drinking water
quality regulatory standards. However,
our unplanned interruptions to supply
performance over the year was not at the
level we expect. Three major events caused
significant disruption and regrettably a
number of our customers were without
water for some time. We have a dedicated
programme in place to improve performance.
Flooding and pollution
We are ahead of our target for reducing the
number of properties on the sewer flooding
risk register, thanks to investments in our
network and our proactive monitoring, which
allows us to identify and fix problems before
they result in failure. We have reduced the
number of network failure-related repairs by
15%, resulting in less disruption to customers
and reduced flooding and pollution.
Managing debt
Our challenge is to reduce bad debt while
helping people who genuinely want to pay,
but are finding it difficult to meet their
payments. In 2010 we introduced a new
credit management system that helps us
target our efforts more efficiently. Along with
our Relationships team, which works with
social housing landlords to track tenants
moving in and out of rented accommodation
and stay on top of debt in this sector, we
reduced bad debt to 2.3% of sales. Our
region is still feeling the effects of the
economic change the country is currently
experiencing and for this reason our outlook
on debt reduction is cautious.
To help people on lower incomes who want
to be good payers but have fallen into debt,
we are piloting the new Together Tariff,
where we match payments made by
customers. We have contributed £4.5 million
to the Severn Trent Trust Fund, helped over
4,800 customers through our WaterSure
tariff and signed up 43,549 people to
Water Direct.
Case study
Transferring sewer
ownership
We anticipate the transfer of
private drains and sewers
(PDAS) will take place in
October 2011. At the moment
home owners are responsible
for everything up to the main
sewer, including the
connection. After the transfer
we will own around 37,000km
of sewers which are currently
privately owned, and be
responsible for their repair
and maintenance. We also
expect roughly 4,000
pumping stations to be
transferred in stages over the
following five years. We
believe this will benefit some
customers in a number of
ways such as reducing their
liability and repair costs,
but will lead to higher bills
in general to fund the
necessary continued
investment. Our plans for the
transition are well advanced
and we have been engaging
with regulators and
government to make sure
we provide customers with
an efficient service after
the transfer.
Customer written complaints per 1,000
properties
First time call resolution for billing
5.73 2011 4.95 2010
90% 2011 89% 2010
Properties at risk of low pressure per
1,000 properties
0.07 2011 0.12 2010
For more information on KPIs
see page 123
12
Severn Trent Plc Annual Report and Accounts 2011
Business review
Severn Trent Water
Performance (continued)
Our sewage treatment works failing consent
limit was 1.69% (2010: 1.80%). We are
working to improve this as part of our
Environmental Improvement plan which we
put in place this year. Our plan, developed
alongside Ofwat, supports our aim of raising
the standards of our watercourses to benefit
local communities and those who use our
rivers for recreation.
One of our challenges is striking a balance
between river water quality and carbon
production. We invest in plant to eliminate
nitrates and pesticides in order to improve
water quality in our rivers and comply with
the Water Framework Directive (WFD). To
reduce the number of new treatment works
we need to build, we work in partnership
with farmers and industries to encourage
them to discharge less effluent and waste
into watercourses through the use of
Catchment Management Investigations
(CMI). Severn Trent is currently engaged
in 47 CMIs, more than any other water
company. We have also developed a
joint initiative with the Environment
Agency to balance carbon emissions
and river ecology.
Environment
Our customers should have confidence that
we will take away waste water and treat it to
the highest environmental standards before
returning it to our region’s rivers. We also
strive to run our operations in a sustainable
way and reduce our carbon footprint.
During the year we made good progress
in protecting our environment and dealing
with waste water, whilst continuing to lead
the industry in the production of renewable
energy. However, severe winter weather
impacted our leakage performance in
what was otherwise a year of improved
environmental performance.
Dealing with waste water
During the past 12 months we have had a
strong focus on continuous improvement
which has resulted in us halving the
number of serious pollution incidents from
eight to four in the year, with no category
1 pollutions. We have been working on
improved processes for identifying,
monitoring and reporting pollution and our
self reporting has increased by 11%. We are
confident that this is helping us to focus on
the right things and whilst this has led to an
overall increase from 322 to 378 reported
pollution incidents, we are confident that this
is due to raising our standards of working
and improving our understanding, such
that in the longer term we will deliver
better overall performance.
An £8.2 million investment to resolve
pollution from our sewers overflowing in
rivers and streams will lead to a further
significant improvement in river quality
in the region.
Jobs resolved first time
Net energy use – gigawatt hours (GWh)
97.5% 2011 96.5% 2010
706 2011
714 2010
Leakage – megalitres per day (Ml/d)
Pollution incidents (cat 1, 2 and 3)
497 2011
497 2010
378 2011
322 2010
For more information on KPIs
see page 123
Case study
Improving river water
quality
A £9 million project to
upgrade our sewerage
network and improve the
water quality of the River
Tame unearthed several
hurdles at the feasibility study
stage. These included
contaminated ground, buried
concrete structures, the
presence of great crested
newts and a complex
geology with a past history of
deep coal mining and high
groundwater levels. We
worked with the Environment
Agency and the local
authority to secure an
agreement to re-use all
excavated material on site,
delivering a huge reduction in
the project’s carbon footprint.
Collaborating with our
contractor also enabled us
to introduce several
innovations, such as
specialist covers to the tank,
and control of groundwater.
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Reducing our carbon footprint
In 2010/11 we met our target of producing
22% of Severn Trent Water’s energy
requirements from renewables, reinforcing
our leading position in the production of
renewable electricity from sewage.
The group also delivered the UK’s first
commercial scale ‘energy crop’ power
plant, using maize and wheat to generate
15 gigawatt hours (GWh) of electricity
per annum, enough to power 4,500 homes.
The group has recently received permission
to build its first wind turbine which will
help us achieve the goal of 30% of Severn
Trent Water’s power requirements being
generated from our own renewables
by 2014/15.
As well as reducing our carbon impact,
renewables will also offer protection against
rising energy prices, reducing our exposure
in volatile energy markets and saving
around £28 million over the next five years.
In addition to generating our own energy,
we also set targets and monitor energy use
across every area of our business. Our
people take every opportunity to reduce
energy from turning off lights to reducing
unnecessary journeys. We continue to
invest in trackers and software that routes
vehicles to make job scheduling more
efficient, leading to reduced mileage and
an improvement in productivity.
Protecting the biodiversity of our region
The scale and scope of our operations puts
us in a unique position to protect and often
enhance the biodiversity of our region,
particularly its aquatic ecosystem. There are
over 800 Sites of Special Scientific Interest
(SSSI) in our region, a number of which are
nominated as sites of European importance
for the conservation and protection of
endangered species. We own or partly
manage 37 SSSIs and work in partnership
with Natural England, Countryside Council
for Wales, our tenants and other partners to
safeguard the special interest of these sites.
Reducing leakage
We experienced the coldest December
in 100 years with significant snowfall and a
prolonged freeze across our region. The
graph below shows how leakage increased
sharply compared to previous years. This
caused severe operational difficulties but we
kept customers on supply throughout the
winter. However, two freezes followed by
two thaws caused leakage to rise to
unprecedented levels. We were able to
maintain leakage at last year’s levels of
497 megalitres per day (Ml/d). However,
despite deploying additional resources we
were unable to achieve our leakage target
of 483 Ml/d as a direct result of the weather.
We have reduced leakage significantly
since the winter and we have plans in
place to achieve our targets in 2011/12.
Our long term trend on leakage is good
and we are confident of hitting our targets
in future years.
Customers also have a part to play and
our water conservation and efficiency
programme has resulted in one of the
lowest per capita water usages in the UK.
Severn Trent Water customers use an
average of 126 litres per day, compared
to the national average of 146 litres.
Winter Peaks 2007/08 to 2010/11
Weekly Leakage April 2007 to March 2011
)
d
/
l
M
(
y
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p
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t
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M
800
750
650
550
450
350
2007
2008
2009
2010
2011
Case study
Saving water and energy
Thanks to the efforts of our
customers we continue to
lead the industry in water
efficiency. Nottingham couple
Gary and Clare Blissett are a
good example: by making a
few practical changes they
virtually halved their water
consumption – and energy
bills – in a year. As Gary
explains, “It’s about small
behavioural changes such
as turning off the tap when
brushing our teeth, only
putting a full load into the
washing machine and
dishwasher and taking
showers instead of baths.”
They also ordered free water
saving devices, such as a
ShowerSave device, from
Severn Trent. Our work
with customers, energy
companies and schools
helps us have the lowest per
capita consumption of water
in the UK.
15 GWh
of electricity from 37,000 tonnes
of converted maize sludge
9%
increase in our production of renewable
energy
126 litres
Customers used on average just
126 litres of water per day
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Severn Trent Plc Annual Report and Accounts 2011
Business review
Severn Trent Water
Performance (continued)
People
Over the past 12 months we have taken
significant steps to transform the way we
work, from the environment our people work
in to the processes and technologies we
use. This is a vital part of our strategy to
improve our performance and operational
efficiency, and the service we provide to our
customers. Any change on this scale is
bound to be challenging but overall our
people are embracing the new working
arrangements, and once again showed
exceptional commitment over a difficult
winter period.
A new way of working
In October we moved to the Severn Trent
Centre in Coventry. One of the most energy
efficient buildings in Europe, it reflects our
ethos of openness, team working, high
standards and low charges. We also
transformed our technology infrastructure.
Virtual desktops allow our employees to
access their PCs and business systems
from any desk at a large proportion of our
sites. It also allows us to form teams
dynamically to resolve specific problems.
For example, during the extreme cold
weather the technology allowed our people
to rapidly form work groups and share
information. We are now using these
working arrangements as a template to
modernise the rest of our sites through our
ongoing workplace improvement plan.
Lost time incidents per 100,000 hours
worked
0.37 2011 0.36 2010
For more information on KPIs
see page 123
Severn Trent Centre in Coventry
Improving our technology and
business processes
Throughout the year we continued to invest
strategically in new technology completing
the implementation of our new SAP
workforce management systems, refreshing
our desktop technology, providing high
bandwidth telecoms infrastructure and new
data centres. The adoption of new, lower
running cost technology has increased
reliability and performance at a lower
operating cost.
The new SAP workforce scheduling
technology and processes are starting to
make our operational teams more
productive and our investment in SAP’s
asset management systems is contributing
to improved capital programme efficiencies.
Our new systems and technology are
fundamentally changing the way we work
and so we have invested heavily in training
our people to equip them with the right skills
to exploit the new technology and systems.
Throughout our business, our teams are
improving their performance by changing
the way they work using our ‘Safer Better
Faster’ approach to continuous
improvement. With more than two thirds of
the organisation now upskilled in the tools
and techniques, managers and their teams
are equipped to improve their processes to
deliver higher standards of performance to
our customers in the most cost effective
ways they can. The approach is now being
introduced into our business support areas.
The success of this programme is due to the
involvement and engagement of our people
in making the improvements for themselves
– taking ownership of their performance,
learning new tools and techniques,
and working more collaboratively with
colleagues in different functions to
solve problems.
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A concept known as Safety
Improvement Teams, set up
by our Waste Water Services
Team to increase employee
engagement around health
and safety, won a RoSPA
Silver Award in 2010.
We have introduced better health
surveillance processes as part of improving
our employees’ wellbeing but recognise that
while we have made positive progress, we
have more to do in this area.
Recruitment and training
Having the right people with the right skills is
more important than ever. We are working
to make sure we have a more diverse
workforce, with a particular focus on
attracting more female candidates for
operational and senior roles. In 2010 we
continued to provide regular diversity-related
training and communications to managers,
employees and new joiners and worked to
embed the importance of diversity within our
business. With the help of ACAS we have
designed and are implementing diversity
training events that will eventually train 500
Water Distribution employees.
To develop succession plans, we identify
and mentor future leaders through our
talent review process which assessed
893 managers and potential leaders this
year. Current managers have access to
our Line Manager Journey which includes
a suite of training modules such as
change management and coaching for
performance. We continue to develop
the training programme package and add
new modules when a need is identified.
Engaging our people
Although our people went through
considerable changes during the year,
those changes led to upskilling, simplified
processes, and a better workplace and
technologies. Our employee engagement
survey revealed that 74% of employees
across the organisation remain positively
engaged. Positively engaged means
employees are committed to the
organisation and have the desire to go
above and beyond the call of duty to achieve
success. People support the need for the
improvements and changes we are making
(86%) and think their colleagues give them
the support they need to do their job (87%).
A high percentage (88%) are also happy to
go the extra mile when required.
However, only 33% of employees felt that
changes which affected their job had been
well implemented. In response to this we
introduced a module on change
management to our line manager
development programme.
We share the results of the employee
engagement survey with our teams and
trades union partners in order to find more
productive and co-operative ways to work
together in the future.
A safe and healthy workforce
During the year our health and safety
performance, despite remaining at upper
quartile and leading the sector, did not
improve. This is the first time in a number
of years that we have not seen a year on
year improvement and we are seeking to
address the identifying causes to enable
the business to attain further progress in
this important performance measure.
Importantly, we have a strong culture of
people taking personal responsibility for
their own health and safety, and that of
others. This year 95% of our workforce
agreed that health and safety is taken
seriously, and 87% said we give them
the right support to do their job safely.
Employee motivation
74% 2011 74% 2010
For more information on KPIs
see page 123
16
Severn Trent Plc Annual Report and Accounts 2011
Business review
Severn Trent Services
Performance
A challenging economic
environment and social and
political uncertainty impacted
negatively on performance,
especially in the second half.
However, we made good
progress in reducing our
costs and improving our
environment and health and
safety performance. We are
also investing in specific
segments, both in our Products
business and Operating
Services, to capture growth
opportunities and deliver
longer term profitability.
The wider social and economic environment
remained challenging, particularly in the
second half of the year, with delays to
financing of capital projects; the Gulf coast
deep well drilling moratorium in the US; and
political unrest in the Middle East. There
were a few visible signs of recovery in the
majority of our markets post the financial
crisis, although a few markets, China for
example, were more robust. The impact was
felt most acutely in our Products business,
particularly disinfection products in the US,
and in Operating Services the impact was
mainly in Europe, particularly Italy.
Water Purification (Products)
Industry publications and trade associations
reported market contractions in the range of
4% for water equipment. Despite the slower
than anticipated market recovery, we were
able to grow some product lines, mainly in
filtration, while disinfection, particularly
electrochlorination, was impacted by the
moratorium on the Gulf of Mexico deep well
drilling. The US water business was
particularly impacted, with the budget crises
experienced by municipal establishments
rippling out to the market. In the future we
expect recovery in this market to be slow
and gradual.
‘ Despite the slower than
anticipated market recovery,
we were able to grow some
product lines.’
In Europe, after a slow start, activity picked
up towards the end of the year. In the UK,
more projects were commissioned as water
companies settled into the new regulatory
period. Delays in financing in our other
European markets led to a slowdown in
product shipments. However, while projects
were delayed, none were cancelled.
With the exception of China, which
remained healthy for most of the year,
uncertainties around the economy and
funding also affected our business in Asia
Pacific, although in the final quarter of the
year there were some signs of improvement.
New project orders (turnover):
Denitrification plant in China
Electrochlorination in India
£1m
£1.3m
Electrochlorination in Egypt
Filtration blocks in Mexico
£2.8m
£2.8m
Case study
Growing business in Spain
Our acquisition of PS
Apliclor SA near Barcelona
in 2009 has resulted in
several new orders in the
country, such as a contract
to supply Spain’s largest
electrochlorination plant in
Tarragona. The plant will
improve water management
in the region, which supplies
140,000 residents with
drinking water. This is a
good working example of
our acquisition strategy to
create a European hub from
which we can bring new
Water Purification business
to the rest of the region.
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Analytical Services
Our business continued to feel the effects
of the UK slowdown, particularly in the
commercial sector. We have just reached
the end of the first full year of our 10 year
contract with Yorkshire Water, using our new
laboratory in Wakefield. During the year our
Wakefield laboratory also took on some
work from our Bridgend facility, where some
testing was temporarily suspended following
a DWI audit. The facility at Bridgend is fully
operational, and with new accreditation
following corrective action.
Continuous improvement
Operational efficiency
In a more challenging market environment
our focus is on being more efficient. Our
Products division has been moving our
production to lower cost regions closer to
our markets, rather than shipping them from
the UK and US. This year we exceeded our
target and made supply chain savings of
£2.4 million on the previous year.
One of the ways we deal with price
pressures in our Operating Services
business is by offering energy management
plans to our US customers. At no extra cost
we review their energy use. This enables
our customers to alter their processes and
operating procedures and improve
efficiency, benefiting both our customers
and Severn Trent Services.
Operating Services
adds £2.1 million through
hub and spoke
We operate on a hub and
spoke approach, looking for
new business in the areas
surrounding existing
contracts. This proved
particularly successful in
Oklahoma where we
expanded our presence
in the area by signing three
new multi year Operating
Services contracts during
the year, bringing in over
£2.1 million revenue annually.
South America remains relatively strong
with 36% year on year growth and a number
of attractive orders, including two orders
for filtration blocks in Mexico worth over
£2.8 million.
In the Middle East and North Africa (MENA)
region the global economic slowdown
continued to adversely impact our business
and several large projects were postponed
due to delays in financing. During the last
quarter the region was also impacted by
social and political unrest.
Operating Services
Forced to find cost efficiencies, municipal
utilities will sometimes look to public private
partnerships. They need to make real
savings from any outsourcing strategy,
so our focus is on cost efficiency and
continually improving our processes. In the
US we increased our market position and
were one of just two companies to report
year on year revenue growth.
To support new business we have continued
to selectively add people to our business
development, new project proposals and
technical support service teams. We expect
to accelerate the investment in these same
departments in the coming year to take
advantage of the medium term growth
potential in the US market.
We also developed our presence in Ireland
this year – an operate and maintain project
in Limerick has been running for almost a
year, and we have won and started work
on a new contract for a waste water
treatment plant in Letterkenny. In the rest
of Europe, financing delayed some larger
design-build-operate projects in the UK
and Italy, which negatively impacted
performance in the second half, although
we continue to develop the project pipeline
in both countries.
£336.1m
£0.4m
turnover in 2010/11
down on 2009/10
£25.7m
(down 10.5%) profit before interest,
tax and exceptional items
18
Severn Trent Plc Annual Report and Accounts 2011
Business review
Severn Trent Services
Performance (continued)
Environment
As part of a global water company we
understand the need to find innovative ways
to reduce our impact on the environment
and in turn, those of our clients and
customers. We achieve this through careful
management of our resources and waste
water discharges, the way we operate our
treatment sites and development of
technologies. For the third consecutive year,
we completed Site Energy Management
Plans (SEMPs) for five major plants in our
US Operating Services business. Our
SEMPs evaluate several operating
conditions to determine the most energy
efficient treatment process. Several of our
businesses are certified under ISO
14001:2004, the international standard
for environmental management systems,
which we use to manage and minimise
our impacts.
Many of our products and services help
our customers improve their environmental
performance and operate more efficiently.
In the first year of our public private
partnership to operate sewerage and waste
water treatment plants for the City of
Clinton, Oklahoma, we saved the city
approximately £100,000 in operating
expenses, improved compliance, got the
plants operating more efficiently and made
significant reductions in energy usage. In
Italy we completed a green energy plant to
generate electricity from biogas, produced
by sewage sludge. We use the energy to
run the treatment plant and sell any excess
to the national energy grid.
People, health and safety
To meet the aims of our growth strategy,
we need to recruit and develop a talented
and motivated workforce and provide them
with a safe and rewarding place to work.
We were therefore delighted that in our
employee engagement survey, Severn
Trent Services outperformed many other
industry and country benchmarks. Results
of the independently run survey show that
the majority of our employees are proud to
work for us, and 90% feel we meet the
needs of our customers.
Given our strategy to embed health and
safety in all areas of our business we were
particularly pleased that 95% of our
employees take personal responsibility for
working safely and 90% are aware of their
responsibility to protect the environment.
In January we set up a multi level task
team to suggest ways we could continue
to improve our health and safety
performance, incorporating their
recommendations into our health and
safety plans for 2011/12.
‘ Our organisation serves more than 38,000
families in Haiti through our household
water treatment programmes. Severn Trent
Services’ donation of water disinfection
equipment will improve our capacity to
serve each of these families in an ongoing,
sustainable way.’
Michael Ritter
Co Founder and CEO of Deep Springs International
90%
of employees feel we meet the needs
of our customers
Case study
Assisting in the effort to
provide safe drinking water
to the residents of Haiti
As part of a humanitarian
campaign to enable ordinary
citizens to treat their drinking
water at the point of
consumption, we donated
11 portable electrolytic water
disinfection systems to
agencies working in Haiti.
The units, which convert
saltwater and energy into
liquid sodium hypochlorite,
are being used to disinfect
drinking water.
Ten portable Sanilec®
systems and one ClorTec®
unit were donated to three
humanitarian agencies
working in Haiti: Operation
Blessing International, Deep
Springs International (DSI)
and St. Damien Hospital.
DSI seeks to alleviate
poverty, illness and
unemployment through an
integrated and sustainable
safe water programme.
Operation Blessing
International provides
strategic disaster relief,
medical aid, hunger relief,
clean water and community
development around the
world, and St. Damien
Hospital is a free paediatric
hospital in Haiti.
The equipment allowed
DSI to quickly set up bulk
distribution of sodium
hypochlorite solution in
response to the cholera
outbreak. In addition to the
equipment, we provided
technical support to optimise
production. This support
allowed DSI to treat over
86 million litres of water.
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In the UK, Operating Services won two
Gold awards from the Royal Society for the
Prevention of Accidents (RoSPA).
Sustainability and growth
As a global leader in advanced water and
waste water technology, it is vital we
develop a strong pipeline of new
technologies that meet a specific need in
the market. It is equally important that our
product portfolio meets and anticipates
future regulatory standards. To that end we
have been centralising product development
across Severn Trent Services, ensuring
that we focus our efforts on developing the
right products in the right areas around the
world. Our recent developments include
two groundbreaking new products:
• BALPURE® is a ballast water treatment
system that received approval from
the Marine Environment Protection
Committee (MEPC) in October (see case
study, right).
• MicroDynamics® microwave ultraviolet
technology uses microwave technology in
the disinfection of waste water. We are the
only company selling this kind of patented
microwave technology, which is more
efficient and leads to longer bulb life.
We plan to continue to invest in the
development of new products, to meet
changing market demands and improve
performance.
‘ With a three year
lamp life guarantee,
the MicroDynamics®
system offered the
lowest overall
operational costs
and maintenance
requirements of any
UV technology we
evaluated.’
Jim Newton,
Environmental Programme Manager,
Regional Waste Water Treatment Plant,
Kent County, Delaware
Outlook
The second half of the year saw significant
impacts from project delays in Europe,
unrest in the Middle East and the impact
from the Gulf of Mexico drilling moratorium.
Although some countries in the Middle
East are now moving forward and the
moratorium has lifted, shipments are only
slowly returning to normal. Financing will
continue to be an issue in the coming year.
The opportunity for sustained future growth
in Severn Trent Services remains. Around
60 ATOs in Italy are expected to move from
the public to private sector in the medium
term and the market for municipality
outsourcing in the US is expected to double
to c.$3 billion. In the Products arena
MicroDynamics® and BALPURE® offer
attractive medium and longer term growth.
As a result, in 2011/12 we will be investing
around £5 million in total, in our business
development resources in the USA and
Italy, and building our market and
technology resources to support the launch
of our BALPURE® and MicroDynamics®
product lines. Our base business of
Operating Services and Water Purification
is expected to deliver increased top line
growth year on year in 2011/12, despite
current difficult market conditions, although
the first six months may still be challenging.
At the PBIT level, growth in the base
business is expected to be offset by the
investment in new opportunities, leaving
Severn Trent Services PBIT in 2011/12
lower year on year. Investment in these
growth areas will, in the medium term,
enable Severn Trent Services to deliver
higher levels of sustainable growth.
Legislation in Italy will drive
market activity for private
partners investing in the
country’s integrated water
services (ATO) segment. We
believe that our strong market
presence gives us a great
foundation to work from and
expect to see an increase in our
business here over the next
several years.
Case study
Tapping into a new
market opportunity
International Maritime
Organisation (IMO)
regulations will soon require
the treatment of ballast water
before it is brought into ports
worldwide. We have
developed the patented
BALPURE® system for the
treatment of ballast water.
The result is highly desirable
technology that puts us at the
forefront of ballast treatment
solutions for larger vessels in
an addressable market that is
expected to be worth around
£7 billion up to 2020 and
around £450 million annually
beyond that.
20
Severn Trent Plc Annual Report and Accounts 2011
Business review
Looking forward
‘ The debate over
the next 20 years
will be about
security of supply.’
Michael McKeon,
Finance Director
Trent will face a shortfall of 232 million
litres a day because of climate change
and population growth if we do not do
things differently.
But this is not just a problem for Severn
Trent; it is one for the nation as a whole.
One change we would like to see is more
water trading. Water companies could trade
resources nationally using water from areas
of lower cost to higher cost. With the right
regulatory regime we believe it would be
possible to use existing networks to move
water from one region to another.
Intelligent funding
There is no doubt that over the next 20
years, the water industry will need to
maintain significant investment in
infrastructure in order to improve network
resilience and reach higher environmental
standards.
Initiatives like water trading and more flexible
outcome-based regulation will help avoid
unnecessary capital investment, but the
sector’s continuing ability to deliver its
investment programmes relies on its being
able to fund them. We believe that
continuing to finance the programme
entirely from borrowing is unsustainable,
putting pressure on credit ratings and
passing on risk to customers. Equity
participation remains as important as ever.
Long term sustainable returns need to
reflect this reality.
Since privatisation our industry
has experienced two decades
of improvement. But the world
today is a very different place
and if we are to meet our vision
of creating a sustainable water
industry, we need some
changes. We are playing an
active role in shaping the future
of the water industry in the UK.
Severn Trent continues to address the
medium and longer term challenges facing
the industry and published its views in its
publication ‘Changing Course’. This
document is available for shareholders to
read and copies may be obtained from the
Company Secretary or electronically at
www.severntrent.com. Some of the
key highlights from that document are
presented below.
Over the past 20 years our industry has
seen improved customer standards,
environmental performance and service
quality, and become more efficient. Water
companies have also successfully funded
an investment programme valued at around
£85 billion. However, these improvements
have come at a cost.
Customer bills have risen, energy use
has increased by 113% and the industry
as a whole is managing debts of some
£33 billion. On top of that, the reality of
climate change is already having an impact
on our business. To carry on in the same
way would not be sustainable. That is why
we published our document Changing
Course in 2010, setting out our position and
outlining the six key changes we believe are
needed to address the challenges we face.
Later this year the UK government is due to
publish its White Paper. While we do not
know what recommendations it will contain,
we are pleased with the response to
Changing Course and encouraged by the
development of the debate over water
trading and policy making.
Climate change
Whether it’s the energy we use, the water
we supply to our customers, or the quality
of the diverse environment under our
stewardship, our business both contributes
to, and is affected by, climate change. On
the question of water scarcity, our strategy is
to reduce demand and improve the flexibility
of our network before developing new
sources. For instance, by encouraging our
customers to use water sensibly we have
one of the lowest per capita consumptions
of water in the UK.
However valuable these measures, they are
not enough on their own. Water companies
need to think differently in order to tackle
climate change and arrive at more
sustainable solutions.
Water trading
Changing weather patterns are predicted
to lead to hotter, drier summers and wetter
winters. This will mean less water being
available at different times of the year. Our
last Water Resources Management Plan
showed that, over the next 25 years, Severn
‘ We’re beyond the
point of whether you
believe in climate
change or not.
The reality is we
are experiencing
more extremes and
we have to find
ways to cope.’
Tony Wray,
Chief Executive
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21
A digital version
of the Changing
Course report is
available at
www.stwater.co.uk
‘ …we are looking at how we can better
reveal the true value of water to enable the
sectors to make better, more sustainable
decisions. For example, we are exploring
how abstraction and water trading can
contribute to this.’
Regina Finn, Chief Executive, Ofwat
Ofwat Annual Report 2009/10
‘ The companies will
need to plan,
innovate and deliver
services in new and
more sustainable
ways. And that
means the regulatory
environment we
provide needs to
change as well.’
Phillip Fletcher, Chairman, Ofwat
Ofwat Annual Report 2009/10
Competition and consolidation
Bringing about the kind of changes we
believe our industry needs would require a
change in the structure and regulation of the
water sector. The framework of incentives
and output setting under the existing regime
can mean that more sustainable solutions
are overlooked in favour of capital intensive
solutions. Faced with the choice of sourcing
low-cost water elsewhere or building a
reservoir, companies often opt to build a
reservoir. This then becomes part of the
regulated asset base, allowing water
companies to increase pricing.
We believe it would be better to encourage
sustainable solutions that benefit customers
and the environment. A gradual move
towards a market-based framework and
competition within the sector would enable
water companies to make best use of
resources nationally rather than regionally.
Such a move would help maintain investors’
confidence in our industry and avoid an
increase in the cost of capital.
As a water company we are unusual in that
we are already able to supply water to large
commercial and industrial companies
across England and Wales through Severn
Trent Services. Our expertise in commercial
markets, together with our confidence about
embracing the future and our operational,
financial and strategic strength mean we are
well placed to adapt to any structural or
regulatory changes in our industry. Indeed,
we are looking forward to the opportunities
the future will bring, both in the regulated
and commercial spheres.
Changing course – six key
changes required to meet
future challenges
Policy changes
• More flexible
implementation of EU
Directives to ensure a
better trade off between
costs and carbon
emissions
• Developing competition
through water trading;
this would also optimise
resources nationally rather
than just regionally
Regulatory changes
• A more flexible approach
to environmental consents
to allow for more cost
effective approaches
• An improved price setting
process to provide the right
incentives for sustainable
financing, more
sustainable solutions and
increased innovation
Industry changes
• Companies must take the
lead in driving innovation,
both in terms of the
strategic and technical
solutions they pursue and
in shaping the wider
direction the sector takes
Changes to the institutional
framework
• Government should
prioritise national policy
outcomes and ensure the
regulatory framework is
set up to deliver them
22
Severn Trent Plc Annual Report and Accounts 2011
Business review
Financial review
Group financial performance
We are now some two years on from the full effect of the financial
crisis and many, but not all, financial activities and markets have
returned to what may be considered normal levels. However, we are
yet to see the return of a fully functioning commercial paper market
and have continued to support our liquidity position by holding cash
reserves from earlier bond market issuances. In other areas, we are
yet to see any material effect on the finances of our customer base
from the package of measures the UK Government has announced
on public spending. Indeed, we have improved our customer
collections performance year on year. The ability of domestic and
commercial customers alike to support their water bills in this new
environment has yet to be seen, though we remain confident that
our debt recovery processes are in good shape to address any
challenge that may arise.
PBIT is profit before interest and tax; underlying PBIT is PBIT
excluding exceptional items as set out in note 8.
Group turnover was £1,711.3 million (£1,703.9 million), an increase
of 0.4% over last year. Severn Trent Water’s prices were reduced by
an average of 0.7% but measured consumption increased so that
turnover was broadly similar to the prior year.
Underlying group PBIT decreased by 6.8% to £519.1 million (£557.1
million). The primary factors affecting underlying PBIT are described
in the commentary on Severn Trent Water and Severn Trent
Services below. There were net exceptional charges of £21.4 million
(£49.7 million). Group PBIT decreased 1.9% to £497.7 million
(£507.4 million).
Severn Trent Water
Turnover in Severn Trent Water increased by 0.3% in 2010/11
to £1,389.8 million. Sales prices decreased by 0.7% (including
inflation) from 1 April 2010. In the first half of the year consumption
was higher period on period, as a result of strong household and
robust commercial consumption. The second half of the year
showed a more normal period on period declining trend, leading to
the 0.3% increase in turnover over the full year.
Underlying PBIT decreased by 6.9% on the previous year to £503.7
million. Beyond the increase in turnover of £4.5 million, a number of
factors impacted underlying PBIT. Employee costs decreased by
£8.1 million as lower headcount offset higher pension costs but hired
and contracted services were £9.8 million higher. Depreciation
increased by £16.4 million due to the growing asset base and write
down of £6.4 million on one experimental sludge dryer. There was a
reduction in infrastructure renewals expenditure of £7.6 million. Own
work capitalised was £21.2 million lower in line with the lower levels
of capital expenditure in the year. Bad debts were £1.4 million lower
and other costs increased by £11.8 million.
During the financial year, Severn Trent Water invested £405.3 million
(UK GAAP net of grants and contributions) in fixed assets and
maintaining and improving its infrastructure network. Included in this
total was net infrastructure renewals expenditure of £96.9 million,
charged to the income statement under IFRS.
Severn Trent Services
Turnover
Services as reported
Impact of exchange rate fluctuations
Like for like businesses in constant
currency
Underlying PBIT
Services as reported
Impact of exchange rate fluctuations
Like for like businesses in constant
currency
2011
£m
Increase/
(decrease)
%
2010
£m
336.1
–
336.1
336.5
(4.4)
332.1
(0.1%)
1.2%
2011
£m
25.7
–
25.7
Increase/
(decrease)
%
2010
£m
28.7
(0.3)
28.4
(10.5%)
(9.5%)
Reported turnover in Severn Trent Services was £336.1 million
in 2010/11, a decrease of 0.1% vs. the prior year, and reported
underlying PBIT decreased by 10.5% to £25.7 million.
After adjusting for the impact of exchange rate fluctuations, turnover
on a constant currency basis increased 1.2% but underlying PBIT
measured on the same basis was down 9.5%. The first half year
saw profits rise period on period but the second half was impacted
by the factors mentioned in the operating review.
Operating Services
Turnover for the year was £201.3 million, a decrease of 3.2%
compared to the prior year on a constant currency basis. In the US
and UK the Operating Services businesses broadly maintained their
levels of activity from the previous year. However, the business was
impacted by project delays in Italy and reduced activity in our
metering services and searches businesses in the UK, both of
which are driven to some extent by the housing market.
Water Purification
Turnover for the year was £105.6 million, an increase of 9.2%
compared to the prior year on a constant currency basis. However,
the strong growth experienced in the first half of the year did not
continue into the second half of the year and turnover in the second
half of 2010/11 was at broadly the same level as the same period in
the previous year.
Analytical Services
Turnover for the year was £29.2 million, an increase of 6.2%.
This represented an improvement due to growth in revenue
from new contracts.
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23
Corporate and other
Corporate overheads amounted to £9.2 million (£12.7 million). Our
captive insurance company and other businesses generated a loss
of £0.6 million (loss of £2.3 million). The group’s captive insurance
company insures Severn Trent group risks only and does not write
any external business.
Exceptional items
There were net exceptional charges in the year to 31 March 2011
of £21.4 million (£49.7 million) comprising:
Restructuring costs:
• a charge of £13.0 million in Severn Trent Water arising from
programmes to restructure and realign the business; and
• a charge of £0.7 million in Severn Trent Services from the
programmes to restructure the Water Purification and Analytical
Services businesses.
Regulatory matters:
• a charge of £3.8 million in Severn Trent Services arising from
the group’s response to an audit in September 2010 by the
Drinking Water Inspectorate (DWI) of aspects of the services
provided by Severn Trent Laboratories Limited from its Bridgend
laboratory; and
• a charge of £3.9 million in Corporate overheads arising from the
group’s response to a request from Ofwat to provide certain
information under the Competition Act in connection with Severn
Trent Laboratories Limited’s contracts with Severn Trent Water
Limited and certain other water companies.
Net finance costs
The group’s net finance costs were £230.6 million, compared to
£218.8 million in the prior year. The group has fixed the interest rate
of its non index-linked debt for the five year period to March 2015.
The group’s cost of index-linked debt is however linked to the
movement in the Retail Prices Index (RPI). This debt provides an
economic hedge for Severn Trent Water’s revenues and regulatory
asset values that are also RPI linked under its regulatory regime.
The increase in the full interest charge is therefore largely due to
higher interest charges on index-linked debt as inflation was higher
than the prior year and in addition, average group net debt
increased during the year. The effective interest rate for 2010/11
was 6.4% (5.8%) of which cash interest cost is 5.0% vs 5.4% in
the prior year.
Profit before tax
Underlying group profit before tax decreased by 14.7% to £288.6
million (£338.4 million). Group profit before tax was £253.0 million
(£334.4 million).
Taxation
The total tax credit for the full year was £21.5 million (charge of
£82.9 million), of which current tax represented a charge of £32.1
million (£40.7 million) and deferred tax was a credit of £53.6 million
(£42.2 million).
A prior year tax credit amounting to £34.4 million arose during the
year, mainly as a result of the agreement of open tax positions
covering a number of years.
The effective rate of current tax, excluding prior year items and
exceptional items, calculated on profit before tax, exceptional items
and gains/(losses) on financial instruments was 24.4% (22.6%). The
change in effective rate is as a result of lower capital allowances in
Severn Trent Water.
Going forward, we expect the effective current tax rate for 2011/12
to be in the range of 26% to 27%.
Profit for the period and earnings per share
Profit for the period was £274.5 million (£251.5 million).
Basic earnings per share were 115.2 pence (105.6 pence).
Adjusted basic earnings per share (before exceptional items,
gains/(losses) on financial instruments and deferred tax) were
105.6 pence (122.8 pence).
Cash flow
Cash generated from operations
Net capital expenditure
Net interest paid
Tax (paid)/received
Other cash flows
Free cash flow
Acquisitions and disposals
Dividends
Net issue of shares
Change in net debt from cash flows
Non cash movements
Change in net debt
Net debt 1 April
Net debt at 31 March
Net debt comprises:
Cash and cash equivalents
Cross currency swaps hedging debt
Bank loans
Other loans
Finance leases
2011
£m
2010
£m
753.0
(399.5)
(180.3)
(32.4)
(1.5)
139.3
–
(169.4)
2.7
(27.4)
(80.0)
(107.4)
708.0
(487.8)
(194.2)
(53.8)
(1.6)
(29.4)
(11.0)
(159.7)
2.4
(197.7)
(3.8)
(201.5)
(3,761.4) (3,559.9)
(3,868.8)
(3,761.4)
315.2
160.4
(846.8)
(3,230.9)
(266.7)
(3,868.8)
227.8
187.3
(689.8)
(3,185.9)
(300.8)
(3,761.4)
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Severn Trent Plc Annual Report and Accounts 2011
Business review
Financial review (continued)
Cash generated from operations was £753 million (£708 million).
Capital expenditure net of grants and proceeds of sales of fixed
assets was £399.5 million (£487.8 million). Net interest paid
decreased to £180.3 million (£194.2 million).
Net debt at 31 March 2011 was £3,868.8 million (£3,761.4 million).
Balance sheet gearing (net debt/net debt plus equity) at the year
end was 77.8% (79.9%). Net debt, expressed as a percentage of
Regulatory Capital Value at 31 March 2011 was 57% (58%). The
group’s net interest charge, excluding gains/(losses) on financial
instruments and net finance costs from pensions, was covered 3.5
times (3.9 times) by profit before interest, tax, depreciation and
exceptional items, and 2.3 times (2.7 times) by underlying PBIT.
The fair value of the group’s borrowings at 31 March 2011 is
estimated to be £4,671.8 million (£4,267.9 million) compared to the
book value of £4,344.4 million (£4,176.5 million). The group’s debt
instruments are not traded in an active market and hence the fair
value disclosed above is based on a theoretical discounted cash
flow calculation and does not represent an estimate of the amount
for which the debt could be settled.
Treasury management and liquidity
The group continues to monitor liquidity carefully. At 31 March 2011
the group had £315.2 million in cash and cash equivalents. The
group also has an undrawn £500 million committed bank facility of
which £41.7 million expires in 2012 with the balance maturing in
2013. Average debt maturity is around 16 years. The group is
funded for its investment and cash flow needs up to March 2013.
Cash is invested in deposits with highly rated (A+) banks and
liquidity funds and the list of counterparties is regularly reviewed and
reported to the board.
Treasury policy and operations
Our treasury affairs are managed centrally and in accordance
with our Treasury Procedures Manual and Policy Statement. The
treasury operation’s role is to manage liquidity, funding, investment
and our financial risk, including risk from volatility in interest and (to a
lesser extent) currency rates and counterparty credit risk. The board
determines matters of treasury policy and its approval is required for
certain treasury transactions.
Our strategy is to access a broad range of sources of finance
to obtain both the quantum required and lowest cost compatible
with the need for continued availability. Our principal operating
subsidiary, Severn Trent Water, is a long term business
characterised by multi year investment programmes. Our strategic
funding objectives reflect this and the liquidity position and the
availability of committed funding are essential to meeting our
objectives and obligations. We therefore aim for a balance of long
term funding or commitment of funds across a range of funding
sources at the best possible economic cost.
The group’s current policy for the management of interest rate risk
requires that no less than 45% 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 2011, interest rates
for some 76% of the group’s net debt of £3,868.8 million were fixed
in this way.
We use financial derivatives solely to manage risks associated with
our normal business activities. We do not hold or issue derivative
financial instruments for financial trading.
Except for debt raised in foreign currency, which is fully hedged, our
business does not involve significant exposure to foreign exchange
transactions. We have investments in various assets denominated
in foreign currencies, principally the US dollar and the euro. Our
current policy is to hedge an element of the currency translation risk
associated with certain foreign currency denominated assets.
We have entered into energy swaps that fix the cost of substantially
all of Severn Trent Water’s expected net electricity consumption for
the next three years and part of its anticipated consumption for the
following year. The price fixed in these swaps is lower than the
amount assumed in the Final Determination for AMP5.
The group issues notes in foreign currency under its EMTN
programme and uses cross currency swaps to convert the proceeds
to sterling. The effect of these swaps is that interest and principal
payments on the borrowings are denominated in sterling and hence
the currency risk is eliminated. The foreign currency notes and the
cross currency swaps are recorded in the balance sheet at their fair
values and the changes in fair values are taken to gains/(losses) on
Maturity profile of gross debt (£ millions)
700
600
500
400
300
200
100
0
2011
2016
2021
2026
2031
2036
2041
2046
2051
2056
2061
2066
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Severn Trent Plc Annual Report and Accounts 2011
25
financial instruments in the profit and loss account. Since the terms
of the swaps closely match those of the underlying notes, such
changes tend to be broadly equal and opposite.
The group holds interest rate swaps with a net notional principal
amount of £462.3 million and cross currency swaps with a net
notional principal amount of £536.6 million which economically act
to hedge the interest rate risk on floating rate debt or the exchange
rate risk on certain foreign currency borrowings. However, the
swaps do not meet the hedge accounting rules of IAS 39 and
therefore these swaps are carried in the balance sheet at fair value.
The changes in fair value are taken to gains/(losses) on financial
instruments in the profit and loss account. During the period there
has been a decrease of £15.7 million in the fair value of these
instruments.
It is important to note that we intend to, and typically do hold these
swaps to maturity. Further, this is not a cash movement and, over
the life of the swaps, these changes in fair value will net out.
Credit ratings
Our long term credit ratings are:
Long term ratings
Moody’s
Standard and Poor’s
Severn
Trent Plc
Severn
Trent Water
Baa1
BBB-
A3
BBB+
Further details of our borrowings, investments and financial
instruments are contained in note 32 to the financial statements.
Pensions
The group operates two defined benefit pension schemes, of which
the Severn Trent Pension Scheme (STPS) is by far the largest.
Formal triennial actuarial valuations and funding agreements for the
STPS are in the course of being renewed as at 31 March 2010. The
key actuarial assumptions from these valuations have been updated
for the accounts as at 31 March 2011 with overall contribution levels
remaining unchanged, including deficit reduction payments of £10
million per annum, until new agreements are agreed.
On an IAS 19 basis, the estimated net position (before deferred tax)
of the group’s defined benefit pension schemes was a deficit of
£292.1 million as at 31 March 2011. This compares to a deficit of
£354.9 million as at 31 March 2010.
On an IAS 19 basis, the funding level has increased from around
79.7% at 31 March 2010 to around 83.5% at 31 March 2011.
Price inflation
Salary increases
Pension increases in payment
Pension increases in deferment
Discount rate
Long term rate of return on equities
Age to which current pensioners aged 65 are
expected to live
– men
– women
Age to which future pensioners aged 45 at the
balance sheet date are expected to live
– men
– women
2011
%
3.50
4.00
3.50
3.50
5.60
7.85
2010
%
3.60
4.10
3.60
3.60
5.70
8.00
87.4
91.0
85.3
88.6
88.0
91.8
86.5
89.6
The following table summarises the estimated impact on scheme
liabilities resulting from changes to key actuarial assumptions whilst
holding all other assumptions constant.
Assumption
Change in assumption
Impact on
scheme liabilities
Discount rate
Price inflation
Mortality
Increase/decrease
by 0.1%
Increase/decrease
by 0.1%
Increase in life
expectancy by 1 year
Decrease/increase
by £30 million
Increase/decrease
by £25 million
Increase
by £45 million
On 11 May 2011, Severn Trent announced it is consulting with its
6,000 plus UK employees on proposed changes to its pension
arrangements, which would see all existing pensions replaced by
one new defined contribution scheme. Under the new proposals,
the defined benefit schemes would close to future accrual, whilst
protecting the benefits already built up by members. The existing
defined contribution scheme would also be replaced by the new
pension arrangements. The proposal is to automatically enrol new
employees into the new pension from 2012 and automatically enrol
those employees who are not currently members of a Severn Trent
scheme from 2013. Severn Trent is consulting with its employees
from June for three months, with changes introduced no earlier
than April 2012.
Accounting Policies and presentation of the financial statements
Our consolidated financial statements are prepared in accordance
with International Financial Reporting Standards that have been
endorsed by the European Union.
26
Severn Trent Plc Annual Report and Accounts 2011
Governance
Directors’ report
The directors present their report, together with the audited financial
statements of the group, for the year ended 31 March 2011.
Principal activity
The principal activity of the group is to provide and treat water and
remove waste water in the UK and internationally.
Details of the principal joint ventures, associated and subsidiary
undertakings of the group at 31 March 2011 appear in notes 19,
20 and 40 to the financial statements on pages 83 and 111.
Business review
The Chairman’s statement, the Chief Executive’s review,
the report and performance reviews for the group’s main
businesses and the financial review on pages 10 to 25 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 2011.
Details of the principal risks and uncertainties facing the group are
set out in the risk and assurance section on pages 56 to 58.
All of the above are incorporated by reference in (and are deemed
to form part of) this report.
Directors and their interests
Biographies of the directors currently serving on the board are set
out on pages 30 and 31.
Details of changes to the board during the year and of the directors
offering themselves for reappointment at the Annual General Meeting
(AGM) are set out in the Chairman’s letter on pages 33 to 38.
Details of directors’ service agreements are set out in the Directors’
remuneration report on page 50. The interests of the directors in the
shares of the company are shown on pages 52 to 55 of that report.
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 judgment is given in their
favour or relief from any liability is granted to them by the court.
Employees
The average number of employees within the group is shown in
note 9 to the financial statements on page 76.
Severn Trent believes that a diverse and inclusive culture is a key
factor in being a successful business. Apart from ensuring an
individual has the ability to do the job we do not discriminate in any
way and make every effort to ensure that those with disabilities are
able to be employed by us. We ensure that training, career
development and promotion opportunities are available for all our
employees irrespective of their gender, race, age or disability.
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. To help develop employees’ interest in the
company’s performance, Severn Trent offers two employee share
plans. The Severn Trent Sharesave Scheme, an HM Revenue and
Customs approved SAYE plan, is offered to UK employees on an
annual basis. The Severn Trent Share Incentive Plan, approved by
HM Revenue and Customs, makes an annual award of shares to
Severn Trent Plc and Severn Trent Water Limited employees, based
on performance against the KPIs.
Research and development
Expenditure on research and development is set out in note 7 to the
accounts on page 75.
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 32 to the accounts on pages 92 to 103. Further details
on our treasury policy and management are set out in the financial
review on page 24.
Post balance sheet events
Details of post balance sheet events are set out in note 38 to the
group financial statements on page 110.
Dividends
An interim dividend of 26.04 pence per ordinary share was paid on
14 January 2011. The directors recommend a final dividend of 39.05
pence per ordinary share to be paid on 29 July 2011 to shareholders
on the register on 24 June 2011. This would bring the total dividend
for 2010/11 to 65.09 pence per ordinary share (2010: 72.32 pence).
The payment of the final dividend is subject to shareholder approval
at the AGM.
Capital structure
Details of the company’s issued share capital and of the movements
during the year are shown in note 29 to the financial statements on
page 91. The company has one class of ordinary shares which
carries no right to fixed income. Each share carries the right to one
vote at general meetings of the company. The issued nominal value
of the ordinary shares is 100% of the total issued nominal value of
all share capital.
There are no specific restrictions on the size of a holding nor on
the transfer of shares, which are both governed by the general
provisions of the articles of association and prevailing legislation.
The directors are not aware of any agreements between holders of
the company’s shares that may result in restrictions on the transfer
of securities or on voting rights.
Details of employee share schemes are set out in note 33 to the
financial statements on pages 103 to 107. For shares held by the
Severn Trent Employee Share Ownership Trust, the trustee abstains
from voting.
No person has any special rights of control over the company’s
share capital and all issued shares are fully paid.
With regard to the appointment and replacement of directors, the
company is governed by its articles of association, the Combined
Code on Corporate Governance, the Companies Act 2006 and
related legislation. The articles may be amended by special
resolution of the shareholders. The powers of directors are
described in the Board Governance document, the articles and the
Chairman’s letter on pages 33 to 38.
Under its articles of association, the directors have authority to allot
ordinary shares, subject to the aggregate nominal amount limit set
at the 2010 AGM.
There are a number of agreements that take effect after, or
terminate upon, a change of control of the company, such as
Severn Trent Plc Annual Report and Accounts 2011
27
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commercial contracts, bank loan agreements, property lease
arrangements and employee share plans. None of these is
considered to be significant in terms of their likely impact on the
business of the group as a whole. There are no agreements
between the company and its directors or employees that provide
for compensation for loss of office or employment that occurs
because of a takeover bid.
Substantial shareholdings
As at 23 May 2011 the company had been notified in accordance
with chapter 5 of the Disclosure and Transparency Rules of the
following major shareholdings:
Name of holder
Norges Bank
Legal & General Group Plc
Aegon Asset Management
Percentages rounded to two decimal places
Percentage of
voting rights and
issued share
capital
3.98%
3.97%
3.04%
No. of ordinary
shares of
9717/19p each
9,438,492
9,403,273
7,214,266
Authority to purchase shares
The company was given authority at its AGM in 2010 to make
market purchases of ordinary shares up to a maximum number
of 23,697,346 shares. Similar authority will again be sought from
shareholders at this year’s AGM. No market purchases were made
by the company during the year ended 31 March 2011.
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 40 to the
financial statements on page 111. Trade creditors for the group at
the year end are estimated as representing 24.4 days’ purchases
(2010: 44.1 days’ purchases).
Contributions for political and charitable purposes
Donations to charitable organisations during the year amounted to
£181,843 (2010: £326,382). Donations are given to charities whose
projects align closely with our aim to promote the responsible use
of water resources and waste water services which provide the
Analysis of shareholdings at 31 March 2011
Category
Individual and
joint accounts
Other*
Total
Number of
shareholders
% of
shareholders
Number of
shares
%
of shares
67,072
6,774
73,846
90.83
9.17
100.00
26,250,821
210,891,713
237,142,534
11.07
88.93
100.00
*
Includes insurance companies, nominee companies, banks, pension funds, other
corporate bodies, limited and public limited companies
opportunity for longer term partnerships. In addition we provide
donations to employee nominated charities through a matched
funding scheme and health and safety reward schemes. We are
also committed to supporting WaterAid, the UK’s only major charity
dedicated to improving access to safe water, hygiene and sanitation
in the world’s poorest countries.
In 2008/09 a provision of £5 million was established for additional
contributions to the Severn Trent Charitable Trust as agreed with
Ofwat. Severn Trent Water paid £2 million additional contributions in
that year and a further £2 million in 2009/10. The remaining £1 million
was paid in 2010/11 (provided for in previous years), to the Severn
Trent Trust Fund which helps people out of poverty and debt.
Severn Trent’s policy is not to make any donations for political
purposes in the UK, or to donate to EU political parties or incur EU
political expenditure. Accordingly neither Severn Trent Plc nor its
subsidiaries made any political donations or incurred political
expenditure in the financial year under review.
Under the provisions of the Political Parties Elections and
Referendums Act 2000 (the relevant provisions of which are now
contained in Part 14 of the Companies Act 2006), shareholder
authority is required for political donations to be made or political
expenditure to be incurred by the company or any of its subsidiaries
in the EU and disclose any such payments in the annual report.
The legislation gives a wide definition of what constitutes political
donations and political expenditure including sponsorship,
subscriptions, payment of expenses, paid leave for employees
fulfilling public duties and support for bodies representing the
business community in policy review or reform. The company
has therefore obtained limited authority from shareholders as a
precautionary measure to allow the company to continue supporting
the community and such organisations without inadvertently
breaching the legislation.
At the 2010 AGM, shareholders gave the company authorities to
make political donations or to incur political expenditure in the EU
(which would not ordinarily be regarded as political donations) up
to an aggregate annual limit of £50,000 for the company and its
subsidiaries. Pursuant to those authorities, during the year ended
31 March 2011 the group incurred costs of £nil (2010: £nil). Those
authorities will expire at the 2011 AGM and, in line with market
practice to renew the authorities on an annual basis, the board has
decided to put forward a resolution to this year’s AGM to renew the
authorities to make donations to political organisations and to incur
political expenditure up to a maximum of £50,000 per annum.
As permitted under the Companies Act 2006, this resolution also
covers any political donations made, or political expenditure
incurred, by any subsidiaries of the company.
Size of holding
1–500
501–1,000
1,001–5,000
5,001–10,000
10,001–25,000
25,001–50,000
Over 50,000
Total
Number of
shareholders
% of
shareholders
Number of
shares
%
of shares
54,416
12,947
5,452
311
196
138
386
73,846
10,730,367
73.69
9,353,906
17.53
9,932,847
7.38
2,162,766
0.42
3,214,558
0.27
5,157,229
0.19
0.52 196,590,861
237,142,534
100.00
4.52
3.94
4.19
0.91
1.36
2.17
82.91
100.00
28
Severn Trent Plc Annual Report and Accounts 2011
Governance
Directors’ report (continued)
Internal controls
The board is responsible 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 and compliance and risk management, at least annually
in accordance with the requirements of the Combined Code for
effectiveness and adequacy. The internal control system can only
provide reasonable and not absolute assurance against material
misstatement or loss, as it is designed to manage rather than
eliminate the risk of failure to achieve business objectives.
The Audit Committee reviews the group’s risk management process
and the effectiveness of the system of internal control on behalf of
the board and keeps under review ways in which to enhance the
control and audit arrangements. The Audit Committee receives
reports every six months from the Chief Executive detailing the
significant risks and uncertainties 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. During the course of its review of the
system of internal control in 2010/11, the Audit Committee has not
identified nor been advised of any failings or weaknesses which it
has determined to be significant. Therefore a confirmation in respect
of necessary actions has not been considered appropriate.
The Internal Audit department provides objective assurance and
advice on risk management and control. The external auditor also
reports on significant financial control issues to this committee.
The board confirms that procedures providing an ongoing process
for identifying, evaluating and managing the principal risks and
uncertainties faced by the group have been in place for the year to
31 March 2011 and up to the date of approval of the Annual Report,
which is in accordance with the revised guidance on internal control
published in October 2005 (the Turnbull Guidance).
External auditor
In the case of each of the persons who were 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 auditor is unaware; and
• each of the directors has taken all the steps that he/she ought to
have taken as a director to make himself/herself aware of any
relevant audit information and to establish that the company’s
auditor is aware of that information.
Relevant audit information means information needed by the
company’s auditor in connection with preparing its report.
This confirmation is given and should be interpreted in accordance
with the provisions of section 418 of the Companies Act 2006.
Deloitte LLP have indicated their willingness to continue as auditor.
A resolution to reappoint Deloitte LLP will be proposed at this
year’s AGM.
The Audit Committee has recommended to the board the
reappointment of Deloitte LLP and a resolution to that effect will
be on the agenda at the AGM. The Audit Committee will also be
responsible for determining the audit fee on behalf of the board.
Accounts of Severn Trent Water Limited
Regulatory accounts for Severn Trent Water Limited are prepared
and sent to Ofwat. 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.
Going concern
The group’s business activities, together with the factors likely to
affect its future development, performance and position are set out
in the Chief Executive’s review on pages 6 and 7 and the business
reviews of Severn Trent Water and Severn Trent Services on
pages 8 to 19. The financial position of the group, its cash flows,
liquidity position and borrowing facilities are described in the
Financial review on pages 22 to 25. The group’s objectives,
policies and processes for managing its capital and its financial
risk management objectives are described in the Financial review
and in the Governance report on pages 26 to 58. Details of the
group’s financial instruments, hedging activities and exposure to
credit risk and liquidity risk are described in note 32 to the group
financial statements.
The group’s principal operating subsidiary, Severn Trent Water, is a
regulated long term business characterised by multi year investment
programmes. The group’s strategic funding objectives reflect this.
The group therefore seeks to attain a balance of long term funding
or commitment of funds across a range of funding at the best
possible economic cost. Average debt maturity is 16 years and the
effective average interest cost during the year was 6.4%. The group
is in a strong liquidity position with £315.2 million in cash and liquid
reserves and £500 million of undrawn committed bank facilities,
which are expected to be sufficient to fund its investment and cash
flow needs until March 2013 in the normal course of business.
Severn Trent Water operates in an industry that is currently subject
to economic regulation rather than market competition. Ofwat, the
economic regulator, has a statutory obligation to set price limits that
it believes will enable the water companies to finance their activities.
As a consequence the directors believe that the group is well placed
to manage its business risks successfully despite the current
uncertain economic outlook.
After making enquiries, the directors have a reasonable expectation
that the company and the group have adequate resources to
continue in operational existence for the foreseeable future.
Accordingly, they continue to adopt the going concern basis in
preparing the Annual Report and Accounts.
Annual general meeting
The AGM of the company will be held at the International Convention
Centre, Broad Street, Birmingham B1 2EA at 11am on Wednesday
20 July 2011. 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
General Counsel and Company Secretary
26 May 2011
Governance
Directors’ responsibility statement
Severn Trent Plc Annual Report and Accounts 2011
29
The directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the company’s
transactions and disclose with reasonable accuracy at any time the
financial position of the company and enable them to ensure that
the financial statements comply with the Companies Act 2006.
They are also responsible for safeguarding the assets of the
company and hence for taking reasonable steps for the prevention
and detection of fraud and other irregularities.
The directors are responsible for 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.
We confirm that to the best of our knowledge:
• the financial statements, prepared in accordance with the relevant
financial reporting framework, give a true and fair view of the
assets, liabilities, financial position and profit or loss of the
company and the undertakings included in the consolidation
taken as a whole; and
• the management report, which is incorporated into the directors’
report, includes a fair review of the development and performance
of the business and the position of the company and the
undertakings included in the consolidation taken as a whole,
together with a description of the principal risks and uncertainties
that they face.
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Andrew Duff
Chairman
Michael McKeon
Finance Director
The directors are responsible for preparing the Annual Report,
Directors’ remuneration report and the financial statements in
accordance with applicable law and regulations.
Company law requires the directors to prepare such financial
statements for each financial year. Under that law the directors are
required to prepare group financial statements in accordance with
International Financial Reporting Standards (IFRSs) as adopted by
the European Union and Article 4 of the IAS Regulation and have
chosen to prepare the parent company financial statements in
accordance with United Kingdom Generally Accepted Accounting
Practice (United Kingdom Accounting Standards and applicable
law). Under company law the directors must not approve the
accounts unless they are satisfied that they 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 parent company financial statements, the directors
are required to:
• select suitable accounting policies and then apply them
consistently;
• make judgements and accounting estimates that are reasonable
and prudent;
• state whether applicable UK Accounting Standards have been
followed subject to any material departures disclosed and
explained in the financial statements; and
• prepare the financial statements on the going concern basis
unless it is inappropriate to presume that the company will
continue in business.
In preparing these financial statements, International Accounting
Standard 1 requires that the directors:
• 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 IFRSs are insufficient to enable users to
understand the impact of particular transactions, other events and
conditions on the entity’s financial position and financial
performance; and
• make an assessment of the company’s ability to continue as a
going concern.
30
Severn Trent Plc Annual Report and Accounts 2011
Governance
Board of directors
Severn Trent Plc board of directors as at 31 March 2011
1
5
9
2
6
3
7
4
8
10
11
Board committees
Management committee
A
R
C
N
E
Audit
Committee
Baroness Noakes (C)*
Dr Bernard Bulkin*
Richard Davey*
Kerry Porritt (S)
Remuneration
Committee
Richard Davey (C)*
Dr Bernard Bulkin*
Andrew Duff*
Martin Lamb*
Fiona Smith (S)
(C) Chairman
(S) Secretary
( * ) Non-executive director
Corporate
Responsibility
Committee
Dr Bernard Bulkin (C)*
Andrew Duff*
Gordon Fryett*
Tony Wray
Kerry Porritt (S)
Nominations
Committee
Andrew Duff (C)*
Dr Bernard Bulkin*
Richard Davey*
Gordon Fryett*
Martin Lamb*
Baroness Noakes*
Tony Wray
Fiona Smith (S)
Executive
Committee
Tony Wray (C)
Dr Tony Ballance
Simon Cocks
Evelyn Dickey
Len Graziano
Myron Hrycyk
Martin Kane
Michael McKeon
Alec Richmond
Andy Smith
Fiona Smith
Senior independent
non-executive director
Richard Davey*
General Counsel and
Company Secretary
Fiona Smith
Severn Trent Plc Annual Report and Accounts 2011
31
1. Dr Tony Ballance BSc
(Hons) MA (Econ) PhD (46)
Director, Strategy and
Regulation
Appointed to the board in
October 2007.
Tony’s extensive experience in utility
policy and regulation working for Ofwat
as Chief Economist and then as an
economic consultant leaves him ideally
placed to lead the company’s strategic
and regulatory work. Other
directorships and offices: Chief
Economist, Office of Water Services
(Ofwat) (1996–1999), director of London
Economics (1999–2000), director of
Stone and Webster Consultants
(2000–2005).
E
2. Dr Bernard Bulkin* BS PhD
FRSC FRSA FIE (69)
Independent non-executive
director
Appointed to the board in January
2006. Bernard is the Chairman of the
Corporate Responsibility Committee.
Bernard’s involvement in both innovation
and policy on climate change and
renewable energy, together with an
understanding of how to guide improved
performance on safety and
environmental operational issues,
enables him to contribute significantly
to the board. Other directorships and
offices: Chairman of Chemrec AB,
a Swedish company, non-executive
director of REAC AB in Sweden and of
Ze-gen Corporation in Boston, Venture
Partner at Vantage Point, an international
venture capital firm, Chair of the Office
of Renewable Energy Deployment,
UK Department of Energy and Climate
Change, was Chief Scientist at BP Plc
(2000–2003).
A C R N
3. Richard Davey* BA (62)
Senior independent
non-executive director
Appointed to the board in January
2006. Richard is Chairman of the
Remuneration Committee.
Richard has an investment banking
background and was formerly Head of
Investment Banking at NM Rothschild
and Sons. With extensive experience of
the financial services sector, having run
Rothschild’s Financial Services Group
and working with a number of high street
banks and insurers, Richard brings
valuable financial expertise to the board
and Audit Committee and as chair of the
Remuneration Committee. Other
directorships and offices: non-
executive Chairman of London Capital
Holdings Plc, Vice Chairman of Yorkshire
Building Society, non-executive director
of Amlin Plc, non-executive director of
Freeserve Plc (1999–2001), non-
executive director of Scottish Widows
Fund and Life Assurance Society
(1996–2000).
A R N
4. Andrew Duff* BSc FEI (52)
Non-executive Chairman
Appointed to the board in May 2010.
Andrew’s strong track record working in
regulated business gives him the relevant
experience to make him the right
Chairman to lead the group through
the next phase of development. Other
directorships and offices: Senior
independent director of Wolseley Plc,
Member of the board of trustees of
Macmillan Cancer Support, Group
Chief Executive Officer, RWE npower
(2003–2009), Fellow of the Energy
Institute.
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5. Gordon Fryett* (57)
Independent non-executive
director
Appointed to the board in July 2009.
Gordon’s extensive experience working
in and with international businesses,
accountability for managing large areas
of capital expenditure and a broad range
of executive and operational experience
in a highly customer facing environment,
enables him to bring a great deal of
experience and expertise to the board.
Other directorships and offices:
Group Property Director of Tesco, CEO
of Tesco Ireland (2001–2006), Director
of International Support for Tesco
(1997–2001), Alumnus of INSEAD.
C N
6. Martin Kane BSc CEng
CEnv MICE MIWEM FIW (58)
Director of Customer Relations
Appointed to the board in October
2007. Martin has been Director of
Customer Relations, Severn Trent
Water, since May 2006.
Martin joined Severn Trent Water in 1975
and has held various senior posts giving
him an extensive understanding of the
design, construction and operation of
water and waste water treatment plants,
water distribution networks and
sewerage systems. Other directorships
and offices: board member of UK Water
Industry Research Limited, board
member of Utilities and Service
Industries Training Limited.
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7. Martin Lamb* BSc MBA (51)
Independent non-executive
director
Appointed to the board in
February 2008.
Martin has extensive experience of
managing and developing large
engineering businesses in all parts of the
world. His strong commercial acumen,
experience of managing complex
projects, and familiarity with current
market pressures as a serving Chief
Executive leave him well placed to add
value to the Severn Trent business.
Other directorships and offices:
Chief Executive of IMI plc, non-executive
director of Spectris plc (1999–2006).
R
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8. Michael McKeon MA CA (54)
Finance Director
Appointed to the board in
December 2005.
Michael has extensive international
business experience having worked
overseas for CarnaudMetalbox, Elf
Atochem and Price Waterhouse. He also
held various senior roles with Rolls-
Royce Plc from 1997 to 2000 including
Finance Director of Aerospace Group
and was Finance Director of Novar Plc
from 2000 to 2005. Michael is a
Chartered Accountant and a Member
of the Institute of Chartered Accountants
of Scotland. Other directorships and
offices: non-executive director and
Chairman of the Audit Committee of
The Merchants Trust Plc, Finance
Director of Novar Plc (2000–2005).
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9. Baroness Noakes* DBE
LLB FCA (61)
Independent non-executive
director
Appointed to the board in February
2008. Sheila Noakes is the Chairman
of the Audit Committee.
Sheila is a Fellow of the Institute of
Chartered Accountants in England and
Wales and served as its President from
1999–2000. She was a senior partner of
KPMG from 1983 to 2000. She is an
experienced audit committee chairman
and currently chairs the Carpetright Plc
Audit Committee. Other directorships
and offices: senior independent
director of Carpetright Plc, director
of the Thomson-Reuters Founder Share
Company, non-executive director of
Imperial Chemical Industries Plc
(2004–2008), non-executive director
of Hanson Plc (2001–2007), Member
of the Court of the Bank of England
(1994–2001).
A N
10. Andy Smith BTech (Hons)
(50)
Director of Water Services
Appointed to the board in
October 2007.
Andy has worked in the UK and overseas
with BP, Mars and Pepsi, in engineering
and operational management roles, and
as group HR director and a member of
the board at Boots. Andy brings a broad
range of executive and operational
experience from different sectors to the
board. Other directorships and
offices: director of Boots Group Plc
(2002–2003)
E
11. Tony Wray BSc (Hons) (49)
Chief Executive
Appointed to the board in March 2005
and became Chief Executive in
October 2007.
Tony’s experience of a wide range of
operational and strategic leadership roles
in the Energy, Telecoms, Water and
Waste industries enables him to bring a
multi disciplined approach to the board.
Other directorships and offices:
non-executive director – Energy and
Utility Skills, the sector skills council,
Member of the Business Advisory Board
for Living with Environmental Change,
director of Networks at Eircom, the
Republic of Ireland’s telephone operation
(2003–2005), director roles within
Transco and National Grid Transco
(1997–2003).
C N E
32
Severn Trent Plc Annual Report and Accounts 2011
Governance
Executive Committee
The Chief Executive is supported in his role by the executive
management team and together they comprise the Executive
Committee. During the year, the Executive Committee comprised
the executive directors and senior executive managers responsible
for key operational and central functions. Photographs of the
members of the committee, together with their biographies are
set out below.
The Executive Committee oversees the development and
execution of the Severn Trent strategy. It also has accountability
for achieving business results. The terms of reference of the
Executive Committee are available on the company’s website
(www.severntrent.com) or from the Company Secretary.
During the year, the Executive Committee met to consider
strategy, business management, policy and planning, and
operational performance.
Members of the Executive Committee are delegated responsibility
to sit on steering groups that oversee the delivery of our strategy
and business management. During the year, steering groups
were set up to oversee areas such as our move to Severn Trent
Centre, the integrated delivery of our year end results and
annual June Return to Ofwat and our leadership development.
1
5
9
2
6
10
3
7
11
4
8
1. Tony Wray BSc (Hons)
(49) Chief Executive
Please see full biography on page 31.
2. Martin Kane BSc CEng
CEnv MICE MIWEM FIW (58)
Director of Customer Relations
Please see full biography on page 31.
3. Michael McKeon MA CA
(54) Finance Director
Please see full biography on page 31.
4. Fiona Smith LLB (52)
General Counsel and Company
Secretary
Joined Severn Trent in February
2006. Fiona is a Solicitor and was
previously General Counsel and
Company Secretary at National Grid
plc, where she worked for 15 years,
before becoming General Counsel at
Transport for London for two years,
prior to joining Severn Trent.
5. Alec Richmond BSc (Econ)
FCA FIIA (53)
Director of Internal Audit
Joined Severn Trent in June 2007.
Prior to that, he worked for Cadbury
Schweppes Plc, leading the company’s
global internal audit service from
2000-2005. Before joining Severn
Trent, he worked for RSM Robson
Rhodes as a Director and a member of
the management board responsible for
Risk Assurance Services. Alec is a
fellow of the ICAEW.
6. Andy Smith BTech (Hons)
(50) Director of Water Services
Please see full biography on page 31.
7. Dr Tony Ballance BSc
(Hons) MA (Econ) PhD (46)
Director, Strategy and
Regulation
Please see full biography on page 31.
8. Simon Cocks BA (Hons)
(45) Waste Water Services
Director
Joined Severn Trent in July 2009.
Simon is an electrical engineer by
training and began his career in military
communications working for Plessey
and then GEC. He previously worked for
London Electricity in various operational
and management roles and, more
recently, for National Grid where he was
Head of UK Operations Performance
and Planning, then Commercial Director
for the gas and electricity business in the
UK and Europe, and more recently held
the position of Chief Procurement Officer
before joining Severn Trent.
9. Myron Hrycyk MBA (54)
Chief Information Officer
Joined Severn Trent in April 2008.
Myron has delivered major IT strategic
programmes, reorganised corporate IT
units and deployed high performance
IT practices in previous roles for NYK
Logistics and Unipart. Myron is the
executive sponsor of the company’s
SAP/ERP transformation programme.
10. Leonard Graziano MBA
BEng (65) President and Chief
Executive Officer, Severn Trent
Services
Joined Severn Trent in January
2000. Prior to joining Severn Trent
Services, Len served as President of
Chemineer, Inc., a unit of Robbins &
Myers, Inc., a global leader in industrial
mixing and agitation equipment and
technology. He also served as a
President of Johnston Pump Company,
a full line vertical pump, parts and
repair company.
11. Evelyn Dickey
BSc (Hons) (48)
Director of Human Resources
Joined Severn Trent in November
2006. Evelyn has wide HR experience
leading design and delivery of major
change programmes, business
restructuring, employee relations,
resourcing, organisational capability
and performance management
initiatives. Before joining Severn Trent
Evelyn worked in HR consultancy and
as HR Director (HR Operations) for
Boots the Chemists.
Governance
Chairman’s letter
Severn Trent Plc Annual Report and Accounts 2011
33
Dear Shareholder
Introduction
I want to set out in this letter how governance underpins our activities in Severn Trent and
describe how we apply the principles of good corporate governance as set out in the
Combined Code on Corporate Governance issued by the Financial Reporting Council
(FRC) in 2008 (Combined Code).
Compliance with the Combined Code
The Combined Code sets out standards of good practice that listed companies are
expected to follow in areas such as how we structure the board appropriately and develop
its members, how we pay and reward our executive team, our accountability and audit, and
our relationship with our shareholders.
For the whole of the financial year ended 31 March 2011, Severn Trent was fully compliant
in its application of the Combined Code.
Our compliance with the Combined Code demonstrates our commitment to the highest
standards of governance and corporate behaviour. The Combined Code has been replaced
during the financial year by the UK Corporate Governance Code. The events in our
corporate markets over the previous two years necessitated a review of the Combined
Code and your board encouraged and supported the changes that the new Code has
introduced. Our response to the consultation on the review of the Combined Code is
available for you to view on the website of the Financial Reporting Council, www.frc.org.uk.
The UK Corporate Governance Code applies to accounting periods beginning on or after
29 June 2010. Our formal obligation for 2011 is to report how we have applied the principles
of the Combined Code.
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Board membership
From 10 May 2010 the board has consisted of me, your non-executive Chairman, five
executive directors and five independent non-executive directors. Together, as a unified
board, I believe we bring an appropriate balance of innovation, experience, independence
and challenge to ensure effective decision making.
Photographs of the members of the board, together with their biographies and a description
of the skills that they bring to bear, can be found on pages 30 and 31.
Further to the publication of the Davis Report, ‘Women on Boards’, in February this year,
boards of FTSE 350s have been encouraged to promote greater female representation
on corporate boards. Recent guidance from the Financial Reporting Council has also
highlighted the importance of greater diversity of psychological profile around the
board table.
I consider that diversity in the board room is essential to good business, helping companies
better to meet the needs of their stakeholders.
As part of our ongoing board membership renewal we will ensure that our recruitment and
appointment processes continue to ensure that all appointments are meritocratic and that
our board represents the best interests of shareholders.
Role of the Chairman
I joined the board in May 2010 and was appointed Chairman from the end of the AGM, on
20 July 2010, replacing Sir John Egan.
Andrew Duff
Chairman
Governance in Severn Trent
The way we are structured
• Our organisation is structured to allow
for effective and efficient decision
making with clear accountabilities.
The way we choose to behave
• Our Code of Conduct sets out our
approach to responsible business
behaviours.
• The Code of Conduct is supported by
14 group policies and our behaviour
model. Further details of the Code of
Conduct can be found on our website
(www.severntrent.com).
The way we assure our performance
• Management assurance is provided
by a combination of effective
management processes and risk and
compliance activities.
• Independent assurance is provided
primarily by Internal Audit, by our
external auditors and other external
bodies.
The way
we are
structured
The way
we work
The way
we choose
to behave
The role of the Chairman is to lead a unified board, facilitating its members at its meetings,
and to be responsible for ensuring that the principles and processes of the board are
maintained in line with the Board Governance document.
The way we
assure our
performance
Agendas for our meetings are agreed in consultation with the Chief Executive and Company
Secretary, although any director may request that an item be added to the agenda. I have
authority to act and speak for the board between its meetings, including engaging with the
Chief Executive. I report to the board and committee chairmen as appropriate on decisions
and actions taken between meetings of the board. I also meet with the non-executive
directors without the executive directors present, to consider the performance of the
executive directors and to provide feedback.
34
Severn Trent Plc Annual Report and Accounts 2011
Governance
Chairman’s letter (continued)
Group Authorisation Arrangements
The Group Authorisation Arrangements
(GAA) are the framework through
which the Severn Trent Plc board
authorises the right people, at the right
level, to take important decisions as we
manage legal, financial and administrative
issues throughout the group. The GAA
are designed to facilitate good control,
efficient decision making and
demonstrable compliance.
The flow of authority is from the Severn
Trent Plc board to the Chief Executive. In
respect of certain issues, the delegated
authority is subject to an obligation to
work with specialist business services
areas (such as Tax, Treasury, Finance
and Company Secretariat) that provide
additional expertise and a group wide
perspective.
Governance of subsidiaries
The board of the listed company,
Severn Trent Plc, is the same as that
of its subsidiary, Severn Trent Water
Limited. This structure was implemented
in 2007 when it was decided to
integrate the management of the
companies to gain greater focus,
transparency and effectiveness around
Severn Trent Water.
The two companies operate as distinct
legal entities. The boards have regard to
the Severn Trent Plc Board Governance
document and the Severn Trent Water
Limited Matters Reserved to the
Board. They are assisted through the
management of separate agendas,
meetings and minutes by the Company
Secretariat and advised in their
meetings by the Company Secretary
where appropriate.
Subsidiary company boards are required
to be managed scrupulously with respect
to all legal, fiscal and administrative
matters. In particular, the relationships
between Severn Trent Water Limited and
our other businesses such as Severn
Trent Services are monitored and
controlled to ensure that we comply with
our Ofwat obligations on arm’s length
transactions.
Senior independent non-executive director
Richard Davey is the senior independent non-executive director. He chairs the
Remuneration Committee and is a member of the Audit and Nominations Committees.
The board has agreed that Richard Davey will act as Chairman of the board in the event
that I am unable to do so for any reason.
Non-executive directors
Your non-executive directors are appointed to the board to contribute their external expertise
and experience in areas of importance to the group such as corporate finance, general
finance, corporate strategy, environmental matters, general management and supply chain
management. They also provide independent challenge and rigour in the board’s
deliberations and are encouraged to make independent assessments of the group’s
competencies. The non-executive directors, led by Richard as the senior independent
non-executive director, meet without me at least once a year, where there is an opportunity
for them to appraise my performance.
Your 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 and the UK Corporate Governance Code.
Chief Executive
The board has delegated all responsibility beyond its matters reserved to the Chief
Executive to achieve the company’s strategy. The Chief Executive, Tony Wray, is
empowered to take all decisions and actions that further the company’s strategy and which
in his judgement are reasonable, having regard to the Chief Executive limits set out in the
company’s Group Authorisation Arrangements (GAA).
Executive directors
The executive directors support Tony in driving strategy forward in Severn Trent. They
are committed to implementing strategy in a responsible way that takes account of our
commitment to long term responsible stewardship of the business, the environment,
our customers and the communities in which we live and work.
Role of the Company Secretary
All directors have access to the advice and services of the Company Secretary, Fiona
Smith, and the Company Secretariat team. The Company Secretary is responsible for
ensuring that the board operates in accordance with the governance framework it has
adopted and that there are good information flows to the board and its committees and
between senior management and the non-executive directors.
Fiona retires from her role at the AGM in July 2011. We wish her a long and happy
retirement and on behalf of the board, I offer her our thanks for her services over the past
five years.
Bronagh Kennedy will succeed Fiona. Bronagh is a qualified solicitor and until recently was
the Company Secretary and General Counsel at Mitchells and Butlers plc.
The appointment and resignation of the Company Secretary is a matter for consideration
by the board as a whole.
Induction
On joining the board, directors are evaluated and then provided with a comprehensive and
individualised induction pack that includes notes on the group structure, the regulatory
framework of the operating businesses within the group, financial reports and business
plans and information on our governance framework.
Meetings are arranged with members of the executive management team and external
advisers who provide support to the relevant board committees the directors may serve on.
Visits to operational and office sites across the group are also arranged for directors
joining the board.
Severn Trent Plc Annual Report and Accounts 2011
35
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.
Continuing professional development
The directors received updates throughout the year on matters such as the Flood and Water
Management Act and the impacts of the proposals on private drains and sewers. There was
also an opportunity to review and understand the outcomes of an exercise to evaluate our
business plan for AMP5.
We are creating individual programmes for learning and development. The programmes will
be reviewed by me with each director as part of the annual performance and effectiveness
reviews undertaken by the board.
Retail shareholder engagement
strategy
The board has an active shareholder
engagement strategy, the main elements
of which are set out below.
Performance and effectiveness reviews
Last year Sir John Egan, my predecessor as Chairman, carried out an internal review on the
effectiveness of the board and its committees. The board discussed the outcomes of that
review in July 2010 and the outcomes gave me some insights into the operations of the
board and its committees that have been helpful to me during my first year as Chairman.
The Annual Report and Accounts is the
principal means of communicating with
shareholders. The group adopted
e-communications after they were
approved by shareholders as an
alternative means of receiving company
information at the 2007 annual general
meeting. As at 5 May 2011, 39,723
shareholders receive company
communications via electronic methods
whilst 28,521 shareholders continue to
receive communications by post.
The company’s website
(www.severntrent.com) contains an
archive of annual reports together with
other information relevant to investors.
This includes comprehensive share
price information, financial results and
financial calendars.
The company offers a Dividend
Reinvestment Plan (DRIP). Details of
the DRIP are available on the company
website and the website of Equiniti,
our registrar.
Further shareholder information can be
found on pages 124 to 125.
Financial calendar
22 June 2011
24 June 2011
20 July 2010
29 July 2011
Ex-dividend date for
2010/11 final dividend
Record date for
2010/11 final dividend
AGM
Payment date for
proposed 2010/11 final
dividend
24 November 2011 Announcement date
13 January 2012
for 2011/12 interim
results
Payment date for
proposed 2011/12
interim dividend
July 2011 marks my first full year as Chairman. I will commence an external review of the
board, committees and the directors in November 2011 and will report back to you on the
outcomes of that review in next year’s report.
Board processes
We have processes in place regarding:
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• our tasks and activities (board membership and administration);
• the matters specifically reserved for our decision making, the authority delegated to the
Chief Executive, the accountability of the Chief Executive for that authority, and guidance
on managing the relationship between us and the Chief Executive; and
• the boundaries on Chief Executive action (Chief Executive limits).
An approved Board Governance document outlines those processes and is available on our
website (www.severntrent.com).
The board has reserved the following for its own consideration:
• the appointment of the Chief Executive, directors, the Company Secretary and the
Director of Internal Audit;
• the strategy and budgets of the company;
• the GAA which set out the group’s delegated approval limits;
• decisions regarding the company and its subsidiaries required to be made by the
company’s GAA, constitutional documents, statute or external regulation; and
• the approval or adoption of documents (including the publication of reports and
statements to shareholders), required to be made by the board by the company’s GAA,
constitutional documents, statute or external regulation.
Board meetings
We have regular scheduled meetings throughout the year.
Papers, including minutes of board committees held since the previous board meeting and
performance reports, are circulated in advance of each meeting.
There is an agreed procedure in place which allows 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 matter he/she is entitled to require the Company Secretary to minute that
concern. Should the director later resign over the issue, I, as Chairman, will bring it to the
attention of the board.
36
Severn Trent Plc Annual Report and Accounts 2011
Governance
Chairman’s letter (continued)
Reporting obligations
As a publicly listed company, the
company has a range of reporting
obligations to meet that are set out by
law and regulation. The company is
committed to the promotion of investor
confidence by taking steps within its
power to ensure that trade in its
securities takes place in an efficient and
informed market.
The company recognises the importance
of effective communication as a key part
of building shareholder value and that,
to prosper and achieve growth, it must
(among other things) earn the trust of
security holders, employees, customers,
suppliers and communities, by being
open in its communications and
consistently delivering on its
commitments.
The company announces its results on
a half yearly basis and complies with
the requirement to make interim
management statements.
The Chief Executive has established a
Disclosure Committee, chaired by the
Finance Director, with specific
responsibilities for the delivery of the year
end reporting processes. The Committee
oversees the delivery of an integrated
plan incorporating all elements of the
year end reporting process, namely the
group’s final results announcement and
report and accounts, the company’s
AGM, the statutory and regulatory
accounts of Severn Trent Water Ltd and
the June Return to Ofwat.
Board attendance in 2010/11
Sir John Egan
Tony Ballance
Dr Bernard Bulkin
Richard Davey
Andrew Duff
Gordon Fryett
3/3
7/7
7/7
7/7
5/6
7/7
Martin Kane
Martin Lamb
Michael McKeon
Baroness Noakes
Andy Smith
Tony Wray
7/7
6/7
7/7
7/7
7/7
7/7
In addition to the formal board meetings, your board attended two full day strategy sessions
this year, where the board and executive management team together considered Severn
Trent Services and also the most significant risks facing the company. During the financial
year, five ad hoc meetings of the board were convened to consider such matters as Severn
Trent Plc’s preliminary and interim results and interim management statements.
Board committees
We have established committees of the board to deal with specific issues or approvals,
as and when necessary.
The four permanent committees of the board assist in the execution of its responsibilities
and the board delegated some of its responsibilities to those board committees. The
committees assist the board by focusing on their specific activities, fulfilling their roles and
responsibilities, reporting to the board on decisions and actions taken, and making any
necessary recommendations.
The terms of reference of the Audit, Remuneration and Nominations Committees comply
with the provisions of the Combined Code and are available for inspection, together with the
terms of reference of the Corporate Responsibility Committee, 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 committees has reviewed its effectiveness and terms of reference during the
year and any necessary actions have been identified and reported to the board.
Reports from the Chairmen of these committees are set out on pages 39 to 55 of this report.
Terms and conditions of appointment
We have made the terms and conditions of appointment of the directors available for
inspection by any person at the company’s registered office during normal business hours.
They will also be available at the AGM. The letters of appointment of the directors can also
be seen on our website (www.severntrent.com).
Remuneration
The Directors’ remuneration report is set out on pages 43 to 55.
Insurance and indemnities
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.
Interests
No director had a material interest at any time during the year in any contract of significance
with the company or any of its subsidiary undertakings.
Institutional shareholders and analysts
Presentations are made to shareholders
and analysts following the release of the
interim and year end results. The Chief
Executive and 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 and monitors
shareholder activity on a quarterly basis
at its meetings.
In December 2010, 50 people attended
the Severn Trent Investor Day, entitled
‘Winning in a changing world’, hosted by
the Chief Executive and Finance Director
at our offices in Coventry.
Severn Trent Plc Annual Report and Accounts 2011
37
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Conflicts of interests – update
The board has a full process in place to authorise situational conflicts in accordance with the
provisions of the Companies Act 2006.
For any actual or potential conflicts, the following procedure has been adopted by the board
to consider and, if it sees fit, to authorise situations where a director has an interest that
conflicts, or may possibly conflict, with the interests of the company:
• the director will notify the Chairman and Company Secretary of the actual or potential
conflict;
• the Nominations Committee will consider the notification and determine whether it needs
to be proposed to a board meeting for authorisation; and
• the conflict will be considered by the board at a scheduled board meeting.
Full details of the conflict will be sent to directors in advance of the meeting. If there is a
major conflict or it is decided that authorisation should not wait until the next scheduled
meeting, the board would be asked to authorise the conflict by way of written resolution.
In addition to reviewing any conflicts notified and proposing them for authorisation by the
board, the Nominations Committee monitors changes to previously notified conflicts and
any conditions imposed. Half yearly reports are made to the board of all directors’ conflicts
and directors are reminded from time to time of their obligations. An annual review of
conflicts is carried out and this is incorporated into the year end process of verifying
directors’ interests.
Annual general meeting
The AGM of the company will be held at the International Convention Centre, Broad Street,
Birmingham B1 2EA at 11am on Wednesday 20 July 2011.
The AGM is shareholders’ opportunity to feedback to the company on performance,
management and the way we work in a very direct fashion – through the way they vote –
either in favour of the resolution, against the resolution or by withholding their vote so that it
does not count either for or against. It is also shareholders’ opportunity to meet informally
with directors and senior management before and after the meeting and ask formal
questions during the meeting.
The board encourages shareholders to attend the company’s AGM 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.
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, Corporate Responsibility, Remuneration
and Nominations Committees, together with all other directors, will attend the AGM.
The company uses electronic voting at the AGM, allowing shareholders present at the
meeting to register one vote per share held. Results of the poll on each resolution, including
details of the votes for and against registered prior to and at the meeting, proxy votes and
the number of abstentions will be displayed at the meeting.
The poll results and a list of questions and answers from the AGM will be made available on
our website after the meeting.
At the 2010 AGM, over 50 shareholders registered for Severn Trent’s Shareholder
Networking Programme which took place on 30 March 2011. The aim of the programme
is to offer retail shareholders the opportunity to learn more about the company, through
a combination of site visits and talking to staff.
38
Severn Trent Plc Annual Report and Accounts 2011
Governance
Chairman’s letter (continued)
The event was hosted by Martin Kane, Director of Customer Relations and a member of the
board. Twenty participants were taken to Minworth, to our Sewage Treatment Works, for a
tour and presentation on renewable energy. This was followed by a visit to our new
headquarters at the Severn Trent Centre.
Positive feedback was given on the organisation and content with strong support for the
company continuing the programme, both from shareholders and employees who enjoyed
the positive interest shown in their work and their part in explaining what work they did.
Your board encourages those shareholders attending the 2011 AGM to register for this
year’s visit.
Reappointment
Under the company’s articles of association, all directors are required to retire and submit
themselves for appointment or reappointment if they have been appointed by the board
since the previous Annual General Meeting or if it is the third Annual General Meeting
following that at which they were appointed or last reappointed.
However, the UK Corporate Governance Code now requires that all directors of companies
in the FTSE 350 index such as the company should be subject to annual election by
shareholders. Accordingly, the directors will all retire at this year’s Annual General Meeting
and submit themselves for reappointment by the shareholders.
Conclusions
At Severn Trent, we are committed to operational excellence and continuous improvement,
supported by good governance. We run our business in a manner which is responsible and
consistent with our belief in transparency and accountability. Good governance is not simply
an exercise in compliance. For Severn Trent it is a vital aspect forming a foundation for the
sustainable growth of the business.
I firmly believe that Severn Trent will continue to achieve profitable and sustainable growth
for our company through the successful mix of good governance, a clear business plan and
strategy and strong management team.
Andrew Duff
Chairman
Governance
Nominations Committee
Severn Trent Plc Annual Report and Accounts 2011
39
This report provides details of the role of the Nominations Committee and the work it has
undertaken during the year.
The Committee keeps under review the balance of skills on the board and the knowledge,
experience, length of service and performance of the directors. It also reviews their external
interests with a view to identifying any actual, perceived or potential conflicts of interests,
including the time available to commit to their duties to the company. The Committee
monitors the independence of each non-executive director and makes recommendations
concerning such to the board. The results of these reviews are important when the board
considers succession planning and the election and reappointment of directors. Members
of the committee take no part in any discussions concerning their own circumstances.
During the year the Committee reviewed the procedure for reporting and authorising, as
appropriate, any actual or potential conflicts of interests, in accordance with the provisions
of the Companies Act 2006.
The members of the Nominations Committee in 2010/11 were the non-executive directors
of the board and the Chief Executive, Tony Wray.
In accordance with the requirements of the UK Corporate Governance Code, all members
of the board will seek re-election at the annual general meeting in July 2011. In March this
year the Nominations Committee formally reviewed the performance, contribution and
commitment of each of the directors retiring at this year’s AGM and seeking reappointment
and supported and recommended their reappointment to the board. The Committee has
confirmed that each director continues to perform well on an individual and collective basis,
making a valuable contribution to the board’s deliberations and demonstrating commitment
to the long term interests of the company.
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Nominations Committee attendance in 2010/11
Sir John Egan
Dr Bernard Bulkin
Richard Davey
Andrew Duff
Gordon Fryett
Martin Lamb
Baroness Noakes
Tony Wray
2/2
4/4
4/4
3/3
2/4
3/4
4/4
4/4
Each committee meeting complied with the terms of reference in that a minimum of five
members were in attendance, with the majority being independent, non-executive directors.
Andrew Duff
Chairman of the Nominations Committee
The main purpose of the Committee is
to assist the board by keeping the
composition of the board under review
and conducting a rigorous and
transparent process when making or
renewing appointments of directors to
the board. It also advises the board on
issues of directors’ conflicts of interest
and independence. The full terms of
reference for the Committee can be
found on the company’s website
(www.severntrent.com) and are also
available from the Company Secretary.
Succession planning
When considering new appointments to
the board, the Committee oversees the
preparation of a position specification
that is provided to an independent
recruitment organisation retained to
conduct a global search. In addition to
the specific skills, knowledge and
experience deemed necessary, the
specification contains criteria such as:
• a proven track record of creating
shareholder value;
• unquestioned integrity and a diversity
of psychological mindset;
• a commitment to the highest standards
of governance;
• having the required time available to
devote to the job;
• strategic mindset, an awareness of
market leadership, outstanding
monitoring skills;
• a preparedness to question, challenge
and openly assess; and
• an independent point of view.
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Severn Trent Plc Annual Report and Accounts 2011
Governance
Audit Committee
Baroness Noakes DBE
Chairman of the Audit Committee
The Committee assists the board in
discharging its responsibilities for the
integrity of the company’s financial
statements, the assessment of the
effectiveness of the systems of internal
controls and monitoring the effectiveness
and objectivity of the internal and external
auditors. The role and the responsibilities
of the Committee are set out in written
terms of reference. These can be
found on the company’s website
(www.severntrent.com) and are also
available from the Company Secretary.
This report provides details of the role of the Audit Committee and the work it has
undertaken during the year.
The members of the Audit Committee are Baroness Noakes DBE (Chairman), Dr Bernard
Bulkin and Richard Davey whose experience and background are set out on pages 30 and
31. The board is satisfied that Baroness Noakes and Richard Davey have recent and
relevant financial experience and that all members of the Committee remain independent.
The members of the Committee receive updates in financial reporting and the group’s
regulatory framework in various forms throughout the year.
The Chairman, the Chief Executive, the Finance Director, the Director of Internal Audit, the
Director of Strategy and Regulation, the Group Financial Controller, the Company Secretary
and the external auditor normally attend, by invitation, all meetings of the Committee. Other
members of senior management are also invited to attend as appropriate. In performing its
duties, the Committee has access to the services of the Director of Internal Audit, the
Company Secretary and external professional advisers.
We met five times in 2010/11 and our work focused on four key areas: financial statements
and accounting policies; internal controls; oversight of internal and external audit; and the
regulatory reporting obligations of our subsidiary Severn Trent Water Limited.
Financial Statements and Accounting Policies
Reviewing the financial statements and accounting policies requires us to make certain
judgements and we set out below some of the key issues we discussed in respect of 2010/11:
• the implementation of accounting standards in the period, in particular IFRIC 18 (in
respect of assets transferred from customers)
• the assumptions which underpin accounting for the group’s retirement benefits schemes
• the rationale for items shown as exceptional in the accounts.
In reviewing the financial statements, we receive input from the Executive Disclosure
Committee and Deloitte. The former is chaired by the Finance Director and considers the
content, accuracy and tone of the financial statements and other public disclosures prior
to their release.
Deloitte reported to the Committee on their review of the half year interim results and on
their audit of the year end financial statements.
Internal Controls
We receive regular reports from Internal Audit in respect of their work on internal controls
and we review management letters received from the external auditors. We review Internal
Audit’s annual review of fraud prevention and mitigation as well as a regular fraud log.
Technology controls and governance were areas of focus in 2010/11 and we received
several reports on the control environment in this area, where we had previously identified
the potential to enhance controls. Much progress has been made in improving the control
environment and we will continue to monitor progress into 2011/12.
We reviewed the processes for and outputs from our enterprise risk management process,
through which the principal risks and related controls are identified. In addition, we
monitored the ongoing development of our compliance and assurance processes in respect
of the key risks.
We discussed the new compliance requirement for Senior Accounting Officers to provide
certification in respect of the accounting records and processes which underpin the
calculation of tax liabilities for UK based companies owned by the group.
A programme is under way to ensure the group is in compliance with the UK Bribery Act which
is due to become effective in July 2011. We will receive further progress reports in 2011/12.
Further details of our Internal Control Framework, including the main features of our internal
control and risk management systems in relation to the financial reporting process, can be
found in the Directors’ Report on page 28.
Oversight of Internal Audit and External Audit
We are responsible for overseeing the work of the internal audit function and also for
managing the relationship with the group’s external auditor. We review the performance of
Severn Trent Plc Annual Report and Accounts 2011
41
Policy on the provision of non-audit
services
The company has approved a formal
policy on the provision of non-audit
services aimed at safeguarding and
supporting the independence and
objectivity of the external auditor.
The policy sets out the approach to be
taken by the group when using the
services of the external auditor, including
requiring that certain services provided
by the external auditor are pre-approved
by the Audit Committee or its Chairman.
It distinguishes between those services
where an independent view is required
and that should be performed by the
external auditor (such as statutory and
non-statutory audit and assurance work),
prohibited services where the
independence of the external auditor
could be threatened and they must not
be used, and other non-audit services
where the external auditor may be used.
Non-audit services where the external
auditor may be used include: non-
recurring internal controls and risk
management reviews (i.e. excluding
outsourcing of internal audit work), advice
on financial reporting and regulatory
matters, due diligence on acquisitions
and disposals, project assurance and
advice, tax compliance services, and
employee tax services.
The approval of the Audit Committee
or its Chairman is always required if
a non-audit service provided by the
auditor is expected to cost more than
£100,000 or if non-audit fees for the
year would thereby exceed the amount
of the audit fee.
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the internal and external auditor annually to ensure that they are effective and recommend
to the board whether the external auditor should be reappointed.
The Committee regularly holds discussions with both the internal and external auditors in
the absence of management. The Committee reports to the subsequent meeting of the
board on the Committee’s work and the board receives a copy of the minutes of each
meeting of the Committee.
Internal audit
The Director of Internal Audit and his Internal Audit team report on a day to day basis
to management on the effectiveness of the group’s systems of internal controls and the
adequacy of these systems to manage business risk and to safeguard the group’s assets
and resources. This work is summarised and reported to the Audit Committee on a regular
basis and is a key element of the assurance that the Committee receives on the risks and
controls in the group.
The plans, the level of resources and the budget of the Internal Audit function are reviewed
at least annually by the Audit Committee. The Director of Internal Audit is free to raise any
issues with the Committee or its Chairman at any time during the year.
External auditor
Deloitte LLP (Deloitte) were appointed auditor of the company in 2005. The Audit
Committee reviews the auditor’s effectiveness each year prior to recommending to the
board that they be proposed for reappointment at the AGM. Deloitte audit all significant
subsidiaries of the group.
Annually, the committee reviews information provided by the external auditor confirming
their independence and objectivity within the context of applicable regulatory requirements
and professional standards. The company does not have a policy of tendering the external
audit at specific intervals but would initiate a tender process if there were any concerns
about the quality of the audit or the independence and objectivity of the auditor. There are
no contractual obligations that act to restrict the Committee’s choice of external auditor.
Details of the amounts paid to Deloitte for audit and non-audit services are provided in note
7 to the accounts page 75.
In accordance with the requirements for auditor independence, the lead partner stood down
after the 2009/10 audit having served five years in that capacity. Our new lead partner
observed the 2009/10 audit to ensure continuity following the changeover.
Severn Trent Water Limited
The regulated activities carried out by Severn Trent Water Limited result in other reporting
requirements to Ofwat and these are also covered by the Audit Committee. These
regulatory reporting obligations include a comprehensive annual return on all of Severn
Trent Water Limited’s regulatory obligations, known as the June Return, and a statement
that underpins the customer charges made by Severn Trent Water Limited, known as the
Principal Statement.
Deloitte make reports to Ofwat in respect of the June Return. The June Return covers many
aspects which are not financial and Severn Trent Water Limited appoints a Reporter, Atkins,
to report on those aspects. The Audit Committee receives reports from Deloitte and the
Reporter on their work as part of its review of the returns.
In June 2010, we held an additional meeting to consider and review the new Ofwat reporting
requirements regarding the split of operating costs and fixed assets between different
activities within Severn Trent Water Limited (‘accounting separation’).
Audit Committee attendance in 2010/11
Baroness Noakes
Dr Bernard Bulkin
Richard Davey
5/5
4/5
5/5
In April 2010, we conducted an annual review of our performance as part of the annual
Board Effectiveness Review process and the board, as a whole, concluded that we continue
to operate effectively.
42
Severn Trent Plc Annual Report and Accounts 2011
Governance
Corporate Responsibility Committee
Dr Bernard Bulkin
Chairman of the Corporate
Responsibility Committee
The Committee provides guidance and
direction to the group’s corporate
responsibility (CR) programme, reviews
the group’s key non-financial risks and
opportunities and monitors progress.
The terms of reference for the Committee
can be found on the company’s website
(www.severntrent.com) and are also
available from the Company Secretary.
The Committee reviews annually the
group’s formal whistleblowing policy that
deals with allegations from employees
relating to breaches of the Code of
Conduct and reviews at each of its
meetings the whistleblowing incident log.
The purpose of the Corporate Responsibility (CR) Committee is to provide board oversight
of the management of all non-financial risks to the group. The structure for our CR policy
and framework is based around the four areas of Workplace, Marketplace, Environment
and Community, providing a common framework for both our businesses – regulated and
non-regulated. The framework remains under review as we continue to integrate corporate
responsibility into our core business operations for both Severn Trent Water and Severn
Trent Services. For each of the areas, there are four goals within our CR policy which help
to focus improvements in our performance.
Within our CR framework, we have identified 10 focus areas that are critical to our
management of risk and reputation. These areas have been determined through
stakeholder dialogue, risk assessment and benchmarking within the water industry and the
FTSE 100. The 10 areas provide the focus of the forward agenda of our CR Committee.
Workplace:
Health, safety and wellbeing. Employee skills, conduct and motivation. Diversity.
Marketplace:
Customer needs – including vulnerable customers. Supply chain responsibility.
Environment:
Environmental stewardship. Waste reduction and recycling. Climate change –
mitigation and adaptation.
Community:
Community engagement. Working with our customers – including pollution
prevention and water efficiency.
These focus areas also determine our approach to working in collaboration with other
organisations who share mutual interests and objectives. Further information is available on
our corporate website (www.severntrent.com/corporateresponsibility).
Within Severn Trent Water we have an effective performance management system in place
through 18 core business Key Performance Indicators (KPIs) and eight KSIs. These are
overseen by the Severn Trent Executive Committee and the board. Many of the business
KPIs relate directly to our CR focus areas and therefore contribute significantly to our CR
performance.
We report internally on our performance through both our Executive Committee and our CR
Committee. Externally, we report through a number of channels including our annual June
Return (our regulatory submission to Ofwat), our websites and our Annual Report and
Accounts.
The members of the Corporate Responsibility Committee are Dr Bernard Bulkin (Chairman),
Gordon Fryett and Tony Wray.
Corporate Responsibility Committee attendance in 2010/11
Dr Bernard Bulkin
Gordon Fryett
Tony Wray
3/3
3/3
3/3
Governance
Remuneration Committee
Severn Trent Plc Annual Report and Accounts 2011
43
Richard Davey
Chairman of the Remuneration Committee
The Committee assists the board by
focusing on the activities detailed below,
reporting to the board on decisions and
actions taken, and making any
necessary recommendations:
• the remuneration policy and its
application to the Chief Executive
and executives reporting to the
Chief Executive;
• the adoption of annual and longer term
incentive plans;
• determination of levels of reward to the
Chief Executive and approval of
reward to executives reporting to the
Chief Executive;
• setting the Chairman’s fee; and
• the communication to shareholders
on remuneration policy and the
Committee’s work on behalf of
the board.
The full terms of reference for
the Committee can be found on
the company’s website
(www.severntrent.com) and are also
available from the Company Secretary.
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This report sets out the remuneration policy for the directors of Severn Trent Plc and
discloses the amounts paid to them in the year ended 31 March 2011.
The report is subject to a shareholder vote and a resolution to approve this Directors’
remuneration report will be proposed at the AGM. The report has been prepared in
accordance with the requirements of the Companies Act 2006, the principles of the
Combined Code on Corporate Governance and best practice guidelines.
During the year, the Committee undertook a thorough review of the variable arrangements
for the executive directors and other members of the Severn Trent Executive Committee.
This review included an examination of both the quantum and structure of the variable pay
arrangements and the measures used to assess performance. The conclusions of this
review were as follows:
• The Committee determined that the structure of awards (cash bonus, deferred share
bonus with matching and long term incentive plan awards) remained appropriate and the
significant proportion of variable pay delivered in shares provided a strong alignment
between the interests of management and shareholders.
• The quantum of rewards remains competitive and no changes were proposed to current
award levels.
• The performance measures and weighting of the targets for the annual bonus plan
(Severn Trent Water KPIs, personal performance and Severn Trent Services performance
for the Chief Executive and Finance Director) continue to provide a strong and challenging
assessment of the financial and operating performance of the business. The annual
bonus will therefore continue to operate on the same basis for 2011/12, save that Severn
Trent Water performance will be measured by reference to 20 rather than 18 KPIs.
• Relative TSR remains an appropriate measure of performance for the Share Matching
Plan, providing alignment with the returns received by shareholders. In the absence of a
sufficient number of listed utility companies, the current FTSE 51-150 comparator group
is considered the most relevant benchmark for measuring performance. However, to
address the share price volatility caused by the uncertainty of the five year pricing review,
rather than measuring performance over a single three year period, a multi-point
measurement basis will be applied to future grants (20% over 0-18 months, 30% over
0-27 months and 50% over 0-36 months). The awards will continue to be subject to the
Committee being satisfied with the financial performance over the performance period
and, further, there being no compromise to the commercial integrity of Severn Trent over
the performance period. This approach should reduce the impact of price uncertainty in
the run up to new asset management periods and reward for sustainable and steady
shareholder returns.
• To provide a stronger focus on the long term financial performance of the business,
future awards under the Long Term Incentive Plan (LTIP) will be subject to a performance
measure based on the company’s return on regulatory capital value (RoRCV) compared
to the Ofwat Final Determination (current awards under this plan are subject to a relative
TSR performance condition). RoRCV was chosen as the measure of performance
because it directly targets management’s delivery of the business plan. For awards
granted in 2011, 0% of the shares will vest if RoRCV equals the Final Determination,
increasing on a straight line basis to 50% vesting if RoRCV exceeds the Final
Determination by 2% p.a. and 100% vesting for outperformance of 7% p.a. or more.
Performance will be based on the average RoRCV over three financial years, starting in
the year in which the award is granted. Further details on the performance measure for
the 2011 award are set out on page 48.
The Committee believes that the new performance measures for the Share Matching Plan
and Long Term Incentive Plan will provide a more rounded assessment of the overall
financial and operational performance of the business and will provide a clearer line of sight
for executives between performance and reward.
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Severn Trent Plc Annual Report and Accounts 2011
Governance
Remuneration Committee (continued)
Remuneration Committee
The Committee determines, on behalf of the board, the company’s
policy on the remuneration of executive directors, other members of
the Executive Committee and the Chairman of the board. The
Committee determines the total remuneration packages and
contractual terms and conditions for these individuals. The policy
framework for remunerating all senior executive managers 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 Andrew
Duff, the company Chairman, who was independent on his
appointment to the board.
The members of the Committee during the year were Dr Bernard
Bulkin, Richard Davey (Committee Chairman), Andrew Duff, Sir
John Egan and Martin Lamb.
Remuneration Committee attendance in 2010/11
Richard Davey
Andrew Duff (appointed to the Committee 20 July 2010)
Dr Bernard Bulkin
Sir John Egan (retired from the Committee 20 July 2010)
Martin Lamb
4/4
3/4
3/4
1/1
4/4
With the exception of the company Chairman, the Committee
members have no personal financial interest, other than as
shareholders, in the matters to be decided. As company Chairman,
Andrew Duff’s fees are set by the Committee but he is not party to
this discussion. 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.
Hewitt New Bridge Street (a trading name of Aon Corporation) is the
independent advisor to the Committee. Neither Hewitt New Bridge
Street nor any other part of the Aon Corporation provided other
services to the company during the year.
The Chief Executive (Tony Wray), the Human Resources Director
(Alec Luhaste until December 2010, Evelyn Dickey thereafter) and
the Reward and HR Systems Manager (Marilyn Gillert) also
attended the Committee meetings to provide advice and respond
to specific questions. Such attendances specifically excluded any
matter concerning their own remuneration. The Company
Secretary, Fiona Smith, acts as secretary to the Committee.
Remuneration Committee activity
During the year ended 31 March 2011, the Committee met four
times to discuss the key remuneration issues arising, the operation
of the remuneration policy and the market updates by its advisers.
The following table sets out what the Committee covered at each of
the meetings over the course of the year.
Date
May 2010
November 2010
January 2011
March 2011
Key agenda items
Agree the vesting results for the 2009/10 annual
bonus scheme and the 2007 LTIP awards
Approve the incentive plan targets for the
2010/11 annual bonus scheme (including
personal performance targets) and the 2010
LTIP awards
Approve the 2010 Directors’ Remuneration
Report
Strategic review of the annual bonus plan and
LTIP (including performance metrics)
Update on executive pension provision
Review of salaries and benefits for 2011 for the
executive directors and other senior executives
Consider proposed changes to the annual bonus
plan and LTIP
Review of the executive directors shareholding
requirements
Incentive plan performance update
Review of good leaver plan statements
Remuneration policy
Each year, the Committee reviews the remuneration policy for
executive directors and other senior executive managers, taking
into account both the external market and the company’s strategic
objectives over the short and the medium term.
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:
Principle
Rationale
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.
Executives must be adequately
focused on the long term
strategy and make decisions
that lead to the creation of long
term value.
The performance of the
business is key and the
package should be
appropriately geared towards
performance related pay.
The Committee wishes the
executives to be appropriately
remunerated for the challenges
they face and ensure that the
right structure and levels are
in place to take the business
forward.
Package flexibility allows the
Committee to take decisive
action with issues of recruitment
and retention in the best
interests of business continuity
and shareholder value.
Severn Trent Plc Annual Report and Accounts 2011
45
The charts below show, as a proportion of the package, firstly, the
expected values of salary, bonus and long term incentives for target
performance and, secondly, the maximum values of salary, bonus
and long term incentives for the executive directors based on the
proposed remuneration policy for 2011/12. The Committee
considers the mix between fixed and performance related pay to
be appropriate.
External directorships
Executive directors are permitted 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.
Expected value
Chief Executive
All other executive directors
0%
20
40
60
80
100%
Base salary
Target bonus (cash)
Target bonus (deferred shares)
Expected value of SMP awards
Expected value of LTIP awards
Maximum value
Chief Executive
All other executive directors
0%
20
40
60
80
100%
Base salary
Maximum bonus (cash)
Maximum bonus (deferred shares)
Maximum value of SMP awards
Maximum value of LTIP awards
The Committee takes seriously the issue of balancing risk and
reward. During the year, the Committee undertook a detailed review
of the variable pay arrangements for the executive directors and
other members of the Executive Committee. The Committee
concluded that the schemes were appropriately managed and the
choice of performance measures and targets did not encourage
undue risk taking by the executives. The schemes incorporate a
range of internal and external performance metrics, measuring both
operational and financial performance providing a rounded
assessment of overall company performance. The Committee
retains ultimate approval for the executive incentive schemes and all
share plans across the company and has the final discretion as to
how they are applied. Furthermore, the rules of the annual bonus
scheme and long term incentive schemes provide that the
Committee may reclaim (‘clawback’) some or all of the after tax part
of any award to executive directors if it transpires that the award was
based on calculations which are subsequently demonstrated to be
materially incorrect.
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 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 Plan and other share based
plans until they meet the guideline holdings. Details of the current
shareholdings of the executive directors are set out on page 52.
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Michael McKeon was appointed as a non-executive director of
The Merchants Trust Plc on 1 May 2008 and in respect of the
appointment for the year ended 31 March 2011 he was paid fees
of £20,115. He has retained these fees in accordance with the
above policy.
No other executive directors currently hold any external fee earning
non-executive directorships.
Base salaries and benefits
Base salaries for individual directors are reviewed annually by
the Committee and take effect from 1 July. Salaries are set with
reference to individual performance, experience and contribution,
together with developments in the relevant employment market
(having regard to the market median for similar roles in publicly
quoted companies of a comparable size and practice in other
water companies) and internal relativities.
The Committee gives due consideration to the current economic
climate and current market practice regarding executive salary
reviews and the broader employee salary review policy at the
company. The Committee has not set a specific policy on the
relationship between executive directors’ pay and that of the rest
of the workforce but aims to pay all employees fairly, taking into
account their respective roles and responsibilities.
With this in mind, the Committee adopted a policy of a zero increase
for the base salaries of the executive directors in 2009/10 and a 2%
increase in 2010/11. Against a backdrop of economic recovery, it
has chosen to adopt a general policy of 3% increase for the base
salaries of the executive directors in 2011/12. This is in line with the
policy of all employees of a 3% increase for base salaries.
At the time of the Chief Executive’s appointment, his salary reflected
the fact that he was new to the role and, accordingly, the Committee
gave a commitment to review his performance each year and if
appropriate increase the base salary over time to align it with the
market median. The Committee agreed that the Chief Executive’s
base salary should be reviewed again this year. Giving due
consideration to the performance of the company and the
individual and the internal relativity with the other executive
directors and market alignment, the Committee agreed that the
Chief Executive’s base salary will be increased from £500,000
to £550,000 on 1 July 2011.
The non-salary benefits for executive directors comprise:
• a car allowance
• private medical insurance
• life assurance
• an incapacity benefits scheme.
Private medical insurance and some other benefits may be flexed
under the company’s flexible benefits scheme.
46
Severn Trent Plc Annual Report and Accounts 2011
Governance
Remuneration Committee (continued)
Remuneration arrangements for executive directors
The remuneration arrangements for the executive directors comprise the following elements:
• Base salary and benefits
• Annual bonus scheme
• Long Term Incentive Plan (LTIP) and Share Matching Plan (SMP)
• Pension.
Details of each of the above elements follow but the table below summarises the proposed packages of each of the executive directors:
Component
Base salary from 1 July 2011
On target bonus (% of salary)
Maximum bonus (% of salary)
% of bonus earned deferred into shares
LTIP award (% salary)
SMP award – ratio of matching shares
to deferred shares
Pension arrangement
Tony Wray
Chief Executive
£550,000
60%
120%
50%
70%
0.5:1
Final salary
occupational
scheme
£446,500
60%
120%
50%
50%
0.5:1
Cash
allowance
Michael
McKeon
Finance
Director
Tony Ballance
Director,
Strategy and
Regulation
Martin Kane
Customer
Relations
Director
£220,600
60%
120%
50%
50%
Andy Smith
Director of
Water
Services
£262,600
60%
120%
50%
50%
£202,100
60%
120%
50%
50%
0.5:1
Defined
contribution
scheme
0.5:1
Cash
supplement
0.5:1
Final salary
occupational
scheme
Benefits
A car allowance, private medical insurance, life assurance and an incapacity benefits scheme
Annual bonus scheme
Executive directors are eligible for annual bonuses to encourage improved performance, with targets established by the Committee
to align executive directors’ interests with shareholders. The annual bonus opportunity for all the executive directors is 120% of salary.
For the achievement of target performance (which requires satisfaction of challenging goals), 60% of salary could be earned.
The following charts show how the annual bonus metrics are weighted for the executive directors:
Annual bonus metric weightings
Chief Executive and Finance Director
Other executive directors
0%
20
40
60
80
100%
Severn Trent Water performance
Severn Trent Services performance
Personal metrics
Severn Trent Plc Annual Report and Accounts 2011
47
The bonus outturn in respect of Severn Trent Water performance
was operated by reference to a balanced scorecard of measures,
based on the 18 KPIs. The Committee believes that the use of the
Severn Trent Water KPIs continues to be both an effective and
challenging annual bonus metric and meets the needs of the
business. The bonus entitlement was determined by reference to
the aggregate number of points awarded across all the KPIs. The
targets taken together 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 Ofwat.
The table below shows the points awarded by the Committee for
bonus purposes under each of the 18 KPIs in relation to the 2010/11
annual bonus scheme. Four of the 18 KPI points have been
adjusted upwards. This was only done after detailed consideration
and in making this decision we recognised that management had
done the right thing when faced with exceptional operational
challenges over the winter period. They also maintained overall
financial performance. As a consequence the bonus awarded for
the Severn Trent Water portion of the annual bonus was 40.0% of its
bonus element maximum.
The Chief Executive and Finance Director have 10% of their bonus
linked to the performance of Severn Trent Services. Performance
is measured against the profit before interest and tax (before
exceptional items) of Severn Trent Services, a measure which is a
fully disclosed KPI of the Severn Trent Services business, as shown
in the Business review section. Performance is measured against
budgeted profit, reflecting the desired growth of Severn Trent
Services, subject to adjustment by the Committee based on its
assessment of overall performance of the business. Severn Trent
Services performance over the year did not reach its target and
therefore resulted in a bonus award of 0%.
In addition, each director has 10% of their bonus opportunity
measured against a set of personal performance metrics.
The metrics for 2010/11 include:
• supporting the business change and transformation process
– focusing on the ongoing improvements to optimise the
performance of the business (e.g. process improvements,
technology and systems to support the processes and location,
training and development of people to operate in the new
environment); and
• developing people – focusing on the individual’s contribution to
ensuring that the talent management processes help to develop
future leaders and therefore support succession planning and
business continuity.
Half of any bonus paid is deferred into shares to be held for three
years following payment. If the executive is summarily dismissed
without notice under his/her employment contract then the deferred
bonuses are forfeited. In all other cases of cessation of employment
the deferred bonus is not lost and the shares automatically vest on
the dealing day after the cessation of employment.
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The rules of the annual bonus scheme provide that the Committee
may reclaim (‘clawback’) some or all of the after tax part of any
bonuses awarded to executive directors if it transpires that the
bonus calculation was based on calculations which are
subsequently demonstrated to be materially incorrect.
Severn Trent Water KPI award for the 2010/11 annual bonus payment
200
180
160
140
120
100
80
60
40
20
0
d
e
d
r
a
w
a
s
t
n
o
P
i
0%
1
I
P
K
0%
3
I
P
K
2
I
P
K
4
I
P
K
5
I
P
K
0%
6
I
P
K
Employee
Customer
7
I
P
K
8
I
P
K
9
I
P
K
0
1
I
P
K
N/A
1
1
I
P
K
2
1
I
P
K
Financial
N/A
0%
3
1
I
P
K
4
1
I
P
K
5
1
I
P
K
6
1
I
P
K
KPI on target performance = 100%
7
1
I
8
1
I
P
K
P
K
Environmental
9
1
I
P
K
0
2
I
P
K
Lost time incidents
Employee motivation
KPI 1
KPI 2
KPI 3 Water quality
KPI 4
KPI 5
KPI 6
KPI 7
Customer written complaints
First time call resolution for billing
Unplanned interruptions
Properties at risk of low pressure
First time job resolution
Non-performance of regulatory obligations
KPI 8
KPI 9
KPI 10 Capex versus Final Determination
KPI 11 Capex process quality (not measured for bonus)
KPI 12 Debtor days
KPI 13 Opex
KPI 14 Ofwat efficiency billing factor (not measured for bonus)
KPI 15 Pollution incidents
KPI 16 Sewer flooding incidents
KPI 17 Sewage treatment works - failing consents
KPI 18 Supply availability
KPI 19 Net energy use
KPI 20 Leakage MI/d
For the purpose of the annual bonus calculation KPIs – Ofwat efficiency billing factor and capex process quality are not included.
48
Severn Trent Plc Annual Report and Accounts 2011
Governance
Remuneration Committee (continued)
Annual bonus payments to executive directors are not pensionable.
The targets for awards granted in 2011 will be as follows:
The Committee has reviewed the operation of the plan and
concluded that it should operate on the same basis for 2011/12.
However, for 2011/12 Severn Trent Water performance will be
measured by reference to 20 KPIs as set out on page 47.
Long term incentives
As disclosed on page 43, the Committee undertook a thorough
review of the incentive arrangements during the year and determined
that some changes should be made to the operation of the long term
incentive schemes to encourage a greater focus on operational
performance and to provide a fairer method of assessing
performance. In this section, we set out details of both the long term
incentives in place for the year under review and the proposed long
term incentive arrangements for 2011/12 and beyond.
During the year under review, the executive directors participated in
two long term incentive schemes: (i) a Long Term Incentive Plan
and (ii) a Share Matching Plan.
a) Long Term Incentive Plan
The Long Term Incentive Plan (LTIP) was approved by shareholders
at the 2005 AGM. Under the LTIP, 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. In 2010, a share award equivalent to 70% of salary was
made to the Chief Executive and 50% of salary to the other
executive directors.
The number of shares subject to an award will be increased 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.
Vesting of awards granted under the LTIP since 2006 has been
subject to TSR performance, measured relative to those companies
ranked 51–150 in the FTSE by market capitalisation (excluding
investment trusts): 25% of awards vesting at median performance,
and 100% vesting for performance in the upper quartile. In addition,
for awards to vest, the Committee must be satisfied that the
company’s TSR is reflective of the company’s underlying
performance. This is the same performance condition as applying
to the awards granted in 2010 under the Share Matching Plan.
At the end of the performance period for each award, the TSR
performance condition will be measured and independently verified
by Hewitt New Bridge Street on behalf of the Committee.
As disclosed on page 43 of this report, during the year the
Committee undertook a review of the variable pay arrangements for
executives and determined to change to the performance targets
applying to future LTIP awards to provide a stronger alignment
between the long term financial and operational performance of the
group and the rewards delivered to management.
Vesting of awards granted in 2011 and beyond will be based on
return on regulatory capital value (RoRCV), with a sliding scale of
targets linked to outperformance of the Ofwat Final Determination.
Severn Trent average annual
RoRCV outperformance against
the Ofwat Final Determination
expectation
Less than or equal to Final
Determination (≤100%)
102%
107% or higher
Vesting level for performance
shares
0%
50%
100%
Performance will be measured over the three financial years ending
31 March 2012, 2013 and 2014. The Committee reserves the
discretionary power to change the result if it is 0% or greater than
50%. If it is greater than 50% it can reduce the vesting to not less
than 50%. If it is 0% it can increase the vesting to not more than
50%. The use of this discretion is expected to be exceptional, but
may be invoked by the Committee in order to take into account of
any of the following factors (not an exhaustive list):
• Actual RPI compared to the Ofwat assumed RPI figure – even
though the regulatory capital value is adjusted each year for RPI
a significant swing in inflation during the year can result in
substantial under or over performance on the return on regulatory
capital value target.
• Changes to the financing of the company as approved by the
board during the performance period – for example a significant
change to the level of gearing of the balance sheet would result
in partially meeting this performance condition.
• Policy changes that occur during the performance period – there
is much discussion on the future shape of the water industry in
the UK and if enacted we would wish to ensure that any changes
have a neutral impact on existing awards.
b) Share Matching Plan
Under the Share Matching Plan executives can receive up to one
matching share for each share deferred under the annual bonus
plan. For awards made in 2010 (the first set of awards granted under
the plan), the ratio was limited to 0.5 matching share for each
deferred share. The performance condition requires the company’s
TSR to be measured relative to those companies ranked 51–150
in the FTSE Index by market capitalisation (excluding investment
trusts). This is considered to be the most suitable comparator group
since the number of comparable regulated utilities against which to
compare the company’s performance remains too small to enable
meaningful analysis. The FTSE 51–150 comparator group allows for
the company’s performance to be measured against a broader
market without any one sector overly impacting the group. 25% of
the matching awards will vest at median performance and 100% will
vest for performance in the upper quartile. In addition, for awards to
vest, the Committee must be satisfied that the TSR is reflective of
the company’s underlying performance. This replicates the LTIP
performance condition for the 2010 awards.
As with the LTIP, the number of shares subject to an award will be
increased 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.
Severn Trent Plc Annual Report and Accounts 2011
49
The below board level executives also participate in the same
incentive arrangements as the executive directors, albeit at lower
award levels.
All employee share plans
Through a variety of share schemes, employees are encouraged
to hold shares in the company.
This includes an all employee Share Incentive Plan. Awards are
currently made which include a performance condition based on
the award of points for the KPIs. Employees of Severn Trent Plc and
Severn Trent Water Limited participate in the plan. For the year
2010/11, awards of shares to the value of £300 will be made to all
eligible employees.
The company also offers an all employee HMRC approved SAYE
plan on an annual basis and periodically reviews the use of other
all employee incentive vehicles.
Hedging of awards
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
pages 53 and 54. In respect of the LTIPs, deferred share awards
(under the Annual Bonus Scheme) and the Share Matching Plan 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
awards. The requirement to purchase shares is calculated, and the
purchase 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
normally 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.
Pensions
Severn Trent Executives receive retirement benefits from a variety
of pensions arrangements including defined benefit, defined
contribution, payments made direct to personal plans and cash
in lieu. As a result of the changes in pension legislation for high
earners, Severn Trent will introduce the following options from April
2011 for any individuals who are affected by the tax changes:
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After careful review, the Committee concluded that relative TSR
remains the most appropriate performance measure for the Share
Matching Plan since it provides alignment between the rewards
received by management and the returns received by shareholders.
The FTSE 51-150 comparator group will be retained and the same
vesting schedule will apply (25% vesting at median performance,
increasing on a straight line basis to 100% vesting for performance
in the upper quartile). However, rather than measure performance
over a single three year period, the Committee concluded that for
future awards performance would be measured on a multi-point
basis (20% over 0-18 months, 30% over 0-27 months and 50% over
0-36 months). The awards will continue to be subject to the
Committee being satisfied with the financial performance over the
performance period and, further, there being no compromise to the
commercial integrity of Severn Trent over the performance period.
The Committee has the authority to reclaim (‘clawback’) some or all
of the after tax part of any shares awarded to executive directors
under the Long Term Incentive Plan and Share Matching Plan and
if it transpires that the vesting calculation was based on calculations
which are subsequently demonstrated to be materially incorrect.
Performance graph
This graph shows the value, by 31 March 2011, of £100 invested in
Severn Trent Plc on 31 March 2006 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. The intermediate points show the value at intervening
financial year ends.
Total shareholder return
)
£
(
l
e
u
a
V
200
175
150
125
100
75
50
25
0
2006
2007
2008
2009
2010
2011
For defined contribution members
Severn Trent Plc
FTSE 100 Index
Source: Datastream
• Continue in the scheme and meet any tax liabilities as they fall
due; or
Below board remuneration
In 2010/11 there were fifteen executives immediately below board
level who were paid salaries of between £100,000 and £300,000
per annum.
• Continue in the scheme up to the Annual Allowance (£50,000 for
2011/12 tax year) and receive a cash alternative (equivalent to the
level of employer contributions made to the scheme) above the
Annual Allowance.
Salary £000
100–150
151–200
201–250
251–300
Number of executives
For defined benefit members
10
2
1
2
• Continue in the scheme and meet any tax liabilities as they fall due
• Opt out of future defined benefit accrual and join the defined
contribution section with the same options as above.
Of the current executive directors, Andy Smith and Tony Wray
participate in the Severn Trent Pension Scheme. The scheme is a
funded HMRC registered final salary occupational pension scheme
which provides:
50
Severn Trent Plc Annual Report and Accounts 2011
Governance
Remuneration Committee (continued)
• 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; and
• a dependant’s pension on death of two thirds of the member’s
pension.
Andy Smith and Tony Wray participate up to the level of the scheme
specific earnings cap which in 2010/11 was £129,600. They are
provided with a cash supplement in lieu of pension entitlement
above this scheme 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 55 with the
consent of the company. Any pension would be subject to a
reduction that the Trustees consider 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, pension payments 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.
It is the policy of the Committee to offer new executives 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. These arrangements
apply to Michael McKeon at 40% of base salary.
Martin Kane is a member of the Severn Trent Pension Scheme
(WPS Section) but opted out of the scheme in June 2007. He
receives a cash supplement of 30% of his basic salary in lieu of
accrual for future service from that date. While he no longer accrues
additional years of service for pension purposes, consistent with the
legislation, Martin Kane’s accrued benefits generally continue to be
linked to his final salary (or £161,000 plus RPI from 30 June 2007
to the date of his retirement, if higher) and scheme benefits are
preserved in relation to ill health, retirement and death in service.
The normal retirement age for the scheme is 65 although early
retirement is possible prior to age 65 with the consent of the
company, but any benefits relating to service accruing after
1 December 2006 would be subject to an actuarial reduction.
Tony Ballance is a member of the Severn Trent Pension Scheme
(Pension Choices section) which is the company’s defined
contribution scheme. He currently contributes 3% of salary and the
company contributes at 30%, plus a further 2.5% in respect of death
in service and ill health benefits. The normal retirement age for the
scheme is 65 although retirement prior to 65 is possible with the
consent of the company.
Directors’ service agreements and letters of appointment
A model service contract was approved by the Committee in 2004
and updated during 2007/08. The main terms of the contracts are
summarised in the table below:
Provision
Policy
Notice period 12 months from either party
Termination
payment
Maximum payment in the case of redundancy
or termination in breach of the agreement by the
company of up to and capped at 175% of base salary
which is calculated as a conservative estimate of the
value of salary, fixed benefits and on target bonus
Any payment will not include amounts in respect of
awards which have been made under the company’s
Long Term Incentive Plan over which the Committee
retains discretion
Any termination payment 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
There are no specific contractual payments or
benefits which would be triggered in the event of
a change in control of the company
Executive
directors
Tony Wray
Date of
agreement
20 May 2008
7 March 2005
Effective date
Mitigation
Change of
control
Contract
dates
Michael McKeon 6 December
Tony Ballance
2005
2 June 2008
Martin Kane
2 June 2008
Andy Smith
2 June 2008
13 December
2005
23 July 2005
30 September
1975
1 January 2005
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 Committee recognises that, in line with current best practice
guidelines, any termination payment should be based upon an
estimate of salary and fixed benefits only. Accordingly, the
Committee will adopt this policy in the service agreements of future
executive directors.
In accordance with the UK Corporate Governance Code, all the
directors are subject to reappointment as directors at the
forthcoming AGM.
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.
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 the senior independent
director and chairmanship or membership of the committees.
Severn Trent Plc Annual Report and Accounts 2011
51
The annual fee, last increased in 2010, is £43,350. The additional fees, unchanged since 2008 are as follows:
Additional fee per annum
Senior
independent
director
£10,000
Audit Committee
Remuneration Committee
Chairman
£15,000
Member
£3,000
Chairman
£15,000
Member
£3,000
Corporate
Responsibility Committee
Chairman
Member
Nominations
Committee
£10,000
£3,000 No fee paid
The Chairman receives a fee of £250,000 per annum. He does not receive any additional fees for committee memberships. He does not
participate in any of the company’s pension arrangements, share or bonus schemes.
The board does not require directors to take a proportion of their fees in shares and, instead, leaves decisions regarding the holding of
shares to individual non-executive directors.
Non-executive directors do not participate in share or bonus schemes, nor is any pension provision made.
Non-executive directors normally serve three terms of three years. They do not have service contracts but their terms of engagement are
regulated by letters of appointment, details of which are shown below:
Chairman and non-executive directors
Sir John Egan (Chairman – retired)
Dr Bernard Bulkin
Richard Davey
Andrew Duff (Chairman)
Gordon Fryett
Martin Lamb
Baroness Noakes
Initial appointment
Current appointment
Current expiry date*
1 October 2004
1 January 2006
1 January 2006
10 May 2010
1 July 2009
29 February 2008
29 February 2008
1 January 2008
1 January 2009
1 January 2009
10 May 2010
1 July 2009
22 February 2011
22 February 2011
–
31 December 2011
31 December 2011
9 May 2013
30 June 2012
28 February 2014
28 February 2014
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* subject to the requirements of the company’s articles of association for the reappointment of directors at AGMs.
All of the directors are subject to reappointment as directors at the 2011 AGM.
The text and tables that follow comprise the auditable part of the Directors’ remuneration report, being the information required by the UKLA
Listing Rules 9.8.6 and 9.8.8.
Directors’ emoluments
Basic salary and fees
Chairman and other non-executive directors
Sir John Egan (Chairman – retired)
Dr Bernard Bulkin
Richard Davey
Andrew Duff (Chairman)
Gordon Fryett
Martin Lamb
Baroness Noakes
Executive directors
Tony Ballance
Martin Kane
Michael McKeon
Andy Smith
Tony Wray
Cash
£000
BIKs
£000
Annual
bonus1
£000
Other2
£000
Total
2010/11
£000
Total
2009/10
£000
76.1
59.4
71.4
224.2
46.4
46.4
58.4
190.2
213.3
430.9
252.8
486.2
2,155.7
–
–
–
–
–
–
–
–
–
–
–
–
–
4.5
0.0
0.1
–
–
–
0.3
80.6
59.4
71.5
224.2
46.4
46.4
58.7
262.5
58.6
70.6
–
34.1
43.1
57.5
3.3
3.1
5.6
3.7
6.3
22.0
103.6
118.2
218.5
133.1
252.0
825.4
15.0
79.0
15.1
67.1
160.6
341.7
312.1
413.6
670.1
456.7
905.1
3,344.8
291.5
411.3
701.8
470.2
878.1
3,279.3
1 The directors receive 50% of their bonus in cash and 50% is deferred into shares to be held for three years.
2 Other emoluments include expenses chargeable to income tax, car allowances, travel allowances, telephone allowances, payments made under the group’s flexible benefits
arrangements and amounts paid in lieu of pension contributions. Included in other emoluments are:
• Sir John Egan car allowance £4,545
• Dr Bernard Bulkin expenses £41
• Richard Davey expenses £69
• Baroness Noakes expenses £301
• Tony Ballance flexible benefits payments £983 and car allowance £15,000
• Martin Kane pension supplement £63,945, flexible benefits payments £126, car allowance £15,000 and expenses £12
• Michael McKeon car allowance £15,000 and expenses £113
• Andy Smith pension supplement £52,060, car allowance £15,000
• Tony Wray pension supplement £145,560 and car allowance £15,000
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Severn Trent Plc Annual Report and Accounts 2011
Governance
Remuneration Committee (continued)
Directors’ pension provisions
Name
Andy Smith
Tony Wray
Martin Kane
Name
Andy Smith
Tony Wray
Martin Kane
Notes:
Service
completed in
years (including
transferred in
service credits)
Accrued
pension at
31 March 2011
£pa
Increase in
accrued pension
during the year
£pa
Increase in
accrued pension
during the year
(net of inflation)
£pa
Transfer value
of accrued
pension at
31 March 2011
£000
Transfer value
of accrued
pension at
31 March 2010
£000
Increase/
(decrease) in
transfer value
over the year,
net of directors’
contributions
£000
6
6
35
25,736
25,002
126,829
4,120
4,120
5,593
2,931
2,971
(1,075)1
434.2
404.8
2,000.6
328.9
303.7
1,751.2
97.9
93.7
249.4
Accrued
pension at
31 March 2011
£pa
25,736
25,002
126,829
Increase in
accrued pension
during the year
£pa
4,120
4,120
5,593
Increase in
accrued pension
during the year
(net of inflation)
£pa
2,931
2,971
(1,075)1
Transfer
value of accrued
benefits net
of directors’
contributions
£000
62.1
59.3
88.5
Relevant directors confirmed by Severn Trent Plc.
Accrued pension figures and transfer value calculations provided by Towers Watson.
There have been no changes to the transfer value basis since last year’s disclosures.
Allowance has been made for changes in market conditions over the year by applying the relevant Market Value Adjustment.
Inflation figure used in respect of year is to February 2011 (5.5%) as the latest available figure prior to the year end.
1 Martin Kane has an increase in accrued pension from £121,236 to £126,829 equating to 4.6%, inflation level used (February 2011) is 5.5% producing a negative net of inflation
figure. Therefore the benefit increase is due to a change in salary not from additional accrual earned over the reporting period.
The following contributions were paid to defined contribution pension arrangements in respect of directors:
Name
Tony Ballance
Michael McKeon
2011
£67,175
£172,550
2010
£59,640
£170,000
Directors’ share interests
The directors of the company at 31 March 2011 and their beneficial interests in the shares of the company were as follows:
(i) Beneficial holdings
Chairman and other non-executive directors
Dr Bernard Bulkin
Richard Davey
Andrew Duff (Chairman)
Martin Lamb
Baroness Noakes
Gordon Fryett
Executive directors
Tony Ballance
Martin Kane1
Michael McKeon
Andy Smith
Tony Wray
Notes:
At 1 April 2010
(or date of
appointment if later)
Number of ordinary
shares of 9717/19p each
At 31 March 2011
Number of
ordinary shares of
9717/19p each
At 23 May 2011
Number of
ordinary shares of
9717/19p each
554
588
–
3,012
4,018
1,000
2,032
8,189
67
5,217
7,057
554
588
3,500
3,012
4,018
1,018
3,149
9,699
4,231
7,516
10,158
554
588
3,500
3,012
4,018
1,018
3,149
10,013
4,231
7,516
10,158
1 Martin Kane acquired 314 shares on 5 May 2011 following the exercise of his 2008 three year Sharesave scheme option.
Severn Trent Plc Annual Report and Accounts 2011
53
(ii) Long Term Incentive Plan
The executive directors 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 (LTIP). 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 552,019 shares held by the Employee Share Ownership Trust. The details of the
performance criteria are explained on page 48 of this report. The individual interests, for the above named directors, which represent the
maximum aggregate number of shares to which each individual could become entitled, are as follows:
Awards
granted
Maximum
award
Awards
vested
Awards
lapsed
Maximum outstanding
awards as at
31 March 2011
Tony Ballance
Martin Kane
Michael McKeon
Andy Smith
Tony Wray
18 July 2007
14 July 2008
7 July 2009
21 June 2010
18 July 2007
14 July 2008
7 July 2009
21 June 2010
18 July 2007
14 July 2008
7 July 2009
21 June 2010
18 July 2007
14 July 2008
7 July 2009
21 June 2010
18 July 2007
14 July 2008
7 July 2009
21 June 2010
3,261
5,486
7,405
6,803
3,475
6,001
8,154
8,504
12,363
13,717
18,733
17,211
5,881
8,230
11,019
10,124
9,189
19,684
27,769
25,512
1,966
–
–
–
2,095
–
–
-
7,454
–
–
–
3,546
–
–
-
5,540
–
–
–
1,295
–
–
–
1,380
–
–
-
4,909
–
–
–
2,335
–
–
-
3,649
–
–
–
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–
5,486
7,405
6,803
–
6,001
8,154
8,504
–
13,717
18,733
17,211
–
8,230
11,019
10,124
–
19,684
27,769
25,512
The market price on the date of the 2010 award was 1,235 pence. The market price at the date of 2007 vesting was 1,221 pence.
The performance period for awards granted on 18 July 2007 ended on 31 March 2010. The TSR result and the level of vesting achieved for
this award is shown below:
LTIP award
2007
Ranking
33 out of 85
Vesting %
60.3%
The performance period for awards granted on 14 July 2008 ended on 31 March 2011. The Committee has subsequently determined the
TSR result and the level of vesting achieved for this award is shown below:
LTIP award
2008
Ranking
48 out of 89
Vesting %
0%
54
Severn Trent Plc Annual Report and Accounts 2011
Governance
Remuneration Committee (continued)
(iii) Annual Bonus Scheme
Since 2008, half of any bonus paid has been deferred into shares. The table below shows the directors’ deferred share awards and the
vesting dates.
Name
Tony Ballance
Martin Kane
Michael McKeon
Andy Smith
Tony Wray
Date of grant
27 June 2008
7 July 2009
21 May 2010
27 June 2008
7 July 2009
21 May 2010
27 June 2008
7 July 2009
21 May 2010
27 June 2008
7 July 2009
21 May 2010
27 June 2008
7 July 2009
21 May 2010
Annual bonus
deferred into shares
Number of
shares
£24,554
£62,294
£51,448
£26,245
£68,598
£64,310
£85,667
£157,590
£128,724
£37,732
£92,700
£75,810
£76,029
£166,680
£138,996
1,818
5,669
4,139
1,957
6,243
5,173
6,345
14,343
10,355
2,794
8,437
6,098
5,631
15,187
11,182
Deferred share
award vests
26 June 2011
6 July 2012
20 May 2013
26 June 2011
6 July 2012
20 May 2013
26 June 2011
6 July 2012
20 May 2013
26 June 2011
6 July 2012
20 May 2013
26 June 2011
6 July 2012
20 May 2013
(iv) Share Matching Plan
The Share Matching Plan received shareholder approval at the 2009 AGM. Under the Share Matching Plan executives can receive, subject
to performance, matching shares for each share deferred under the annual bonus plan. For awards made in 2010 (the first set of awards
granted under the plan), the ratio was limited to 0.5 matching share for each deferred share. The details of the performance criteria are
explained on pages 48 and 49 of this report. The individual interests, for the directors under the Share Matching Plan, are as follows:
Tony Ballance
Martin Kane
Michael McKeon
Andy Smith
Tony Wray
Date of grant
21 May 2010
21 May 2010
21 May 2010
21 May 2010
21 May 2010
Maximum
award
Awards
vesting
Award
lapsing
Maximum outstanding
awards as at
31 March 2011
2,069
2,586
5,177
3,049
5,591
–
–
–
–
–
–
–
–
–
–
2,069
2,586
5,177
3,049
5,591
The number of shares subject to an award will be increased 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.
Severn Trent Plc Annual Report and Accounts 2011
55
(v) Sharesave options over ordinary shares
At the start of
the year
(No. of shares)
Exercised
during
the year
(No. of shares)
Cancelled
during
the year
(No. of shares)
Granted
during
the year
(No. of shares)
At the
end of
the year
(No. of shares)
Year of
grant of
option
Exercise
price (p)
Date from
which
exercisable
Expiry
date
Sharesave1
Tony Ballance
Martin Kane
Michael McKeon
Andy Smith
Tony Wray
556
561
322
314
222
449
–
1,943
1,123
1,123
–
(322)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
316
–
556
561
–
314
222
449
316
1,943
1,123
1,123
2009
2010
2007
2008
2009
2010
2011
2009
2010
2010
862 May 2012 Oct 2012
808 May 2013 Oct 2013
1172 May 2010 Oct 2010
1221 May 2011 Oct 2011
862 May 2012 Oct 2012
808 May 2013 Oct 2013
1137 May 2014 Oct 2014
862 May 2014 Oct 2014
808 May 2013 Oct 2013
808 May 2013 Oct 2013
1 The executive directors, in common with all eligible UK employees of the group, are entitled to participate in the company’s HMRC 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.
a) No executive share options in respect of executive directors were granted or lapsed during the year. At 31 March 2011 there were two
other executives participating in the group’s historical executive Share Option Scheme (31 March 2010: five other executives).
b) At the close of business on 31 March 2011 the mid-market price of the company’s shares was 1461p and the range during the year
was 1086p to 1513p.
Signed on behalf of the board which approved the Directors’ remuneration report on 26 May 2011.
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Richard Davey
Chairman of the Remuneration Committee
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Severn Trent Plc Annual Report and Accounts 2011
Governance
Risk and assurance
Risk management process
Cascading
objectives
Company
risk map
Performance
reporting and
monitoring
Board &
Committees
Businesses &
Functions
STEC
cut off
Departments, Teams & Individuals
filter
Business Unit
risk maps
filter
Specific risk
assessments, e.g.
safety asset
project
fraud
process
Enterprise Risk Management
Our established Enterprise Risk Management (ERM) process as
illustrated above is used for the identification and assessment of
risks to significant business objectives. This includes consideration
of the effectiveness of existing controls and identification,
prioritisation and tracking of actions needed to reduce the risk and/
or improve controls. Our assessment also considers both financial
and reputational impact of risks in order to give a holistic view.
During the year we have continued to work to fully embed the
process across the business, including rolling out the process to
Severn Trent Services. We have continued to keep the process
fresh through the introduction of new tools and challenges and are
working to better integrate with the processes used by business
teams to monitor their performance.
The key business risks are formally reported to the Severn Trent
Executive Committee and Audit Committee every six months and
to the board annually. Reviews of risk generally take place within
the business on a quarterly basis to monitor that our key risks are
identified, that controls and mitigating actions continue to be
effective and to confirm that focus is maintained on the most critical
risks requiring attention.
During the year we have also held a risk workshop with the board
which looked at their views on the most significant risks facing the
organisation in order to give greater visibility of their view on risk.
The key focus of these discussions was around the inter-
relationships between risks, and the board recognised that whilst
some risks may not be catastrophic on their own, an aggregation of
smaller risks occurring simultaneously or in close succession could
become very significant.
In response to the discussions at the board we are now conducting
a series of workshops aimed at challenging the robustness of
controls in order to help us withstand even the most catastrophic
scenario. These workshops will consider the inter-relationships
between risks to enable us to obtain maximum value from the risk
information held.
Over the coming year we will continue to work to maintain and
improve our ERM process with a particular emphasis on closer
integration with the business planning process. This will include
clearer articulation of our willingness to accept risk as part of the
prioritisation of business activity.
Severn Trent Plc Annual Report and Accounts 2011
57
Principal Risks
The following table illustrates the principal risks facing our business. However, as part of our regular reporting, other risks have also been
considered and discussed by the Severn Trent Audit, Corporate Responsibility and Executive Committees and the board during the year.
Examples of how we are managing our risks can also be found in the table.
Principal risk and business impact
Examples of controls, procedures and future plans
Strategic
We continue to manage the risks associated with the delivery
of the strategic objectives of Severn Trent Water including our
ability to influence the regulatory framework towards creating
a sustainable Water Industry in England and Wales and our
ability to continue to develop a sustainable water company.
Additionally, in the current and ongoing challenging economic
climate, we continue to address risks which may affect the
strategic objective to grow Severn Trent Services such as the
political situations in some of our markets and the threat of
new competitors.
Stakeholder
We continue to manage the risks associated with meeting
the needs and expectations of key stakeholders (investors,
regulators, customers, staff and suppliers) in order to protect
and enhance our financial position, brand, reputation and
investor confidence.
With regard to Severn Trent Water:
• We have a strategy to be the leading water and waste water
company in the UK that is supported by a robust approach to
legal and regulatory compliance.
• We have an appropriate organisational design to support the
achievement of the strategy.
• We engage with key regulatory and government stakeholders to
understand and influence the direction of future regulatory and
public policy development within the Water Industry.
With regard to Severn Trent Services:
• We have a clearly articulated strategy in place for products and
markets to be targeted. See pages 16 and 19 for details.
• We are implementing a plan to deliver the anticipated growth.
• We have business partners in place to provide local support in
target markets.
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• We promote and protect the reputation of Severn Trent Water
through effective internal and external communications and
robust crisis management plans that include a clear
communications plan and responsibilities.
• We maintain performance across a range of corporate
responsibility issues to increase confidence of our key
stakeholders and to enhance and protect our reputation.
• We maintain close relationships with our regulators and other
stakeholders.
• We continue to build on Changing Course and demonstrate
thought leadership within the industry. See page 21
for details.
• We continue to work with our staff to ensure our people have
the right skills.
• We monitor closely the performance of our One Supply Chain
contractors involved on the AMP5 programme.
58
Severn Trent Plc Annual Report and Accounts 2011
Governance
Risk and assurance (continued)
Principal risk and business impact
Examples of controls, procedures and future plans
Operational and asset related
We continue to manage the risks associated with our daily
operations, including the failure of assets, processes or systems
which in turn may affect our ability to serve our customers, could
impact on health and safety or security at our sites and on our
ability to meet regulatory targets.
Financial
We continue to manage the risks associated with our financial
activities including our ability to effectively manage counterparty
risk, attract funding at commercially attractive rates, fund
pensions promises sustainably and meet the challenging stretch
targets we have set ourselves within our Severn Trent Water and
Severn Trent Services businesses.
Legal, regulatory and compliance
We continue to manage the risks associated with potential
non-compliance with the numerous and increasingly demanding
obligations reflecting the international spread of our operations.
Management of these is often dispersed throughout the
organisation. We pay particular attention to risks in areas
subjected to changing legal and regulatory requirements.
Current areas of focus include:
• The UK Bribery Act.
• The taking on of private sewers and lateral drains (PDAS).
• The introduction of Service Incentive Mechanism (SIM)
by Ofwat.
• We have asset management plans in place for key assets and
investment governance boards to prioritise capital investment.
• We have initiated an ‘Always On’ improvement programme to
improve controls in relation to investment, training, and the
processes and equipment to maintain our distribution network.
• We conduct contingency planning and ‘what if’ analyses to
ensure our assets, systems and processes are robust to
withstand significant disruption events.
• We have safety improvement programmes in place at all sites
driven by local employee groups to continuously improve
performance. See page 15 for details.
• We run awareness campaigns to ensure security issues are
appropriately considered.
• We have developed a close working relationship with
government departments and emergency forces to maintain
appropriate levels of security required at all critical sites.
• We have regular detailed counterparty and investment reporting
processes and monitoring.
• Through planning and monitoring we ensure the group has
access to funds to meet its ongoing business needs.
• We have an effective Pension Trustee structure, investment
policy and investment performance monitoring process in place
in addition to regular board reviews of pension affordability.
• We ensure external audits are conducted of processes and
departments.
• We establish business plans and budgets and continually
monitor the financial performance of our businesses against
those targets.
• We have established a compliance management framework,
as part of the corporate governance framework for the group,
for Severn Trent Water.
• We plan to undertake a legal risk review of our Severn Trent
Services business.
• We are currently in the process of updating our existing Anti
Bribery and Anti Fraud Policy and supporting standards to
reflect the Bribery Act 2010 guidance.
• We have a change programme in place to effectively manage
the transfer of private sewers and lateral drains. See page 11
for details.
Independent auditor’s report to the members
of Severn Trent Plc
Severn Trent Plc Annual Report and Accounts 2011
59
Opinion on other matter prescribed by the Companies
Act 2006
In our opinion the information given in the Directors’ report for
the financial year for which the group financial statements are
prepared is consistent with the group financial statements.
Matters on which we are required to report by exception
We have nothing to report in respect of the following:
Under the Companies Act 2006 we are required to report to you
if, in our opinion:
• certain disclosures of directors’ remuneration specified by
law are not made; or
• we have not received all the information and explanations
we require for our audit.
Under the Listing Rules we are required to review:
• the directors’ statement, contained within the Directors’
report, in relation to going concern;
• the part of the Chairman’s letter relating to the company’s
compliance with the nine provisions of the June 2008
Combined Code specified for our review; and
• certain elements of the report to shareholders by the Board
on directors’ remuneration.
Other matters
We have reported separately on the parent company financial
statements of Severn Trent Plc for the year ended 31 March
2011 and on the information in the Remuneration Committee
report that is described as having been audited.
Carl D Hughes (Senior statutory auditor)
for and on behalf of Deloitte LLP
Chartered Accountants and Statutory Auditor
London, UK
26 May 2011
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We have audited the group financial statements of Severn Trent
Plc for the year ended 31 March 2011 which comprise the
consolidated income statement, the consolidated statement of
comprehensive income, the consolidated statement of changes
in equity, the consolidated balance sheet, the consolidated cash
flow statement, and the related notes 1 to 40. The financial
reporting framework that has been applied in their preparation is
applicable law and International Financial Reporting Standards
(IFRSs) as adopted by the European Union.
This report is made solely to the company’s members, as a
body, in accordance with Chapter 3 of Part 16 of the Companies
Act 2006. 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 auditor’s 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 auditor
As explained more fully in the Directors’ responsibility statement,
the directors are responsible for the preparation of the group
financial statements and for being satisfied that they give a true
and fair view. Our responsibility is to audit and express an
opinion on the group financial statements in accordance with
applicable law and International Standards on Auditing (UK and
Ireland). Those standards require us to comply with the Auditing
Practices Board’s Ethical Standards for Auditors.
Scope of the audit of the financial statements
An audit involves obtaining evidence about the amounts and
disclosures in the financial statements sufficient to give
reasonable assurance that the financial statements are free from
material misstatement, whether caused by fraud or error. This
includes an assessment of: whether the accounting policies
are appropriate to the group’s circumstances and have been
consistently applied and adequately disclosed; the
reasonableness of significant accounting estimates made by
the directors; and the overall presentation of the financial
statements. In addition, we read all the financial and non-
financial information in the annual report to identify material
inconsistencies with the audited financial statements. If we
become aware of any apparent material misstatements or
inconsistencies we consider the implications for our report.
Opinion on financial statements
In our opinion the group financial statements:
• give a true and fair view of the state of the group’s affairs as
at 31 March 2011 and of its profit for the year then ended;
• have been properly prepared in accordance with IFRSs as
adopted by the European Union; and
• have been prepared in accordance with the requirements of
the Companies Act 2006 and Article 4 of the IAS Regulation.
60
Severn Trent Plc Annual Report and Accounts 2011
Consolidated income statement
For the year ended 31 March 2011
Turnover
Operating costs before exceptional items
Exceptional restructuring costs
Exceptional charge relating to regulatory matters
Total operating costs
Exceptional loss on disposal of businesses
Profit before interest, tax and exceptional items
Exceptional items
Profit before interest and tax
Finance income
Finance costs
Net finance costs
(Losses)/gains on financial instruments
Share of results of associates and joint ventures
Profit before tax, (losses)/gains on financial instruments and exceptional items
Exceptional Items
(Losses)/gains on financial instruments
Profit on ordinary activities before taxation
Taxation on profit on ordinary activities
Current tax
Deferred tax
Exceptional deferred tax credit arising from rate change
Total taxation
Profit for the period
Attributable to:
Equity holders of the company
Non-controlling interests
Earnings per share (pence)
Basic
Diluted
Notes
6, 5
7
8
8
7
8
5
8
10
11
12
8
12
13
13
13
13
15
15
2011
£m
1,711.3
(1,192.2)
(13.7)
(7.7)
(1,213.6)
–
519.1
(21.4)
497.7
100.7
(331.3)
(230.6)
(14.2)
0.1
288.6
(21.4)
(14.2)
253.0
(32.1)
(14.1)
67.7
21.5
2010
£m
1,703.9
(1,146.8)
(48.0)
–
(1,194.8)
(1.7)
557.1
(49.7)
507.4
80.9
(299.7)
(218.8)
45.7
0.1
338.4
(49.7)
45.7
334.4
(40.7)
(42.2)
–
(82.9)
274.5
251.5
272.6
1.9
274.5
115.2
114.6
249.2
2.3
251.5
105.6
105.5
Consolidated statement of comprehensive income
For the year ended 31 March 2011
Severn Trent Plc Annual Report and Accounts 2011
61
Profit for the period
Gains/(losses) on cash flow hedges taken to equity
Deferred tax on gains/losses on cash flow hedges taken to equity
Amounts on cash flow hedges transferred to the income statement in the period
Deferred tax on transfers to income statement
Exchange movement on translation of overseas results and net assets
Tax on exchange differences on foreign currency
Actuarial gains/(losses) on defined benefit pension schemes
Tax on actuarial gains/losses
Deferred tax movement arising from rate change
Other comprehensive income/(loss) for the period
Total comprehensive income for the period
Attributable to:
Equity shareholders of the company
Non-controlling interests
2011
£m
274.5
16.0
(4.1)
4.5
(1.2)
(6.3)
(0.4)
50.7
(13.2)
0.7
2010
£m
251.5
(13.2)
3.7
7.6
(2.1)
(9.0)
(0.4)
(124.4)
34.8
–
46.7
(103.0)
321.2
148.5
319.7
1.5
321.2
146.5
2.0
148.5
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Severn Trent Plc Annual Report and Accounts 2011
Consolidated statement of changes in equity
For the year ended 31 March 2011
At 1 April 2009
Profit for the period
Losses on cashflow hedges taken to equity
Deferred tax on losses on cashflow hedges taken
to equity
Amounts on cash flow hedges transferred to the
income statement
Deferred tax on transfers to the income statement
Exchange movement on translation of overseas
results and net assets
Tax on exchange differences
Actuarial losses
Tax on actuarial losses
Total comprehensive income for the period
Share options and LTIPs
- proceeds from shares issued
- value of employees’ services
- free shares issued
Current tax on share based payments
Dividends paid
Share
capital
£m
231.0
–
–
–
–
–
–
–
–
–
–
0.6
–
–
–
–
At 31 March 2010
231.6
75.9
455.6
Profit for the period
Gains on cashflow hedges taken to equity
Deferred tax on gains on cashflow hedges taken
to equity
Amounts on cash flow hedges transferred to the
income statement
Deferred tax on transfers to the income statement
Exchange movement on translation of overseas
results and net assets
Tax on exchange differences
Actuarial gains
Tax on actuarial gains
Deferred tax arising from rate change
Total comprehensive income for the period
Share options and LTIPs
- proceeds from shares issued
- value of employees’ services
- free shares issued
Current tax on share based payments
Deferred tax on share based payments
Dividends paid
–
–
–
–
–
–
–
–
–
–
–
0.6
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
4.1
–
–
–
–
–
–
16.0
(4.1)
4.5
(1.2)
(5.9)
(0.4)
–
–
–
8.9
–
–
–
–
–
–
Share
premium
£m
Other
reserves
£m
Retained
earnings
£m
Equity
attributable to
equity holders
of Severn
Trent Plc
£m
Non-
controlling
interests
£m
71.9
468.7
–
–
–
–
–
–
–
–
–
–
4.0
–
–
–
–
–
(13.2)
3.7
7.6
(2.1)
(8.7)
(0.4)
–
–
–
–
–
–
–
(13.1)
159.6
174.5
249.2
–
–
–
–
–
–
(124.4)
34.8
–
5.1
(2.2)
0.3
(159.7)
177.6
272.6
–
–
–
–
–
–
50.7
(13.2)
0.7
946.1
249.2
(13.2)
3.7
7.6
(2.1)
(8.7)
(0.4)
(124.4)
34.8
146.5
4.6
5.1
(2.2)
0.3
(159.7)
940.7
272.6
16.0
(4.1)
4.5
(1.2)
(5.9)
(0.4)
50.7
(13.2)
0.7
310.8
319.7
–
4.6
(2.0)
0.3
1.2
(169.4)
4.7
4.6
(2.0)
0.3
1.2
(169.4)
Total
£m
952.1
251.5
(13.2)
3.7
7.6
(2.1)
(9.0)
(0.4)
(124.4)
34.8
148.5
4.6
5.1
(2.2)
0.3
(161.4)
947.0
274.5
16.0
(4.1)
4.5
(1.2)
(6.3)
(0.4)
50.7
(13.2)
0.7
321.2
4.7
4.6
(2.0)
0.3
1.2
(170.9)
6.0
2.3
–
–
–
–
(0.3)
–
–
–
2.0
–
–
–
–
(1.7)
6.3
1.9
–
–
–
–
(0.4)
–
–
–
–
1.5
–
–
–
–
–
(1.5)
At 31 March 2011
232.2
80.0
464.5
323.1
1,099.8
6.3
1,106.1
Consolidated balance sheet
At 31 March 2011
Severn Trent Plc Annual Report and Accounts 2011
63
2011
Note
£m
2010
(Restated
see note 3)
£m
70.6
138.5
6,302.0
0.3
4.6
203.8
0.1
68.3
134.9
6,427.0
0.2
4.8
188.1
0.1
6,823.4
6,719.9
27.1
478.5
4.3
315.2
825.1
26.5
472.8
2.9
227.8
730.0
7,648.5
7,449.9
(23.9)
(0.1)
(391.2)
(67.0)
(12.6)
(260.9)
(4.4)
(464.4)
(67.2)
(25.5)
(494.8)
(822.4)
(4,320.5)
(122.4)
(367.8)
(919.4)
(292.1)
(25.4)
(3,915.6)
(140.3)
(284.9)
(956.4)
(354.9)
(28.4)
(6,047.6)
(5,680.5)
(6,542.4)
(6,502.9)
1,106.1
947.0
232.2
80.0
464.5
323.1
1,099.8
6.3
1,106.1
231.6
75.9
455.6
177.6
940.7
6.3
947.0
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a
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a
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F
i
16
17
18
19
20
32
32
21
22
32
23
32
32
25
28
32
32
25
26
27
28
29
30
31
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
Total assets
Current liabilities
Borrowings
Derivative financial instruments
Trade and other payables
Current income tax liabilities
Provisions for liabilities and charges
Non-current liabilities
Borrowings
Derivative financial instruments
Trade and other payables
Deferred tax
Retirement benefit obligations
Provisions for 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
Non-controlling interests
Total equity
Signed on behalf of the board who approved the accounts on 26 May 2011.
Andrew Duff
Chairman
Michael McKeon
Finance Director
Company Number: 2366619
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Severn Trent Plc Annual Report and Accounts 2011
Consolidated cash flow statement
For the year ended 31 March 2011
Cash generated from operations
Tax paid
Net cash generated from operating activities
Investing activities
Interest received
Dividends received from associates and joint ventures
Net cash inflow from sale of investments
Acquisition of subsidiaries
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
Interest paid
Closed out swap
Interest element of finance lease payments
Dividends paid to shareholders of the parent
Dividends paid to non-controlling interests
Repayments of borrowings
Repayments of obligations under finance leases
New loans raised
Issues of shares
Purchase of own shares
Net cash used in financing activities
Increase/(decrease) in cash and cash equivalents
Net cash and cash equivalents at beginning of period
Effect of foreign exchange rates
Net cash and cash equivalents at end of period
The increase in cash and cash equivalents is reconciled to the movement in net debt in note 34.
Note
34
2011
£m
753.0
(32.4)
2010
£m
708.0
(53.8)
720.6
654.2
10.3
–
–
–
5.1
(20.9)
(403.1)
19.4
10.5
0.1
2.2
(13.2)
6.9
(47.8)
(464.9)
18.0
(389.2)
(488.2)
(179.8)
20.5
(10.8)
(169.4)
(1.5)
(28.7)
(47.3)
171.2
4.7
(2.0)
(194.7)
–
(10.0)
(159.7)
(1.7)
(180.0)
(43.2)
1.0
4.6
(2.2)
(243.1)
(585.9)
88.3
227.8
(0.9)
315.2
(419.9)
648.1
(0.4)
227.8
Notes to the group financial statements
For the year ended 31 March 2011
Severn Trent Plc Annual Report and Accounts 2011
65
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 2011.
The financial statements have been prepared on the going
concern basis (see Directors’ report on page 28) 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.
b) Basis of consolidation
The financial statements include the results of Severn Trent Plc
and its subsidiaries, joint ventures and associated undertakings.
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.
Non-controlling interests in the net assets of consolidated
subsidiaries are identified separately from the group’s equity
therein. Non-controlling interests consist of the amount of those
interests at the date of the original business combination and the
non-controlling interest’s share of changes in equity since that
date. Losses attributable to the non-controlling interest in excess
of its interest in the subsidiary’s equity are allocated against the
interests of the group except to the extent that the non-
controlling interest has a binding obligation and is able to make
an additional investment to cover the losses.
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.
Turnover includes an estimate of the amount of mains water and
waste water 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.
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.
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
group’s rights to receive payment have been established.
Interest and dividend income are included in finance income.
d) 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. In this
context, materiality is assessed at the segment level.
e) Taxation
Current tax 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 or deductible 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 bases 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.
Deferred tax assets and liabilities are offset when there is a
legally enforceable right to set off current tax assets against
current tax liabilities and when they relate to income taxes
levied by the same taxation authority and the group intends
to settle its current tax assets and liabilities on a net basis.
f) 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.
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Severn Trent Plc Annual Report and Accounts 2011
Notes to the group financial statements (continued)
For the year ended 31 March 2011
2 Accounting policies (continued)
f) Goodwill (continued)
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 in note 2 m) below 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.
g) Intangible non-current assets
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.
h) 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:
• it is technically feasible to create and make the asset
available for use or sale;
• there are adequate resources available to complete the
development and to use or sell the asset;
• there is the intention and ability to use or sell the asset;
• 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.
i) 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 a prepayment which is written off to the
income statement over the life of the contract.
j) Property, plant and equipment
Property, plant and equipment is held at cost (or at deemed
costs for infrastructure assets on transition to IFRS) less
accumulated depreciation. The costs of like for like replacement
of infrastructure components are recognised in the income
statement as they arise. Where it is probable that the
expenditure will cause future economic benefits to flow to
the group, then costs are capitalised.
Where items of property, plant and equipment are transferred
to the group from customers or developers, the fair value of the
asset transferred is recognised in the balance sheet. Fair value
is determined based on estimated depreciated replacement cost.
Where the transfer is in exchange for connection to the network
and there is no further obligation, the corresponding credit is
recognised immediately in turnover. Where the transfer is
considered to be linked to the provision of ongoing services
the corresponding credit is recorded in deferred income and
released to operating costs over the expected useful lives of
the related assets.
Borrowing costs directly attributable to the acquisition,
construction or production of assets, that necessarily take a
substantial period of time to get ready for their intended use, are
added to the cost of those assets until such time as the assets
are ready for their intended use.
Property, plant and equipment is depreciated to its estimated
residual value over its estimated useful life, with the exception
of freehold land which is not depreciated. Assets in the course
of construction are not depreciated until commissioned.
The estimated useful lives are:
Infrastructure assets
Impounding reservoirs
Raw water aqueducts
Mains
Sewers
Other assets
Buildings
Fixed plant and equipment
Vehicles and mobile plant
Years
250
250
80-150
150-200
30-80
20-40
2-15
k) Leased assets
Where the group obtains assets under leasing arrangements
which transfer substantially all the risks and rewards of
ownership of an asset to the group as 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.
Leases where substantially all the risks and rewards of
ownership remain with the lessor 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 to the group at the end of the lease.
l) Grants and contributions
Grants and contributions received in respect of non-current
assets, including certain charges made as a result of 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 non-current assets.
Severn Trent Plc Annual Report and Accounts 2011
67
2 Accounting policies (continued)
l) Grants and contributions (continued)
Grants and contributions which are given in compensation for
expenses incurred with no future related costs are recognised in
operating costs in the income statement in the period that they
become receivable.
m) Impairment of non-current assets
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 asset 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 an 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.
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 comprehensive income.
Contributions to defined contribution pension schemes are
charged to the income statement in the period in which they
fall due.
q) Provisions
Provisions are recognised 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.
Insurance provisions are recognised for claims notified and for
claims incurred but which have not yet been notified, based on
advice from the group’s independent insurance advisers.
Provisions are discounted to present value using a pre-tax
discount rate that reflects the risks specific to the liability where
the effect is material.
r) Purchase of own shares
The group balance sheet includes the shares held by the Severn
Trent Employee Share Ownership 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.
n) Inventory
Inventory and work in progress is stated at the lower of cost and
net realisable value. Cost includes labour, materials, transport
and attributable overheads.
s) Financial instruments
(i) Financial assets
Financial assets are classified into the following specified
categories:
o) Service concession agreements
Where the group has an unconditional right to receive cash from
a government body in exchange for constructing or upgrading
a public sector asset, the amounts receivable are recognised
as a financial asset in prepayments and accrued income.
Costs of constructing or upgrading the public sector asset are
recognised on a straight line basis, before adjusting for expected
inflation, over the life of the contract.
p) Retirement benefits
The group operates both defined benefit and defined
contribution pension schemes.
The difference between the value of defined benefit pension
scheme assets and defined benefit pension scheme liabilities
is recorded on the balance sheet as a retirement benefit asset
or obligation.
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. Service cost, which is the increase in the
• At fair value through profit or loss;
• Held to maturity investments;
• Available for sale financial assets; and
• Loans and receivables.
Financial assets at fair value through profit or loss
A financial asset is classified at fair value through profit or loss if
it is so designated or if it is held for trading. Derivative financial
assets that are not designated and effective as hedging
instruments are classified as held for trading. Financial assets at
fair value through profit or loss are stated at fair value, with any
gains or losses arising on remeasurement recognised in
gains/losses on financial instruments in the income statement.
Fair value is determined using the methodology described in
note 32. Interest receivable in respect of derivative financial
assets is included in finance income.
Held to maturity investments
Where the group has the ability and intent to hold an investment
to maturity the financial asset is classified as held to maturity.
Such financial assets are measured at amortised cost using the
effective interest rate method, with any gains or losses being
recognised in the income statement.
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Severn Trent Plc Annual Report and Accounts 2011
Notes to the group financial statements (continued)
For the year ended 31 March 2011
2 Accounting policies (continued)
s) Financial instruments (continued)
(i) Financial assets (continued)
Available for sale financial assets
After initial recognition at cost (being the fair value of the
consideration paid), investments which are classified as
available for sale are measured at fair value, with gains or losses
recognised in equity. 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. Where there is no active
market in the investments and the fair value cannot be measured
reliably, the investments are held at cost.
Loans and receivables
Trade receivables, loans and other receivables that have fixed
or determinable payments and that are not quoted in an active
market are classified as loans and receivables. Such assets 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 its recoverable amount and
the irrecoverable amount is recognised as an expense.
Trade receivables that are assessed not to be impaired
individually are assessed collectively for impairment by reference
to the group’s historical collection experience for receivables of
similar age.
(ii) Financial liabilities
Financial liabilities are classified as either:
• financial liabilities at fair value through profit or loss; or
• other financial liabilities.
Financial liabilities at fair value through profit or loss
A financial liability is classified at fair value through profit or loss
if it is so designated or if it is held for trading. Derivative financial
liabilities that are not designated and effective as hedging
instruments are classified as held for trading. Financial liabilities
at fair value through profit or loss are stated at fair value, with
any gains or losses arising on remeasurement recognised in
gains/losses on financial instruments in the income statement.
Fair value is determined using the methodology described in
note 32. Interest payable in respect of derivative financial
liabilities is included in finance costs.
Other financial liabilities
Other financial liabilities, including borrowings, are initially
recognised at fair value less transaction costs. After initial
recognition, other financial liabilities are subsequently measured
at amortised cost using the effective interest rate method.
(iii) Hedge accounting
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
recognised and measured in accordance with the accounting
policies described above.
At the inception of the hedge relationship the group documents:
• the relationship between the hedging instrument and the
hedged item;
• its risk management objectives and strategy for undertaking
hedge transactions; and
• whether the hedging instrument is highly effective in
offsetting changes in fair values or cash flows (as
appropriate) of the hedged item.
The group continues to test and document the effectiveness of
the hedge on an ongoing basis.
Hedge accounting is discontinued when the hedging instrument
expires, is sold, terminated or exercised, or no longer qualifies
for hedge accounting.
Fair value hedges
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
gains/losses on financial instruments in the income statement.
The gain or loss on the hedging instrument is taken to gains/
losses on financial instruments in the income statement where
the effective portion of the hedge will offset the gain or loss on
the hedged item.
When hedge accounting is discontinued the fair value
adjustment to the carrying amount of the hedged item arising
from the hedged risk is amortised to the income statement from
that date.
Cash flow hedges
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 gains/losses on financial
instruments in the income statement. The gains or losses
deferred in equity in this way are recycled through gains/losses
on financial instruments in the income statement in the same
period in which the hedged underlying transaction or firm
commitment is recognised in the income statement.
When hedge accounting is discontinued any cumulative gain
or loss on the hedging instrument recognised in equity is kept
in equity until the forecast transaction occurs, or transferred
to gains/losses on financial instruments in the income statement
if the forecast transaction is no longer expected to occur.
Hedges of net investments in foreign operations
Where forward currency contracts and foreign currency
borrowings are used to hedge net investments in foreign
currency denominated operations, to the extent that they are
designated and effective as net investment hedges, they are
matched in equity against changes in value of the related assets.
Any ineffectiveness is taken to gains/losses on financial
instruments in the income statement.
(iv) Embedded derivatives
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 gains/losses on financial
instruments in the income statement.
t) 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.
Severn Trent Plc Annual Report and Accounts 2011
69
2 Accounting policies (continued)
u) 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 bank balances and
investments in liquid funds. Cash and cash equivalents also
include overdrafts repayable on demand.
v) Foreign currency
The results of overseas subsidiary and associated undertakings
are translated into sterling, the presentational currency of the
group, 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 2 s).
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.
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.
3 New accounting policies and future requirements
IAS 27 (revised) was required to be implemented by the group
from 1 April 2010. The revised standard requires the effects of
all transactions with non-controlling interests to be recorded in
equity if there is no change in control. The standard also
specifies the accounting when control is lost. The group has had
no transactions in the current or prior year that would have been
impacted by the revised standard.
IFRS 3 (revised) was also required to be implemented by the
group from 1 April 2010. The standard continues to apply the
acquisition method to business combinations, with some
significant changes. The group has had no significant
transactions in the current or prior year that would have been
impacted by the revised standard.
IFRIC 18 “Transfers of assets from customers” was issued in
January 2009 and was required to be applied with effect from
1 April 2010 for assets transferred after 1 July 2009. Where
property, plant and equipment is transferred, the fair value of the
asset is recognised in the balance sheet. Where the transfer is
in exchange for connection to the network, the corresponding
credit is recognised immediately in turnover. However, in most
cases the transfer is considered to be linked to the provision of
ongoing services and in these cases the corresponding credit is
recorded in deferred income and released to operating costs
over the expected useful lives of the related assets. The impact
of the adoption of IFRIC 18 on the comparative figures presented
in these financial statements is summarised below:
At 31 March 2010
As previously stated
Fair value of assets
transferred
Property
plant and
equipment
£m
6,260.5
Trade and other payables
Current
liabilities
£m
(464.2)
Non-current
liabilities
£m
(243.6)
41.5
(0.2)
(41.3)
As restated
6,302.0
(464.4)
(284.9)
The following standards have been issued by the International
Accounting Standards Board and are likely to affect future
financial statements.
IFRS 9 “Financial instruments” is likely to affect the
measurement and disclosure of financial instruments. The
standard is required to be implemented by the group with effect
from the year ending 31 March 2014, subject to EU
endorsement.
IFRS 10 “Consolidated Financial Statements” was issued in May
2011 and is required to be implemented by the group from 1 April
2013. The standard includes a new definition of control to be
used to determine when entities are consolidated. The standard
is not expected to have a material impact on the current
consolidation.
IFRS 11 “Joint Agreements” was issued in May 2011 and is
required to be implemented by the group from 1 April 2013.
IFRS 11 replaces IAS 31 “Interests in Joint Ventures” and SIC-13
“Jointly-controlled Entities”. IFRS 11 uses the definition of control
given in IFRS 10 to define joint control and removes the option
to account for joint ventures using proportionate consolidation.
This is not expected to have a material impact on the group.
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70
Severn Trent Plc Annual Report and Accounts 2011
Notes to the group financial statements (continued)
For the year ended 31 March 2011
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 27 to the
financial statements.
d) Unbilled revenue
Severn Trent Water raises bills and recognises revenue in
accordance with its right to receive revenue in line with the limits
established by the periodic regulatory price review processes.
For water and waste water customers with water meters, the
amount recognised is dependent upon the volume supplied
including an estimate of the sales value of units supplied
between the date of the last meter read and the year end. Meters
are read on a cyclical basis and the group recognises revenue
for unbilled amounts based on estimated usage from the last
billing to the end of the financial year. The estimated usage is
based on historical data, judgement and assumptions.
e) Provision for impairment of trade receivables
Provisions are made against Severn Trent Water’s trade
receivables based on historical experience of levels of recovery
from accounts in a particular ageing category. The actual
amounts collected could differ from the estimated level of
recovery which could impact operating results.
5 Segmental analysis
The group has two reportable segments: Severn Trent Water
and Severn Trent Services. The key factor determining the
identification of reportable segments is the regulatory
environment in which the businesses operate. Severn Trent
Water is subject to economic regulation by Ofwat and operates
under a licence to provide water and sewerage services within a
defined geographical region in England and Wales. Severn Trent
Services is not subject to economic regulation and operates in
markets in the USA, Europe and Asia.
The Severn Trent Executive Committee (STEC) is considered to
be the group’s chief operating decision maker. The reports
provided to STEC include segmental information prepared on
the basis described above. Details of Severn Trent Water’s
operations are described on pages 10 to 15 of the Business
Review and those of Severn Trent Services on pages 16 to 19.
The group has a large and diverse customer base and there is
no significant reliance on any single customer.
3 New accounting policies and future
requirements (continued)
IFRS 12 “Disclosure of Interests in Other Entities” was issued in
May 2011 and is required to be implemented by the group from
1 April 2013. The standard provides disclosure requirements for
subsidiaries, associates and joint agreements and structured
entities which were previously covered in IAS 27, IAS 28 and IAS
31. Additional disclosures will be required in the group financial
statements to meet the requirements of the standard.
IFRS 13 “Fair Value Measurement” was issued in May 2011 and
is required to be implemented by the group from 1 April 2013.
The standard provides additional guidance on how to measure
fair value but does not change when fair value is permitted or
required. The standard may impact the methods of determining
fair value which are currently employed by the group and will
require enhanced disclosure of these methods.
The directors assess that the other standards and interpretations
issued but not yet effective are not likely to have a significant
impact on future financial statements.
4 Significant accounting judgements and key
sources of estimation uncertainty
In the process of applying the group’s accounting policies, the
group is required to make certain judgements, estimates and
assumptions that it believes are reasonable based on the
information available.
The more significant judgements were:
a) Tax provisions
Assessing the outcome of uncertain tax positions requires
judgements 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.
b) Provisions for other liabilities and charges
Assessing the financial outcome of uncertain commercial and
legal positions requires judgements to be made regarding the
relative merits of each party’s case and the extent to which
any claim against the group is likely to be successful. The
assessments made are based on advice from the group’s
internal counsel and, where appropriate, independent
legal advice.
The key accounting estimates were:
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 16 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 j).
Severn Trent Plc Annual Report and Accounts 2011
71
5 Segmental analysis (continued)
The measure of profit or loss that is reported to STEC for the segments is profit before interest, tax and exceptional items (underlying
PBIT). A segmental analysis of sales and underlying PBIT is presented below.
2011
External sales
Inter-segment sales
Total sales
Profit before interest, tax and exceptional items
Exceptional items
Profit before interest and tax
Profit before interest, tax and exceptional items is stated after
Amortisation of intangible assets
Depreciation of property plant and equipment
Profit on disposal of fixed assets
2010
External sales
Inter-segment sales
Total sales
Profit before interest, tax and exceptional items
Exceptional items
Profit before interest and tax
Profit before interest, tax and exceptional items is stated after charging
Amortisation of intangible assets
Depreciation of property plant and equipment
Profit on disposal of fixed assets
Severn Trent
Water
Severn Trent
Services
£m
1,388.9
0.9
1,389.8
503.7
(13.0)
490.7
23.6
247.4
(2.1)
£m
321.7
14.4
336.1
25.7
(4.5)
21.2
1.6
6.4
(0.5)
Severn Trent
Water
£m
1,383.6
1.7
Severn Trent
Services
£m
320.3
16.2
1,385.3
336.5
541.3
(42.1)
499.2
23.4
232.5
(4.3)
28.7
(7.6)
21.1
1.6
6.1
(0.2)
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The group’s treasury and tax affairs are managed centrally by the Group Treasury and Tax Departments. Finance costs are managed
on a group basis and hence interest income and costs are not reported at the segmental level. Tax is not reported to STEC on a
segmental basis.
Interests in joint ventures and associates are not material and are not included in the segmental reports reviewed by STEC.
Separate segmental analyses of assets and liabilities are not reviewed by STEC. The balance sheet measure reviewed by STEC on
a segmental basis is capital employed which includes the following components:
2011
Operating assets
Goodwill
Interests in joint ventures and associates
Segment assets
Segment operating liabilities
Capital employed
Severn Trent
Water
£m
6,864.8
–
0.1
Severn Trent
Services
£m
203.8
68.3
4.7
6,864.9
(959.7)
5,905.2
276.8
(87.8)
189.0
72
Severn Trent Plc Annual Report and Accounts 2011
Notes to the group financial statements (continued)
For the year ended 31 March 2011
5 Segmental analysis (continued)
2010
Operating assets
Goodwill
Interests in joint ventures and associates
Segment assets
Segment operating liabilities
Capital employed
Severn Trent
Water
(Restated
see note 3)
£m
6,731.4
–
0.2
6,731.6
(1,026.8)
Severn Trent
Services
£m
215.3
70.6
4.7
290.6
(92.0)
5,704.8
198.6
Operating assets comprise other intangible assets, property plant and equipment, inventory and trade and other receivables.
Operating liabilities comprise trade and other payables, retirement benefit obligations and provisions.
The comparative figures for Severn Trent Water have been restated to reflect the impact of IFRIC 18, which is described in note 3.
Additions to other intangible assets and property, plant and equipment were as follows:
2011
Other intangible assets
Property, plant and equipment
2010
Other intangible assets
Property, plant and equipment
Severn Trent
Water
£m
18.3
Severn Trent
Services
£m
2.6
370.7
4.9
Severn Trent
Water
(Restated
see note 3)
£m
44.4
538.9
Severn Trent
Services
£m
3.2
13.0
The comparative figures for Severn Trent Water have been restated to reflect the impact of IFRIC 18, which is described in note 3.
The reportable segments’ revenue is reconciled to group turnover as follows:
Severn Trent Water
Severn Trent Services
Other
Inter-segment sales
Group turnover
2011
£m
1,389.8
336.1
8.1
(22.7)
2010
£m
1,385.3
336.5
5.3
(23.2)
1,711.3
1,703.9
Severn Trent Plc Annual Report and Accounts 2011
73
5 Segmental analysis (continued)
Segmental underlying PBIT is reconciled to the group’s profit before tax and discontinued operations as follows:
Underlying PBIT
- Severn Trent Water
- Severn Trent Services
Corporate and other costs
Consolidation adjustments
Group underlying PBIT
Exceptional items
- Severn Trent Water
- Severn Trent Services
Corporate
Share of results of associates and joint ventures
Net finance costs
(Losses)/gains on financial instruments
2011
£m
2010
£m
503.7
25.7
(12.5)
2.2
519.1
(13.0)
(4.5)
(3.9)
0.1
(230.6)
(14.2)
541.3
28.7
(14.2)
1.3
557.1
(42.1)
(7.6)
–
0.1
(218.8)
45.7
Profit before tax and discontinued operations
253.0
334.4
The reportable segments’ assets are reconciled to the group’s total assets as follows:
Segment assets
- Severn Trent Water
- Severn Trent Services
Corporate assets
Financial assets
Cash and cash equivalents
Available for sale financial assets
Consolidation adjustments
Total assets
2011
£m
2010
(Restated
see note 3)
£m
6,864.9
276.8
46.8
192.4
315.2
0.1
(47.7)
6,731.6
290.6
21.7
206.7
227.8
0.1
(28.6)
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7,449.9
The consolidation adjustments include intra-group debtors and unrealised profits on fixed assets.
The comparative figures for Severn Trent Water have been restated to reflect the impact of IFRIC 18, which is described in note 3.
74
Severn Trent Plc Annual Report and Accounts 2011
Notes to the group financial statements (continued)
For the year ended 31 March 2011
5 Segmental analysis (continued)
The reportable segments’ liabilities are reconciled to the group’s total liabilities as follows:
Segment liabilities
- Severn Trent Water
- Severn Trent Services
Corporate and other
Borrowings
Derivative financial liabilities
Current tax
Deferred tax
Consolidation adjustments
Total liabilities
2011
£m
2010
(Restated
see note 3)
£m
(959.7)
(87.8)
(59.0)
(4,344.4)
(122.5)
(67.0)
(919.4)
17.4
(1,026.8)
(92.0)
(49.7)
(4,176.5)
(144.7)
(67.2)
(956.4)
10.4
(6,542.4)
(6,502.9)
The consolidation adjustments include intra-group creditors.
The comparative figures for Severn Trent Water have been restated to reflect the impact of IFRIC 18, which is described in note 3.
Geographical areas
The group’s sales were derived from the following countries:
UK
USA
Other
2011
£m
1,465.4
154.0
91.9
2010
£m
1,459.2
145.1
99.6
1,711.3
1,703.9
The group’s non-current assets (excluding financial instruments, deferred tax assets and post employment benefit assets) were
located in the following countries:
UK
USA
Other
The comparative figures have been restated to reflect the impact of IFRIC 18, which is described in note 3.
6 Revenue
Water and sewerage services
Other services
Sale of goods
Service concession arrangements (note 36)
Total turnover
Interest receivable (note 10)
Total revenue
2011
£m
6,550.8
58.3
26.2
2010
(Restated
see note 3)
£m
6,428.2
61.3
26.6
6,635.3
6,516.1
2011
£m
1,380.0
192.3
103.2
35.8
1,711.3
7.5
2010
(Restated)
£m
1,377.0
190.4
100.5
36.0
1,703.9
9.8
1,718.8
1,713.7
The significant categories of revenue have been redefined to better reflect the nature of the activities performed. The prior year
figures have been restated accordingly. Revenue from service concessions arrangements is now disclosed separately to other
service income and revenue from long term contracts to supply goods is included in sale of goods.
Severn Trent Plc Annual Report and Accounts 2011
75
2011
Total
£m
266.8
16.2
27.6
4.6
315.2
57.9
135.9
62.4
35.2
32.6
251.5
25.4
184.8
4.7
0.8
7.8
4.5
(2.6)
(0.9)
96.9
69.9
1,282.0
(8.4)
(60.0)
Before
exceptional
costs
£m
276.8
18.5
19.1
5.1
Exceptional
costs
£m
14.6
0.5
7.5
–
319.5
56.0
116.9
61.0
35.1
31.1
236.1
25.2
145.9
4.2
1.1
8.2
5.6
(4.5)
–
104.5
89.5
1,235.4
(7.5)
(81.1)
22.6
–
0.4
0.8
0.1
–
0.8
5.8
4.9
5.4
0.1
0.1
–
–
–
–
7.0
48.0
–
–
48.0
1,213.6
1,146.8
2010
Total
£m
291.4
19.0
26.6
5.1
342.1
56.0
117.3
61.8
35.2
31.1
236.9
31.0
150.8
9.6
1.2
8.3
5.6
(4.5)
–
104.5
96.5
1,283.4
(7.5)
(81.1)
1,194.8
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2011
£m
2010
£m
0.1
0.4
0.1
0.6
0.2
0.2
–
0.4
0.1
0.4
0.1
0.6
0.2
–
0.1
0.3
7 Operating costs
Wages and salaries
Social security costs
Pension costs
Share based payments
Total employee costs
Power
Raw materials and consumables
Rates
Charge for bad and doubtful debts
Service charges
Depreciation of property, plant and equipment
Amortisation of intangible fixed assets
Hired and contracted services
Operating leases rentals
- land and buildings
- other
Hire of plant and machinery
Research and development expenditure
Profit on disposal of property, plant and equipment
Foreign exchange gains
Water and sewerage infrastructure maintenance
expenditure
Other operating costs
Release from deferred income
Own work capitalised
Total operating costs
Before
exceptional
costs
£m
263.7
15.8
27.0
4.6
Exceptional
costs
£m
3.1
0.4
0.6
–
311.1
57.9
135.3
62.4
35.2
32.6
251.5
25.4
177.6
4.3
0.8
7.8
4.5
(2.6)
(0.9)
96.9
60.8
1,260.6
(8.4)
(60.0)
1,192.2
4.1
–
0.6
–
–
–
–
–
7.2
0.4
–
–
–
–
–
–
9.1
21.4
–
–
21.4
Further details of exceptional costs are given in note 8.
During the year the following fees were charged by the auditors:
Fees payable to the company’s auditors for
- the audit of the company’s annual accounts
- the audit of the company’s subsidiaries pursuant to legislation
- audit fees payable to associates of the company’s auditors
Total audit fees
Fees payable to the company’s auditors and their associates for other services to the group
- other services pursuant to legislation
- other services relating to taxation
- services relating to corporate finance
Total non-audit fees
Details of directors’ remuneration are set out in the Directors’ remuneration report on pages 51 to 55.
76
Severn Trent Plc Annual Report and Accounts 2011
Notes to the group financial statements (continued)
For the year ended 31 March 2011
8 Exceptional items
Restructuring programmes
- Severn Trent Water
- Severn Trent Services
Exceptional restructuring costs
Costs relating to regulatory matters (see note 35)
- Severn Trent Services
- Corporate and other
Exceptional costs relating to regulatory matters
Total exceptional operating costs
Exceptional loss on disposal of business
Total exceptional items
9 Employee numbers
Average number of employees (including executive directors) during the year:
By type of business
Severn Trent Water
Severn Trent Services
Corporate and Other
10 Finance income
Interest revenue earned on
Bank deposits
Other financial income
Total interest revenue
Expected return on defined benefit scheme assets
Total finance income
2011
£m
13.0
0.7
13.7
3.8
3.9
7.7
21.4
–
21.4
2010
£m
42.1
5.9
48.0
–
–
–
48.0
1.7
49.7
2011
Number
2010
Number
5,236.6
3,031.7
13.2
5,685.8
3,090.0
11.7
8,281.5
8,787.5
2011
£m
3.8
3.7
7.5
93.2
100.7
2010
£m
7.0
2.8
9.8
71.1
80.9
Severn Trent Plc Annual Report and Accounts 2011
77
11 Finance costs
Interest on bank loans and overdrafts
Interest on other loans
Interest on finance leases
Total borrowing costs
Other financial expenses
Interest cost on defined benefit scheme obligations
Total finance costs
2011
£m
6.9
214.1
11.1
232.1
0.8
98.4
331.3
2010
£m
7.6
195.0
10.1
212.7
0.9
86.1
299.7
In accordance with IAS 23 borrowing costs of £11.4 million (2010: £2.6 million) incurred funding eligible capital projects have been
capitalised at an interest rate of 5.99% (2010: 5.65%).
12 (Losses)/gains on financial instruments
Gain/(loss) on cross currency swaps used as hedging instruments in fair value hedges
(Loss)/gain arising on adjustment for foreign currency debt in fair value hedges
Exchange loss on other loans
Loss on cash flow hedges transferred from equity
(Loss)/gain arising on swaps where hedge accounting is not applied
The group’s hedge accounting arrangements are described in note 32 g).
13 Taxation
a) Analysis of tax (credit)/charge in the year
Current tax
Current year at 28% (2010: 28%)
Prior year at 28% (2010: 28%)
Total current tax
Deferred tax
Origination and reversal of temporary differences - current year
Origination and reversal of temporary differences - prior year
Exceptional credit arising from rate change
Total deferred tax
Total tax (credit)/charge
2011
£m
17.6
(10.4)
(1.2)
(4.5)
(15.7)
(14.2)
2011
£m
66.5
(34.4)
32.1
4.6
9.5
(67.7)
(53.6)
(21.5)
s
t
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e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
2010
£m
(10.9)
22.3
–
(7.6)
41.9
45.7
2010
£m
71.3
(30.6)
40.7
25.9
16.3
–
42.2
82.9
The prior year credit for current tax arises from the settlement in the year of certain outstanding tax positions which arose principally
in the years 2005 – 2009.
The exceptional deferred tax credit arises from the reduction in the rate at which the temporary differences are expected to reverse
from 28% to 26%.
The standard rate of corporation tax in the UK changed from 28% to 26% with effect from 1 April 2011.
78
Severn Trent Plc Annual Report and Accounts 2011
Notes to the group financial statements (continued)
For the year ended 31 March 2011
13 Taxation (continued)
b) Factors affecting the tax (credit)/charge in the year
The tax expense for the current year is lower (2010: lower) than the standard rate of corporation tax in the UK. The differences are
explained below:
Profit on ordinary activities before tax
Tax at the standard rate of corporation tax in the UK 28% (2010: 28%)
Tax effect of (income not taxable)/expenditure not deductible in determining taxable profits
Effect of different rates in overseas jurisdictions
Adjustments in respect of prior years
Exceptional deferred tax credit arising from rate change
Total tax (credit)/charge
2011
£m
253.0
70.8
(0.2)
0.5
(24.9)
(67.7)
(21.5)
2010
£m
334.4
93.6
2.7
0.9
(14.3)
–
82.9
c) Tax charged/(credited) directly to equity
In addition to the amount (credited)/charged to the income statement, the following amounts of tax have been charged/(credited)
directly to equity.
2011
£m
2010
£m
Current tax
Tax on share based payments
Tax on pension contributions in excess of profit and loss charge
Tax on exchange differences on foreign currency hedging
Total current tax credited directly to equity
Deferred tax
Tax on actuarial gains/losses
Tax on cash flow hedges
Tax on share based payments
Effect of change in tax rate
Total deferred tax charged/(credited) directly to equity
14 Dividends
Amounts recognised as distributions to equity holders in the period:
Final dividend for the year ended 31 March 2010 (2009)
Interim dividend for the year ended 31 March 2011 (2010)
Proposed final dividend for the year ended 31 March 2011
(0.3)
–
0.4
0.1
13.2
5.3
(1.2)
(0.7)
16.6
Pence per
share
41.1
26.7
(0.3)
(0.7)
0.4
(0.6)
(34.1)
(1.6)
–
–
(35.7)
2010
£m
96.5
63.2
67.8
159.7
2011
£m
107.8
61.6
169.4
Pence per
share
45.6
26.0
71.7
39.1
The proposed final dividend is subject to approval by shareholders at the AGM and has not been included as a liability in these
financial statements.
Severn Trent Plc Annual Report and Accounts 2011
79
15 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 calculation of basic and diluted earnings per share is based on the following data:
Earnings
Earnings for the purpose of basic and diluted earnings per share from operations
Profit for the period attributable to the equity holders of the company
Number of shares
Weighted average number of ordinary shares for the purpose of basic earnings per share
Effect of dilutive potential ordinary shares
- share options and LTIPs
Weighted average number of ordinary shares for the purpose of diluted earnings per share
Adjusted earnings per share
Adjusted basic earnings per share
Adjusted diluted earnings per share
2011
£m
2010
£m
272.6
249.2
2011
m
236.7
2010
m
236.0
1.1
0.3
237.8
236.3
2011
pence
105.6
105.1
2010
pence
122.8
122.6
Adjusted earnings per share figures are presented for continuing operations. These exclude the effects of deferred tax,
losses/gains on financial instruments and exceptional items in both 2011 and 2010. The directors consider that the adjusted
figures provide a useful additional indicator of performance. The denominators used in the calculations of adjusted basic and
diluted earnings per share are the same as those used in the unadjusted figures set out above.
The adjustments to earnings are as follows:
Adjustments to earnings
Earnings for the purpose of basic and diluted earnings per share from continuing operations
Adjustments for
- exceptional items
- current tax related to exceptional items at 28% (2010: 28%)
- losses/(gains) on financial instruments
- deferred tax
2011
£m
272.6
21.4
(4.7)
14.2
(53.6)
2010
£m
249.2
49.7
(5.6)
(45.7)
42.2
Earnings for the purpose of adjusted basic and diluted earnings per share
249.9
289.8
s
t
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e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
80
Severn Trent Plc Annual Report and Accounts 2011
Notes to the group financial statements (continued)
For the year ended 31 March 2011
16 Goodwill
Cost and net book value
At 1 April
Additions
Amounts written off
Exchange adjustments
At 31 March
2011
£m
70.6
–
–
(2.3)
68.3
2010
£m
63.3
10.3
(0.2)
(2.8)
70.6
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:
Severn Trent Services
Water Purification US
Contract Operations
UK Laboratories
Services Italy
Apliclor
2011
£m
26.2
11.6
12.0
8.2
10.3
68.3
2010
£m
27.8
12.5
12.0
8.0
10.3
70.6
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. The key assumption underlying these budgets is revenue
growth. Assumptions are determined by management of each CGU based on past experience, current market trends and
expectations of future developments.
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. The assumptions used in relation to
growth rates beyond the five year period and discount rates were:
Water Purification US
Contract Operations
UK Laboratories
Services Italy
Apliclor
Nominal growth rate
Discount rate
2011
%
3.0
3.0
3.0
3.0
3.0
2010
%
3.0
3.0
3.0
3.0
3.0
2011
%
7.3
7.7
7.3
11.0
11.6
2010
%
7.8
8.9
8.9
10.1
10.0
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 CGU.
Severn Trent Plc Annual Report and Accounts 2011
81
16 Goodwill (continued)
Changes in the growth rate outside the five year period or in the discount rate applied to the cash flows may cause a CGU’s carrying
value to exceed its recoverable amount. Where such a change is considered reasonably possible, the amount by which the
recoverable amount exceeded its carrying value, and the amount by which the growth rate and discount rate would have to change,
is set out below for each CGU.
Severn Trent Services
UK Laboratories
Services Italy
Apliclor
Surplus of
recoverable amount
over carrying
amount
£m
Change required for recoverable
amount to equal carrying amount
Growth rate
percentage
points
Discount rate
percentage
points
22.0
1.0
–
(4.7)
(0.3)
(0.4)
3.5
0.1
0.2
In the opinion of the directors, the changes in growth rate or discount rate that would be required to reduce the recoverable amounts
of Water Purification US and Contract Operations below their carrying value are not reasonably possible.
17 Intangible assets
Cost
At 1 April 2009
Additions
Acquisition of businesses
Disposals
Disposal of businesses
Reclassifications
Exchange adjustments
At 1 April 2010
Additions
Disposals
Reclassifications
Exchange adjustments
At 31 March 2011
Amortisation
At 1 April 2009
Amortisation for year
Exceptional impairment
Disposals
Disposal of businesses
Exchange adjustments
At 1 April 2010
Amortisation for year
Disposals
Exchange adjustments
At 31 March 2011
Net book value
At 31 March 2011
At 31 March 2010
Other assets primarily comprise capitalised development costs and patents.
Computer software
Internally
generated
£m
Purchased
£m
Other
Internally
generated
£m
104.3
13.1
–
–
–
–
–
117.4
4.1
–
–
–
121.5
(62.0)
(9.1)
(2.3)
–
–
–
(73.4)
(9.4)
–
–
154.9
31.5
0.3
(1.2)
(0.1)
0.1
(0.2)
185.3
14.6
(29.8)
0.2
(0.2)
170.1
(84.1)
(14.7)
(3.5)
1.1
0.1
0.2
(100.9)
(15.1)
29.7
0.1
18.7
3.1
–
–
(0.1)
0.4
(0.3)
21.8
2.2
–
1.2
(0.4)
24.8
(10.5)
(1.4)
–
–
0.1
0.1
(11.7)
(0.9)
–
0.1
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
Total
£m
277.9
47.7
0.3
(1.2)
(0.2)
0.5
(0.5)
324.5
20.9
(29.8)
1.4
(0.6)
316.4
(156.6)
(25.2)
(5.8)
1.1
0.2
0.3
(186.0)
(25.4)
29.7
0.2
(82.8)
(86.2)
(12.5)
(181.5)
38.7
44.0
83.9
84.4
12.3
10.1
134.9
138.5
82
Severn Trent Plc Annual Report and Accounts 2011
Notes to the group financial statements (continued)
For the year ended 31 March 2011
18 Property, plant and equipment
Cost
At 1 April 2009
Additions (restated see note 3)
Acquisition of businesses
Disposals
Disposal of businesses
Reclassifications
Exchange adjustments
At 1 April 2010
Additions
Disposals
Reclassifications
Exchange adjustments
At 31 March 2011
Depreciation
At 1 April 2009
Charge for the year
Exceptional impairment
Acquisition of businesses
Disposals
Reclassifications
Exchange adjustments
At 1 April 2010
Charge for the year
Disposals
Reclassifications
Exchange adjustments
At 31 March 2011
Net book value
At 31 March 2011
At 31 March 2010
Land and
buildings
£m
Infrastructure
assets
£m
Fixed plant
and equipment
£m
Movable
plant
£m
2,330.0
162.2
0.3
(7.4)
–
(1.4)
(0.4)
2,483.3
94.7
(7.5)
(0.3)
(0.3)
3,942.2
119.8
–
–
–
–
–
4,062.0
130.2
(0.5)
–
–
2,902.1
270.0
0.9
(22.0)
(0.3)
1.0
(1.7)
3,150.0
153.5
(32.0)
(3.9)
(1.4)
60.4
10.4
–
(10.0)
–
(0.1)
(0.7)
60.0
3.8
(6.4)
–
(0.7)
Total
£m
9,234.7
562.4
1.2
(39.4)
(0.3)
(0.5)
(2.8)
9,755.3
382.2
(46.4)
(4.2)
(2.4)
2,569.9
4,191.7
3,266.2
56.7
10,084.5
(725.8)
(51.7)
–
–
7.3
0.9
0.2
(769.1)
(56.3)
7.3
1.9
0.1
(1,040.2)
(25.7)
–
–
–
–
–
(1,065.9)
(27.6)
–
–
–
(1,457.5)
(150.3)
(0.8)
(0.7)
21.7
(1.0)
1.2
(1,587.4)
(160.5)
31.5
–
1.0
(31.1)
(8.4)
–
–
8.0
0.1
0.5
(30.9)
(7.1)
5.0
–
0.5
(3,254.6)
(236.1)
(0.8)
(0.7)
37.0
–
1.9
(3,453.3)
(251.5)
43.8
1.9
1.6
(816.1)
(1,093.5)
(1,715.4)
(32.5)
(3,657.5)
1,753.8
3,098.2
1,550.8
1,714.2
2,996.1
1,562.6
24.2
29.1
6,427.0
6,302.0
The comparative figures have been restated to reflect the impact of IFRIC 18 as set out in note 3. The amounts included for additions
to infrastructure assets and fixed plant and equipment increased by £41.1 million and £0.4 million respectively.
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 2011
At 31 March 2010
Land and
buildings
£m
Infrastructure
assets
£m
Fixed plant
and equipment
£m
Movable plant
£m
–
–
120.1
121.1
96.4
116.4
–
–
Total
£m
216.5
237.5
Property, plant and equipment includes £433.8 million (2010: £459.6 million) in respect of assets in the course of construction for
which no depreciation is charged.
Severn Trent Plc Annual Report and Accounts 2011
83
2011
£m
0.2
0.6
(0.6)
0.2
3.3
(3.3)
–
–
–
2010
£m
–
1.8
(1.5)
0.3
4.7
(4.7)
–
–
–
19 Interests in joint ventures
Group’s share of
Long term assets
Current assets
Current liabilities
Group’s share of
Turnover
Operating costs
Profit before tax
Tax
Profit after tax
As at 31 March 2011 and 2010 the joint ventures had no significant contingent liabilities to which the group was exposed and the
group did not have any significant contingent liabilities in relation to its interests in the joint ventures. The group had no capital
commitments in relation to its interests in the joint ventures.
Particulars of the group’s principal joint venture undertakings at 31 March 2011 were:
Name
Cognica Limited
Jackson Water Partnership
Country of
incorporation
Great Britain
USA
Proportion of
Proportion of
voting power
ownership
50%
50%
70% See below
The partnership agreement for the Jackson Water Partnership requires that certain key decisions require the unanimous consent of
the partners and consequently the partnership has been accounted for as a joint venture.
20 Interests in associates
At 1 April 2009
Share of profits
Other movements
At 31 March 2010
Group’s share of
Total assets
Total liabilities
Turnover
Profit before tax
2011
£m
4.6
0.1
0.1
4.8
2010
£m
4.8
0.1
(0.3)
4.6
26.1
(21.3)
25.6
(21.0)
4.8
0.1
0.1
4.6
8.0
0.1
At 31 March 2011 and 2010 the associate company had no significant contingent liabilities to which the group was exposed. The
group had no capital commitments in relation to its interests in the associate at 31 March 2011 and 2010.
The principal associate at 31 March 2011 was:
Name
Country of operation
and incorporation
Equity interest
Percentage of share
capital held
Nature of business
Servizio Idrico Integrato S.c.p.a.
Italy 16,279,127 of €1
30%
Water and
sewerage
The group has given certain guarantees in respect of the associate’s borrowings. The guarantees are limited to €11.2m
(2010: €11.2m). The group does not expect any liabilities to arise from these arrangements.
s
t
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e
m
e
t
a
t
s
l
a
i
c
n
a
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F
i
84
Severn Trent Plc Annual Report and Accounts 2011
Notes to the group financial statements (continued)
For the year ended 31 March 2011
21 Inventory
Inventory and work in progress
22 Trade and other receivables
Trade receivables
Less provisions for impairment of receivables
Trade receivables net
Receivables from related parties
Other amounts receivable
Prepayments and accrued income
2011
£m
27.1
2010
£m
26.5
2011
£m
286.6
(98.5)
188.1
0.2
40.1
250.1
478.5
2010
£m
288.4
(91.8)
196.6
0.2
42.4
233.6
472.8
The carrying values of trade and other receivables are reasonable approximations of their fair values.
Prepayments and accrued income include £27.1 million (2010: £26.2 million) in respect of amounts due from customers for contract
work and £49.7 million (2010: £43.0 million) which is recoverable after more than one year.
Credit control policies and procedures are determined at the individual business unit level. By far the most significant business unit
of the group is Severn Trent Water Limited, which represents 81% of group turnover and 68% of net trade receivables. Severn Trent
Water has a statutory obligation to provide water and sewerage services to customers within its region. Therefore there is no
concentration of credit risk with respect to its trade receivables and the credit quality of its customer base reflects the wealth and
prosperity of all of the commercial businesses and domestic households within its region. None of the other business units are
individually significant to the group.
Movements on the doubtful debts provision were as follows:
At 1 April
Amounts written off during the year
Charge for bad and doubtful debts
Exchange adjustments
At 31 March
2011
£m
91.8
(28.5)
35.2
–
98.5
2010
£m
93.0
(36.3)
35.2
(0.1)
91.8
Severn Trent Plc Annual Report and Accounts 2011
85
22 Trade and other receivables (continued)
Included in trade receivables are balances with a carrying amount of £146.0 million (2010: £139.2 million) which were past due at
the reporting date but for which no specific provision has been made as the collective impairment recorded against such assets
is considered to be sufficient allowance for the risk of non-collection of such balances.
The aged analysis of past due receivables that were not individually impaired is as follows:
Up to 90 days
91-365 days
1-2 years
2-3 years
More than 3 years
Total
2011
£m
47.7
60.6
25.0
8.4
4.3
2010
£m
52.6
60.4
19.4
5.9
0.9
146.0
139.2
Included in the allowance for doubtful debts are provisions amounting to £24 million (2010: £13.1 million) against specific trade
receivables. The age of the impaired receivables was as follows:
Up to 90 days
91-365 days
1-2 years
2-3 years
More than 3 years
Total
23 Cash and cash equivalents
Cash at bank and in hand
Short term deposits
2011
£m
2.5
18.1
4.1
3.7
4.7
33.1
2011
£m
66.6
248.6
315.2
2010
£m
1.6
15.4
1.2
0.4
3.1
21.7
2010
£m
44.1
183.7
227.8
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
Of the £248.6 million (2010: £183.7 million) of short term bank deposits, £28.4 million (2010: £27.4 million) is held as security deposits
for insurance obligations and is not available for use by the group.
24 Finance leases
Obligations under finance lease are as follows:
Gross obligations under finance leases
Less future finance charges
Present value of lease obligations
2011
£m
316.6
(49.9)
2010
£m
385.5
(84.7)
266.7
300.8
86
Severn Trent Plc Annual Report and Accounts 2011
Notes to the group financial statements (continued)
For the year ended 31 March 2011
24 Finance leases (continued)
A maturity analysis of gross obligations under finance leases is presented in note 32. Net obligations under finance leases fall due
as follows:
Within one year
In the second year
In the third to fifth year inclusive
After more than five years
Included in non-current liabilities
2011
£m
13.5
16.4
84.1
152.7
253.2
266.7
2010
£m
47.3
12.9
57.3
183.3
253.5
300.8
The remaining terms of finance leases ranged from 4 to 21 years at 31 March 2011. Interest terms are set at the inception of the
leases. Leases with capital outstanding of £266.7 million (2010: £159.0 million) bear fixed interest at a weighted average rate of 5.4%
(2010: 5.4%). The lease obligations are secured against the related assets.
There were no contingent rents, escalation clauses or material renewal or purchase options. The terms of the finance leases do not
impose restriction on dividend payments, additional debt or further leasing.
25 Trade and other payables
Current liabilities
Trade payables
Social security and other taxes
Other payables
Accruals and deferred income
Non-current liabilities
Trade payables
Other payables
Deferred income
Accrued expenses
2011
£m
2010
(Restated
see note 3)
£m
31.8
6.8
32.1
320.5
391.2
0.5
2.1
345.9
19.3
367.8
28.4
6.0
34.9
395.1
464.4
–
0.3
280.6
4.0
284.9
The directors consider that the carrying value of trade payables is not materially different from their fair values.
Accruals and deferred income includes nil (2010: nil) in respect of amounts due to customers for contract work.
The comparative figures for accruals and deferred income have been restated by £0.2 million and £41.3 million respectively
(see note 3).
Severn Trent Plc Annual Report and Accounts 2011
87
26 Deferred tax
An analysis of the movements in the major deferred tax liabilities and assets recognised by the group is set out below:
At 1 April 2009
Charge to income
Charge to equity
Transfers
Acquisitions/disposals
Exchange differences
At 1 April 2010
Charge to income
Credit to income arising from rate change
Charge to equity
Credit to equity arising from rate change
Exchange differences
At 31 March 2011
Accelerated
tax
depreciation
£m
Retirement
benefit
obligation
£m
Fair value of
financial
instruments
£m
Tax losses
£m
1,066.0
44.2
–
51.0
0.4
0.2
1,161.8
13.6
(77.5)
–
(5.5)
(0.5)
1,091.9
(65.3)
–
(34.1)
–
–
–
(99.4)
3.2
3.1
13.2
4.0
–
(75.9)
(10.5)
2.7
–
–
–
0.7
(7.1)
0.3
–
–
–
0.4
(6.4)
(44.2)
12.3
(1.6)
–
–
–
(33.5)
1.0
1.2
5.3
1.2
–
(24.8)
Other
£m
2.4
(17.0)
–
(51.0)
–
0.2
(65.4)
(4.0)
5.5
(1.2)
(0.4)
0.1
Total
£m
948.4
42.2
(35.7)
–
0.4
1.1
956.4
14.1
(67.7)
17.3
(0.7)
–
(65.4)
919.4
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 settled after more than 12 months
Deferred tax liability to be settled within 12 months
27 Retirement benefit schemes
a) Defined benefit schemes
(i) Amount included in the balance sheet arising from the group’s obligations under defined benefit schemes
Fair value of scheme assets
Equities
Gilts
Corporate bonds
Property
Cash
Total fair value of assets
Present value of the defined benefit obligations – funded schemes
Present value of the defined benefit obligations – unfunded schemes
Liability recognised in the balance sheet
2011
£m
(14.4)
–
(14.4)
933.8
–
933.8
919.4
2011
£m
798.8
41.3
530.6
95.0
7.7
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
2010
£m
(13.6)
(4.0)
(17.6)
974.0
–
974.0
956.4
2010
£m
745.7
270.8
307.0
61.1
8.4
1,473.4
(1,757.4)
(284.0)
(8.1)
1,393.0
(1,740.3)
(347.3)
(7.6)
(292.1)
(354.9)
88
Severn Trent Plc Annual Report and Accounts 2011
Notes to the group financial statements (continued)
For the year ended 31 March 2011
27 Retirement benefit schemes (continued)
Movements in the fair value of the scheme assets were as follows:
Fair value at 1 April
Expected return on scheme assets
Contributions from the sponsoring companies
Contributions from scheme members
Actuarial gains recognised in the statement of comprehensive income
Benefits paid
Fair value at 31 March
Movements in the present value of the defined benefit obligations were as follows:
Present value at 1 April
Service cost
Interest cost
Curtailment/settlement costs
Contributions from scheme members
Actuarial (gains)/losses recognised in the statement of comprehensive income
Benefits paid
Present value at 31 March
Of which:
Amounts relating to funded schemes
Amounts relating to unfunded schemes
Present value at 31 March
(ii) Amounts recognised in the income statement in respect of these defined benefit schemes
Amounts charged to operating costs
Current service cost
Exceptional curtailment charge
Amounts charged to finance costs
Interest cost
Amounts credited to finance income
Expected return on scheme assets
Total amount charged to the income statement
2011
£m
1,393.0
93.2
40.0
6.1
12.2
(71.1)
2010
£m
1,075.0
71.1
39.6
6.8
270.4
(69.9)
1,473.4
1,393.0
2011
£m
1,747.9
22.7
98.4
–
6.1
(38.5)
(71.1)
2010
£m
1,308.0
14.7
86.1
7.4
6.8
394.8
(69.9)
1,765.5
1,747.9
2011
£m
1,757.4
8.1
2010
£m
1,747.9
–
1,765.5
1,747.9
2011
£m
(22.7)
–
(22.7)
2010
£m
(14.7)
(7.4)
(22.1)
(98.4)
(86.1)
93.2
(27.9)
71.1
(37.1)
The actual return on scheme assets was a gain of £105.4 million (2010: gain of £341.5 million).
Actuarial gains and losses have been reported in the statement of comprehensive income. The cumulative amount of actuarial gains
and losses recognised in the statement of comprehensive income since the adoption of IFRSs is a net loss of £169.4 million
(2010: net loss of £220.1 million).
Severn Trent Plc Annual Report and Accounts 2011
89
27 Retirement benefit schemes (continued)
(iii) Background
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. The trustees are required to act in the best interests of the schemes’ beneficiaries. A formal actuarial valuation of each
scheme is carried out on behalf of the trustees at triennial intervals by an independent professionally qualified actuary. Under the
defined benefit schemes, members are entitled to retirement benefits calculated as a proportion (varying between 1/30 and 1/80 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.
On 11 May 2011, Severn Trent announced it is consulting with its 6,000 plus UK employees on proposed changes to its pension
arrangements, which would see all existing pensions replaced by one new defined contribution scheme. Under the new proposals,
the group would close its defined benefit scheme to future accrual, whilst protecting the benefits already built up by members.
The UK defined benefit schemes and the date of their last formal actuarial valuation are as follows:
Severn Trent Pension scheme (STPS)*
Severn Trent Mirror Image Pension Scheme
* The STPS is by far the largest of the group’s UK defined benefit schemes.
Date of last formal actuarial valuation
31 March 2007
31 March 2009
The group has an obligation to pay pensions 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 £8.1 million (2010: £7.6 million) is included as an
unfunded scheme within the retirement benefit obligation.
(iv) Actuarial assumptions
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
Pension increases in deferment
Discount rate
Long term rate of return on
Equities
Gilts
Corporate bonds
Property
Cash
2011
%
3.50
4.00
3.50
3.50
5.60
7.85
4.35
5.60
6.85
4.25
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
2010
%
3.60
4.10
3.60
3.60
5.70
8.00
4.50
5.70
7.00
4.50
The assumption for price inflation is derived from the difference between the yields on longer term fixed rate gilts and on index-linked
gilts. The discount rate is set by reference to AA rated sterling corporate 17 year bonds.
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. For equities, an equity
risk premium has been added to the gilt rate.
The mortality assumptions adopted are based on mortality tables applicable to the sex and year of birth of individual members, with
allowance for the CMI 2010 future improvements and a 0.5% trend. For men the assumptions are based on 110% of the “SAPS”
S1NMA_L tables and for women on 78% of the S1NFA_L tables. These have been based on a mortality investigation carried out in
conjunction with the valuation of the STPS as at 31 March 2010 on behalf of the Trustees.
The life expectancies implied by the mortality assumptions adopted at each year end are as follows:
Age to which current pensioners aged 65 are expected to live
- men
- women
Age to which future pensioners aged 45 at the balance sheet date are expected to live
- men
- women
Years
Years
87.4
91.0
88.0
91.8
85.3
88.6
86.5
89.6
90
Severn Trent Plc Annual Report and Accounts 2011
Notes to the group financial statements (continued)
For the year ended 31 March 2011
27 Retirement benefit schemes (continued)
(iv) Actuarial assumptions (continued)
The calculation of the scheme liabilities is sensitive to the actuarial assumptions and in particular to the assumptions relating to
discount rate, price inflation and mortality. The following table summarises the estimated impact on scheme liabilities and service cost
resulting from changes to key actuarial assumptions whilst holding all other assumptions constant.
Assumption
Discount rate
Price inflation
Mortality
Change in assumption
Impact on scheme liabilities
Increase/decrease by 0.1%
Increase/decrease by 0.1%
Increase in life expectancy by 1 year
Decrease/increase by £30 million
Increase/decrease by £25 million
Increase by £45 million
(v) Contributions to the schemes
Contribution rates are set in consultation with the trustees for each scheme and each participating employer. The triennial actuarial
valuation of the STPS is currently under discussion with the trustees. It is therefore not possible to determine the level of contributions
that will be payable in the year ending 31 March 2012.
(vi) History of actual and expected performance of pension scheme assets and liabilities
Present value of defined benefit obligations
Fair value of scheme assets
2011
£m
2010
£m
2009
£m
2008
£m
2007
£m
(1,765.5)
1,473.4
(1,747.9)
1,393.0
(1,308.0)
1,075.0
(1,458.3)
1,332.3
(1,499.7)
1,364.6
Deficit in schemes
(292.1)
(354.9)
(233.0)
(126.0)
(135.1)
Difference between actual and expected return on scheme assets
Experience adjustments on scheme liabilities
12.2
105.1
270.4
(329.8)
(125.7)
19.8
(7.9)
(64.3)
(10.6)
(3.7)
b) 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 £4.9 million (2010: £4.5 million) represents contributions payable to these schemes by the
group at rates specified in the rules of the schemes. As at 31 March 2011, all contributions (2010: 100%) due in respect of the current
reporting period had been paid over to the schemes.
28 Provisions
At 1 April 2010
Charged to income statement
Utilisation of provision
Other movements
Exchange differences
At 31 March 2011
Included in
Current liabilities
Non-current liabilities
Restructuring
£m
Insurance
£m
Onerous
contracts
£m
Terminated
operations and
disposals
£m
10.9
2.0
(9.5)
(0.1)
–
3.3
22.1
9.0
(8.0)
–
–
23.1
12.4
(2.3)
(0.8)
(2.4)
–
6.9
5.6
(1.8)
–
–
(0.1)
3.7
Other
£m
2.9
(0.1)
(0.7)
(1.0)
(0.1)
1.0
2011
£m
12.6
25.4
38.0
Total
£m
53.9
6.8
(19.0)
(3.5)
(0.2)
38.0
2010
£m
25.5
28.4
53.9
Severn Trent Plc Annual Report and Accounts 2011
91
28 Provisions (continued)
The restructuring provision reflects costs to be incurred in respect of committed restructuring 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. 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 and the indemnities described in note 35 b).
29 Share capital
Total issued and fully paid share capital
237,142,534 ordinary shares of 9717/19p (2010: 236,585,205)
Changes in share capital were as follows:
Ordinary shares of 97 17/19p
At 1 April 2010
Shares issued under the Employee Sharesave Scheme
Shares issued under the group’s Share Option Scheme
At 31 March 2011
30 Share premium
At 1 April
Share premium arising on issue of shares for Employee Sharesave Scheme
At 31 March
31 Other reserves
2011
£m
2010
£m
232.2
231.6
Number
£m
236,585,205
550,525
6,804
237,142,534
2011
£m
75.9
4.1
80.0
231.6
0.6
–
232.2
2010
£m
71.9
4.0
75.9
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
At 1 April 2009
Total comprehensive loss for the period
At 1 April 2010
Total comprehensive (loss)/income for the period
At 31 March 2011
Capital
redemption
reserve
£m
Infrastructure
reserve
£m
Translation
exchange
reserve
£m
Hedging
reserve
£m
Total other
reserves
£m
156.1
–
156.1
–
156.1
314.2
–
314.2
–
314.2
40.8
(9.1)
31.7
(6.3)
25.4
(42.4)
(4.0)
(46.4)
15.2
(31.2)
468.7
(13.1)
455.6
8.9
464.5
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 interest rate swaps taken directly to equity under the hedge accounting provisions
of IAS 39 and the transition rules of IFRS 1.
92
Severn Trent Plc Annual Report and Accounts 2011
Notes to the group financial statements (continued)
For the year ended 31 March 2011
32 Financial instruments
a) Capital management
It is the group’s policy 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 is funded using a mixture of equity and debt (including fixed rate, index
linked and floating rate).
At 31 March the group’s equity and debt capital comprised the following:
Cash and short term deposits
Bank loans
Other loans
Obligations under finance leases
Cross currency swaps
Net debt
Equity attributable to the company’s equity shareholders
Total capital
b) Categories of financial assets
Fair value through profit and loss
Derivatives that do not qualify for hedge accounting
- cross currency swaps
- interest rate swaps
Derivatives that are designated and effective as hedging instruments carried at fair value
- cross currency swaps
- energy swaps
Available for sale investments carried at fair value
Unquoted shares
Loans and receivables (including cash and cash equivalents)
Trade receivables
Short term deposits
Cash at bank in hand
Total financial assets
Disclosed in the balance sheet as:
Non-current assets
Derivative financial instruments
Available for sale financial assets
Current assets
Derivative financial instruments
Cash and cash equivalents
Trade receivables (note 22)
2011
£m
315.2
(846.8)
(3,230.9)
(266.7)
160.4
(3,868.8)
(1,099.8)
2010
£m
227.8
(689.8)
(3,185.9)
(300.8)
187.3
(3,761.4)
(940.7)
(4,968.6)
(4,702.1)
2011
£m
2010
£m
62.3
17.3
98.1
14.7
192.4
–
19.4
187.3
–
206.7
0.1
0.1
188.1
248.6
66.6
503.3
695.8
188.1
0.1
188.2
4.3
315.2
188.1
507.6
695.8
196.6
183.7
44.1
424.4
631.2
203.8
0.1
203.9
2.9
227.8
196.6
427.3
631.2
Severn Trent Plc Annual Report and Accounts 2011
93
32 Financial instruments (continued)
c) Categories of financial liabilities
Fair value through profit and loss
Derivatives that do not qualify for hedge accounting
- interest rate swaps
- foreign exchange forward contracts
Derivatives that are designated and effective as hedging instruments carried at fair value
- interest rate swaps
- energy swaps
Other financial liabilities
Bank loans
Other loans
Obligations under finance leases
Trade payables
Total financial liabilities
Disclosed in the balance sheet as
Non-current liabilities
Derivative financial instruments
Borrowings
Current liabilities
Derivative financial instruments
Borrowings
Trade payables (note 25)
2011
£m
2010
£m
(104.6)
(0.1)
(125.4)
–
(17.8)
–
(9.5)
(9.8)
(122.5)
(144.7)
(846.8)
(3,230.9)
(266.7)
(32.3)
(689.8)
(3,185.9)
(300.8)
(28.4)
(4,376.7)
(4,204.9)
(4,499.2)
(4,349.6)
(122.4)
(4,320.5)
(140.3)
(3,915.6)
(4,442.9)
(4,055.9)
(0.1)
(23.9)
(32.3)
(4.4)
(260.9)
(28.4)
(56.3)
(293.7)
(4,499.2)
(4,349.6)
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
94
Severn Trent Plc Annual Report and Accounts 2011
Notes to the group financial statements (continued)
For the year ended 31 March 2011
32 Financial instruments (continued)
d) Derivative contracts
Cross currency swaps - fair value hedges
Interest rate swaps - cash flow hedges
Energy swaps - cash flow hedges
Interest rate swaps - derivatives not in a formal hedging relationship
Cross currency swaps - derivatives not in a formal hedging relationship
Foreign exchange forward contracts - derivatives not in a formal hedging
relationship
Total
Less non-current portion
Cross currency swaps - fair value hedges
Interest rate swaps - cash flow hedges
Energy swaps - cash flow hedges
Interest rate swaps - derivatives not in a formal hedging relationship
Cross currency swaps - derivatives not in a formal hedging relationship
Foreign exchange forward contracts - derivatives not in a formal hedging
relationship
Total non-current
Current portion
Asset
£m
98.1
–
14.7
17.3
62.3
2011
Liability
£m
–
(17.8)
–
(104.6)
–
Asset
£m
187.3
–
–
19.4
–
2010
Liability
£m
–
(9.5)
(9.8)
(125.4)
–
–
(0.1)
–
–
192.4
(122.5)
206.7
(144.7)
95.6
–
12.9
17.3
62.3
–
(17.8)
–
(104.5)
–
184.5
–
–
19.3
–
–
(9.5)
(9.7)
(121.1)
–
–
(0.1)
–
–
188.1
(122.4)
203.8
(140.3)
4.3
(0.1)
2.9
(4.4)
e) Fair values of financial instruments
Except as disclosed below, the directors consider that the carrying amount of financial assets and liabilities recorded in the financial
statements approximate their fair values:
Bank loans - amortised cost
Other loans
Obligations under finance leases - amortised cost
31 March 2011
31 March 2010
Book value
£m
(846.8)
(3,230.9)
(266.7)
Fair value
£m
(836.8)
(3,597.6)
(237.4)
Book value
£m
(689.8)
(3,185.9)
(300.8)
Fair value
£m
(679.1)
(3,328.5)
(260.3)
(4,344.4)
(4,671.8)
(4,176.5)
(4,267.9)
Discounted future cash flows are used to determine fair values for debt. Discount rates are derived from yield curves based on quoted
interest rates and are adjusted for the group’s credit risk.
Fair value measurements recognised in the balance sheet
The following table provides an analysis of financial instruments that are measured subsequent to initial recognition at fair value,
grouped into Levels 1 to 3 based on the degree to which the fair value is observable:
Level 1 fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets and
liabilities;
Level 2 fair value measurements are those derived from inputs other than quoted prices included within Level 1 that are observable
for the asset or liability, either directly or indirectly; and
Level 3 fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not
based on observable market data.
The fair value of interest rate swaps is calculated as the present value of the estimated future cash flows estimated and discounted
based on the application of yield curves derived from quoted interest rates.
Cross currency swaps and forward exchange contracts are valued by reference to quoted forward exchange rates at the balance
sheet date and yield curves derived from quoted interest rates matching the maturities of the contracts.
Severn Trent Plc Annual Report and Accounts 2011
95
32 Financial instruments (continued)
e) Fair values of financial instruments (continued)
2011
Derivative financial assets
Cross currency swaps - fair value hedges
Cross currency swaps - derivatives not in designated hedging relationships
Interest rate swaps - derivatives not in designated hedging relationships
Energy swaps - cash flow hedges
Derivative financial liabilities
Interest rate swaps - cash flow hedges
Interest rate swaps - derivatives not in designated hedging relationships
Foreign exchange forward contracts
2010
Derivative financial assets
Cross currency swaps - fair value hedges
Interest rate swaps - derivatives not in designated hedging relationships
Derivative financial liabilities
Interest rate swaps - cash flow hedges
Interest rate swaps - derivatives not in designated hedging relationships
Energy swaps - cash flow hedges
Level 1
£m
Level 2
£m
Level 3
£m
–
–
–
–
–
–
–
–
–
–
Level 1
£m
–
–
–
–
–
–
–
–
98.1
62.3
17.3
14.7
192.4
(17.8)
(104.6)
(0.1)
(122.5)
69.9
Level 2
£m
187.3
19.4
206.7
(9.5)
(125.4)
(9.8)
(144.7)
62.0
–
–
–
–
–
–
–
–
–
–
Level 3
£m
–
–
–
–
–
–
–
–
Total
£m
98.1
62.3
17.3
14.7
192.4
(17.8)
(104.6)
(0.1)
(122.5)
69.9
Total
£m
187.3
19.4
206.7
(9.5)
(125.4)
(9.8)
(144.7)
62.0
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
f) Financial risk factors
The group’s activities expose it to a variety of financial risks: market risk (including currency and interest rate risk) credit risk, liquidity
risk and inflation risk. The group’s overall risk management programme addresses the unpredictability of financial markets and seeks
to reduce potential adverse effects on the group’s financial performance or position.
Financial risks are managed 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 exchange rate risk,
interest rate risk, credit risk, the use of derivative and non-derivative financial instruments. Derivative financial instruments are used to
hedge exposure to changes in exchange rates and interest rates. The group’s policy is that derivative financial instruments are not
held for trading.
96
Severn Trent Plc Annual Report and Accounts 2011
Notes to the group financial statements (continued)
For the year ended 31 March 2011
32 Financial instruments (continued)
f) Financial risk factors (continued)
(i) Market risk
The principal market risk that the group is exposed to is fluctuations in interest rates. Since substantially all of the group’s profits and
net assets arise from Severn Trent Water, which has very limited and indirect exposure to changes in exchange rates, the sensitivity
of the group’s results to changes in exchange rates is not material.
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 45-90%
of its net debt in fixed rate instruments. At 31 March 2011 75.9% of the group’s net debt was fixed (2010: 82.4%).
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, 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 debt within the group which is denominated as floating rate, but do not
achieve hedge accounting under the strict criteria of IAS 39. This has led to a £15.7 million charge (2010: credit of £41.9 million) in
the income statement.
Some of the group’s debt is index-linked, that is its cost is linked to changes in the Retail Price Index (RPI). This debt provides an
economic hedge for Severn Trent Water’s revenues and Regulatory Capital Value that are also RPI linked under its regulatory regime.
Financial liabilities analysed by interest rate after taking account of various interest rate swaps entered into by the group
2011
Bank loans and overdrafts
Other loans
Finance leases
Other financial liabilities
Impact of interest rate swaps not matched against specific debt
instruments
Non-interest
bearing
liabilities Floating rate
£m
£m
Fixed rate
£m
Index-linked
£m
Total
£m
–
(1.2)
–
(32.3)
(33.5)
(544.1)
(263.5)
–
–
(150.0)
(2,014.7)
(266.7)
–
(152.7)
(951.5)
–
–
(846.8)
(3,230.9)
(266.7)
(32.3)
(807.6)
(2,431.4)
(1,104.2)
(4,376.7)
–
462.3
(462.3)
–
–
(33.5)
(345.3)
(2,893.7)
(1,104.2)
(4,376.7)
Weighted average interest rate
Weighted average period for which interest is fixed (years)
5.96%
11.7
2010
Bank loans and overdrafts
Other loans
Finance leases
Other financial liabilities
Impact of interest rate swaps not matched against specific debt
instruments
Non-interest
bearing
liabilities
£m
–
–
–
(28.5)
(28.5)
Floating rate
£m
Fixed rate
£m
Index-linked
£m
(544.2)
(247.5)
(141.8)
–
–
(2,029.9)
(159.0)
–
(145.6)
(908.5)
–
–
Total
£m
(689.8)
(3,185.9)
(300.8)
(28.5)
(933.5)
(2,188.9)
(1,054.1)
(4,205.0)
–
835.0
(835.0)
–
–
(28.5)
(98.5)
(3,023.9)
(1,054.1)
(4,205.0)
Weighted average interest rate
Weighted average period for which interest is fixed (years)
5.88%
10.9
Severn Trent Plc Annual Report and Accounts 2011
97
32 Financial instruments (continued)
f) Financial risk factors (continued)
Financial assets analysed by interest rates
2011
Available for sale financial assets
Loans and receivables
Cash and cash equivalents
2010
Available for sale financial assets
Loans and receivables
Cash and cash equivalents
Non-interest
bearing
liabilities Floating rate
£m
£m
Fixed rate
£m
Index-linked
£m
0.1
188.1
–
188.2
–
–
315.2
315.2
–
–
–
–
–
–
–
–
Non-interest
bearing
liabilities
£m
0.1
196.6
–
196.7
Floating rate
£m
Fixed rate
£m
Index-linked
£m
–
–
227.8
227.8
–
–
–
–
–
–
–
–
Interest rate sensitivity analysis
The sensitivity after tax of the group’s profits, cash flow and equity, including the impact on derivative financial instruments, to
changes in interest rates at 31 March is as follows:
Profit or loss
Cash flow
Equity
+1.0%
£m
46.1
0.1
83.3
2011
-1.0%
£m
(55.3)
(0.1)
(98.6)
+1.0%
£m
(38.7)
19.4
(33.7)
Inflation rate sensitivity analysis
The sensitivity of the group’s profit and equity to changes in inflation at 31 March is set out in the following table. This analysis
excludes any impact on Severn Trent Water’s revenues and Regulated Capital Value.
Profit or loss
Equity
+1.0%
£m
(8.0)
(8.0)
2011
-1.0%
£m
8.0
8.0
+1.0%
£m
(7.6)
(7.6)
Total
£m
0.1
188.1
315.2
503.4
Total
£m
0.1
196.6
227.8
424.5
2010
-1.0%
£m
47.9
(15.4)
43.5
2010
-1.0%
£m
7.6
7.6
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
Exchange rate 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. However, since substantially all of the group’s profits and net assets arise from
Severn Trent Water which has very limited and indirect exposure to changes in exchange rates, the sensitivity of the group’s results
to changes in exchange rates is not material.
The group has a significant value of foreign currency debt, primarily in yen and euros. The group’s policy is to manage the foreign
exchange risk arising from foreign currency debt by entering into cross currency swaps, or forward contracts with external parties.
At 31 March 2011 the group had cross currency swaps or forward contracts in place for all foreign currency denominated debt
(2010: 100%).
98
Severn Trent Plc Annual Report and Accounts 2011
Notes to the group financial statements (continued)
For the year ended 31 March 2011
32 Financial instruments (continued)
f) Financial risk factors (continued)
Monetary assets and liabilities by currency, excluding functional currency
Certain of the group’s subsidiaries operate in markets where the local currency is different from the functional currency of the
operation. Exchange risks relating to such operations are managed centrally by Group Treasury through forward exchange contracts
to buy or sell currency. External foreign exchange contracts are designated at group level as hedges of foreign exchange risk on
specific assets, liabilities or future transactions on a gross basis. The net amount of foreign currency assets and liabilities and the
forward contracts that have been taken out to hedge the exchange risks on these assets and liabilities and on future committed
transactions are summarised below.
2011
Functional currency of operation
Sterling
Total
2010
Functional currency of operation
Sterling
Total
US Dollar
£m
–
–
US Dollar
£m
0.6
0.6
Euro
£m
0.1
0.1
Euro
£m
0.1
0.1
Other
£m
0.1
0.1
Other
£m
0.1
0.1
Total
£m
0.2
0.2
Total
£m
0.8
0.8
The group’s borrowings are denominated in the following currencies after taking account of cross currency swaps:
Sterling
Euro
2011
£m
2010
£m
(4,343.1)
(1.3)
(4,175.3)
(1.2)
(4,344.4)
(4,176.5)
The euro denominated borrowings relate to operations in which the euro is the functional currency.
(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 supply domestic customers even in cases where bills are not paid. Amounts provided against accounts receivable and movements
on the provision during the year are disclosed in note 22.
For financing purpose, 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.
Credit risk analysis
At 31 March the credit limits and the amounts held on short term deposits were as follows:
AAA
Double A range
Single A range
Credit limit
Amount deposited
2011
£m
300.0
450.0
525.0
2010
£m
300.0
450.0
525.0
2011
£m
54.8
81.2
112.6
2010
£m
35.5
89.6
58.6
1,275.0
1,275.0
248.6
183.7
The amounts of derivative assets analysed by credit ratings of counterparties were as follows:
Rating
Double A range
Single A range
Financial assets
2010
£m
90.8
115.9
2011
£m
100.9
91.5
192.4
206.7
Severn Trent Plc Annual Report and Accounts 2011
99
32 Financial instruments (continued)
f) Financial risk factors (continued)
(iii) Liquidity risk
Prudent liquidity management implies maintaining sufficient cash balances and the availability of funding through an adequate
amount of committed facilities and the ability to close out market positions. Group Treasury manages liquidity and flexibility in funding
by monitoring forecast and actual cash flows and the maturity profile of financial assets and liabilities and by keeping committed credit
lines available.
At the balance sheet date the group had committed undrawn borrowing facilities expiring as follows:
Within one year
Between one and two years
Between two and five years
2011
£m
41.7
458.3
–
500.0
2010
£m
–
191.7
458.3
650.0
Non-derivative financial instruments analysed by maturity date
The following tables detail the group’s remaining contractual maturity for its non-derivative net financial liabilities. The information
presented is based on the earliest date on which the group can be required to pay and represents the undiscounted cash flows
including principal and interest.
within one year
£m
between one
and two years
£m
between two
and five years
£m
between five
and ten years
£m
between ten
and twenty
years
£m
after more
than twenty
years
£m
2011
Financial liabilities
Bank loans
Other loans
Finance leases
Other financial liabilities
Financial assets
Trade receivables
Cash and short term deposits
2010
Financial liabilities
Bank loans
Other loans
Finance leases
Other financial liabilities
Financial assets
Trade receivables
Cash and short term deposits
(19.7)
(135.8)
(19.7)
(32.3)
(207.5)
188.1
315.2
295.8
(206.0)
(142.4)
(56.2)
(28.4)
(433.0)
196.6
227.8
(26.8)
(201.3)
(25.7)
–
(431.5)
(1,264.3)
(109.5)
–
(507.7)
(808.8)
(47.4)
–
(39.4)
(1,650.1)
(114.3)
–
–
(5,770.3)
–
–
(253.8)
(1,805.3)
(1,363.9)
(1,803.8)
(5,770.3)
(11,204.6)
–
–
–
–
–
–
–
–
–
–
188.1
315.2
(253.8)
(1,805.3)
(1,363.9)
(1,803.8)
(5,770.3)
(10,701.3)
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
within one year
£m
between one
and two years
£m
between two
and five years
£m
between five
and ten years
£m
between ten
and twenty
years
£m
after more
than twenty
years
£m
(10.4)
(142.2)
(21.2)
–
(212.7)
(743.7)
(78.8)
–
(341.9)
(1,444.8)
(101.5)
–
(43.1)
(1,680.0)
(95.8)
–
–
(5,320.7)
(32.0)
–
(173.8)
(1,035.2)
(1,888.2)
(1,818.9)
(5,352.7)
(10,701.8)
–
–
–
–
–
–
–
–
–
–
196.6
227.8
(8.6)
(173.8)
(1,035.2)
(1,888.2)
(1,818.9)
(5,352.7)
(10,277.4)
Total
£m
(1,025.1)
(9,830.6)
(316.6)
(32.3)
Total
£m
(814.1)
(9,473.8)
(385.5)
(28.4)
100
Severn Trent Plc Annual Report and Accounts 2011
Notes to the group financial statements (continued)
For the year ended 31 March 2011
32 Financial instruments (continued)
f) Financial risk factors (continued)
Other loans include index-linked debt with maturities up to 56 years. The principal is revalued at fixed intervals and is linked to
movements in the retail price index. Interest payments are made biannually based on the revalued principal. The principal repayment
equals the revalued amount at maturity. The calculations above are based on forward inflation rates at the balance sheet date.
Derivative financial instruments analysed by maturity date
The following table details the group’s liquidity analysis for its derivative financial instruments. The tables are based on the
undiscounted net cash inflows/(outflows) on the derivative financial instruments that settle on a net basis and the undiscounted gross
inflows and (outflows) on those derivatives that require gross settlement. When the amount payable or receivable is not fixed, the
amount disclosed has been determined by reference to the projected interest and foreign currency rates derived from the forward
curves existing at the balance sheet date. Actual amounts may be significantly different from those indicated below.
2011
Instruments settled net
Interest rate swaps
Energy swaps
Instruments settled gross
Cross currency swaps
- cash receipts
- cash payments
Net cash flow
Total
Within one year
£m
Between one
and two years
£m
Between two
and five years
£m
Between five
and ten years
£m
Between ten
and twenty
years
£m
Greater than
twenty years
£m
Assets total
£m
Financial
assets
falling due
7.1
1.9
48.3
(31.6)
16.7
25.7
5.1
9.1
6.2
4.8
131.4
(99.2)
32.2
46.4
891.9
(759.8)
132.1
143.1
–
–
2.4
(2.2)
0.2
0.2
–
–
27.5
(12.2)
15.3
15.3
–
–
–
–
–
–
18.4
15.8
1,101.5
(905.0)
196.5
230.7
Financial
liabilities
falling due
2011
Instruments settled net
Interest rate swaps
Total
Within one year
£m
Between one
and two years
£m
Between two
and five years
£m
Between five
and ten years
£m
Between ten
and twenty
years
£m
Greater than
twenty years Liabilities total
£m
£m
(30.2)
(30.2)
(23.4)
(23.4)
(42.8)
(42.8)
(15.2)
(15.2)
(6.9)
(6.9)
0.8
0.8
(117.7)
(117.7)
Severn Trent Plc Annual Report and Accounts 2011
101
32 Financial instruments (continued)
f) Financial risk factors (continued)
2010
Instruments settled net
Interest rate swaps
Instruments settled gross
Cross currency swaps
- cash receipts
- cash payments
Net cash flow
Total
Within one year
£m
Between one
and two years
£m
Between two
and five years
£m
Between five
and ten years
£m
Between ten
and twenty
years
£m
Greater than
twenty years
£m
Assets total
£m
8.0
6.0
5.5
0.3
–
–
19.8
Financial
assets
falling due
51.9
(33.0)
18.9
26.9
48.2
(43.3)
4.9
10.9
303.7
(244.2)
59.5
65.0
753.7
(630.9)
122.8
123.1
56.7
(38.7)
18.0
18.0
128.9
(60.7)
68.2
68.2
1,343.1
(1,050.8)
292.3
312.1
Financial
liabilities
falling due
2010
Instruments settled net
Interest rate swaps
Energy swaps
Total
Within one year
£m
Between one
and two years
£m
Between two
and five years
£m
Between five
and ten years
£m
Between ten
and twenty
years
£m
Greater than
twenty years
£m
Liabilities total
£m
(44.5)
(0.1)
(44.6)
(30.4)
(0.6)
(31.0)
(45.4)
(8.7)
(54.1)
(26.1)
(1.0)
(27.1)
(33.4)
–
(33.4)
(15.8)
–
(15.8)
(195.6)
(10.4)
(206.0)
g) Hedge accounting
The group uses derivative financial instruments to hedge exposures to changes in exchange rates and interest rates. Hedge
accounting is adopted for such instruments where the criteria set out in IAS 39 are met.
(i) Fair value hedges
The group raises debt denominated in currencies other than sterling – principally Japanese Yen and Euro. Cross currency swaps are
entered into at the time that the debt is drawn down to swap the proceeds into sterling debt bearing interest based on LIBOR in order
to mitigate the group’s exposure to exchange rate fluctuations. The terms of the receivable leg of the swap closely match the terms
of the underlying debt hence the swaps are expected to be effective hedges. At the year end the amounts of cross currency swaps
designated as fair value hedges were as follows:
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
US dollar
Euro
Yen
Czech krona
Notional principal amount
Fair value
2011
£m
27.0
11.4
103.3
47.2
188.9
2010
£m
27.0
548.0
161.0
47.2
783.2
2011
£m
6.6
6.0
60.8
24.7
98.1
2010
£m
7.7
90.2
66.9
22.5
187.3
102
Severn Trent Plc Annual Report and Accounts 2011
Notes to the group financial statements (continued)
For the year ended 31 March 2011
32 Financial instruments (continued)
g) Hedge accounting (continued)
(ii) Cash flow hedges
The group has entered into interest rate swaps under which it has agreed to exchange the difference between fixed and floating
interest rate amounts calculated on agreed notional principal amounts. Such contracts enable the group to mitigate the risk of
changing interest rates on future cash flow exposures arising from issued variable rate debt. The group also entered into a number of
interest rate contracts with future start dates during the AMP5 regulatory period. Such contracts enable the group to mitigate the risk
of changing interest rates on debt which is highly probable to be issued over the AMP5 period to fund Severn Trent Water’s capital
programme and have been accounted for as cash flow hedges. The fair value of interest rate swaps at the balance sheet date is
determined by discounting the future cash flows using the yield curve prevailing at the balance sheet date and the credit risk inherent
in the contract.
The interest rate swaps primarily settle net on a biannual basis. The floating rate on the interest rate swaps is six months LIBOR.
Details of interest rate swaps that have been accounted for as cash flow hedges are summarised below.
Period to maturity
Less than 1 year
1-2 years
2-5 years
5-10 years
10-20 years
More than 20 years
Average
contract fixed
interest rate
2011
%
–
–
–
–
5.07%
–
5.07%
2010
%
–
–
–
–
5.07%
–
5.07%
2011
£m
–
–
–
–
493.0
–
493.0
Notional
principal
amount
2010
£m
–
–
–
–
493.0
–
493.0
2011
£m
–
–
–
–
(17.8)
–
(17.8)
Fair value
2010
£m
–
–
–
–
(9.5)
–
(9.5)
The group has entered into a series of energy swaps under which it has agreed to exchange the difference between fixed and market
prices of electricity at six-monthly intervals up to March 2015.
Details of energy swaps that have been accounted for as cash flow hedges are summarised below:
Period to maturity
Less than 1 year
1-2 years
2-5 years
Average
contract
price
2010
£/MWh
35.6
43.9
52.4
Notional
contracted
amount
2010
MWh
65,520
196,560
1,275,456
2011
MWh
131,040
428,064
1,087,632
44.0
1,646,736
1,537,536
2011
£/MWh
42.0
45.1
54.7
47.3
Changes in the amounts deferred in equity during the period relating to cash flow hedges were as follows:
Fair value (losses)/gains deferred in equity at the start of the period
Fair value gains/(losses) recognised in equity in the period
Fair value gains transferred to finance costs in the period
Fair value gains/(losses) deferred in equity at the end of the period
2011
£m
1.8
6.2
6.7
14.7
2011
£m
(2.1)
16.0
4.5
18.4
Fair value
2010
£m
(0.1)
(1.0)
(8.7)
(9.8)
2010
£m
3.5
(13.2)
7.6
(2.1)
Severn Trent Plc Annual Report and Accounts 2011
103
32 Financial instruments (continued)
g) Hedge accounting (continued)
Details of interest rate swaps that have not been accounted for as cash flow hedges are summarised below:
Period to maturity
Less than 1 year
1-2 years
2-5 years
5-10 years
10-20 years
20-30 years
Average contract fixed
interest rate
Notional principal amount
Fair value
2011
%
–
–
6.32
–
5.41
5.22
5.60
2010
%
5.11
–
–
6.32
–
5.32
5.60
2011
£m
–
–
225.0
–
237.3
200.0
2010
£m
355.0
–
–
225.0
–
455.0
2011
£m
–
–
(33.0)
–
(41.2)
(30.4)
2010
£m
(4.2)
–
–
(38.6)
–
(82.6)
662.3
1,035.0
(104.6)
(125.4)
Contracts where the group receives fixed interest are summarised below:
Period to maturity
Less than 1 year
1-2 years
2-5 years
5-10 years
10-20 years
20-30 years
Average contract fixed
interest rate
Notional principal amount
Fair value
2011
%
–
–
5.18
–
–
–
5.18
2010
%
–
–
–
5.18
–
–
5.18
2011
£m
–
–
200.0
–
–
–
200.0
2010
£m
–
–
–
200.0
–
–
200.0
2011
£m
–
–
17.3
–
–
–
17.3
2010
£m
–
–
–
19.4
–
–
19.4
33 Share based payments
The group operates a number of share based remuneration schemes for employees. During the period, the group recognised total
expenses of £4.6 million (2010: £5.1 million) related to equity settled share based payment transactions.
The weighted average share price during the period was £13.40 (2010: £10.50).
At 31 March 2011 the number of shares that were exercisable under each of the share based remuneration schemes was as follows:
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
Long Term Incentive Plan
Employee Sharesave Scheme
Share Incentive Plan
Approved Share Option Scheme
Unapproved Share Option Scheme
Share Matching Plan
2011
2010
Number of
exercisable
options/awards
Weighted
average
exercise price
Number of
exercisable
options/awards
Weighted
average
exercise price
–
369,304
–
–
22,984
–
392,288
–
937p
–
–
729p
–
–
525,098
–
3,125
35,259
–
563,482
–
870p
–
720p
728p
–
a) Long Term Incentive Plans (LTIPs)
Under the LTIPs conditional awards of shares may be made to executive directors and senior staff. Awards are subject to
performance conditions and continued employment throughout the vesting period. Awards have been made on different bases
to Severn Trent Plc and Severn Trent Water employees (the LTIP) and to Severn Trent Services employees (the Services LTIP).
During the year awards over 141,111 shares (2010: 163,421 shares) with a fair value of £7.91 (2010: £5.41) were made to 20
employees (2010: 21 employees) under the LTIP. The LTIP awards are subject to total shareholder return over three years relative
to the companies ranked 51 – 150 by market capitalisation in the FTSE index (excluding investment trusts).
The Services LTIP awards vest in three equal tranches which are subject to achievement of turnover and profit targets in the years
ending 31 March 2011, 2012 and 2013. No awards have been made to employees under the Services LTIP during the year (2010: nil).
104
Severn Trent Plc Annual Report and Accounts 2011
Notes to the group financial statements (continued)
For the year ended 31 March 2011
33 Share based payments (continued)
a) Long term incentive plans (continued)
Details of changes in the number of awards outstanding during the year are set out below:
Outstanding at 1 April 2009
Granted during the year
Cancelled during the year
Lapsed during the year
Outstanding at 1 April 2010
Granted during the year
Vested during the year
Cancelled during the year
Lapsed during the year
Outstanding at 31 March 2011
Details of LTIP awards outstanding at 31 March were as follows:
Date of grant
July 2007
July 2008
July 2008
July 2008
July 2009
July 2010
Number of awards
LTIP Services LTIP
582,182
163,421
(17,131)
(334,989)
393,483
141,111
(71,849)
(10,671)
(49,373)
118,489
–
(8,049)
–
110,440
–
–
(9,053)
–
402,701
101,387
Number of shares
2011
2010
–
151,322
33,671
33,109
151,786
134,200
121,223
153,528
36,813
36,813
155,546
–
504,088
503,923
Normal date
of vesting
2010
2011
2012
2013
2012
2013
The fair value of the LTIP awards made during the year was calculated using the Monte Carlo method using the principal assumptions
set out below:
Assumptions
Expected volatility
Severn Trent group
Comparator group
Correlation between Severn Trent Plc and comparator group
Proportion of employees expected to cease employment before vesting
2011
2010
27%
47%
32%
0%
25%
45%
30%
0%
Severn Trent share price volatility is based on observations of historical weekly volatility over a period prior to grant commensurate
with the remaining term of the performance period for each award.
For the July 2010 LTIP award and the July 2009 award the comparator group is the group of companies ranked 51 – 150 in the
FTSE index excluding investment trusts.
The volatility of the comparator companies, the correlation between Severn Trent and the comparator companies, and performance
over the portion of the performance period that had elapsed at the date of grant was taken into account when modelling the TSR
performance condition.
The share price at the grant date was £12.28 (2010: £11.34). The vesting period commences before the grant date. Performance in
the vesting period prior to the grant date is taken into account in determining the fair value of the award.
Dividends ‘paid’ on shares during the vesting period are accumulated during the vesting period and released subject to achievement
of the performance condition in the same manner as the underlying shares. As a result a dividend yield assumption is not required.
The 2009 Services LTIP is based entirely on non-market conditions and hence market assumptions are not required to determine the
fair value of the award. For 2011 it has been assumed that performance against the Services LTIP non-market conditions will be 0.3%
Details of the basis of the LTIP schemes are set out in the remuneration report on page 48.
Severn Trent Plc Annual Report and Accounts 2011
105
33 Share based payments (continued)
b) Employee Sharesave Scheme
Under the terms of the Sharesave Scheme, the board may grant the right to purchase ordinary shares in the company to those
employees who have entered into an HMRC approved Save As You Earn contract for a period of three or five years.
Details of changes in the number of options outstanding during the year are set out below:
Outstanding at 1 April 2009
Granted during the year
Forfeited during the year
Cancelled during the year
Exercised during the year
Expired during the year
Outstanding at 1 April 2010
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
3,724,812
992,888
(95,659)
(320,240)
(639,121)
(25,612)
3,637,068
366,272
(146,468)
(92,030)
(550,525)
(86,132)
877p
808p
1,007p
981p
715p
953p
899p
1,137p
895p
875p
841p
1,062p
Outstanding at 31 March 2011
3,128,185
904p
Sharesave options outstanding at 31 March were as follows:
Date of grant
January 2003
January 2004
January 2005
January 2006
January 2007
January 2008
January 2009
January 2010
January 2011
Normal date of exercise
Option price
2011
2010
Number of share options
2010
2011
2010 or 2012
2011 or 2013
2010, 2012 or 2014
2011 or 2013
2012 or 2014
2013 or 2015
2014 or 2016
536p
592p
759p
823p
1,172p
1,221p
862p
806p
1,137p
–
45,820
54,324
212,941
93,243
218,048
1,247,781
890,670
365,358
73,017
53,862
332,581
239,385
286,787
252,683
1,411,657
987,096
–
3,128,185
3,637,068
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The fair value of the Sharesave options granted during the year was calculated using the Black Scholes model. The principal
assumptions were as follows:
Assumptions
3 year scheme 5 year scheme
3 year scheme
5 year scheme
2011
2010
Expected volatility
Risk free rate
Expected dividend yield
Proportion of employees expected to cease employment before vesting
Fair value per share - Sharesave
27%
1.63%
4.4%
15%
348p
27%
2.24%
4.4%
17%
359p
25%
1.80%
4.0%
15%
264p
25%
2.78%
4.0%
17%
280p
Expected volatility is based on historical weekly volatility over a three year period. Weekly volatility in the observed data was
between 25-31%.
The risk free rate is derived from yields at the grant date of gilts of similar duration to the Sharesave contracts.
The proportion of employees expected to cease employment before vesting is based on historically observed data.
106
Severn Trent Plc Annual Report and Accounts 2011
Notes to the group financial statements (continued)
For the year ended 31 March 2011
33 Share based payments (continued)
b) Employee Sharesave Scheme (continued)
The following data was used in calculating the fair value of the Sharesave options:
Share price at grant date
Vesting period (years)
Option life (years)
3 year scheme 5 year scheme
3 year scheme
5 year scheme
2011
2010
1,486p
3
3.5
1,486p
5
5.5
1,080p
3
3.5
1,080p
5
5.5
The number of employees entering into Sharesave contracts and the number of options granted during the year were as follows:
Number of employees
Number of options granted
3 year scheme 5 year scheme
3 year scheme 5 year scheme
2011
2010
1,073
223,291
448
142,981
1,602
586,381
563
406,507
c) Share Incentive Plan (SIP)
Under the SIP the board may grant share awards to employees of group companies. During the year the board has announced that
it will make awards under the SIP based on performance against Severn Trent Water’s targets for its Key Performance Indicators.
Eligible employees will be entitled to shares to a maximum value of £750. It is expected that these awards will be made in August
2011. SIP shares vest with the employee on the date of grant.
d) Approved Share Option Scheme
Under the terms of the Share Option Scheme (formerly Executive Share Option Scheme), the board has granted directors and other
executives options to purchase ordinary shares in the company. No awards have been made under this scheme since July 2003.
Outstanding 1 April 2009
Exercised during the year
Outstanding 1 April 2010
Exercised during the year
Outstanding 31 March 2011
Number of
share options
Weighted
average
exercise price
4,759
(1,634)
3,125
(3,125)
–
724p
731p
720p
720p
–
Options outstanding under this scheme at 31 March were as follows:
Date of grant
July 2002
Normal date of
exercise
Option price
2005-2012
720p
Number of shares
2011
–
2010
3,125
e) Unapproved Share Option Scheme
The board has granted a number of executives options to purchase ordinary shares in the company under an unapproved share
option scheme. No awards have been made under this scheme since July 2003.
Details of movements in the share awards outstanding during the year are as follows:
Outstanding at 1 April 2009
Exercised during the year
Outstanding at 1 April 2010
Lapsed during the year
Exercised during the year
Outstanding at 31 March 2011
Number of
share options
Weighted
average
exercise price
40,763
(5,504)
35,259
(8,596)
(3,679)
22,984
728p
728p
728p
729p
720p
729p
Severn Trent Plc Annual Report and Accounts 2011
107
33 Share based payments (continued)
e) Unapproved Share Option Scheme (continued)
Options outstanding under this scheme at 31 March were as follows:
Date of grant
June 2001
June 2002
Number of shares
Normal date of
exercise
2004-2011
2005-2012
Option price
2011
2010
738p
720p
11,844
11,140
16,274
18,985
22,984
35,259
f) Share Matching Plan (SMP)
Under the Share Matching Plan members of the Executive Committee receive matching share awards over those shares which have
been acquired under the deferred share component of the annual bonus scheme. Matching shares may be awarded at a maximum
ratio of one matching share for every one deferred share and are subject to a three year vesting period. During the year matching
shares were awarded at a ratio of 0.5 to 1.
Matching shares are subject to total shareholder return over three years measured relative to the companies ranked 51-150 by market
capitalisation in the FTSE Index (excluding investment trusts). This replicates the LTIP performance condition for the July 2010 award.
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 Remuneration
Committee determines that the performance conditions have been met provided that the participant remains in employment at the
end of the performance period.
During the year 25,187 matching shares with a fair value of £6.79 were awarded to 11 employees (2010: nil).
Outstanding at 1 April 2010
Granted during the year
Exercised during the year
Outstanding at 31 March 2011
Number of
share options
–
25,187
–
25,187
Details of share matching awards outstanding at 31 March 2011 were as follows:
Date of grant
May 2010
Number of shares
Normal date of
vesting
2011
June 2013
25,187
2010
–
The fair value of the share matching awards made during the year was calculated using the Monte Carlo method using the principal
assumptions set out below:
Assumptions
Expected volatility
Severn Trent group
Comparator group
Correlation between Severn Trent Plc and comparator group
Proportion of employees expected to cease employment before vesting
2011
27%
46%
33%
0%
Share price volatility is based on observations over a historical period prior to the date of grant, commensurate to the expected term
of the performance period.
The comparator group is the companies ranked 51-150 in the FTSE Index.
The share price at the grant date was £11.26.
Dividends paid on the shares during the vesting period are accumulated during the vesting period and released subject to the
achievement of the performance condition, in the same manner as the underlying shares. As a result a dividend yield assumption
is not required.
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Notes to the group financial statements (continued)
For the year ended 31 March 2011
34 Cash flow statement
a) Reconciliation of operating profit to operating cash flows
Profit before interest and tax
Depreciation of property, plant and equipment
Amortisation of intangible assets
Exceptional impairment and depreciation
Pension service cost
Curtailment cost
Pension contributions
Share based payments charge
Profit on sale of property, plant and equipment
Loss on disposal of businesses
Deferred income movement
Provisions charged to the income statement
Utilisation of provisions for liabilities and charges
(Increase)/decrease in stocks
Increase in debtors
Increase/(decrease) in creditors
Cash generated from operations
Tax paid
2011
£m
497.7
251.5
25.4
–
22.7
–
(40.0)
4.6
(2.6)
–
(8.4)
6.8
(19.0)
(0.5)
(7.5)
22.3
753.0
(32.4)
2010
£m
507.4
236.1
25.2
6.6
14.7
7.4
(39.6)
5.1
(4.5)
1.7
(7.4)
24.2
(10.5)
3.9
(26.4)
(35.9)
708.0
(53.8)
Net cash generated from operating activities
720.6
654.2
b) Non-cash transactions
No additions to property, plant and equipment during the year were financed by new finance leases (2010: nil).
c) Exceptional cash flows
The following cash flows arose from items classified as exceptional in the income statement:
Restructuring costs
Regulatory matters
Fines and penalties
Loss on disposal of businesses
d) Reconciliation of movement in cash and cash equivalents to movement in net debt
2011
£m
(27.6)
(3.8)
–
–
(31.4)
2010
£m
(15.9)
–
(2.0)
(0.9)
(18.8)
Cash and cash equivalents
Net cash and cash equivalents
Bank loans
Other loans
Finance leases
Cross currency swaps
As at
1 April
2010
£m
227.8
227.8
(689.8)
(3,185.9)
(300.8)
187.3
Cash flow
£m
Fair value
adjustments
£m
RPI uplift on
index-linked
debt
£m
Foreign
exchange
£m
Other
non-cash
movements
£m
As at
31 March
2011
£m
88.3
88.3
(150.0)
7.5
47.3
(20.5)
–
–
–
(10.4)
–
(4.1)
(14.5)
–
–
(7.0)
(42.9)
–
–
(49.9)
(0.9)
(0.9)
–
(1.2)
–
–
(2.1)
–
315.2
–
–
2.0
(13.2)
(2.3)
315.2
(846.8)
(3,230.9)
(266.7)
160.4
(13.5)
(3,868.8)
Net debt
(3,761.4)
(27.4)
Severn Trent Plc Annual Report and Accounts 2011
109
35 Contingent liabilities
a) Bonds and guarantees
Group undertakings have entered into bonds and guarantees in the normal course of business. No liability is expected to arise in
respect of either bonds or guarantees.
b) Disposal of subsidiaries
The group has given certain guarantees and indemnities in relation to disposals of businesses.
On 5 March 2007 the group received notice of a claim for €23.4 million from Veolia Proprete S.A (‘Veolia’) alleging breach of warranty
in relation to the disposal of Biffa Belgium. The group subsequently received notice from Veolia of a further claim for €5 million
relating to the same matter. The group considered that there was no basis for this claim and hence no provision was recorded in the
financial statements in relation to this matter. Following a hearing in the Commercial Court in Belgium in February 2010, the Court
rendered judgment in favour of the group on 1 April 2010 and declared all of Veolia’s claims to be unfounded. The group has received
notice that Veolia has filed an appeal against this decision.
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.
c) Regulatory matters
Following an audit in September 2010 by the Drinking Water Inspectorate (DWI) of aspects of the services provided by Severn Trent
Laboratories Ltd from its Bridgend laboratory, inorganic testing services provided by that laboratory were temporarily suspended, and
transferred to another of the group’s laboratories, pending completion of an investigation commissioned by Severn Trent Plc. The
results of this investigation have been discussed with the DWI. Inorganics testing resumed at Bridgend in January 2011 following
accreditation by UKAS of revised testing processes.
At this stage it is not possible to determine what, if any, liability will arise as a result of this incident.
On 17 December 2010 Severn Trent Plc, Severn Trent Water Ltd and Severn Trent Laboratories Ltd received a request from Ofwat to
provide certain information under the Competition Act in connection with Severn Trent Laboratories Ltd’s contracts with Severn Trent
Water Ltd and certain other water companies. The information requested has subsequently been provided to Ofwat.
At this stage it is not possible to determine what, if any, liability will arise as a result of this request.
36 Service concession arrangements
The group’s contract to provide water and waste water services to the Ministry of Defence (MoD) is a service concession
arrangement under the definition set out in IFRIC 12. The group acts as the service provider under the MoD Project Aquatrine
Package C – a 25 year contract spanning some 1,523 sites across England covering the Eastern sea border and from Lancashire
in the North West to West Sussex on the South Coast.
Under the contract the group maintains and upgrades the MoD infrastructure assets and provides operating services for water and
waste water. The maintenance and upgrade services are charged at an agreed rate, adjusted for inflation, that is agreed in the
contract. The operating services are charged under an agreed volumetric tariff.
Since the group has an unconditional right to receive cash in exchange for the maintenance and upgrade services, the amounts
receivable are recognised as a financial asset within prepayments and accrued income. At 31 March 2011 the amount receivable
was £27.1 million (2010: £26.2 million).
There have been no significant changes to the arrangement during the year.
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Notes to the group financial statements (continued)
For the year ended 31 March 2011
37 Financial and other commitments
a) Investment expenditure commitments
Contracted for but not provided in the financial statements
2011
£m
91.7
2010
£m
321.0
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 (Ofwat) and to provide
for growth in demand for water and sewerage services.
b) Leasing commitments
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 year to fifth years inclusive
After more than five years
2011
£m
4.4
11.2
7.3
22.9
2010
£m
4.9
9.0
4.9
18.8
Operating lease payments represent rentals payable by the group for certain of its office properties, plant and equipment.
38 Post balance sheet events
Following the year end the board of directors has proposed a final dividend of 39.05 pence per share. Further details of this are
shown in note 14.
39 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.
Trading transactions
Cognica
SII
Jackson Water Partnership
Sale of goods
Purchase of goods
Amounts due from related
parties
2011
£m
–
6.9
2.9
9.8
2010
£m
–
10.5
5.0
15.5
2011
£m
–
–
–
–
2010
£m
0.1
–
–
0.1
2011
£m
–
18.5
–
18.5
2010
£m
–
15.5
1.5
17.0
Amounts due to related parties
2011
£m
2010
£m
–
–
–
–
The related parties are associates and joint ventures in which the group has a participating interest.
Remuneration of key management personnel
Key management personnel comprise the members of STEC during the year.
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 51 to 55.
Short term employee benefits
Post employment benefits
Termination benefits
Share based payments
2011
£m
4.8
0.5
0.3
0.6
6.2
–
–
–
–
2010
£m
5.5
0.6
0.3
0.5
6.9
Severn Trent Plc Annual Report and Accounts 2011
111
40 Principal subsidiary undertakings and
their directors
Details of the principal operating subsidiaries as at 26 May 2011
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 Water
Severn Trent Water Limited
2 St John’s Street, Coventry CV1 2LZ
Telephone 02477 715 000
Directors
A J Duff
A J Ballance
B Bulkin
R H Davey
G Fryett
M J Lamb
M J Kane
M J E McKeon
Baroness Noakes
A P Smith
A P Wray
Severn Trent Services
Severn Trent Services Inc.
Suite 300, 580 Virginia Drive,
Ft Washington, Pennsylvania 19034, USA
Telephone 001 215 646 9201
(Incorporated and operational in the United States of America)
Directors
D L Chester
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
L F Graziano
K J Kelly
Severn Trent Services Limited
Arley Drive, Birch Coppice Business Park
Dordon, Tamworth B78 1SA
Telephone 01827 266 000
Directors
L F Graziano
R C McPheely
K A A Porritt
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
L F Graziano
K J Kelly
Severn Trent Services International Limited
2308 Coventry Road, Birmingham B26 3JZ
Telephone 0121 722 6000
Directors
L F Graziano
R C McPheely
K A A Porritt
P M Senior
C2C Services Limited
(80% owned)
2308 Coventry Road, Birmingham B26 3JZ
Telephone 0121 722 6000
Directors
D Godfrey
A J Handford
R G Piper
R J Phillips
W G Weatherdon
E A Wilson
Severn Trent Laboratories Limited
STL Business Centre, Torrington Avenue
Coventry CV4 9GU
Telephone 024 764 21213
Directors
L F Graziano
R C McPheely
K A A Porritt
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
J Davies
N Feetham
F B Smith
F White
Severn Trent Luxembourg Overseas Holdings S.a.r.l.
1A rue Thomas Edison L-1445 Strassen, Luxembourg
(Finance company – registered and operational in Luxembourg)
Directors
D L Chester
L F Graziano
M J E McKeon
X Pauwels
D Robyns
F B Smith
Country of incorporation and main operation is Great Britain and
registration is in 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.
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Severn Trent Plc Annual Report and Accounts 2011
Independent auditor’s report to the members of
Severn Trent Plc
Opinion on other matters prescribed by the Companies
Act 2006
In our opinion:
• the part of the Directors’ remuneration report to be audited
has been properly prepared in accordance with Companies
Act 2006; and
• the information given in the Directors’ report for the financial
year for which the financial statements are prepared is
consistent with the parent company financial statements.
Matters on which we are required to report by exception
We have nothing to report in respect of the following matters
where the Companies Act 2006 requires us to report to you if,
in our opinion:
• adequate accounting records have not been kept by the
parent company, or returns adequate for our audit have
not been received from branches not visited by us; or
• the parent company financial statements and the part of
the Directors’ remuneration report to be audited are not in
agreement with the accounting records and returns; or
• certain disclosures of directors’ remuneration specified by
law are not made; or
• we have not received all the information and explanations
we require for our audit.
Other matter
We have reported separately on the group financial statements
of Severn Trent Plc for the year ended 31 March 2011.
Carl D Hughes (Senior statutory auditor)
for and on behalf of Deloitte LLP
Chartered Accountants and Statutory Auditor
London, UK
26 May 2011
We have audited the parent company financial statements of
Severn Trent Plc for the year ended 31 March 2011 which
comprise the company balance sheet, the company statement
of total recognised gains and losses, and the related notes
1 to 19. The financial reporting framework that has been applied
in their preparation is applicable law and United Kingdom
Accounting Standards (United Kingdom Generally Accepted
Accounting Practice).
This report is made solely to the company’s members, as a
body, in accordance with Chapter 3 of Part 16 of the Companies
Act 2006. 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 auditor’s 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 auditor
As explained more fully in the Directors’ responsibility statement,
the directors are responsible for the preparation of the parent
company financial statements and for being satisfied that they
give a true and fair view. Our responsibility is to audit and
express an opinion on the parent company financial statements
in accordance with applicable law and International Standards
on Auditing (UK and Ireland). Those standards require us to
comply with the Auditing Practices Board’s Ethical Standards
for Auditors.
Scope of the audit of the financial statements
An audit involves obtaining evidence about the amounts
and disclosures in the financial statements sufficient to give
reasonable assurance that the financial statements are free
from material misstatement, whether caused by fraud or error.
This includes an assessment of: whether the accounting policies
are appropriate to the parent company’s circumstances and
have been consistently applied and adequately disclosed; the
reasonableness of significant accounting estimates made by
the directors; and the overall presentation of the financial
statements.
Opinion on financial statements
In our opinion the parent company financial statements:
• give a true and fair view of the state of the parent company’s
affairs as at 31 March 2011;
• have been properly prepared in accordance with United
Kingdom Generally Accepted Accounting Practice; and
• have been prepared in accordance with the requirements
of the Companies Act 2006.
Company balance sheet
At 31 March 2011
Severn Trent Plc Annual Report and Accounts 2011
113
Non-current assets
Tangible fixed assets
Investments in subsidiaries
Derivative financial instruments
Current assets
Debtors
Derivative financial instruments
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 26 May 2011.
Andrew Duff
Chairman
Michael McKeon
Finance Director
Company Number: 2366619
Note
2011
£m
2010
£m
2
3
4
5
6
8
9
10
11
11
0.2
3,550.1
27.5
0.4
3,609.3
21.0
3,577.8
3,630.7
16.2
–
223.2
239.4
(827.2)
56.3
2.8
239.0
298.1
(746.1)
(587.8)
(448.0)
2,990.0
(167.7)
3,182.7
(466.6)
2,822.3
2,716.1
232.2
80.0
150.6
2,359.5
231.6
75.9
148.6
2,260.0
2,822.3
2,716.1
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Company statement of total recognised gains
and losses
For the year ended 31 March 2011
Transfers
Transfers to the profit and loss account on cash flow hedges
Deferred tax on transfers to the profit and loss account
Profit for the period
Total recognised gains and losses for the period
2011
£m
2.7
(0.7)
2.0
264.5
266.5
2010
£m
3.2
(0.9)
2.3
140.0
142.3
114
Severn Trent Plc Annual Report and Accounts 2011
Notes to the company financial statements
For the year ended 31 March 2011
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
2006 (‘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
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 the
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.
d) Impairment of fixed assets and investments
Impairments of fixed assets and investments are calculated
as the difference between the carrying values 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
(i) Financial assets
Financial assets are classified into the following specified
categories:
• At fair value through profit or loss;
• Held to maturity investments;
• Available for sale financial assets; and
• Loans and receivables.
Financial assets at fair value through profit or loss
A financial asset is classified at fair value through profit or loss if
it is so designated or if it is held for trading. Derivative financial
assets that are not designated and effective as hedging
instruments are classified as held for trading. Financial assets at
fair value through profit or loss are stated at fair value, with any
gains or losses arising on remeasurement recognised in gains/
losses on financial instruments in the income statement. Fair
value is determined using the methodology described in note 32
to the group’s financial statements. Interest receivable in respect
of derivative financial assets is included in finance income.
Held to maturity investments
Where the company has the ability and intent to hold an
investment to maturity the financial asset is classified as held to
maturity. Such financial assets are measured at amortised cost
using the effective interest rate method, with any gains or losses
being recognised in the income statement.
Available for sale financial assets
After initial recognition at cost (being the fair value of the
consideration paid), investments which are classified as
available for sale are measured at fair value, with gains or losses
recognised in equity. 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. Where there is no
active market in the investments and the fair value cannot be
measured reliably, the investments are held at cost.
Loans and receivables
Trade receivables, loans and other receivables that have fixed
or determinable payments and that are not quoted in an active
market are classified as loans and receivables. Such assets
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 its recoverable amount and the irrecoverable amount is
recognised as an expense.
(ii) Financial liabilities
Financial liabilities are classified as either:
• financial liabilities at fair value through profit or loss; or
• other financial liabilities.
Financial liabilities at fair value through profit or loss
A financial liability is classified at fair value through profit or loss
if it is so designated or if it is held for trading. Derivative financial
liabilities that are not designated and effective as hedging
instruments are classified as held for trading. Financial liabilities
at fair value through profit or loss are stated at fair value, with
any gains or losses arising on remeasurement recognised in
gains/losses on financial instruments in the income statement.
Fair value is determined using the methodology described
in note 32 in the group financial statements. Interest payable
in respect of derivative financial liabilities is included in
finance costs.
Other financial liabilities
Other financial liabilities, including borrowings, are initially
recognised at fair value less transaction costs. After initial
recognition, other financial liabilities are subsequently measured
at amortised cost using the effective interest rate method.
Severn Trent Plc Annual Report and Accounts 2011
115
1 Accounting policies (continued)
e) Financial instruments (continued)
(iii) Hedge accounting
The company 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
recognised and measured in accordance with the accounting
policies described above.
At the inception of the hedge relationship the company
documents:
• the relationship between the hedging instrument and the
hedged item;
• its risk management objectives and strategy for undertaking
hedge transactions; and
• whether the hedging instrument is highly effective in
offsetting changes in fair values or cash flows (as
appropriate) of the hedged item.
The company continues to test and document the effectiveness
of the hedge on an ongoing basis.
Hedge accounting is discontinued when the hedging instrument
expires, is sold, terminated or exercised, or no longer qualifies
for hedge accounting.
Fair value hedges
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
gains/losses on financial instruments in the income statement.
The gain or loss on the hedging instrument is taken to gains/
losses on financial instruments in the income statement where
the effective portion of the hedge will offset the gain or loss on
the hedged item.
When hedge accounting is discontinued the fair value
adjustment to the carrying amount of the hedged item arising
from the hedged risk is amortised to the income statement
from that date.
Cash flow hedges
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 gains/losses on financial
instruments in the income statement. The gains or losses
deferred in equity in this way are recycled through gains/losses
on financial instruments in the income statement in the same
period in which the hedged underlying transaction or firm
commitment is recognised in the income statement.
When hedge accounting is discontinued any cumulative gain
or loss on the hedging instrument recognised in equity is kept
in equity until the forecast transaction occurs, or transferred
to gains/losses on financial instruments in the income statement
if the forecast transaction is no longer expected to occur.
Hedges of net investments in foreign operations
Where forward currency contracts and foreign currency
borrowings are used to hedge net investments in foreign
currency denominated operations, to the extent that they are
designated and effective as net investment hedges, they are
matched in equity against changes in value of the related assets.
Any ineffectiveness is taken to gains/losses on financial
instruments in the income statement.
(iv) Embedded derivatives
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 gains/losses on financial
instruments in the income statement.
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.
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
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 company
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 27 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.
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Severn Trent Plc Annual Report and Accounts 2011
Notes to the company financial statements (continued)
2 Tangible fixed assets
Cost
As at 1 April 2010
As at 31 March 2011
Depreciation
As at 1 April 2010
Charge for the year
As at 31 March 2011
Net book value
At 31 March 2011
At 31 March 2010
3
Investments
As at 1 April 2010
Additions/loans advanced
Disposals/loans repaid
As at 31 March 2011
Land and
buildings
£m
Plant and
equipment
£m
0.7
0.7
(0.7)
–
(0.7)
–
–
0.6
0.6
(0.2)
(0.2)
(0.4)
0.2
0.4
Total
£m
1.3
1.3
(0.9)
(0.2)
(1.1)
0.2
0.4
Shares
£m
3,288.1
4.4
–
Subsidiary undertakings
Loans
£m
321.2
–
(63.6)
Total
£m
3,609.3
4.4
(63.6)
3,292.5
257.6
3,550.1
Details of principal subsidiaries of the company are given in note 40 of the group financial statements.
4 Debtors
Amounts owed by group undertakings
Deferred tax
Corporation tax recoverable
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
Accrued expenses
2011
£m
5.4
9.2
–
0.2
1.4
16.2
2011
£m
(4.9)
–
(4.9)
–
(0.2)
(808.3)
(8.6)
(0.7)
(4.5)
2010
£m
3.5
10.1
38.3
0.1
4.3
56.3
2010
£m
(91.4)
(10.6)
(102.0)
(2.0)
(0.2)
(635.5)
(5.6)
–
(0.8)
(827.2)
(746.1)
Severn Trent Plc Annual Report and Accounts 2011
117
2011
£m
(81.8)
(52.8)
(33.1)
2010
£m
(77.8)
(350.2)
(38.6)
(167.7)
(466.6)
6 Creditors: amounts falling due after more than one year
Borrowings - other loans (note 7)
Amounts due to group undertakings
Derivative financial instruments
7 Borrowings
Borrowings due within one year
Borrowings due after more than one year
Between one and two years
Between two and five years
After more than five years
Total borrowings due after one year
2011
£m
4.9
22.9
58.9
–
81.8
86.7
2010
£m
102.0
–
55.8
22.0
77.8
179.8
Total
£m
4.9
81.8
86.7
–
86.7
Total
£m
91.4
88.4
179.8
–
179.8
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Borrowings analysed by interest rate after taking account of interest rate swaps entered into by the company were:
2011
Bank loans and overdrafts
Other loans
Impact of interest rate swaps not matched against specific debt instruments
Weighted average interest rate
Weighted average period for which interest is fixed (years)
2010
Bank loans and overdrafts
Other loans
Impact of interest rate swaps not matched against specific debt instruments
Weighted average interest rate
Weighted average period for which interest is fixed (years)
Non-interest
bearing
liabilities Floating rate
£m
4.9
81.8
£m
–
–
Fixed rate
£m
–
–
–
–
–
86.7
(225.0)
–
225.0
(138.3)
225.0
6.32%
4.5
Non-interest
bearing
liabilities
£m
–
–
–
–
–
Floating rate
£m
91.4
88.4
179.8
(300.0)
Fixed rate
£m
–
–
–
300.0
(120.2)
300.0
6.32%
4.2
118
Severn Trent Plc Annual Report and Accounts 2011
Notes to the company financial statements (continued)
7 Borrowings (continued)
The company’s borrowings are denominated in sterling, after taking account of cross currency swaps the company has entered into.
There is no difference between the book value and the fair value of the company’s borrowings. Fair values are based on the expected
future cash flows discounted using zero coupon forward interest rates related to the expected timing of payments.
At the balance sheet date the company had committed undrawn borrowing facilities expiring as follows:
Within one year
1-2 years
2-5 years
After more than five years
8 Share capital
Total issued and fully paid share capital
237,142,534 ordinary shares of 97 17/19p (2010: 236,585,205)
Changes in share capital were as follows:
Ordinary shares of 97 17/19p
At 1 April 2010
Shares issued under the group’s Employee Sharesave Scheme
Shares issued under the group’s Share Option Scheme
At 31 March 2011
9 Share premium
At 1 April
Share premium arising on issue of shares for Employee Sharesave Scheme
At 31 March
10 Other reserves
2011
£m
41.7
458.3
–
–
500.0
2010
£m
–
191.7
458.3
–
650.0
2011
£m
2010
£m
232.2
231.6
Number
£m
236,585,205
550,525
6,804
237,142,534
2011
£m
75.9
4.1
80.0
231.6
0.5
0.1
232.2
2010
£m
71.9
4.0
75.9
At 1 April 2009
Transfers to the profit and loss account on cash flow hedges
At 1 April 2010
Transfers to the profit and loss account on cash flow hedges
At 31 March 2011
The capital redemption reserve arose on the repurchase of B shares. This is not distributable.
Capital
redemption
reserve
£m
156.1
–
156.1
–
156.1
Hedging
reserve
£m
(9.8)
2.3
(7.5)
2.0
(5.5)
Total other
reserves
£m
146.3
2.3
148.6
2.0
150.6
Severn Trent Plc Annual Report and Accounts 2011
119
Share
capital
£m
231.0
Share
premium
£m
71.9
Other
reserves
£m
146.3
Retained
earnings
£m
2,274.5
Equity
attributable to
the equity
holders of
Severn Trent
Plc
£m
2,723.7
–
0.6
–
–
–
–
4.0
–
–
–
2.3
–
2.3
–
–
–
–
–
5.2
140.0
(159.7)
4.6
5.2
140.0
(159.7)
231.6
75.9
148.6
2,260.0
2,716.1
–
0.6
–
–
–
–
4.1
–
–
–
2.0
–
2.0
–
–
–
–
–
4.4
264.5
(169.4)
4.7
4.4
264.5
(169.4)
232.2
80.0
150.6
2,359.5
2,822.3
11 Reconciliation of movements in shareholders’ equity
At 1 April 2009
Cash flow hedges
- transfers to net profit
Share options and LTIPs
- proceeds from shares issued
- awards granted by subsidiaries
Net profit for the year
Dividends
At 1 April 2010
Cash flow hedges
- Transfers to net profit
Share options and LTIPs
- proceeds from shares issued
- awards granted by subsidiaries
Net profit for the year
Dividends
At 31 March 2011
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 408 of the Companies Act 2006, no profit or loss account is presented
for the company.
12 Employee costs and auditors’ remuneration
Wages and salaries
Social security costs
Pension costs
Total employee costs
2011
£m
1.3
0.2
0.6
2.1
2010
£m
1.2
0.1
0.8
2.1
For details of directors’ remuneration see the Directors’ remuneration report on pages 51 to 55.
Fees payable to Deloitte LLP and their associates for non-audit services to the company are not required to be disclosed because
the consolidated financial statements are required to disclose such fees on a consolidated basis.
13 Employee numbers
Average number of employees of the company (including executive directors) during this year was 12 (2010: 11).
All were based in the United Kingdom.
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Severn Trent Plc Annual Report and Accounts 2011
Notes to the company financial statements (continued)
14 Employee share schemes
For details of employee share schemes and options granted over the shares of the company, see note 33 of the group financial
statements. Details of the LTIP conditional awards and share options granted by the company to its employees are set out below.
The company has charged £0.1 million (2010: £0.1 million) to the profit and loss account in respect of share based payments.
At 31 March 2011 the number of options that were exercisable under each of the share based remuneration schemes was as follows:
Employee Sharesave Plan
Long Term Incentive Plan
Share Matching Plan
(i) Long Term Incentive Plan
Changes in the number of awards outstanding during the year:
Outstanding at 1 April 2009
Granted during the year
Lapsed during the year
Outstanding at 1 April 2010
Granted during the year
Outstanding at 31 March 2011
Awards outstanding at 31 March were:
Date of grant
2008
2009
2010
(ii) Employee Sharesave Scheme
Changes in the number of options outstanding during the year:
Outstanding at 1 April 2009
Granted during the year
Exercised during the year
Transferred from other group companies
Outstanding at 1 April 2010
Lapsed during the year
Outstanding at 31 March 2011
Options outstanding at 31 March were:
Date of grant
January 2007
January 2009
January 2010
2011
Number of
exercisable
options/awards
–
–
–
Weighted
average
exercise price
–
–
–
Number of
exercisable
options
161
–
–
2010
Weighted
average
exercise price
1,172
–
–
Number of
awards
80,140
4,813
(76,574)
8,379
4,422
12,801
Number of shares
2011
3,566
4,813
4,422
12,801
Number of
shares
1,237
449
(1,237)
4,107
4,556
(161)
4,395
2010
3,566
4,813
–
8,379
Weighted
average
exercise
price
598p
806p
598p
874p
867p
1,172p
856p
Number of shares
2011
–
3,946
449
4,395
2010
161
3,946
449
4,556
Normal date of vesting
2011
2012
2013
Normal date of vesting
2010, 2012 or 2014
2012 or 2014
2013 or 2015
Option price
1,172p
862p
806p
14 Employee share schemes (continued)
(iii) Share Matching Plan (SMP)
Changes in the number of options outstanding during the year:
Outstanding at 1 April 2010
Granted during the year
Exercised during the year
Outstanding at 31 March 2011
Options outstanding at 31 March were:
Date of grant
May 2011
Severn Trent Plc Annual Report and Accounts 2011
121
Number of
share options
–
457
–
457
Normal date of
vesting
June 2011
Number of shares
2011
457
457
2010
–
–
15 Pensions
The company operates two defined benefit schemes (being the Severn Trent Pension Scheme and the Severn Trent Water Mirror
Image 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 27 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 scheme was a defined contribution scheme.
The pension charge for the year was £0.2 million (2010: £0.8 million).
16 Related party transactions
The company has taken advantage of the exemption under FRS 8 “Related Party Disclosures” and not disclosed details of
transactions with other undertakings within the 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 subsidiary 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.
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18 Post balance sheet events
On 26 May 2011 the board of directors proposed a final dividend of 39.05 pence per share.
19 Dividends
For details of the dividends paid in the years ended 31 March 2011 and 31 March 2010 see note 14 in the group financial statements.
122
Severn Trent Plc Annual Report and Accounts 2011
Five year summary
Continuing operations
Turnover
Profit before interest, tax and exceptional items
Net exceptional items
Net interest payable before (losses)/gains on financial
instruments
(Losses)/gains on financial instruments
Results of associates and joint ventures
Profit on ordinary activities before taxation
Current taxation on profit on ordinary activities
Deferred taxation
Profit on ordinary activities after taxation
Discontinued
Profit for the period
Net assets employed
Fixed assets
Other net liabilities excluding net debt, retirement benefit
obligation and provisions
Derivative financial instruments1
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
Non-controlling interests
Net debt2
Statistics
Earnings per share (continuing) - pence
Adjusted earnings per share - pence
Dividends per share (excluding special dividend) - pence
Dividend cover (before exceptional items and deferred tax)
Gearing
Ordinary share price at 31 March - pence
Average number of employees
- Severn Trent Water
- Other
1 Excludes hedging instruments
2 Includes hedging instruments
2011
£m
1,711.3
519.1
(21.4)
(230.6)
(14.2)
0.1
253.0
(32.1)
53.6
274.5
–
274.5
2010
(restated)
£m
1,703.9
557.1
(49.7)
(218.8)
45.7
0.1
334.4
(40.7)
(42.2)
251.5
1.0
252.5
2009
2008
2007
£m
1,642.2
469.9
(18.9)
£m
1,552.4
469.5
(68.8)
£m
1,480.2
405.3
24.7
(196.4)
(87.0)
–
167.6
(52.1)
(171.5)
(56.0)
–
(56.0)
(177.4)
(31.0)
0.1
192.4
(56.2)
74.4
210.6
0.8
211.4
(153.8)
48.8
0.5
325.5
(58.5)
(18.4)
248.6
20.0
268.6
6,635.3
6,516.1
6,169.9
5,892.9
5,675.5
(320.4)
(90.5)
(292.1)
(957.4)
–
(317.2)
(125.3)
(354.9)
(1,010.3)
–
(287.2)
(153.9)
(233.0)
(988.0)
4.2
(217.3)
(26.1)
(165.6)
(885.5)
–
(242.9)
(41.6)
(135.1)
(930.0)
–
4,974.9
4,708.4
4,512.0
4,598.4
4,325.9
232.2
867.6
1,099.8
6.3
3,868.8
231.6
709.1
940.7
6.3
3,761.4
231.0
715.1
946.1
6.0
3,559.9
229.7
971.3
1,201.0
4.2
3,393.2
228.3
905.9
1,134.2
3.1
3,188.6
4,974.9
4,708.4
4,512.0
4,598.4
4,325.9
115.2
105.6
65.1
1.6
77.8%
1,446.0
105.6
122.8
72.3
1.7
79.9%
1,195.0
(24.6)
92.7
67.3
1.4
78.9%
990.0
89.3
97.8
65.6
1.5
74.0%
1,419.0
106.1
82.4
61.5
1.3
73.3%
1,434.0
5,236.6
5,685.8
5,624.0
5,569.0
5,289.0
3,044.9
3,101.7
3,144.0
2,814.0
7,172.0
The prior year figures have been restated to reflect the impact of IFRIC 18, which is described in note 3.
Gearing has been calculated as net debt divided by the sum of equity and net debt.
Severn Trent Water –
Delivering against our KPIs
Severn Trent Plc Annual Report and Accounts 2011
123
2009/10
Performance
2010/11
performance
2010/11
quartile
At a glance
0.37
74%
210
5.73
90%
23.85
0.07
97.5%
4%
7.4%
33.8
519.0
378
0.103
1.69%
94.4%
706
497
Upper
Lower
Upper
Upper
Median
Lower
Upper
Upper
Upper
N/A
Median
N/A
N/A
N/A
Median
Upper
Lower
Lower
Upper
N/A
N/A
Basis
KPI
MAT
Lost time incidents per 100,000 hrs worked 1
QR
Employee motivation % 2
MAT
Water quality (test failure rate) ppm
MAT
Customer written complaints per 1,000 properties 3,4
MAT
First time call resolution for billing % 5
MAT
Unplanned interruptions > 6 hrs per 1,000 properties 3
NPR
Properties at risk of low pressure per 1,000 properties 3
MAT
First time job resolution % 5
QR
Non-performance against Regulatory Obligations % 5
AMP
Capex (Gross) vs Final Determination % 6,14
ACT
Debtor days 7
ACT
Opex - £m 6,7
MAT
Pollution incidents (cat 1, 2 & 3)8,9
0.36
74%
131
4.95
89%
10.09
0.12
96.5%
5%
6.1%
32.6
492.4
322
MAT
Sewer flooding incidents – other causes per 1,000 properties 3,13
0.131
ACT
Sewage Treatment Works – failing consent limit % 9,10
ACT
Supply availability % 11
MAT
Net Energy Use – GWh 5, 12
MLE
Leakage MI/d 3,6
1.80%
91.9%
714
497
Key
Improved quartile
Maintained quartile
Declined quartile
Notes
Benchmarks updated in September.
MAT = Moving Annual Total
QR = Quarterly Review
NPR = Number of Properties on Register
AMP = Asset Management Plan 5 to date
PPS = Percentage of Population Served
MLE = Maximum Likelihood Estimate
ACT = Year end Actual
1. Actual performance across all employees and
agency staff.
2. Performance based on annual survey of all
employees (2009/10 based on a sample of
10% of STW’s employees).
3. As reported in June Return to Ofwat. Performance
figures are provisional at this stage as the June
Return will be submitted to Ofwat on 10 June 2011.
4. Performance excludes properties billed by other
water companies.
5. Actual performance based partially or wholly
on internal data.
6. As this is the first year of AMP5, benchmark data
is unavailable until September 2011.
7. Actual performance based on audited UK
GAAP financial statements for the year ended
31 March 2011.
8. Metrics of this KPI changed from pollution incidents
per 1,000 properties to number of pollution
incidents. Prior year performance has been
restated accordingly.
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9. Measure for calendar year to 31 December 2010.
10. Metrics of this KPI changed to align with
Environment Agency approach. Prior year
performance has been restated accordingly.
11. Metrics of this KPI changed from security of supply
to supply availability. Prior year performance has
been restated accordingly. The KPI measures how
much of our designed capacity is available taking
into account known restrictions and works outages.
There were no supply failures resulting from works
restrictions during the year.
12. Metrics of this KPI changed from KWh/Ml to GWh.
Prior year performance has been restated
accordingly.
13. Excludes minor escape of sewage.
14. Percentage outperformance against the
Final Determination.
124
Severn Trent Plc Annual Report and Accounts 2011
Information for shareholders
Electronic communications and our website
Under the Articles of Association, the company is authorised to
communicate with shareholders either via the Severn Trent Plc
website or by post. The company last wrote to shareholders in
April 2008 asking that they choose to either:
• provide an email address to receive notifications when
shareholder documentation is made available on the website; or
• continue to receive shareholder documentation in hard copy by
returning the personalised reply card.
If the completed card was not returned then, in accordance with
the Companies Act 2006, shareholders were deemed to have
agreed to receive shareholder documentation via the website.
These shareholders, and those who have positively elected for
website communication, will receive, immediately prior to the
publication date, notification whenever shareholder documents
are available to view on the website at www.severntrent.com
Shareholders may receive electronic communications either:
• via email – this option is available though Shareview.
Shareholders will receive an email notification when a new
document is made available; or
• via our website – shareholders will receive a notification by
post when a new document is made available.
The electronic arrangements enable shareholders to access
information immediately as it becomes available. By using
electronic communications the company is also able to both
reduce its impact on the environment from reducing the use of
paper and the energy required for publication and distribution,
and benefit from savings associated with reduced printing and
mailing costs.
Shareholders who register to receive shareholder documentation
from Severn Trent Plc electronically can:
• view the Annual Report and Accounts on the day it
is published;
• receive an email alert when shareholder documents
are available;
• cast their AGM vote electronically; and
• manage their shareholding quickly and securely online,
through Shareview.
Shareholders who receive such a notification are entitled to
request a hard copy of the document and may also change the
way they receive communications, at any time, by contacting
Equiniti. Visit www.shareview.co.uk for more information and to
register for electronic shareholder communications.
We will periodically consult with shareholders to check how they
wish to receive information from us and a shareholder is taken to
have agreed to website communications if a response has not
been received.
Notwithstanding any election, the company may, at its sole and
absolute discretion, send any notification or information to
shareholders in hard copy form.
Corporate website
Our website provides company news and information, together
with links to our operational businesses’ websites. The Investor
Centre on the website contains up to date information for
shareholders including:
• comprehensive share price information;
• financial results;
• a history of dividend payment dates and amounts; and
• access to current and historical shareholder documents such
as the Annual Report and Accounts.
Severn Trent shareholder helpline
The company’s registrar is Equiniti Limited. Equiniti’s main
responsibilities include maintaining the shareholder register
and making dividend payments.
If you have any queries on the following matters you should
contact Equiniti:
• transfer of shares;
• change of name or address;
• lost share certificate;
• lost or out of date dividend cheques and other
dividend queries;
• death of the registered holder of shares; or
• any other query relating to your Severn Trent shareholding.
Registrar contact details:
Telephone: 0871 384 2967*
Overseas enquiries: +44 121 415 7044
Text phone: 0871 384 2255*
By post: Equiniti, Aspect House, Spencer Road, Lancing, West
Sussex, BN99 6DA
Email: severntrent@equiniti.com
Dividend payments directly into bank accounts
Dividends can be paid automatically into your bank or building
society account. This service has a number of benefits:
• no risk of the dividend cheque being lost in the post;
• the dividend payment is cleared more quickly as the cash is
paid directly into the account on the payment date without the
need to pay in the cheque and wait for it to clear; and
• since the 2009/10 financial year, a single consolidated tax
voucher is issued annually in February in time for your self
assessment tax return.
To take advantage of this service or for further details contact
Equiniti or visit www.shareview.co.uk
Dividend reinvestment plan
A dividend reinvestment plan was introduced in July 2009.
The plan gives shareholders the option of using their dividend
payments to buy more Severn Trent Plc shares instead of
receiving cash. If you would like to participate in the plan, please
request a dividend reinvestment plan mandate from Equiniti
Financial Services Limited.
Telephone: 0871 384 2268*
Lines are open from 8.30am to 5.30pm Monday to Friday.
Telephone number from outside the UK: +44 121 415 7058
Overseas dividend payments
Shareholders in over 30 countries have the opportunity to
receive Severn Trent dividends in their local currency. For a
small administration fee, shareholders can have their dividends
automatically converted from sterling and paid into their bank
account, normally within five working days of the dividend
payment date. Please call +44 121 415 7044 for further details.
Amalgamating different share accounts
Shareholders with more than one account, arising from
inconsistencies in name or address details, may avoid receipt
of duplicate mailings by asking the registrar to amalgamate
their holdings.
* Calls to these numbers are charged at 8 pence per minute from a BT landline.
Other providers’ costs may vary.
www.severntrent.com
Contents
Introduction
Severn Trent Plc Annual Report and Accounts 2011
125
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Overview
1
2
4
6
8
2011 Severn Trent group highlights
Group at a glance
Chairman’s statement
Chief Executive’s review
Our strategy
Business review
10 Severn Trent Water – Performance
16 Severn Trent Services – Performance
20
Looking forward
22 Financial review
Governance
26 Directors’ report
29 Directors’ responsibility statement
30 Board of directors
32 Executive Committee
33 Chairman’s letter
39 Nominations Committee
40 Audit Committee
42 Corporate Responsibility Committee
43 Remuneration Committee
56 Risk and assurance
Group financial statements
59
Independent auditor’s report
60 Consolidated income statement
61 Consolidated statement of comprehensive income
62 Consolidated statement of changes in equity
63 Consolidated balance sheet
64 Consolidated cash flow statement
65 Notes to the group financial statements
Independent auditor’s report
Company financial statements
112
113 Company balance sheet
113 Company statement of total recognised gains and losses
114 Notes to the company financial statements
Other information
122 Five year summary
123 Severn Trent Water – delivering against our KPIs
124
Information for shareholders
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Severn Trent is a FTSE 100
company. Our core business is
water. We provide and treat water
and waste water in the UK and
internationally through our two
complementary businesses –
Severn Trent Water and Severn
Trent Services.
Find out more at our corporate website
www.severntrent.com
Severn Trent Water website
www.stwater.co.uk
Severn Trent Services website
www.severntrentservices.com
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’, ‘will’, ‘could’, ‘may’, ‘should’, ‘expects’,
‘believes’, ‘intends’, ‘plans’, ‘potential’, ‘reasonably possible’, ‘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.
Nothing in this document should be regarded as a profits forecast.
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 2011.
More information on Severn Trent Plc can be found on our
website at www.severntrent.com
Lost investors
During 2009/10 we appointed ProSearch to look for investors
who had failed to keep their details up to date. We have unclaimed
funds waiting to be claimed. Shareholders are reminded that if
they move house they need to contact Equiniti and advise them
of their new address.
Buying and selling shares in the UK
If you wish to buy or sell certificated Severn Trent shares, you will
need to use a stockbroker or high street bank which trades on the
London Stock Exchange. There are also many telephone and
online services available to you. If you are selling, you will need to
present your share certificate at the time of sale. Details of low
cost dealing services may be obtained from www.shareview.co.uk
or 0845 603 7037.
Share price information
Shareholders can find share price information on our website
and in most national newspapers. Ceefax, where available, also
displays share prices that are updated regularly throughout the
trading day. For a real-time buying or selling price, you should
contact a stockbroker.
Gifting your shares
To transfer your shares to another member of your family as a gift,
please request a gift transfer form from Equiniti. The completed
transfer form together with the relevant share certificate(s) should
be returned to Equiniti to record the change in ownership.
If you have a small number of shares and would like to donate
them to charity, please ask Equiniti for a ShareGift (charity
donation scheme) transfer form. ShareGift (registered charity No.
1052686) is an independent charity which provides a free service
for shareholders wishing to dispose charitably of small numbers
of shares, which would cost more to sell than they are worth.
Further information is also available on the ShareGift website at
www.sharegift.org or by telephoning 020 7337 0501.
Shareholder security
Many companies have become aware that their shareholders have
received unsolicited phone calls or correspondence concerning
investment matters. These are typically from overseas based
‘brokers’ who target UK shareholders, offering to sell them what
often turn out to be worthless or high risk shares in US or UK
investments. These operations are commonly known as ‘boiler
rooms’. These ‘brokers’ can be very persistent and extremely
persuasive and the number of instances of this type of fraud has
increased dramatically in recent years. A 2006 survey by the
Financial Services Authority (FSA) has reported that the average
amount lost by investors is around £20,000. It is not just the novice
investor that has been duped in this way: many of the victims had
been successfully investing for several years.
In addition, in the current economic climate, boiler rooms are now
targeting victims who have redundancy money or those who are
not experienced investors, and are asking for smaller sums of
money to be invested.
If you receive any unsolicited investment advice:
• ensure you get the full name of the person and organisation;
• check that they are properly authorised by the FSA before
getting involved by visiting www.fsa.gov.uk/register
• report the matter to the FSA either by calling 0300 500 5000
or visiting www.moneymadeclear.fsa.gov.uk; and
• if the calls persist, hang up.
Please be aware that if you deal with an unauthorised firm, you
will not be eligible to receive payment under the Financial
Services Compensation Scheme. The FSA can be contacted by
completing an online form at www.fsa.gov.uk/pages/doing/
regulated/law alerts/overseas.shtml
Shareholders are advised to be very wary of any unsolicited
advice, offers to buy shares at a discount or offers of free
company reports. Details of any share dealing facilities that the
company endorses will be included in company mailings or on
our website. For more detailed information from the FSA go to
www.moneymadeclear.fsa.gov.uk
Shareholder fraud – tips on protecting your shareholding
To reduce the risk of fraud happening to you please consider the
following:
• ensure all your share certificates and dividend tax vouchers
are kept in a safe place, or consider holding your shares
electronically in CREST via a nominee;
• keep all correspondence from the registrar in a safe place.
Destroy all correspondence showing your personal details
(e.g. shareholder reference number) by shredding;
• if you change your address inform the registrar. If you receive
a letter from the registrar regarding a change of address and
have not recently moved house, please contact them
immediately. You may be a victim of identity theft; and
• know when dividends are paid. Consider having your dividend
paid directly into your bank or building society account, reducing
the risk of cheques being intercepted or lost in the post. If you
change your bank or building society account, inform the
registrar of the details of your new account immediately.
Respond to any letters the registrar sends you about this.
If you have any reason to believe that you may have been the
target of a fraud, or attempted fraud, please contact the registrar
immediately.
Unsolicited mail
The company is legally obliged to make its share register
available to the general public. Consequently some shareholders
may receive unsolicited mail. If you wish to limit the amount of
unsolicited mail you receive please contact:
The Mailing Preference Service (MPS),
Freepost 29 LON20771, London W1E 0ZT
Alternatively, register online at www.mpsonline.org.uk or call the
MPS Registration line on 0845 703 4599.
Share capital history
Information on the company’s share capital history, including the
share capital reorganisation in August 1997 and the demerger of
Biffa Plc, return of capital by payment of a special dividend and
share consolidation in October 2006, is available from the
Investor Centre pages on our website.
Designed and produced by Salterbaxter
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Sustainable growth
Annual Report and Accounts 2011
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Severn Trent Plc
Registered office:
Severn Trent Centre
2 St John’s Street
Coventry
CV1 2LZ
Tel: 02477 715000
www.severntrent.com
Registered number: 2366619