Severn Trent Annual Report 2012

FY2012 Annual Report · Severn Trent
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Sustainable growth

Severn Trent Plc  Annual Report and Accounts 2012

Severn Trent Plc  Annual Report and Accounts 2012

2012 Severn Trent group highlights
•  Leakage reduced by 7% year on year to a record low level, 

and below Ofwat target.

•  Maintaining the lowest combined water and waste water bills 

for our customers.

•  No usage restrictions in the Severn Trent Water region forecast 

for this year.

•  Severn Trent Water operating expenditure below level allowed 

in Ofwat’s Final Determination.

•  Additional investment of £150 million in Severn Trent Water’s 

networks over the next 3 years to enhance security and resilience 
for our customers, on top of £1.6 billion previously planned.

•  Proposed capital return of £150 million to shareholders maintains 

an efﬁcient and sustainable balance sheet with a strong 
investment grade credit rating.

Group turnover £m

Group proﬁt* £m

Group proﬁt before tax £m 

£1,770.6m

£275.3m

£156.7m

3
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3
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7
6
5
1

2011

2012

2011

2012

2011

2012

*  before tax, gains/losses on ﬁnancial 
instruments and exceptional items.

Dividend pence per share 

Earnings per share* pence

70.10p

88.9p

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6
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9
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2011

2012

2011

2012

*  before exceptional items, gains/losses 

on ﬁnancial instruments and 
deferred tax.

Total shareholder return (value £)

150

125

100

75

50

25

0

07

08

09

10

11

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Severn Trent Plc

FTSE 100 index

This graph illustrates the value, by 31 March 2012, of £100 invested in Severn Trent on 31 March 2007 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

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  Annual Report and Accounts 2012

1

We treat and provide water and 
treat waste water in the UK, and 
internationally, through our two 
complementary businesses – Severn 
Trent Water and Severn Trent Services. 
Severn Trent Water is one of the largest 
of the 10 regulated water and sewerage 
companies in England and Wales. 
It provides high quality services to 
more than 4.2 million households 
and businesses in the Midlands and 
mid-Wales. See pages 8 – 21
Severn Trent Services is one of the 
world’s leading commercial suppliers 
of water and waste water treatment 
services and products, with customers 
in the US, Europe, Middle East and Asia.
See pages 22 – 30

Find our more on our corporate website: www.severntrent.com
Severn Trent Water website: www.stwater.co.uk
Severn Trent Services website: www.severntrentservices.com

Overview

2012 Severn Trent group highlights  
Chairman’s statement 
Chief Executive’s review

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Severn Trent Water 

Business review 
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22  Severn Trent Services 
31  Looking forward 
33  Financial review 
37  Risk management

Governance
42  Board of directors 
44  Executive Committee 
45  Chairman’s letter 
50  Nominations Committee 
52  Audit Committee 
54  Corporate Responsibility Committee 
55  Remuneration Committee 
69  Directors’ report 
73  Directors’ responsibility statement

Group ﬁnancial statements 
75  Independent auditor’s report 
76  Consolidated income statement 
77  Consolidated statement of  
comprehensive income 

78  Consolidated statement of changes in equity 
79  Consolidated balance sheet 
80  Consolidated cash ﬂow statement 
81  Notes to the group ﬁnancial statements

Company ﬁnancial statements 
128  Independent auditor’s report 
129  Company balance sheet 
129  Company statement of total recognised  

gains and losses 

130  Notes to the company ﬁnancial statements

Other information 
138  Five year summary 
139  Severn Trent Water  

– delivering against our KPIs 
140  Information for shareholders

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Severn Trent Plc  Annual Report and Accounts 2012

Chairman’s statement

2

‘ I’m delighted to report on 
another good year for Severn 
Trent. We delivered sound 
ﬁnancial results and continued 
to improve key aspects of our 
operational performance.’

  Andrew Duff, Chairman

Sound ﬁnancial results
Severn Trent has a good ﬁnancial track 
record and we delivered another solid set 
of results in 2011/12. Total group revenue 
rose by 3.5% to £1.77 billion, while our 
proﬁt before tax, exceptional items and 
losses on ﬁnancial instruments was 
£275.3 million, a decrease of 4.6%. 
This gave us adjusted earnings per share 
excluding deferred tax of 88.9 pence, 
down by 15.8%.

Our dividend policy is to grow our 
dividend by 3% more than the retail price 
index up to 2014/15. The board is 
therefore proposing a ﬁnal dividend of 
42.06 pence, to be paid on 27 July 2012. 
This will give a total dividend for the 
year of 70.10 pence, representing 
growth of 7.7%.

We are pleased to share the beneﬁts 
of our strong balance sheet with our 
stakeholders, in an efﬁcient and 
sustainable way which maintains 
our investment grade credit rating. 
We will increase by £150 million our 
investment programme in our water 
and waste water networks, to improve 
further our services to customers, 
and propose to return an additional 
£150 million to our shareholders. 
This special dividend, subject to 
shareholder approval, equates to 
63 pence per share and will be payable 
with the ﬁnal dividend on 27 July 2012. 
These actions underpin our ability to 
invest in our networks in the future, 
for the beneﬁt of all stakeholders.

Continually improving 
our performance
I’m delighted that at Severn Trent 
Water we improved our operational 
performance in 2011/12. In particular, 
we were able to reduce leakage, to a 
record low level. Severn Trent Water is 
the only company targeting signiﬁcant 
reductions in leakage over this ﬁve year 
regulatory period.

After the driest 18 months on record, 
it is pleasing that we are managing our 
water resources so well. Our customers 
continued to receive a high quality water 
supply and we have avoided a hosepipe 
ban to date. Good water management 
also helps us to maintain our 
environmental performance.

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Severn Trent Plc  Annual Report and Accounts 2012

Chairman’s statement

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At Severn Trent, we know that we 
can always do better. The desire to 
continuously improve runs right through 
our company. We enjoyed our ﬁrst full 
year in our new operating centre in 
Coventry which is helping our people 
to work together more effectively as a 
cohesive team. Our SAP-based systems 
allow us to respond to our customers 
more quickly and ﬂexibly and make us 
more efﬁcient. We’re also continuing to 
invest in the training and development 
of our people so they can give our 
customers the best possible service.

Delivering a good service and 
value for money
Severn Trent Water customers over the 
last year have received high quality water, 
good overall service and value for money, 
with the lowest average annual water 
and sewerage bill in the UK. However, 
we recognise that we can do better in 
the way in which we deal with customers 
if they have reason to contact us.

Whilst complaints have signiﬁcantly 
fallen and our new processes and 
systems mean that we handle customer 
enquiries efﬁciently, we do not always 
make it easy enough for customers to 
deal with us or resolve their problems at 
the ﬁrst time of asking. This is an area of 
focus for us and at the end of the year 
we were seeing positive signs that the 
changes we are putting in place are 
making a difference.

I am also pleased to see the continued 
improvement in the level of service we 
provide to our customers. In other areas, 
Severn Trent Water has met its leakage 
targets and signiﬁcantly reduced 
interruptions to supply.

Health and safety 
There is nothing more essential than 
the health and safety of our customers, 
employees and contractors. I’m therefore 
particularly pleased that, across the 
company, we reduced the number of 
employee lost time injuries for the third 
successive year. Our annual employee 
survey showed that 95% of our people 
were clear about how to do their jobs 
safely and 89% believed that we give 
them the right support to do so.

We’re always looking for ways to help our 
people work more safely and that is why 
we are introducing the MindSafety™ 
behavioural training programme which 
encourages our people to be aware of 
what they’re doing and to be 
accountable for their own safety. Taking 
care over health and safety can also help 
us to improve performance in a whole 
range of other areas such as service 
quality, environmental compliance and 
productivity of our teams.

Changing Course
Over the last few years, Severn Trent has 
sought to lead the debate on our 
industry’s future by publishing a series of 
papers called ‘Changing Course’. During 
the year, we published our latest paper 
making the case for a new system of 
‘water trading’ to allow water to be 
shared across water company 
boundaries as an economic and 
environmental alternative to developing 
new local resources. 

We were therefore delighted to see 
strong UK Government support for 
increasing interconnection and the 
trading of bulk supplies of treated water 
in its Water White Paper, ‘Water For Life’, 
published during the year. With last 
year’s drought conditions in parts of 
England, including the Midlands, 
continuing into the new year, far sighted 
ideas like this will become a necessity 
as England and Wales addresses its 
water balance.

Boosting the economy 
and employment
Severn Trent contributes signiﬁcantly to 
the economy. We build much needed 
infrastructure and ﬁnance it efﬁciently, 
so it’s not a burden on the public sector. 
Our business provides many job 
opportunities and boosts the economy.

I’m also delighted that we provide long 
term careers for the young people of our 
region. Our apprenticeship programme is 
going from strength to strength, helping 
young people into work and making sure 
that we have the skills we’ll need in the 
future. We currently have 81 apprentices 
across customer service, water and 
waste water roles. One of our 

apprentices, Michael Williams, won the 
national EEF Outstanding Achievement 
by a Final Year Apprentice Award, for 
introducing process changes that 
improved efﬁciency and reliability and 
saved us money.

Severn Trent Services
Severn Trent Services had a challenging 
start to the year, while the second half 
saw an improved performance. Full year 
revenues were £332.3 million, an 
increase of 0.6% year on year, after 
adjusting for the impact of changes 
in exchange rates, driven by good 
performance in Europe offsetting a weak 
US result. PBIT1 (proﬁt before interest 
and tax) was £18.0 million, a decline of 
26.5%, on a constant currency basis, 
due to investments in new business 
opportunities, a change in product mix 
in our water puriﬁcation division and 
economic conditions. Interest in our new 
BALPURE® ballast water treatment 
products was greater than expected, 
with initial orders generating £5 million 
in recorded orders. 

Summary
This has been another good year for 
Severn Trent. We’ve improved our 
operational performance and the 
efﬁciency of our investment, allowing us 
to deliver sustainable returns to our 
shareholders and the lowest cost of 
water and waste water services to our 
customers. I’m particularly grateful to all 
of the staff at Severn Trent for their 
contribution to our su
contribution to our success.

Andrew Duff 
Chairman

1.  Before exceptional items.

 
 
 
 
 
 
 
 
 
 
 
Severn Trent Plc  Annual Report and Accounts 2012

Chief Executive’s review

4

‘ Our long term success depends on balancing 
the needs of all our stakeholders and our 
ability to continually improve our services and 
efﬁciency. We also aim to drive the industry 
forwards, by leading the regulatory debate.’
  Tony Wray, Chief Executive

Strategy
Our strategy is focused on delivering 
sustainable growth. This is crucial to us 
because we have to plan far ahead – 
often over decades. To be truly 
sustainable, we must maintain the 
appropriate balance across our 
customers, people, the environment 
and investors. 

Water is vital to life, so we look to offer 
the highest quality at a price customers 
can afford. We need to attract 
investment, so we can fund the 
infrastructure our service depends on. 
Our people must have the skills, support 
and motivation to continually improve 
our service. We have to protect the 
environment because our business and 
our customers depend upon it to provide 
the resources we need.

Achieving this balance leads directly to 
good ﬁnancial performance. It allows us 
to deliver organic growth and reliable 
returns over the long term, without 
excessive risk.

The timescales we work to are long, but 
our industry doesn’t stand still. Politics, 
regulation, climate and the availability of 
ﬁnance all change over time, both in the 
UK and internationally. For this reason, 
our board considers strategic topics 
regularly and formally reviews our 
strategy every year. The experience of 
recent years supports our view that we’re 
following the right strategy. Whatever 
happens to economies around the world, 
the need for clean water and sanitation 
remains.

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Severn Trent Plc  Annual Report and Accounts 2012

Chief Executive’s review

5

Our strategy
Sustainable

Strategy aim
Delivering value for our customers 
and investors.

Highlights 2012
• At Severn Trent Water we are focused  
on delivering key service improvements:
 – we have met our leakage targets;
 – interruptions to supply have been reduced;
 – we have maintained security of  

supply in a dry year; and

 – we have maintained the lowest charges 

in the UK.

• Severn Trent Services has returned a 

creditable performance in difﬁcult markets.

Key measures

4.88

Customer written  
complaints per  
1,000 properties (STW) 
(2011: 5.72)

464 Ml/d

Leakage megalitres 
per day  
(2011: 497)

Sustainable ﬁnancing, ensuring we have 
a strong and ﬂexible balance sheet.

• We are well ﬁnanced.
• We have successfully reﬁnanced part 

£729.4m

56.0%

of our debt.

• We have maintained a strong credit rating.
• We have kept our dividend promise.

Cash generated 
from operations 
(2011: £753.0m)

Net Debt/RCV Gearing 
(2011: 56.8%)

Responsible leadership, protecting the 
environment, thinking long term and 
setting high standards in everything 
we do.

• We have improved our health and safety 

performance.

• We have generated record levels of 

renewable energy.

• We have completed a series of successful 

catchment management pilots.
• We have inﬂuenced the regulatory 

debate around the future of our industry.

Support for water trading in the UK Government’s 
Water White Paper, ‘Water for Life’

Growth

Strategy aim
Growing Severn Trent in the UK through 
investment in our networks and services.

Highlights 2012
• We have made good progress in 

preparation for the next price review 
in 2014 (PR14).

• We have successfully transferred private 
drains and sewers to our asset database. 

• We grew our Regulated Capital Value 

(RCV) by £275.0 million.

Key measures

4.0%

RCV growth 
(2011: 6.2%)

Positioning Severn Trent to capitalise 
on opportunities in a changing 
regulatory framework.

• Severn Trent Services is well placed 

• Granted both water and sewerage retail 

to compete in the emerging UK market 
for non-domestic retail.

• Severn Trent Water is well placed 

geographically to beneﬁt from future 
water trading.

licences in Scotland

• Severn Trent Water is looking at 

opportunities to provide water to other 
areas of the country 

Deploying Severn Trent Services business 
into new markets.

Developing new treatment technologies.

• We have successfully introduced our 
existing water ﬁltration products into 
a number of key markets in Spain, 
China and South America.

58

Countries with representative/ 
distributor locations  
(2011: 53) 

• Water Puriﬁcation (Products) – BALPURE® 

is making good progress with new 
contracts with Greenway Shipping 
(and others).

£5m

New commercial orders

 
 
 
 
 
 
 
 
 
 
 
‘ Despite the driest 18 
months on record, we 
managed our resources 
carefully and kept our 
customers supplied 
with high quality water, 
without having a 
hosepipe ban’

Severn Trent Plc  Annual Report and Accounts 2012

Chief Executive’s review

6

Business performance review
Severn Trent delivered good ﬁnancial and 
operational performance in 2011/12, 
despite challenging UK and international 
markets. We maintained our focus on 
efﬁciency and service improvement, and 
both Severn Trent Water and Severn 
Trent Services achieved high standards 
for their customers. 

Whilst keeping prices low, we delivered 
anticipated returns for investors, 
maintaining our dividend promise to 
grow our dividend by 3% more than the 
retail price index up to 2014/15. We also 
took important steps to maintain our 
ﬁnancial strength. We completed a 
successful £250 million 30 year bond 
issue at 4.875%. We bought back 75% of 
our 2014 £200 million bond, which was 
due for repayment shortly before the 
next price review, when raising ﬁnance 
could be more difﬁcult. We thus reduced 
a future reﬁnancing risk.

Our performance is a credit to our 
employees throughout the group. We are 
proud of their continuing commitment 
whilst we’ve made major changes over 
the last few years, including key change 
projects introducing new systems and 
processes, and a signiﬁcant change in 
beneﬁts for our employees, being the 
closing of our deﬁned beneﬁt pensions 
schemes to future accrual from 2015.

Our employees have proved adaptable 
and willing to embrace change which 
is important for our future prospects 
of success.

Severn Trent Water
Our household customers still have the 
lowest bills, on average, in England and 
Wales, and our prices will increase by less 
than the industry average in 2012/13. 
We’ve also been able to keep bad debts 
down, despite rising unemployment, 
by helping customers in need to pay 
their bills. 

During the year, we remained focused on 
improving our service and efﬁciency. We 
stepped up our network replacement, 
which helped us in the aftermath of the 
harsh December in 2010, which was 
the coldest in 100 years. Leakage was 
reduced to a new low, ahead of our 
target, and we dramatically reduced 
interruptions to supply.

Despite the driest 18 months on record, 
we managed our resources carefully 
and kept our customers supplied with 
high quality water, without having a 
hosepipe ban. As we enter the next 
ﬁnancial year, our water resources mean 
that we do not presently expect any 
usage restrictions.

One of the year’s key achievements was 
our smooth adoption of 37,000 km of 
private drains and sewers. Feedback from 
customers has been positive and the 
extra work required to repair and 
maintain these assets has so far been 
at the lower end of our expectations.

Any company that wants long term, 
sustainable success has to work in the 
right way. We call our approach ‘Safer, 
Better Faster’. It’s a combination of 
management disciplines and our belief 
in people taking responsibility for the 
way they work. We want our people to 
do the right thing the Severn Trent way, 
to get things right ﬁrst time, to help cut 
waste from our systems and processes, 
and to care about one another. 
We’ve built our ability to continuously 
improve, developing our people and 
upgrading our workplaces and 
technology, so we have a better 
working environment. All of these help 
us to deliver great service efﬁciently. 

Key areas for continued improvement 
include our environmental management, 
further reducing water supply 
interruptions and our customers’ 
experience of our services.

We’re not content with what we’ve 
achieved, so we’re always looking for 
new areas for success. For example, 
we’re increasingly using technology to 
make it easier for our customers to 
contact us and for us to stay in touch 
with them. And we’re introducing new 
water and waste water treatment 
processes that will cut energy use and 
make us more efﬁcient.

Severn Trent Water already has a sector 
leading position in renewable energy 
and we’re on track to generate up to 
30% of our electricity by 2015. We have 
no strong desire to be a big electricity 
generator – our motivation is to keep 
prices low for customers and reduce our 
carbon emissions. The next steps include 
increasing our use of anaerobic digestion 
and wind turbines.

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Severn Trent Plc  Annual Report and Accounts 2012

Chief Executive’s review

7

review in 2014 (PR14). Engaging with our 
customers and other stakeholders will be 
key, as we develop with them our plans 
for investment in our water and waste 
water networks to maintain the services 
provided, deliver our environmental 
obligations and ensure security of supply.

In Severn Trent Services our new 
management team is focused on 
operating efﬁciency and positioning for 
growth when the economy improves. 
We also continue to target new 
opportunities. For example, in addition to 
our existing England and Wales licence, 
we have been granted both water and 
sewerage retail licences in Scotland. 
Having the necessary operating licences 
in both markets prepares our business 
for the creation of a market across all of 
Great Britain as indicated in the UK 
Government’s Water White Paper, ‘Water 
for Life’. This will enable customers with 
sites across Great Britain to easily switch 
to Severn Trent Services as their single 
national water services supplier as the 
market opens up.

For several years, Severn Trent Water has 
been at the forefront of shaping the future 
of the water sector in the UK through the 
development of a series of publications 
known as ‘Changing Course’. We’re 
encouraged that our ideas are reﬂected 
in Ofwat’s publications on regulatory 
compliance and future price limits, and 
in the UK Government’s Water White 
Paper. These ideas will lead to optimal 
use of water resources, better ﬁnancial 
and environmental outcomes for 
customers and more certainty for 
investors. Looking to future opportunities 
for growth, Severn Trent Water is ideally 
placed to beneﬁt from water trading 
and to help other water companies 
meet their strategic shortfalls in supply 
– something we ﬁrst championed 
in ‘Changing Course’ and that has 
now been picked up by Ofwat and 
the UK Government.

Tony Wrayay
Tony Wray
Chief Executive

Severn Trent Services
Severn Trent Services performed 
creditably against a challenging 
economic backdrop. Severn Trent 
Services faced tough trading conditions, 
particularly in the ﬁrst half of the year. 
Political unrest in the Middle East and 
North Africa (MENA) as well as sluggish 
economic growth in developed markets 
made for a challenging environment for 
product sales and contract renewals. 
Reﬁnancing of the receivables for part 
of our business in Italy remained difﬁcult 
for all partners amid the ongoing 
Eurozone crisis.

Over the year as a whole, our revenues 
were slightly ahead on a constant 
currency basis (versus last year), 
although proﬁts were down by around 
a third, in part due to £2 million of 
investment in business development 
opportunities in both Products and 
Operating Services. Our Operating 
Services business continued to do well in 
the UK and Ireland but US markets were 
tougher and, as we reported at the half 
year, we have ceased any further 
development of our business activities 
in Italy. 

Water puriﬁcation products saw a slow 
recovery, with challenging markets in 
North Africa and the US, but better 
conditions in the Far East and the UK.

We made further progress with our new 
treatment product BALPURE®, our ballast 
water treatment system, which received 
Type Approval and we’re pleased to have 
sold the ﬁrst units in what is a potentially 
sizeable market.

Our UK Analytical Services business has 
reduced as two water utility clients have 
decided to insource their work.

At the end of the year, for Severn Trent 
Services, we appointed Martin Kane as 
the new Chief Executive Ofﬁcer along 
with a new Chief Financial Ofﬁcer, 
Stephane Bouvier.

Looking forward
The UK economy will remain tough for 
both consumers and businesses. This 
means we must continue to focus on 
delivering efﬁcient, high quality and low 
cost services, and be attentive to our 
customers’ needs. The UK climate will 
also be a challenge and we will have to 
manage our water resources carefully. 
The coming year will see us continuing 
with our preparations for the next price 

‘ For several years, 
Severn Trent Water 
has been at the 
forefront of shaping 
the future of the water 
sector in the UK’

 
 
 
 
 
 
 
 
 
 
 
Severn Trent Plc  Annual Report and Accounts 2012

Severn Trent Water
Group at a glance

8

Severn Trent Water provides high quality water and sewerage 
services to over 4.2 million households and businesses in the 
Midlands and mid-Wales. We want to be the best water and waste 
water company in the UK, by providing the highest standards 
and lowest possible charges, through our great people. 

Key strengths
•  We are committed to long 

term sustainability, keeping in 
balance the needs of our 
customers, the environment 
and our investors.

•  Our high standards and 

efﬁciencies keep our costs low 
and generate progressive, 
sustainable returns for our 
shareholders.

•  Our bills for water and 

sewerage combined are the 
lowest on average in England 
and Wales.

•  We have one of the lowest per 
capita consumption rates in 
the UK.

•  We continually work to 

improve our performance and 
deliver cost and operational 
efﬁciencies against Key 
Performance Indicators (KPIs), 
each of which is aligned to our 
long term strategy.

•  We have a clear business plan 
and a strong management 
team.

Where we operate

The industry

Our region stretches across the heart of the 
UK, from the Bristol Channel to the Humber, 
and from mid-Wales to the East Midlands.

Key facts

1.8bn litres

Drinking water supplied per day

1.4bn litres

Waste water collected per day

5,294

Employees  
as at 31 March 2012

Turnover

£1,457.5m
(2011: £1,389.8m)

Proﬁt*

£500.0m
(2011: £503.7m)

*  Before interest, tax and exceptional items.

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 in 1989 led 
to improvements in services to customers, 
better quality drinking water and higher 
environmental standards. Our proposals for 
changes in our industry are helping us to play 
a role in shaping the debate.

Our business

Severn Trent Water is a regulated business. 
We work within ﬁve year planning 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 
second year of AMP5.

How we measure success

Water companies are required to publish 
performance against a set of indicators. 
These indicators provide Ofwat with an 
overall picture of company performance 
against the commitments made as part of 
the AMP5 price review.

As well as being regulated by Ofwat, our 
performance is also monitored by:

•  the Drinking Water Inspectorate, which is 

responsible for making sure we comply with 
drinking water quality regulations; and

•  the Environment Agency, which controls 
water abstraction, river pollution and 
ﬂooding.

We also work with the UK Government 
(including the Department for Environment, 
Food and Rural Affairs and the Welsh 
Assembly Government) and other agencies 
such as the Consumer Council for Water, 
Natural England and Countryside Council for 
Wales to make sure we meet the highest 
customer service and environmental 
standards, while offering our customers the 
lowest prices.

Severn Trent Plc  Annual Report and Accounts 2012

Severn Trent Water – Group at a glance

9

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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 20 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

...delivered through our areas of focus
We focus on four key areas – customers, people, 
process and ﬁnance – to deliver the highest 
standards and lowest charges to our customers, 
through a highly skilled and committed workforce:

Customers

Our household customers have on average, the 
lowest bills in England and Wales. But keeping 
customers satisﬁed is not just about low charges 
and value for money. We also need to deliver 
reliability, reﬂect their needs and priorities in our 
plans, communicate clearly, keep our promises 
and put things right if they go wrong.

More on customers on page 12

People

Our people are the cornerstone of our success. 
We strive to recruit, train and retain the best people, 
underpinned by great workplaces and a strong 
culture of safety and personal responsibility.

More on people on page 16

Process

Our drive to work safer, better and faster is the 
foundation of our approach to continuous 
improvement. Making sure we have the right 
processes and systems in place is a fundamental 
part of our drive for operational excellence.

More on process on page 17

Finance

The higher our standards the more effectively and 
efﬁciently we work. In turn this improves our ability 
to keep our costs low and generate progressive, 
sustainable returns which earns the trust of our 
investors and shareholders. We always look to 
ﬁnance the company in an efﬁcient, sustainable way 
and maintain an investment grade credit rating.

More on ﬁnance on page 19

 
 
 
 
 
 
 
 
 
 
 
Severn Trent Plc  Annual Report and Accounts 2012

10

Our business model

Water is essential to life and to the communities in which we live 
and work. Severn Trent Water is intrinsically linked to the life cycle 
of water. The customer is at the heart of our continuous drive to 
improve our operations and services across collection, delivery 
and cleaning of water.

Severn Trent Water is a regulated business. 
We work within ﬁve year planning cycles, 
with customer prices set by our economic 
regulator, Ofwat, to allow us to fund our 
investment programme and cover an 
efﬁcient level of operating costs. We are 
also subject to regulation by two quality 
regulators – the DWI and the EA (details 
of these regulators are provided below).
Our prices and asset base are adjusted by 
RPI inﬂation each year. In certain 
circumstances we can ask for prices to be 
reviewed within the ﬁve year period due to 
costs associated with ‘notiﬁed items’ 
or ‘relevant changes of circumstance’. 
Customer bad debt and the adoption of 
private drains and sewers are included 
in these categories for the current ﬁve 
year period. 
The company earns a return on our asset 
base. We can generate additional returns if 
we outperform Ofwat’s assumptions by 
becoming more efﬁcient in the delivery of 
our capital programme, managing our 
operational costs more effectively, and by 
ﬁnancing our business at a lower cost. 
Our operating performance is assessed and 
benchmarked against the sector by Ofwat. 
At the next price review there is scope to 
earn additional income, or suffer penalties, 
based on our performance.

Regulatory framework

Consumer Council for Water
Consumer Council for Water is an independent body 
designed to protect the rights of consumers.  
www.ccwater.org.uk
Drinking Water Inspectorate (DWI)
The Drinking Water Inspectorate makes sure 
companies supply water that is safe to drink and 
complies with all national and European standards. 
www.dwi.defra.gov.uk
Environment Agency (EA)
The Environment Agency is a public body set up to 
protect and improve the environment.  
www.environment-agency.gov.uk
Health and Safety Executive
The Health and Safety Executive is the enforcing 
authority on health and safety law.  
www.hse.gov.uk
Natural environment
Such as Countryside Council for Wales and 
Natural England. 
Ofwat
The economic regulator for the water and sewerage 
industry. It makes sure that water companies use 
customers’ money efﬁciently and effectively and 
sets our price limits.  
www.ofwat.gov.uk

The role of Severn Trent Water

1

2

Water is collected  
(abstraction)
We pay the Environment 
Agency for the water we 
collect from reservoirs, rivers 
and underground aquifers 
across our region.

Water is cleaned 
Our 126 waterworks clean 
raw water to the highest 
standards making it safe  
to drink. 

Regulatory framework

• Natural environment
• Environment Agency

• Drinking Water Inspectorate

Risks (where these are currently considered Principal Risks, 
further details provided on pages 37–40)

•  We may be unable to collect and 
store sufﬁcient water to meet 
customer demand.

•  Failure of key assets may result 
in damage to property, injury to 
people and/or disruption to our 
ability to supply our customers. 
(Principal Risk Ref 4 and 6)

•  Failure of key assets or processes 
may result in a decline in water 
quality, disruption in our supply 
to customers or failure to meet 
regulatory targets. 

•  Hazardous processes or chemicals 
may result in people being injured. 
(Principal Risk Ref 4)

7

Networks invested 
and maintained

We are an investment led 
industry, and our capital 
programme this year was 
£474 million, or £112 per 
connected property reﬂecting 
increased investment year on 
year in our water and sewerage 

 
Severn Trent Plc  Annual Report and Accounts 2012

11

Risks

We operate within a complex legal and regulatory environment as a water 
and sewerage service provider in England and Wales. As a result we face a 
number of risks including those associated with possible non-compliance 
with our legal and regulatory framework and failure to meet the terms of 
our regulatory contract as set out in our agreed business plan for 2010–
2015. We also face risks associated with possible future changes in 
legislation which may result in our business plans becoming unsustainable. 
(Principal Risk Ref 1, 7 and 8 on pages 38–40)

3

4

5

6

Clean water  
is distributed
A 46,000 km network of pipes 
and enclosed storage 
reservoirs bring a continuous 
supply of clean water right to 
our customers’ taps.

Customers  
enjoy our services
We bill 4.2 million businesses 
and households a year. 
In return, we provide a safe, 
reliable supply of water and 
the collection of waste water 
24 hours a day, 365 days 
a year. 

Waste water  
is collected
Our c. 92,000 km of sewers 
collect waste water from 
homes and businesses, and 
surface water from outside 
properties and drains.

Waste water  
is treated
Waste water is carefully screened, 
ﬁltered and treated in our 
1,026 works to meet stringent 
environmental standards. 
We pay the Environment 
Agency an annual consent 
fee to return the now treated 
water to the water system.

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• Ofwat
• Health and Safety Executive
• Drinking Water Inspectorate

• Ofwat
• Consumer Council for Water
• Drinking Water Inspectorate

• Ofwat
• Environment Agency

• Natural environment
• Environment Agency

•  We may be unable to sufﬁciently 

improve our performance in 
relation to customer service 
in order to deliver what our 
customers tell us they want.  
(Principal Risk Ref 2)

•  The performance of our 

distribution network may fall 
below the standards expected by 
DWI or Ofwat, resulting in poor 
service to our customers and 
increased leakage from our 
network. (Principal Risk Ref 5)
•  Failure of one of our key assets 
could result in disruption to 
supply to customers.  
(Principal Risk Ref 6)

•  We may be unable effectively to 
integrate management of new 
assets taken on as a result of 
adoption of private drains and 
sewers resulting in deterioration in 
customer service and/or increased 
operational costs.

•  Failure to deal with customer 
waste effectively may lead 
to sewer ﬂooding.  
(Principal Risk Ref 5)

•  We may suffer operational 
failure in our waste water 
operations which results in 
damage to the local environment. 
(Principal Risk Ref 3)

networks, including ﬁnding and 
ﬁxing more leaks and reducing the 
number of supply interruptions, 
improvements to our water 
and sewage treatment plants 
and upgrades to our sewer 

network to reduce incidents of 
sewer ﬂooding. We fund this 
investment programme from 
the proﬁts we generate, but also 
by borrowing money from the 
capital markets. 

This capital investment is added 
onto our asset base, called the 
regulated capital value (or RCV). 
Our asset base also rises in line 
with inﬂation each year. 

The returns that we generate 
for shareholders on that asset 
base are set by our regulator, 
Ofwat, over ﬁve year planning 
cycles. We can increase these 
returns by outperformance. 

 
 
 
 
 
 
 
 
 
 
 
Severn Trent Plc  Annual Report and Accounts 2012

12

Performance

As we explain on page 9, Severn 
Trent Water strives for high 
standards and focuses on four key 
areas – customers, people, process 
and ﬁnance. Having the right people 
with the right skills, using the right 
processes, enables us to offer high 
quality, low cost services to our 
customers. This in turn drives our 
ﬁnancial results.
The following pages describe what 
we delivered for our customers 
during the year, along with the 
development of our people and 
processes. Severn Trent Water’s 
ﬁnancial performance is explained 
in the ﬁnancial review, on page 33.

Customers
We want to deliver the highest standards 
and lowest possible prices for our 
customers. Our water and sewerage bills 
are the lowest on average in England 
and Wales, at £311. We’re also increasing 
prices slower than most other 
companies. In 2012/13, the industry 
average price increase will be 5.7%, 
compared to 5.0% for our customers.

Customer complaints per 1,000 properties

2012

2011

4.88

5.72

Properties at risk of low pressure per 1,000 properties

2012

2011

0.06

0.07

First time call resolution (%)

2012

2011

93.8

97.5

Average water and sewage bill

£311

Average customer cost per day

85p

A continuous supply of quality water
We aim to deliver water that’s good to 
drink, meaning that it’s safe, tastes and 
looks good, and is always available.

Although the last 18 months were the 
driest ever recorded, we avoided any 
hosepipe bans or other limits on our 
customers’ water use. We did this by 
reacting quickly to conditions and by 
effective, forward and proactive planning. 
We draw our water from reservoirs, rivers 
and underground aquifers. By making 
sure we always used the most 
appropriate source, even if it was not 
always the most cost effective, we 
preserved water in areas where levels 
were lower. We improved our networks, 
so we could move water around more 
effectively, and invested in additional 
equipment at our water treatment 
works, so we could get water to the right 
place at the right time.

Our water quality remained high and 
once again we achieved 99.97% 
compliance with the Drinking Water 
Inspectorate’s standards. We continued 
to deliver water at the right pressure and 
signiﬁcantly reduced supply interruptions. 
However, interruptions are still higher 
than we would like and we expect to 
reduce them further in the coming year. 
To do this, we’re investing in training, 
better incident management and 
further improving our network.

We continue to invest to ensure we 
provide the best water quality. 
This includes improvements to our 
biggest water treatment works at 
Frankley, West Birmingham and a 
major investment programme at 
Bamford, Derbyshire.

We’re also progressing with our 
catchment management programme, 
as a key part of our water supply 
strategy. We’re encouraging farmers and 
other large land users to change the way 
they work, so they reduce their impact 
on water resources. For example, we’ve 
developed an online nutrient budget 
calculator for farmers, which allows 
them to make quick and easy savings 
through efﬁcient fertiliser use. If we can 
help farmers to apply fertiliser more 
efﬁciently, it saves them money and 
reduces the water treatment we need 
to do.

Severn Trent Plc  Annual Report and Accounts 2012

13

Customer experience
We recognise that most of our 
customers don’t have a choice about 
who supplies them. That doesn’t mean 
they are not our ﬁrst priority. We 
recognise that we will not be in business 
if they are not satisﬁed with the service 
we provide.

Ofwat’s Service Incentive Mechanism 
(SIM) measures our customers’ 
experience of dealing with us and helps 
us to track our performance. Our SIM 
score is based on the number of times 
customers have to contact us and 
the quality of service we deliver when 
they do. 

While we’re much better than average 
for the number of contacts, the quality of 
our service has not been as good as it 
should be. We’ve done a lot of work over 
the last year to put this right. Areas we’ve 
focused on include:

•  ﬁxing problems before customers have 

to contact us;

•  resolving problems ﬁrst time, when 
they do have to contact us; and

•  providing more ways to keep in touch 

with customers, for example by 
making better use of web channels 
and using text messages to conﬁrm 
appointments.

We’ve also improved our bills. They’re 
now simpler to understand and we can 
add targeted messages for customers, 
letting them know about different ways 
to pay or tips for saving water.

It’s also important to get direct feedback 
about how we’re doing. We’re now 
surveying many customers at the end of 
their calls, asking whether their problem 
was solved, how helpful our agent was 
and for their general views of our service. 
This process will be fully rolled out by the 
middle of 2012 and will inform us how to 
do better.

We are starting to see the beneﬁts of our 
actions with a continuous increase in 
SIM qualitative scores through the ﬁrst 
half of 2012 and an improvement in 
performance relative to other water 
companies in the ﬁnal quarter of 
the year.

We have reduced the number of written 
complaints by 14%, which brings us to 
a record low number of complaints. 
This was helped by the actions we’ve 
taken and the milder winter.

Managing debt
We aim to keep bad debts down, while 
helping people who want to pay but are 
struggling to do so. Despite the weak 
economy and rising unemployment, 
we were able to limit bad debts to 2.2% 
of sales, a similar level to last year.

We have several tariffs and schemes to 
help people pay. During the year we 
piloted the Together Scheme for 
people with debt problems, whereby 
we match the customer’s payments. 
The WaterSure tariff caps bills for people 
with low incomes, who use large 
amounts of water because of a medical 
condition or because they have a big 
family. We also have a scheme called 
Water Direct, which allows customers 
to make payments directly from their 
beneﬁts. During the year, we helped 
139 people through the Together 
Scheme, 6,347 through WaterSure 
and over 42,000 through Water Direct.

The Severn Trent Trust Fund distributes 
money to people who are ﬁnding it 
difﬁcult to pay their bills. We donated 
£3.5 million during the year. We’re 
also looking at ways to help vulnerable 
customers more broadly, by working 
with the Citizens Advice Bureau to advise 
people about managing their money and 
give them a sustainable solution to their 
debt issues.

Engaging with customers
As we approach the next price review in 
2014 (PR14), we’ll be working closely 
with customers and other stakeholders 
to ﬁnd out what they want from us and 
what they’re willing to pay for. Their input 
will be a key part of the plan we put 
forward to Ofwat. 

As part of this, we’ve created the Severn 
Trent Water Forum with representatives 
from a wide range of stakeholders. 
The Forum will engage with us to help 
us develop our plan to ensure we take 
account of their views. We will be holding 
workshops on issues such as climate 
change and how we manage waste 
water. We’ve also published a document 
called ‘Making the Right Choices’, 
which explains our challenges, the 
choices we have to make and asks 
for our stakeholders’ input.

Making the Right Choices

During 2012, Severn Trent Water 
will be consulting with customers 
and stakeholders on our 
investment plans for 2015–2020. 
We have published a consultation 
document, ‘Making the Right 
Choices’ which can be 
downloaded from our website. 
Stakeholder workshops will be 
held throughout the summer, 
supported by customer research 
and a wider programme of 
customer awareness and 
engagement.

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Severn Trent Plc  Annual Report and Accounts 2012

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‘ It’s nice to be able to speak 
to someone who understands 
your situation and will do 
everything they can to help. 
The services they offer, such 
as the large print bills, are 
gratefully received and 
very much appreciated.’

  Miss B Elwell, Stourbridge customer

Severn Trent Plc  Annual Report and Accounts 2012

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Keeping 
customers 
happy

Our customers continue to beneﬁt  
from high quality drinking water,  
a good service and value for money.

Meeting leakage targets
We have achieved our lowest 
levels of leakage ever, and have 
beaten our Ofwat target of 
474 Ml/d by 10 Ml/d (2%). 
This was achieved through 
improvements to targeting areas 
for leak detection, increases in 
efﬁciency in leakage ﬁnd, 
improved work scheduling and 
improvements to leak repairs. 

Maintaining security

We avoided the need for usage 
restrictions (hosepipe bans) 
despite the driest 18 months on 
record in the Midlands. This was 
achieved using our strategic grid 
to move water from the wetter 
areas in our North and West 
regions to the drier areas, by 
installation of additional pipelines 
and by operating our existing 
assets even more ﬂexibly. 

Reducing interruptions

We have reduced interruptions 
over 12 hours by over 10,000 
properties to 5,223. This was 
achieved through a focused 
‘Always On’ programme which 
has delivered people, process 
and technical improvements 
during the year.

Reducing complaints

We have shown signiﬁcant 
reductions this year including 
a reduction in Water Service 
complaints of around 34%. 
The overall complaint reduction 
of 14% is against the backdrop 
of greatly increased sewerage 
jobs and contacts since the 
transfer of private drains and 
sewers to us in October 2011.

Lowest 
levels of leakage 
achieved.

18 months 

of the driest 
weather didn’t 
affect water usage.

10,000
fewer properties 
affected by 
interruptions

34% 

reduction in water 
service complaints

 
 
 
 
 
 
 
 
 
 
 
Severn Trent Plc  Annual Report and Accounts 2012

16

Support for WaterAid

Severn Trent Water has 
continued to support WaterAid 
as its partner charity. In March 
2012, a team of nine from Severn 
Trent Water travelled to Tanzania 
to climb Mount Kilimanjaro 
raising over £30,000 for 
WaterAid. The team also visited 
projects run by WaterAid in rural 
areas in the country. The team 
came back challenged and 
inspired by the experience:

“The whole trip was amazing. 
Climbing Kilimanjaro was 
fantastically rewarding. We were 
fortunate to see ﬁrst hand the 
ways in which WaterAid spends 
this money. We visited a village 
that now has easy access to 
safe drinking water and a 
school that now beneﬁts from 
simple yet effective sanitation. 
The difference relatively small 
sums of money can make to 
people’s lives is amazing.” 

Andrew Fairburn 
UK Government & Stakeholder 
Engagement Manager 

People
Our aim is to have people with the right 
skills and the right approach to work, 
personal development and customer 
focus. To encourage the behaviours we 
think are important, we launched a new 
Code of Conduct in September 2011 
across Severn Trent, called ‘Doing the 
Right Thing, the Severn Trent Way’. 
This sets out our approach to corporate 
responsibility issues ranging from health 
and safety, to ethics and honesty, to 
delivering excellent customer service. 
‘Doing the Right Thing, the Severn Trent 
Way’ is supported by 15 group policies 
and their supporting standards and 
guidance notes.

A safe and healthy workforce
Protecting the health and safety of our 
people and contractors is our number 
one priority. We were pleased to have 
reduced the number of lost time injuries 
and can report that Severn Trent Water’s 
overall performance remains in the 
industry’s upper quartile. 

Our employee survey shows that we 
have a strong safety culture. This year, 
95% of our people said they were clear 
about their role and their responsibility 
for doing their job safely, while 89% said 
that we provided the right support for 
them to do their job safely.

One example of the actions we are 
taking was the launch of the Waste 
Water Services Safety Improvement 
Strategy, with the aim of eliminating all 
accidents in the workplace. This involves 
12 safety improvement workstreams, 
which are being developed through 
teams of employees, and ﬁve safety 
improvement projects. By the end of 
the ﬁnancial year, we had completed 
ﬁve of the workstreams, including site 
standards and leadership behaviour, and 
two of the projects – occupational road 
risk and managing contractors.

We focused on health and safety training 
and education during the year. This 
included piloting the MindSafety™ 
behavioural training programme. It 
teaches people about different states of 
awareness, so they understand why we 
want them to work in certain ways and 
they can take responsibility for their own 
safety. Attendees found the programme 
changed their behaviour and made them 
think more positively about health 
and safety.

We’ve also worked closely with our 
supply chain partners to make sure 
we both prioritise health and safety 
performance. This includes ensuring 
we have the same vision and values 
focused on health and safety, the right 
systems and training, and share lessons 
about safe working.

While we are rightly focused on safety, 
we also want to support our employees’ 
health. More than 600 people attended 
our wellbeing days, which included blood 
pressure, cholesterol and diabetes 
checks. We also piloted a back pain clinic 
and launched a physiotherapy helpline.

Engaging our people
Our annual employee survey once again 
showed that our people are positive 
about working for us. Our overall 
Engagement Index revealed 75% of our 
employees remain positively engaged.

Some notable results included:

•  92% saying they took responsibility 

for ‘Doing the Right Thing, the Severn 
Trent Way’;

•  87% being happy to go the extra 

mile at work; and

•  85% understanding how their role 

contributes to customers’ experience.

The survey also highlighted areas where 
we need to improve. For example, only 
39% said that the changes we have 
made over the last 12 months were well 
implemented. Our people also wanted 
visibility of the Severn Trent Executive 
Committee and to see that it is leading 
the business effectively. 

We know that our employees often 
haven’t had the chance to discuss with 
the Executive Committee face to face 
what we’re doing and why, and that 
these conversations can really help 
people to connect their role to the aims 
of the business. As a result, we have set 
up a rolling 12 month programme of 
discussions. The aim is for members of 
the Executive Committee to meet 
around 1,500 people from all parts of the 
business in small groups, in their 
workplaces. The conversations are open 
ended, so employees can ask whatever 
they want and share their view of the 
challenges and opportunities we face. As 
we can’t meet all of our people, we’re 
encouraging the invitees to talk to their 
colleagues before and after the meetings 
so everyone gains from the process.

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Diversity
Having the right people means having 
a suitably diverse workforce. This year, 
we focused on understanding gender 
issues and conducted gender diversity 
research with women employed by 
Severn Trent Water to understand more 
about the perceptions and experiences 
of women employees. This focused 
particularly on issues relating to job 
progression and the achievement of 
senior positions. The insights from the 
research will help us to improve our 
policies and practices in developing 
women in our organisation. We plan to 
use the same methodology to explore 
ethnic diversity in the near future, so we 
can gain more insights into this aspect of 
our workforce composition.

Process
To deliver great service to our customers 
we are continuously improving our 
processes and technology, whether it’s 
for treating water, monitoring our 
network, or scheduling our staff.

At our Minworth Sewage Treatment 
Works in Birmingham, we’re using an 
anaerobic ammonium oxidation 
treatment process, which is new to the 
UK. It’s a more efﬁcient biological 
treatment process for waste water, 
which allows us to reduce the energy 
and chemicals we use.

Another UK ﬁrst is an activated sludge 
process known as HYBACS, which we’re 
installing at Ashbourne, Derbyshire. 
This technique is used extensively in 
the Far East and allows us to process 
higher volumes, with much lower energy 
use and on a much smaller footprint.

We continued to add sensors to our 
telemetry system, which monitors the 
health and performance of our network, 
checking, for example, the pressure and 
ﬂow of water, water quality and reservoir 
levels. This gives us an early warning of 
problems, so we can proactively ﬁx them 
with minimum disruption for customers. 

Improving our organisation
We continue to review the structure and 
organisation of our teams to deliver 
improved efﬁciency and effectiveness. 
For example, in November 2011 we 
changed our operating model in Waste 
Water. This involved moving around 750 
people into new teams. Each team 
covers a smaller geographic area but 
now has more responsibility for customer 
service and repairing assets. In the run 
up to the change we trained our people 
so they could work on any of our assets 
in their area. The model gives us a 
platform on which to build service 
improvements.

Following our successful move to 
Coventry, we refurbished our Shrewsbury 
and Derby ofﬁces and adopted the same 
tools and ways of working, such as 
collaborative workspaces. This ongoing 
programme is giving our people a 
modern and effective working 
environment. 

Developing our people
We invest heavily in training and 
developing our people. This year involved 
a signiﬁcant amount of technical training, 
as well as leadership development. 
We continued to encourage our people 
to use our ‘Safer Better Faster’ approach 
to continuous improvement and we 
refocused our line manager training to 
help them manage and engage their 
teams more effectively.

The talent review process is ongoing and 
we have assessed over 600 managers 
and potential leaders this year. 
We’re increasingly creating individual 
development plans and moving people 
on our talent list around the company 
to broaden their experience. 

Our apprenticeship programme 
continues to grow, helping young people 
into work and giving us the skills we’ll 
need in the future. We currently have 
81 apprentices – in customer relations, 
water and waste water. One of our 
apprentices – Michael Williams – won the 
national EEF Outstanding Achievement 
by a Final Year Apprentice Award, for 
introducing process changes that saved 
money for the company by improving 
efﬁciency and reliability. We plan 
to recruit another 20 apprentices 
during 2012.

New Shrewsbury ofﬁce 
building improves 
effectiveness

In January 2012, more than 200 
of our employees moved into our 
new 29,000 sq ft ofﬁce building 
in Shrewsbury.

The layout of the innovative 
building was designed in 
conjunction with key managers 
to enable the optimal use of 
ofﬁce areas and collaborative 
work spaces; the best mix of 
purpose-built facilities as well as 
an effective common space at 
the heart of the building to 
encourage teams to meet and 
share ideas. The result is an 
engaging environment that has 
dramatically improved 
employees’ working experience 
and created an opportunity for 
them to work at their best 
every day.

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Severn Trent Plc  Annual Report and Accounts 2012

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We also invested to exploit new and 
existing features in our SAP and 
telemetry systems to deliver a better 
service to our customers. SAP now 
supports all our key processes and 
holds our operational data allowing 
us to make better operational and 
investment decisions. We have an 
ongoing programme of improvement 
to increasingly exploit SAP’s and other 
systems’ functionality to drive 
performance.

We have invested in giving our customers 
access to data from our telemetry and 
SAP systems through our website, 
helping our customers ﬁnd out if there is 
work going on in their area and what the 
latest status is. 

We’ve also introduced a shared support 
organisation. This brings together people 
from operations and information 
systems, who between them understand 
how our employees, technology and 
processes work. Their goal is to 
continuously improve, optimise and 
exploit SAP and other systems. We’re 
now seeing step changes in our use of 
the system. For example, we’ve re-
engineered our process for handling 
bursts on private properties, so we can 
offer quicker service.

New processes have also been added to 
automate operational ﬁeldwork crews. 
SAP holds data on the skills of all our 
operational employees. When a job is 
raised, the system automatically 
schedules a nearby work crew with the 
right skills to go and ﬁx the problem. It 
also provides them with the information 
they need, such as plans and maps, and 
records the time and materials used.

Environment
Delivering our environmental obligations 
is central to the way we work and has a 
real impact on our customers and the 
communities in which they live and work. 
The case studies on pages 20 and 21 
provide details of our investment in 
renewable energy.

Managing waste water
The driest 18 months on record 
contributed to a deterioration in our 
performance in the ﬁrst six months last 
year. Pollution incidents rose and we 
suffered a higher level of sewage 
treatment works breaches of consent.

We responded by increasing our asset 
maintenance activities, inspection 
regimes and installed more remote 
monitoring on our assets to help 
pre-empt potential failures. This has 
improved our performance from the 
summer onwards. We also continued 
our policy of self reporting to the 
Environment Agency, to raise our 
standards and highlight areas where we 
need to do better. Even so, for the year as 
a whole our performance fell short of the 
standards we aim for. There were 445 
reported pollution incidents (2011: 353), 
14 serious pollution incidents (2011: 4) 
and our sewage treatment works failing 
consent limit was 2.54% (2011: 1.69%). 
Our maintenance and inspection 
programme should deliver further 
improvements in the coming year.

Successful delivery of our investment 
programme is very important in 
delivering good service to our customers. 
We’ve invested in major schemes, 
particularly in Gloucester and 
Leamington Spa, which have improved 
our network reliability and have removed 
the risk of sewer ﬂooding – one of the 
worst service failures that can happen to 
a customer – for around 150 properties, 
gardens and other areas. We’ve also tried 
to minimise disruption to our customers 
while we carried out this work, for 
example by working with other utility 
companies to reduce road closures. 
In addition, we have a programme to 
refurbish some of our largest sewage 
treatment works, which will make them 
more resilient and improve river quality.

The transfer of private drains and sewers 
to us on 1 October 2011 went smoothly, 
adding 37,000 km to our existing 
55,000 km network. So far, we’ve had 
to do less repair work than we expected 
and customer feedback has been good. 
We’ve cleared around 12,000 sewer 
blockages on the transferred assets, 
which was 41% of the total blockages 
cleared since the transfer on 1 October 
2011. We’re now seeing fewer blockages 
and better management of pollution 
incidents on these assets. To help the 
transfer, we reorganised our supply chain 
so we have fewer contractor companies 
looking after our assets. Our remaining 
contractors have scaled up their 
operations so they can handle the 
greater workload.

Deploying water resources wisely
Severn Trent is the only company to 
have targeted a signiﬁcant reduction 
in leakage during AMP5. We were 
pleased to improve our performance 
again during the year. We cut leakage to 
464 megalitres per day (Ml/d), compared 
to 497 Ml/d last year and our target of 
474 Ml/d.

The investment we’ve made in SAP and 
in our ‘Safer Better Faster’ approach has 
helped us to improve our repair 
processes, so we can ﬁx leaks more 
quickly. We’re also beneﬁting from our 
investment in a system to help us 
improve detection of leaks.

Customers also have an important part 
to play and our water efﬁciency 
programme helps them to reduce their 
usage. For example, customers can use 
our website to view their water usage 
and understand where they can make 
savings. We also offer water saving 
devices such as aerated taps and shower 
timers. In addition, we work with schools 
and colleges to help them view and 
reduce their water usage, and with 
social housing providers to ﬁt water 
efﬁcient devices. 

This work ensures our customers 
continue to have among the lowest 
water usage in the UK. During the year, 
our customers used an average of 
125 litres per person each day, compared 
to the national average of 148 litres.

Severn Trent Plc  Annual Report and Accounts 2012

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Finance 
Our business is funded by receipts from 
customer bills, by raising money (debt) 
on the capital markets, and by 
shareholders retaining equity in the 
business. We aim to ﬁnance the 
company in an efﬁcient and sustainable 
way. By keeping ﬁnancing costs low we 
can keep customer bills low. We currently 
have an investment grade credit rating, 
with a stable outlook. In January we 
successfully issued a £250 million, 
30 year bond, with an interest rate of 
4.875%, the lowest rate we have seen 
to date.

Outlook
We continue to deliver on our 
programmes to raise standards and drive 
efﬁciency improvements. We are 
committed to enhancing our capital 
investment programme and delivering 
improved customer service and network 
performance. Whilst we are seeing signs 
of improvement in our SIM performance, 
industry benchmarks have moved 
forward and so must we. In terms of 
prospects for regulatory and industry 
change, Severn Trent remains at the 
forefront of industry thinking and we 
were pleased to see some of our ideas 
reﬂected in consultations from both our 
regulator and the UK Government. 
We will continue to make a positive 
contribution to the debate. Throughout 
our operations, our goal continues to be 
to deliver long term sustainable growth. 
This strategy, underpinned by a clear 
focus on customers, people, 
environmental performance and 
shareholder value will continue.

Cutting our carbon footprint
We’ve been investing in renewable 
energy for nearly a decade. Renewables 
provided 23.7% of the electricity we 
needed during the year and we’re on 
track to meet our target of generating 
30% of our electricity by 2014/15.

The ‘energy crop’ anaerobic digestion 
plant next to the Stoke Bardolph Sewage 
Treatment Works in Nottinghamshire is 
the UK’s ﬁrst on an industrial scale. It 
converts crops into electricity, using crops 
grown on land unsuitable for food 
production, and has been so successful 
that it’s received three awards. It’s also 
given us valuable experience that is 
helping us to improve the performance 
of our sludge anaerobic digestion plants.

In 2013, our ﬁrst large wind turbine will 
start generating electricity on land next 
to our Wanlip Sewage Treatment Works 
in Leicestershire, with another at 
Newthorpe in Nottinghamshire due to 
come on stream soon after. These, and 
four others currently in planning, could 
generate 6% of our electricity needs. 
We’re also pursuing a gas-to-grid project, 
which will allow us to provide cleaned up 
sewage gas to the national grid, and we 
are looking at several hydroelectric 
projects.

Protecting biodiversity
Severn Trent has a role in protecting and 
enhancing biodiversity at our sites or sites 
affected by our activities. We own or 
partly manage 37 sites of special 
scientiﬁc interest and work in partnership 
with our tenants and other partners to 
safeguard them. We have 21 rangers 
who manage our 12 public access sites 
working with volunteers and 
organisations like the RSPB and Wildlife 
Trusts. The sites provide the opportunity 
to engage with customers whilst 
enhancing and protecting the sites for 
nationally and internationally important 
species such as butterﬂies, water voles 
and tree sparrows. 

The ‘energy crop’ anaerobic 
digestion plant at Stoke Bardolph 
Sewage Treatment Works.

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Severn Trent Plc  Annual Report and Accounts 2012

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10,000 
properties were 
installed with water 
efﬁciency measures

212 GWh 
of electricity was 
generated from 
renewable sources

Water efﬁciency

We are working closely with the 
Environment Agency, social 
housing providers, Global Action 
Plan and South Staffordshire 
Water on a joint programme, 
‘Plug-In’. The aim of this 
programme is to encourage 
water and energy efﬁciency. 
Through it we are educating 
consumers and installing water 
efﬁciency measures including tap 
and shower ﬂow regulators, dual 
ﬂush systems and shower heads 
in 10,000 properties. 

Renewables

We’ve been investing in 
renewable energy for nearly 
a decade. This year, we have 
continued the growth, generating 
212 GWh of electricity from 
renewable sources. This equates 
to 23.7% of the electricity that 
Severn Trent Water needs to 
provide its water and waste water 
services and represents another 
signiﬁcant step towards our target 
of 30% by 2014/15. In 2013, our 
ﬁrst large wind turbine will start 
generating electricity on land 
next to our Wanlip Sewage 
Treatment Works in Leicestershire, 
with another at Newthorpe in 
Nottinghamshire due to come on 
stream soon after. These, and 
four others currently in planning, 
could produce 6% of our 
electricity needs.

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Always 
innovating

Innovation is driving operational 
performance across all of our operations.

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 The Renewable Heat Incentive 
scheme aims to stimulate investment 
in the supply of renewable heat 
and the injection of renewable gas 
(bio-methane) into the gas grid. 
We can beneﬁt from this scheme by 
diverting gas away from electricity 
generation and into the gas grid. This is 
an emerging ﬁeld with no commercial 
installations in operation yet which 
means an inevitable variety of technical 
and regulatory challenges that have to 
be negotiated for the ﬁrst time. But we 
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be injecting gas in 2013. 

 
 
 
 
 
 
 
 
 
 
 
Severn Trent Plc  Annual Report and Accounts 2012

22

Group at a glance

Severn Trent Services is one of the world’s leading suppliers of 
water and waste water treatment solutions. We are known for 
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 provide operating services 
to an increasing number of 
utilities, municipalities and 
commercial customers in 
targeted countries.

•  We are a leader in the design, 
production and sale of water 
puriﬁcation products in high 
growth markets such as 
disinfection, ﬁltration, 
adsorption and marine/
offshore waste water 
treatments.

Where we operate

The 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 products and 
operating services to utilities, municipalities 
and commercial customers in selected key 
markets around the world. We focus on the 
high growth markets and geographies where 
our speciﬁc products and services meet the 
signiﬁcant needs of our customers.

We have three principal business streams:

•  Water Puriﬁcation (Products) is one of the 

leading global providers of advanced 
technologies products and integrated 
solutions for water and waste water 
disinfection, ﬁltration, adsorption and 
marine/offshore waste water treatment.

•  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.

•  Analytical Services operates in the UK 

environmental water and contaminated 
land testing services.

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.

Key facts

£56.5m

order book

2,933

Employees  
as at 31 March 2012

Turnover

£332.3m
(2011: £336.1m)

Proﬁt*

£18.0m
(2011: £25.7m)

*  Before interest, tax and exceptional items.

Severn Trent Plc  Annual Report and Accounts 2012

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Key strategic intentions...
Eight Key Strategic Intentions deﬁne our 
strategy and set out how we intend to achieve 
our objectives:

...delivered through our areas of focus
Severn Trent Services is one of the leading water 
and waste water businesses in the world. 
To achieve our strategy we focus on:

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

Water Puriﬁcation (Products)

Municipal, commercial, industrial and 
marine applications require water 
treatment technologies to meet their 
disinfection, ﬁltration and process needs. 
The Water Puriﬁcation group’s portfolio of 
water products are used around the 
world in support of these applications. 

More on Water Puriﬁcation on page 26

Operating Services

Operating Services delivers safe 
drinking water and waste water 
treatment services. It is responsible for 
the operation of more than 900 
treatment facilities in the United States, 
United Kingdom, Ireland and Italy. 

More on Operating Services on page 29

 
 
 
 
 
 
 
 
 
 
 
Severn Trent Plc  Annual Report and Accounts 2012

Severn Trent Services
Our business model

24

Our core customers are municipal utilities 
looking to sustain high quality standards 
and to ﬁnd cost efﬁciencies through 
public–private partnerships.
The market for water and waste water 
products and services is signiﬁcant, 
with good prospects for long term sales 
and proﬁt growth due to fundamental 
drivers: water scarcity, population 
growth, climate change and more 
stringent regulatory requirements. 
Our strategy is to introduce new 
technologies into existing markets, 
such as our BALPURE® ballast water 
treatment technology, as well as 
growing our Operating Services business 
in the US and Europe where we operate 
more than 900 facilities and have 
£205 million revenue. 
We target a return on capital in excess of 
the regulated water business, commonly 
above 10%.

Key to our services

Filtration 
Areas where STS offers ﬁltration products/
services for all or part of the process cycle

Disinfection 
Areas where STS offers disinfection 
products/services for all or part of the 
process cycle

Operating Services 
Areas of the process cycle where STS offers 
contract operations

Our websites

www.severntrentservices.com 
www.severntrentdenora.com 
www.stsoperatingservices.co.uk 
www.stsanalytical.com

(cid:3)
Providing Operating Services  
and Water Puriﬁcation Products to:

1
Municipal Water  
Treatment
Severn Trent Services provides a multiple barrier 
treatment approach incorporating ﬁltration, 
disinfection and process solution technologies for 
various municipal water treatment applications. 

In addition, we provide contract operations for 
municipal water treatment facilities in the US, 
UK, Ireland and Italy. 

Disinfection
Product: 
Advance™, AQUAWARD®, Capital Controls®, Chlor-a-Vac®, 
Chloromatic™, ClorTec®, MicroDynamics®

Filtration
Product: 
Bayoxide® E33, Omni-SORB™, SORB 07™/09™/33®, 
TETRA® DeepBed™, TETRApHix®, UAT™

Seawater and Separation
Product: 
Bayoxide® E33, Capital Controls®, ClorTec®, Higgins Loop™, 
MicroDynamics®, Omni-Flow™, Omni-SORB™, SORB 33®, SORB 07™, 
TETRA FlumeFlow®, TETRA® LP Blocks™, TETRApHix®, UAT ™

Services: 
Water Facility Operations & Maintenance (O&M), Water System 
Treatment & Distribution, Asset & Capital Management, 
Design & Build, Integrated Water Services Management, Leakage 
Detection & Reduction, Legionella Control, Meter Installation, 
Repair & Maintenance, Network Repair, Maintenance & Renewal, 
Project Finance Arrangements, Water Quality Sampling, 
Assessment & Rectiﬁcation, Water Regulations Compliance, 
Water Sampling & Analysis

Risks

•  We may be unable to collect and store sufﬁcient water to 

meet customer demand. 

•  Hazardous processes may result in our people being injured. 

(Principal Risk Ref 4)

•  Regulatory or political change may lead to decreased demand 

for our services.

Severn Trent Plc  Annual Report and Accounts 2012

Severn Trent Services – Our business model

25

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Municipal Waste  
Water Treatment
Severn Trent Services provides a multiple barrier 
treatment approach incorporating ﬁltration, 
disinfection and process solution technologies 
for various municipal waste water treatment 
applications. 

In addition, we provide contract operations for 
municipal waste water treatment facilities in the  
US, UK, Ireland and Italy.

3
Industrial
Severn Trent Services offers a range 
of disinfection, ﬁltration and process 
solutions for a suite of industrial 
water and waste water applications. 
In addition, we provide design, build 
and contract operations for water 
and waste water treatment facilities 
for a variety of industrial segments 
in the US, UK, Ireland and Italy.

4
Marine
Severn Trent Services offers a range 
of disinfection, ﬁltration and process 
solutions for marine and offshore 
water and waste water applications.

Primary Treatment

Secondary/Biological Treatment
Product: 
TETRA® SAF, Amphidrome, TETRA® ColOX

Tertiary/Advanced Treatment
Product: 
TETRA® DeepBed™, TETRA® Denite®, TETRA® NSAF, TETRA® 
Shortcut-NRT™, TETRA® SNAP-T®

Final Treatment UV/Chlor Disinfection
Product: 
Capital Controls®, ClorTec®, MicroDynamics®

Services: 
Waste Water Facility Operations & Maintenance (O&M), Waste Water 
System Treatment & Collection, Asset & Capital Management, Design 
& Build, Industrial Pre-treatment, Network Repair, Maintenance & 
Renewal, Project Finance Arrangements, Sludge Treatment & Disposal, 
Waste Water Sampling & Analysis 

Process Water
Product: 
Capital Controls®, ClorTec®, EST™, 
MicroDynamics®, TETRA® DeepBed™, TETRA® 
Higgins Loop™, UAT™, UltraDynamics®

Cooling Water
Product: 
Capital Controls®, ClorTec®, EST™, 
MicroDynamics®, SANILEC®, SEACLOR®, 
TETRA® DeepBed™, TETRA® Higgins Loop™, 
UAT™, UltraDynamics® 

Services: 
Severn Trent Services provides a full range of 
expertise from the individual aspects of water/
waste water utility management to the 
provision of integrated water/waste water 
services for a variety of clients, including:
•  Utilities
•  Public Sector
•  Estates and Facilities Management
•  UK MoD
•  Developers
•  Domestic Customers

Electrochlorination
Product: 
ClorTec®, SANILEC® , SEACLOR®

Desalination
Product: 
SANILEC®, SEACLOR®, UAT™, UltraDynamics® 

Marine Sewerage
Product: 
MARINER OMIPURE® Series M55, OMNIPURE™ & 
OMNIPURE™ Series 55, SANILEC®, SEACLOR®, 
UAT™, UltraDynamics®

Ballast Water Treatment
Product: 
BALPURE®

Risks

Risks

Risks

•  Failure of treatment processes may result in environmental 

•  Failure of products or treatment processes 

•  The Intellectual Property in our key 

damage and regulatory non-compliance. 

•  Regulatory or political change may lead to decreased demand 

for our services.

•  Hazardous processes may result in our people being injured. 

(Principal Risk Ref 4) 

may result in injury to people, 
environmental damage and regulatory 
non-compliance. (Principal Risk Ref 4 
and 8)

•  Disruption in the global supply chain may 

impact our ability to meet customer 
needs. 

products may be used by competitors.

•  Regulatory change may lead to 

decreased demand for our products.
•  Competitors may enter the market 

leading to decreased demand for our 
products and services.

 
 
 
 
 
 
 
 
 
 
 
Severn Trent Plc  Annual Report and Accounts 2012

Severn Trent Services
Performance

26

As we explain on pages 22 and 23, 
Severn Trent Services focuses on 
Water Puriﬁcation (Products) and 
Operating Services to provide water 
and waste water treatment 
products as well as providing 
contract operations such as 
managing water treatment plants 
on behalf of our customers and 
environmental testing services. 
We look to enhance our products 
and contract operations to improve 
our effectiveness and efﬁciency; 
develop and launch new 
technologies; move new and 
existing products into new 
territories; and expand the scope 
of our Operating Services. 
The following pages describe how 
we performed during the year, 
along with details of our approach 
to continuous improvement. 

In Disinfection, which accounts for 68% 
of Products turnover, activity in the Gulf 
of Mexico increased due to the lifting of 
the drilling ban and strong oil prices. 
This in turn increased demand for our 
sewage treatment and disinfection 
products in that segment. In MENA 
and Asia Paciﬁc, investment in power 
and water projects contributed to 
growth in demand for our ClorTec® 
electrochlorination product. 
Egypt remains a key target market 
for industrial water treatment products, 
but political uncertainties and civil 
unrest have delayed investment and 
thus dampened demand.

Savings in the supply chain helped 
reduce costs and assisted in combating 
competitive pricing pressures. 

In the marine market, we received Type 
Approval for our full line of BALPURE® 
ballast water treatment products in 
October 2011. Interest in this product 
line was greater than expected 
with recorded orders of £5 million. 
Orders were received from various 
shipyards and ship owners, including 
Greenway Shipping and Sasaki 
Shipbuilding. We have a pipeline of 
projects that supports our ambitious 
growth targets. To sustain this growth, 
during the year we invested in establishing 
a dedicated BALPURE® sales organisation. 
We will continue to develop our channels 
to market, with additional investment 
anticipated for the coming year.

Severn Trent Services had a challenging 
start to the year, with economic and 
operating conditions in many of our 
markets impacting negatively on both 
turnover and proﬁt. The second half saw 
an improved performance and while 
markets remain challenging, the 
business is well positioned to take 
advantage of longer term growth drivers. 
In 2011/12 revenue was £332.3 million, 
growth of 0.6%, on a constant currency 
basis, driven by increased Operating 
Services sales in UK and Ireland markets. 
PBIT1 (proﬁt before interest and tax) 
was £18.0 million, a decline of 
25.6% on a constant currency basis, 
due to investments in business 
development, a change in product 
mix in our Water Puriﬁcation division 
and competitive pressures. 

At the end of the year we made two 
signiﬁcant management changes with 
the appointment of Martin Kane as 
Chief Executive Ofﬁcer, taking over from 
Len Graziano who retired, and he was 
joined by our new Chief Financial Ofﬁcer, 
Stephane Bouvier.

Water Puriﬁcation 
(Products)
Economic conditions in our markets were 
mixed during the year. In Filtration, which 
accounts for 32% of Products turnover, 
the US saw limited investment by local 
municipalities due to their weaker 
ﬁnances. The main driver of demand is 
the ongoing regulation of environmental 
and quality standards. So, many 
municipalities struggling with ﬁnancial 
pressures have chosen to delay making 
upgrades and improvements not critical 
to achieving these standards. In the 
industrial market, sales grew year on 
year due to higher demand from the 
steel industry. 

Emerging markets such as Asia Paciﬁc 
and the Middle East and North Africa 
(MENA) grew, and in the UK the second 
year of the regulatory cycle saw water 
companies’ capital investment 
programmes ramp up, meaning demand 
for our ﬁltration products was robust.

1.  Before exceptional items.

Severn Trent Plc  Annual Report and Accounts 2012

27

‘ Greenway Shipping chose the 
BALPURE® system because of its 
technical features and Severn 
Trent De Nora’s long history of 
water treatment in the marine 
industry. We strongly believe 
Severn Trent De Nora will support 
us throughout the barge’s 
expected lifespan of 30 years.’

  Trym Gade Lintoft Greenway Shipping

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  Iqbal Hossain, BALPURE® Service Engineer

Expanding 
our markets

We are successfully introducing our 
products into a number of key markets 
in Asia, China and Europe.

BALPURE®

The BALPURE® system has gained 
headway globally among larger 
vessels requiring a reliable ballast 
water treatment solution. 
Since its initial Type Approval 
in July 2011, BALPURE® was 
selected for use across different 
vessel types, attesting to its 
ﬂexibility and suitability for the 
diverse and demanding marine 
market. The BALPURE® system is 
chosen over competing vendors 
due to its robust and proven 
electrolytic disinfection 
technology perfected by 
Severn Trent De Nora over 
35 years in the marine and 
offshore industries. BALPURE® 
has been chosen by ship 
operators and yards for its 
treatment approach, low power 
consumption and low 
maintenance requirements.

50,000+ ships 
requiring ballast 
water treatment 
systems 

£21.3 billion 
estimated market 
value to 2020

 
 
 
 
 
 
 
 
 
 
 
 
Severn Trent Plc  Annual Report and Accounts 2012

28

Developing 
relationships

Severn Trent Services’ business with 
Costain, C2C (Coast to Coast Water and 
C2C Services), is delivering operations 
and maintenance for the UK MoD’s 
water and waste water assets as part 
of a 25 year, £1 billion contract.

‘ To date, C2C has exceeded leakage reduction 
targets, upheld environmental performance, 
and invested in assets and crown ﬁre standards. 
Behind these headlines are hard working 
teams managing the day to day operation and 
maintenance of the MoD assets, providing a 24-7 
service. They continually ensure that the contract 
requirements are met, and customers receive the 
appropriate level of service.’
 Defence Infrastructure Organisation (DIO), Aquatrine, UK MoD

11 years ahead 
C2C achieved the UK 
Government’s MoD 
target to cut water 
consumption by 
25% by the year 
2020 in 2009, 
11 years early

Project Aquatrine

Severn Trent Services’ business 
with Costain, C2C, has been 
working with the Ministry of 
Defence (MoD) under Project 
Aquatrine since 2005, providing a 
fully managed service to operate, 
maintain and improve nearly 
5,000 water and waste water 
assets across 1,300 sites in 
England. C2C has built a strong 
relationship with the MoD 
establishing a safe, efﬁcient, and 
responsive service across this 
wide geography. C2C manages 
over 7,100 megalitres of water, 
takes around 69,000 water 
samples and processes over 
17,000 bills a year. This year it 
has reduced average monthly 
leakage across the MoD estate 
by over 250 megalitres, which is 
equivalent to over 100 Olympic 
swimming pools, and with the 
installation of a highly accurate 
metering system with telemetry 
to C2C headquarters, both parties 
can check progress in an instant. 
Thanks to the success of 
Aquatrine, the MoD and its 
contractors now appoint C2C to 
carry out water and waste water 
services work outside of the 
contract, where MoD ‘Value for 
Money’ tests have been proved.

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Severn Trent Plc  Annual Report and Accounts 2012

Severn Trent Services – Operating Services

29

Operating Services
Operating Services (OS) revenues were 
£204.5 million, growth of 3% on a 
constant currency basis, compared to 
the previous year. The calendar year 
2011 was challenging for our US region 
which accounts for 51% of OS revenues. 
The lagging effects of the recession 
resulted in constrained municipal 
budgets and the loss of some small 
contracts taken back in house by 
municipalities, although the total 
number of contracts remained broadly 
stable. The US market was ﬂat overall, 
although we maintained our market 
share. We have focused our business 
development efforts accordingly, but we 
do not expect market conditions to 
change signiﬁcantly in 2012. All of the 
basic market drivers for public-private 
partnerships remain strong – regulatory 
compliance, cost control necessitated by 
shrinking municipal budgets, human 
resources management, infrastructure 
investment requirements, need for 
technical resources, transfer of risk, 
and safety concerns. Our investment in 
business development began to pay 
off in the second half of the year, as we 
won several projects in new states 
such as Georgia and improved our 
opportunity pipeline.

As noted in the half year results, political 
and economic uncertainty impacted our 
Italian business which represents 16% 
of OS revenues. While the business is 
proﬁtable and cash generative, the 
impact of the economic crisis in Italy 
in the autumn of 2011 hampered 
the efforts of all partners to agree a 
reﬁnancing package for part of our 
business. This led us to take a provision 
against our economic exposure in this 
associate company. The political 
situation also stalled the move of any 
further regional water companies, 
known as ATOs, from the public to the 
private sector.

However, project growth in the UK and 
Ireland exceeded our expectations, 
driven by new contracts wins, including 
a ﬁve year contract to design, build and 
operate waste water treatment for a 
major European food manufacturer 
worth £2.0 million, and a four year water 
hygiene contract worth £2.0 million with 
a large London borough council. 

Analytical Services
This has been a very challenging year for 
Analytical Services. The Drinking Water 
Inspectorate published its report on the 
results of its investigation into aspects of 
the services provided at our Bridgend 
Laboratory. No ﬁnancial penalty was 
imposed and as a result of this report no 
further liability has arisen. Low levels of 
activity in the UK economy led to a 
lower level of soil analysis work for 
the construction market, while the 
Water Framework Directive contributed 
to higher volumes for analysis. 
We improved our operational efﬁciency 
during the year through investment in 
instruments and an improved project 
management process. Towards the end 
of the year and early in the new ﬁnancial 
year we have been informed that certain 
contracts from utilities companies will 
not be renewed and will be taken back in 
house. This will signiﬁcantly reduce the 
size of this business in the future with a 
greater balance of commercial versus 
utility work. 

Continuous improvement
Environment
We understand the need to ﬁnd 
innovative ways to reduce our 
environmental impact and to help our 
customers do the same. We do this by 
carefully managing our resources, waste 
water discharges and treatment sites, 
and by developing new technologies. 

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 
environmental impact. For the fourth 
year in a row, our US Operating Services 
business completed site energy 
management plans for three major 
plants. These help us to determine 
the most energy efﬁcient treatment 
processes. 

Many of our products and services 
help our customers to improve 
their environmental performance 
and to operate more efﬁciently. 
The Environmental Business Journal 
recognised us for the range of new 
technologies we have introduced over 
the past year, including inorganics 
removal systems, BALPURE®, and a 
system to control chemical feed in 
water and waste water applications.

 
 
 
 
 
 
 
 
 
 
 
Severn Trent Plc  Annual Report and Accounts 2012

Severn Trent Services – people

30

Outlook
The medium term outlook for Severn 
Trent Services is positive, driven by the 
fundamentals of population growth, 
water scarcity, and regulation, although 
there remain short term challenges. 
Our Water Puriﬁcation business will 
target growth in emerging markets, 
although European and US markets 
will remain challenging. In Operating 
Services, although the US utility 
outsourcing market remains ﬂat we are 
in a favourable position on several new 
projects, and we are investing to extend 
our geographic reach and support our 
longer term growth. In the UK and 
Ireland we aim to capture additional 
opportunities in both contract operations 
and the design, build and operate (DBO) 
markets. Overall we expect additional 
costs of around £2 million in 2012/13 
from ongoing investment in new 
business opportunities across Severn 
Trent Services to position ourselves for 
future growth.

People, health and safety
Severn Trent Services ended the ﬁnancial 
year with a loss time injury (LTI) accident 
frequency rate (LTI per 100,000 hours 
worked) up 9% on the previous year, 
although an improvement in 
performance was seen during the 
second half of the year.

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 our employee 
engagement survey showed that the 
majority of our employees (69%) 
are proud to work for us, and that we 
outperformed many other industry 
and country benchmarks. 

Given our strategy to embed health, 
wellbeing and safety in all areas of our 
business, we were pleased that our C2C 
and Metering Services businesses in the 
UK once again received Gold Awards 
from the Royal Society for the Prevention 
of Accidents. These awards recognise 
effective health and safety management 
systems. The continuous improvement 
of our management systems is paying 
off, with our UK, Ireland and Italian 
Operating Services businesses working 
through the year with no lost time 
injuries. Overall Severn Trent Services 
ended the ﬁnancial year with an LTI 
accident frequency rate of 0.36. We’re 
also sharing lessons and best practice 
with Severn Trent Water. For example, 
we’re introducing the MindSafety™ 
behavioural training programme which 
Severn Trent Water introduced this year.

Get the World Moving

We were also pleased with the 
results of our commitment to 
improve health through the 
Global Corporate Challenge, 
a 16 week virtual walking journey 
around the world. We had 
735 employees taking part. 
Afterwards, 89% said it improved 
their health and 82% thought 
it increased ofﬁce morale. 
We also gave 735 children the 
chance to participate in the 
Global Children’s Challenge.

Severn Trent Plc  Annual Report and Accounts 2012

Looking forward

31

Severn Trent is committed to helping 
shape the future of the water 
industry so it is better able to meet 
future challenges.
In 2010 we published the ﬁrst of our 
‘Changing Course’ documents setting out 
our contribution to the debate on the 
future of the industry. We have been 
encouraged by how many of these ideas 
were reﬂected in recent UK Government 
and Ofwat publications.

In December 2011, the UK Government 
published ‘Water for Life’, its Water White 
Paper setting out its strategic vision for 
the water industry. We welcome the 
objectives and strategic direction of 
the White Paper. We are particularly 
encouraged by the White Paper’s support 
for water trading, upstream competition 
and catchment management. We also 
welcome the UK Government’s strong 
and explicit acknowledgement of the 
need to maintain the conﬁdence of 
investors.

Earlier in May, Ofwat published ‘Future 
price limits – statement of principles’ 
setting out how it proposes to regulate 
the industry in the future. We welcome 
this document and look forward to 
working with Ofwat and others to 
achieve the best possible outcomes 
for our stakeholders.

In terms of general principles set out 
in ‘Future price limits’, we particularly 
support:

•  Ofwat’s overall objectives of creating 
a more targeted, proportionate and 
appropriate regulatory framework 
which focuses on the most important 
outcomes; 

•  the aim of reducing the regulatory 
burden and a move to a more 
targeted, risk based approach for the 
next price review; and

•  more involvement from customer 
groups in the price setting process.

We were also pleased to see the strong 
encouragement by Ofwat for water 
trading, building on the policy direction 
set by ministers in the White Paper.

We will continue to work constructively 
with the UK Government, our regulators 
and others to help shape the water 
industry so it can meet future challenges.

The challenges for the next 20 years
The challenge of the last 20 years was 
ensuring higher quality. The challenges 
for the next 20 will be no less demanding, 
with climate change putting resilience 
and security of supply at the top of 
the agenda.

‘Water for Life’ emphasises the need 
for making the true social, economic 
and environmental cost of water visible. 
We think that’s right. The UK has a 
growing water scarcity problem, 
particularly in the south and east, 
which will affect everyone over the 
next two decades. We all have a part 
to play in maintaining supplies and 
delivering high standards.

We’re particularly pleased that the White 
Paper supports more focus on network 
interconnection and water trading, with 
the Environment Agency challenging 
companies’ Water Resource Management 
Plans where alternative water sources 
are available. Applied effectively, this will 
help to correct the UK’s supply-demand 
imbalance and increase water trading. 
Moving water across areas should be 
cheaper and have less environmental 
impact than current practices, which 
increase carbon emissions and capital 
intensive local investment.

We’re also pleased to see support for 
the trading of abstraction licences. 
Change in this signiﬁcant area needs 
full consultation, so the UK Government’s 
timetable is sensible, with the new 
regime expected to start in the mid 
to late 2020s.

The encouragement to reduce pollution 
through catchment management, 
instead of expensive ‘end of pipe’ 
solutions, is also welcome. We’re keen 
to share our experience of this over the 
last few years.

Taken together, these initiatives should 
improve the UK’s resilience to drought 
and water scarcity, while reducing 
carbon emissions. There are also possible 
incentives for water companies to reduce 
consumption and for the sustainable 
‘economic level’ of leakage calculation 
to be revisited.

Changing Course

In April 2010 we published 
Changing Course, a report setting 
out six proposals to secure a 
sustainable future for the water 
industry. Since then, the report 
has contributed to a wide-
ranging policy and regulatory 
debate, and our proposals for 
water trading were taken forward 
in the UK Government’s Water 
White Paper, ‘Water for Life’. 

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Severn Trent Plc  Annual Report and Accounts 2012

Looking forward

32

The customers’ role
Customers have a key role in reducing 
water use. The industry needs to change 
the way that customers think about and 
value water, and encourage them to 
use less.

We’re pleased that the White Paper rules 
out universal metering. Metering must 
make sense in the context of an area’s 
supply and demand balance, and our 
experience shows that it’s more effective 
alongside behavioural change.

Affordability is also a key theme and 
there’s no doubt that customers want 
value for money. Bills could be lower if 
the industry were to tackle bad debts 
and follow the White Paper’s principles, 
which emphasise catchment 
management and smarter 
environmental solutions.

Still more work to do
There are aspects of ‘Water for Life’ that 
we like but that need further work, to 
keep regulation clear and predictable.

There’s no doubt that the sector will 
need to invest signiﬁcant sums and will 
rely on the capital markets for ﬁnancing. 
The UK Government recognises the need 
to reassure investors and has said that 
reforms will be evolutionary, rather than 
revolutionary. It has also avoided 
fundamental structural change, such as 
legally separating companies’ retail 
operations. Even so, there are areas 
where we need to move cautiously and 
in full consultation with all stakeholders.

One of the key talking points is the shift 
towards more competition. While the 
UK Government has ruled out retail 
competition for domestic customers, it 
will take long overdue steps to improve 
retail competition for business 
customers. We have positioned Severn 
Trent Services for new opportunities in 
this market and expect that competition 
will be largely around service innovation 
and not just price.

Scrapping the ‘cost principle’ could 
promote competition but it needs to be 
replaced with something more sensible. 
We would like to see Ofwat working with 
the Ofﬁce of Fair Trading to design a 
better access price system, and not 
rushing to a conclusion that risks 
passing the cost to domestic customers. 
This may mean waiting to abolish the 
cost principle from law and not leaving 
the industry in limbo. Changes to the 
Water Services licence to introduce 
upstream competition should also be 
treated with caution, in case it’s seen 
as weakening the fundamental 
business model.

The case for change has been made
In summary, the case for change has 
been made and the direction is set. 
‘Water for Life’ is the start of a process of 
breaking down the sector’s rigidity, by 
creating space for competition and 
allowing more ﬂexibility, so we can meet 
the challenges of climate change, 
affordability and carbon reduction. As an 
industry, we should get behind it and 
work out the best outcomes.

Sustainable ﬁnancing
The water industry has been investing 
heavily to renew ageing infrastructure, 
to meet growing demand and to deliver 
environmental improvements. Much has 
been achieved, but signiﬁcant further 
investment is needed.

At the same time, public sector ﬁnances 
are stretched and there is growing 
competition for limited private sector 
funds that can be used to invest in 
infrastructure.

Against this backdrop it is essential 
that the ﬁnancial structure of the 
companies in the sectors enables 
ﬁnance for the future investment 
programme to be raised, when 
required, and at reasonable cost.

Up to now most of the additional ﬁnance 
that has been needed to fund their 
growing asset base has been raised by 
borrowing and many companies have 
even reduced their equity ﬁnancing. 
We think that this ﬁnancing model 
cannot be relied on indeﬁnitely.

There are risks in highly geared ﬁnancial 
structures and there may be limits to the 
capacity of the debt market to continue 
to provide low cost ﬁnance. In addition, 
one company getting into ﬁnancial 
difﬁculties could have long term impacts 
on the ﬁnancial market’s conﬁdence in 
the regulatory framework and its 
assessment of risk in the utility sectors. 

The ﬁnancial and banking crisis in 2008, 
the credit crunch that followed, and 
more recently the sovereign debt crisis 
and associated turmoil in ﬁnancial 
markets all underline that there may be 
beneﬁts from a lower risk approach to 
ﬁnancing in the sector, in which not all 
future ﬁnance is raised from borrowing.

Severn Trent has worked with National 
Grid to examine how to make the 
ﬁnancing of the utility sector more 
sustainable in the longer term. We think 
that action needs to be taken to 
encourage additional equity ﬁnancing, 
rather than waiting for problems to 
develop. We will shortly be publishing a 
report proposing modest but important 
evolutionary change.

Severn Trent Plc  Annual Report and Accounts 2012

Financial review

33

Group ﬁnancial performance
We have sought, since the start of the ﬁnancial crisis in 2008, to 
retain a cautious view on management of our cost base and 
ﬁnancing. At Severn Trent Water we were pleased to see that 
the ability of our customers to pay their bills did not see any 
serious deterioration, and indeed our level of bad debt charges 
improved in the year as we continue our proactive efforts in 
this area. Costs remain a key focus and while we saw increases 
in environmental taxes and other charges we do not control, 
our performance on controlled costs was satisfactory. 

Access to long term secure ﬁnancing in these economic 
conditions has remained a key focus and our actions over the 
last year reﬂect this. We renewed our ﬁve year £500 million 
revolving credit facility (RCF) with 11 banks and issued a 30 year 
sterling bond at 4.875%, the lowest rate we have seen to date. 
We called in early £150 million of our bonds due for redemption 
in 2014, the year of the next price review for Severn Trent Water, 
a time which traditionally has been difﬁcult for regulated water 
companies to reﬁnance in public bond markets. This latter 
action resulted in a one off ﬁnance charge of £16.5 million in 
the year but considerably reduces the risk of not being able to 
reﬁnance our bonds that were due in 2014. 

PBIT is proﬁt before interest and tax; underlying PBIT is PBIT 
excluding exceptional items as set out in note 8.

Group turnover was £1,770.6 million (2011: £1,711.3 million), 
an increase of 3.5% over last year. 

Underlying group PBIT decreased by 2.9% to £504.2 million 
(2011: £519.1 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 £50.9 million 
(2011: charges of £21.4 million). Group PBIT decreased 5.6% 
to £469.8 million (2011: £497.7 million).

Severn Trent Water
Turnover in Severn Trent Water increased by 4.9% in 2011/12, 
to £1,457.5 million. Sales prices were increased by inﬂation 
from 1 April 2011 which gave rise to an increase in turnover of 
£73.1 million. Consumption from metered customers was lower 
year on year reducing turnover by £10.5 million. New growth 
and meter optants increased turnover by £0.2 million and 
there were other increases amounting to £4.9 million.

Underlying PBIT was down by 0.7% on the same period last 
year, to £500.0 million. Direct operating costs increased by 
£32.5 million (see below), there was an increase in infrastructure 
renewals expenditure of £32.0 million and depreciation 
increased by £7.5 million including £3.7 million in respect 
of the early retirement of an experimental sludge dryer.

Employment costs increased by 2.1% to £202.4 million. Hired 
and contracted costs increased by £36.1 million to £155.6 million 
partly as a result of increased leakage detection and repair work 
performed by sub-contractors and also due to £2.9 million of 
costs relating to private drains and sewers (PDaS). Raw materials 
and consumables at £46.8 million were 1.3% higher than the 
same period in the prior year. Bad debts were 9.8% lower 
at £30.3 million, representing 2.2% of turnover (2011: 2.3%). 

An increase of only £1.3 million in power costs to £51.8 million 
reﬂected the success of our strategy of ﬁxing these costs 
through our supply contract and by using energy swaps. 
Quasi taxes, which comprise rates, service charges and the 
Carbon Reduction Commitment (‘CRC’) levy, increased by 
£13.5 million to £107.6 million, mainly due to the introduction 
of the CRC. Other operating costs decreased by £2.9 million 
to £44.0 million. Labour and related overheads capitalised at 
£76.8 million were £16.9 million higher than in 2010/11, mainly 
due to the higher level of capital expenditure in 2011/12. 

During the ﬁnancial year, Severn Trent Water invested 
£474.2 million (UK GAAP after deducting grants and 
contributions) (2011: £405.3 million) in ﬁxed assets and 
maintaining and improving its infrastructure network. Included 
in this total was net infrastructure renewals expenditure of 
£128.9 million (2011: £96.9 million), charged to the income 
statement under IFRS.

Severn Trent Services 

Turnover
Services as reported
Impact of exchange rate 
ﬂuctuations
In constant currency

Underlying PBIT
Services as reported
Impact of exchange rate 
ﬂuctuations
In constant currency

2012 
£m 

2011 
£m 

Increase/ 
(decrease) 
%

332.3 

336.1 

(1.1%)

– 
332.3 

(5.9)
330.2 

0.6%

2012  
£m

2011  
£m

Increase/ 
(decrease) 
%

18.0 

25.7 

(30.0%)

– 
18.0 

(1.2)
24.5 

(26.5%)

In Severn Trent Services, some activities saw improvements 
in the second half of the year. However, looking forward the 
scale of our activities in Analytical Services will be reducing 
signiﬁcantly. Also the macro economic outlook has deteriorated 
in Spain and Italy. We have therefore, as required by IAS 36, 
reviewed the underlying forward looking assumptions 
supporting the carrying value of the goodwill in these businesses 
and adjusted goodwill values to lower levels. More details are 
provided in the exceptional items section overleaf.

Reported turnover in Severn Trent Services was £332.3 million 
in 2011/12, a decrease of 1.1% versus the prior year, and 
reported underlying PBIT decreased by 30.0% to £18.0 million.

After adjusting for the impact of exchange rate ﬂuctuations 
turnover on a like for like constant currency basis was up 
0.6% and underlying PBIT measured on the same basis was 
down 26.5%.

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Severn Trent Plc  Annual Report and Accounts 2012

Financial review

34

Operating Services
Turnover for the year was £204.6 million, an increase of 3.2% 
compared to the prior year on a constant currency basis. 
In the UK new contract wins and increased activity on our 
C2C contract delivered revenue growth but this was offset by 
contract losses in the US and lower activity in Italy. 
Water Puriﬁcation
Turnover for the year was £97.3 million, a decrease of 5.4% 
compared to the prior year on a constant currency basis as 
US market conditions remained difﬁcult and in Europe sales 
remained ﬂat.
Analytical Services
Turnover for the year was £30.4 million, an increase of 4.1%. 
Towards the end of the year and early in the new ﬁnancial year 
we have been informed that certain contracts from utilities 
companies will not be renewed and will be taken back in house. 
Management of this business is developing a plan to reduce the 
scale of the business accordingly.

Corporate and other
Corporate overheads amounted to £15.6 million (2011: 
£13.0 million). Our other businesses generated an underlying 
proﬁt of £0.2 million (2011: loss of £0.6 million) and there were 
exchange gains in Corporate of £0.1 million (2011: £1.1 million).

Exceptional items
There were net exceptional charges in the year to 31 March 
2012 of £50.9 million (2011: £21.4 million) including exceptional 
operating costs of £34.4 million (2011: £21.4 million) which are 
described in further detail below and exceptional ﬁnance costs 
of £16.5 million arising on the early redemption of debt.

Exceptional operating costs included:

•  costs arising from Severn Trent Water’s programme to 

restructure and realign the business which resulted in an 
exceptional charge of £11.5 million (2011: £13.0 million);

•  exceptional provisions in Severn Trent Services of £23.1 million 
including £21.5 million against our economic interests in SII, 
an associate company in Italy, as previously reported; 

•  impairments of £22.9 million were recorded against the 

carrying value of goodwill comprising: 

 – £12.0 million against our UK Laboratories business to 

recognise the smaller scale of the business going forward; 
and

 – £10.9 million against our businesses in Italy (£5.7 million) 
and Spain (£5.2 million) against a more cautious backdrop 
for growth of these Eurozone countries; and

•  an exceptional credit arising from the agreement to close the 
group’s deﬁned beneﬁt pension schemes to future accrual 
with effect from 31 March 2015. This resulted in exceptional 
credits of £21.8 million in Severn Trent Water and £1.3 million 
in Severn Trent Services.

Net ﬁnance costs
The group’s net ﬁnance costs before exceptional items were 
£229.0 million, compared to £230.6 million in the prior year. 

The reﬁnancing exercise referred to under Treasury 
management and liquidity resulted in exceptional ﬁnance 
costs of £16.5 million on the early redemption of debt. 
Total ﬁnance costs were £245.5 million (2011: £230.6 million).

The effective interest rate, including index linked debt, 
for 2011/12 was 6.4% (2011: 5.6%). The cash interest rate 
was 4.9% (2011: 5.0%).

Gains/(losses) on ﬁnancial instruments
The group uses ﬁnancial derivatives solely to hedge risks 
associated with its normal business activities including:

•  exchange rate exposure on borrowings denominated in 

foreign currencies;

•  interest rate exposures on ﬂoating rate borrowings; and

•  exposures to increases in electricity prices.

Accounting rules generally require that these derivatives are 
revalued at each balance sheet date and, unless the strict 
criteria for cash ﬂow hedge accounting are met, the changes in 
value are taken to the income statement. If the risk that is being 
hedged does not impact the income statement in the same 
period then an accounting mismatch arises from the hedging 
activities and there is a net charge or credit to the income 
statement.

Over the lives of the derivatives, these mismatches are expected 
to net out. Furthermore, the changes in value that are recorded 
during the lives of the derivatives do not represent cash ﬂows. 

Therefore the group presents adjusted earnings ﬁgures that 
exclude these non-cash items. An analysis of the amounts 
charged to the income statement in the period is presented in 
note 12 to the ﬁnancial statements.

Proﬁt before tax
Underlying group proﬁt before tax decreased by 4.6% to 
£275.3 million (2011: £288.6 million). Group proﬁt before tax 
was £156.7 million (2011: £253.0 million).

Taxation
The total tax charge for the full year was £17.7 million (2011: 
£21.5 million). Current tax represented a charge of £60.5 million 
(2011: £32.1 million) including credits relating to adjustments 
to prior year computations of £8.7 million (2011: £34.4 million). 
Deferred tax (see note 26) was a credit of £78.2 million (2011: 
credit of £53.6 million) including an exceptional credit of 
£69.1 million (2011: £67.7 million) arising from the reduction 
in corporation tax rate from 26% to 24% with effect from 
1 April 2012.

The effective rate of current tax, excluding prior year charges 
and exceptional items, calculated on proﬁt before tax, 
exceptional items and gains/(losses) on ﬁnancial instruments 
was 25.7% (2011: 24.4%). 

Going forward, we expect the effective current tax rate for 
2012/13 to be in the range of 24% to 26%.

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Severn Trent Plc  Annual Report and Accounts 2012

Financial review

35

Proﬁt for the period and earnings per share
Proﬁt for the period was £174.4 million (2011: £274.5 million).

Treasury management and liquidity
The group’s principal treasury management objectives are:

Adjusted basic earnings per share (before exceptional items, 
gains/(losses) on ﬁnancial instruments and deferred tax) were 
88.9 pence (2011: 105.6 pence) (see note 15). Basic earnings 
per share were 72.5 pence (2011: 115.2 pence).

Cash ﬂow

Cash generated from operations
Net capital expenditure
Net interest paid
Tax (paid)/received
Other cash ﬂows
Free cash ﬂow
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
Bank overdrafts
Cross currency swaps hedging debt
Bank loans
Other loans
Finance leases

2012  
£m
725.9 
(351.2)
(210.4)
(72.0)
(1.0)
91.3 
(159.0)
2.4 
(65.3)
(33.7)
(99.0)
(3,868.8)
(3,967.8)

295.1 
(0.4)
135.9 
(852.5)
(3,326.9)
(219.0)
(3,967.8)

2011 
£m 
753.0 
(399.5)
(180.3)
(32.4)
(1.5)
139.3 
(169.4)
2.7 
(27.4)
(80.0)
(107.4)
(3,761.4)
(3,868.8)

315.2 
–
160.4 
(846.8)
(3,230.9)
(266.7)
(3,868.8)

Cash generated from operations was £725.9 million 
(2011: £753.0 million). Capital expenditure net of grants 
and proceeds of sales of ﬁxed assets was £351.2 million 
(2011: £399.5 million). Net interest paid increased to 
£210.4 million (2011: £180.3 million).

Net debt at 31 March 2012 was £3,967.8 million 
(2011: £3,868.8 million). Balance sheet gearing (net debt/
net debt plus equity) at the year end was 80.2% (2011: 
77.8%). Net debt, expressed as a percentage of Regulatory 
Capital Value at 31 March 2012 was 56.0% (2011: 56.8%). 
The group’s net interest charge, excluding gains/(losses) on 
ﬁnancial instruments and net ﬁnance costs from pensions, 
was covered 3.3 times (2011: 3.4 times) by proﬁt before 
interest, tax, depreciation and exceptional items, and 2.2 times 
(2011: 2.3 times) by underlying PBIT.

The fair value of the group’s net debt at 31 March 2012 is 
estimated to be £4,579.3 million (2011: £4,196.2 million) 
compared to the book value of £3,967.8 million (2011: 
£3,868.8 million). 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.

•  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;

•  to maintain an investment grade credit rating; and

•  to maintain a ﬂexible and sustainable balance sheet 

structure.

The group continues to carefully monitor liquidity. 
At 31 March 2012 the group had £295.1 million in cash 
and cash equivalents. 

In January 2012 the group issued £250 million 4.875% 
Guaranteed Notes under its Euro Medium Term Note 
Programme. The Notes have a 30 year term. Part of the 
proceeds were used to redeem £150.6 million 5.25% Notes 
which were due for repayment in 2014. The Notes were 
redeemed at a premium of 10.515%, which represents a 
1.1% premium to market value, resulting in an exceptional 
ﬁnance cost of £16.5 million.

A new ﬁve year £500 million revolving credit facility was agreed 
in October 2011. This replaced the existing £500 million 
revolving credit facility. A new 10 year £100 million bilateral 
facility was agreed in March 2012. This facility was drawn on 
18 April 2012. Average debt maturity is around 16 years. 
The group is funded for its investment and cash ﬂow needs 
up to December 2013.

Cash is invested in deposits with highly rated 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 2012, interest rates for some 74% of the group’s 
net debt of £3,967.8 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 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Severn Trent Plc  Annual Report and Accounts 2012

Financial review

36

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 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 £463.6 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 income statement. 
During the period there has been a decrease of £80.3 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.

The group’s long term credit ratings are:

Long term ratings
Moody’s
Standard and Poor’s

Severn Trent Plc
Baa1
BBB-

Severn Trent Water
A3
BBB+

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 have been renewed as at 31 March 
2010. The key actuarial assumptions from these valuations 
have been updated for these accounts as at 31 March 2012. 
The valuations left the level of current service contributions 
unchanged and agreed deﬁcit reduction contributions of 
£10.0 million per annum in cash and a further £8.0 million per 
annum through an asset backed funding arrangement. 

On 11 May 2011, Severn Trent announced that it was 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. Following 
the period of consultation and after discussion with the 

schemes’ trustees, ﬁnal proposals have been accepted by the 
employees’ representatives and the trustees. A new deﬁned 
contribution scheme has been established and from 1 April 2012 
new employees have been auto enrolled into this scheme. 
The deﬁned beneﬁt schemes will close to future accrual on 
31 March 2015 and members of the deﬁned beneﬁt schemes 
will then become members of the new deﬁned contribution 
scheme. The existing deﬁned contribution scheme will also be 
replaced by the new pension arrangements with effect from 
1 April 2015 and it is proposed to automatically enrol those 
employees who are not currently members of a Severn Trent 
scheme from 2013.

On an IAS 19 basis, the estimated net position (before deferred 
tax) of the group’s deﬁned beneﬁt pension schemes was a 
deﬁcit of £345.8 million as at 31 March 2012. This compares to 
a deﬁcit of £292.1 million as at 31 March 2011. The movements 
in the net deﬁcit are summarised in note 27.

On an IAS 19 basis, the funding level has reduced from around 
83.5% at 31 March 2011 to around 81.8% at 31 March 2012.

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 

2012  
%
3.1 
3.6 
3.1 
3.1 
4.9 
6.8 

2011  
%
3.5 
4.0 
3.5 
3.5 
5.6 
7.9 

87.5 
91.1 

87.4 
91.0 

88.0 
91.9 

88.0 
91.8 

The following table summarises the estimated impact on 
scheme liabilities resulting from changes to key actuarial 
assumptions whilst holding all other assumptions constant.

Assumption

Discount rate

Price inﬂation

Mortality

Change in assumption
Increase/decrease  
by 0.1%
Increase/decrease  
by 0.1%
Increase in 
life expectancy  
by one year

Impact on  
scheme liabilities
Decrease/increase 
by £35.0 million
Increase/decrease 
by £30.0 million

Increase  
by £45.0 million

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. 

 
 
 
 
 
 
 
 
Severn Trent Plc  Annual Report and Accounts 2012

Risk management

37

Our approach to risk
Overall we take a considered approach to 
risk. Across the group, individual risks and 
decisions are managed in line with our 
Group Authorisation Arrangements 
which set out clear limits for delegated 
authority. 

Within the largest part of our group, 
Severn Trent Water, our approach reﬂects 
our status as a regulated utility providing 
essential services and operating as part 
of the Critical National Infrastructure for 
the UK. The nature of our Severn Trent 
Water business is such that there are 
some signiﬁcant inherent risks as 
illustrated in the following paragraph on 
Principal Risks. We aim to have a strong 
control framework in place to enable us 
to understand our risks and manage 
them effectively.

Although the Severn Trent Services 
businesses are not generally regulated, 
we provide products and services for 
customers who operate in regulated 
environments, and as a result we take 
a similarly considered approach to risk. 

Our Enterprise Risk 
Management Process
Our now established Enterprise Risk 
Management (ERM) process which is 
used across the group, identiﬁes possible 
risks, their causes and their potential 
impacts. This allows us to place focus on 
having the right controls in place to 
manage our risks by considering both 
how to minimise the likelihood of risks 
occurring and how to maximise our 
resilience to risks. In addition to assessing 
ﬁnancial impact, our assessment of risks 
includes explicit consideration of the 
possible effect on the reputation of 
the group. 

Key risks are reported to the Audit 
Committee and to the board every six 
months in the form of risk maps. 

In addition, individual risks or speciﬁc risk 
topics are also discussed by the board 
during the year. This year we have paid 
particular attention to low likelihood, high 
impact risks, with the board requesting 
additional assurance that controls 
around such risks are robust. We have 
also introduced regular risk ‘deep dives’ 
at our Severn Trent executive team 
meetings. These take the form of 
updates from individual business teams 
within Severn Trent Water on their 
progress with improving controls and 
providing effective mitigation for their 
most signiﬁcant risks.

For the preparation of our annual 
business plan for Severn Trent Water we 
have introduced an explicit link between 
the ERM and business planning processes 
in order that we can have greater 
conﬁdence that business plans 
sufﬁciently address areas of key risk. 

Principal risks
There are a number of signiﬁcant risks 
which are inherent to all water and 
sewerage companies, as shown on our 
business models on pages 10 and 11 
and 24 and 25, including:

•  Severn Trent Water operates in a 

heavily regulated environment and 
is subject to many varied, complex 
and changing obligations. As a result, 
we face risks associated with 
non-compliance;

•  Severn Trent Water has an extensive 

network of assets and the failure of key 
individual or collections of these assets 
could result in a signiﬁcant impact on 
our core business activities;

•  we face risks to the health, safety and 
wellbeing of our people, customers, 
contractors and others as a result of 
the nature of our operations; and 
•  we share a concern with many other 

businesses over our ability to fund long 
term pension promises. 

Where appropriate these are included 
in the table of Principal Risks overleaf.

How does our ERM process work 
in practice?
Our sewerage network consists of 
thousands of miles of sewers carrying 
waste water to our treatment plants. 
There is a risk that these sewers could 
collapse or become blocked resulting 
in ﬂooding of our customers’ homes 
or pollution of the environment.

We recognise that sewer ﬂooding 
of property is very distressing for 
customers affected and we aim 
to minimise the possibility of this 
happening. Similarly, pollution of 
watercourses has an adverse effect on 
the environment and enjoyment of the 
amenities in the communities we serve. 
Both types of incident incur additional 
costs to the company in rectifying 
such incidents.

Our risk assessment was primarily set 
around the Ofwat requirement to 
supply assets capable of delivering an 
agreed level of service to our customers 
and the environment. We further 
analysed our risks to introduce 
more speciﬁc risks based around 
infrastructure (below ground assets) 
and non infrastructure (above ground 
assets) within our ERM process to help 
to generate clarity on causes and 
controls of failure. From this we were 
able to develop further improvement 
actions to ensure risks are 
constructively managed to deliver the 
service promises. In order to mitigate 
the risk we have enhanced our 
programme of investment to maintain 
our sewerage network to reduce sewer 
blockages, collapses and sewer 
ﬂooding incidents. 

We have also embarked on an 
holistic Environmental Improvement 
Programme which considers all aspects 
of our processes and how these can be 
improved to minimise our impact on 
the environment. Reducing these 
incidents is good for customers, good 
for the environment and good for 
the company. 

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Severn Trent Plc  Annual Report and Accounts 2012

Risk management

38

1

2

3

Which part of 
Severn Trent 
is affected?

Severn Trent 
Water

Ref What is the risk?

Business Model Risks

We may not be able 
to achieve all of the 
challenging targets 
agreed with Ofwat 
for our business plan 
from 2010 to 2015 
resulting in reduction 
in funding.

Severn Trent 
Water

We may be unable to 
sufﬁciently improve 
our performance in 
relation to customer 
service in order to 
deliver what our 
customers tell us 
they want.

Severn Trent 
Water

We may suffer 
operational failure 
in our waste water 
operations which 
results in damage 
to the local 
environment.

What does it mean for us?

What are we doing to manage the risk?

Current performance against plan 
does not indicate particular cause for 
concern. However, if we are unable to 
meet all of the targets and regulatory 
outputs agreed in our business plan 
within the constraints assumed in the 
plan, the following may occur:

•  we may require additional funding 
or experience reduced proﬁt during 
this ﬁve year planning period; 

•  ﬁnancial penalties may be imposed 
by Ofwat during the AMP6 period 
2015–2020; or 

•  our share price may be affected if 

we are unable to deliver the 
ﬁnancial and performance targets 
we have shared with investors.

Our current customer service 
performance is disappointing, and we 
have programmes of work underway 
to address the root causes of the 
issues highlighted. We recognise, 
however, that failure to address these 
issues may result in customer 
dissatisfaction and as a result we 
may fail to gain customer support for 
our plans for the next price review 
period (AMP6) between 2015–2020. 
At present, we believe we can 
achieve the necessary improvements 
in our performance.

Failure of certain key assets may 
result in process failure, leading to 
environmental damage. This is a 
particular concern in relation to our 
waste water treatment processes. 
For example, failure of our key assets 
may render our treatment less 
effective resulting in pollution.

We have robust business planning 
processes. Our business plans are 
updated and reviewed on an annual 
basis. We monitor progress against 
agreed targets each month and are 
able to make adjustments to planned 
activities if we identify any concerns.

We have programmes of work underway 
across Severn Trent Water to make the 
necessary improvements in our 
processes and technology to 
enable Severn Trent Water to deliver 
outstanding customer service. 

We monitor the performance of our 
treatment works and the efﬂuent we 
are producing to within strict limits. 
Where we are unable to prevent 
pollutions, we clean up polluted waters 
as quickly as possible and put in place 
measures to prevent recurrence. 
We have introduced an Environmental 
Improvement Programme which 
includes regular audits of our sites 
and we continue to work to improve 
our environmental performance.

What does it mean for us?

What are we doing to manage the risk?

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Severn Trent Plc  Annual Report and Accounts 2012

Risk management

39

Ref What is the risk?

Which part of 
Severn Trent 
is affected?

Business Model Risks (continued)

4

5

6

Group wide

Our assets or 
processes may fail 
resulting in injury 
to an employee, 
contractor, customer 
or member of 
the public.

Severn Trent 
Water

Severn Trent 
Water

We may fail to meet 
all of our regulatory 
targets, including 
targets from Ofwat, 
in relation to 
ongoing operational 
performance of 
our assets resulting in 
regulatory penalties.

Failure of certain key 
assets may result in 
inability to provide a 
continuous supply of 
quality water to large 
populations within 
our area, or in 
damage to third 
party property.

The nature of our work requires our 
employees and contractors to 
undertake activities or to use 
equipment which have potential to 
cause serious harm. Whilst we seek 
to take precautions to prevent 
injury, asset failure or failure to 
follow agreed processes may 
result in someone being hurt. 
Speciﬁc examples include injury to 
our employees using chemicals in 
our processes. Additionally, failure 
of one of our key assets such as a 
reservoir could result in injury to 
customers or members of the public.

If we are unable to meet operational 
performance targets, we may be 
subjected to signiﬁcant regulatory 
penalties. 

Regulatory targets apply to all of 
our water treatment, distribution, 
sewerage and sewage treatment 
assets. Measures are in place in 
relation to water quality, continuous 
supplies, sewer ﬂooding, sewer 
collapses and pollution events. 

Some of our assets are not 
duplicated, and whilst every effort is 
made to maintain the assets, failure 
may occur which could result in 
temporary inability to continue to 
serve our customers. 

Legal and Regulatory Risks

7

We may be unable to 
effectively anticipate 
and/or inﬂuence 
future developments 
in the UK water 
industry resulting 
in our business 
plans becoming 
unsustainable.

Severn Trent 
Water

The major part of our business, 
Severn Trent Water, operates in a 
highly regulated environment. 

Our document ‘Changing Course’ sets 
out the key changes we believe are 
necessary to ensure a sustainable 
future for the water industry in 
England and Wales. Although some 
of our points are reﬂected in the UK 
Government Water White Paper 
issued in December 2011, future 
changes in legislation could have a 
signiﬁcant impact on Severn Trent.

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We have risk and safety action teams 
at site level who identify local hazards 
and how these can be mitigated. Safety 
performance is monitored and we are 
delivering year on year improvement. 

Wherever hazardous work is to be 
undertaken or hazardous chemicals are 
used, we undertake thorough training, 
which is kept up to date, to minimise 
the risk. 

Our assets are subject to regular 
and rigorous monitoring including 
independent inspections of our reservoirs 
to ensure that they remain safe and 
that maintenance work is undertaken 
where needed. 

We continue to monitor and invest in 
our assets and to improve our processes 
in order to maintain the performance 
of our key assets. We have programmes 
of work ongoing to review all aspects of 
our operations, including the necessary 
improvements to maintain continuous 
supplies, ensure water quality, reduce 
sewer collapses and sewer ﬂooding and 
improve environmental performance.

We have asset management plans in 
place which drive investment in 
maintenance and improvement of our 
assets in order to maintain our service 
to customers.

We also have security measures to 
protect our assets and contingency 
plans to maintain supplies in the event 
of failure.

We will continue to work with:

•  peers across the water industry; 
•  UK Government departments; 
•  Ofwat and other regulators; and
•  other agencies 

to ensure we keep abreast of policy 
developments and inﬂuence the 
future direction of regulatory policy 
where possible.

 
 
 
 
 
 
 
 
 
 
 
What does it mean for us?

What are we doing to manage the risk?

Severn Trent Plc  Annual Report and Accounts 2012

Risk management

40

Ref What is the risk?

Which part of 
Severn Trent 
is affected?

Legal and Regulatory Risks (continued)

Group wide

8

The regulatory 
landscape is complex 
and subject to 
ongoing change. 
There is a risk that 
processes may fail or 
that our processes 
may not effectively 
keep pace with 
changes in legislation 
leading to the risk of 
non-compliance.

Financial Risks

Group wide

The current crisis 
in the Eurozone 
may increase the 
difﬁculties associated 
with obtaining 
funding for the group 
(at similar rates to 
those assumed in our 
business plan).

Our policies and processes must 
reﬂect the current legal and 
regulatory environment and all 
relevant employees need to be kept 
aware of new requirements. Due to 
the spread of our operations, and 
changes in activity and organisational 
structure this is not always 
straightforward. The group as 
a whole may face censure for 
non-compliance in an individual 
group company or a speciﬁc region 
in which we operate. 

As a result of current market and 
economic conditions across the 
Eurozone, there may be increased 
difﬁculty for all businesses to obtain 
funds. We may therefore be unable 
to meet all of our funding 
requirements at commercially 
attractive rates.

Group wide

Changing 
demographics and 
ﬂuctuations in the 
investment market 
may affect our ability 
to fund pensions 
promises sustainably.

We already provide signiﬁcant 
funding. We may be called upon to 
provide more money to reduce 
deﬁcits in our pension schemes. 

Although the risk is not considered 
likely to occur, the impact could be 
signiﬁcant.

9

10

11

We have policies, standards, procedures 
and relevant training for employees to 
mitigate this risk.

During this year, we have refreshed our 
Code of Conduct and group policies and 
are carrying out an extensive programme 
to raise awareness of the updated Code 
of Conduct and policies. 

We ensure we maintain access to funds 
through cash held on short term deposit 
and through our committed borrowing 
facilities. We constantly monitor the 
possible impacts of economic conditions 
on the funding requirements for the 
group. We have diversiﬁed sources 
of funding and have a timetable for 
replacement of committed lending 
facilities which allows us more than one 
opportunity to go to market in order to 
mitigate against short term problems in 
the marketplace.

We regularly revalue our schemes and 
monitor our investment performance. 

We are introducing new pensions 
arrangements which we believe will be 
fairer for all our employees as well as 
reducing the build up of further deﬁcit 
in our schemes in future years, thus 
allowing us to continue to fund pensions 
sustainably into the future.

Group wide

Counterparties with 
whom we have 
invested money 
may fail, putting our 
investment at risk.

We may have cash which we have 
not yet invested in agreed capital 
programmes, and we need 
to manage this in the most 
advantageous way for our customers 
and shareholders. There is a risk that 
we may deposit cash with third 
parties who may default resulting in 
ﬁnancial loss.

We have strict policies which restrict the 
counterparties we can invest with and 
limit the amount which can be invested 
with individual counterparties. We closely 
monitor the credit status of all our 
counterparties to ensure we only deposit 
with those who have good credit status. 
Compliance with our policies is monitored 
continuously to mitigate this risk.

Severn Trent Plc  Annual Report and Accounts 2012

41

Governance

42  Board of directors 
44  Executive Committee 
45  Chairman’s letter 
50  Nominations Committee 
52  Audit Committee 
54  Corporate Responsibility Committee 
55  Remuneration Committee 
69  Directors’ report 
73  Directors’ responsibility statement

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Severn Trent Plc  Annual Report and Accounts 2012

Governance
Board of directors

42

Dr Tony Ballance 
BSc (Hons) MA (Econ) PhD (47)
Director, Strategy and Regulation
Appointed to the board on 2 October 2007
Tony’s extensive experience in utility policy  
and regulation leaves him ideally placed to lead 
the company’s strategic and regulatory work.  
He has previously held the posts of Chief 
Economist for Ofwat, economic consultant, 
director of London Economics and a director  
of Stone and Webster Consultants.

External appointments 
Member of Water UK Council

Committee membership
Executive Committee

Dr Bernard Bulkin 
BS PhD FRSC FRSA FIE (70)
Independent non-executive director
Appointed to the board on 1 January 2006
Bernard has been involved in a range of scientiﬁc, 
technology and engineering businesses, including 
holding the position of Chief Scientist of BP Plc. 
His 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. 

External appointments 
Chairman of Chemrec AB (Sweden)
Non-executive director of Ze-gen Corporation (USA) 
Non-executive director, Chairman of the Remuneration 
Committee and member of the Audit Committee of 
Pursuit Dynamics plc
Chair of the Ofﬁce of Renewable Energy Deployment 
at the UK Department of Energy and Climate Change

Committee membership
Audit Committee
Corporate Responsibility Committee (Chairman)
Nominations Committee 
Remuneration Committee

Richard Davey 
BA (63)
Senior independent non-executive director
Appointed to the board on 1 January 2006
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, the Audit Committee and as chair of the 
Remuneration Committee. Previously he held 
non-executive roles at Yorkshire Building Society, 
where he was Vice Chairman, Freeserve Plc and 
Scottish Widows Fund and Life Assurance Society.

External appointments 
Non-executive Chairman of London Capital Group 
Holdings Plc
Non-executive Chairman of Amlin Plc

Committee membership
Audit Committee
Nominations Committee
Remuneration Committee (Chairman)

Martin Lamb 
BSc MBA (52)
Independent non-executive director
Appointed to the board on 29 February 2008
Martin has extensive experience of managing  
and developing large engineering businesses in 
all parts of the world. Martin has worked for IMI 
for over 25 years where he has held a number of 
senior management roles. 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. Previously Martin was a non-executive 
director of Spectris plc.

External appointments 
Chief Executive of IMI plc
Member of the Advisory Board of AEA Investors 
(UK) Limited 

Committee membership
Nominations Committee
Remuneration Committee

Michael McKeon 
MA CA (55)
Finance Director
Appointed to the board on 13 December 2005
Michael brings signiﬁcant ﬁnancial and commercial 
expertise to the board. Prior to joining Severn Trent 
he was Finance Director of Novar Plc and before 
that held various senior roles with Rolls-Royce Plc, 
including Finance Director of Aerospace Group. 
He has extensive international business experience 
having worked overseas for CarnaudMetalbox, 
Elf Atochem and Price Waterhouse. Michael is a 
Chartered Accountant and a Member of the 
Institute of Chartered Accountants of Scotland.

External appointments 
Non-executive director and Chairman of the 
Audit Committee of The Merchants Trust Plc 

Committee membership
Executive Committee

Baroness Noakes 
DBE LLB FCA (62)
Independent non-executive director
Appointed to the board on 29 February 2008
Sheila is an experienced director on UK listed 
company boards and an experienced audit 
committee chairman. A qualiﬁed chartered 
accountant, she previously headed KPMG’s 
European and International Government practices 
and has been President of the Institute of Chartered 
Accountants in England and Wales. Sheila was 
appointed to the House of Lords in 2000 and has 
served on the Conservative front bench in various 
roles including as shadow treasury minister 
between 2003 and May 2010. Previously she held 
non-executive roles on the Court of the Bank of 
England, Hanson Plc, ICI Plc, John Laing and SThree. 

External appointments
Non-executive director, member of the Group Audit, 
Group Nominations and Board Risk Committees of 
The Royal Bank of Scotland Group Plc
Deputy Chairman, senior independent director and 
Chairman of the Audit and Nominations Committees 
of Carpetright Plc
Trustee of the Thomson Reuters Founders Share Company 

Committee membership
Audit Committee (Chairman)
Nominations Committee

Severn Trent Plc  Annual Report and Accounts 2012

Governance – Board of directors

43

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Andrew Duff 
BSc FEI (53)
Non-executive Chairman
Appointed to the board on 10 May 2010 and 
Chairman on 20 July 2010 
Andrew’s extensive knowledge of international 
business, strategic management, customer service 
and regulated business make him the right Chairman 
to lead the group. Andrew spent 16 years at BP in 
marketing, strategy and oil trading. He joined 
National Power in 1998 and the board of its daughter 
company Innogy plc upon its demerger from 
National Power in 2000. He led the restructuring 
and subsequent sale of Innogy to RWE in 2003. 
He became CEO of the successor company, 
npower, and a member of the RWE Group Executive 
Committee. He was non-executive Chairman of 
RWE npower until his retirement in December 2010. 

External appointments
Senior independent director, Chairman of the 
Remuneration Committee, member of the Audit 
Committee and Nominations Committee of Wolseley Plc
Member of the CBI President’s Committee 
Trustee of Macmillan Cancer Support and Earth Trust
Fellow of the Energy Institute

Committee membership
Corporate Responsibility Committee
Nominations Committee (Chairman)
Remuneration Committee

Andy Smith 
BTech (Hons) (51)
Director of Water Services
Appointed to the board on 2 October 2007
Andy brings a broad range of executive and 
operational expertise gained from different sectors 
to the board. Andy has signiﬁcant experience 
having worked in the UK and overseas with BP, 
Mars and Pepsi, in engineering and operational 
management roles. Previously he was Group HR 
Director and a member of the board at Boots 
Group Plc. 

Committee membership
Executive Committee

Gordon Fryett 
(58)
Independent non-executive director
Appointed to the board on 1 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 substantial 
experience and expertise to the board. He is 
currently Tesco Group Property Director and CEO of 
Central Europe, having previously held a number of 
senior positions within the Tesco Group including 
CEO Republic of Ireland and Director of 
International Support. 

External appointments
CEO of Tesco Europe 
Alumnus of INSEAD

Committee membership
Corporate Responsibility Committee
Nominations Committee

Martin Kane 
BSc CEng CEnv MICE MIWEM FIW (59)
Chief Executive Ofﬁcer, Severn Trent Services
Appointed to the board on 2 October 2007
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. Martin held the role of Director of 
Customer Relations, Severn Trent Water, from 
May 2006 until January 2012, at which point he 
was appointed Chief Executive Ofﬁcer of Severn 
Trent Services.

External appointments
Member of the boards of Utilities and Service  
Industries Training Limited and National Association  
of Water Companies (US).
Trustee of International Society for Trenchless 
Technology

Committee membership
Executive Committee

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Tony Wray 
BSc (Hons) (50)
Chief Executive
Appointed to the board on 7 March 2005
Tony became Chief Executive on 2 October 2007. 
His extensive experience in 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. Tony brings to his position an in-depth 
operational knowledge of Severn Trent and 
strategic vision for the group. Previously he was 
director of Networks at Eircom, the Republic of 
Ireland’s telephone operation and has held director 
roles within Transco and National Grid Transco.

External appointments
Non-executive director and member of the Audit 
Committee of Grainger plc
Member of Business Advisory Board for ‘Living with 
Environmental Change’
Member of Water UK Board

Committee membership
Corporate Responsibility Committee
Executive Committee (Chairman) 
Nominations Committee

 
 
 
 
 
 
 
 
 
 
 
Severn Trent Plc  Annual Report and Accounts 2012

Governance
Executive Committee

44

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 the integrated delivery of our year end results and Ofwat 
Annual Return.

1 

5 

9 

1. Dr Tony Ballance 
BSc (Hons) MA (Econ) PhD (47)
Director, Strategy and Regulation
Please see full biography on page 42.

2. Simon Cocks 
BA (Hons) (46) 
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. Simon is 
a board member of UK Water 
Industry Research.

2 

6 

3 

7 

4 

8 

10 

11 

3. Evelyn Dickey
BSc (Hons) (49)
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.

4. Myron Hrycyk 
MBA (55)
Chief Information Ofﬁcer
Joined Severn Trent in April 2008. 
Myron has held senior IT posts 
for major organisations across a 
range of business sectors, Financial 
Services, Publishing, Automotive 
and Logistics/Supply Chain. He has 
delivered strategic IT and business 
transformation programmes, 
restructured corporate IT units 
and deployed high performance IT 
practices. Myron also has executive 
responsibility for Supply Chain & 
Procurement and our Business 
Improvement Team of programme 
managers and ‘Safer, Better, Faster’ 
continuous improvement 
practitioners. 

5. Angela Hunter-Dobson 
MA (Hons) (40) 
Customer Relations Director
Joined Severn Trent in May 2012. 
Angela commenced her career with 
IBM during its transformation from 
manufacturing to services business. 
She has since held senior operational 
leadership positions for Barclays, 
Hiscox and Vodafone, delivering 
customer services across B2B, B2C, 
domestic, international, indirect and 
regulated markets. In addition to 
leading her own award winning 
customer operations, she has 
consulted widely in the area of 
customer service in multiple sectors.

6. Martin Kane 
BSc CEng CEnv MICE MIWEM FIW (59)
Chief Executive Ofﬁcer,  
Severn Trent Services
Please see full biography on page 43.

7. Bronagh Kennedy 
(BA) (Hons) (48)
General Counsel and Company 
Secretary
Joined Severn Trent in June 2011. 
Bronagh is a Solicitor and was 
previously Group Company Secretary 
and General Counsel at Mitchells & 
Butlers, where she worked for 15 
years. Prior to that, she was a Senior 
Associate at Allen & Overy.

8. Michael McKeon 
MA CA (55) 
Finance Director
Please see full biography on page 42.

9. Alec Richmond 
BSc (Econ) FCA FIIA (54)
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 
Institute of Chartered Accountants in 
England and Wales and the Institute 
of Internal Auditors.

10. Andy Smith 
BTech (Hons) (51) 
Director of Water Services
Please see full biography on page 43.

11. Tony Wray 
BSc (Hons) (50) 
Chief Executive
Please see full biography on page 43.

Severn Trent Plc  Annual Report and Accounts 2012

Governance
Chairman’s letter

45

Dear Shareholder

Introduction
At Severn Trent, we are committed to delivering value and building a sustainable 
business, supported by good governance. As a board we are responsible and 
accountable to shareholders for ensuring effective governance processes are in place 
and complied with. 

The board’s role is to: 

•  understand and meet its obligations to the company’s stakeholders;

•  lead the group within a framework of prudent and effective controls which enable 

Andrew Duff  
Chairman

risk to be assessed and managed;

•  approve the group’s strategic objectives; and 

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: ‘Doing the Right 
Thing – the Severn Trent Way’ (which 
was reissued during the year) sets out 
our approach to responsible business 
behaviours.

• The Code of Conduct is supported by 
15 group policies and our behaviours 
model. Further details of these 
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  
choose to behave

The way we work

The way we 
 assure our  
performance

•  ensure that sufﬁcient resources are available to enable it to meet those objectives. 

The Combined Code on Corporate Governance issued by the Financial Reporting 
Council (FRC) in 2008 has been replaced by the UK Corporate Governance Code (the 
‘Governance Code’). There have been a number of substantive changes to both the 
main principles and provisions designed primarily to place greater emphasis on board 
behaviours. These are all changes which your board encouraged and supported. 

The following sections of this report set out how good governance underpins our 
activities in Severn Trent and describe how we apply the principles of the Governance 
Code.

Compliance with the UK Corporate Governance Code 
For the whole of the ﬁnancial year ended 31 March 2012, Severn Trent was fully 
compliant in its application of the Governance Code, which is available on the FRC 
website www.frc.org.uk. This demonstrates our commitment to the highest standards 
of governance and corporate behaviour. 

Board membership
During the year under review the board has consisted of me, your non-executive 
Chairman, ﬁve executive directors and ﬁve independent non-executive directors. 
Photographs of the members of the board, together with their biographies and a 
description of the complementary skills and wealth of experience that they bring to 
bear, can be found on pages 42 and 43. 

Together, as a uniﬁed board, I believe we bring an appropriate balance of innovation, 
experience, independence and challenge to ensure effective decision making.

Details of our policy on diversity in the boardroom are provided in the Nominations 
Committee report on pages 50 and 51.

Role of the Chairman
The role of the Chairman is to lead a uniﬁed board, facilitating the contribution of 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.

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.

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 will act as Chairman of the 
board in the event that I am unable to do so for any reason.

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Severn Trent Plc  Annual Report and Accounts 2012

Governance – Chairman’s letter

46

Non-executive directors
Your non-executive directors are appointed to the board to contribute their individual 
external expertise and experience in areas of importance to the group such as 
corporate ﬁnance, general ﬁnance, corporate strategy, customer care, property, 
environmental and scientiﬁc 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 as deﬁned by the Governance Code.

Chief Executive
Responsibility has been delegated to the Chief Executive, Tony Wray, to achieve the 
company’s strategy. He 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). The non-executive directors, led by me, appraise his performance annually.

Executive directors
The executive directors support Tony in driving the implementation of 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, Bronagh 
Kennedy, 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.

The appointment and resignation of the Company Secretary is a matter for 
consideration by the board as a whole.

Induction
On joining the board, a director’s induction needs are evaluated and then they are 
provided with a comprehensive and individualised induction pack which includes 
information on the group structure, the regulatory framework of the operating 
businesses within the group, strategic plans, ﬁnancial reports and business plans and 
information on our governance framework.

Meetings are arranged with members of the executive management team and with 
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 and subsequently throughout the year.

Continuing professional development
The directors received updates throughout the year on matters such as the impacts of 
the proposals on private drains and sewers, the UK Government’s Water White Paper, 
‘Water for Life’, PR14 and changes in Listing Rules requirements.

The directors also have access to professional development provided by external 
bodies and our advisers.

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 
and his Executive Committee (STEC). 
In respect of certain issues, the 
delegated authority is subject to an 
obligation to work with specialist 
business services areas (such as Tax, 
Treasury, Group 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 regulated 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.

Following his appointment as CEO of 
Severn Trent Services in January 2012, 
Martin Kane became a non-executive 
director of Severn Trent Water Limited.

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 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 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.

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Severn Trent Plc  Annual Report and Accounts 2012

Governance – Chairman’s letter

47

Reporting obligations
As a public 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 interim and 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 
Annual General Meeting, the statutory 
and regulatory accounts of Severn 
Trent Water Limited and the Ofwat 
Annual Return.

Performance and effectiveness reviews
In November 2011 I commissioned an independent external review of the 
effectiveness of the board, which was conducted between December and March. 
The review was carried out by Boardroom Review and was designed to encourage 
the directors to step back from the normal business of the board, and provide 
them with an opportunity to question the board’s approach, assess its impact 
and contribution and prepare for the challenges ahead. 

The reviewer conducted conﬁdential interviews with all 11 directors and the Company 
Secretary and reviewed a selection of board papers. This enabled the reviewer to 
consider the board’s effectiveness and identify any key themes arising from the review, 
which were then presented to and discussed by the board at its meeting in March.

The strengths of the board identiﬁed included a good understanding of stakeholder 
views including the company’s regulators and shareholders; good market information 
to the non-executive directors; strong Audit, Corporate Responsibility and 
Remuneration Committees; and open access to executives below board level.

Areas for further development which were discussed included prioritisation of strategic 
matters on board agendas and improving focus on leadership development and 
succession planning. In fact, during and after the review, progress has already been 
made in these areas. 

Board processes
We have processes in place regarding:

•  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 and committee meetings 
are convened when required.

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.

In addition to formal board meetings, your board attended a full day strategy session 
this year, where the board and executive management team together considered the 
strategic change agenda and the strategic context for and overall approach to PR14. 
During the ﬁnancial year, six 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.

 
 
 
 
 
 
 
 
 
 
 
Severn Trent Plc  Annual Report and Accounts 2012

Governance – Chairman’s letter

48

Institutional shareholders 
and analysts
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.

Presentations are made to shareholders 
and analysts following the release of 
the interim and year end results. The 
Chief Executive and Finance Director 
regularly 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.

Board attendance in 2011/12

Andrew Duff

Tony Ballance 

Dr Bernard Bulkin 

Richard Davey 

Gordon Fryett

Martin Kane 

7/7 Martin Lamb 

7/7 Michael McKeon

Baroness Noakes 

Andy Smith 

Tony Wray 

7/7

6/7

6/7

7/7

7/7

7/7

7/7

7/7

7/7

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 fulﬁlling their roles and 
responsibilities, focusing on their speciﬁc activities, reporting back 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 Governance 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.

The effectiveness of each of the committees has been reviewed during the year as 
part of the wider externally facilitated board review and the committees have also 
considered their terms of reference during the year. 

Reports from the Chairmen of these committees are set out on pages 50 to 68 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 55 to 68.

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.

Conﬂicts of interests 
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. 

Severn Trent Plc  Annual Report and Accounts 2012

Governance – Chairman’s letter

49

Retail shareholder 
engagement strategy
The board has an active shareholder 
engagement strategy, the main 
elements of which are set out below:

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 3 May 2012, 34,629 
shareholders receive company 
communications via electronic method 
whilst 26,015 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, company 
news and ﬁnancial calendars.

The company offers a Dividend 
Reinvestment Plan (DRIP). Details of the 
DRIP are available on our website and 
the website of Equiniti, our registrar.

Shareholder networking day
As part of our Shareholder Networking 
Programme, participants in October 2011 
had a choice to visit either a waste water 
or clean water site. These were hosted by 
Simon Cocks, Waste Water Services 
Director and Martin Kane, who was 
Director of Customer Relations at the 
time. Twenty participants were taken 
to our Minworth Sewage Treatment 
Works (Birmingham) for a tour and 
presentation on renewable energy. 
Twenty participants were taken to 
Campion Hills Water Treatment Works 
(Royal Leamington Spa) for a tour then 
on to Severn Trent Water Finham for a 
demonstration of making a connection 
to a live water main and a display of 
materials used in the distribution network. 
This was followed by both groups visiting 
our operating centre in Coventry. 

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.

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. This review has conﬁrmed that there were no 
conﬂicts of interest requiring authorisation by the board.

In addition, at every board meeting there is a standing agenda item at the beginning 
of the meeting to consider and discuss whether any potential conﬂicts exist.

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 18 July 2012.

Presentations are made on the group’s activities, performance during the year and 
an operationally focused presentation prior to the formal business of the meeting. 
The Chairmen of the Audit, Corporate Responsibility, Remuneration and Nominations 
Committees, together with all other directors, will attend the AGM.

The AGM gives shareholders an 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. Shareholders may 
also 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 to 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.

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 from the AGM will be made available on our website after the meeting.

At the 2011 AGM, 54 shareholders registered to participate in the Severn Trent 
Shareholder Networking Programme which took place on Tuesday 11 October 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. Further 
details of the event are set out in the box on this page. Your board encourages those 
shareholders attending the 2012 AGM to register for this year’s event. 

Reappointment
In accordance with the Governance Code, and as was the case at the AGM last year, 
all the directors will retire at this year’s AGM and submit themselves for reappointment 
by the shareholders.

Conclusions
Good governance is not simply an exercise in compliance. For Severn Trent it is a vital 
aspect of the foundation for the sustainable growth of the business. I ﬁrmly believe 
that we will continue to deliver value and achieve proﬁtable and sustainable growth 
for our company through the successful mix of good governance, a clear strategy 
with a supporting business plan and a strong management team.

Andrew Duff 
Chairman

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Severn Trent Plc  Annual Report and Accounts 2012

Governance
Nominations Committee

50

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.

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.

The members of the Committee in 2011/12 were the non-executive directors of the 
board and the Chief Executive, Tony Wray. 

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.

During the year the Committee reviewed succession planning below board level. 
The Committee considered in detail the appointment of Martin Kane as the new 
Chief Executive Ofﬁcer for Severn Trent Services, following the retirement of Len 
Graziano. The Committee has also considered the consequential appointment of 
Angela Hunter-Dobson as the new Customer Relations Director to succeed Martin. 
Angela will be a member of the Executive Committee and not a member of the board.

In accordance with the requirements of the Governance Code, all members of the 
board will seek re-election at the Annual General Meeting in July 2012. In March 
this year the 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. 

Nominations Committee attendance in 2011/12

Dr Bernard Bulkin 

4/4 Martin Lamb 

Richard Davey 

Andrew Duff 

Gordon Fryett 

Baroness Noakes 

Tony Wray 

3/4

4/4

4/4

4/4

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.

Severn Trent Plc  Annual Report and Accounts 2012

Governance – Nominations Committee

51

Succession planning
When considering new appointments 
to the board, the Committee oversees 
the preparation of a role 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.

Diversity
Further to the publication of the Davies Report, ‘Women on Boards’, in February 2011, 
boards of FTSE 350s have been encouraged to promote greater female representation 
on corporate boards. Guidance from the Financial Reporting Council has also 
highlighted the importance of greater diversity of psychological proﬁle around 
the board table.

Severn Trent believes that a diverse and inclusive culture is a key factor in being a 
successful business. Severn Trent Plc shares the aspiration of the Davies Report to 
promote greater female representation on listed company boards.

As and when board appointment opportunities arise, recognising the relatively short 
tenure of current directors, we will make full use of the procedures recommended by 
the Davies Report and by the Governance Code to support this aspiration. All board 
appointments will be based on merit and must be in the interests of all stakeholders.

As at 31 March 2012 we had one female member on our board of 11 (representing 
9%) and two female members out of 11 on the Executive Committee (representing 
18%). As at the date of this report, and following the recent appointment of Angela 
Hunter-Dobson, there are three female members of the Executive Committee 
(representing 27%). The total workforce gender split is 30% female and 70% male.

As reported on page 17, we have conducted gender diversity research with 
women employees in Severn Trent Water to understand what is important to them 
in developing careers at Severn Trent. We plan to use the same methodology to 
explore ethnic diversity in the near future, so we can gain more insights into this 
aspect of our workforce composition and the ﬁndings will be examined by our 
Diversity Working Group.

Gender diversity
Board

9%

Executive Committee

Total workforce

27%

30%

91%

73%

70%

Male

Female

Andrew Duff 
Chairman of the Nominations Committee

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Severn Trent Plc  Annual Report and Accounts 2012

Governance
Audit Committee

52

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 Committee are Baroness Noakes DBE (Chairman), Dr Bernard 
Bulkin and Richard Davey whose experience and background are set out on pages 42 
and 43. 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 Group Financial 
Controller and the external auditors 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.

The Committee reports to the subsequent meeting of the board on the 
Committee’s work.

The Committee met four times in 2011/12 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 an examination of 
material judgements made in preparing the ﬁnancial statements. We set out below 
some of the key issues we discussed in respect of 2011/12:

•  a provision of £21.5 million in exceptional charges, for the potential non recovery of 

our economic interest in an Operating Services business in Italy;

•  the value of goodwill including impairments of £22.9 million to the goodwill in 

respect of three Severn Trent Services businesses; and

•  the group’s accounting policy for exceptional items and the criteria to determine 

when items would be classiﬁed as exceptional.

In reviewing the ﬁnancial statements, we receive input from the Disclosure Committee 
and Deloitte LLP (Deloitte). The former is chaired by the Finance Director and considers 
the content, accuracy and tone of the ﬁnancial statements, the Ofwat Annual Return 
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 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.

The Committee in particular reviewed the systems and processes designed to prevent 
fraud and bribery. The Committee also receives a regular log of incidents of fraud or 
bribery which includes the actions taken to investigate and respond to the incidents. 
There were no material incidents during the year.

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 71.

Severn Trent Plc  Annual Report and Accounts 2012

Governance – Audit Committee

53

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 auditors.

The policy sets out the approach to be 
taken by the group when using the 
services of the external auditors, 
including requiring that certain services 
provided by the external auditors 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 auditors (such as statutory 
and non-statutory audit and assurance 
work), prohibited services where the 
independence of the external auditors 
could be threatened and they must 
not be used, and other non-audit 
services where the external auditors 
may be used.

Non-audit services where the external 
auditors may be used include: 
non-recurring internal controls and risk 
management reviews (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 
auditors 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.

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 auditors. We review the 
performance of the internal and external auditors annually to ensure that they are 
effective and recommend to the board whether the external auditors should be 
reappointed.

The Committee regularly holds discussions with both the internal and external 
auditors in the absence of management. 

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 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 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 auditors
Deloitte was appointed auditors of the company in 2005. The Committee reviews 
the auditors’ 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 auditors 
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 auditors. There are no contractual obligations that act to restrict 
the Committee’s choice of external auditors.

Details of the amounts paid to Deloitte for audit and non-audit services are provided in 
note 7 to the accounts page 91.

Severn Trent Water Limited
The regulated activities carried out by Severn Trent Water Limited result in two other 
reporting requirements to Ofwat and these are also covered by the Committee: an 
annual return on Severn Trent Water Limited’s regulatory obligations, known as the 
Ofwat Annual Return; and a statement that underpins the customer charges made by 
Severn Trent Water Limited, known as the Principal Statement. 

In March 2012 the Committee discussed the assurance framework in place for the 
new Ofwat Annual Return process. 

Deloitte makes reports to Ofwat in respect of Severn Trent Water’s regulatory 
accounts. The Ofwat Annual Return covers many aspects which are not ﬁnancial and 
Severn Trent Water Limited appoints engineering consultants, Atkins, to report on 
those aspects. The Committee receives reports from Deloitte and Atkins on their work 
as part of its review of the returns.

Audit Committee attendance in 2011/12

Baroness Noakes 

Dr Bernard Bulkin 

4/4

4/4

Richard Davey 

3/4

The performance of the Committee was included in the external review of the board 
referred to on page 47. No matters requiring action by the Committee arose from 
that review.

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Severn Trent Plc  Annual Report and Accounts 2012

54

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 has been based around the four areas of Workplace, 
Marketplace, Environment and Community. This provides a common framework for 
both our businesses – regulated and non-regulated. We will continue to review the 
framework as we integrate corporate responsibility into our core business operations 
for both Severn Trent Water and Severn Trent Services.

Within our CR framework, we have identiﬁed 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 focus areas have provided the basis for the forward agenda of the Committee, and 
will continue to be aligned to the nine principles set out in our Code of Conduct.

1.  Keeping everyone healthy and safe

2.  Supporting employees’ rights and diversity

3.  Maintaining ethical and honest behaviour

4.  Staying free from bribery and corruption

5.  Keeping our communications open and responsible

6.  Delivering excellent customer service

7.  Working within the community

8.  Protecting our environment

9.  Standing up for what’s right

The 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). 

Within Severn Trent Water we have an effective performance management system 
in place through 20 core business Key Performance Indicators (KPIs) and eight Key 
Strategic Intentions (KSIs). These are overseen by the 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 the Committee. Externally, we report through a number of channels including 
our annual regulatory submission to Ofwat, our websites and our Annual Report 
and Accounts.

During the year the Committee has received papers on key business programmes 
and strategies linked to the terms of reference of the Committee. These included 
catchment management, climate change adaptation, diversity and employee 
motivation. The Committee also received reports from Internal Audit with respect to 
their work on non-ﬁnancial risk aligned with the CR framework and regular updates on 
health, safety and environmental performance. In addition, the Committee responds 
to emerging issues and ﬂuoridation was tabled as a result of questions posed at the 
2011 AGM.

The members of the Committee are Dr Bernard Bulkin (Chairman), Andrew Duff, 
Gordon Fryett and Tony Wray.

Corporate Responsibility Committee attendance in 2011/12

Dr Bernard Bulkin 

Andrew Duff

5/5

5/5

Gordon Fryett 

Tony Wray 

5/5

4/5

Severn Trent Plc  Annual Report and Accounts 2012

Governance
Remuneration Committee

55

Dear Shareholder
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 2012.

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The report is subject to a shareholder vote and a resolution to approve the 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 
Governance Code and best practice guidelines.
Key developments for 2012/13
Following a thorough review of the variable arrangements for the executive directors 
and other members of the Severn Trent Executive Committee (STEC) in 2010/11, the 
Remuneration Committee has continued to monitor the policy to take account of 
evolving best and market practice, whilst also seeking to ensure that a stable 
framework is maintained and avoiding making unnecessary and frequent changes 
to the structure of pay. Accordingly, for 2012/13, there is limited change to the 
remuneration policy. However, the following points are of note:

•  the annual bonus plan will continue to be based on a portfolio of KPIs linked to our 
Balanced Scorecard and Ofwat’s measures of success. The number of KPIs will be 
reduced from 20 to 10 to align with Ofwat’s revised suite of published KPIs;

•  the existing clawback provisions within the bonus plan, Long Term Incentive Plan 
(LTIP) and Share Matching Plan have been amended to include the right to claw 
back in the event of misconduct or misstatement of results due to an error in 
calculation in line with the Governance Code. This reﬂects best practice since the 
original provisions were adopted; and

•  the policy on pensions for new executive directors who are appointed to the board 

will be an entitlement to 25% of salary. 

The Committee will continue to take a pro-active approach to responding to 
developments in legislation, best practice and the wider market, as well as the 
corporate strategy, in order to ensure that our senior executive reward policy remains 
ﬁt for purpose. 

Richard Davey 
Chairman of the Remuneration Committee

Richard Davey  
Chairman of the Remuneration Committee

The Remuneration Committee 
determines, on behalf of the board, the 
company’s policy on the remuneration 
of executive directors, other members 
of the Severn Trent Executive 
Committee (STEC) 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 members of the Remuneration 
Committee during the year were 
Dr Bernard Bulkin, Richard Davey 
(Committee Chairman) and Martin 
Lamb all of whom are independent 
non-executive directors. Andrew Duff, 
the company Chairman, who was 
independent on his appointment 
to the board, is also a member. 
Accordingly, the composition of the 
Committee is in accordance with the 
Governance Code. 

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Severn Trent Plc  Annual Report and Accounts 2012

Governance – Remuneration Committee

56

Remuneration Committee activity
During the year ended 31 March 2012, the Committee met ﬁve 
times to discuss key remuneration issues arising, the review and 
operation of the company’s remuneration policy and market 
updates by its advisers. 

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.

Remuneration Committee attendance in 2011/12

Richard Davey

Andrew Duff

Dr Bernard Bulkin 

Martin Lamb

5/5

5/5

5/5

5/5

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. 

New Bridge Street (a trading name of Aon Corporation) is the 
independent adviser to the Committee. Neither New Bridge 
Street nor any other part of the Aon Corporation provided other 
services to the company during the year. During 2011/12, the 
Committee carried out a formal review of its advisers, and 
reappointed New Bridge Street.

The Chief Executive (Tony Wray) and the Director of Human 
Resources (Evelyn Dickey) 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, Bronagh 
Kennedy, acts as secretary to the Committee.

How we reﬂect our core strategic priorities in executive remuneration 
The remuneration policy for senior executives is set with close regard to the company’s four key focus areas and risk management. 

Key focus
Customer – delivering 
quality services at 
prices customers 
can afford

Employee – investing 
in the right people 
with the right skills

Environment – reducing 
pollution and our 
carbon footprint
Financial – making our 
business attractive 
to investors

Remuneration policy

Annual bonus and LTIP potential just below the median when compared to the FTSE 51–150, supported by 
competitive base salary at or below market median.

RoRCV targets within the LTIP and ﬁnancial based KPIs within the annual bonus are set with close regard to 
Ofwat’s determination, ensuring that we closely manage our performance within the regulatory limits.

Customer focused KPIs form a substantial part of the annual bonus scorecard.

The Committee aims to ensure that the executive salary movement is aligned to the rest of the workforce.

The corporate scorecard approach is used for the annual bonus throughout the company.

HMRC approved share plans (all-employee SIP and SAYE) are operated annually for UK based executives 
and employees.

KPIs within the annual bonus for all employees include environmental factors.

A variety of ﬁnancial KPIs are used within the annual bonus plan to help ensure our ﬁnancial performance 
is optimised.

Out-turn under the LTIP is wholly determined by the achievement of RoRCV against the Ofwat Final 
Determination. No LTIP payout will be made if performance is below the RoRCV target set by Ofwat.

Relative TSR is used to measure performance in the Share Matching Plan to reward executives for Severn 
Trent outperforming the stock market.

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. 
Furthermore, there is a clear link between all-employee 
remuneration policies and those operated at senior 
executive level. 

The Committee addresses the need to balance risk and 
reward. The Committee continues to monitor the variable pay 
arrangements for the executive directors and other members 
of the Executive Committee to take account of the risk proﬁle 
of the company ensuring sustainability and how this is reﬂected 
in variable remuneration. The Committee believes that the 
schemes are appropriately managed and that the choice of 
performance measures and targets does not encourage 

Severn Trent Plc  Annual Report and Accounts 2012

Governance – Remuneration Committee

57

undue risk taking by the executives so that the long term 
performance of the business is not put at the risk of short term 
value. 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. 
Workforce remuneration policy and its linkage to senior 
executive policy
The Committee addresses the need to ensure that changes in 
senior executive remuneration is kept in line with workforce 
pay. Whilst it has not set a speciﬁc policy on the relationship 
between executive directors’ pay and that of the rest of the 
workforce, it aims to ensure that executive salary movement 
is appropriately aligned to the rest of the workforce and 
speciﬁcally considers this aspect as part of its decision 
making process. 

All-employee share plans (UK)
The company also actively encourages all-employee share 
ownership, and aims to ensure that employees are given 
the opportunity to share in the success of the company. 
For example, two all-employee share plans are operated 
as follows:

•  an all-employee Share Incentive Plan. Awards are currently 
made which include a performance condition based on 
achievement of the KPIs. Employees of Severn Trent Plc and 
Severn Trent Water Limited participate in the plan. In respect 
of 2011/12 performance, in the forthcoming year awards 
of shares to the value of £309 will be made to all eligible 
employees; and 

•  an all-employee HMRC approved SAYE plan on an 

annual basis.

The Committee periodically reviews the use of other 
all-employee incentive vehicles.

In addition, the employee bonus plans include a signiﬁcant 
element of performance consistent with the KPIs measured 
within the executive directors’ annual bonus plan. 

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

•  base salary and beneﬁts;

•  annual bonus scheme;

•  LTIP and Share Matching Plan (SMP); and

•  pension.

Details of each of the above elements follow but the table below summarises the packages of each of the executive directors:

Component

Base salary from 
1 July 2012

On target bonus  
(% of salary)

Maximum bonus  
(% of salary)

% of bonus earned 
deferred into shares

LTIP award  
(% salary)

SMP award – 
maximum ratio of 
matching shares to 
deferred shares

Pension arrangement

Tony Wray 
Chief Executive
£561,000

Michael McKeon 
Finance Director
£455,400

Tony Ballance 
Director, Strategy 
and Regulation
£206,100

Martin Kane 
Chief Executive Ofﬁcer 
– Severn Trent Services
£250,600

Andy Smith 
Director of  
Water Services
£267,900

60%

120%

50%

70%

0.5 : 1

60%

120%

50%

50%

0.5 : 1

60%

120%

50%

50%

0.5 : 1

60%

120%

50%

50%

0.5 : 1

60%

120%

50%

50%

0.5 : 1

Cash allowance

Cash supplement

Deﬁned  
contribution  
scheme

Final salary 
occupational 
scheme

Final salary 
occupational 
scheme to 
31.12.2011 and 
cash allowance 
effective from 
01.01.2012

Beneﬁts

A car allowance, private medical insurance, life assurance and an incapacity beneﬁts scheme

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Severn Trent Plc  Annual Report and Accounts 2012

Governance – Remuneration Committee

58

Target value

Chief Executive

All other executive directors 

0%

20%

40%

60%

80%

100%

Base salary
Target bonus (cash)
Target bonus (deferred shares)

Target value of SMP awards
Target 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

Pay arrangements for Martin Kane
Martin Kane was promoted to the role of Chief Executive Ofﬁcer 
(CEO) – Severn Trent Services with effect from 1 January 2012. 
From that date, his salary was increased to £250,600 and a 
disturbance allowance of £29,400 has been put in place in 
recognition of the international nature of this role and Martin’s 
continued board duties. His bonus, LTIP and Share Matching 
Plan award levels remain unchanged.

In order to carry out his new role, Martin was required to 
relocate to the US. Consequently, his beneﬁts ﬁgure for 
2011/2012 included an amount of £28,628 relating to his 
relocation and associated costs. Of this total, £12,470 was ‘one 
off’ in nature, being in respect of household goods. The balance 
of £16,158 relates to ongoing costs including property lease 
rental, US medical insurance and US lease car. This relates to an 
annualised amount of £54,091. The associated tax liability in 
relation to these relocation costs will be borne by Severn Trent 
when they fall due. For 2011/2012 this is estimated to be 
£21,458. Martin also receives an allowance of £2,909 to cover 
US Utilities cost associated with his relocation. In setting his 
relocation package specialist external advice was sought from 
ECA who specialise in expatriate remuneration.

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 reviewed salaries for 2012/13 and has 
determined that salaries for all executive directors except 
Martin Kane (who will receive no further increase until July 2013), 
will be increased by 2% from 1 July 2012. This 2% increase is in 
line with the average increase across the rest of the company. 

The core non-salary beneﬁts for executive directors comprise:

•  a car allowance;

•  private medical insurance;

•  life assurance; and

•  an incapacity beneﬁts scheme.

Private medical insurance and some other beneﬁts may be 
ﬂexed under the company’s ﬂexible beneﬁts scheme.

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.

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 are automatically released on the dealing day after the 
cessation of employment.

For several years, Severn Trent has operated a clawback 
provision which will continue for the forthcoming year. In light 
of the publication of the Governance Code, the Committee 
considered the structure of the company’s clawback provision 
reviewing best and evolving practice. In the light of this it made 
some changes to the operation of the clawback to allow for the 
clawback to be triggered on gross misconduct, an error in the 
basis of calculation and misstatement of results. The clawback 
would usually be satisﬁed by reducing future annual bonus 
payments or the next release of share based awards. In the 
event that a cash clawback were necessary, it would normally 
be only to the net of tax amounts. 

Annual bonus payments to executive directors are not 
pensionable.

Severn Trent Plc  Annual Report and Accounts 2012

Governance – Remuneration Committee

59

Bonus out-turn for 2011/12
In 2012, the Chief Executive and Finance Director had 80% of 
their bonus out-turn based on the performance of Severn Trent 
Water, 10% based on Severn Trent Services performance and 
10% based on personal contribution to reﬂect the risk proﬁle of 
the group and their level of accountability. The remaining 
executive directors had 90% of their bonus out-turn attributed 
to Severn Trent Water performance and 10% based on personal 
performance. 

Severn Trent Water performance
The bonus outturn in respect of Severn Trent Water 
performance was operated by reference to a balanced 
scorecard of measures, based on the 20 KPIs set at the start of 
the ﬁnancial year. 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 total score achieved against the KPIs was 63.72% of the 
maximum available. The Committee applied discretion by 
moving downwards two KPIs. 10.39% relates to Customer 
Metrics, 14.06% to Employee Metrics, 21.26% relates to 
Environment Metrics and 18.01% to Financial Metrics.

Severn Trent Services performance
The Chief Executive and Finance Director had 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) return on invested capital of 
Severn Trent Services and speciﬁc personal objectives relating to 
governance and control. 

Personal performance measures
In addition, each director has 10% of their bonus opportunity 
measured against a set of personal performance metrics. 
The personal performance scores for the executive directors 
ranged from 8.5% to 9.4% out of a maximum 10% available. 
Bonus targets for 2012/13
The Committee has reviewed the operation of the plan and 
concluded that it should operate on a similar basis for 2012/13. 
However, under the Severn Trent Water element, a change is 
being made to reduce the number of KPIs from 20 to 10. This 
change reﬂects that Ofwat has published a revised suite of KPIs 
against which they have indicated that they will assess water 
companies, and it is therefore appropriate to measure the 
company’s performance consistently with those externally 
published measures of success. 

As a result of his promotion to CEO – Severn Trent Services, 
Martin Kane’s bonus will now comprise 70% linked to the 
performance of Severn Trent Services, 10% linked to the 
performance of Severn Trent Water and 20% to personal 
performance. For the other executive directors, their bonus 
weightings will remain unchanged. 

The following chart summarises how the annual bonus metrics 
are weighted for the executive directors for 2012/13:

Annual bonus metric weightings

Chief Executive and Finance Director

Director, Strategy and Regulation and Director of Water Services 

CEO, Severn Trent Services

0%

10%

20%

30%

40%

STW performance
Personal metrics

50%

60%

70%
STS performance

80%

90%

100%

Long term incentives
The executive directors are eligible to participate in two long 
term incentive schemes: a Long Term Incentive Plan; and 
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. 

The policy level of LTIP awards is 70% of salary for the Chief 
Executive and 50% of salary for the other executive directors. 
Awards of this level were made in 2011. 

Participants are entitled to additional shares in lieu of dividends 
paid on vested shares over the performance period. 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.

In 2011, the Committee changed the performance targets 
applying to LTIP awards to be based on return on regulatory 
capital value (RoRCV). The Committee believes that the use of 
RoRCV provides a strong alignment between the long term 
ﬁnancial and operational performance of the group and the 
rewards delivered to management. It is felt by the Committee 
to be the most all encompassing indicator of performance.

This measure is entirely consistent with the method used 
by Ofwat in setting customer prices as part of the Final 
Determination (the process whereby Ofwat set the level of 
prices we can charge customers), and reﬂects the efﬁciency 
of earnings rather than simply being an absolute measure of 
proﬁt and is veriﬁed and published as part of the Ofwat Annual 
Return process.

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Severn Trent Plc  Annual Report and Accounts 2012

Governance – Remuneration Committee

60

A sliding scale of targets is used, linked to outperformance of 
the Ofwat Final Determination shown graphically below:

RoRCV vesting schedule for 2011 and 2012 LTIP awards

Percentage of award vesting (%)

100

75

50

25

0

99%

100% 101% 102% 103% 104% 105% 106% 107%

108%

Average annual RoRCV against the Ofwat Final Determination expectation

This vesting schedule is set so as to ensure that executives are 
appropriately rewarded for performance in excess of the Final 
Determination, with no payouts for performance below this. 
However, it is also important that executives are not over-
incentivised to achieve excessive levels of RoRCV, which could in 
theory incentivise inappropriate behaviours such as operational 
performance which does not deliver customer value or 
inadequate investment in our capital base. The Committee 
believes the above scale encourages delivery of strong 
performance against the Final Determination, but without 
compromising the company’s wider values. 

For 2012 awards, performance will be measured over the three 
ﬁnancial years ending 31 March 2013, 2014 and 2015. If the 
vesting result is 0% or greater than 50% than the Committee 
reserves the discretionary power to change this result. If it is 
greater than 50% it may reduce the vesting to a number not 
less than 50% as it considers appropriate; and if it is 0% it may 
increase it to any ﬁgure not greater 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 RoRCV is adjusted each year for RPI a signiﬁcant 

swing in inﬂation during the year can result in substantial 
under or over performance on the RoRCV target. RPI in itself is 
not a factor that management can inﬂuence;

•  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; and

•  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 (‘SMP’) executives can receive 
up to one matching share for each share deferred under the 
annual bonus plan. The current policy is that they receive 0.5 
matching share for each deferred share. At the time of vesting 
participants will receive the dividends paid on vested shares over 
the vesting period. 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 three year period.

Awards under the SMP are subject to a relative Total 
Shareholder Return (TSR) measure over three distinct 
performance periods. However, awards will not normally 
vest to participants until the third anniversary of grant. 
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. In addition, for awards to vest, the 
Committee must be satisﬁed that the TSR is reﬂective of the 
company’s underlying performance. 

At the time of vesting participants will receive the dividends 
paid on vested shares over the performance period.

Shown graphically, the vesting schedule and performance and 
vesting periods applying to the 2011 and 2012 SMP awards is: 

TSR vesting schedule and performance periods for 2011 and 2012 awards

Percentage of award vesting (%)

Performance and vesting period

100

90

80

70

60

50

40

30

20

10

0

20% of award

0–18 months

30% of award

0–27 months

50% of award

0–36 months

Median

Upper Quartile

Position against FTSE 51–150 (excluding investment trusts)

0

9

18
Vesting period (months)

27

36

TSR performance measured

Holding period

Severn Trent Plc  Annual Report and Accounts 2012

Governance – Remuneration Committee

61

Pensions
Severn Trent executives receive retirement beneﬁts from a 
variety of legacy pension arrangements including deﬁned 
beneﬁt, deﬁned contribution, payments made direct to 
personal plans and cash in lieu. However, whilst for legacy 
reasons the executive directors participate in a variety of 
different arrangements, the policy for employer contributions 
for new executive directors has been agreed at 25% of salary 
(with cash equivalent above the Annual Allowance or cash in 
lieu of the whole pension contribution if above the Lifetime 
Allowance).

As a result of the changes in pension legislation for high earners, 
Severn Trent has introduced the following options for any 
individuals who are affected by the tax changes:
For deﬁned contribution members
•  Continue in the scheme and individuals meet any tax 

liabilities as they fall due; or

•  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. If affected by the 
Lifetime Allowance, executives may receive cash in lieu of the 
pension contribution they would otherwise have received. 

For deﬁned beneﬁt members 
•  Continue in the scheme and individuals meet any tax 

liabilities as they fall due; or

•  Opt out of future deﬁned beneﬁt accrual and join the deﬁned 

contribution section with the same options as above.

Tony Wray has elected to opt out of the deﬁned beneﬁt scheme 
since he is affected by the Lifetime Allowance. Therefore, he will 
now receive a salary supplement of 40% of base salary in lieu of 
future pension provision. 

Of the current executive directors, Andy Smith participates in 
the Severn Trent Pension Scheme, and he has elected to remain 
in this scheme until its closure in 2015. The scheme is a funded 
HMRC registered ﬁnal salary occupational pension scheme 
which provides:

•  a normal retirement age of 60 years;

•  an overall pension at normal retirement age of two thirds 
of ﬁnal pensionable salary, which for executive directors is 
deﬁned as base salary only, subject to the completion of 
20 years’ pensionable service;

•  life cover of 4 x pensionable earnings;

•  a pension payable in the event of retirement on grounds 

of ill health; and

•  a dependant’s pension on death of two thirds of the 

member’s pension.

Andy Smith participates up to the level of the scheme speciﬁc 
earnings cap which in 2011/12 was £129,600. He is provided 
with a cash supplement in lieu of pension entitlement above 
this scheme cap at 40% of his salary.

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

Individual executives are 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.

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Severn Trent Plc  Annual Report and Accounts 2012

Governance – Remuneration Committee

62

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. External non-executive appointments help 
to bring a further external perspective to the group and help in 
the development of key individuals experience. 

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 2012 he was paid 
fees of £23,205. He has retained these fees in accordance with 
the above policy.

Tony Wray was appointed as a non-executive director of 
Grainger plc on 24 October 2011 and in respect of the 
appointment for the year ended 31 March 2012 has been 
paid fees of £17,590. 

No other executive directors currently hold any external fee 
earning non-executive directorships.

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 all of the net 
of tax number of shares they receive through the LTIP, SMP and 
other share-based plans until the shareholding guidelines have 
been met. Good progress is being made to meet the guideline 
holdings. Details of the current shareholdings of the executive 
directors are set out on page 65.

Directors’ service agreements and letters of appointment
The Committee continues to ensure that service contracts for 
new executive directors reﬂect best practice. Taking this into 
account, it is the Committee’s policy that for future executive 
director appointments, the termination provisions within the 
service contracts will state that any termination payment 
should be based upon an estimate of salary and ﬁxed 
beneﬁts only. 

The existing executive directors all have contracts under a 
model which was approved by the Committee in 2004 and 
updated during 2007/08. The main terms of the contracts for 
existing executive directors are summarised in the table below.

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.

All are subject to reappointment as directors at the 
forthcoming AGM. 

Provision

Policy

Notice period 12 months from either party.

Termination 
payment

Theoretical maximum payment in the case of redundancy or termination in breach of the agreement by the company 
of 175% of base salary. In determining actual payouts, the Committee has a duty to take into account the following: 

•  A reduction of up to 10% can be made at the Committee’s sole discretion (i.e. lowering the payout to 157.5% 

of salary); and 

•  There is an explicit clause in the contract stating that the company shall not be required to reward 

poor performance.

Any payment will not include amounts in respect of awards which have been made under any share plan which are 
governed by the rules of individual plans.

Mitigation

Any termination payment will not be made automatically but will be subject to both phasing and mitigation 
(including offset against any earnings from new employment) 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.

Change of 
control

There are no speciﬁc contractual payments or beneﬁts which would be triggered in the event of a change in control 
of the company.

Contract dates Executive directors

Tony Wray

Michael McKeon

Tony Ballance

Martin Kane

Andy Smith

Date of current  
agreement

20 May 2008

6 December 2005

2 June 2008

1 January 2012

2 June 2008

Date of appointment  
to Severn Trent

7 March 2005

13 December 2005

23 July 2005

30 September 1975

1 January 2005

Severn Trent Plc  Annual Report and Accounts 2012

Governance – Remuneration Committee

63

Performance graph
This graph shows the value, by 31 March 2012, of £100 invested 
in Severn Trent Plc on 31 March 2007 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

Value (£)

200

175

150

125

100

75

50

25

0

2007

2008

2009

2010

2011

2012

Severn Trent Plc

FTSE 100 index

Source: Datastream

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. 

The level and structure of the non-executive directors’ fees was 
reviewed by the board in 2012 and some changes made which 
were effective from April 2012. Rather than paying a separate 
fee for membership of board committees, a single fee including 
such memberships will be paid. Additional fees will continue to 
be paid for the senior independent director and chairmanship of 
the board committees. 

The breakdown of the non-executive directors’ fees from 1 April 
2012 is shown in the table below:

Base fee paid to all non-executive directors
Supplementary fees:

– Senior independent director
– Audit Committee Chairman
– Remuneration Committee Chairman
– Corporate Responsibility Committee Chairman

Fees 
£50,000

£10,000
£15,000
£15,000
£13,000

The Chairman receives a fee of £250,000 per annum. This was 
reviewed in 2012 and no change was made to his fee. 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.

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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:

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Initial appointment

Current appointment

Current expiry date*

Bernard Bulkin

Richard Davey

Andrew Duff (Chairman)

Gordon Fryett

Martin Lamb

Baroness Noakes

1 January 2006

1 January 2006

10 May 2010

1 July 2009

29 February 2008

29 February 2008

1 January 2012

31 December 2014

1 January 2012

31 December 2014

10 May 2010

1 July 2009

9 May 2013

30 June 2012

1 March 2011

28 February 2014

1 March 2011

28 February 2014

* 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 2012 AGM.

 
 
 
 
 
 
 
 
 
 
 
Severn Trent Plc  Annual Report and Accounts 2012

Governance – Remuneration Committee

64

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  
£000

Annual 
bonus –
 cash2
£000

Annual 
bonus –
 deferred2
£000

BIKs1
£000

–
–
–
–
–
–

59.4
71.4
250.0
46.4
46.4
58.4

Chairman and other non-executive directors
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

195.1
226.7
442.3
251.5
530.1
2,177.7

2.8
34.7
6.9
3.2
7.7
55.3

–
–
–
–
–
–

–
–
–
–
–
–

55.6
69.9
119.1
72.2
153.0
469.8

55.6
69.9
119.1
72.2
153.0
469.8

Total  
2011/12 
before DC 
pensions 
£000

DC  
pension 
contributions4
£000

Total  
including DC 
pension 
contributions 
£000

Total  
2010/11 
including DC 
pensions 
£000

59.4
71.4
250.0
46.4
46.4
58.6

324.1
501.4
829.8
466.5
1,034.9
3,688.9

–
–
–
–
–
–

71.2
–
50.0
–
–
121.2

59.4
71.4
250.0
46.4
46.4
58.6

395.3
501.4
879.8
466.5
1,034.9
3,810.1

59.4
71.5
224.2
46.4
46.4
58.7

379.3
413.6
842.7
456.7
905.1
3,504.0

Other3
£000

–
–
–
–
–
0.2

15.0
100.2
142.4
67.4
191.1
516.3

1  In respect to Martin Kane’s relocation cost, the associated tax will be borne by Severn Trent when it falls due estimated at £21,458 for 2011/2012. Please refer to page 58 which 

provides further details.

2  The directors receive 50% of their bonus in cash and 50% in shares, awarded under the Annual Bonus Scheme. The amounts shown in respect of share bonus are those awards 
made in respect of 2012 performance. Outstanding unreleased Annual Bonus Scheme awards are shown as non-beneﬁcial interests in the table of directors’ share interests and 
in the deferred bonus awards table.

3  Other emoluments include expenses chargeable to income tax, car allowances, travel allowances, telephone allowances and amounts paid in lieu of pension contributions. 

Included in other emoluments are:

•  Baroness Noakes expenses £179.

•  Tony Ballance car allowance £15,000 and expenses £5.

•  Martin Kane pension supplement £67,950, car allowance £15,000 and expenses £17,300. 

•  Michael McKeon pension supplement £127,300, car allowance £15,000 and expenses £115. 

•  Andy Smith pension supplement £52,440, car allowance £15,000 and expenses £7.

•  Tony Wray pension supplement £176,120 and car allowance £15,000. 

4  Michael McKeon received £50,000 up to the annual allowance, the balance of his pension arrangement £127,300 was provided in a cash supplement under ‘other’. 

Severn Trent Plc  Annual Report and Accounts 2012

Governance – Remuneration Committee

65

Directors’ deﬁned beneﬁt pension provisions

Service 
completed in 
years (including 
transferred in 
service credits)
7
6
35

Accrued 
pension at 
31 March 2012 
£pa
31,317
29,471
134,773

Increase in 
accrued 
pension 
during  
the year 
£pa
5,581
4,469
7,944

Increase 
in accrued 
pension 
during  
the year  
(net of inﬂation) 
£pa
4,629
3,544
3,251

Transfer value 
of accrued 
pension at 
31 March 2012 
£000
493.3
424.3
2,166.1

Transfer value 
of accrued 
pension at 
31 March 2011 
£000
434.2
404.8
2,000.6

Increase/ 
(decrease) in 
transfer value 
over the year, 
net of directors’ 
contributions 
£000
51.3
13.7
165.5

Accrued  
pension at  
31 March 2012 
£pa
31,317
29,471
134,773

Increase in 
accrued pension 
during the year 
£pa
5,581
4,469
7,944

Increase in 
accrued pension 
during the year 
(net of inﬂation) 
£pa
4,629
3,544
3,251

Transfer 
value of accrued 
beneﬁts net 
of directors’ 
contributions 
£000
80.1
58.5
128.0

Name
Andy Smith
Tony Wray
Martin Kane

Name
Andy Smith
Tony Wray
Martin Kane

Notes: 

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.

Tony Wray ceased to contribute to the Scheme from 31 December 2011 further details can be found on page 61.

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 2012 (3.7%) as the latest available ﬁgure prior to the year end.

Directors’ share interests
The directors of the company at 31 March 2012 and their beneﬁcial interests in the shares of the company were as follows:
i)  Beneﬁcial holdings and outstanding deferred shares

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 Kane2
Michael McKeon
Andy Smith
Tony Wray

Notes

At 1 April 2011 (or date of 
appointment if later)  
Number of ordinary  
shares of 9717/19p each
Beneﬁcial Non-beneﬁcial1

At 31 March 2012 
Number of ordinary 
shares of 9717/19p each
Beneﬁcial Non-beneﬁcial1

At 22 May 2012 
Number of ordinary 
shares of 9717/19p each
Beneﬁcial Non-beneﬁcial1

554
588
3,500
3,012
4,018
1,018

3,149
9,699
4,231
7,516
10,158

–
–
–
–
–
–

11,626
13,373
31,043
17,329
32,000

554
588
3,500
3,012
4,018
1,064

4,218
11,162
8,168
9,514
13,429

–
–
–
–
–
–

13,544
15,678
32,574
19,333
35,453

554
588
3,500
3,012
4,018
1,064

4,218
11,384
8,168
9,514
13,429

–
–
–
–
–
–

13,544
15,678
32,574
19,333
35,453

1  Non-beneﬁcial holdings are yet to be released shares conditionally held under the Annual Bonus Scheme, to which directors become unconditionally entitled on the third 

anniversary of grant. Details of the yet to be released Annual Bonus Scheme shares are provided on page 67.

2  Martin Kane acquired 222 shares on 1 May 2012, with a market price of 1,683p per share, following the exercise of his 2009 three year Sharesave scheme option.

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Severn Trent Plc  Annual Report and Accounts 2012

Governance – Remuneration Committee

66

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 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 515,844 shares held by the Severn Trent Employee Share Ownership Trust. The details 
of the performance criteria are explained on page 59 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:

Tony Ballance

Martin Kane

Michael McKeon

Andy Smith

Tony Wray

Awards  
granted
14 July 2008
7 July 2009
21 June 2010
22 June 2011
14 July 2008
7 July 2009
21 June 2010
22 June 2011
14 July 2008
7 July 2009
21 June 2010
22 June 2011
14 July 2008
7 July 2009
21 June 2010
22 June 2011
14 July 2008
7 July 2009
21 June 2010
22 June 2011

Maximum  
award
5,486
7,405
6,803
6,525
6,001
8,154
8,504 
7,121
13,717
18,733
17,211
14,411
8,230
11,019
10,124
8,477
19,684
27,769
25,512
23,271

Awards  
vested
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–

Awards  
lapsed
5,486
–
–
–
6,001
–
–
–
13,717
–
–
–
8,230
–
–
–
19,684
–
–
–

Maximum 
outstanding awards 
as at 31 March 2012
–
7,405
6,803
6,525
–
8,154
8,504
7,121
–
18,733
17,211
14,411
–
11,019
10,124
8,477
–
27,769
25,512
23,271

The market price on the date of the 2011 award was 1,398p.

The LTIP awards made in 2009 and 2010 are subject to TSR performance, measured relative to those companies ranked 51–150 
in the FTSE by market capitalisation (excluding investment trusts). 25% of awards vest at median performance, and 100% vest 
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. 

The TSR performance up to 31 March 2012 for the 2010 award indicates that this award is currently on track to vest at 100%. 
The 2009 award ended its TSR performance period on 31 March 2012 and will vest at 28.4%.

Severn Trent Plc  Annual Report and Accounts 2012

Governance – Remuneration Committee

67

iii) Annual Bonus Scheme
The shares in respect to 2011/2012 performance year will be granted in June 2012. The table below shows outstanding unreleased 
share awards from previous years.

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Martin Kane

Michael McKeon

Andy Smith

Tony Wray

Date of  
grant
7 July 2009
21 May 2010
20 May 2011
7 July 2009
21 May 2010
20 May 2011
7 July 2009
21 May 2010
20 May 2011
7 July 2009
21 May 2010
20 May 2011
7 July 2009
21 May 2010
20 May 2011

Annual bonus  
deferred into shares
£62,294
£51,448
£51,823
£68,598
£64,310
£59,119
£157,590
£128,724
£109,242
£92,700
£75,810
£66,555
£166,680
£138,996
£126,000

Number of  
shares
5,669
4,139
3,736
6,243
5,173
4,262
14,343
10,355
7,876
8,437
6,098
4,798
15,187
11,182
9,084

Deferred share  
award release date
6 July 2012
20 May 2013
19 May 2014
6 July 2012
20 May 2013
19 May 2014
6 July 2012
20 May 2013
19 May 2014
6 July 2012
20 May 2013
19 May 2014
6 July 2012
20 May 2013
19 May 2014

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 performance 
condition for the 2010 SMP awards is the same as that applying to the LTIP awards granted in 2010 (see page 60). The details of the 
performance criteria applying to the 2011 awards are explained on page 59 of this report. The individual interest of 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
20 May 2011
21 May 2010
20 May 2011
21 May 2010
20 May 2011
21 May 2010
20 May 2011
21 May 2010
20 May 2011

Maximum  
award
2,069
1,868
2,586
2,131
5,177
3,938
3,049
2,399
5,591
4,542

Awards  
vesting
–
–
–
–
–
–
–
–
–
–

Maximum  
outstanding 
awards as at  
31 March 2012
2,069
1,868
2,586
2,131
5,177
3,938
3,049
2,399
5,591
4,542

Award  
lapsing
–
–
–
–
–
–
–
–
–
–

The TSR performance up to 31 March 2012 for the 2010 and 2011 SMP awards against the median and upper quartile of the 
comparator group indicate that these awards are currently on track to both vest at 100%. 

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Severn Trent Plc  Annual Report and Accounts 2012

Governance – Remuneration Committee

68

v) Sharesave options over ordinary shares
Exercised  
during  
the year  
(No. of 
shares)

At the start of  
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 Kane2

Michael McKeon
Andy Smith
Tony Wray

556
561
314
222
449
–
1,943
1,123
1,123

–
–
(314)
–
–
–
–
–
–

–
–
–
–
–
–
–
–
–

–
–
–
–
–
316
–
–
–

556
561
–
222
449
316
1,943
1,123
1,123

2009
2010
2008
2009
2010
2011
2009
2010
2010

862 May 2012 Oct 2012
808 May 2013 Oct 2013
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.

2  Martin Kane acquired 314 shares on 5 May 2011, with a market price of 1,482p per share, following the exercise of his 2008 three year Sharesave scheme options, 

generating a £820 gain.

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 2012 there were 
no other executives participating in the group’s historical executive Share Option Scheme (31 March 2011: ﬁve other executives).

b)   At the close of business on 31 March 2012 the mid-market price of the company’s shares was 1,520p and the range during the 

year was 1,375p to 1,613p.

Signed on behalf of the board which approved the Directors’ remuneration report on 29 May 2012.

Richard Davey 
Chairman of the Remuneration Committee

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Severn Trent Plc  Annual Report and Accounts 2012

Governance
Directors’ report

The directors present their report, together with the audited 
ﬁnancial statements of the group, for the year ended 
31 March 2012.

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 2012 appear in notes 
19, 20 and 40 to the ﬁnancial statements on pages 99 and 127.

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 2 to 36 provide 
detailed information relating to the group, its business models 
and strategy, the operation of its businesses and the results and 
ﬁnancial position for the year ended 31 March 2012.

Details of the principal risks and uncertainties facing the group 
are set out in the risk management section on pages 37 to 40.

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 42 and 43.

All of the directors will be offering themselves for reappointment 
at the Annual General Meeting (AGM), as set out in the 
Chairman’s letter on pages 45 to 49.

Details of directors’ service agreements are set out in the 
Directors’ remuneration report on page 55. The interests of 
the directors in the shares of the company are shown on 
pages 65 to 68 of that report. 

Insurance and indemnities
The Company maintains Directors’ and Ofﬁcers’ Liability 
Insurance in respect of legal action that might be brought against 
its directors and ofﬁcers. In accordance with the company’s 
articles of association, and to the extent permitted by law, in 
November 2011 the company indemniﬁed each of its directors 
and other ofﬁcers of the group against certain liabilities that 
may be incurred as a result of their positions with the group. 

Severn Trent does not have in place any indemnities for the 
beneﬁt of the auditors.

Employees
The average number of employees within the group is shown 
in note 9 to the ﬁnancial statements on page 92.

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 endeavour to 
retain employees in the workforce if they become disabled, we 
make all reasonable adjustments to their role and, if necessary, 
look for redeployment opportunities to support them in seeking 
an alternative role within Severn Trent. We ensure that training, 
career development and promotion opportunities are available 
for all our employees irrespective of their gender, race, age 
or disability.

69

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 91.

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 108 to 118. 
Further details on our treasury policy and management are 
set out in the Financial review on page 35.

Post balance sheet events
Details of post balance sheet events are set out in note 38 to 
the group ﬁnancial statements on page 126.

Dividends
An interim dividend of 28.04 pence per ordinary share was paid 
on 13 January 2012. The directors recommend a ﬁnal dividend 
of 42.06 pence per ordinary share to be paid on 27 July 2012 to 
shareholders on the register on 22 June 2012. This would bring 
the total dividend for 2011/12 to 70.10 pence per ordinary 
share (2011: 65.09 pence). The payment of the ﬁnal dividend is 
subject to shareholder approval at the AGM.

In addition to the recommended ﬁnal dividend, the directors 
recommend a special dividend of 63.0 pence per ordinary share 
to be paid on 27 July 2012 to shareholders on the register on 
22 June 2012. 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 107. 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 119 to 123. For shares held by 
the Severn Trent Employee Share Ownership Trust, the trustee 
abstains from voting.

 
 
 
 
 
 
 
 
 
 
 
Severn Trent Plc  Annual Report and Accounts 2012

Governance – Directors’ report

70

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 
Governance Code, 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 45 to 49.

Under its articles of association, the directors have authority to 
allot ordinary shares, subject to the aggregate nominal amount 
limit set at the 2011 AGM.

There are a number of agreements that take effect after, or 
terminate upon, a change of control of the company, such as 
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 31 March 2012 the company had been notiﬁed in 
accordance with chapter 5 of the Disclosure and Transparency 
Rules of the following major shareholdings:

Name of holder
Blackrock Inc
Newton Investment 
Management Ltd
Legal & General Group Plc

No. of ordinary 
 shares of  
9717/19p each
26,001,134

Percentage of voting 
rights and issued 
share capital
10.94%

12,087,473
9,403,273

5.09%
3.97%

Percentages rounded to two decimal places.

As at 29 May 2012, the company had been notiﬁed of the 
following holdings of voting rights in the ordinary share 
capital of the company: Blackrock Inc 23,457,458 (9.87%); 
Newton Investment Management Ltd 12,087,473 (5.09%) 
and Legal & General Group Plc 9,403,273 (3.97%).

Authority to purchase shares
The company was given authority at its AGM in 2011 to make 
market purchases of ordinary shares up to a maximum number 
of 23,748,497 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 2012.

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 127. 
Trade creditors for the group at the year end are estimated as 
representing 21.2 days’ purchases (2011: 24.4 days’ purchases).

Contributions for political and charitable purposes
Donations to charitable organisations during the year 
amounted to £107,325 (2011: £181,843). 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 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.

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 2011 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 2012 the group incurred costs 
of £nil (2011: £nil). Those authorities will expire at the 2012 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.

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Severn Trent Plc  Annual Report and Accounts 2012

Governance – Directors’ report

71

Analysis of shareholdings at 31 March 2012

Category
Individual and joint accounts
Other* 
Total 

Number of 
shareholders 
 64,900 
5,709 
70,609

% of  
shareholders
91.91 
8.09

Number of  
shares
25,499,121 
212,108,990 
 100.00  237,608,111 

* Includes insurance companies, nominee companies, banks, pension funds, other corporate bodies, limited and public limited companies.

Size of holding
1–499
500–999 
1,000–4,999 
5,000–9,999 
10,000–49,999 
50,000–99,999 
100,000+
Total

Number of 
shareholders 
51,947
12,158
5,487
315
322
116 
264
70,609

Number of  
% of  
shares
shareholders
9, 985,255
73.57 
8,525,535
17.22 
9,439,778
7.77
2,131,111
0.45
7,705,422
0.46
0.16 
8,268,252
0.37  191,552,758
100.00  237,608,111

% of shares
11.07
88.93
100.00

% of shares
4.20
3.59
3.97
0.90
3.24
3.48
80.62
100.00

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 
Governance Code. The internal control system can provide 
only 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 2011/12, 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 
auditors also report on signiﬁcant ﬁnancial control issues to the 
Audit Committee.

An independent reporter (Atkins) provides objective assurance in 
relation to the Severn Trent Water Limited Ofwat Annual Return.

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 2012 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).

The group’s procedures for exercising control and managing risk 
in relation to ﬁnancial reporting and preparation of consolidated 
accounts include:

•  the formulation and communication of group accounting 

policies which are regularly updated for developments in IFRS 
and other reporting requirements;

•  speciﬁcation of a set of ﬁnancial controls that all of the 

group’s operating businesses are required to implement as a 
minimum;

•  deployment of a group wide consolidation system with 
controls to restrict access and maintain integrity of data; 

•  recruitment, training and development of appropriately 

qualiﬁed and experienced ﬁnancial reporting personnel; and

•  monthly reviews by STEC of ﬁnancial reports from the group’s 

operating businesses.

Relevant Audit Information
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 auditors are 
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 auditors are aware of that information.

This conﬁrmation is given and should be interpreted in 
accordance with the provisions of section 418 of the Companies 
Act 2006.

External Auditors
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. Deloitte LLP have indicated their 
willingness to continue as auditors. The Audit Committee will 
also be responsible for determining the audit fee on behalf of 
the board.

 
 
 
 
 
 
 
 
 
 
 
Severn Trent Plc  Annual Report and Accounts 2012

Governance – Directors’ report

72

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 18 July 2012. 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

Bronagh Kennedy 
General Counsel and Company Secretary 
29 May 2012

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 4 to 7 and the 
business reviews of Severn Trent Water and Severn Trent 
Services on pages 8 to 30. The ﬁnancial position of the group, 
its cash ﬂows, liquidity position and borrowing facilities are 
described in the Financial review on pages 33 to 36. The group’s 
objectives, policies and processes for managing its capital and 
its ﬁnancial risk management objectives are described in the 
Financial review, the risk management report and the 
Governance report on pages 37 to 73. 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 
before exceptional ﬁnance costs during the year was 6.4%. 
The group is in a strong liquidity position and had £295.1 million 
in cash and liquid reserves and £600.0 million of undrawn 
committed bank facilities at 31 March 2012, which are expected 
to be sufﬁcient to fund its investment and cash ﬂow needs until 
at least December 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.

Severn Trent Plc  Annual Report and Accounts 2012

73

Governance
Directors’ responsibility statement

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.

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 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.

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Severn Trent Plc  Annual Report and Accounts 2012

74

Financial 
statements

Group ﬁnancial statements 
75  Independent auditor’s report 
76  Consolidated income statement 
77  Consolidated statement of  
comprehensive income 

78  Consolidated statement of changes in equity 
79  Consolidated balance sheet 
80  Consolidated cash ﬂow statement 
81  Notes to the group ﬁnancial statements

Company ﬁnancial statements 
128  Independent auditor’s report 
129  Company balance sheet 
129  Company statement of total recognised  

gains and losses 

130  Notes to the company ﬁnancial statements

 
 
Severn Trent Plc  Annual Report and Accounts 2012

75

Independent auditor’s report to the 
members of Severn Trent Plc

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 UK Corporate 
Governance 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 
2012 and on the information in the Remuneration Committee 
report that is described as having been audited.

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Carl D Hughes (Senior statutory auditor)
for and on behalf of Deloitte LLP 
Chartered Accountants and Statutory Auditor

London, UK  
29 May 2012

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We have audited the group ﬁnancial statements of 
Severn Trent Plc for the year ended 31 March 2012 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 2012 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.

 
 
 
 
 
 
 
 
 
 
 
Severn Trent Plc  Annual Report and Accounts 2012

76

Consolidated income statement

For the year ended 31 March 2012

Turnover
Operating costs before exceptional items
Exceptional operating costs
Total operating costs
Proﬁt before interest, tax and exceptional items
Exceptional items before interest and tax
Proﬁt before interest and tax
Finance income
Finance costs excluding exceptional costs
Exceptional ﬁnance costs
Net ﬁnance costs
Losses on ﬁnancial instruments
Share of results of associates and joint ventures
Proﬁt before tax, losses on ﬁnancial instruments and exceptional items
Exceptional items before tax
Losses on ﬁnancial instruments
Proﬁt on ordinary activities before taxation
Taxation on proﬁt on ordinary activities
Current tax
Deferred tax excluding exceptional credits
Exceptional deferred tax credit
Total taxation
Proﬁt for the year
Attributable to:
Owners of the company
Non-controlling interests

Earnings per share (pence)
Basic
Diluted

Notes
5, 6
7
8
7
5
8

10
11
11

12

8
12

13
13
13
13

15
15

2012
£m
1,770.6
(1,266.4)
(34.4)
(1,300.8)
504.2
(34.4)
469.8
107.7
(336.7)
(16.5)
(245.5)
(67.7)
0.1
275.3
(50.9)
(67.7)
156.7

(60.5)
9.1
69.1
17.7
174.4

171.8
2.6
174.4

72.5
72.1

2011
£m
1,711.3
(1,192.2)
(21.4)
(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
274.5

272.6
1.9
274.5

115.2
114.6

Severn Trent Plc  Annual Report and Accounts 2012

77

Consolidated statement of comprehensive income

For the year ended 31 March 2012

Proﬁt for the year
(Losses)/gains on cash ﬂow hedges taken to equity
Deferred tax on losses/gains on cash ﬂow hedges taken to equity
Amounts on cash ﬂow hedges transferred to the income statement
Deferred tax on transfers to income statement
Exchange movement on translation of overseas results and net assets
Tax on exchange movement
Actuarial (losses)/gains on deﬁned beneﬁt pension schemes
Tax on actuarial losses/gains
Deferred tax movement arising from rate change
Other comprehensive (loss)/income for the year
Total comprehensive income for the year
Attributable to:
Owners of the company
Non-controlling interests

2012
£m
174.4
(86.5)
20.8
3.7
(0.9)
(1.4)
–
(110.7)
26.6
1.7
(146.7)
27.7

25.1
2.6
27.7

2011
£m
274.5
16.0
(4.1)
4.5
(1.2)
(6.3)
(0.4)
50.7
(13.2)
0.7
46.7
321.2

319.7
1.5
321.2

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Severn Trent Plc  Annual Report and Accounts 2012

78

Consolidated statement of changes in equity

For the year ended 31 March 2012

At 1 April 2010
Proﬁt for the period
Gains on cash ﬂow hedges
Deferred tax on gains on cash ﬂow hedges
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
At 31 March 2011

Proﬁt for the period
Losses on cash ﬂow hedges
Deferred tax on losses on cash ﬂow hedges
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
Actuarial losses
Tax on actuarial losses
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
At 31 March 2012

Equity attributable to owners of the company

Share
capital
£m
231.6
–
–
–

Share
premium
£m
75.9
–
–
–

Other
reserves
£m
455.6
–
16.0
(4.1)

Retained
earnings
£m
177.6
272.6
–
–

–

–

–
–
–
–
–
–

0.6
–
–
–
–
–
232.2

–
–
–

–

–

–
–
–
–
–

0.4
–
–
–
–
–
232.6

–

–

–
–
–
–
–
–

4.1
–
–
–
–
–
80.0

–
–
–

–

–

–
–
–
–
–

3.8
–
–
–
–
–
83.8

4.5

(1.2)

(5.9)
(0.4)
–
–
–
8.9

–
–
–
–
–
–
464.5

–
(86.5)
20.8

3.7

(0.9)

(1.4)
–
–
–
(64.3)

–
–
–
–
–
–
400.2

–

–

–
–
50.7
(13.2)
0.7
310.8

–
4.6
(2.0)
0.3
1.2
(169.4)
323.1

171.8
–
–

–

–

–
(110.7)
26.6
1.7
89.4

–
4.5
(1.8)
0.4
0.3
(159.0)
256.9

Total
£m
940.7
272.6
16.0
(4.1)

4.5

(1.2)

(5.9)
(0.4)
50.7
(13.2)
0.7
319.7

4.7
4.6
(2.0)
0.3
1.2
(169.4)
1,099.8

171.8
(86.5)
20.8

3.7

(0.9)

(1.4)
(110.7)
26.6
1.7
25.1

4.2
4.5
(1.8)
0.4
0.3
(159.0)
973.5

Non-
controlling
interests
£m
6.3
1.9
–
–

–

–

(0.4)
–
–
–
–
1.5

–
–
–
–
–
(1.5)
6.3

2.6
–
–

–

–

–
–
–
–
2.6

–
–
–
–
–
(1.0)
7.9

Total
equity
£m
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)
1,106.1

174.4
(86.5)
20.8

3.7

(0.9)

(1.4)
(110.7)
26.6
1.7
27.7

4.2
4.5
(1.8)
0.4
0.3
(160.0)
981.4

 
Severn Trent Plc  Annual Report and Accounts 2012

Consolidated balance sheet

At 31 March 2012

79

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
Equity
Called up share capital
Share premium account
Other reserves
Retained earnings
Equity attributable to owners of the company
Non-controlling interests
Total equity

Signed on behalf of the board who approved the accounts on 29 May 2012.

Andrew Duff 
Chairman 

Michael McKeon 
Finance Director

Company Number: 2366619

Note

2012
£m

2011
£m

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s

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16
17
18
19
20
32
32

21
22
32
23

32
32
25

28

32
32
25
26
27
28

29
30
31

44.9
116.0
6,577.8
0.2
4.6
132.6
0.1
6,876.2

34.4
479.4
30.0
295.1
838.9
7,715.1

(89.3)
(0.5)
(397.6)
(46.5)
(17.0)
(550.9)

(4,309.5)
(288.0)
(411.0)
(801.5)
(345.8)
(27.0)
(6,182.8)
(6,733.7)
981.4

232.6
83.8
400.2
256.9
973.5
7.9
981.4

68.3
134.9
6,427.0
0.2
4.8
188.1
0.1
6,823.4

27.1
478.5
4.3
315.2
825.1
7,648.5

(23.9)
(0.1)
(391.2)
(67.0)
(12.6)
(494.8)

(4,320.5)
(122.4)
(367.8)
(919.4)
(292.1)
(25.4)
(6,047.6)
(6,542.4)
1,106.1

232.2
80.0
464.5
323.1
1,099.8
6.3
1,106.1

 
 
 
 
 
 
 
 
 
 
 
Severn Trent Plc  Annual Report and Accounts 2012

80

Consolidated cash ﬂow statement

For the year ended 31 March 2012

Cash generated from operations
Tax paid
Net cash generated from operating activities
Investing activities
Interest received
Proceeds on disposal of property, plant and equipment and intangible assets
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
(Decrease)/increase 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
Net cash and cash equivalents comprise:
Total cash and cash equivalents
Bank overdrafts
Net cash and cash equivalents at end of period

The decrease in cash and cash equivalents is reconciled to the movement in net debt in note 34.

Note
34

2012
£m
725.9
(72.0)
653.9

6.7
9.1
(12.0)
(371.1)
22.8
(344.5)

(203.5)
–
(13.6)
(159.0)
(1.0)
(157.4)
(47.6)
250.0
4.2
(1.8)
(329.7)
(20.3)
315.2
(0.2)
294.7

295.1
(0.4)
294.7

2011
£m
753.0
(32.4)
720.6

10.3
5.1
(20.9)
(403.1)
19.4
(389.2)

(179.8)
20.5
(10.8)
(169.4)
(1.5)
(28.7)
(47.3)
171.2
4.7
(2.0)
(243.1)
88.3
227.8
(0.9)
315.2

315.2
–
315.2

Severn Trent Plc  Annual Report and Accounts 2012

81

Notes to the group ﬁnancial statements

For the year ended 31 March 2012

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 2012.

The ﬁnancial statements have been prepared on the going 
concern basis (see Directors’ report on page 72) 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. 

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 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.

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Severn Trent Plc  Annual Report and Accounts 2012

Notes to the group ﬁnancial statements

82

2 Accounting policies (continued)
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.

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 2m) 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. 

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

Amortisation charged on assets with ﬁnite lives is taken to the 
income statement through operating costs.

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.

The group assesses that it is probable that a contract will be 
awarded when preferred bidder or equivalent status has been 
achieved and there are no signiﬁcant impediments to the 
award of the contract.
j) Property, plant and equipment

Property, plant and equipment is held at cost (or at deemed 
cost 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

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Severn Trent Plc  Annual Report and Accounts 2012

Notes to the group ﬁnancial statements

83

2 Accounting policies (continued)
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.

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.

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.
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 at fair 
value using bid price for assets with quoted prices. 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 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 in the group’s captive insurance subsidiary 
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.

 
 
 
 
 
 
 
 
 
 
 
Severn Trent Plc  Annual Report and Accounts 2012

Notes to the group ﬁnancial statements

84

2 Accounting policies (continued)
r) Purchase of own shares

(ii) Financial liabilities
Financial liabilities are classiﬁed as either:

Shares held by the Severn Trent Employee Share Ownership 
Trust which have not vested unconditionally by the balance 
sheet date are deducted from shareholders’ funds until such 
time as they vest.
s) Financial instruments

(i) Financial assets
Financial assets are classiﬁed into the following 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 classiﬁed as ‘held for trading’. 
Derivative ﬁnancial assets that are not designated and effective 
as hedging instruments are required to be classiﬁed as ‘held for 
trading’ by IAS39. However, the group’s Treasury Policy, 
described in the Financial Review on page 35, is that the group 
does not hold or issue derivative ﬁnancial instruments 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 received 
in respect of derivative ﬁnancial assets is included in ﬁnance 
income but changes in accrued interest receivable are included 
in gains/losses on ﬁnancial instruments.

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.

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 other comprehensive income. When an available 
for sale investment is disposed of or impaired, the gain or loss 
previously recognised in other comprehensive income 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.

•  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 classiﬁed as ‘held for trading’. 
Derivative ﬁnancial liabilities that are not designated and 
effective as hedging instruments are required to be classiﬁed as 
‘held for trading’ by IAS39. However, the group’s Treasury Policy, 
described in the Financial Review on page 35, is that the group 
does not hold or issue derivative ﬁnancial instruments 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 paid in 
respect of derivative ﬁnancial liabilities is included in ﬁnance 
costs but changes in accrued interest payable are included in 
gains/losses on ﬁnancial instruments.

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.

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Severn Trent Plc  Annual Report and Accounts 2012

Notes to the group ﬁnancial statements

85

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 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 2s).

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 classiﬁed 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.

2 Accounting policies (continued)
s) Financial instruments (continued)

(iii) Hedge accounting (continued)
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 held 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.
u) Cash ﬂow statement

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.

Interest paid in the cash ﬂow statement includes amounts 
charged to the income statement and amounts included in the 
cost of property, plant and equipment.

 
 
 
 
 
 
 
 
 
 
 
Severn Trent Plc  Annual Report and Accounts 2012

Notes to the group ﬁnancial statements

86

3 New accounting policies and future requirements
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 1 April 2013, 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 group’s ﬁnancial statements.

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’s 
ﬁnancial statements.

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, 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. 

IAS 19 ‘Employee Beneﬁts’ (revised) includes a requirement to 
measure the expected return on the deﬁned beneﬁt pension 
scheme assets using the discount rate applied to the scheme 
liabilities. This will impact the income statement and statement 
of comprehensive income. It is not possible to estimate the 
impact this will have on the ﬁnancial statements at this time. 
The other amendments are not likely to have a material impact 
on the group. The standard is required to be implemented by 
the group with effect from 1 April 2013, subject to EU 
endorsement. 

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 unit 
(‘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).
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.

Severn Trent Plc  Annual Report and Accounts 2012

Notes to the group ﬁnancial statements

87

4 Signiﬁcant accounting judgements and key sources of 
estimation uncertainty (continued)
d) Unbilled revenue

amounts collected could differ from the estimated level of 
recovery which could impact operating results.
f) Adoption of private drains and sewers

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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 

On 1 October 2011 Severn Trent Water was required to adopt 
approximately 37,000 km of drains and sewers as a result of 
legislation. The group’s accounting policy is to recognise 
adopted assets at fair value at the point of adoption. Estimation 
of the fair value of these assets requires assumptions to be 
made about:

•  the costs required to bring the assets up to the required 

standard;

•  the costs required to maintain the operating capability of the 

assets at the required standard; and

•  the extent and timing of recovery of these costs.

In all reasonably probable scenarios, the present value of the 
costs recovered will not exceed the present value of the costs 
incurred and hence a fair value of nil has been attributed to 
these assets.

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 8 to 21 of the Business Review and those of Severn Trent Services on pages 24 to 30.

Transactions between reportable segments are included within segmental results, assets and liabilities in accordance with group 
accounting policies. These are eliminated on consolidation.

The group has a large and diverse customer base and there is no signiﬁcant reliance on any single customer.

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:

2012
External sales
Inter-segment sales
Total sales
Proﬁt before interest, tax and exceptional items
Exceptional items
Proﬁt/(loss) 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

Severn Trent 
Water
£m
1,456.1
1.4
1,457.5
500.0
10.3
510.3

Severn Trent 
Services
£m
313.3
19.0
332.3
18.0
(44.7)
(26.7)

28.7
252.1
(4.2)

1.9
5.9
(0.2)

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Severn Trent Plc  Annual Report and Accounts 2012

Notes to the group ﬁnancial statements

88

5 Segmental analysis (continued)

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

Severn Trent 
Water
£m
1,388.9
0.9
1,389.8
503.7
(13.0)
490.7

Severn Trent 
Services
£m
321.7
14.4
336.1
25.7
(4.5)
21.2

23.6
247.4
(2.1)

1.6
6.4
(0.5)

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:

2012
Operating assets
Goodwill
Interests in joint ventures and associates
Segment assets
Segment operating liabilities
Capital employed

2011
Operating assets
Goodwill
Interests in joint ventures and associates
Segment assets
Segment operating liabilities
Capital employed

Severn Trent 
Water
£m
7,022.9
–
0.1
7,023.0
(1,064.3)
5,958.7

Severn Trent 
Services
£m
185.5
44.8
4.6
234.9
(95.3)
139.6

Severn Trent 
Water
£m
6,864.8
–
0.1
6,864.9
(959.7)
5,905.2

Severn Trent 
Services
£m
203.8
68.3
4.7
276.8
(87.8)
189.0

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.

 
Severn Trent Plc  Annual Report and Accounts 2012

Notes to the group ﬁnancial statements

89

5 Segmental analysis (continued)
Additions to other intangible assets and property, plant and equipment were as follows:

2012
Other intangible assets
Property, plant and equipment

2011
Other intangible assets
Property, plant and equipment

Severn Trent 
Water
£m
9.8
405.3

Severn Trent 
Services
£m
2.1
5.5

Severn Trent 
Water
£m
18.3
370.7

Severn Trent 
Services
£m
2.6
4.9

The reportable segments’ revenue is reconciled to group turnover as follows:

Severn Trent Water
Severn Trent Services
Other
Inter-segment sales
Group turnover

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 operating costs
– Severn Trent Water
– Severn Trent Services
– Corporate and other
Share of results of associates and joint ventures
Net ﬁnance costs
Losses on ﬁnancial instruments
Proﬁt before tax

2012
£m
1,457.5
332.3
9.8
(29.0)
1,770.6

2011
£m
1,389.8
336.1
8.1
(22.7)
1,711.3

2012
£m

2011
£m

500.0
18.0
(15.3)
1.5
504.2

10.3
(44.7)
–
0.1
(245.5)
(67.7)
156.7

503.7
25.7
(12.5)
2.2
519.1

(13.0)
(4.5)
(3.9)
0.1
(230.6)
(14.2)
253.0

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Severn Trent Plc  Annual Report and Accounts 2012

Notes to the group ﬁnancial statements

90

5 Segmental analysis (continued)

The reportable segments’ assets are reconciled to the group’s total assets as follows:

Segment assets
– Severn Trent Water
– Severn Trent Services
Corporate assets
Other ﬁnancial assets
Consolidation adjustments
Total assets

2012
£m

2011
£m

7,023.0
234.9
46.4
457.8
(47.0)
7,715.1

6,864.9
276.8
46.8
507.7
(47.7)
7,648.5

The consolidation adjustments comprise elimination of intra-group debtors and unrealised proﬁts on ﬁxed assets.

The reportable segments’ liabilities are reconciled to the group’s total liabilities as follows:

Segment liabilities
– Severn Trent Water
– Severn Trent Services
Corporate liabilities
Other ﬁnancial liabilities
Current tax
Deferred tax
Consolidation adjustments
Total liabilities

The consolidation adjustments comprise elimination of intra-group creditors.
Geographical areas

The group’s sales were derived from the following countries:

UK
USA
Other

2012
£m

2011
£m

(1,064.3)
(95.3)
(57.8)
(4,687.3)
(46.5)
(801.5)
19.0
(6,733.7)

(959.7)
(87.8)
(59.0)
(4,466.9)
(67.0)
(919.4)
17.4
(6,542.4)

2012
£m
1,538.0
136.5
96.1
1,770.6

2011
£m
1,465.4
154.0
91.9
1,711.3

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

6 Revenue

Water and sewerage services
Other services
Sale of goods
Service concession arrangements (note 36)
Total turnover
Interest receivable (note 10)

2012
£m
6,670.4
59.2
14.0
6,743.6

2012
£m
1,446.3
191.4
94.4
38.5
1,770.6
7.0
1,777.6

2011
£m
6,550.8
58.3
26.2
6,635.3

2011
£m
1,380.0
192.3
103.2
35.8
1,711.3
7.5
1,718.8

Severn Trent Plc  Annual Report and Accounts 2012

Notes to the group ﬁnancial statements

91

7 Operating costs

Wages and salaries
Social security costs
Pension costs
Share based payments
Total employee costs
Power 
Carbon Reduction Commitment
Raw materials and consumables
Rates
Charge for bad and doubtful debts
Service charges
Depreciation of property, plant and equipment
Amortisation of intangible ﬁxed assets
Impairment of goodwill
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
Infrastructure maintenance expenditure
Other operating costs

Release from deferred income
Own work capitalised

Before 
exceptional 
costs
£m
264.2 
17.7 
27.5 
4.1 
313.5 
59.0 
 5.9
135.0 
69.4 
30.7 
33.3 
256.0 
30.8 
 –
219.2 

3.4 
1.5 
5.6 
4.5 
(4.4)
0.1 
128.9 
59.2 
1,351.6 
(8.7)
(76.5)
1,266.4 

Exceptional 
costs
£m
2.6 
0.1 
(23.1)
– 
(20.4)
– 
–
0.4 
– 
21.5 
– 
– 
– 
22.9
4.3 

– 
– 
– 
– 
– 
– 
– 
5.7 
34.4 
– 
– 
34.4 

2012   

Total

£m  
266.8  
17.8  
4.4  
4.1  
293.1  
59.0  
5.9
135.4  
69.4  
52.2  
33.3  
256.0  
30.8  
22.9
223.5  

3.4  
1.5  
5.6  
4.5  
(4.4) 
0.1  
128.9  
64.9  
1,386.0  
(8.7) 
(76.5) 
1,300.8  

Before 
exceptional 
costs
£m
263.7 
15.8 
27.0 
4.6 
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 

Exceptional 
costs
£m
3.1 
0.4 
0.6 
– 
4.1 
– 
–
0.6 
– 
– 
– 
– 
– 
– 
7.2 

0.4 
– 
– 
– 
– 
– 
– 
9.1 
21.4 
– 
– 
21.4 

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)
1,213.6 

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
Total non-audit fees

Details of directors’ remuneration are set out in the Directors’ remuneration report on pages 55 to 68.

2012
£m

2011
£m

0.1
0.4
0.2
0.7

0.2
–
0.2

0.1
0.4
0.1
0.6

0.2
0.2
0.4

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Severn Trent Plc  Annual Report and Accounts 2012

Notes to the group ﬁnancial statements

92

8 Exceptional items before tax

Exceptional operating costs
Severn Trent Water
Restructuring costs
Curtailment gains on deﬁned beneﬁt pension schemes

Severn Trent Services
Provisions for commercial disputes and bad debts
Curtailment gains on deﬁned beneﬁt pension schemes
Impairment of goodwill
Restructuring costs
Costs relating to regulatory matters (see note 35)

Corporate and Other
Costs relating to regulatory matters (see note 35)

Total exceptional operating costs
Exceptional ﬁnance costs
Costs incurred on early redemption of debt
Exceptional items before tax

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

2012
£m

2011
£m

11.5
(21.8)
(10.3)

23.1
(1.3)
22.9
–
–
44.7

–
–
34.4

16.5
50.9

13.0
–
13.0

–
–
–
0.7
3.8
4.5

3.9
3.9
21.4

–
21.4

2012
Number

2011
Number

5,162
2,878
11
8,051

2012
£m

4.1
2.9
7.0
100.7
107.7

5,237
3,032
13
8,282

2011
£m

3.8
3.7
7.5
93.2
100.7

Severn Trent Plc  Annual Report and Accounts 2012

Notes to the group ﬁnancial statements

93

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

Before 
exceptional 
costs

Exceptional 
costs

28.9
198.9
9.7
237.5
1.5
97.7
336.7

–
–
–
–
16.5
–
16.5

2012

2011

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£m
28.9
198.9
9.7
237.5
18.0
97.7
353.2

Total
£m
6.9
214.1
11.1
232.1
0.8
98.4
331.3

In accordance with IAS 23 borrowing costs of £10.5 million (2011: £11.4 million) incurred funding eligible capital projects have been 
capitalised at an interest rate of 5.93% (2011: 5.99%).

12 Losses on ﬁnancial instruments

(Loss)/gain on cross currency swaps used as hedging instruments in fair value hedges
Gain/(loss) arising on adjustment for foreign currency debt in fair value hedges
Exchange gain/(loss) on other loans
Loss on cash ﬂow hedges transferred from equity
Loss arising on swaps where hedge accounting is not applied

The group’s hedge accounting arrangements are described in note 32 f).

13 Taxation
a) Analysis of tax credit in the year

Current tax
Current year at 26% (2011: 28%)
Prior year at 28% (2011: 30%)
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

2012
£m
(5.1)
1.9
41.5
(3.7)
(102.3)
(67.7)

2012
£m

69.2
(8.7)
60.5

(14.0)
4.9
(69.1)
(78.2)
(17.7)

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)

The exceptional deferred tax credit arises from the reduction in the rate at which the temporary differences are expected to reverse 
from 26% to 24%. The standard rate of corporation tax in the UK changed from 26% to 24% with effect from 1 April 2012.

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Severn Trent Plc  Annual Report and Accounts 2012

Notes to the group ﬁnancial statements

94

13 Taxation (continued)
b) Factors affecting the tax credit in the year

The tax expense for the current year is lower (2011: 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 26% (2011: 28%)
Tax effect of expenditure not deductible/(income not taxable) in determining taxable proﬁts
Current year impact of rate change
Effect of different rates in overseas jurisdictions
Adjustments in respect of prior years
Exceptional deferred tax credit arising from rate change
Total tax credit

2012
£m
156.7
40.8
12.0
1.9
0.5
(3.8)
(69.1)
(17.7)

2011
£m
253.0
70.8
(0.2)
–
0.5
(24.9)
(67.7)
(21.5)

c) Tax (credited)/charged directly to equity

In addition to the amount credited to the income statement, the following amounts of tax have been (credited)/charged directly to 
equity:

Current tax
Tax on share based payments
Tax on pension contributions in excess of proﬁt and loss charge
Tax on exchange movement
Total current tax (credited)/charged directly to equity
Deferred tax
Tax on actuarial losses/gains
Tax on cash ﬂow hedges
Tax on share based payments
Effect of change in tax rate
Total deferred tax (credited)/charged directly to equity

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

Final dividend for the year ended 31 March 2011 (2010)
Interim dividend for the year ended 31 March 2012 (2011)

Proposed ﬁnal dividend for the year ended 31 March 2012
Proposed special dividend

2012
£m

(0.4)
(8.8)
–
(9.2)

(17.8)
(19.9)
(0.3)
(1.7)
(39.7)

2011
£m

(0.3)
–
0.4
0.1

13.2
5.3
(1.2)
(0.7)
16.6

2012

£m
92.5
66.5
159.0

Pence per 
share
45.61
26.04
71.65

2011

£m
107.8
61.6
169.4

Pence per 
share
39.05
28.04
67.09
42.06
63.00

The proposed ﬁnal and special dividends are subject to approval by shareholders at the AGM and have not been included as a 
liability in these ﬁnancial statements.

Severn Trent Plc  Annual Report and Accounts 2012

Notes to the group ﬁnancial statements

95

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

2012
£m

2011
£m

171.8

272.6

2012
m
237.0

1.2
238.2

2012
pence
88.9
88.5

2011
m
236.7

1.1
237.8

2011
pence
105.6
105.1

Adjusted earnings per share ﬁgures are presented for continuing operations. These exclude the effects of deferred tax, losses on 
ﬁnancial instruments and exceptional items in both 2012 and 2011. 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.

Adjustments to earnings

The adjustments to earnings that are made in calculating adjusted earnings per share are as follows:

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 26% (2011: 28%)
– losses on ﬁnancial instruments
– deferred tax
Earnings for the purpose of adjusted basic and diluted earnings per share

2012
£m
171.8

50.9
(1.5)
67.7
(78.2)
210.7

2011
£m
272.6

21.4
(4.7)
14.2
(53.6)
249.9

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Severn Trent Plc  Annual Report and Accounts 2012

Notes to the group ﬁnancial statements

96

16 Goodwill

Cost
At 1 April
Exchange adjustments
At 31 March
Impairment
At 1 April
Amounts written off
At 31 March
Net book value
At 31 March

Goodwill impairment tests

2012
£m

68.3
(0.5)
67.8

–
(22.9)
(22.9)

2011
£m

70.6
(2.3)
68.3

–
–
–

44.9

68.3

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
Services Spain (formerly Apliclor)

2012
£m

26.3
11.7
–
2.2
4.7
44.9

2011
£m

26.2
11.6
12.0
8.2
10.3
68.3

The group has reviewed the carrying value of goodwill for impairment in accordance with the policy stated in note 2m). 

The value in use 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. Management of each CGU determines assumptions 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
Services Spain

Nominal growth rate 

Discount rate

2012 
%
3.5 
3.5 
– 
3.0 
3.1 

2011 
%
3.0 
3.0 
3.0 
3.0 
3.0 

2012 
%
5.8 
5.9 
8.0 
11.0
8.9 

2011 
%
7.3 
7.7 
7.3 
11.0 
11.6 

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.

As a result of the impairment review, the group has recorded the following impairment losses in the Severn Trent Services segment. 
In each case the recoverable amount has been determined by calculating the value in use of the asset using the assumptions 
described above. 

 
 
Severn Trent Plc  Annual Report and Accounts 2012

Notes to the group ﬁnancial statements

97

16 Goodwill (continued)
In UK Laboratories, towards the end of the year, and early in the new ﬁnancial year, management was informed that certain 
contracts from utilities companies would not be renewed. Management is developing a plan to reduce the scale of this business 
accordingly. The business’s cash ﬂow projections have been amended to take these changes into account and as a result an 
impairment loss of £12.0 million has been recognised in these ﬁnancial statements.

The group has discontinued any further investment in resources to support future market growth in Italy and continues to take a 
cautious view as to the medium term business opportunities in that country. As a result an impairment loss of £5.7 million has been 
recognised in these ﬁnancial statements in respect of Services Italy.

In Services Spain the group has taken a cautious view of the prospects for growth both in the short and medium term. As a result an 
impairment loss of £5.2 million has been recognised in these ﬁnancial statements.

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.  However, 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 and therefore no sensitivity analysis has been provided.

17 Intangible assets

Cost
At 1 April 2010
Additions
Disposals
Reclassiﬁcations
Exchange adjustments
At 1 April 2011
Additions
Disposals
Exchange adjustments
At 31 March 2012
Amortisation
At 1 April 2010
Amortisation for year
Disposals
Exchange adjustments
At 1 April 2011
Amortisation for year
Disposals
Exchange adjustments
At 31 March 2012
Net book value
At 31 March 2012
At 31 March 2011

Other assets primarily comprise capitalised development costs and patents.

Computer software

Other

Internally 
generated
£m

Purchased
£m

Internally 
generated
£m

117.4
4.1
–
–
–
121.5
0.3
–
–
121.8

(73.4)
(9.4)
–
–
(82.8)
(19.4)
–
–
(102.2)

185.3
14.6
(29.8)
0.2
(0.2)
170.1
9.7
(0.4)
0.2
179.6

(100.9)
(15.1)
29.7
0.1
(86.2)
(9.7)
0.2
–
(95.7)

19.6
38.7

83.9
83.9

21.8
2.2
–
1.2
(0.4)
24.8
2.0
–
(0.2)
26.6

(11.7)
(0.9)
–
0.1
(12.5)
(1.7)
–
0.1
(14.1)

12.5
12.3

Total
£m

324.5
20.9
(29.8)
1.4
(0.6)
316.4
12.0
(0.4)
–
328.0

(186.0)
(25.4)
29.7
0.2
(181.5)
(30.8)
0.2
0.1
(212.0)

116.0
134.9

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Severn Trent Plc  Annual Report and Accounts 2012

Notes to the group ﬁnancial statements

98

18 Property, plant and equipment

Cost
At 1 April 2010
Additions
Disposals
Reclassiﬁcations
Exchange adjustments
At 1 April 2011
Additions
Disposals
Exchange adjustments
At 31 March 2012
Depreciation
At 1 April 2010
Charge for the year
Disposals
Reclassiﬁcations
Exchange adjustments
At 1 April 2011
Charge for the year
Disposals
Exchange adjustments
At 31 March 2012
Net book value
At 31 March 2012
At 31 March 2011

Land and 
buildings
£m

Infrastructure 
assets
£m

Fixed plant 
and 
equipment
£m

Movable 
plant
£m

2,483.3
94.7
(7.5)
(0.3)
(0.3)
2,569.9
106.9
(3.6)
–
2,673.2

(769.1)
(56.3)
7.3
1.9
0.1
(816.1)
(56.0)
3.3
–
(868.8)

4,062.0
130.2
(0.5)
–
–
4,191.7
118.8
(0.1)
–
4,310.4

(1,065.9)
(27.6)
–
–
–
(1,093.5)
(28.2)
–
–
(1,121.7)

3,150.0
153.5
(32.0)
(3.9)
(1.4)
3,266.2
181.5
(26.4)
(0.8)
3,420.5

(1,587.4)
(160.5)
31.5
–
1.0
(1,715.4)
(165.1)
22.8
0.3
(1,857.4)

60.0
3.8
(6.4)
–
(0.7)
56.7
4.5
(4.3)
0.1
57.0

(30.9)
(7.1)
5.0
–
0.5
(32.5)
(6.7)
3.8
–
(35.4)

Total
£m

9,755.3
382.2
(46.4)
(4.2)
(2.4)
10,084.5
411.7
(34.4)
(0.7)
10,461.1

(3,453.3)
(251.5)
43.8
1.9
1.6
(3,657.5)
(256.0)
29.9
0.3
(3,883.3)

1,804.4
1,753.8

3,188.7
3,098.2

1,563.1
1,550.8

21.6
24.2

6,577.8
6,427.0

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 2012
At 31 March 2011

Land and 
buildings
£m

Infrastructure 
assets
£m

Fixed plant 
and 
equipment
£m

Movable 
plant
£m

–
–

119.2
120.1

76.3
96.4

–
–

Total
£m

195.5
216.5

Property, plant and equipment includes £372.3 million (2011: £433.8 million) in respect of assets in the course of construction for 
which no depreciation is charged.

Severn Trent Plc  Annual Report and Accounts 2012

Notes to the group ﬁnancial statements

99

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 2012 and 2011 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 at 31 March 2012 or 2011.

Particulars of the group’s principal joint venture undertakings at 31 March 2012 were:

Name
Cognica Limited
Jackson Water Partnership

Country of  
incorporation
Great Britain
USA

Proportion of 
ownership interest
50%
70%

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.

2012
£m

2011
£m

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0.2
0.6
(0.6)
0.2

0.4
(0.4)
–
–
–

0.2
0.6
(0.6)
0.2

3.3
(3.3)
–
–
–

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2012
£m
4.8
0.1
(0.3)
4.6

24.7
(20.1)
4.6
7.7
0.1

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2011
£m
4.6
0.1
0.1
4.8

26.1
(21.3)
4.8
7.6
0.1

20 Interests in associates

At 1 April
Share of proﬁts
Exchange adjustments
At 31 March
Group’s share of
Total assets
Total liabilities

Turnover
Proﬁt before tax

At 31 March 2012 and 2011 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 2012 or 2011.

The principal associate at 31 March 2012 was Servizio Idrico Integrato S.c.p.a., a company incorporated in Italy. The proportion of 
ownership interest held by the group was 25%.

The group has given certain guarantees in respect of the associate’s borrowings. The guarantees are limited to €11.2 million 
(2011: €11.2 million). The group does not expect any liabilities that are not provided for in these ﬁnancial statements to arise from 
these arrangements.

 
 
 
 
 
 
 
 
 
 
 
Severn Trent Plc  Annual Report and Accounts 2012

Notes to the group ﬁnancial statements

100

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

2012
£m
34.4

2011
£m
27.1

2012
£m
306.3
(125.2)
181.1
0.2
32.5
265.6
479.4

2011
£m
286.6
(98.5)
188.1
0.2
40.1
250.1
478.5

The carrying values of trade and other receivables are reasonable approximations of their fair values.

Prepayments and accrued income include £25.5 million (2011: £27.1 million) in respect of amounts due from customers for 
contract work and £43.1 million (2011: £49.7 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 82% of group turnover and 79% 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
Amounts recovered during the year
Charge for bad and doubtful debts
Exceptional charge for bad and doubtful debts
Exchange adjustments
At 31 March

2012
£m
98.5
(24.4)
(0.3)
30.7
21.5
(0.8)
125.2

2011
£m
91.8
(28.5)
–
35.2
–
–
98.5

Included in trade receivables are balances with a carrying amount of £157.8 million (2011: £146.0 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

2012
£m
46.4
70.1
26.4
9.5
5.4
157.8

2011
£m
47.7
60.6
25.0
8.4
4.3
146.0

Severn Trent Plc  Annual Report and Accounts 2012

Notes to the group ﬁnancial statements

101

22 Trade and other receivables (continued)

Included in the allowance for doubtful debts are provisions amounting to £27.5 million (2011: £24.0 million) against speciﬁc trade 
receivables. The age of the impaired receivables was as follows:

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91–365 days
1–2 years
2–3 years
More than 3 years

23 Cash and cash equivalents

Cash at bank and in hand
Short term deposits

2012
£m
1.4
2.9
15.1
4.5
4.1
28.0

2012
£m
37.4
257.7
295.1

2011
£m
2.5
18.1
4.1
3.7
4.7
33.1

2011
£m
66.6
248.6
315.2

Of the £257.7 million (2011: £248.6 million) of short term bank deposits, £26.9 million (2011: £28.4 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

2012
£m
292.1
(73.1)
219.0

2011
£m
352.6
(85.9)
266.7

A maturity analysis of gross obligations under ﬁnance leases is presented in note 32. Net obligations under ﬁnance leases fall due as 
follows:

Within 1 year
1–2 years
3–5 years
After more than 5 years
Included in non-current liabilities

2012
£m
–
17.8
85.5
115.7
219.0
219.0

2011
£m
13.5
16.4
84.1
152.7
253.2
266.7

The remaining terms of ﬁnance leases ranged from 3 to 20 years at 31 March 2012. Interest terms are set at the inception of the 
leases. Leases with capital outstanding of £219.0 million (2011: £266.7 million) bear ﬁxed interest at a weighted average rate of 
5.4% (2011: 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.

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Severn Trent Plc  Annual Report and Accounts 2012

Notes to the group ﬁnancial statements

102

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

2012
£m

34.9
7.0
18.4
337.3
397.6

–
0.4
396.6
14.0
411.0

The directors consider that the carrying value of trade payables is not materially different from their fair values.

Accruals and deferred income includes nil (2011: nil) in respect of amounts due to customers for contract work.

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 2010
Charge to income
Credit to income arising from rate change
Charge to equity
Credit to equity arising from rate change
Exchange differences
At 1 April 2011
Charge to income
Credit to income arising from rate change
Charge to equity
Credit to equity arising from rate change
At 31 March 2012

Accelerated 
tax 
depreciation
£m
1,161.8
13.6
(77.5)
–
(5.5)
(0.5)
1,091.9
(83.1)
(72.4)
–
(5.5)
930.9

Retirement 
beneﬁt 
obligation
£m
(99.4)
3.2
3.1
13.2
4.0
–
(75.9)
13.7
2.8
(17.8)
3.0
(74.2)

Fair value of 
ﬁnancial 
instruments
£m
(33.5)
1.0
1.2
5.3
1.2
–
(24.8)
(16.7)
1.1
(19.9)
0.7
(59.6)

Tax losses
£m
(7.1)
0.3
–
–
–
0.4
(6.4)
–
–
–
–
(6.4)

Other
£m
(65.4)
(4.0)
5.5
(1.2)
(0.4)
0.1
(65.4)
77.0
(0.6)
(0.3)
0.1
10.8

Deferred tax assets and liabilities have been offset. The offset amounts, which are to be recovered/settled after more than 
12 months, are as follows:

Deferred tax asset
Deferred tax liability

2012
£m
(194.9)
1,000.4
805.5

2011
£m

31.8
6.8
32.1
320.5
391.2

0.5
2.1
345.9
19.3
367.8

Total
£m
956.4
14.1
(67.7)
17.3
(0.7)
–
919.4
(9.1)
(69.1)
(38.0)
(1.7)
801.5

2011
£m
(14.4)
933.8
919.4

Severn Trent Plc  Annual Report and Accounts 2012

Notes to the group ﬁnancial statements

103

27 Retirement beneﬁt schemes
a) Deﬁned beneﬁt pension schemes

(i) Amount included in the balance sheet arising from the group’s obligations under deﬁned beneﬁt pension schemes

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Fair value of scheme assets
Equities
Gilts
Corporate bonds
Property
Hedge funds
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

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 (losses)/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
Net curtailment gain
Contributions from scheme members
Actuarial losses/(gains) 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

2012
£m

2011
£m

798.6
235.2
339.1
105.7
52.6
26.0
1,557.2
(1,894.4)
(337.2)
(8.6)
(345.8)

2012
£m
1,473.4
100.7
53.5
5.6
(4.5)
(71.5)
1,557.2

2012
£m
1,765.5
22.6
97.7
(23.1)
5.6
106.2
(71.5)
1,903.0

2012
£m
1,894.4
8.6
1,903.0

798.8
41.3
530.6
95.0
–
7.7
1,473.4
(1,757.4)
(284.0)
(8.1)
(292.1)

2011
£m
1,393.0
93.2
40.0
6.1
12.2
(71.1)
1,473.4

2011
£m
1,747.9
22.7
98.4
–
6.1
(38.5)
(71.1)
1,765.5

2011
£m
1,757.4
8.1
1,765.5

 
 
 
 
 
 
 
 
 
 
 
Severn Trent Plc  Annual Report and Accounts 2012

Notes to the group ﬁnancial statements

104

27 Retirement beneﬁt schemes (continued)
a) Deﬁned beneﬁt schemes (continued)

(ii) Amounts recognised in the income statement in respect of these deﬁned beneﬁt pension schemes

Amounts charged to operating costs
Current service cost
Exceptional curtailment gain

Amounts charged to ﬁnance costs
Interest cost
Amounts credited to ﬁnance income
Expected return on scheme assets
Total amount credited/(charged) to the income statement

2012
£m

(22.6)
23.1
0.5

2011
£m

(22.7)
–
(22.7)

(97.7)

(98.4)

100.7
3.5

93.2
(27.9)

The actual return on scheme assets was a gain of £95.9 million (2011: gain of £105.4 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 IFRS is a net loss of £280.1 million 
(2011: net loss of £169.4 million).

(iii) Background
The group operates a number of deﬁned beneﬁt pension schemes in the UK, covering the majority of UK employees. The deﬁned 
beneﬁt pension 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 pension 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. 

On 11 May 2011, Severn Trent announced that it was 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 pension scheme. Following 
the period of consultation and after discussion with the schemes’ trustees, ﬁnal proposals have been accepted by the employees’ 
representatives and the trustees. A new deﬁned contribution pension scheme has been established and from 1 April 2012 new 
employees have been auto enrolled into this scheme. The deﬁned beneﬁt pension schemes will close to future accrual on 31 March 
2015 and members of the deﬁned beneﬁt pension scheme will then become members of the new deﬁned contribution pension 
scheme. This resulted in an exceptional net curtailment gain of £23.1 million being recognised in the income statement. The existing 
deﬁned contribution pension scheme will also be replaced by the new pension arrangements with effect from 1 April 2015 and it is 
proposed to automatically enrol those employees who are not currently members of a Severn Trent scheme from 1 April 2013.

The ﬁnal salary sections 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 until the schemes are closed to future accrual. 

The UK deﬁned beneﬁt pension 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 2010
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 £8.6 million (2011: £8.1 million) is included 
as an unfunded scheme within the retirement beneﬁt obligation.

Severn Trent Plc  Annual Report and Accounts 2012

Notes to the group ﬁnancial statements

105

27 Retirement beneﬁt schemes (continued)
a) Deﬁned beneﬁt pension schemes (continued)

(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
Hedge funds
Cash

2012
%
3.10
3.60
3.10
3.10
4.90

6.80
3.30
4.90
5.80
6.30
3.90

2011
%
3.50
4.00
3.50
3.50
5.60

7.85
4.35
5.60
6.85
–
4.25

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 17 year corporate bonds. 

(iv) Actuarial assumptions (continued)
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, 
property and hedge funds, a 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

2012
Years

87.5
91.1

88.0
91.9

2011
Years

87.4
91.0

88.0
91.8

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
Increase/decrease by 0.1%
Increase/decrease by 0.1%
Increase in life expectancy by 1 year

Impact on scheme liabilities
Decrease/increase by £35 million
Increase/decrease by £30 million
Increase by £45 million

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Severn Trent Plc  Annual Report and Accounts 2012

Notes to the group ﬁnancial statements

106

27 Retirement beneﬁt schemes (continued)
a) Deﬁned beneﬁt pension schemes (continued)

(v) Contributions to the schemes
Contribution rates are set in consultation with the trustees for each scheme and each participating employer. It is anticipated 
that normal contributions to the scheme in the year ended 31 March 2013 will be unchanged and agreed lump sum deﬁcit 
contributions include a payment of £10 million per annum in cash and a further £8 million per annum through an asset backed 
funding arrangement.

(vi) History of actual and expected performance of pension scheme assets and liabilities

Present value of deﬁned beneﬁt obligations
Fair value of scheme assets
Deﬁcit in schemes
Difference between actual and expected return on scheme assets
Experience adjustments on scheme liabilities

b) Deﬁned contribution pension schemes

2012
£m
(1,903.0)
1,557.2
(345.8)
(4.5)
(106.2)

2011
£m
(1,765.5)
1,473.4
(292.1)
12.2
105.1

2010
£m
(1,747.9)
1,393.0
(354.9)
270.4
19.8

2009
£m
(1,308.0)
1,075.0
(233.0)
(329.8)
(7.9)

2008
£m
(1,458.3)
1,332.3
(126.0)
(125.7)
(64.3)

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 pension 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 (2011: £4.9 million) represents contributions payable to these schemes by 
the group at rates speciﬁed in the rules of the schemes. As at 31 March 2012, all contributions (2011: 100%) due in respect of the 
current reporting period had been paid over to the schemes.

28 Provisions

At 1 April 2011
Charged to income statement
Utilisation of provision
Unwinding of discount
At 31 March 2012

Included in
Current liabilities
Non-current liabilities

Restructuring
£m
3.3
1.4
(2.8)
–
1.9

Insurance
£m
23.1
7.4
(5.6)
–
24.9

Onerous 
contracts
£m
6.9
–
(1.6)
0.2
5.5

Terminated 
operations 
and disposals
£m
3.7
2.7
–
–
6.4

Other
£m
1.0
5.3
(1.1)
0.1
5.3

2012
£m

17.0
27.0
44.0

Total
£m
38.0
16.8
(11.1)
0.3
44.0

2011
£m

12.6
25.4
38.0

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 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).

Other provisions include provisions for dilapidations and commercial disputes. The associated outﬂows are estimated to arise over a 
period up to six years from the balance sheet date.

Severn Trent Plc  Annual Report and Accounts 2012

Notes to the group ﬁnancial statements

107

29 Share capital

Total issued and fully paid share capital
237,608,111 ordinary shares of 9717/19p (2011: 237,142,534)

Changes in share capital were as follows:

Ordinary shares of 9717/19p
At 1 April 2011
Shares issued under the Employee Sharesave Scheme
Shares issued under the Unapproved Share Option Scheme
At 31 March 2012

30 Share premium

At 1 April
Share premium arising on issue of shares for Employee Sharesave Scheme
Share premium arising on issue of shares for Unapproved Share Option Scheme
At 31 March

31 Other reserves

At 1 April 2010
Total comprehensive income for the period
At 1 April 2011
Total comprehensive loss for the period
At 31 March 2012

Capital 
redemption 
reserve
£m
156.1
–
156.1
–
156.1

Infrastructure 
reserve
£m
314.2
–
314.2
–
314.2

Translation 
exchange 
reserve
£m
31.7
(6.3)
25.4
(1.4)
24.0

2012
£m
80.0
3.7
0.1
83.8

Hedging 
reserve
£m
(46.4)
15.2
(31.2)
(62.9)
(94.1)

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 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.

2012
£m

2011
£m

232.6

232.2

Number

£m

237,142,534
442,593
22,984
237,608,111

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a
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232.2
0.4
–
232.6

2011
£m
75.9
4.1
–
80.0

Total
£m
455.6
8.9
464.5
(64.3)
400.2

 
 
 
 
 
 
 
 
 
 
 
Severn Trent Plc  Annual Report and Accounts 2012

Notes to the group ﬁnancial statements

108

32 Financial instruments
a) Capital management

The group’s principal objectives in managing capital are:

•  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;

•  to maintain an investment grade credit rating; and
•  to maintain a ﬂexible and sustainable balance sheet structure.

The group seeks to achieve a balance of long term funding or commitment of funds across a range of funding sources at the best 
possible economic cost.

The group does not have a speciﬁc gearing target but seeks to maintain gearing at a level consistent with its capital management 
objectives described above.

The group’s dividend policy is a key tool in achieving its capital management objectives. This policy is reviewed and updated in line 
with Severn Trent Water’s ﬁve year price control cycle and takes into account, inter alia; the planned investment programme; the 
appropriate gearing level achieving a balance between an efﬁcient cost of capital; and retaining an investment grade credit rating 
and delivering an attractive and sustainable return to shareholders.

The directors have reviewed the group’s capital structure, taking into account the funding requirements over the remainder of AMP5, 
the proportion of index linked debt in issue and historical and forecast RPI, and concluded that there is an opportunity to deliver 
additional returns to shareholders. The board has therefore proposed a return to shareholders of £150 million, which equates to 
63.00 pence per share. See note 14.

The group monitors future funding requirements and credit market conditions to ensure continued availability of funds.

On 24 January 2012, the group issued a £250 million bond with a coupon of 4.875% and a maturity of 30 years. On 27 January 
2012, the group purchased £150.6 million of a £200 million bond maturing in 2014 through a tender offer launched simultaneously 
with the bond issue. The costs of the tender offer gave rise to an exceptional ﬁnance charge of £16.5 million, representing the 
difference between the purchase price and the carrying value of the bond. 

A new ﬁve year £500 million Revolving Credit Facility was agreed in October 2011. This replaced the existing £500 million Revolving 
Credit Facility. A new 10 year £100 million bilateral bank facility was agreed in March 2012. This facility was drawn on 18 April 2012. 

At 31 March the group’s equity and debt capital comprised the following:

Cash and short term deposits
Bank overdrafts
Bank loans
Other loans
Obligations under ﬁnance leases
Cross currency swaps
Net debt
Equity attributable to the company’s equity shareholders
Total capital

2012
£m
295.1
(0.4)
(852.5)
(3,326.9)
(219.0)
135.9
(3,967.8)
(973.5)
(4,941.3)

2011
£m
315.2
–
(846.8)
(3,230.9)
(266.7)
160.4
(3,868.8)
(1,099.8)
(4,968.6)

Severn Trent Plc  Annual Report and Accounts 2012

Notes to the group ﬁnancial statements

109

32 Financial instruments (continued)
b) Categories of ﬁnancial assets

Fair value through proﬁt and loss
Cross currency swaps – fair value hedges
Interest rate swaps – not hedge accounted
Energy swaps – cash ﬂow hedges
Cross currency swaps – not hedge accounted

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)

2012
£m

95.2
23.7
2.5
41.2
162.6

2011
£m

98.1
17.3
14.7
62.3
192.4

0.1

0.1

181.1
257.7
37.4
476.2
638.9

132.6
0.1
132.7

30.0
295.1
181.1
506.2
638.9

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

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Severn Trent Plc  Annual Report and Accounts 2012

Notes to the group ﬁnancial statements

110

32 Financial instruments (continued)
c) Categories of ﬁnancial liabilities

Fair value through proﬁt and loss
Cross currency swaps – not hedge accounted
Interest rate swaps – cash ﬂow hedges
Interest rate swaps – not hedge accounted
Energy swaps – cash ﬂow hedges
Foreign exchange forward contracts – not hedge accounted

Other ﬁnancial liabilities
Bank loans
Other loans
Obligations under ﬁnance leases
Overdraft
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)

2012
£m

2011
£m

(0.5)
(91.6)
(194.4)
(1.4)
(0.6)
(288.5)

(852.5)
(3,326.9)
(219.0)
(0.4)
(34.9)
(4,433.7)
(4,722.2)

–
(17.8)
(104.6)
–
(0.1)
(122.5)

(846.8)
(3,230.9)
(266.7)
–
(32.3)
(4,376.7)
(4,499.2)

(288.0)
(4,309.5)
(4,597.5)

(122.4)
(4,320.5)
(4,442.9)

(0.5)
(89.3)
(34.9)
(124.7)
(4,722.2)

(0.1)
(23.9)
(32.3)
(56.3)
(4,499.2)

Severn Trent Plc  Annual Report and Accounts 2012

Notes to the group ﬁnancial statements

111

32 Financial instruments (continued)
d) Fair values of ﬁnancial instruments

Except as disclosed below, the directors consider that there is no signiﬁcant difference between the carrying amount of ﬁnancial 
assets and liabilities recorded in the ﬁnancial statements and their fair values:

Bank loans – amortised cost
Other loans
Obligations under ﬁnance leases – amortised cost

Book value
£m
(852.5)
(3,326.9)
(219.0)
(4,398.4)

2012

Fair value
£m
(858.3)
(3,936.2)
(215.4)
(5,009.9)

Book value
£m
(846.8)
(3,230.9)
(266.7)
(4,344.4)

2011

Fair value
£m
(836.8)
(3,597.6)
(237.4)
(4,671.8)

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
In 2012 and 2011, all the fair values of ﬁnancial instruments that were measured subsequent to initial recognition at fair value, were 
based on observable inputs other than quoted prices for identical instruments, deﬁned as ‘Level 2’ in IFRS 7. 

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.
e) 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 and 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.

(i) Market risk
The principal market risk that the group is exposed to is ﬂuctuations in interest rates.

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. The group’s policy is to maintain 
45% to 90% of its net debt in ﬁxed rate instruments. At 31 March 2012 74.0% of the group’s net debt was at ﬁxed rates 
(2011: 75.9%).

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 the interest cost of 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 an £80.3 million charge 
(2011: charge of £15.7 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.

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Severn Trent Plc  Annual Report and Accounts 2012

Notes to the group ﬁnancial statements

112

32 Financial instruments (continued)
e) Financial risk factors (continued)

(i) Market risk (continued)
Financial liabilities analysed by interest rate after taking account of various interest rate swaps entered into by the group

2012
Bank loans and overdrafts
Other loans
Finance leases
Other ﬁnancial liabilities

Impact of interest rate swaps not matched against speciﬁc debt 
instruments

Weighted average interest rate
Weighted average period for which interest is ﬁxed (years)

2011
Bank loans and overdrafts
Other loans
Finance leases
Other ﬁnancial liabilities

Impact of interest rate swaps not matched against speciﬁc debt 
instruments

Weighted average interest rate
Weighted average period for which interest is ﬁxed (years)

Financial assets analysed by interest rates

2012
Available for sale ﬁnancial assets
Loans and receivables
Cash and cash equivalents

2011
Available for sale ﬁnancial assets
Loans and receivables
Cash and cash equivalents

Non-interest 
bearing 
liabilities
£m
–
(1.2)
–
(34.9)
(36.1)

Floating 
rate
£m
(500.4)
(265.2)
–
–
(765.6)

–
(36.1)

463.6
(302.0)

Non-interest 
bearing 
liabilities
£m
–
(1.2)
–
(32.3)
(33.5)

Floating 
rate
£m
(544.1)
(263.5)
–
–
(807.6)

–
(33.5)

462.3
(345.3)

Non-interest 
bearing 
assets
£m
0.1
181.0
–
181.1

Non-interest 
bearing 
assets
£m
0.1
188.1
–
188.2

Floating 
rate
£m
–
–
295.1
295.1

Floating 
rate
£m
–
–
315.2
315.2

Fixed 
rate
£m
(192.2)
(2,063.1)
(219.0)
–
(2,474.3)

(463.6)
(2,937.9)
5.84%
12.8

Fixed 
rate
£m
(150.0)
(2,014.7)
(266.7)
–
(2,431.4)

(462.3)
(2,893.7)
5.96%
11.7

Fixed 
rate
£m
–
–
–
–

Fixed 
rate
£m
–
–
–
–

Index-
linked
£m
(160.3)
(997.4)
–
–
(1,157.7)

Total
£m
(852.9)
(3,326.9)
(219.0)
(34.9)
(4,433.7)

–
(1,157.7)

–
(4,433.7)

Index-
linked
£m
(152.7)
(951.5)
–
–
(1,104.2)

Total
£m
(846.8)
(3,230.9)
(266.7)
(32.3)
(4,376.7)

–
(1,104.2)

–
(4,376.7)

Index-
linked
£m
–
–
–
–

Index-
linked
£m
–
–
–
–

Total
£m
0.1
181.0
295.1
476.2

Total
£m
0.1
188.1
315.2
503.4

Severn Trent Plc  Annual Report and Accounts 2012

Notes to the group ﬁnancial statements

113

32 Financial instruments (continued)
e) Financial risk factors (continued)

(i) Market risk (continued)
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
75.3
0.1
121.7

2012

-1.0%
£m
(90.1)
(0.1)
(143.1)

+1.0%
£m
46.1
0.1
83.3

2011

-1.0%
£m
(55.3)
(0.1)
(98.6)

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, or accounting for deﬁned beneﬁt pension 
schemes.

Proﬁt or loss
Equity

+1.0%
£m
(8.8)
(8.8)

2012

-1.0%
£m
8.8
8.8

+1.0%
£m
(8.0)
(8.0)

2011

-1.0%
£m
8.0
8.0

Exchange rate risk
The group operates internationally and is exposed to 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’s net debt includes foreign currency borrowings, primarily denominated in yen and euros. The group’s policy is to 
manage the exchange risk arising from foreign currency borrowings by entering into cross currency swaps or forward contracts 
with external parties.

The group’s gross and net currency exposures arising from currency borrowings are summarised below:

2012
Borrowings by currency
Cross currency swaps – hedge accounted
Cross currency swaps – not hedge accounted

Cash
Net currency exposure

2011
Borrowings by currency
Cross currency swaps – hedge accounted
Cross currency swaps – not hedge accounted

Cash
Net currency exposure

Sterling
£m
(3,473.5)
(184.0)
(617.6)
(4,275.1)
276.9
(3,998.2)

Sterling
£m
(3,536.5)
(188.9)
(617.7)
(4,343.1)
284.9
(4,058.2)

Euro
€m
(720.6)
19.9
700.0
(0.7)
5.3
4.6

Euro
€m
(721.4)
19.9
700.0
(1.5)
12.1
10.6

US Dollar
$m
(50.0)
50.0
–
–
22.1
22.1

US Dollar
$m
(50.0)
50.0
–
–
31.6
31.6

Japanese  
Yen
¥Bn
(30.0)
20.0
10.0
–

Czech  
Krona
CZKm
(1,970.0)
1,970.0
–
–

–

–

Japanese  
Yen
¥Bn
(31.0)
21.0
10.0
–
–
–

Czech  
Krona
CZKm
(1,970.0)
1,970.0
–
–
–
–

The euro and US dollar net cash balances relate to operations in which the euro or US dollar is the functional currency.

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Severn Trent Plc  Annual Report and Accounts 2012

Notes to the group ﬁnancial statements

114

32 Financial instruments (continued)
e) Financial risk factors (continued)

Monetary assets and liabilities by currency, excluding functional currency
Certain of the group’s subsidiaries enter into transactions in currencies other than the functional currency of the operation. Exchange 
risks relating to such operations are not material but are managed centrally by Group Treasury through forward exchange contracts 
to buy or sell 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 purposes, derivative counterparties and cash transactions are limited to high credit quality ﬁnancial institutions. 
The group has policies that limit the amount of credit exposure to any one ﬁnancial institution.

Credit risk analysis
At 31 March the aggregate credit limits of authorised counterparties and the amounts held on short term deposits were as follows:

Credit limit

Amount deposited

AAA
Double A range
Single A range

2012
£m
20.0
150.0
450.0
620.0

2011
£m
300.0
450.0
525.0
1,275.0

The fair values of derivative assets analysed by credit ratings of counterparties were as follows:

Rating
Double A range
Single A range

2012
£m
0.1
111.1
146.5
257.7

2011
£m
54.8
81.2
112.6
248.6

Derivative assets

2012
£m
44.6
118.0
162.6

2011
£m
100.9
91.5
192.4

(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 1 year
1–2 years
2–5 years
After more than 5 years

2012
£m
–
–
500.0
100.0
600.0

2011
£m
41.7
458.3
–
–
500.0

Severn Trent Plc  Annual Report and Accounts 2012

Notes to the group ﬁnancial statements

115

32 Financial instruments (continued)
e) Financial risk factors (continued)

(iii) Liquidity risk (continued)
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.

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£m

G
o
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a
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c
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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

(0.4)
(20.7)
(262.1)
(4.4)
(34.9)
(322.5)

181.1
295.1
476.2
153.7

–
(384.6)
(175.1)
(25.4)
–
(585.1)

–
–
–
(585.1)

–
(191.4)
(1,908.9)
(103.6)
–
(2,203.9)

–
–
–
(2,203.9)

–
(340.1)
(837.7)
(35.6)
–
(1,213.4)

–
–
–
(1,213.4)

–
(33.9)
(2,224.8)
(123.1)
–
(2,381.8)

–
–
–
(2,381.8)

–
–
(6,022.7)
–
–
(6,022.7)

(0.4)
(970.7)
(11,431.3)
(292.1)
(34.9)
(12,729.4)

–
–
–
(6,022.7)

181.1
295.1
476.2
(12,253.2)

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

Total
£m

(19.7)
(135.8)
(19.0)
(32.3)
(206.8)

188.1
315.2
503.3
296.5

(26.8)
(201.3)
(25.5)
–
(253.6)

–
–
–
(253.6)

(431.5)
(1,264.3)
(106.8)
–
(1,802.6)

–
–
–
(1,802.6)

(507.7)
(808.8)
(70.2)
–
(1,386.7)

–
–
–
(1,386.7)

(39.4)
(1,650.1)
(114.7)
–
(1,804.2)

–
–
–
(1,804.2)

–
(5,770.3)
(16.4)
–
(5,786.7)

(1,025.1)
(9,830.6)
(352.6)
(32.3)
(11,240.6)

–
–
–
(5,786.7)

188.1
315.2
503.3
(10,737.3)

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a
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2012
Financial liabilities
Overdraft
Bank loans
Other loans
Finance leases
Other ﬁnancial liabilities

Financial assets
Trade receivables
Cash and short term deposits

Net cash ﬂow

2011
Financial liabilities
Bank loans
Other loans
Finance leases
Other ﬁnancial liabilities

Financial assets
Trade receivables
Cash and short term deposits

Net cash ﬂows

Other loans include index-linked debt with maturities up to 55 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.

 
 
 
 
 
 
 
 
 
 
 
Severn Trent Plc  Annual Report and Accounts 2012

Notes to the group ﬁnancial statements

116

32 Financial instruments (continued)
e) Financial risk factors (continued)

(iii) Liquidity risk (continued)
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/(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.

2012
Derivative liabilities
Instruments settled net
Interest rate swaps

  Energy swaps

Derivative assets
Instruments settled net
Interest rate swaps

  Energy swaps
Instruments settled gross
  Cross currency swaps
  – cash receipts
  – cash payments

Net cash ﬂow

2011
Derivative liabilities
Instruments settled net
Interest rate swaps

Derivative assets
Instruments settled net
Interest rate swaps

  Energy swaps
Instruments settled gross
  Cross currency swaps
  – cash receipts
  – cash payments

Net cash ﬂow

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

Total
£m

(33.5)
–
(33.5)

(39.4)
(0.4)
(39.8)

(110.6)
(1.1)
(111.7)

(93.6)
–
(93.6)

(74.9)
–
(74.9)

(4.6)
–
(4.6)

(356.6)
(1.5)
(358.1)

3.8
1.8

3.2
0.7

3.4
–

–
–

–
–

–
–

10.4
2.5

125.9
(97.8)
33.7
0.2

37.4
(37.0)
4.3
(35.5)

814.9
(715.4)
102.9
(8.8)

5.2
(3.7)
1.5
(92.1)

44.7
(24.8)
19.9
(55.0)

–
–
–
(4.6)

1,536.3
(878.7)
670.5
312.4

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

Total
£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)

7.1
1.9

5.1
9.1

6.2
4.8

–
–

–
–

48.3
(31.6)
25.7
(4.5)

131.4
(99.2)
46.4
23.0

891.9
(759.8)
143.1
100.3

2.4
(2.2)
0.2
(15.0)

27.5
(12.2)
15.3
8.4

–
–

–
–
–
0.8

18.4
15.8

1,101.5
(905.0)
230.7
113.0

 
 
 
 
Severn Trent Plc  Annual Report and Accounts 2012

Notes to the group ﬁnancial statements

117

32 Financial instruments (continued)
f) 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 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:

US dollar
Euro
Yen
Czech krona

Notional principal amount

Fair value

2012
£m
27.0
11.4
98.4
47.2
184.0

2011
£m
27.0
11.4
103.3
47.2
188.9

2012
£m
7.6
7.8
59.0
20.8
95.2

2011
£m
6.6
6.0
60.8
24.7
98.1

(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 10 years
10-20 years
More than 20 years

Average 
contract ﬁxed 
interest rate

2012
%
–
5.07%
–
5.07%

2011
%
–
5.07%
–
5.07%

Notional 
principal 
amount

2011
£m
–
(493.0)
–
(493.0)

2012
£m
–
(492.3)
–
(492.3)

Fair value

2011
£m
–
(17.8)
–
(17.8)

2012
£m
–
(91.6)
–
(91.6)

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.

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Severn Trent Plc  Annual Report and Accounts 2012

Notes to the group ﬁnancial statements

118

32 Financial instruments (continued)
f) Hedge accounting (continued)

(ii) Cash ﬂow hedges (continued)
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

Notional 
contracted 
amount

2012
£/MWh
48.8
53.3
62.9
52.2

2011
£/MWh
42.0
45.1
54.7
47.3

2011
2012
MWh
MWh
131,040
725,088
550,368
428,064
174,720 1,087,632
1,450,176 1,646,736

Changes in the amounts deferred in equity during the period relating to cash ﬂow hedges were as follows:

Fair value gains/(losses) deferred in equity at the start of the period
Fair value (losses)/gains recognised in equity in the period
Fair value losses transferred to ﬁnance costs in the period
Fair value (losses)/gains deferred in equity at the end of the period

Fair value

2011
£m
1.8
6.2
6.7
14.7

2011
£m
(2.1)
16.0
4.5
18.4

2012
£m
1.8
0.3
(1.0)
1.1

2012
£m
18.4
(86.5)
3.7
(64.4)

(iii) Interest rate swaps not hedge accounted
The group has a number of interest rate swaps which are not accounted for as cash ﬂow hedges. Contracts where the group pays 
ﬁxed rate 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

2012
%
–
–
6.32
–
5.41
5.10
5.61

2011
%
–
–
6.32
–
5.41
5.22
5.61

2012
£m
–
–
225.0
–
313.6
125.0
663.6

2011
£m
–
–
225.0
–
237.3
200.0
662.3

2012
£m
–
–
(37.9)
–
(114.6)
(41.9)
(194.4)

2011
£m
–
–
(33.0)
–
(41.2)
(30.4)
(104.6)

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

2012
%
–
–
5.18
–
–
–
5.18

2011
%
–
–
5.18
–
–
–
5.18

2012
£m
–
–
200.0
–
–
–
200.0

2011
£m
–
–
200.0
–
–
–
200.0

2012
£m
–
–
23.7
–
–
–
23.7

2011
£m
–
–
17.3
–
–
–
17.3

Severn Trent Plc  Annual Report and Accounts 2012

Notes to the group ﬁnancial statements

119

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 £4.1 million (2011: £4.6 million) related to equity settled share based payment transactions.

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The weighted average share price during the period was £15.00 (2011: £13.40).

At 31 March 2012, there were no options exercisable under any of the share based remuneration schemes (2011: 22,984 options in 
the Unapproved Share Option Scheme).
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).

(i) Awards outstanding
Awards made under the LTIP
In July 2011 awards over 112,446 shares (2011: 141,111 shares) with a fair value of £12.16 (2011: £7.91) were made to 18 
employees (2011: 20 employees) under the LTIP. These awards are subject to Severn Trent Water’s achievement of Return on 
Regulated Capital Value in excess of the level included in the Severn Trent Water AMP5 business plan. The LTIP awards granted in 
July 2010 are subject to total shareholder return (TSR) over three years relative to the companies ranked 51–150 by market 
capitalisation in the FTSE index (excluding investment trusts). It has been assumed that performance against the LTIP non-market 
conditions will be 100%) (2011: 100%).

Awards made under the Services LTIP
In July 2011 awards over 38,493 shares with a fair value of £12.16 were made to 10 employees under the Services LTIP. 
These awards are subject to achievement of turnover and proﬁt targets in the year ending 31 March 2014. It has been assumed 
that performance against the 2011 Services LTIP non-market conditions will be 75%. 

The awards granted in July 2008 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. It has been assumed that performance against the 2008 Services LTIP non-market 
conditions will be 0% (2011: 0.3%).

Details of changes in the number of awards outstanding during the year are set out below:

Outstanding at 1 April 2010
Granted during the year
Vested during the year
Forfeited during the year
Lapsed during the year
Outstanding at 1 April 2011
Granted during the year
Vested during the year
Forfeited during the year
Lapsed during the year
Outstanding at 31 March 2012

Number of awards

LTIP Services LTIP
110,440
–
–
(9,053)
–
101,387
38,493
–
(10,329)
(34,607)
94,944

393,483
141,111
(71,849)
(10,671)
(49,373)
402,701
112,446
–
(14,946)
(116,714)
383,487

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Severn Trent Plc  Annual Report and Accounts 2012

Notes to the group ﬁnancial statements

120

33 Share based payments (continued)
Details of LTIP and Services LTIP awards outstanding at 31 March were as follows:

Date of grant
July 2008
July 2008
July 2008
July 2009
July 2010
July 2011

Normal date 
of vesting
2011
2012
2013
2012
2013
2014

Number of awards

2012
–
33,671
31,145
151,786
127,727
134,102
478,431

2011
151,322
33,671
33,109
151,786
134,200
–
504,088

(ii) Fair value
The share price at the grant date was £13.98 (2011: £12.28). 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. 

The fair value of the LTIP awards made during the year was calculated using the Black-Scholes method using the principal 
assumptions set out below:

Assumptions
Expected volatility – Severn Trent Plc
Expected dividend yield 
Risk free rate

2012 
 27%
 4.7%
 1.57%

Expected volatility is based on historical weekly volatility over a three year period. Weekly volatility in the observed data was 
between 25% and 31%.

The risk free rate is derived from yields at the grant date of gilts of similar duration to the LTIP awards.

The dividend yield is calculated using the expected dividend for the year divided by the share price at the date of grant.

The fair value of the LTIP awards made during the previous year was calculated using the Monte Carlo method using the principal 
assumptions set out below:

Assumptions
Expected volatility
Severn Trent Plc
Comparator group
Correlation between Severn Trent Plc and comparator group

2011

27%
47%
32%

Expected volatility is based on historical weekly volatility over a three year period. Weekly volatility in the observed data was 
between 25% and 31%.

For the July 2010 LTIP 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 Plc 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.

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.

Details of the basis of the LTIP schemes are set out in the remuneration report on page 59 and 60.

Severn Trent Plc  Annual Report and Accounts 2012

Notes to the group ﬁnancial statements

121

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.

(i) Options outstanding
The number of employees entering into Sharesave contract and the number of options granted during the year were as follows:

Number of employees
Number of options granted

3 year 
scheme
1,610
440,930

2012

5 year 
scheme
363
127,631

3 year 
scheme
1,073
223,291

2011

5 year 
scheme
448
142,981

Details of changes in the number of options outstanding during the year are set out below:

Outstanding at 1 April 2010
Granted during the year
Forfeited during the year
Cancelled during the year
Exercised during the year
Lapsed during the year
Outstanding at 1 April 2011
Granted during the year
Forfeited during the year
Cancelled during the year
Exercised during the year
Lapsed during the year
Outstanding at 31 March 2012

Sharesave options outstanding at 31 March were as follows:

Date of grant
January 2004
January 2005
January 2006
January 2007
January 2008
January 2009
January 2010
January 2011
January 2012

Normal date of exercise Option price
592p
2011
759p
2012
823p
2011 or 2013
1,172p
2012 or 2014
1,221p
2011 or 2013
862p
2012 or 2014
806p
2013 or 2015
1,137p
2014 or 2016
1,177p
2015 or 2017

Number of 
share options
3,637,068
366,272
(146,468)
(92,030)
(550,525)
(86,132)
3,128,185
568,561
(60,732)
(51,578)
(442,593)
(57,357)
3,084,486

Weighted 
average 
exercise price
899p
1,137p
895p
875p
841p
1,062p
904p
1,177p
903p
947p
928p
913p
950p

Number of share options

2012
–
52,912
20,468
78,280
78,488

2011
45,820
54,324
212,941
93,243
218,048
1,141,447 1,247,781
890,670
365,358
–
3,084,486 3,128,185

810,413
334,910
567,568

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Severn Trent Plc  Annual Report and Accounts 2012

Notes to the group ﬁnancial statements

122

33 Share based payments (continued)
b) Employee Sharesave Scheme (continued)

(ii) Fair value
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
Expected volatility
Expected dividend yield
Risk free rate
Fair value per share

3 year 
scheme
27%
4.6%
0.53%
320p

2012

5 year 
scheme
27%
4.6%
1.75%
339p

3 year 
scheme
27%
4.4%
1.63%
348p

2011

5 year 
scheme
27%
4.4%
2.24%
359p

Expected volatility is based on historical weekly volatility over a three year period. Weekly volatility in the observed data was 
between 25% and 31%. The risk free rate is derived from yields at the grant date of gilts of similar duration to the Sharesave 
contracts. The dividend yield is calculated using the expected dividend for the year divided by the share price at the date of grant.

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)

c) Share Incentive Plan (SIP)

3 year 
scheme
1,520p
3
3.5

2012

5 year 
scheme
1,520p
5
5.5

3 year 
scheme
1,486p
3
3.5

2011

5 year 
scheme
1,486p
5
5.5

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 
2012. SIP shares vest with the employee on the date of grant.
d) Unapproved Share Options Scheme

The board has granted options to purchase ordinary shares in the company to a number of executives 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 were as follows:

Outstanding at 1 April 2010
Exercised during the year
Lapsed during the year
Outstanding at 1 April 2011
Exercised during the year
Outstanding at 31 March 2012

Options outstanding under this scheme at 31 March were as follows:

June 2001
June 2002

Date of grant

Normal date 

of exercise Option price
738p
720p

2004–2011
2005–2012

Number of 
share options
35,259
(3,679)
(8,596)
22,984
(22,984)
–

Weighted 
average 
exercise price
728p
720p
729p
729p
729p
–

Number of shares

2012
–
–
–

2011
11,844
11,140
22,984

Severn Trent Plc  Annual Report and Accounts 2012

Notes to the group ﬁnancial statements

123

33 Share based payments (continued)
e) Share Matching Plan (SMP)

Under the Share Matching Plan members of STEC 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.

(i) Awards outstanding
During the year 19,072 (2011: 25,187) matching shares with a fair value of £8.84 (2011: £6.79) were awarded to 11 employees 
(2011: 11).

Outstanding at 1 April 2010
Granted during the year
Outstanding at 1 April 2011
Granted during the year
Cancelled during the year
Vested during the year
Outstanding at 31 March 2012

Details of share matching awards outstanding at 31 March were as follows:

Date of grant
May 2010
May 2011

Number of 
awards
–
25,187
25,187
19,072
(1,900)
(909)
41,450

Normal date 
of vesting
June 2013
May 2014

Number of awards

2012
22,378
19,072
41,450

2011
25,187
–
25,187

(ii) Fair value
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

2012

2011

26%
41%
n/a

27%
46%
33%

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 £15.02 (2011: £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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Severn Trent Plc  Annual Report and Accounts 2012

Notes to the group ﬁnancial statements

124

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
Pension service cost
Curtailment gain
Pension contributions
Share based payments charge
Proﬁt on sale of property, plant and equipment and intangible assets
Deferred income movement
Provisions charged to the income statement
Utilisation of provisions for liabilities and charges
Increase in inventory
Decrease/(increase) in amounts receivable
Increase in amounts payable
Cash generated from operations
Tax paid
Net cash generated from operating activities

b) Non-cash transactions

No additions to property, plant and equipment during the year were ﬁnanced by new ﬁnance leases (2011: nil).

c) Exceptional cash ﬂows

The following cash ﬂows arose from items classiﬁed as exceptional in the income statement:

Restructuring costs
Regulatory matters
Finance costs

2012
£m
469.8
256.0
30.8
22.9
22.6
(23.1)
(53.5)
4.1
(4.4)
(8.7)
16.8
(11.1)
(7.4)
6.1
5.0
725.9
(72.0)
653.9

2012
£m
(14.4)
(3.9)
(16.5)
(34.8)

d) Reconciliation of movement in cash and cash equivalents to movement in net debt

Cash and cash equivalents
Bank overdrafts
Net cash and cash equivalents
Bank loans
Other loans
Finance leases
Cross currency swaps
Net debt

As at
1 April 
2011
£m
315.2
–
315.2
(846.8)
(3,230.9)
(266.7)
160.4
(3,868.8)

Cash ﬂow
£m
(19.9)
(0.4)
(20.3)
1.9
(94.5)
47.6
–
(65.3)

Fair value 
adjustments
£m
–
–
–
–
1.9
–
(26.6)
(24.7)

RPI uplift on 
index-linked 
debt
£m
–
–
–
(7.6)
(46.0)
–
–
(53.6)

Foreign 
exchange
£m
(0.2)
–
(0.2)
–
41.5
–
–
41.3

Other
non cash
movements
£m
–
–
–
–
1.1
0.1
2.1
3.3

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)
720.6

2011
£m
(27.6)
(3.8)
–
(31.4)

As at
 31 March 
2012
£m
295.1
(0.4)
294.7
(852.5)
(3,326.9)
(219.0)
135.9
(3,967.8)

Severn Trent Plc  Annual Report and Accounts 2012

Notes to the group ﬁnancial statements

125

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.

The group has given certain guarantees in respect of the borrowings of its associate, Servizio Idrico Integrato S.c.p.a. The guarantees 
are limited to €11.2 million (2011: €11.2 million). The group does not expect any liabilities that are not provided for in these ﬁnancial 
statements to arise from these arrangements.
b) Disposal of subsidiaries

The group has given certain guarantees and indemnities in relation to disposals of businesses.

Following a hearing in the Commercial Court in Belgium in February 2010 in relation to a claim from Veolia Proprete S.A. (‘Veolia’) 
arising from the sale of Biffa Belgium to Veolia in 2006, the Court rendered judgment in favour of the group on 1 April 2010 and 
declared all of Veolia’s claims to be unfounded. Veolia has ﬁled an appeal against this decision, however, the group considers that 
Veolia’s case remains unfounded and no provision has been recorded in respect of this matter.

The group is not aware of any other liability that is likely to result from these guarantees and indemnities that has not been provided 
for in these ﬁnancial statements.
c) Regulatory matters

On 17 December 2010 Severn Trent Plc, Severn Trent Water Limited and Severn Trent Laboratories Limited received 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. 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 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 2012 the amount receivable 
were £25.5 million (2011: £27.1 million).

There have been no signiﬁcant changes to the arrangement during the year.

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Severn Trent Plc  Annual Report and Accounts 2012

Notes to the group ﬁnancial statements

126

37 Financial and other commitments
a) Investment expenditure commitments

Contracted for but not provided in the ﬁnancial statements

2012
£m
159.8

2011
£m
91.7

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 1 year
2–5 years
After more than 5 years

2012
£m
4.7
12.0
8.1
24.8

2011
£m
4.4
11.2
7.3
22.9

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 42.06 pence per share and a special dividend 
of 63.00 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

SII
Jackson Water Partnership

Sale of goods

Purchase of goods

Amounts due from related 
parties

Amounts due to related 
parties

2012
£m
5.6
–
5.6

2011
£m
6.9
2.9
9.8

2012
£m
–
–
–

2011
£m
–
–
–

2012
£m
16.1
–
16.1

2011
£m
18.5
–
18.5

2012
£m
–
–
–

2011
£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 64 to 68.

Short term employee beneﬁts
Post employment beneﬁts
Termination beneﬁts
Share based payments

2012
£m
5.1
0.5
–
0.8
6.4

2011
£m
4.8
0.5
0.3
0.6
6.2

Severn Trent Plc  Annual Report and Accounts 2012

Notes to the group ﬁnancial statements

127

40 Principal subsidiary undertakings and their directors
Details of the principal operating subsidiaries as at 29 May 2012 
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 Kane

M J Lamb 
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 
S Bouvier  

M J Kane

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 
S Bouvier  
M J Kane

K J Kelly 

Severn Trent Services Limited
Arley Drive, Birch Coppice Business Park 
Dordon, Tamworth B78 1SA 
Telephone 01827 266 000

Directors 
M J Kane  
B Kennedy 

R C McPheely 
G P Tyler

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
S Bouvier  
M J Kane

K J Kelly 

Severn Trent Services International Limited
2308 Coventry Road, Birmingham B26 3JZ 
Telephone 0121 722 6000

Directors
B Kennedy 
R C McPheely

G P Tyler   

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
B Kennedy 
R C McPheely

Other Businesses

G P Tyler   

Derwent Insurance Limited
6A Queensway, PO Box 64, Gibraltar 
Telephone 00 350 200 45502 
(Insurance company – incorporated and operational 
in Gibraltar)

Directors
J P J Davies 
N Feetham 

A Richmond 
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)

Managers
S Bouvier  
F Gerardy 
B Kennedy 

M J E McKeon 
J Prendergast 
D Robyns 

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 2012

128

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 2012. 

Carl D Hughes (Senior statutory auditor) 
for and on behalf of Deloitte LLP 
Chartered Accountants and Statutory Auditor

London, UK  
29 May 2012

We have audited the parent company ﬁnancial statements of 
Severn Trent Plc for the year ended 31 March 2012 which 
comprise the company balance sheet, the company statement 
of total recognised gains and losses, and the related notes 1 to 
17. 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. 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 parent company ﬁnancial statements:

•  give a true and fair view of the state of the parent company’s 

affairs as at 31 March 2012;

•  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.

Severn Trent Plc  Annual Report and Accounts 2012

Company balance sheet

At 31 March 2012

129

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 assets/(liabilities)
Total assets less current liabilities
Creditors: amounts falling due after more than one year
Net assets
Capital and reserves
Called up share capital
Share premium account
Other reserves
Retained earnings
Total capital and reserves

Signed on behalf of the board who approved the accounts on 29 May 2012.

Andrew Duff 
Chairman 

Michael McKeon
Finance Director

Company number: 2366619

Note

2012
£m

2011
£m

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5

6

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0.2
3,638.0
20.8
3,659.0

44.3
6.7
234.6
285.6
(181.0)
104.6
3,763.6
(96.9)
3,666.7

232.6
83.8
152.4
3,197.9
3,666.7

0.2
3,550.1
27.5
3,577.8

16.2
–
223.2
239.4
(827.2)
(587.8)
2,990.0
(167.7)
2,822.3

232.2
80.0
150.6
2,359.5
2,822.3

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Company statement of total recognised gains and losses

For the year ended 31 March 2012

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

2012
£m
2.3
(0.6)
1.7
993.3
995.0

2011
£m
2.7
(0.7)
2.0
264.5
266.5

 
 
 
 
 
 
 
 
 
 
 
Severn Trent Plc  Annual Report and Accounts 2012

130

Notes to the company ﬁnancial statements

For the year ended 31 March 2012

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’).

Severn Trent Plc is a partner in Severn Trent Limited Partnership 
(‘the partnership’), which is registered in Scotland. As the 
partnership is included in the Severn Trent Plc consolidated 
accounts, the company has taken advantage of the exemption 
conferred by Regulation 7 of The Partnership (Accounts) 
Regulations 2008 from the requirements of Regulations 4 to 6.
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) 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.

d) Financial instruments

(i) Financial assets
Financial assets are classiﬁed into the following 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 classiﬁed as ‘held for trading’. 
Derivative ﬁnancial assets that are not designated and effective 
as hedging instruments are required to be classiﬁed as ‘held for 
trading’ by FRS26. However, the group’s Treasury Policy, 
described in the Financial review on page 35, is that the group 
does not hold or issue derivative ﬁnancial instruments for 
trading. Financial assets at fair value through proﬁt or loss 
are stated at fair value, with any gains or losses arising on 
remeasurement being recognised in the proﬁt and loss account. 
Fair value is determined using the methodology described in 
note 32 to the group’s ﬁnancial statements. 

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 the proﬁt and loss account.

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 proﬁt and loss account. 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 an 
asset is impaired, when it is written down to its recoverable 
amount and the irrecoverable amount is recognised as an 
expense.

Severn Trent Plc  Annual Report and Accounts 2012

Notes to the company ﬁnancial statements

131

1 Accounting policies (continued)
d) Financial instruments (continued)

(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 classiﬁed as ‘held for trading’. 
Derivative ﬁnancial liabilities that are not designated and 
effective as hedging instruments are required to be classiﬁed as 
‘held for trading’ by FRS26. However, the group’s Treasury Policy, 
described in the Financial review on page 35, is that the group 
does not hold or issue derivative ﬁnancial instruments for 
trading. Financial liabilities at fair value through proﬁt or loss are 
stated at fair value, with any gains or losses arising on 
remeasurement being recognised in the proﬁt and loss account. 
Fair value is determined using the methodology described in 
note 32 in the group ﬁnancial statements. 

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 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 
the proﬁt and loss account.

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 proﬁt and loss account 
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 the proﬁt and loss account. 
The gains or losses deferred in equity in this way are recycled 
through the proﬁt and loss account in the same period in which 
the hedged underlying transaction or ﬁrm commitment is 
recognised in the proﬁt and loss account.

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 the proﬁt and loss account 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 the proﬁt and 
loss account.

(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 the proﬁt and loss account.
e) Investments

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 proﬁt and loss 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.
f) 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.
g) 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.

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Severn Trent Plc  Annual Report and Accounts 2012

Notes to the company ﬁnancial statements

132

1 Accounting policies (continued)
h) 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.

i) 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 in the proﬁt and loss account are 
the contributions payable to the scheme in respect of the 
accounting period in respect of the deﬁned beneﬁt and deﬁned 
contribution schemes.

2 Tangible ﬁxed assets

Cost
As at 1 April 2011
Additions
As at 31 March 2012
Depreciation
As at 1 April 2011
Charge for the year
As at 31 March 2012
Net book value
As at 31 March 2012
As at 31 March 2011

3 Investments

As at 1 April 2011
Additions/loans advanced
Provisions
As at 31 March 2012

Land and 
buildings
£m

Plant and 
equipment
£m

0.7
–
0.7

(0.7)
–
(0.7)

–
–

0.6
0.2
0.8

(0.4)
(0.2)
(0.6)

0.2
0.2

Total
£m

1.3
0.2
1.5

(1.1)
(0.2)
(1.3)

0.2
0.2

Shares
£m
3,292.5
14.8
–
3,307.3

Subsidiary undertakings

Loans
£m
257.6
81.2
(8.1)
330.7

Total
£m
3,550.1
96.0
(8.1)
3,638.0

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
Other debtors
Prepayments and accrued income

2012
£m
34.4
7.9
0.3
1.7
44.3

2011
£m
5.4
9.2
0.2
1.4
16.2

Severn Trent Plc  Annual Report and Accounts 2012

Notes to the company ﬁnancial statements

133

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

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

2012
£m
(31.0)
(22.8)
(53.8)
(0.4)
(0.4)
(120.1)
(5.9)
–
(0.4)
(181.0)

2012
£m
(59.0)
–
(37.9)
(96.9)

2012
£m
53.8

–
59.0
–
59.0
112.8

Borrowings analysed by interest rate after taking account of interest rate swaps entered into by the company were:

2012
Bank loans and overdrafts
Other loans
Other ﬁnancial liabilities

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
£m
–
–
0.4
0.4
–
0.4

Floating 
rate
£m
31.0
81.8
–
112.8
(225.0)
(112.2)

Fixed 
rate
£m
–
–
–
–
225.0
225.0
6.32%
3.5

2011
£m
(4.9)
–
(4.9)
–
(0.2)
(808.3)
(8.6)
(0.7)
(4.5)
(827.2)

2011
£m
(81.8)
(52.8)
(33.1)
(167.7)

2011
£m
4.9

22.9
58.9
–
81.8
86.7

Total
£m
31.0
81.8
0.4
113.2
–
113.2

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Severn Trent Plc  Annual Report and Accounts 2012

Notes to the company ﬁnancial statements

134

7 Borrowings (continued)

2011
Bank loans and overdrafts
Other loans
Other ﬁnancial liabilities

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
£m
–
–
–
–
–
–

Floating  
rate
£m
4.9
81.8
–
86.7
(225.0)
(138.3)

Fixed  
rate
£m
–
–
–
–
225.0
225.0
6.32%
4.5

Total
£m
4.9
81.8
–
86.7
–
86.7

The company’s borrowings are denominated in sterling, after taking account of cross currency swaps the company has entered into. 
There is no signiﬁcant 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.

A new ﬁve year £500 million Revolving Credit Facility was agreed in October 2011 for Severn Trent Plc and Severn Trent Water 
Limited. This replaced the existing £500 million Revolving Credit Facility. Severn Trent Plc has access to £200 million of this facility.

At the balance sheet date the company had committed undrawn borrowing facilities expiring as follows:

Within 1 year
1–2 years
2–5 years
After more than 5 years

8 Share capital

Total issued and fully paid share capital
237,608,111 ordinary shares of 9717/19p (2011: 237,142,534)

Changes in share capital were as follows:

Ordinary shares of 9717/19p
At 1 April 2011
Shares issued under the group’s Employee Sharesave Scheme
Shares issued under the group’s Share Option Scheme
At 31 March 2012

2012
£m
–
–
200.0
–
200.0

2011
£m
41.7
458.3
–
–
500.0

2012
£m

2011
£m

232.6

232.2

Number

£m

237,142,534
442,593
22,984
237,608,111

232.2
0.4
–
232.6

Severn Trent Plc  Annual Report and Accounts 2012

Notes to the company ﬁnancial statements

135

9 Reconciliation of movements in shareholders’ equity

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 1 April 2011
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 2012

Share capital
£m
231.6

Share 
premium
£m
75.9

Hedging 
reserve
£m
(7.5)

Capital 
redemption 
reserve
£m
156.1

Retained 
earnings
£m
2,260.0

Total
£m
2,716.1

–

–

2.0

–

–

2.0

0.6
–
–
–
232.2

4.1
–
–
–
80.0

–
–
–
–
(5.5)

–
–
–
–
156.1

–
4.4
264.5
(169.4)
2,359.5

4.7
4.4
264.5
(169.4)
2,822.3

–

–

1.8

–

–

1.8

0.4
–
–
–
232.6

3.8
–
–
–
83.8

–
–
–
–
(3.7)

–
–
–
–
156.1

–
4.1
993.3
(159.0)
3,197.9

4.2
4.1
993.3
(159.0)
3,666.7

The capital redemption reserve arose on the repurchase of B shares. This is not distributable. As permitted by Section 408 of the 
Companies Act 2006, no proﬁt or loss account is presented for the company.

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.

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10 Employee costs and auditors’ remuneration

Wages and salaries
Social security costs
Pension costs
Total employee costs

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£m
1.4
0.2
1.7
3.3

2011
£m
1.3
0.2
0.6
2.1

For details of directors’ remuneration see the Directors’ remuneration report on pages 64 to 68.

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.

11 Employee numbers
Average number of employees of the company (including executive directors) during this year was 12 (2011: 12).

All were based in the United Kingdom.

 
 
 
 
 
 
 
 
 
 
 
Severn Trent Plc  Annual Report and Accounts 2012

Notes to the company ﬁnancial statements

136

12 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 (2011: £0.1 million) to the proﬁt and loss account in respect of share based payments.

At 31 March 2012, there were no options (2011: no options) exercisable under any of the share based remuneration schemes.
a) Long Term Incentive Plan

Changes in the number of awards outstanding during the year:

Outstanding at 1 April 2010
Granted during the year
Lapsed during the year
Outstanding at 1 April 2011
Granted during the year
Lapsed during the year
Outstanding at 31 March 2012

Awards outstanding at 31 March were:

Date of grant
July 2008
July 2009
July 2010
July 2011

b) Employee Sharesave Scheme

Changes in the number of options outstanding during the year:

Outstanding at 1 April 2010
Exercised during the year
Outstanding at 1 April 2011
Granted during the year
Forfeited during the year
Transferred during the year
Exercised during the year
Outstanding at 31 March 2012

Options outstanding at 31 March were:

Date of grant
January 2009
January 2010
January 2011
January 2012

Number of 
awards
8,379
4,422
–
12,801
3,702
(3,566)
12,937

Normal date 
of vesting
2011
2012
2013
2014

Number of awards

2012
–
4,813
4,422
3,702
12,937

2011
3,566
4,813
4,422
–
12,801

Number of 
share options
4,556
(161)
4,395
916
(445)
1,301
(314)
5,853

Weighted 
average 
exercise price
867p
1,172p
856p
1,177p
862p
996p
1,221p
918p

Number of share options

2012
3,723
898
316
916
5,853

2011
3,946
449
–
–
4,395

Normal date of vesting Option price
862p
806p
1,137p
1,177p

2012 or 2014
2013 or 2015
2014 or 2016
2015 or 2017

Severn Trent Plc  Annual Report and Accounts 2012

Notes to the company ﬁnancial statements

137

12 Employee share schemes (continued)
c) Share Matching Plan

Changes in the number of awards outstanding during the year:

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Outstanding at 1 April 2010
Granted during the year
Outstanding at 1 April 2011
Granted during the year
Outstanding at 31 March 2012

Awards outstanding at 31 March were:

Date of grant
May 2010
May 2011

Number of 
awards
–
457
457
360
817

Normal date of vesting
June 2013
May 2014

Number of awards

2012 
457 
360 
817 

2011 
457 
– 
457 

13 Pensions
The company participates in two deﬁned beneﬁt pension schemes (being the Severn Trent Pension Scheme and the Severn Trent 
Water Mirror Image Pension Scheme). In addition, the company 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 
pension schemes, and hence it continues to account for the cost of contributions as if the scheme was a deﬁned contribution 
pension scheme.

The pension charge for the year was £1.7 million (2011: £0.6 million).

14 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.

15 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.

16 Post balance sheet events
Following the year end the board of directors has proposed a ﬁnal dividend of 42.06 pence per share and a special dividend 
of 63.00 pence per share.

17 Dividends
For details of the dividends paid in the years ended 31 March 2012 and 31 March 2011 see note 14 in the group ﬁnancial 
statements.

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Severn Trent Plc  Annual Report and Accounts 2012

Five year summary

138

Continuing operations
Turnover
Proﬁt before interest, tax and exceptional items
Net exceptional items
Net interest payable before losses on ﬁnancial instruments and 
exceptional ﬁnance costs
Losses 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 
provisions and deferred tax
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 instruments hedging foreign currency debt

2 Includes instruments hedging foreign currency debt

2012
£m
1,770.6
504.2
(50.9)

2011
£m
1,711.3
519.1
(21.4)

2010
£m
1,703.9
557.1
(49.7)

2009
£m
1,642.2
469.9
(18.9)

2008
£m
1,552.4
469.5
(68.8)

(229.0)
(67.7)
0.1
156.7
(60.5)
78.2
174.4
–
174.4

(230.6)
(14.2)
0.1
253.0
(32.1)
53.6
274.5
–
274.5

(218.8)
45.7
0.1
334.4
(40.7)
(42.2)
251.5
–
252.5

(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

6,743.6

6,635.3

6,516.1

6,169.9

5,892.9

(341.3)
(261.8)
(345.8)
(845.5)
–
4,949.2

232.6
740.9
973.5
7.9
3,967.8
4,949.2

72.5
88.9
70.1
1.3
80.2%
1,544.0

(320.4)
(90.5)
(292.1)
(957.4)
–
4,974.9

(317.2)
(125.3)
(354.9)
(1,010.3)
–
4,708.4

232.2
867.6
1,099.8
6.3
3,868.8
4,974.9

115.2
105.6
65.1
1.6
77.8%
1,446.0

231.6
709.1
940.7
6.3
3,761.4
4,708.4

105.6
122.8
72.3
1.7
79.9%
1,195.0
–
5,686
3,102

(287.2)
(153.9)
(233.0)
(988.0)
4.2
4,512.0

231.0
715.1
946.1
6.0
3,559.9
4,512.0

(24.6)
92.7
67.3
1.4
78.9%
990.0
–
5,624
3,144

(217.3)
(26.1)
(165.6)
(885.5)
–
4,598.4

229.7
971.3
1,201.0
4.2
3,393.2
4,598.4

89.3
97.8
65.6
1.5
74.0%
1,419.0
–
5,569
2,814

5,162
2,889

5,237
3,045

Gearing has been calculated as net debt divided by the sum of equity and net debt.

At a glance

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Severn Trent Plc  Annual Report and Accounts 2012

Delivering against our KPIs

139

KPI

1 Lost time incidents per 100,000 hrs worked 1
2 Employee motivation % 2
3 Water quality (test failure rate) ppm
4 SIM – Qualitative
5 SIM – Quantitative
6 Unplanned interruptions > 6 hrs per 1,000 properties 3
7 Properties at risk of low pressure per 1,000 properties 3
8 First time job resolution % 4
9 Non-performance against Regulatory Obligations % 4

Basis
MAT
QR
MAT
MAT
MAT
MAT
NPR
MAT
QR
ACT 10 Capex (net) % 5, 6
MAT 11 Capital process quality
ACT 12 Debtor days 6
ACT 13 Opex – £m 5, 6
ACT 14 Efﬁcient billing factor (per 1,000 properties connected)
MAT 15 Pollution incidents (cat 1, 2 & 3) 7
MAT 16 Sewer ﬂooding incidents – other causes per 1,000 properties 3, 8
ACT 17 Sewage Treatment Works – breach of consents % 7
ACT 18 Supply availability %
MAT 19 Net Energy Use – GWh 4
MLE 20 Leakage Ml/d 3, 5

2010/11 
Performance
0.37
74%
210
–
–
23.85
0.07
97.5%
4%
7.40%
–
33.8
519
–
378
0.154
1.69%
94.4%
706
497

2011/12 
performance
0.30
75%
225
3.96
205
11.12
0.06
93.8%
6%
4.31%
972
35.8
548
3,306
458
0.141
2.54%
96.5%
679
464

2011/12  
quartile
Upper
Median
Median
Median
Upper
Lower
Upper
Upper
Upper
n/a
n/a
Median
n/a
n/a
Median
Median
Lower
Lower
Upper
Upper

Key

Improved quartile 

  Maintained quartile 

  Declined quartile

Notes
Benchmarks updated in September. 
Excludes PDaS.
MAT = Moving annual total
QR = Quarterly review
NPR = Number of properties on register
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.

3.  As reported in the Ofwat Annual 
Return. Performance ﬁgures are 
provisional at this stage as the Ofwat 
Annual Return will be submitted to 
Ofwat on 15 June 2012.

4.  Actual performance based partially or 

wholly on internal data.

5.  Benchmark data is unavailable until 

September 2012.

6.  Actual performance based on audited 
UK GAAP ﬁnancial statements for the 
year ended 31 March 2012.

7.  Measure for calendar year to 

31 December 2011.

8.  Includes minor escape of sewage. 

Prior year restated.

KPIs 4 & 5 SIM (Service Incentive 
Mechanism). Consists of 2 equally 
weighted measures: Quantitative looks 
at the number of complaints, unwanted 
contacts and engaged/abandoned calls. 
Qualitative looks at the end to end 
customer service by completing 200 
customers surveys 4 times a year. 
Customers rate us based on a score of 1 
(very dissatisﬁed) to 5 (very satisﬁed). 
The 2 SIM measures replace customer 
written complaints per 1,000 properties 
and ﬁrst time call resolution for billing.

KPI 11 Capital process quality. This covers 
the capital work undertaken by the 
One Supply Chain. There is no external 
benchmark available for this measure. 
The KPI is based on an index of four areas 
(people, process, customer and ﬁnance) 
incorporating a number of metrics such 
as health and safety, programme 
management, customer service, and 
ﬁnancial performance.

KPI 14 Efﬁcient billing factor (’000 
properties connected). Ofwat have 
introduced a Billing Incentive which is 
designed to ensure that companies are 
appropriately rewarded for the efﬁciency 
of their billing in terms of maintaining 
and growing their chargeable customer 
base. It looks at the average number of 
billable properties connected to water 
services.

 
 
 
 
 
 
 
 
 
 
 
 
Severn Trent Plc  Annual Report and Accounts 2012

140

Information for shareholders

Corporate website 
Shareholders are encouraged to visit our website  
www.severntrent.com which provides:

•  company news and information; 
•  links to our operational businesses’ websites;
•  details of our governance arrangements;
•  details of our strategy;
•  details of the group’s business models and business plan; and 
•  the company’s approach to operating responsibly.

There is also a dedicated Investors section on the website which 
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.

Electronic communications
By registering to receive shareholder documentation from 
Severn Trent Plc electronically shareholders can beneﬁt from 
being able to:

•  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. 

Electronic shareholder communications also enable the 
company to reduce its impact on the environment and beneﬁt 
from savings associated with reduced printing and mailing costs. 

For further information and to register for electronic shareholder 
communications visit www.shareview.co.uk

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 relating to your Severn Trent Plc 
shareholding you should contact Equiniti.

Registrar contact details: 

Online: https://help.shareview.co.uk from here, you will be 
able to securely email Equiniti with your query.

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. 

Dividend payments
Bank mandates
Dividends can be paid automatically into your bank or building 
society account.

The beneﬁts of doing this are you will:

•  receive cleared funds in your bank account on the payment 

date;

•  avoid postal delays; and
•  remove the risk of your cheques getting lost in the post.

To take advantage of this service or for further details contact 
Equiniti or visit www.shareview.co.uk 

Dividend reinvestment plan 
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* 
Telephone number from outside the UK: +44 121 415 7173 

Buying and selling shares in the UK
If you wish to buy or sell certiﬁcated Severn Trent Plc 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. For a real-time buying or 
selling price, you should contact a stockbroker.

Shareholder security
Share fraud includes scams where investors are called out of 
the blue and offered shares that often turn out to be worthless 
or non-existent, or an inﬂated price for shares they own. These 
calls come from fraudsters operating in ‘boiler rooms’ that are 
mostly based abroad. 

If you are offered unsolicited investment advice, discounted 
shares, a premium price for shares you own, or free company or 
research reports, you should take these steps before handing 
over any money:

•  Get the name of the person and organisation contacting you.
•  Check the Financial Services Authority (FSA) Register at  

www.fsa.gov.uk/fsaregister to ensure they are authorised.

•  Use the details on the FSA Register to contact the ﬁrm.
•  Call the FSA Consumer Helpline on 0845 606 1234 if there 

are no contact details on the Register or you are told they are 
out of date.

•  Search the FSA list of unauthorised ﬁrms and individuals to 

avoid doing business with.

•  Remember, if it sounds too good to be true, it probably is.

*  Calls to these numbers are charged at 8 pence per minute from a BT landline. Other providers’ costs may vary. Lines are open from 8.30am to 5.30pm Monday to Friday.

**  Lines are open Monday – Friday, 8.00am to 4.30pm for dealing, and until 6.00pm for enquiries.

Severn Trent Plc  Annual Report and Accounts 2012

Information for shareholders

141

If you use an unauthorised ﬁrm to buy or sell shares or 
other investments, you will not have access to the Financial 
Ombudsman Service or Financial Services Compensation 
Scheme (FSCS) if things go wrong.

If you are approached about a share scam you should 
inform the FSA using the share fraud reporting form at  
www.fsa.gov.uk/scams, where you can ﬁnd out about the 
latest investment scams. You can also call the Consumer 
Helpline on 0845 606 1234.

You should contact Action Fraud on 0300 123 2040 if you 
have already paid money to share fraudsters.

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.

American Depositary Receipts (ADRs)
Severn Trent has a sponsored Level 1 American Depositary 
Receipt (ADR) program, for which The Bank of New York Mellon 
acts as Depositary. 

The Level 1 ADR program trades on OTCQX which is the 
premier tier of the US over-the-counter (OTC) market under 
the symbol STRNY (it is not listed on a US stock exchange). 
Each ADR represents 1 Severn Trent ordinary share.

If you have any enquiries regarding Severn Trent ADRs please 
contact The Bank of New York Mellon.

By post:
The Bank of New York Mellon 
PO Box 358516 
Pittsburgh 
PA 15252 – 8516 
USA

By telephone:
If calling from within the USA: (888) 269 2377 (toll-free) 
If calling from outside the USA: +1 201 680 6825

By email: shrrelations@bnymellon.com

Website: www.bnymellon.com/shareowner

Financial calendar
Preliminary results announcement
Ex dividend date – ﬁnal and special dividend
Record date to be eligible for the ﬁnal and special dividend
AGM
Interim management statement – Q1 year ending 31 March 2013
Final and special dividend payment date
Interim results announcement – year ending 31 March 2013
Ex dividend date – interim dividend
Record date to be eligible for the interim dividend
Interim dividend payment date

All future dates are indicative and may be subject to change.

30 May 2012
20 June 2012
22 June 2012
18 July 2012
18 July 2012
27 July 2012
27 November 2012
5 December 2012
7 December 2012
11 January 2013

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Radley Yeldar www.ry.com

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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